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LOGO
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 000-23343
NOVACARE EMPLOYEE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 23-2866146
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
VALLEY FORGE CORPORATE CENTER
2621 VAN BUREN AVENUE
NORRISTOWN, PA 19403
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 650-4700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK, PAR VALUE $.01 PER SHARE
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
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
AS OF SEPTEMBER 14, 1999, 30,273,782 SHARES OF COMMON STOCK WERE
OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD
BY NON-AFFILIATES WAS APPROXIMATELY $20,863,937. (DETERMINATION OF STOCK
OWNERSHIP BY NON-AFFILIATES WAS MADE SOLELY FOR THE PURPOSE OF RESPONDING TO
THIS REQUIREMENT AND THE REGISTRANT IS NOT BOUND BY THIS DETERMINATION FOR ANY
OTHER PURPOSE.)
DOCUMENTS INCORPORATED BY REFERENCE
PART III INCORPORATES INFORMATION BY REFERENCE FROM PORTIONS OF THE REGISTRANT'S
PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
DECEMBER 14, 1999.
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NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
FORM 10-K -- FISCAL YEAR ENDED JUNE 30, 1999
CONTENTS AND CROSS REFERENCE SHEET
FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K
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FORM 10-K FORM 10-K FORM 10-K
PART NO. ITEM NO. DESCRIPTION PAGE NO.
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I 1 Business 1
The Company............................................................. 1
Professional Employer Organization Industry............................. 2
Company Strategy........................................................ 3
Growth Strategy...................................................... 4
Operating Strategy................................................... 6
Business Profile........................................................ 7
Contractual Arrangement with Parent.................................. 9
Information Technology............................................... 10
Marketing and Sales.................................................. 11
Workers' Compensation and Health Care Program........................ 13
Competition............................................................. 13
Regulation.............................................................. 14
Employees............................................................... 18
Insurance............................................................... 18
Executive Officers of the Registrant.................................... 18
2 Properties..................................................................... 20
3 Legal Proceedings.............................................................. 20
4 Submission of Matters to a Vote of Security Holders............................ 20
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters.................................................... 20
6 Selected Financial Data........................................................ 22
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 24
8 Financial Statements and Supplementary Data.................................... 35
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................................. 56
III 10 Directors and Executive Officers of the Registrant............................. 56
11 Executive Compensation......................................................... 56
12 Security Ownership of Certain Beneficial Owners and
Management.............................................................. 56
13 Certain Relationships and Related Transactions................................. 56
14 Exhibits, Financial Statement Schedules and Reports on
IV Form 8-K............................................................... 57
SIGNATURES............................................................................................................ 58
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PART I
ITEM 1. BUSINESS
THE COMPANY
NovaCare Employee Services, Inc (the "Company") is one of the
largest (measured by number of worksite employees) professional employer
organizations ("PEOs") in the United States. The Company is an employee services
company that provides small-to medium-sized businesses with comprehensive, fully
integrated outsourcing solutions to human resource needs, including payroll
management, workers' compensation risk management, benefits management,
unemployment management and human resource management and consulting services.
The Company believes it offers better solutions at the best value by providing a
convenient, integrated complement of services which enable small and
medium-sized businesses to cost-effectively manage and enhance the employment
relationship by: (i) controlling the risks and costs associated with workers'
compensation, workplace safety and employee-related litigation; (ii) providing
employees with high quality health care coverage and related benefits; (iii)
managing the increasingly complex legal and regulatory environment affecting
employment; (iv) providing payroll and human resource administrative services
that are reliable, accurate and delivered in a friendly and caring way; and (v)
achieving scale advantages typically available to larger organizations. As of
June 30, 1999, the Company provided PEO services to 4,084 clients with 54,313
employees in 46 states, primarily in ten different industries.
The Company was established by NovaCare, Inc. (the "Parent"), in
September 1996, as a subsidiary and 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 entered into a contract
with the Parent to provide traditional PEO services to principally all of the
Parent's worksite employees (the "NovaCare Contract"). During fiscal 1998, the
Company completed three additional acquisitions - NovaPro, a temporary staffing
business acquired from the Parent on July 1, 1997; AmeriCare Employers Group,
Inc. ("AmeriCare"), a PEO based in Arizona, acquired on December 1, 1997; and
Staff Leasing Systems, Inc. (" SLS"), a PEO based in Maryland, acquired on May
1, 1998. In addition, in November 1997 and June 1998, the Company expanded via
start-up operations into two new markets, Atlanta and Philadelphia,
respectively. See "Contractual Arrangement With Parent" for subsequent changes
to the NovaCare Contract effective July 1, 1999. The Company acquired two
additional PEO's during fiscal 1999, Pay America, Inc. ("Pay America"), a PEO
based in Utah, on August 1, 1998 and Payday Professional Employer ("Payday"), a
PEO based in New Mexico, on October 1, 1998.
On September 8, 1999, the Company signed a definitive agreement to
sell the Company to an investment group comprised of Patricof & Co. Ventures
Inc., Fidelity Ventures Limited and AFLAC Incorporated (the "Investors"). Under
the terms of the agreement, a new private company established by the Investors
will acquire all of the outstanding common stock of the Company at a price of
$2.50 per share. The purchase will be effected through a cash tender offer to
the Company's stockholders and subsequent merger of the Company into a new
private company managed by the Investors. The Parent also executed a definitive
agreement, subject to certain conditions, to tender its shares in the tender
offer at the price of $2.50 per share. The tender offer was approved by the
Parent's stockholders on September 21, 1999 and is subject to the satisfaction
of customary closing conditions. The tender offer commenced on September 15,
1999 and is expected to close during October 1999. See "Overview" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional details.
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The Company contractually assumes certain administrative, regulatory
and financial employer responsibilities with respect to worksite employees in a
"co-employment" relationship. The Company believes its clients benefit from the
Company's services by: (i) improving profitability through lowering or
controlling costs associated with workers' compensation, health insurance, other
benefit coverage and regulatory compliance; (ii) improving productivity through
reducing the time and effort expended by business owners and executives to deal
with the complexities of employment management, enabling them to focus on their
business core competencies and growth; and (iii) improving employee satisfaction
and performance. The Company helps employers improve job satisfaction and
performance of worksite employees by providing improved health care and related
benefits, delivering training programs and providing dependable payroll and
benefits administration.
As co-employer of worksite employees, the Company assumes
responsibility for and manages the risks associated with: (i) worksite employee
payroll; (ii) employee-related benefits, such as workers' compensation and
health care insurance coverage; and (iii) compliance with certain
employment-related governmental regulations that can be effectively managed
offsite from the client's business. The client retains responsibility for
supervision and direction of the worksite employees' services in its business
and generally remains responsible for compliance with other employment-related
governmental regulations that are more closely related to worksite employee
supervision. The service fee charged by the Company to its clients includes the
cost of certain employment-related taxes, workers' compensation insurance
coverage and risk management services, administrative and field services, wages
of worksite employees and the client's portion of health and retirement benefit
plan costs. The Company also provides other value-added services such as
temporary staffing, recruiting, training and human resource consulting.
PROFESSIONAL EMPLOYER ORGANIZATION INDUSTRY
According to industry analysts, the PEO industry had approximately $22
billion in annual revenues during 1997 with an historical growth rate over the
last five years of approximately 28% per year. According to the U. S. Small
Business Administration, there are nearly six million businesses in the United
States with fewer than 500 employees, employing over 52 million persons and with
$1.2 trillion in aggregate annual payroll. The National Association of
Professional Employer Organizations ("NAPEO") estimates that the PEO industry
co-employs fewer than three million worksite employees. The Company believes,
therefore, that approximately 49 million of these employees are currently
unserved by the PEO industry.
The PEO industry is highly fragmented. NAPEO data suggest that there are
approximately 2,000 PEOs currently in operation. According to industry analysts,
the ten largest PEOs account for approximately 39% of existing revenues in the
industry. The Company believes that significant consolidation opportunities
exist within the PEO industry due to increasing industry regulatory complexity
and capital requirements associated with developing larger service delivery
infrastructures, more diversified services and more sophisticated management
information systems.
Demand for Services. The PEO industry evolved in the early 1980s in response to
increasing employment and benefit costs, and the complexities of the legal and
regulatory environment for the rapidly expanding small-to medium-sized business
sector. The Company believes demand for PEO services will continue to increase
as: (i) employment-related governmental regulation grows more complex; (ii)
growth continues within the small-to medium-sized business community; (iii) the
need to provide health and retirement benefits in a cost-effective convenient
manner increases; and (iv) the business and regulatory communities accept and
recognize the PEO industry. While various service
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providers, such as payroll processing firms, benefits and safety consultants and
temporary services firms, are available to assist these businesses with specific
tasks, such organizations do not typically provide the more comprehensive range
of services generally offered by PEOs. PEOs enter into agreements with numerous
small-to medium-sized employers, and can therefore achieve economies of scale as
professional employers and offer benefits packages and human resource services
at a level typically available only to larger companies which have greater
resources to devote to human resources management. The Company believes PEO
services will continue to experience growing demand because of the increasing
trend among small-to medium-sized employers to: (i) outsource non-core
competencies; (ii) seek to reduce employee benefit costs; (iii) manage
employee-related risks and regulatory complexities; and (iv) attract better
employees and retain them through improved benefit plans.
Effectiveness of Services. According to estimates by the U.S. Small
Business Administration, the management of an average small-to medium-sized
business devotes from 7% to 25% of its time to employee-related matters, leaving
management with less time to focus on core competencies. Work-related injuries
cost employers over $53 billion in medical expenses and lost employee
productivity each year, according to industry estimates. A PEO can manage these
costs through effective workers' compensation injury prevention, medical
management, rehabilitation and return to work programs. Employees are typically
attracted to small and medium-sized businesses that provide employees with human
resource benefits and services more characteristic of large employers. An
industry analyst's study indicated that 40% of the companies that outsourced
services to a PEO upgraded their employee benefits offerings and one-fourth of
those clients offered health care and other benefits for the first time.
COMPANY STRATEGY
VALUES-BASED BUSINESS
The Company believes that the most important and differentiating quality
of outstanding organizations is a set of values that inspires, unites and
sustains them. Values are constant and enduring, and precede and underlie
business plans, policies, procedures, practices, performance and outcomes. The
Company's Values are:
Credo Helping Make Life a Little Better
Beliefs Respect for the Individual
Service to the Customer
Pursuit of Excellence
Commitment to Personal Integrity
Purpose To effectively provide better human resource
solutions at the best value to our customers through
service leadership.
It is management's belief that these Values unify the Company and
mandate an open participation and empowered environment. The Company's strong
commitment to these Values by all employees enables the Company to provide a
unique level of service to its customers thereby enabling employees to build the
business and enhance their careers. The pursuit of the Company's Values unlocks
an inherent capacity to drive change, creating substantial opportunity. It is
management's opinion that the Company's greatest strengths and competitive
advantages are its people, values driven culture and capacity for change.
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STRATEGY STATEMENT
OVERALL
The Company's strategy is to be the preferred human resources partner by
leveraging operational excellence, technology and strategic alliances to
achieve market leadership. This strategy is based on management's beliefs
that:
- PEO services will continue to experience growing demand because of the
trend among small-to medium-sized employers to: (i) outsource non-core
competencies; (ii) reduce employee benefit costs; (iii) avoid
employee-related risks and regulatory complexities; and (iv) attract
better employees through improved benefit plans.
- The market for PEO services, based on analyst reports, is
approximately 94% unserved and is expected to grow at the rate of 28%
per year for the next five years.
- The PEO industry is highly fragmented with significant consolidation
opportunities for companies with access to capital, larger service
delivery infrastructures, and sophisticated management information
systems.
- PEOs typically take a transaction processing approach to their
services and do not emphasize the improved workforce performance
characteristics of satisfied employees.
- In selecting PEO providers, small-to medium-sized businesses will
increase their emphasis on cost-effectiveness, service excellence and
breadth of services provided.
- Employees are attracted to small and medium-sized businesses that
provide employees with human resources services more characteristic of
large employers.
- Strategic alliances will enable PEOs to enhance endorsement
opportunities, expand the distribution channel and broaden the
service/product offering.
GROWTH STRATEGY
The Company intends to grow through: (i) increasing investment in
marketing and sales; (ii) focusing on geographic expansion; (iii) targeting high
potential industries and services; (iv) acquiring PEOs and other employee
service providers; and (v) entering into strategic alliances.
Increasing Investment in Marketing and Sales. The Company's
management is experienced in building businesses utilizing focused marketing
strategies and professional sales forces. A significant part of the Company's
marketing strategy is the continued development of its brand identity. A
recognized brand name is a valuable marketing tool. The Company believes that
its marketing efforts will benefit from its brand strategy. The Company's brand
promise is to provide better human resource solutions at the best value. The
Company seeks to create a more satisfying and more productive relationship
between its worksite employees and clients by "caring for and about people." By
effectively and consistently delivering against this service commitment, the
Company believes it will attain a brand name reputation for operational
excellence among existing and potential clients.
The Company has invested heavily in improving the quality of its
sales force over the past year. Investments included recruiting and training
strong professional sales people and sales management from inside and outside
the PEO industry. These investments have resulted in the Company doubling its
sales productivity over the past year, as measured by monthly sales closed per
salesperson.
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Focusing on Geographic Expansion. The Company has identified key
attractive geographic target markets and has established a plan for entering
those markets in a disciplined manner. The Company believes its market
development model will enable it to penetrate new markets quickly. This market
development model consists of a highly structured sales management control
system and an efficient selling process. The model includes market research to
identify potential client businesses and a direct mail and telemarketing
campaign to reach those businesses. In certain cases, the Company may rely on
platform acquisitions to achieve scale in a market.
Entry priority for specific markets is determined by the number and
growth of small-to medium-sized businesses, the state regulatory environment and
access to infrastructure to support operations. Once a market is selected, the
Company executes an entry plan which includes defining benefit plans and service
offerings, recruiting a manager and sales team, site selection, training and
orientation and launching a specific marketing plan to begin the selling
process.
Targeting High Potential Industries and Accounts. Targeted
industries vary from market to market depending on the economic characteristics
and business demographics of each geographic location. The Company intends to
focus on industries with high gross profit per worksite employee and significant
workers' compensation profit opportunities. High potential industries are those,
such as health care and construction, that the Company believes could benefit
most from the Company's risk management expertise (e.g., traditional high
workers' compensation classifications) and the Company's offering of an
extensive benefits package (e.g., industries facing a shortage of workers).
Other high potential industries include those characterized by rapid growth or
change. The sales force is expected to utilize the key industry strategy and
become expert in one or more select industries in the markets in which they
operate. The Company plans to target larger accounts where it can leverage its
unique capabilities and expertise gained from servicing the Parent.
Acquiring PEOs and Other Employee Service Providers. The Company
believes that the opportunities for PEO consolidation are substantial with
approximately 2,000 PEOs (according to an estimate by NAPEO) operating in a
highly fragmented industry. The Company believes that industry consolidation
will be driven by increasing industry and regulatory complexity, increasing
capital requirements and the significant economies of scale available to PEOs
with a concentration of clients and employees in target markets. The Company
intends to make opportunistic acquisitions where appropriate to achieve greater
density in targeted geographic markets or expand its service offering.
Entering into Strategic Alliances. The Company is creating strategic
alliances with service providers to small and medium-sized businesses. For
example, in March 1999, the Company entered into a strategic alliance with AFLAC
Incorporated, the nation's largest provider of supplemental insurance products
with approximately 130,000 clients, whereby products and services are cross-sold
among each firm's existing and targeted client base. The Florida Home Builders
Association, an organization that has approximately 17,000 members with 450,000
worksite employees, has endorsed the Company as the PEO of choice for its
members. Additionally, the Greater Philadelphia Chamber of Commerce has endorsed
the Company as the exclusive PEO of choice for its approximately 6,000 business
client members.
With the trend toward outsourcing non-core competencies, small and
medium-sized businesses typically have service relationships with accountants,
attorneys, banks, trade associations and other business advisors. Alliances with
these service providers offer cross-selling opportunities for the Company's
employee services. Other potential alliances being pursued include additional
product or service offerings, as well as creating additional sales distribution
channels. The Company intends to develop such alliance opportunities as an
extension of its existing marketing and sales capability.
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OPERATING STRATEGY
The Company has developed an operating strategy designed to control
costs while supporting growth. The operating strategy encompasses implementing a
sophisticated business model, which monitors performance while delivering
customer intimacy with efficiency.
Implementing a Sophisticated Business Model. The Company's business
model includes a portfolio based management control system and an efficient
operating model that is designed around best demonstrated practices for service
industries.
Management Control System. The Company has implemented a portfolio
based management control system designed to control and improve its performance
in the selection of new business, assurance in meeting its brand promise with
respect to existing customers and analyzing lapsed business. The new business
criteria include target industries with high gross profit per worksite employee
and acceptable underwriting risk. The criteria include number of worksite
employees, credit rating, three-year workers' compensation loss ratios, state
unemployment experience, expected administrative fee and predicted gross profit
per employee.
The current business portfolio component of the management control
system enables management to monitor new client start-ups, review
client-specific financial and risk performance and employee and employer
satisfaction. By focusing management attention on key business variables, the
system permits day-to-day management to direct actions consistent with the
Company's strategy and business plan. The business variables measured are the
same as those used to assess new business, and include service delivery
performance metrics, accounts receivable, at-risk clients and employer and
employee satisfaction. The Company believes that attention to these variables
increases gross profit per worksite employee. Lapsed business is analyzed to
facilitate identification of service delivery system issues and to improve
future client retention.
Efficient Operating Model. The Company believes it has established
an operating model that delivers customer intimacy with efficiency. The
operating model facilitates customer responsiveness while maximizing
administrative support productivity. The Company's local service center delivers
the customer intimate activities including sales management, personalized
customer care, new client and employee orientation and enrollment, temporary
staffing and local risk management services. Local risk management services
include worksite safety evaluations, safety promotion, client meetings, early
intervention of workers' compensation reported claims and early return to work
monitoring. Economies of scale are achieved through centralized activities
including nationally directed telemarketing, branding, marketing material
development and benefits procurement. Efficiencies are also gained regionally
where the Company performs customer care management, payroll processing,
benefits and human resource administration, underwriting and claims management.
Staffing of the local service centers and the centralized regional
centers is based on metrics identifying the number of worksite employees or
other applicable customers who can be adequately served by each kind of service
representative, including customer care representatives, payroll technicians,
benefits specialists, human resources consultants, workers' compensation
specialists, safety consultants and underwriters. These staffing metrics are
designed to provide efficient service at a carefully controlled cost. The
Company believes it can achieve its strategic objectives by implementing the
local service model in each strategic market it enters.
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BUSINESS PROFILE
In order to implement its strategy to provide better solutions at
the best value, the Company provides six primary categories of employee
services: (i) workers' compensation and safety management; (ii) unemployment
insurance management; (iii) employee benefits procurement and administration;
(iv) human resource and compliance management; (v) payroll management; and (vi)
other value-added services. By engaging the Company to provide these services,
clients can focus on their core competencies.
These services are provided under the Company's PEO client service
agreement, which typically has an initial one-year term; thereafter, the
agreement is renewed periodically. The agreement is subject to termination by
the Company or the client upon 30 days' prior written notice. Service revenues,
billed to clients along with each periodic payroll, are based on a pricing model
that takes into account the gross pay of each employee and a mark-up that
includes the estimated costs of employment-related taxes, providing insurance
coverage and benefit plans, performing human resource administration, payroll,
benefits and compliance management and other services and an administration fee.
The specific mark-up varies by client based principally on the workers'
compensation classification of the worksite employees, their human resource
needs and the size of the client. Accordingly, the Company's average mark-up
percentage will fluctuate based on client mix.
Clients are required to pay the Company its total fee concurrent
with the applicable payroll date. Although the Company is ultimately liable as
the co-employer to pay employees for work previously performed, it retains the
right to terminate the PEO client service agreement as well as the worksite
employees upon non-payment by a client, which limits any future liability. This
right and the periodic nature of payroll, combined with client credit
verifications and the Company's client selection process, are used to control
this exposure.
Workers' Compensation and Safety Management. Workers' compensation
is a state-mandated, comprehensive insurance program that requires employers to
fund medical expenses, lost wages and other costs that result from work-related
injuries and illnesses, regardless of fault and without any co-payment by
employees. See "Regulation" below for a discussion of workers' compensation.
Pursuant to the Company's PEO client service agreement, the Company assumes the
obligations of its clients to pay workers' compensation claims. The Company
seeks to control its workers' compensation costs through comprehensive risk
evaluation of prospective clients, the prevention of workplace injuries, timely
intervention with employee injuries, aggressive management of the medical costs
related to such injuries and the prompt return of employees to work. The Company
seeks to prevent workplace injuries by implementing a wide variety of training
and safety programs. The Company's efforts to return employees to work quickly
involve both rehabilitation services and the placement of employees in
transitional, light-duty positions until they are able to resume their former
positions.
Unemployment Insurance Management. Pursuant to the Company's PEO
client service agreement, the Company also assumes the obligation of its clients
to pay unemployment insurance costs. The Company manages its unemployment
insurance costs by establishing employee termination procedures, responding on a
timely basis to unemployment claims, attending unemployment hearings and
attempting to reassign employees to other worksites when a reduction in force
occurs at any one worksite location.
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Employee Benefits Procurement and Administration. Pursuant to the
Company's PEO client service agreement, the Company is required to provide
mandated employee benefits to worksite employees. Additionally the Company
offers worksite employees a voluntary benefits package that includes several
health care options, such as point-of-service, preferred provider organizations,
health maintenance organizations ("HMOs") and indemnity plans. Supplemental
benefit programs offer dental care, prescription drugs, and life and disability
insurance options. The Company also offers 401(k) retirement savings and
cafeteria style plans to its eligible employees. The Company believes that its
ability to provide and administer a wide variety of employee benefits on behalf
of its clients tends to mitigate the competitive disadvantage small and
medium-sized businesses normally face in the areas of employee benefit cost
control and employee recruiting and retention.
Human Resources and Compliance Management. Pursuant to the Company's
PEO client service agreement, the Company provides comprehensive human resources
services to its clients. These services reduce the employment-related
administrative burdens faced by its clients, and provide worksite employees with
a wide array of benefits typically offered by large employers. The Company
develops and administers human resource policies and procedures for each of its
clients, relating to, among other things, recruiting, retention programs,
performance management, discipline and terminations. The Company also provides
orientation, training and development, counseling and substance abuse awareness
for worksite employees.
By contract, the Company generally assumes responsibility for
complying with many employment-related regulatory requirements. In addition, the
Company assists its clients in understanding and complying with other
employment-related laws for which the Company does not assume responsibility.
Laws and regulations applicable to employers include state and Federal tax laws,
state workers' compensation laws, state unemployment laws, safety and health
laws, immigration laws, and discrimination, sexual harassment and other civil
rights laws.
Payroll Management. Pursuant to the PEO client service agreement,
the Company is responsible for payroll processing, check preparation,
distribution and recordkeeping, payroll tax deposits, payroll tax reporting,
employee file maintenance, unemployment claims and monitoring and responding to
changing regulatory requirements. The Company indemnifies the client against the
Company's failure to comply with regulatory requirements. Payroll reports are
prepared for clients for financial and other recordkeeping purposes. The
provision of these services by the Company generally reduces the client's
employment liabilities and allows clients to focus on their core business.
Other Value-Added Services. Since the acquisition of NovaPro on July
1, 1997, the Company has offered rehabilitation temporary staffing in the health
care industry. The rehabilitation temporary staffing service currently can draw
on a pool of approximately 6,000 rehabilitation clinicians to provide staff to
health care providers. This business is supported by technology which provides
detailed recruitment and sales productivity information for management purposes.
It also generates billing and utilization reports for clients.
The Company also plans to offer additional value-added services to
clients and worksite employees. Such services may include employee recognition
programs, travel discount arrangements, vision care, credit union membership,
smart cards, warehouse club memberships and various financial services. Some of
these services may generate fee income or commissions for the Company.
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The Company's standard PEO client service agreement also establishes the
division of responsibilities between the Company and the client as co-employers.
The division of responsibilities is generally as follows:
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THE COMPANY CLIENT SHARED
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- - Payment of payroll - Supervision of - Implementation of
job-specific activities of policies and practices
- - Tax reporting and payment worksite employees, relating to the
(state and Federal including designation of employer-employee
withholding, Federal job descriptions and relationship
Insurance Contributions duties and
Act ("FICA"), Federal responsibilities - Selection of fringe
Unemployment Tax Act benefits, including employee
("FUTA") and state - Assignment to, and leave policies (other
unemployment insurance ownership of, all than as controlled by the
administration) intellectual property Family and Medical Leave
Act of 1993 or other
- - Workers' compensation - Product liability laws)
compliance, procurement,
management, payment and - Professional liability or - Compliance with
reporting malpractice provisions of the Internal
Revenue Code of 1986, as
- - Employee benefit - Compliance with OSHA amended (the "Code"),
procurement, regulations, state and regarding benefits
administration and local government discrimination
payment contracting provisions,
professional licensing - Hiring, terminating and
- - Compliance with requirements and fidelity disciplining worksite
Immigration Reform and bonding requirements employees
Control Act and Consumer
Credit Protection Act, as - Negligent or tortious - Compliance with Title VII
well as monitoring conduct of worksite employees of the Civil Rights Act of
changes in other acting under the 1964, the Age
government regulations direction and control of Discrimination in
governing the the client Employment Act, the
employer-employee Americans with
relationship and updating - Determination of Disabilities Act, the
the client when necessary compensation of worksite Fair Labor Standards Act
employees and similar state or
local legislation
- Safety management and
training
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CONTRACTUAL ARRANGEMENT WITH PARENT
The Parent and the Company entered into the NovaCare Contract in
February 1997, whereby principally all of the Parent's employees became
co-employed by the Company. Under the NovaCare Contract, the Company had
provided traditional PEO services such as payroll and benefits management,
worksite safety evaluation, employment-related risk management and compensation
and benefits consultation. In January 1998, the Parent initiated a restructuring
plan to favorably position its long-term care services segment for recent
changes in the Medicare reimbursement system as mandated by the Balanced Budget
Act of 1997. The intent of the plan was to substantially reduce the cost of its
workforce by transitioning to a lower cost operating model for providing quality
therapy services. In support of this transition and to address the increased
demand from the Parent for additional human resource services, the Company and
the Parent amended the NovaCare Contract. The amended contract was a four-year
agreement which became effective July 1, 1998.
9
<PAGE> 12
On March 31, 1999, the Parent announced that, due primarily to lower
reimbursement rates and declines in rehabilitation caseloads at long-term care
services customer facilities, resulting principally from the new reimbursement
structure for therapy under the Medicare program, the Parent was forced to exit
selected long-term care markets and facilities, and to continue to lower
expenses by reducing labor costs. On June 1, 1999, the Parent sold its remaining
long-term care services segment business to Chance Murphy, Inc., an independent
company managed by a subsidiary of Integrated Health Services, Inc. In addition,
on July 1, 1999, the Parent sold its orthotics and prosthetics services business
to a subsidiary of Hanger Orthopedic Group, Inc. ("Hanger"). The Company entered
into a six-month transition services agreement with Hanger.
Based on these announcements, the Company and the Parent have
negotiated new contract terms to reflect changes in the Parent's ongoing service
needs. The new contract terms, which became effective July 1, 1999, consist of a
four-year services agreement relative to the Parent's physical rehabilitation
and occupational health (PROH) business and a six-month agreement relative to
the Parent's corporate support services personnel. In addition, the Parent
assumed certain costs associated with the Company's downsizing to adjust to the
revised service needs.
The Company evaluated the implications of these events on its
organizational structure, and recorded a provision for restructure in the fourth
quarter of fiscal 1999. The provision consisted principally of employee
severance costs, which represent the accumulation of termination benefits as set
forth in the Company's severance policy, and facility lease costs.
INFORMATION TECHNOLOGY
The Company's nationwide information systems network connects its local
customer service centers, regional processing centers, worksite employees,
clients and service providers. These technologies include, but are not limited
to, a combined Internet/Intranet access and electronic mail system, client
server-based expertise, which provides distributed processing and rapid
implementation of business changes and telecopier to data technology (which
eliminates the need for manual data entry). The regional processing centers
serve as disaster recovery backup sites, having the capability to handle the
Company's operations for a short period of time.
The Company currently uses commercially available software to manage
information related to payroll processing, benefits administration, human
resource management and employee enrollment. The Company has also developed the
requirements to create a proprietary information management system to handle the
expected growth in worksite employees. In July 1999, the Company entered into
agreements with a nationally recognized software and technology provider and a
leading information management consulting firm to develop and implement an
enterprise-wide-information system for operating and financial applications. The
cost of this commitment, including computer hardware, software and other related
costs, approximates $2.7 million and is projected to be expended during fiscal
2000.
10
<PAGE> 13
MARKETING AND SALES
The Company's client base as of June 30, 1999 consisted of 4,084
client companies, representing 54,313 worksite employees. The Parent represented
approximately 44% of the Company's fiscal 1999 revenues. The Company's clients,
excluding the Parent, have an average of 11 worksite employees. As of June 30,
1999, the Company's approximate distribution of worksite employees by major
Standard Industrial Classification ("SIC") code industry grouping was:
<TABLE>
<CAPTION>
WITHOUT WITH
THE PARENT THE PARENT
---------- ----------
<S> <C> <C>
Wholesale/Retail Trade....................................................... 29% 24%
Construction................................................................. 19 16
Restaurants.................................................................. 10 8
Health Care.................................................................. 9 25
Hospitality.................................................................. 8 6
Finance, Insurance and Real Estate........................................... 7 6
Manufacturing................................................................ 5 4
Agriculture.................................................................. 5 4
Transportation............................................................... 5 4
Property Management.......................................................... 3 3
</TABLE>
The Company is focused on serving clients in targeted industries
that generate high gross profit per worksite employee. See "Growth Strategy"
above. All prospective clients are evaluated individually on the basis of
workers' compensation risk, group medical history, unemployment history and
operating stability.
The Company's marketing and sales efforts are focused on the
Company's target markets and industries. The Company currently markets its
services through 74 sales professionals who specialize in one or more of the
Company's target industries. All sales representatives are direct employees.
Employed sales representatives are paid a combination of salary and incentive
compensation. The incentive is based on the gross profit projected to be earned
with respect to a customer contract and is paid after the contract has been in
effect for one full calendar month. The incentive is required to be repaid by
the sales representative if the applicable contract is terminated within 120
days after inception. The Company's sales materials are client specific and
communicate the Company's broad range of high quality services and the potential
benefits to employers and employees.
The Company utilizes professional marketing tools and strategies,
including public relations and advertising, to communicate its brand promise and
performance to target audiences. First, the Company will seek to identify target
audiences through market research. The Company uses market research firms to
assist in designing the messages to be delivered to the target audiences.
Referrals from existing clients and professionals, as well as telemarketing and
direct mail, are used to generate qualified customer leads. The sales force will
then deliver targeted presentations to qualified prospects using industry and
customer-specific marketing materials. These activities are intended to
supplement and enhance the effectiveness of the Company's marketing efforts and
reinforce brand loyalty on the part of employees and clients. Brand loyalty is
expected to generate referrals, improve client retention and thereby improve
profitability. The Company plans to survey the marketplace, its worksite
employees and potential clients on a continuous basis to measure satisfaction
and the effectiveness of its marketing efforts.
For its worksite employees, the Company believes its brand promise
is fulfilled by: (i) establishing a respectful and trusting relationship between
the Company and its worksite employees through clearly defined policies and
procedures, and competitive health care and related benefits; (ii) providing a
positive work environment by way of risk prevention and safety and recognition
programs; (iii) consistently rendering dependable and responsive employee
services, most notably payroll and benefits administration and management; and
(iv) providing reassignment during cyclical changes in its client's businesses.
11
<PAGE> 14
For its clients, the Company seeks to: (i) improve employee
satisfaction and thereby improve workforce performance and productivity; (ii)
reduce the time and effort required by business owners and executives to deal
with the complexities of employment and payroll management; (iii) improve client
business performance by enabling management to focus on core competencies,
increasing workforce productivity through training, recognition, risk prevention
and safety programs, and lowering costs associated with workers' compensation,
health insurance, other benefit coverage, and regulatory compliance; and (iv)
establish a respectful and trusting relationship between the Company and its
clients through expert, responsive and dependable service and accountability for
performance.
The Company has historically benefited from a high level of client
retention resulting in a recurring revenue stream. The Company's client
attrition is attributable to a variety of factors, including: (i) client
business failure; (ii) sale or acquisition of the client company; (iii)
termination by the Company resulting from the client's inability to make timely
payments or implement safety recommendations; (iv) the Company implementing
health plan participation and employee contribution minimum requirements; and
(v) client nonrenewal due to price or dissatisfaction with service. The Company
believes that only a small percentage of nonrenewing clients withdrew due to
dissatisfaction with service or to retain the services of a competitor. The
Company's portfolio management approach, utilizing a management control system
focused on key operating variables, is designed to reduce further the incidence
of non-renewal.
The Company plans to enter new geographic markets on a regular
basis. The Company believes its market development model, which consists of a
structured sales management control system and selling process, will enable it
to penetrate new markets quickly.
Each new salesperson attends the Company's NovaCare University
training program. The Company provides at least three weeks of training for new
sales people to familiarize them with the Company's services, policies and
procedures. The training focuses on the Company's values, business model and
target market approach. The composition of the sales force assigned to each
target market is determined by business objectives related to worksite
employees, profit, client growth and individual sales productivity.
The Company's sales management control system, which monitors
activity both on an individual and a consolidated basis, is designed to ensure
an efficient sales process in support of the Company's objectives. The
measurement criteria used in the sales management process include the number of
qualified sales leads generated, proposals presented, contract close ratio,
number of worksite employees covered by signed contracts, profit per worksite
employee and client retention.
Referrals from existing clients and professionals (such as
accountants, bankers and lawyers) are a primary source of sales leads. Each
sales person visits his or her clients periodically in order to maintain an
ongoing relationship and to benefit from referrals. Referrals are also expected
to result from the Company's brand recognition and the Company's strategic
alliances with other outsourcing service providers to small and medium-sized
businesses, including the Company's relationship with the Parent.
The sales leads result in initial presentations to prospective
clients. The Company's sales executives then gather information about the
prospective client, employees, workers' compensation job classifications and
claims history, state unemployment experience, health insurance claims history,
compatibility with the Company's workplace safety program philosophy, salary and
the desired level of employee benefits and credit history. These various factors
are reviewed in the context of the Company's pricing model and client selection
profile. A client proposal is prepared for potential clients. This prospective
client screening process plays a vital role in controlling the Company's cost
and limiting exposure to liability.
12
<PAGE> 15
Once a prospective client accepts the Company's proposal, the new
client is incorporated into the Company's system by a new account start-up team.
A customer service manager then assumes responsibility for ensuring service
performance for the client and its employees.
WORKERS' COMPENSATION AND HEALTH CARE PROGRAM
The majority of the Company's controllable direct costs relate to
workers' compensation benefits and health care. Consequently, the Company's
ability to manage these worksite employee costs is critical to its success and
profitability. To effectively manage its workers' compensation and health care
costs, the Company utilizes: (i) careful underwriting and selection of new
clients; (ii) effective workers' compensation injury prevention, medical
management, rehabilitation and return to work techniques; and (iii) health care
provider networks in key markets.
If an injury occurs, the Company's goal is to take control of the
claim within 24 hours after receipt of the injury report, aggressively medically
manage the injury by coordinating with the worksite employer, employee and
provider, and return the employee to work as early as is safe and feasible. This
approach substantially lowers injury-related costs, particularly the most
expensive cost component, lost workdays. Temporarily placing injured employees
in light duty positions until they are able to return to their previous duties
is an opportunity afforded the Company in its more densely penetrated markets.
The Company's workers' compensation insurance coverage is currently
provided by Liberty Mutual, the largest workers' compensation insurance carrier
in the United States. The coverage is provided under a workers' compensation
deductible program with an aggregate stop loss that limits the liability of the
Company to a capped percentage of the standard premium. Under this program, the
Company receives a benefit if it reduces actual claims experience below the cap.
The Company accrues workers' compensation expense based on management's
evaluation of the nature and severity of individual claims and past claims
experience. Actual claims experience is then recognized against the amount
accrued. The Liberty Mutual arrangement extends through June 30, 2000 and
provides for: (i) a dedicated claims processing unit; (ii) intensive training of
the Company's safety consultants and risk assessors; and (iii) favorable rates
and payment terms.
When buying health care coverage for its employees, the Company
believes its scale economics will be a source of leverage with insurers.
Accordingly, the Company believes that over time it will be able to achieve
attractive health care rates by forming strategic partnerships with national and
regional providers in each local market.
COMPETITION
The PEO industry consists of approximately 2,000 companies (according to an
estimate by NAPEO), most of which serve a single market or region. The Company
is the third largest PEO (measured by number of worksite employees) in the
United States. According to industry analysts, the ten largest PEOs account for
approximately 39% of the existing revenues in the industry. The Company
considers its primary competition to include: (i) traditional in-house human
resource departments; (ii) other PEOs; and (iii) providers of unbundled
employment-related services, such as payroll processing firms, temporary
employment firms, commercial insurance brokers, human resource consultants,
workers' compensation insurers, HMOs and other specialty managed care providers.
Competition in the highly fragmented PEO industry is generally on a local
or regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, reputation and price.
The Company believes that brand recognition, regulatory expertise, financial
resources, risk management, information technology capability, strategic
alliances, and economies of scale can distinguish a large-scale PEO from the
rest of the industry. The Company believes that it competes favorably in these
areas.
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<PAGE> 16
The Company believes that barriers to entry in the PEO industry are
increasing primarily due to the following factors: (i) the complexity of the PEO
business and the need for expertise in multiple disciplines; (ii) the three to
five years of experience required to establish experience-rates in key cost
areas of workers' compensation, health insurance and state unemployment; and
(iii) the need for sophisticated management information systems to track all
aspects of business in a high growth environment.
REGULATION
The Company is subject to local, state and Federal regulations,
which include operating, financial and licensing requirements. Adding complexity
to the Company's regulatory environment are: (i) uncertainties resulting from
the non-traditional employment relationships created by PEOs; (ii) variations in
state regulatory schemes; and (iii) the ongoing evolution of regulations
regarding health care and workers' compensation.
Many of the Federal and state laws and regulations relating to tax,
benefit and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and, accordingly, do not
specifically address the obligations and responsibilities of PEOs or the
co-employment relationship. Moreover, the Company's PEO services are regulated
primarily at the state level. Regulatory requirements regarding the Company's
business therefore vary from state to state, and as the Company enters new
states it will be faced with new regulatory and licensing environments. There
can be no assurance that the Company will be able to: (i) satisfy the licensing
requirements or other applicable regulations of any particular state; (ii)
provide the full range of services currently offered; or (iii) operate
profitably within the regulatory environment of any state in which it does not
obtain regulatory approval. The absence of required licenses would require the
Company to restrict the services it offers. New legislation or new
interpretations of current licensing and regulatory requirements could impose
operating or licensing requirements on the Company which it may not be able to
satisfy or which could have a material adverse effect on the Company's business,
financial condition, results of operations and liquidity. Additionally,
interpretation of such legislation or regulation by regulatory agencies with
broad discretionary powers could require the Company to materially modify its
existing operations in order to comply with applicable regulations.
The application of many laws to the Company's PEO services will
depend on whether the Company is considered an employer under the relevant
statutes and regulations. The Internal Revenue Service ("IRS") is currently
examining this issue. See "Employee Benefit Plans" below. In addition, from time
to time there have been proposals to expand the statutory definition of employer
to include PEO's for certain purposes of the Code.
Regulation in the health care and workers' compensation fields
continues to evolve. Numerous reform proposals have been the subject of debate
at both the Federal and state government levels. The Company cannot predict what
effect any such proposed reform will have on its business. If new legislation
results in increased health care or workers' compensation costs, which comprise
a significant portion of the Company's direct costs, and if the Company is not
able to reflect promptly such increased costs in its service fees, such
legislation could have a material adverse impact on the Company's business,
financial condition, results of operations and liquidity.
PEO Licensing Requirements. A critical aspect of the growth of the
PEO industry has been the increasing recognition and acceptance of PEOs by state
authorities. As the concept of PEO services has become more understood by
regulatory authorities and more brand name companies enter this industry, the
regulatory environment has begun to shift from one of skepticism to one of
recognition. During the mid-to late-1980s, legitimate industry participants were
challenged to overcome well publicized failures of financially unsound and, in
some cases, unscrupulous operators.
14
<PAGE> 17
While many states do not explicitly regulate PEOs, approximately
one-third have licensing, registration or other regulatory requirements for PEOs
and several additional states, including Pennsylvania, are considering such
regulation. Such laws vary from state to state but generally provide for
monitoring the fiscal responsibility of PEOs. The Company is licensed or
registered in 13 states and expects to be licensed or registered in several more
over the next twelve months. State regulation assists in screening
insufficiently capitalized PEO operations, imposes requirements regarding
payment of wages, taxes, benefits and workers' compensation and resolves issues
concerning an employee's status for specific purposes under applicable state
law. Because existing regulations are relatively new, there is limited
interpretive or enforcement guidance available. The development of additional
regulations and interpretation of existing regulations can be expected to evolve
over time.
In Florida, the Company's PEO operations are licensed under the
Florida Employee Leasing Licensing Act of 1991 (the "Florida Licensing Act").
The Florida Licensing Act requires PEOs and their controlling persons to be
licensed, mandates reporting requirements and allocates several employer
responsibilities. The Florida Licensing Act also requires licensed PEOs to
submit annual audited financial statements and maintain a tangible accounting
net worth and positive working capital. The Florida Licensing Act also requires
PEOs to, among other things: (i) reserve the right of direction and control over
the leased employees; (ii) enter into a written agreement with the client
company; (iii) pay wages to the leased employees; (iv) pay and collect payroll
taxes; (v) maintain authority to hire, terminate, discipline and reassign
employees; (vi) reserve a right to direct and control the management of safety,
risk and hazard control at the worksite; (vii) promulgate and administer
employment and safety policies; and (viii) manage workers' compensation claims.
Federal and State Employment Taxes. The Company assumes the
responsibility and liability for the payment of Federal and state employment
taxes with respect to wages and salaries paid to its employees, including
worksite employees. There are essentially three types of Federal employment tax
obligations: (i) income tax withholding requirements; (ii) social security and
Medicare obligations under FICA; and (iii) unemployment obligations under FUTA.
Under the applicable Code sections, the employer has the obligation to remit the
employer portion and, where applicable, to withhold and remit the employee
portion of these taxes.
To date, the IRS has relied extensively on the common law test of
employment in determining employer status and the resulting liability for
failure to withhold. However, the IRS has formed a Market Segment Study Group
for the stated purpose of examining whether PEOs, such as the Company, are the
employers of the worksite employees under the Code provisions applicable to
Federal employment taxes and, consequently, whether they are exclusively
responsible for payment of employment taxes on wages and salaries paid to such
employees. Another stated purpose of the Market Segment Study Group was to
determine whether owners of client companies can be employees of PEOs under the
Federal employment tax laws.
IRS officials have reported that the Market Segment Study is near
completion and that the issuance of a tax advice memorandum has been delayed
pending the outcome of legislation to be proposed by the PEO industry. NAPEO is
in the process of drafting federal legislation that will recognize qualified
PEOs as the employer for employment tax and benefit plan purposes. Specifically,
the legislation would establish that a company's PEO would be considered to be
the employer of such company's employees for purposes of tax collection,
reporting and remittance. It would also clarify and establish that as an
employer, a PEO can sponsor employee benefit plans, including defined
contribution plans, such as 401(k) plans. NAPEO believes that this federal
legislation will become law at some point in the future.
The interpretive uncertainties raised by the Market Segment Study
Group may affect the Company's ability to report employment taxes on its own
account rather than for the accounts of its clients and would increase
administrative burdens on the Company's payroll service function.
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<PAGE> 18
Employee Benefit Plans. The Company offers various employee benefit
plans to its worksite employees, including 401(k) plans (a defined contribution
plan with an employer contribution feature), cafeteria plans, group health
plans, group life insurance plans, group disability insurance plans and employee
assistance programs. Generally, employee benefit plans are subject to provisions
of both the Code and the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). In order to qualify for favorable tax treatment under the
Code, the plans must be established and maintained by an employer for the
exclusive benefit of its employees.
The Market Segment Study Group was established by the IRS to examine
whether PEOs, such as the Company, are the employers of worksite employees under
Code provisions applicable to certain employee benefit plans and consequently
able to offer to worksite employees benefit plans that qualify for favorable tax
treatment. The Company is unable to predict the actual timing of the release of
any report or nature of the findings of the Market Segment Study Group or the
ultimate outcome of such conclusions or findings. If the IRS study were to
conclude that a PEO is not an employer of its worksite employees for plan
purposes, worksite employees might not be able to continue to make contributions
to the Company's 401(k) plans or cafeteria plans. The Company believes that,
although unfavorable to the Company, a prospective application by the IRS of an
adverse conclusion would not have a material adverse effect on its financial
position and results of operations. If such conclusion were applied
retroactively, employees' vested account balances would become taxable
immediately, the Company would lose its tax deduction to the extent the
contributions were not vested, the plans' trusts would become taxable trusts and
penalties could be assessed. In such a case, the Company would face the risk of
client dissatisfaction as well as potential litigation. A retrospective
application by the IRS could have a material adverse effect on the Company's
business, financial position, results of operations and liquidity. While the
Company believes that a retroactive disqualification is unlikely, there can be
no assurance as to the ultimate resolution of these issues.
In addition to the employer/employee relationship requirement
described above, pension and profit-sharing plans, including the Company's
401(k) plans, must satisfy certain other requirements under the Code. These
other requirements are generally designed to prevent discrimination in favor of
highly compensated employees to the detriment of non-highly compensated
employees with respect to both the availability of, and the benefits, rights and
features offered in, qualified employee benefit plans. The Company applies the
nondiscrimination requirements of the Code at both a consolidated and client
company level to ensure that its 401(k) plans are in compliance with the
requirements of the Code.
Employee pension and welfare benefit plans are also governed by
ERISA. ERISA defines the term employer as "any person acting directly as an
employer, or indirectly in the interest of an employer, in relation to an
employee benefit plan." ERISA defines the term employee as "any individual
employed by an employer." The United States Supreme Court has held that the
common law test of employment must be applied to determine whether an individual
is an employee or an independent contractor under ERISA.
A definitive judicial interpretation of employer in the context of a
PEO or employee leasing arrangement has not been established. If the Company
were found not to be an employer for ERISA purposes, its plans might not comply
with ERISA, the level of services the Company could offer may be materially
adversely affected, and the Company and its plans might not enjoy the preemption
of state laws provided by ERISA and could be subject to varying state laws and
regulations, as well as to claims based upon state common laws.
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<PAGE> 19
Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund or insure
medical expenses, lost wages and other costs resulting from work-related
injuries and illnesses. In exchange for providing workers' compensation coverage
for employees, employers are not subject to litigation by employees for benefits
in excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical costs and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials. Workers' compensation laws also regulate
the methods and procedures that the Company may employ in its workers'
compensation managed care programs. For example, workers' compensation laws
prohibit medical co-payment and deductible payment by employees. In addition,
certain states restrict employers' rights to direct health care providers and
establish maximum fee levels for treatment of injured workers.
As a creation of state law, workers' compensation is subject to
change by each state's legislature and is influenced by the political processes
in each state. Several states have mandated that employers receive coverage only
from state-operated funds. Florida and other states have adopted legislation
requiring that all workers' compensation injuries be treated through a managed
care program. While such legislation may increase the market for the Company's
workers' compensation managed care services, it may also intensify the
competition faced by the Company for such services. In addition, Federal health
care reform proposals include a proposal that may require 24-hour health
coverage, in which the coverage of traditional employer-sponsored health plans
is combined with workers' compensation coverage to provide a single insurance
plan for health problems, whether or not related to work. Incorporating workers'
compensation coverage into conventional health plans may adversely affect the
market for the Company's services and may intensify the competition faced by the
Company from HMOs and other health care providers. Moreover, because workers'
compensation benefits are mandated by law and are subject to extensive
regulation, payers and employers do not have the same flexibility to alter
benefits as they have with other health benefit programs. Finally, because
workers' compensation programs vary from state to state, it is difficult for
payers and multi-state employers to adopt uniform policies to administer, manage
and control the costs of benefits.
Other Employer-Related Requirements. As an employer, the Company is
subject to a wide variety of Federal, state and local laws and regulations
governing employer-employee relationships, including the Immigration Reform and
Control Act, the Americans with Disabilities Act, the Family and Medical Leave
Act, the Occupational Safety and Health Act, wage and hour regulations, and
comprehensive local, state and Federal civil rights laws and regulations,
including those prohibiting discrimination and sexual harassment. The definition
of employer may be broadly interpreted under these laws.
Responsibility for complying with various state and Federal laws and
regulations is allocated by agreement between the Company and its clients, or in
some cases is the shared responsibility of both. See "Business Profile" above.
Because the Company acts as a co-employer with the client company, it is
possible that the Company could incur a liability for violations of laws even
though the Company is not contractually or otherwise responsible for the conduct
giving rise to such liability. The Company's standard client service agreement
generally provides that the client will indemnify the Company for liability
incurred as a result of an act of negligence of a worksite employee under the
direction and control of the client or to the extent the liability is
attributable to the client's failure to comply with any law or regulation for
which it has specified contractual responsibility. However, there can be no
assurance that the Company will be able to enforce such indemnification and the
Company may therefore be ultimately responsible for satisfying the liability in
question.
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<PAGE> 20
CORE (NON-WORKSITE) EMPLOYEES
At June 30, 1999, the Company had 471 core employees. None of the
Company's core employees are represented by a collective bargaining agreement
and the Company is not aware of any current activity to organize any of its core
employees. The Company considers relations with its core employees to be good.
For information with respect to the Company's worksite employees, see "Marketing
and Sales" above.
INSURANCE
The Company believes that it maintains the types and amounts of
insurance customary in the industry, including coverage for general liability,
directors and officers, crime, fiduciary and workers' compensation. The Company
considers its insurance coverage to be adequate both as to risks and amounts.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company who served during the fiscal year are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- ------ ---------------------------------------------
<S> <C> <C>
Loren J. Hulber................... 57 President, Chief Executive Officer and
Director
Aven A. Kerr...................... 53 Executive Vice President and Chief Operating
Officer
Thomas D. Schubert................ 38 Senior Vice President and Chief Financial Officer
Kenneth J. Jankowski.............. 44 Senior Vice President of Client Services and
Chief Information Officer
Andrew W. Stith................... 31 Senior Vice President of Marketing and Sales
Christina D. Harris, Esquire...... 37 Senior Vice President of Regulatory Affairs
and Compliance and General Counsel
Ronald N. Shostack................ 44 Senior Vice President of Strategic Planning
Edwin A. Neumann.................. 32 Vice President of Finance and Chief Accounting Officer
</TABLE>
The following is a brief summary of the business experience of each
of the executive officers of the Company:
Loren J. Hulber. Mr. Hulber has been the President, Chief Executive
Officer and a director of the Company since March 3, 1997. For the previous ten
years, he served in various capacities for Fortune Brands, Inc., most recently
as President and Chief Executive Officer of Day-Timers, Inc., a subsidiary
specializing in time management and personal organization. From 1973 until 1981,
Mr. Hulber was President and Chief Executive Officer of Durand Corporation, an
office products company. Upon Durand Corporation's acquisition by Jostens, Inc.
in 1981 and until 1987, Mr. Hulber was President of that company's Business
Products Group, a provider of business products and services. Mr. Hulber
previously served as Vice Chairman of the Board of Trustees of Lehigh Valley
Hospital and Health Network.
Aven A. Kerr. Ms. Kerr became Executive Vice President and Chief
Operating Officer of the Company in June 1998. Ms. Kerr was previously Senior
Vice President, Human Resources of the Parent since October 1996. From November
1995 to September 1996, she was Senior Vice President, Administration and
Systems at United Healthcare Corp. She was Senior Vice President, Human
Resources at MetraHealth Care Company from May 1995 to November 1995. Prior to
that, she was employed by Prudential Insurance Company for 27 years in various
positions, most recently as Senior Vice President, Central Atlantic Operations.
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<PAGE> 21
Thomas D. Schubert. Mr. Schubert has been the Senior Vice President
and Chief Financial Officer of the Company since June 4, 1997. Prior to joining
the Company, he served in various capacities with Chemical Leaman Tank Lines,
Inc., a transportation and logistics company, since 1991, most recently as Vice
President of Finance. From 1984 to 1990, he worked in the accounting/auditing
practice with the Philadelphia office of Ernst & Young LLP where he managed a
variety of client engagements in the manufacturing and service sectors.
Kenneth J. Jankowski. Mr. Jankowski became Senior Vice President of
Client Services and Chief Information Officer in January 1998. Prior to joining
the Company, Mr. Jankowski was most recently Vice President and Chief
Information Officer for Whirlpool Financial Corporation from March 1995 to
January 1998, where he was responsible for all information service functions and
system operations worldwide. Prior to this appointment, Mr. Jankowski served in
various corporate and staff management positions with Whirlpool from July 1989
to February 1995. Mr. Jankowski had additional management positions with TRW,
Inc., The First National Bank of Chicago and Baxter International Inc. from
March 1982 through June 1989.
Andrew W. Stith. Mr. Stith became Senior Vice President of Marketing
and Sales of the Company on March 3, 1997. In 1994, he joined the Parent as
Assistant to the Chairman of the Parent. In 1995, Mr. Stith assumed the position
of Vice President of Sales for the Long-Term Care Services Division of the
Parent. Prior to joining the Parent, from 1992 to 1994, Mr. Stith obtained his
M.B.A. from the Amos Tuck School of Management of Dartmouth College. From 1989
to 1992, he was associated with River Capital, Inc. as a venture capital
associate.
Christina D. Harris, Esq. Ms. Harris became Senior Vice President of
Regulatory Affairs and Compliance of the Company on July 18, 1997 and assumed
the position of General Counsel on May 1, 1998. Prior to joining the Company,
she was National Vice President of Marketing (Alternative Staffing) for AIG Risk
Management, Inc. ("AIG") from April 1996 to July 1997. Before joining AIG, she
was Vice President for Legal and Regulatory Affairs and General Counsel for The
Vincam Group, Inc., a PEO, from December 1991 to April 1996. Ms. Harris has
served as NAPEO's chief delegate on employment law to its government affairs
committees and as Chairperson of its Legal Advisory Council. She is also the
current President of Mid-Atlantic Association of Professional Employers
("MAAPE") and past president of the Florida Association of Professional Employer
Organizations ("FAPEO"), both chapters of NAPEO. Ms. Harris currently serves on
the Board of Directors of NAPEO.
Ronald N. Shostack. Mr. Shostack became Senior Vice President of
Strategic Planning in January 1998. Previously, Mr. Shostack was founder,
President, Chief Executive Officer and majority shareholder of AmeriCare, a PEO
based in Phoenix, Arizona, which was established in 1982 and acquired by the
Company in December 1997. Prior to founding AmeriCare, Mr. Shostack was a
Certified Public Accountant with Laventhol and Horwath.
Edwin A. Neumann. Mr. Neumann became Vice President of Finance and
Chief Accounting Officer on July 1, 1999. Mr. Neumann was previously the
Corporate Controller of the Company since October 1997. From September 1996 to
October 1997, he was Senior Manager of the Corporate Audit department for Crown
Cork & Seal Company, Inc., a global manufacturer of packaging products. From
1993 to 1996, he worked in the accounting/auditing practice with the
Philadelphia office of Ernst & Young LLP, where he managed a variety of client
engagements in the manufacturing, aerospace and defense, and service industries.
19
<PAGE> 22
ITEM 2. PROPERTIES
The Company's principal executive offices are located at the Valley Forge
Corporate Center, 2621 Van Buren Avenue, Norristown, Pennsylvania 19403 where
the Company leases approximately 30,000 square feet. The lease for this office
space expires in July 2004. In addition, the Company leases other office space
at approximately 17 locations in various cities within the United States. The
terms of these lease arrangements are typically three to five years in duration.
See Note 11 of Notes to Consolidated Financial Statements for further
information concerning the Company's leases for its facilities.
The Company does not anticipate that it will experience any difficulty in
renewing any leases upon their expiration or obtaining alternate space on
comparable terms if such leases are not renewed. The Company believes that its
facilities are suitable for operations, are well maintained and are of adequate
size for present needs and planned expansion in the near future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims, suits and
complaints which arise in the ordinary course of business. Currently, there are
no such claims, suits or complaints which, in the opinion of management, would
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under
the symbol "NCES".
The following table sets forth, for the quarters indicated, the high and
low bid prices per share of common stock from November 11, 1997 (the first day
the common stock was publicly traded) as reported on the NASDAQ National Market.
<TABLE>
<CAPTION>
COMMON STOCK PRICES
-------------------------------
HIGH LOW
--------------- ------------
YEAR ENDED JUNE 30, 1999:
<S> <C> <C>
First Quarter............................................ $9.38 $3.00
Second Quarter........................................... 6.19 2.97
Third Quarter............................................ 8.56 5.09
Fourth Quarter........................................... 6.63 2.75
YEAR ENDED JUNE 30, 1998:
Second Quarter (beginning November 11, 1997)............. $10.00 $6.31
Third Quarter............................................ 8.00 5.13
Fourth Quarter........................................... 10.19 6.94
</TABLE>
As of September 14, 1999, there were approximately 100 shareholders of
record of common stock. This number does not include beneficial owners of the
common stock whose shares are held in "nominee" or "street name" by various
dealers, clearing agencies, banks, brokers and other fiduciaries.
20
<PAGE> 23
The Company has never paid a cash dividend on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. The payment of
cash dividends in the future will depend on the Company's earnings, financial
condition and capital needs and on other factors deemed pertinent by the
Company's Board of Directors. It is the current policy of the Company's Board of
Directors to retain earnings to finance the operations and expansion of the
Company's business.
On November 11, 1997, the Company's Registration Statement on Form S-1 (No.
333-35071), covering 5,000,000 shares of Common Stock was declared effective by
the Securities and Exchange Commission. The Company's initial public offering
(the "Offering") was completed on November 14, 1997. Subsequent to the Offering,
the Company issued an additional 750,000 shares pursuant to the exercise of an
over-allotment provision, for a total issuance of 5,750,000 shares. The Offering
was underwritten by BancBoston Robertson Stephens and Salomon Smith Barney Inc.
The aggregate offering price of the shares sold by the Company, including
the over-allotment provision, approximated $51.8 million. The net proceeds from
the Offering, after deducting offering costs of $6.1 million, amounted to $45.7
million and were used by the Company to pay the Company's outstanding revolving
credit loan of $28.4 million from the Parent and pay $17.2 million to retire
deferred purchase obligations. The remaining proceeds have been allocated for
general corporate purposes.
21
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
audited financial statements of the Company, and the predecessor company,
Resource One, Inc., which are incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998. The selected financial
data for the Company and its predecessor should be read in conjunction with the
financial statements and notes thereto, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------- -
FOR THE YEARS ENDED JUNE 30 PERIOD FROM
------------------------------------- OCTOBER 1, 1996
1999 1998 TO JUNE 30, 1997
---------------- --------------- ---------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(2)
Revenues(3).................. $ 1,544,622 $ 1,271,757 $ 394,193
================ ============== ============
Gross profit................. 64,001 41,547 12,238
Selling, general and
administrative
expenses................... 42,479 27,848 8,273
Amortization of excess
cost of net assets
acquired................... 3,571 2,801 1,034
Provision for restructure.... 910 -- --
---------------- -------------- -----------
Income from operations....... 17,041 10,898 2,931
Interest (expense) income,
net........................ (382) (699) (697)
----------------- -------------- ------------
Income before income
taxes...................... 16,659 10,199 2,234
Income taxes................. 7,663 4,743 1,542
---------------- -------------- ------------
Net income................... $ 8,996 $ 5,456 $ 692
================ ============== ============
Historical net income
(loss) per share, with
accretion adjustment:
Basic(5)................... $ .31 $ .17 $ (.02)
Assuming dilution(5)....... $ .30 $ .17 $ (.02)
Proforma net income per
share, excluding
accretion adjustment:
Basic(5)................... $ .31 $ .22 $ .04
Assuming dilution(5)....... $ .30 $ .22 $ .04
THE COMPANY
--------------------------------------------------------------
AS OF JUNE 30,
1999 1998 1997
---------------- ---------------- ----------------
BALANCE SHEET DATA:
Current assets............. $ 54,132 $ 76,532 $ 39,879
Total assets............... 144,614 157,421 95,998
Current liabilities(4)..... 60,304 84,431 88,721
Financing
arrangements(4).......... 425 739 1,068
Shareholders' equity....... 79,795 61,806 301
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------------------
FOR THE NINE FOR THE YEARS ENDED
MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------------------
1996(1) 1995 1994
------------------ ----------------- --------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(2)
Revenues(3).................. $ 23,465 $ 18,749 $ 11,987
========== =========== ===========
Gross profit................. 1,838 2,096 2,005
Selling, general and
administrative
expenses................... 1,767 1,763 1,683
Amortization of excess
cost of net assets
acquired................... -- -- --
Provision for restructure.... -- -- --
----------- ---------- ----------
Income from operations....... 71 333 322
Interest (expense) income,
net........................ 6 (5) 1
---------- ----------- -----------
Income before income
taxes...................... 77 328 323
Income taxes................. 21 64 94
---------- ----------- -----------
Net income................... $ 56 $ 264 $ 229
========== =========== ===========
Historical net income
(loss) per share, with
accretion adjustment:
Basic(5)................... $ -- $ -- $ --
Assuming dilution(5)....... $ -- $ -- $ --
Proforma net income per
share, excluding
accretion adjustment:
Basic(5)................... $ -- $ -- $ --
Assuming dilution(5)....... $ -- $ -- $ --
PREDECESSOR COMPANY
------------------------------------------------------------
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
1996(1) 1995 1994
--------------- ---------------- --------------------
BALANCE SHEET DATA:
Current assets............. $ 1,320 $ 986 $ 821
Total assets............... 1,544 1,241 1,006
Current liabilities(4)..... 1,087 748 591
Financing
arrangements(4).......... 8 101 164
Shareholders' equity....... 449 393 345
</TABLE>
22
<PAGE> 25
(1) The Company commenced operations effective October 1, 1996, concurrent
with the acquisition of Resource One, Inc., which was accounted for as a
purchase. In February 1997, the Company acquired three additional PEOs --
Employee Services of America, Inc., Prostaff Human Resources, Inc. and The
TPI Group, Ltd. and entered into the NovaCare Contract. The Company
completed three acquisitions during the year ended June 30, 1998, that
included NovaPro, a rehabilitation temporary staffing business, acquired
from the Parent on July 1, 1997, AmeriCare acquired December 1, 1997 and
SLS acquired on May 1, 1998. During the year ended June 30, 1999, the
Company acquired Pay America and Payday on August 1, 1998 and October 1,
1998, respectively. See Note 1 of the Notes to Consolidated Financial
Statements.
(2) Results of operations from business combinations and the NovaCare Contract
are included from the dates of acquisition and the date of contract
inception, respectively.
(3) Revenues include all amounts billed to clients for gross salaries and
wages, related employment taxes and health care and workers' compensation
coverage of worksite employees.
(4) The current portion of financing arrangements is included in current
liabilities.
(5) For the year ended June 30, 1998 and for the period October 1, 1996 to
June 30, 1997 historical net income per share is computed by dividing net
income, net of the accretion of mandatorily redeemable common stock, by
the weighted average number of shares outstanding. Pro forma net income
per share excludes the accretion of mandatorily redeemable common stock.
See Note 1 of the Notes to Consolidated Financial Statements.
23
<PAGE> 26
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
NovaCare Employee Services, Inc. (the "Company") is one of the largest
(measured by number of worksite employees) professional employer organizations
("PEOs") in the United States. The Company is an employee services company that
provides small-to medium-sized businesses with comprehensive, fully integrated
outsourcing solutions to human resource needs, including payroll management,
workers' compensation risk management, health care and other employee benefits
management, unemployment services, temporary staffing and human resource
consulting services. The Company was established by NovaCare, Inc. (the
"Parent"), in September 1996, as a subsidiary and commenced operations on
October 1, 1996, concurrent with the acquisition of Resource One, Inc. In
February 1997, the Company acquired three additional PEO businesses -- Employee
Services of America, Inc.; The TPI Group, Ltd.; and Prostaff Human Resources,
Inc., and entered into a contract with the Parent to provide traditional PEO
services to principally all of the Parent's worksite employees (the "NovaCare
Contract"). During fiscal 1998, the Company completed three additional
acquisitions -- NovaPro, a rehabilitation temporary staffing business acquired
from the Parent on July 1, 1997; AmeriCare Employers Group, Inc. ("AmeriCare"),
a PEO based in Arizona, acquired on December 1, 1997; and Staff Leasing Systems,
Inc. ("SLS"), a PEO based in Maryland, acquired on May 1, 1998. In addition, in
November 1997 and June 1998, the Company expanded via start-up operations into
two new markets, Atlanta and Philadelphia, respectively. During fiscal 1999, the
Company acquired Pay America, Inc. ("Pay America"), a PEO based in Utah, on
August 1, 1998 and Payday Professional Employer ("Payday"), a PEO based in New
Mexico, on October 1, 1998. At June 30, 1999, the Company served 4,084 client
organizations with 54,313 employees in 46 states, principally in ten different
industries.
Strategic Alternative Review and Sale of Company
On August 13, 1999, the Parent sent a proxy statement ("Proxy Statement")
to the stockholders asking them to consider and vote upon proposals to approve:
(i) the sale of the Parent's outpatient physical rehabilitation and occupational
health business (the "PROH Sale"), (ii) the sale of the Parent's interest in the
Company (the "NCES Sale") and (iii) the adoption of the Plan of Restructuring of
the Parent (the "Restructuring Proposal"). On September 21, 1999 the Parent's
stockholders approved the three proposals noted above.
On September 8, 1999 the Company signed a definitive agreement to sell the
Company to an investment group comprised of Patricof & Co. Ventures
Incorporated, Fidelity Ventures Limited and AFLAC Incorporated (the
"Investors"). Under the terms of the agreement, a new private company
established by the Investors will acquire all of the outstanding common stock of
the Company at a price of $2.50 per share. The purchase will be effected through
a cash tender offer to the Company's stockholders and subsequent merger of the
Company into a new private company managed by the Investors. The Parent also
executed a definitive agreement, subject to certain conditions, to tender its
shares in the tender offer at the price of $2.50 per share. The tender offer is
subject to the satisfaction of customary closing conditions. The tender offer
commenced on September 15, 1999 and is expected to close during October 1999.
The Parent is in the process of seeking buyers for its PROH business and
anticipates that PROH will be structured as a stock sale. While, to date, no
definitive agreement has been entered into with respect to the PROH Sale, the
Parent sought stockholder approval via the Proxy Statement to proceed with the
sale when a suitable buyer is identified and a definitive agreement is
negotiated with such buyer. The consummation of the sale would be subject to the
receipt by the Parent of the minimum sales price set forth in the Proxy
Statement, obtaining the opinion of financial advisors in connection with the
sale and approval by the Board of Directors of the Parent of the terms of any
definitive sale agreement. Except as requested in the Proxy Statement, no
further stockholder vote will be solicited by the Parent for the PROH Sale or
the NCES Sale. Accordingly, the Parent's stockholders will not have the
opportunity to vote on the definitive sale agreements.
24
<PAGE> 27
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
With the approved Plan of Restructuring, the Parent intends to seek to
reinvest the net proceeds to the Parent from the PROH Sale and the NCES Sale,
after the payment of liabilities, in a new business or businesses. Any such
reinvestment would be subject to the further vote and approval of the
stockholders of the Parent. If the Parent is unable, or chooses not, to reinvest
any proceeds in a new business or businesses, the Parent will liquidate.
Initial Public Offering
In November 1997, the Company completed an initial public offering (the
"Offering") of 5,000,000 shares of its common stock. Subsequent to the Offering
an additional 750,000 shares were issued pursuant to the exercise of an
over-allotment provision for a total issuance of 5,750,000 shares. The net
proceeds from the Offering (including the exercise of the over-allotment
provision), after deducting offering costs of $6.1 million, amounted to $45.7
million and were used by the Company to pay an outstanding revolving credit loan
to the Parent and to retire deferred purchase price obligations due to the
former owners of the businesses acquired. At June 30, 1999, the Parent owned
approximately 67% of the Company's outstanding common stock.
Contractual Arrangement with Parent
The Parent and the Company entered into the NovaCare Contract in February
1997, whereby principally all of the Parent's employees became co-employed by
the Company. Under the NovaCare Contract, the Company provided traditional PEO
services such as payroll and benefits administration, worksite safety
evaluation, employment-related risk management and compensation and benefits
consultation. In fiscal 1998, the Parent paid the Company a fee for its services
equal to the salary and Federal payroll costs plus an average base fee of 9.7%
of gross earnings of employees, or approximately 117% of the gross earnings of
employees covered under the NovaCare Contract.
In January 1998, the Parent initiated a restructuring plan to favorably position
one of its operating divisions for recent changes in the Medicare reimbursement
system as mandated by the Balanced Budget Act of 1997. The intent of the plan
was to substantially reduce the cost of its workforce by transitioning to a
lower cost operating model for providing quality therapy services. In support of
this transition and to address the increased demand from the Parent for
additional human resource services, the Company and the Parent amended the
NovaCare Contract effective July 1, 1998. The amended contract provided the
existing PEO services and a broader array of services, including recruiting,
employee training and orientation, outplacement and human resource consulting.
The amended contract was principally a fee-for-service contract, replacing the
previous contract, which was priced as a percentage of payroll. Due to the
specialty nature of the additional services, the Company realized increased
gross profit and operating profit margins on the amended contract compared with
the previous arrangement.
On March 31, 1999, the Parent announced that, due primarily to lower
reimbursement rates and to declines in rehabilitation caseloads at long-term
care facilities resulting from the new reimbursement structure for therapy under
the Medicare program, it would be forced to exit selected long-term care markets
and facilities, and would continue to lower expenses by reducing labor costs. On
June 1, 1999, the Parent sold its remaining long-term care services business
segment to Chance Murphy, Inc. In addition, on July 1, 1999, the Parent sold its
orthotics and prosthetics services business to a subsidiary of Hanger Orthopedic
Group, Inc.
Based on these events, the Company and the Parent negotiated a new service
arrangement to reflect changes in the Parent's ongoing service needs. The new
arrangements, which became effective July 1, 1999, consists of a four-year
agreement relative to the Parent's physical rehabilitation and occupational
health division (PROH) and provides for PEO services such as payroll and
benefits administration, worksite safety evaluation, employment related risk
management and compensation and benefits consultation. The new contract is
principally a fee-for-service contract. The Company also entered into a
six-month transition service agreement with the Parent's corporate support
services group. In addition, the Parent assumed certain costs associated with
the Company's downsizing to adjust to the revised service needs.
PROH may not terminate the NovaCare Contract except in the event of (i) the
breach of any of the Company's agreements, duties, or performance standards
under the NovaCare Contract; (ii) the making of false or misleading
representations, warranties, or statements of material fact in documents
submitted by or on behalf of the Company to the Parent; or (iii) the insolvency,
bankruptcy, or receivership of the Company.
25
<PAGE> 28
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Provision for Restructure
The events described above in "Contractual Arrangement with Parent" will
have an adverse impact on the future operating results of the NovaCare Contract
and the Company's temporary staffing services business. The Company evaluated
the implications these events will have on its organizational structure, and
recorded a $910,000 ($491,000 net of tax) pre-tax restructure charge in the
fourth quarter of fiscal 1999. The provision consists principally of employee
severance costs and facility lease costs.
Revenues
The Company enters into a PEO services agreement with its clients,
establishing a three-party relationship among the Company, the client and the
worksite employees. The agreement generally provides for an initial one-year
term, subject to termination without cause on 30 days' notice by either the
Company or the client. Although PEO client service agreements are periodically
canceled, no such termination singly, or in the aggregate, has had a material
adverse effect on the Company's financial position or results of operations. The
PEO client service agreement also sets forth the service fee payable to the
Company. Such service fee, which constitutes the Company's revenues, is based on
the gross earnings of each employee plus a mark-up which includes the estimated
costs of employment-related taxes, providing human resource services, performing
administrative functions, providing insurance coverages and benefit plans and an
administration fee. This structure yields a comprehensive service fee percentage
to be applied to each employee's gross pay. These fees are invoiced along with
each periodic payroll. The Company's revenues are subject to fluctuations as the
result of: (i) changes in the wage base and employment tax rates of worksite
employees serviced by the Company; (ii) changes in the volume of clients and
worksite employees serviced by the Company; (iii) changes in the mark-up charged
by the Company for its services based upon client mix; and (iv) the number of
worksite employees enrolled in benefit plans.
Pursuant to the PEO client service agreement, the Company has the
obligation to provide the benefits and services enumerated in that agreement as
well as to pay the direct costs associated with such services, regardless of
whether the client company makes timely payment to the Company. Worksite
employees' salaries and wages comprise the largest portion of direct costs
associated with each PEO client service agreement, and are generally disbursed
promptly after the applicable client service fee is received. For a description
of additional costs of services, see "Direct Costs" below.
Direct Costs
The Company's primary direct costs are: (i) the salaries and wages of
worksite employees (gross earnings) and the employer's portion of Social
Security, Medicare and Federal unemployment taxes; (ii) employee benefit plan
costs; (iii) workers' compensation costs; (iv) state unemployment taxes; and (v)
salaries and benefit costs of employees who provide the new administrative
services to the Parent under the amended NovaCare Contract. Salaries and wages
of worksite employees are affected by the inflationary effects on wage levels
and by differences in the local economies of the Company's markets. Changes in
gross earnings have a proportionate impact on the Company's revenues. The
Company can significantly impact its gross profit margin by actively managing
the direct costs described in clauses (ii), (iii) and (iv) above (hereinafter
referred to as "controllable direct costs").
Federal employment-related taxes consist of the employer's portion of
payroll taxes required under FICA, which includes Social Security and Medicare,
and Federal unemployment taxes. The Federal tax rates are defined by the
appropriate Federal regulations.
Employee benefit plan costs consist of medical insurance premiums, payments
of and reserves for claims subject to deductibles, and the costs of dental care,
vision care, disability, employee assistance and other similar benefit plans.
The Company's health care benefit plans consist of guaranteed cost programs,
with third party insurers providing insurance. A portion of the NovaCare
Contract worksite employees are covered by a self-insured plan with reinsurance
for claims that exceed certain levels ("stop loss coverage"). Liabilities for
health care self-insured claims are recorded based on the Company's evaluation
of the nature and severity of individual claims and past claims experience and
include an estimate for incurred but not reported claims. The Company's current
group health care benefit plans are provided by national and regional health
care providers under separate contracts.
26
<PAGE> 29
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Workers' compensation costs include premiums, administrative costs and
claims-related expenses under the Company's workers' compensation program.
Currently, the coverage is provided under a workers' compensation deductible
program with an aggregate stop loss that limits the liability to the Company at
a capped percentage of the standard premium. Through June 30, 1997, certain of
the Company's worksite employees were covered by large deductible workers'
compensation policies and certain other worksite employees were covered by
guaranteed cost or low deductible workers' compensation insurance policies.
Costs related to these prior plans include estimates of ultimate claims amounts
that are recorded as accrued workers' compensation claims. Changes in these
estimates are reflected as a component of direct costs in the period of the
change.
State unemployment taxes are based on rates, which vary from state to
state. Generally they are subject to certain minimum rates, but the aggregate
rates payable by an employer are affected by the employer's claims history. The
Company controls unemployment claims by aggressively contesting unfounded claims
and, when possible, quickly returning employees to work by reassigning them to
other worksites.
Selling, General and Administrative Expenses
The Company's principal selling, general and administrative expenses are
salaries, wages, benefits and other personnel expenses of administrative
employees and sales associates, general and administrative expenses and
marketing and sales expenses.
Income Taxes
The Company's provision for income taxes differs from the U.S. statutory rate of
35% due primarily to state income taxes and non-deductible goodwill
amortization.
Operating Income
The Company's operating income is determined in part by its ability to
manage controllable direct costs and its ability to incorporate such costs into
the service fees charged to clients. The Company manages these costs through:
(i) appropriately designed health care benefit plans; (ii) effective risk
management through new client underwriting, effective loss prevention and claims
management of existing clients relative to the fixed cost workers' compensation
program; and (iii) aggressive management of state unemployment tax exposure. The
Company attempts to reflect changes in the controllable direct costs through
adjustments in service fees charged to clients, subject to contractual
arrangements.
The following table sets forth certain income statement and statistical
data for the years ended June 30, 1999 and 1998 and the period from October 1,
1996 (inception) to June 30, 1997.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
------------------------------------------------------------------
JULY 1, 1998 JULY 1, 1997
TO TO
(TABLE IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1999 JUNE 30, 1998
------------------------------- -------------------------------
$ % $ %
---------------- ------------- ---------------- -------------
OPERATING RESULTS:
<S> <C> <C> <C> <C>
Revenues................................................... $1,544,622 100.0% $1,271,757 100.0%
Direct costs:
Salaries, wages and employment taxes of
worksite employees....................................... 1,372,560 88.9 1,136,547 89.3
Health care, workers' compensation, state
unemployment taxes and other............................ 108,061 7.0 93,663 7.4
----------- ----------- -------------- ----
Gross profit............................................ 64,001 4.1 41,547 3.3
Selling, general and administrative
expenses............................................... 42,479 2.8 27,848 2.2
Amortization of excess cost of net assets
acquired................................................ 3,571 0.2 2,801 0.2
Provision for restructure.................................. 910 0.0 - 0.0
-------------- ----------- -------------- ----------
Income from operations.................................. 17,041 1.1 10,898 0.9
Interest expense, net...................................... (382) --- (699) (0.1)
-------------- ----------- -------------- ----
Income before income taxes.............................. 16,659 1.1 10,199 0.8
Income tax expense......................................... 7,663 0.5 4,743 0.4
------------- ----------- -------------- ----
Net income.............................................. $ 8,996 0.6% $ 5,456 0.4%
============ ============ ============== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
-----------------------------------
OCTOBER 1, 1996
(INCEPTION), TO
(TABLE IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1997
-----------------------------------
$ %
---------------- -----------------
OPERATING RESULTS:
<S> <C> <C>
Revenues................................................... $ 394,193 100.0%
Direct costs:
Salaries, wages and employment taxes of
worksite employees....................................... 357,238 90.6
Health care, workers' compensation, state
unemployment taxes and other............................ 24,717 6.3
------------ ----
Gross profit............................................ 12,238 3.1
Selling, general and administrative
expenses............................................... 8,273 2.1
Amortization of excess cost of net assets
acquired................................................ 1,034 0.3
Provision for restructure.................................. - 0.0
------------ ----------
Income from operations.................................. 2,931 0.7
Interest expense, net...................................... (697) (0.2)
------------ ----
Income before income taxes.............................. 2,234 0.5
Income tax expense......................................... 1,542 0.4
------------ ----
Net income.............................................. $ 692 0.1%
============ ===
</TABLE>
27
<PAGE> 30
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
------------------------------------------------------------
JULY 1, 1998 JULY 1, 1997 OCTOBER 1, 1996
TO TO (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1997
------------------- ------------------- -----------------
STATISTICAL DATA:
<S> <C> <C> <C> <C>
EBITDA (in thousands)(1)................................. $ 23,203 $ 14,726 $ 4,217
================ ============ ==========
Number of clients at period end.......................... 4,084 3,001 1,742
Worksite employees at period end:
Third parties......................................... 44,557 34,105 18,634
Related party......................................... 9,756 18,747 16,394
------------------ --------- ----------
Total............................................ 54,313 52,852 35,028
================= ========= ==========
Weighted average worksite employees paid during the
period:
Third parties......................................... 39,867 26,728 11,764
Related party......................................... 16,109 16,634 15,879
----------------- --------- ----------
Weighted average...................................... 55,976 43,362 18,582
================= ========= ==========
Year-to-date gross profit per weighted average
worksite employee (in whole $'s):
Third parties......................................... $ 811 $ 783 $ 665
Related party......................................... 1,967 1,212 650
Weighted average...................................... 1,143 958 659
</TABLE>
(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.
Year Ended June 30, 1999 Compared With the Year Ended June 30, 1998
Revenues totaled $1.545 billion for the year ended June 30, 1999, compared
to $1.272 billion for the year ended June 30, 1998, representing an increase of
$273 million or 21%. During this period, third party revenues increased $359.5
million or 72%, while related party revenues decreased $86.7 million or 11%. The
overall increase is attributable to an increased number of third party clients
and worksite employees served. From June 30, 1998 to June 30, 1999, the number
of third party clients increased 36% from 3,000 to 4,083, while the number of
weighted average worksite employees increased 49% from 26,728 to 39,867. The
increases are attributable to: (i) additions from businesses acquired; (ii)
internal growth in existing markets; and (iii) start-up of new markets. The
Company expects continued third party growth in the number of clients and
worksite employees in fiscal 2000 based upon expansion into new markets through
either platform acquisitions or start-up operations and internal growth in
existing markets. The decline in related party revenues was due to a reduction
in worksite employees caused by the Parent exiting the long-term care market.
28
<PAGE> 31
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Gross profit was $64.0 million for the year ended June 30, 1999, compared
to $41.5 million for the year ended June 30, 1998, representing an increase of
$22.5 million or 54%. The increase in gross profit is attributable to: (i)
additional higher margin services provided to the Parent under the amended
NovaCare Contract; (ii) gross profit from newly acquired businesses; (iii)
internal growth resulting from increased clients and worksite employees in the
Company's existing markets; and (iv) growth from the start-up of new markets.
Gross profit as a percentage of revenues increased from 3.3% in the prior year
to 4.1% for the year ended June 30, 1999. The improvement is attributable to:
(i) additional higher margin services provided under the amended NovaCare
Contract which became effective July 1, 1998; (ii) third party business, which
has a higher gross profit margin, comprising a larger portion of the Company's
operations compared to the same period in the prior year; and (iii) the
provision of higher margin temporary staffing services to the Parent. The third
party gross profit per weighted average worksite employee increased to $811 for
fiscal 1999 from $783 for fiscal 1998. The increase is attributable to improved
same market gross profit per worksite employee and the impact of newly acquired
businesses. The related party gross profit per weighted average worksite
employee increased to $1,967 for fiscal 1999 from $1,212 for fiscal 1998 due to:
(i) the higher margin services provided under the amended NovaCare Contract; and
(ii) the provision of higher margin temporary staffing services.
Selling, general and administrative expenses increased $14.7 million, from
$27.8 million for the year ended June 30, 1998 to $42.5 million for the year
ended June 30, 1999. The increase results from increased staffing and other
expenses associated with: (i) the timing of acquisitions; (ii) the selling,
general and administrative impact of new services provided under the amended
NovaCare Contract; (iii) executing the Company's internal growth strategy; and
(iv) opening new markets. As a percentage of revenue, selling, general and
administrative expenses were 2.8% for the year ended June 30, 1999, compared to
2.2% for the same period in the prior year. The increase in selling, general and
administrative expenses as a percentage of revenues is due primarily to: (i) the
additional services provided under the amended NovaCare Contract; (ii) an
increase in expenses to support the Company's expanding infrastructure; and
(iii) third party operations, which have higher selling, general and
administrative expenses as a percentage of revenue, comprising a larger portion
of the current period's expenses. The Company anticipates that selling, general
and administrative expenses associated with the NovaCare Contract will decrease
in fiscal 2000 due to the reduction in the Parent's worksite employee base.
Expenses associated with the Company's third party business are expected to
increase in future periods to the extent the Company continues to experience
growth and expand its service offerings.
Amortization of excess cost of net assets acquired increased to $3.6
million for the year ended June 30, 1999 from $2.8 million for the comparable
period in the prior year, principally as a result of fiscal 1999 acquisitions
and the full year effect of businesses acquired in fiscal 1998.
Interest expense, net of investment income, decreased to $382,000 for the
year ended June 30, 1999 from $699,000 for the comparable period in the prior
year. The decrease is due primarily to a reduction in related party interest
expense. During the second quarter of fiscal 1998, the Company repaid all
outstanding indebtedness to the Parent with a portion of the net proceeds
available from the Offering completed November 14, 1997. The decrease in related
party interest expense is offset by an increase in interest expense through
borrowings from the Company's revolving credit facility. During fiscal 1999 the
average borrowings on the revolving credit facility were increased to finance
acquisitions. See "Liquidity and Capital Resources" for a further discussion of
the Company's revolving credit facility.
Income tax expense as a percentage of pretax income decreased to 46.0% from
46.5%. The principal reason for the reduction in the tax rate was the relative
impact of non-deductible amortization of excess costs of net assets acquired on
pre-tax income for the year ended June 30, 1999 compared with the prior year.
29
<PAGE> 32
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Year Ended June 30, 1998 Compared With the Period from October 1, 1996 (date of
inception) to June 30, 1997
Revenues for the year ended June 30, 1998 were $1.272 billion compared to
$394 million for the period October 1, 1996 to June 30, 1997, representing an
increase of $878 million or 223%. The increase is attributable to an increased
number of clients and worksite employees. From June 30, 1997 to June 30, 1998,
the number of clients increased 72% from 1,742 to 3,001 and the number of
weighted average worksite employees increased 133% from 18,582 to 43,362. The
increases are attributable to: (i) a full year of operations in fiscal 1998 for
the NovaCare Contract and the three PEOs acquired in February 1997 versus five
months of operations in fiscal 1997; (ii) the fiscal 1998 PEO acquisitions of
AmeriCare and SLS completed in December 1997 and May 1998, respectively; (iii)
internal growth in existing markets and start-up of new markets; and (iv) the
acquisition of a rehabilitation temporary staffing business (NovaPro) in July
1997.
Gross profit for the year ended June 30, 1998 was $41.5 million compared to
$12.2 million for the period October 1, 1996 to June 30, 1997, representing an
increase of $29.3 million or 240%. This increase was due to the higher volume of
salaries and wages paid in fiscal 1998 which was a direct function of the growth
in clients and worksite employees as discussed above. Gross profit as a
percentage of revenues increased from 3.1% in the prior year to 3.3% for the
year ended June 30, 1998. The improvement is attributable to: (i) gross profit
margins realized from fiscal 1998 acquisitions that exceeded the consolidated
gross profit percentage in the prior year; (ii) the provision of temporary
staffing services; and (iii) the relative impact of the NovaCare Contract which
was greater in the prior year, and has a lower gross profit percentage compared
with the traditional PEO businesses, due to a more highly compensated employee
population. The third party gross profit per weighted average worksite employee
increased to $783 for fiscal 1998 from $665 for fiscal 1997. The increase is
attributable to a full year of operations in fiscal 1998 for the three PEOs
acquired in February 1997 compared to five months of operations in fiscal 1997
and the impact of fiscal 1998 acquisitions. The related party gross profit per
weighted average worksite employee increased to $1,212 for fiscal 1998 from $650
for fiscal 1997 due to the full year effect of the NovaCare Contract for the
year ended June 30, 1998 versus five months of activity in the prior year and
the provision of additional temporary staffing services at higher margins.
Selling, general and administrative expenses increased $19.5 million, from
$8.3 million for the period October 1, 1996 to June 30, 1997 to $27.8 million
for the year ended June 30, 1998. The increased costs resulted primarily from
increases in staffing and other expenses associated with: (i) the timing of
acquisitions and the start-up of the NovaCare Contract; (ii) opening new
markets; and (iii) executing the Company's internal growth strategy. As a
percentage of revenues, selling, general and administrative expenses increased
from 2.1% to 2.2% for the same periods, respectively. The increase is
attributable to: (i) the addition of operating and sales personnel, consistent
with the Company's strategy to increase its client base in its existing and
acquired markets; (ii) operating expenses incurred in the expansion of new
markets, which include compensation related costs, recruiting and training costs
of newly hired sales personnel, advertising and promotion costs and general
office expenses; and (iii) the NovaCare Contract, which has lower selling,
general and administrative expenses as a percentage of revenue, which comprised
a larger portion of fiscal 1997 expenses.
Amortization of excess cost of net assets acquired increased to $2.8
million for the year ended June 30, 1998 from $1.0 million for the period
October 1, 1996 to June 30, 1997, principally as a result of fiscal 1998
acquisitions and the full year effect of businesses acquired in fiscal 1997.
Interest expense, net for the year ended June 30, 1998 was $699,000 versus
$697,000 for the period October 1, 1996 to June 30, 1997. Interest expense, net,
for both periods resulted primarily from interest due to the Parent for amounts
loaned to the Company to finance the acquisition of the four PEO businesses
acquired in fiscal 1997. Interest was charged to the Company at the Parent's
borrowing rate (Eurodollar rate plus a range of 0.5% to 1.125%). The weighted
average borrowing rate for fiscal 1998 and 1997 was 6.8% and 6.6%, respectively.
Interest expense for the year ended June 30, 1998 also included interest charges
from borrowings under the Company's revolving credit facility. See "Liquidity
and Capital Resources" for a further discussion of the Company's revolving
credit facility.
Income tax expense as a percentage of pre-tax income decreased to 46.5% for
the year ended June 30, 1998 from 69.0% for the period from October 1, 1996 to
June 30, 1997. The principal reasons for the reduction in the tax rate were the
relative impact of non-deductible amortization of excess costs of net assets
acquired on pre-tax income for fiscal 1998 compared with fiscal 1997, and lower
effective state income tax rates.
30
<PAGE> 33
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, cash and cash equivalents totaled $5.4 million, a
decrease of $532,000 from June 30, 1998. As of the same date, the Company had a
working capital deficit of $6.2 million compared to a working capital deficit of
$7.9 million at June 30, 1998.
The Company's cash flows from operating activities in fiscal 1999 were $4.5
million versus $20.0 million in fiscal 1998. The decrease of $15.5 million
resulted principally from a $26.1 million decrease in cash flows related to
workers' compensation and health claim liabilities. During fiscal 1999,
liabilities for workers' compensation and health claims, net of the effects from
acquisitions, decreased by $12.6 million from fiscal 1998 due primarily to the
timing of benefit payments attributable to the NovaCare Contract. During fiscal
1999, the number of worksite employees served under the NovaCare Contract
decreased from 18,747 at June 30, 1998 to 9,756 at June 30, 1999 primarily as a
result of the Parent's exit from the long-term care market. As the number of
worksite employees decreased, liabilities for workers' compensation and health
claims decreased to reflect reduced levels of benefit plan participation and the
liquidation of reserves to pay outstanding claims and premiums for worksite
employees no longer served by the Company. In fiscal 1998, cash flows from
workers' compensation and health claims liabilities were $13.4 million due to an
increase in the number of worksite employees served. The fiscal 1999 decrease in
cash flows from workers' compensation and health claims is partially offset by
the following increases in cash flows from fiscal 1998 to fiscal 1999: (i) $4.0
million for accounts payable and accrued expenses; (ii) a $3.5 million increase
in net income; (iii) a $2.8 million increase in non-cash charges consisting of
amortization, depreciation, provision for restructure and provision for
uncollectible accounts; and (iv) $1.1 million for accounts receivable, net of
changes in accrued wages and payroll taxes.
The increase in cash flows from operating activities from fiscal 1997 to
fiscal 1998 of $20.1 million is due to: (i) a net increase in cash flows of $9.9
million for accounts receivable and accrued salaries, wages and payroll taxes;
(ii) a $9.3 million increase in worker's compensation and health claim
liabilities; (iii) a $4.8 million increase in net income; and (iv) a $2.8
million increase in non-cash charges consisting of amortization, depreciation
and provision for uncollectible accounts. The above increases in fiscal 1998
were offset by a net cash use of $6.7 million from payment of accounts payable
and accrued expenses, accrued interest related party, income taxes payable and
other current assets.
Accounts receivable, accrued salaries, wages and payroll taxes and health
benefit premiums payable are subject to fluctuation depending on the correlation
between the financial reporting cycle versus the payroll cycle.
Cash expended for investing activities was $6.7 million in fiscal 1999
compared with $32.0 million and $25.0 million in fiscal 1998 and 1997,
respectively. Cash paid for acquisitions decreased to $3.6 million in fiscal
1999 compared with $28.7 million and $24.2 million in fiscal 1998 and fiscal
1997, respectively. During fiscal 1999, the Company completed two acquisitions
for $2.8 million and paid $750,000 related to fiscal 1997 acquisitions. During
fiscal 1998, the Company retired $17.2 million of deferred purchase price
obligations related to acquisitions completed in fiscal 1997 and paid cash of
$11.5 million for fiscal 1998 acquisitions. Capital expenditures totaled $3.1
million, $2.8 million and $329,000 in fiscal 1999, 1998 and 1997, respectively.
Capital expenditures in fiscal 1999 relate to computer equipment, software and
furniture to support the Company's internal growth strategy in existing markets
and expansion into new markets. The increase in capital expenditures from fiscal
1997 to fiscal 1998 of $2.5 million related primarily to furniture, leasehold
improvements and computer equipment costs associated with the Company's
relocation to new corporate headquarters.
Cash flows from financing activities were $1.6 million, $16.1 million and
$26.9 million in fiscal 1999, 1998 and 1997, respectively. The Company's major
financing activities consisted of completing the Offering of 5,750,000 shares of
the Company's common stock and establishing a new revolving credit facility in
fiscal 1998. The proceeds from the Offering were $45.7 million, net of offering
costs. Of the proceeds, $28.4 million was used to retire the outstanding
revolving credit loan borrowed from the Parent in fiscal 1997 to finance the
acquisition of four PEO businesses (see Note 5 and Note 6 of Notes to
Consolidated Financial Statements).
31
<PAGE> 34
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
In November 1997, the Company entered into a $25.0 million three-year
revolving credit facility with a syndicate of lenders. 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) Parent's interest in the common stock of the Company.
The revolving credit facility requires the maintenance of minimum capitalization
and net worth amounts, capital expenditure thresholds as well as certain
financial ratios. At June 30, 1999, the Company was in compliance with these
requirements. During fiscal 1999 and 1998, the Company borrowed $13.5 million
and $9.3 million, respectively, under the revolving credit facility for
short-term working capital needs and to finance acquisitions. The Company repaid
all outstanding amounts under the revolving credit facility in fiscal 1998,
through cash generated from operations. At June 30, 1999, only $2.0 million
remains outstanding under the revolving credit facility. The unused portion of
the credit facility at June 30, 1999 was $23.0 million.
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. The Company anticipates additional
cash requirements in fiscal 2000 related to cash payments for acquisitions,
capital expenditures to support the Company's internal growth strategy and
expansion into new markets. The Company projects capital expenditures of
approximately $3.9 million in fiscal 2000, which includes $2.7 million committed
for the development and implementation of an enterprise wide information system
for operating and financial applications (see Note 15 of Notes to Consolidated
Financial Statements). 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.
Inflation
A significant portion of the Company's operating expenses and revenues is
subject to inflationary increases, particularly worksite employee salary
increases that are directly reimbursed by the Company's customers. The Company
believes the effects of inflation have not had a significant impact on its
results of operations or its financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS 132 does not change the measurement or recognition of those plans, however,
it does require additional information on changes in the benefit obligations and
fair values of plan assets in order to facilitate financial analysis. The
Company does not have any defined benefit pension plans or postretirement
benefit plans; therefore, the adoption of SFAS 132 did not have a material
impact on the Company's disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP is effective for the year ending June 30, 2000.
Management does not believe the adoption of SOP 98-1 will have a material effect
on the Company's financial position or results of operations.
In June 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-5 "Reporting on the Cost
of Start-Up Activities" which the Company is required to adopt no later than
June 30, 2000. SOP 98-5 provides the reporting standards for the costs of
start-up activities, including organizational costs, which should be expensed as
incurred. Management does not believe the adoption of SOP 98-5 will have a
material effect on the Company's financial position or results of operations.
32
<PAGE> 35
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
YEAR 2000 READINESS
The "Year 2000 issue" is the result of historical computer programming of
date sensitive software. Many existing computer programs have been written using
only two digits to define an applicable year (e.g. 98 for 1998), rather than
four digits. On January 1, 2000, any date recording mechanism, including date
sensitive software, may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in systems failures or create erroneous
results, including among other things, a temporary inability to process
transactions.
Generally, the scope of the Company's exposure to the Year 2000 issue is
limited to its core business systems (payroll, human resources and financial
reporting systems) and the computer systems used by third party service
providers and suppliers. The Company has completed its initial assessment and
believes that all internal Year 2000 issues will be addressed timely to ensure
that the core business systems are in the appropriate state of readiness.
In January 1998, the Company launched a Year 2000-review program, which
included a dedicated Year 2000 project team, review process and internal and
external communication activities. At June 30, 1999, all of the core business
systems have been identified, evaluated and risk assessed for Year 2000
readiness. All significant external suppliers, comprised primarily of financial
institutions, third party insurers and service providers and information
technology suppliers, have been contacted to determine the extent to which the
Company is vulnerable to any external Year 2000 issues. While the Company is not
currently aware of any significant Year 2000 issues related to its business with
service providers and suppliers, there can be no guarantee that the Company will
not be adversely affected by the failure of its primary vendors to remediate
their own Year 2000 issues.
The Company expects to complete all Year 2000 testing and remediation by
October 31, 1999. Remediation activities to date have consisted of developing
new programs to enhance or provide additional functionality to the Company's
core business systems. The next phase of the Company's Year 2000 review program,
testing and validation of external supplier Year 2000 readiness, is expected to
be completed by September 30, 1999. Given the Company's current state of
readiness and limited exposure, the cost of remediation activities should not
exceed $150,000. As of June 30, 1999, the Company's incurred costs related to
Year 2000 readiness have been limited to salary and benefits costs of internal
information systems personnel, and are included as an expense in the fiscal 1998
and 1999 operating results. If the Company is unsuccessful in completing
remediation of non-compliant systems or third party vendors are not capable of
rectifying Year 2000 issues, the Company could be subjected to the following
risks: (i) disruption of payroll, benefits and compensation administration; (ii)
information from internal management control and reporting systems may lack
integrity; (iii) the quality of service to clients could decline, resulting in
higher attrition and loss of business; and (iv) eligibility information from
third party insurers could be compromised resulting in denial of benefits to
health plan participants.
In the event the Company would be subject to the above risks, an
appropriate contingency plan would be implemented. At June 30, 1999, the
Company's contingency plan includes: (i) a dedicated internal group of
information systems professionals that is primarily focused on system or process
disruption; (ii) the creation of a partnership with external service providers
and suppliers to respond to a disruption; (iii) labor intensive efforts in place
of core business system processing; and (iv) on a selective basis engaging
external consultants.
33
<PAGE> 36
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
MARKETING AGREEMENT
In fiscal 1998, the Company implemented a strategy to identify and evaluate
potential marketing alliances to augment other opportunities for growth. In
March 1999, the Company entered into a three-year marketing agreement with
AFLAC, Incorporated (AFLAC), the leading writer of supplemental insurance in the
United States, to cross-sell products between the two companies' respective
client bases. The marketing agreement will give the Company access to AFLAC's
substantial customer base across the country and will broaden the Company's
reach to prospective customers through AFLAC's national sales organization. In
addition, the Company's existing worksite employees will be offered an enhanced
employee benefits package through AFLAC's wide array of supplemental insurance
products.
The Company believes that the agreement with AFLAC will enhance its ability
to increase the growth of worksite employees and clients in existing and new
markets. However, there can be no assurance of these results in the future. The
Company intends to continue developing other alliance opportunities as an
extension of its marketing and sales capability.
CAUTIONARY STATEMENT
Except for historical information, matters discussed above including, but
not limited to, statements concerning future growth and Year 2000 readiness, 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: (i) management retention and
development; (ii) management's success in integrating acquired businesses, in
developing and introducing new products and lines of business and in entering
new markets; (iii) the ability of the Company, its customers and its suppliers
to complete assessment, testing and remediation of Year 2000 issues; (iv)
adverse Internal Revenue Service rulings and state regulations with respect to
the employer status of employee services businesses; (v) the Company's ability
to implement its employee services business model; and (vi) any adverse impact
on the operating results of the NovaCare Contract in the event the Parent
executes a sale of PROH and subsequent Plan of Restructuring.
34
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 5,394 $ 5,926
Accounts receivable:
Related party .................................................... 13,757 45,083
Unbilled ......................................................... 22,592 13,903
Third parties, net of allowance for doubtful accounts
at June 30, 1999 and 1998 of $1,051 and $318, respectively ...... 7,143 7,660
Prepaid assets ...................................................... 2,242 1,948
Deferred income taxes ............................................... 2,393 1,688
Other current assets ................................................ 611 324
--------- ---------
Total current assets ........................................ 54,132 76,532
Property and equipment, net ........................................... 6,223 4,490
Excess cost of net assets acquired, net ............................... 81,971 75,570
Deferred income taxes ................................................. 1,669 61
Other assets, net ..................................................... 619 768
--------- ---------
$ 144,614 $ 157,421
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements ........................... $ 2,226 $ 217
Accounts payable and accrued expenses ............................... 4,668 3,748
Accrued salaries, wages and payroll taxes ........................... 41,877 59,759
Current portion of accrued workers' compensation and health claims .. 8,741 17,948
Current portion of deferred purchase price obligations .............. 600 750
Income taxes payable ................................................ 2,192 2,009
--------- ---------
Total current liabilities ................................... 60,304 84,431
Financing arrangements, net of current portion ........................ 425 739
Accrued workers' compensation and health claims, net of current portion 2,909 4,466
Deferred purchase price obligations, net of current portion ........... 600 5,456
Other ................................................................. 581 523
--------- ---------
Total liabilities ........................................... 64,819 95,615
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 29,109 shares at June 30, 1999 and 27,349 shares
at June 30, 1998 ................................................. 291 273
Additional paid-in capital .......................................... 66,382 57,365
Retained earnings ................................................... 13,267 4,271
--------- ---------
79,940 61,909
Less: Common stock in treasury (at cost), 24 shares at
June 30, 1999 ............................................. (67) --
Deferred compensation, net ............................. (78) (103)
--------- ---------
Total shareholders' equity ................................ 79,795 61,806
--------- ---------
$ 144,614 $ 157,421
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
35
<PAGE> 38
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE PERIOD
ENDED JUNE 30, OCTOBER 1, 1996
----------------------------- (INCEPTION) TO
1999 1998 JUNE 30, 1997
----------- ----------- -------------
Revenues:
<S> <C> <C> <C>
Related party ........................................... $ 685,487 $ 772,168 $ 255,289
Third parties ........................................... 859,135 499,589 138,904
----------- ----------- -----------
Total revenues ..................................... 1,544,622 1,271,757 394,193
Direct costs:
Related party:
Salaries, wages and employment taxes of worksite
employees .......................................... 594,073 689,295 234,182
Healthcare and workers' compensation, state
unemployment and other ............................. 59,727 61,434 15,368
Third parties:
Salaries, wages and employment taxes of worksite
employees .......................................... 778,487 447,252 123,056
Healthcare and workers' compensation, state
unemployment and other ............................. 48,334 32,229 9,349
----------- ----------- -----------
Gross profit ....................................... 64,001 41,547 12,238
Selling, general and administrative expenses .............. 42,479 27,848 8,273
Amortization of excess cost of net assets acquired ........ 3,571 2,801 1,034
Provision for restructure ................................. 910 - -
----------- ----------- -----------
Income from operations ............................. 17,041 10,898 2,931
Investment income ......................................... 99 220 52
Interest expense .......................................... (481) (308) (56)
Interest expense -- related party ......................... - (611) (693)
----------- ----------- -----------
Income before income taxes ......................... 16,659 10,199 2,234
Income taxes .............................................. 7,663 4,743 1,542
----------- ----------- -----------
Net income ......................................... $ 8,996 $ 5,456 $ 692
=========== =========== ===========
Historical information, with accretion adjustment (Note 1):
Net income (loss) applicable to common
stockholders .................................... $ 8,996 $ 4,271 $ (341)
=========== =========== ===========
Net income (loss) per share:
Basic ........................................... $ .31 $ .17 $ (.02)
=========== =========== ===========
Assuming dilution ............................... $ .30 $ .17 $ (.02)
=========== =========== ===========
Pro forma information, excluding accretion adjustment
(Note 1):
Net income ......................................... $ 8,996 $ 5,456 $ 692
=========== =========== ===========
Net income per share:
Basic ........................................... $ 31 $ .22 $ .04
=========== =========== ===========
Assuming dilution ............................... $ .30 $ .22 $ .04
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic ........................................... 29,106 24,942 18,078
=========== =========== ===========
Assuming dilution ............................... 30,075 25,135 18,078
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
36
<PAGE> 39
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
SHARES ISSUED STOCK
----------------------------------- ($.01 PAR TREASURY
COMMON TREASURY VALUE) STOCK
---------- ----------- ------------- -------------
Balance at October 1, 1996
<S> <C> <C> <C> <C>
(inception)......................................... -- -- $ -- $ --
Issued to related party............................... 6,200 -- 62 --
Issued to employees................................... 430 -- 4 --
Common stock split.................................... 12,000 -- 120 --
Repurchase of common stock............................ 563 (563) 6 (1,080)
Accretion of mandatorily
redeemable common stock............................. -- -- -- --
Comprehensive income:
Net income.......................................... -- -- -- --
-------------- ------------ ------------ ------------
Balance at June 30,1997............................... 19,193 (563) $ 192 $(1,080)
Issued through initial public
offering, net of offering costs of $6,041.......... 5,750 -- 57 --
Issued in connection with
acquisitions........................................ 1,585 563 16 1,080
Accretion of mandatorily
redeemable common stock............................. -- -- -- --
Conversion of mandatorily
redeemable common stock............................. 813 -- 8 --
Issued in connection with stock
option plan......................................... -- -- -- --
Issued upon exercise of stock
options............................................. 8 -- -- --
Amortization of deferred
compensation........................................ -- -- -- --
Comprehensive income:
Net income.......................................... -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 1998.............................. 27,349 -- $ 273 $ --
ISSUED IN CONNECTION WITH
ACQUISITIONS........................................ 1,758 -- 18 --
ISSUED UPON EXERCISE OF STOCK
OPTIONS............................................. 2 -- -- --
REPURCHASE OF COMMON STOCK............................ -- (24) -- (67)
AMORTIZATION OF DEFERRED
COMPENSATION........................................ -- -- -- --
COMPREHENSIVE INCOME:
NET INCOME.......................................... -- -- -- --
----------- ------------ --------- ------------
BALANCE AT JUNE 30, 1999.............................. 29,109 (24) $ 291 $ (67)
======== ==== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN DEFERRED RETAINED
CAPITAL COMPENSATION EARNINGS
------------- ------------- -----------
Balance at October 1, 1996
<S> <C> <C> <C>
(inception)............................................ $ -- $ -- $ --
Issued to related party............................... -- -- --
Issued to employees................................... 870 -- --
Common stock split.................................... (120) -- --
Repurchase of common stock............................ 780 -- --
Accretion of mandatorily
redeemable common stock............................. (341) -- (692)
Comprehensive income:
Net income.......................................... -- -- 692
------------ ------------ ----------
Balance at June 30,1997............................... $ 1,189 $ -- $ --
Issued through initial public
offering, net of offering costs of $6,041.......... 45,652 -- --
Issued in connection with
acquisitions........................................ 6,470 -- --
Accretion of mandatorily
redeemable common stock............................. -- -- (1,185)
Conversion of mandatorily
redeemable common stock............................. 3,907 -- --
Issued in connection with stock
option plan......................................... 124 (124) --
Issued upon exercise of stock
options............................................. 23 -- --
Amortization of deferred
compensation........................................ -- 21 --
Comprehensive income:
Net income.......................................... -- -- 5,456
------------ ------------ ----------
Balance at June 30, 1998.............................. $ 57,365 $ (103) $ 4,271
ISSUED IN CONNECTION WITH
ACQUISITIONS........................................ 9,012 -- --
ISSUED UPON EXERCISE OF STOCK
OPTIONS............................................. 5 -- --
REPURCHASE OF COMMON STOCK............................ -- -- --
AMORTIZATION OF DEFERRED
COMPENSATION........................................ -- 25 --
COMPREHENSIVE INCOME:
NET INCOME.......................................... -- -- 8,996
------------ ---------- ------------
BALANCE AT JUNE 30, 1999.............................. $ 66,382 $ (78) $ 13,267
========== ========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
<PAGE> 40
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED JUNE 30, OCTOBER 1, 1996
---------------------------- (INCEPTION) TO
1999 1998 JUNE 30, 1997
------------------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ........................................................... $ 8,996 $ 5,456 $ 692
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Depreciation and amortization ...................................... 5,252 3,828 1,285
Deferred income taxes .............................................. (107) (817) 135
Provision for uncollectible accounts ............................... 733 292 26
Provision for restructure .......................................... 910 _ _
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable -- related party ............................ 32,157 (19,343) (27,607)
Accounts receivable -- third parties ............................ (9,585) (4,092) (2,293)
Other current assets ............................................ (421) (1,072) 230
Accounts payable and accrued expenses ........................... (1,925) (5,904) (1,309)
Accrued salaries, wages, and payroll taxes ...................... (18,585) 26,262 22,865
Accrued interest -- related party ............................... -- -- 693
Accrued workers' compensation and health claims ................. (12,638) 13,417 4,113
Income taxes payable ............................................ 235 1,533 902
Other, net ...................................................... (519) 428 164
-------- -------- --------
Net cash flows provided by (used in) operating
activities ................................................. 4,503 19,988 (104)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash acquired ............... (3,583) (11,489) (24,250)
Payment of deferred purchase price obligations ....................... -- (17,172) --
Additions to property and equipment .................................. (3,067) (2,784) (329)
Other, net ........................................................... -- (515) (387)
-------- -------- --------
Net cash flows used in investing activities ................... (6,650) (31,960) (24,966)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering of common stock ............ -- 45,709 --
Proceeds from note payable to related party .......................... -- -- 27,689
Payment of note payable to related party ............................. -- (28,382) --
Proceeds from financing arrangements ................................. 13,500 9,250 --
Payment of financing arrangements .................................... (11,890) (10,484) (94)
Payment for purchase of treasury stock ............................... -- -- (1,080)
Proceeds from common stock issued .................................... 5 23 914
Other, net ........................................................... -- -- (577)
-------- -------- --------
Net cash flows provided by financing activities ............... 1,615 16,116 26,852
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................. (532) 4,144 1,782
Cash and cash equivalents, beginning of period ....................... 5,926 1,782 --
-------- -------- --------
Cash and cash equivalents, end of period ............................. $ 5,394 $ 5,926 $ 1,782
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
38
<PAGE> 41
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: 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 needs, including payroll management, workers'
compensation risk management, health care and other employee benefits
management, unemployment services, temporary staffing and human resource
consulting services. The Company provides these services to companies in a
variety of industries located primarily in the states of Florida, Arizona, New
York, Maryland, Utah, New Mexico, Pennsylvania and California.
PEO services are typically provided under a standard client service
agreement which provides for an initial one year term, and is renewed
periodically. The agreement is subject to termination without cause by the
Company or the client at any time upon 30 days' prior written notice. The
service agreement establishes a "co-employment" relationship whereby the Company
contractually assumes certain administrative, regulatory and financial employer
responsibilities with respect to worksite employees.
The Company was established by NovaCare, Inc. (the "Parent") in September
1996 as a subsidiary and commenced operations in October 1996, concurrent with
the acquisition of Resource One, Inc. ("Resource One"), a PEO based in Florida.
In February 1997, the Company acquired three additional PEOs -- Employee
Services of America, Inc. ("ESA"), Prostaff Human Resources, Inc. ("Prostaff")
and The TPI Group, Ltd. ("TPI") and entered into a contract with the Parent to
co-employ substantially all of the Parent's workforce (the "NovaCare Contract")
(see Note 5). The Company completed three acquisitions during the year ended
June 30, 1998, including NovaPro, a temporary staffing business, acquired from
the Parent on July 1, 1997 (see Note 5), AmeriCare Employers Group, Inc.,
(AmeriCare) a PEO based in Phoenix, Arizona, acquired December 1, 1997 and Staff
Leasing Systems, Inc. (SLS), a PEO based in Bowie, Maryland, acquired on May 1,
1998 (see Note 6). The Company acquired Pay America Inc. ("Pay America"), a PEO
based in Utah, on August 1, 1998 and Payday Professional Employer ("Payday"), a
PEO based in New Mexico, on October 1, 1998 (see Note 6).
Operating Segments: The Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards for
reporting financial and descriptive information about operating segments and
related disclosures regarding products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect the Company's results of
operations or financial position. The Company operates in the United States as
one business segment under SFAS 131, providing professional employer services.
Accordingly, there were no changes to, or additional disclosures required as a
result of adopting this new standard.
Principles of Consolidation: The Consolidated Financial Statements include
the operations of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications: Certain amounts in the fiscal 1998 and 1997 consolidated
financial statements have been reclassified to conform with the fiscal 1999
presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
39
<PAGE> 42
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue Recognition: Revenues and the related costs of wages, salaries, and
employment taxes pertaining to worksite employees are recognized in the period
in which the employee performs the service. Because the Company is at risk for
all of its direct costs, independently of whether payment is received from its
clients, all amounts billed to clients for gross salaries and wages, related
employment taxes, and health care and workers' compensation coverage are
recognized as revenue by the Company. Revenues relating to worksite employees
with earned but unpaid wages at the end of each period are recognized as
unbilled accounts receivable and the corresponding direct cost as an accrued
liability. The Company establishes an allowance for doubtful accounts for
accounts receivable based on management judgement and prior experience.
Cash and Cash Equivalents: The Company considers its holdings of highly
liquid debt and money-market instruments to be cash equivalents if the
securities mature within 90 days from the date of acquisition. These investments
are carried at cost, which approximates fair value.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, which principally range from three to ten years. Assets
under capital leases and leasehold improvements are amortized over the lesser of
the lease term or the asset's estimated useful life.
Excess Cost of Net Assets Acquired: Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred taxes have been recorded
to the extent of the difference between the fair value and the tax basis of the
assets acquired and liabilities assumed. The excess of the purchase price over
the fair value of net assets acquired, including the recognition of applicable
deferred taxes, consists of non-compete agreements, customer lists, assembled
workforce, and goodwill and is amortized on a straight-line basis over the
estimated useful lives of the assets, which range from five to 40 years.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"), the Company reviews the
realizability of long-lived assets, certain intangible assets and goodwill
whenever events or circumstances occur which indicate recorded cost may not be
recoverable. The Company also reviews the overall recoverability of goodwill
based primarily on estimated future undiscounted cash flows.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic market.
Workers' Compensation: The Company is contractually obligated to provide
workers' compensation coverage for its employees and co-employees. The Company
accomplishes this through a combination of various commercial insurance policies
and self insurance programs. The self insurance programs relate to
pre-acquisition workers' compensation arrangements. The Company records
estimated accruals for workers' compensation claims, including estimates for
incurred but not reported claims, based upon a review of claims activity and
past experience. Management believes any differences which may arise between
actual settlement of claims and reserves at June 30, 1999 would not have a
material effect on the Company's financial position.
On July 1, 1997, the Company entered into a three-year contract with a
commercial insurance company for workers' compensation coverage. Under this
program, the Parent's worksite employees and third party worksite employees are
covered under a fixed cost insurance program, which is subject to certain per
incident and aggregate deductibles.
40
<PAGE> 43
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Taxes: The Company records deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.
Net Income Per Share: The Company computes earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). Under this statement, earnings per
share-basic represents net income 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 dilutive stock options and contingently issuable shares under certain
acquisition agreements.
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 PERIOD
FROM
FOR THE YEARS ENDED JUNE 30, OCTOBER 1, 1996
--------------------------------------- (INCEPTION) TO
1999 1998 JUNE 30, 1997
--------- ------------------------ -------------------------
Historical Pro forma Historical Pro forma
---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
NET INCOME .................................... $ 8,996 $ 5,456 $ 5,456 $ 692 $ 692
ADJUSTMENT TO NET INCOME:
Deduct -- accretion of mandatorily redeemable
common stock ................................ -- (1,185) -- (1,033) --
-------- -------- -------- -------- --------
Net income (loss) attributable to common stock $ 8,996 $ 4,271 $ 5,456 $ (341) $ 692
======== ======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Weighted average shares outstanding -- basic .. 29,106 24,942 24,942 18,078 18,078
Stock options ............................... 91 135 135 -- --
Contingently issuable shares ................ 878 58 58 -- --
-------- -------- -------- -------- --------
Weighted average shares outstanding -- assuming
dilution .................................... 30,075 25,135 25,135 18,078 18,078
======== ======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic ....................................... $ .31 $ .17 $ .22 $ (.02) $ .04
======== ======== ======== ======== ========
Assuming dilution ........................... $ .30 $ .17 $ .22 $ (.02) $ .04
======== ======== ======== ======== ========
</TABLE>
Historical net income per share is computed by dividing net income, net of
the accretion of mandatorily redeemable common stock (see Note 13), by the
weighted average number of shares outstanding.
Pro forma net income per share is computed by dividing net income, without
consideration to the accretion of mandatorily redeemable common stock, by the
weighted average number of shares outstanding.
41
<PAGE> 44
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Options to purchase 1,464 shares of common stock for the year ended June
30, 1999 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 over multiple reporting
periods. Approximately 4,600 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. There were no
transactions occurring subsequent to June 30, 1999 that would have materially
changed the number of shares used in computing net income per share-basic or net
income per share-assuming dilution.
Comprehensive Income: The Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. There have not
been any non-owner changes in equity other than net income. Comprehensive income
is reported in the Consolidated Statements of Shareholders' Equity.
Recently Issued Accounting Standards: The Company has adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
pronouncement revises employers' disclosures about pension and other
postretirement benefit plans. SFAS 132 does not change the measurement or
recognition of those plans, however, it does require additional information on
changes in the benefit obligations and fair values of plan assets in order to
facilitate financial analysis. The Company does not have any defined benefit
pension plans or postretirement benefit plans; therefore, the adoption of SFAS
132 did not have a material impact on the Company's disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP is effective for the year ending June 30, 2000.
Management does not believe the adoption of SOP 98-1 will have a material effect
on the Company's financial position or results of operations.
In June 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-5 "Reporting on the Cost
of Start-Up Activities" which the Company is required to adopt no later than
June 30, 2000. SOP 98-5 provides the reporting standards for the costs of
start-up activities, including organizational costs, which should be expensed as
incurred. Management does not believe the adoption of SOP 98-5 will have a
material effect on the Company's financial position or results of operations.
2. STRATEGIC ALTERNATIVES REVIEW AND SALE OF COMPANY
On August 13, 1999, the Parent sent a proxy statement ("Proxy Statement")
to its stockholders asking them to consider and vote upon proposals to approve:
(i) the sale of the Parent's outpatient physical rehabilitation and occupational
health business (the "PROH Sale"), (ii) the sale of the Parent's interest in the
Company (the "NCES Sale") and (iii) the adoption of the Plan of Restructuring of
the Parent ("the Restructuring Proposal"). On September 21, 1999 the Parent's
stockholders approved the three proposals noted above.
On September 8, 1999 the Company signed a definitive agreement to sell the
Company to an investment group comprised of Patricof & Co. Ventures
Incorporated, Fidelity Ventures Limited and AFLAC Incorporated (the
"Investors"). Under the terms of the agreement, a new private company
established by the Investors will acquire all of the outstanding common stock of
the Company at a price of $2.50 per share. The purchase will be effected through
a cash tender offer to the Company's stockholders and subsequent merger of the
Company into a new private company managed by the Investors. The Parent also
executed a definitive agreement, subject to certain conditions, to tender its
shares in the tender offer at the price of $2.50 per share. The tender offer is
subject to the satisfaction of customary closing conditions. The tender offer
will commence on or about September 15, 1999 and is expected to close during
October 1999.
42
<PAGE> 45
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA
The Parent is in the process of seeking a buyer for its PROH business. The
Parent anticipates that the PROH Sale will be structured as a stock sale. While,
to date, no definitive agreement has been entered into with respect to the PROH
Sale, the Parent is seeking stockholder approval to proceed with the sale when a
suitable buyer is identified and a definitive agreement is negotiated with such
buyer. The consummation of the sale would be subject to the receipt by the
Parent of the minimum sales price set forth in the Proxy Statement, obtaining
the opinion of financial advisors in connection with the sale and approval by
the Board of Directors of the Parent of the terms of any definitive sale
agreement. Except as requested in the Proxy Statement, no further stockholder
vote will be solicited by the Parent for the PROH Sale or the NCES Sale.
Accordingly, the Parent's stockholders will not have the opportunity to vote on
the definitive sale agreements.
With the approved Plan of Restructuring, the Parent intends to seek to
reinvest the net proceeds to the Parent from the PROH Sale and the NCES Sale,
after the payment of liabilities, in a new business or businesses. Any such
reinvestment would be subject to the further vote and approval of the
stockholders of the Parent. If the Parent is unable, or chooses not, to reinvest
any proceeds in a new business or businesses, the Parent will liquidate.
3. PROVISION FOR RESTRUCTURE
On March 31, 1999, the Parent announced that, due primarily to lower
reimbursement rates and to declines in caseloads at long-term care services
customer facilities, resulting from the new reimbursement structure for therapy
under the Medicare program, it would be forced to exit selected long-term care
markets and facilities, and would continue to lower expenses by reducing labor
costs. On June 1, 1999, the Parent sold its remaining long-term care services
business. In addition, on July 1, 1999, the Parent sold its orthotics and
prosthetics division. Based on these events, the Company and the Parent
negotiated new contract terms to reflect changes in the Parent's ongoing service
needs. The new contract terms, which became effective July 1, 1999, reduce the
scope of services provided to the Parent's remaining business.
In response to the above, the Company commenced a restructuring of its
NovaCare Contract and temporary staffing operations and recorded a pretax
provision for restructuring of $910 in the fourth quarter of fiscal 1999. The
provision consists principally of employee severance costs for the termination
of approximately 50 employees, which represent the accumulation of termination
benefits set forth in the Company's severance policy, and lease termination
costs to reduce three facilities to levels more appropriate to current business
requirements.
The following table sets forth the components of the Company's provision
for restructure:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1999
-------------
COST REDUCTION PROGRAMS:
<S> <C>
Employee termination benefits......................... $ 502
Facility lease terminations........................... 408
------
Total provision............................................ $ 910
======
</TABLE>
Through June 30, 1999, $181 of the restructuring accrual has been utilized.
43
<PAGE> 46
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. INITIAL PUBLIC OFFERING
On November 14, 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, (including the exercise of the over-allotment provision),
after deducting offering costs of $6,041, amounted to $45,709 and were used by
the Company to pay the Company's outstanding revolving credit loan of $28,382
from the Parent and pay $17,172 to retire deferred purchase obligations. The
remaining proceeds have been allocated for general corporate purposes.
5. RELATED PARTY TRANSACTIONS
In return for its efforts as the founder, its initial investment of $40 and
the use of the Parent's trademark, the Company issued 18,200 shares (as adjusted
for the common stock split -- see Note 12) of common stock to the Parent. Given
that the transactions were between companies under common control, the issuance
of shares was recorded at the cost basis of the Parent. The excess of the
consideration given to the Parent over the Parent's cost basis in the assets
transferred was recorded as a reduction of additional paid-in capital, the same
account credited upon issuance of the shares. Therefore, the transaction had no
net effect on shareholders' equity.
Effective October 1996, the Company entered into a line of credit agreement
with the Parent which provided for an unspecified availability. Interest was
charged to the Company at the Parent's borrowing rate, which was the EuroDollar
rate plus a range of 0.5% to 1.125%. The weighted average borrowing rate for
fiscal 1998 and 1997 was 6.8% and 6.6%, respectively. The line of credit
agreement terminated upon completion of the Company's initial public offering,
at which time all outstanding amounts were paid to the Parent (see Note 4).
In February 1997, the Parent and the Company entered into the NovaCare
Contract, whereby substantially all of the Parent's employees became co-employed
by the Company. Under the NovaCare Contract, the Company provided traditional
PEO services such as payroll and benefits administration, worksite safety
evaluation, employment-related risk management and compensation and benefits
consultation. The Parent paid the Company a fee for its services equal to the
salary and Federal payroll costs plus an average base fee of 9.7% of gross
earnings of employees, or approximately 117% of the gross payroll covered by the
NovaCare Contract. Effective July 1, 1998, the NovaCare Contract was amended,
whereby the Company agreed to provide the existing PEO services and a broader
array of services, including recruiting, employee training and orientation,
outplacement and human resource consulting. The amended contract was principally
a fee-for-service contract, replacing the previous payment arrangement, which
was priced as a percentage of payroll, as described above. During the fourth
quarter of fiscal 1999, the Company and the Parent negotiated new contract terms
to reflect changes in the Parent's ongoing service needs (see Note 3). The new
contract became effective July 1, 1999, for a period of four years relative to
the PROH business and for six-months relative to the Parent's corporate support
services personnel, and provides for PEO services such as payroll and benefits
administration, worksite safety evaluation, employment related risk management
and compensation and benefits consultation. The new contract is principally a
fee-for-service contract.
The Parent may not terminate the NovaCare Contract except in the event of:
(i) the breach of any of the Company's agreements, duties, or performance
standards under the NovaCare Contract; (ii) the Company making false or
misleading representations, warranties, or statements of material fact in
documents submitted by or on behalf of the Parent; or (iii) the insolvency,
bankruptcy, or receivership of the Company.
44
<PAGE> 47
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Parent is the Company's only customer with revenue concentrations in
excess of ten percent. Related party revenues totaled $685,487, $772,168 and
$255,289 of consolidated revenues for fiscal 1999, fiscal 1998 and for the
period October 1, 1996 (inception) to June 30, 1997, respectively.
During fiscal 1998 and 1997, the Parent subleased office space to the
Company. The sublease was a month-to-month arrangement, terminable on 30 days'
notice by either party, under which the Company paid the Parent approximately $9
per month which equaled the Parent's cost. The agreement was terminated in
October 1997, concurrent with the Company's relocation to the new corporate
headquarters.
The Parent also provides general administrative and financial services to
the Company on an as-needed basis at the Parent's cost. During fiscal 1999, 1998
and 1997, the Company reimbursed the Parent for such expenses, in the amount of
$80, $220 and $160, respectively, based upon estimates of time incurred by the
Parent's personnel on behalf of the Company.
Effective July 1, 1997, the Company issued 1,200 shares of its common
stock, valued at $5,400, to acquire the assets and liabilities of NovaPro,
formerly a business of the Parent, in a transaction accounted for as a purchase.
Given that the transaction was between companies under common control, the
transfer of assets and liabilities was recorded at the historical cost basis of
the Parent. The excess paid over the historical cost has been treated as a
reduction of additional paid-in capital, the same account credited upon issuance
of the shares. Therefore the transaction had no effect on shareholders' equity.
The terms of the aforementioned related party transactions are equivalent
to those that would result from transactions among unrelated parties.
6. ACQUISITIONS
During the year ended June 30, 1999, the Company acquired two PEO
businesses. On August 1, 1998, the Company acquired Pay America, a PEO based in
Salt Lake City, Utah. On October 1, 1998, the Company acquired Payday, a PEO
based in Albuquerque, New Mexico. The purchase price of both acquisitions was
comprised of cash, shares of the Company's common stock and future contingent
payments. The cash portion of the purchase price was partially funded through
borrowings from the Company's revolving credit facility with the remainder
generated from operations.
During the year ended June 30, 1998, the Company acquired two PEO
businesses (see Note 1) and one temporary staffing business from the Parent (see
Note 5). During the period ended June 30, 1997, the Company acquired four PEO
businesses, which included the initial platform acquisition (see Note 1).
The following unaudited pro forma consolidated results of the Company give
effect to each of the acquisitions as if they occurred as of July 1, 1997:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Net revenues .................................. $ 1,553,916 $ 1,394,206
Net income .................................... 9,113 5,720
Net income per share -- basic ................. .31 .22
Net income per share -- assuming dilution ..... .30 .22
</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 July 1, 1997, or the results that may occur in the future.
45
<PAGE> 48
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Information with respect to businesses acquired in purchase transactions
was as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------
1999 1998
---- ----
<S> <C> <C>
Goodwill .............................................. $77,553 $68,033
Customer lists ........................................ 7,764 7,552
Other ................................................. 4,060 3,820
------- -------
Cost in excess of fair value of net assets acquired.... 89,377 79,405
Less: accumulated amortization ........................ 7,406 3,835
------- -------
$81,971 $75,570
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Cash paid (net of cash acquired) ...................... $ 2,833 $10,959
Common stock issued ................................... 4,200 7,590
Deferred purchase price obligations ................... 600 4,600
Closing costs and other ............................... 600 975
------- -------
8,233 24,124
Liabilities assumed ................................... 2,786 9,709
------- -------
11,019 33,833
Fair value of assets acquired ......................... 1,047 9,153
------- -------
Cost in excess of fair value of net assets acquired.... $ 9,972 $24,680
======= =======
</TABLE>
The acquisitions were accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to net
assets acquired based on their estimated fair values. Net assets acquired
consisted primarily of accounts receivable and property and equipment.
Certain purchase agreements require additional payments if specific
financial targets and/or operating conditions are met. Aggregate contingent
payments in connection with these acquisitions at June 30, 1999 of approximately
6,500 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. At June 30, 1998, 484
shares of common stock valued at $4,600 were accrued. The Company issued 830
shares of common stock in fiscal 1999 and in fiscal 1998 paid $1,555 in cash and
issued 93 shares of common stock in connection with these agreements.
Deferred current and long-term guaranteed purchase price obligations were
$1,200 at June 30, 1999. Obligations at June 30, 1998 totaled $6,206, consisting
of $1,606 in guaranteed payments and $4,600 accrued for contingent
consideration. During fiscal 1999, the Company paid $750 in cash in connection
with guaranteed payment obligations.
46
<PAGE> 49
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Land and buildings ............................ $ 70 $ 70
Property, equipment and furniture ............. 2,863 2,580
Leasehold improvements ........................ 622 563
Computer equipment and capitalized software ... 5,022 2,201
------- -------
8,577 5,414
Less: accumulated depreciation and amortization (2,354) (924)
------- -------
$ 6,223 $ 4,490
======= =======
</TABLE>
Depreciation expense for fiscal 1999, 1998 and the period from October 1,
1996 (inception) to June 30, 1997 was $1,430, $759 and $165, respectively.
8. FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------
1999 1998
------- -------
<S> <C> <C>
$25,000 revolving credit facility, due November 17, 2000 $2,000 $ --
Subordinated promissory notes (6% to 10%), payable
through 2002 ...................................... 501 678
Capitalized lease obligations, payable through 2001 .... 150 278
------ ------
2,651 956
Less: current portion .................................. 2,226 217
------ ------
$ 425 $ 739
====== ======
</TABLE>
In November 1997, the Company entered into a three year revolving credit
facility with a syndicate of lenders. 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%. The weighted average borrowing rate for
fiscal 1999 was 7.7%. 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) Parent's interest in
the common stock of the Company. The revolving credit facility requires the
maintenance of minimum capitalization and net worth amounts, capital expenditure
thresholds as well as certain financial ratios. At June 30, 1999, the Company
was in compliance with these requirements. The unused portion of the credit
facility at June 30, 1999 was $23,000.
At June 30, 1999, aggregate annual maturities of financing arrangements
were as follows for the next five fiscal years and thereafter:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------
<S> <C> <C>
2000.................. $ 2,226
2001.................. 355
2002.................. 70
2003.................. --
2004.................. --
Thereafter ........... --
--------
$ 2,651
========
</TABLE>
Interest paid on debt during fiscal 1999 and 1998 and the period October 1,
1996 (inception) through June 30, 1997, amounted to $412, $804 and $49,
respectively.
47
<PAGE> 50
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. ACCRUED WORKERS' COMPENSATION AND HEALTH CLAIMS
The Company's accruals for claims are summarized as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Accrued health benefit premiums payable and claims
reserves ....................................... $ 6,802 $16,638
Accrued workers' compensation premiums payable and
claims reserves ................................ 4,848 5,776
------- -------
11,650 22,414
Less: workers' compensation claims and health
benefits claims expected to be settled in less
than one year .................................. 8,741 17,948
------- -------
$ 2,909 $ 4,466
======= =======
</TABLE>
Under the NovaCare Contract, as described in Note 5, the Company is
self-insured for certain health benefits up to $150 per individual per year. The
Company expensed amounts for estimated costs occurring from incurred losses,
both reported and unreported. The estimate of the liability for unasserted
claims arising from unreported incidents is based on an analysis of historical
claims rates.
10. INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JUNE 30, OCTOBER 1, 1996
---------------------------- (INCEPTION) TO
1999 1998 JUNE 30, 1997
------- -------- -------------
Current:
<S> <C> <C> <C>
Federal $ 6,206 $ 4,460 $ 937
State . 1,564 1,100 470
------- ------- -------
7,770 5,560 1,407
------- ------- -------
Deferred:
Federal (81) (744) 122
State . (26) (73) 13
------- ------- -------
(107) (817) 135
------- ------- -------
$ 7,663 $ 4,743 $ 1,542
======= ======= =======
</TABLE>
48
<PAGE> 51
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The components of net deferred tax assets as of June 30, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------
1999 1998
------- -------
<S> <C> <C>
Net operating loss carryforward ................................ $ 1,669 $ 2,058
Accruals and reserves not currently deductible for tax purposes:
Current ...................................................... 2,393 1,688
Non-current .................................................. -- 61
------- -------
Gross deferred tax assets ...................................... 4,062 3,807
Valuation reserve .............................................. -- (2,058)
------- -------
Total deferred tax assets ...................................... 4,062 1,749
Expenses capitalized for financial statement
purposes ..................................................... (344) (195)
------- -------
Net deferred tax asset ......................................... $ 3,718 $ 1,554
======= =======
</TABLE>
In fiscal 1997, the Company acquired net operating loss carryforwards of
approximately $6,000, of which $4,000 is remaining at June 30, 1999, expiring
through 2010. The Internal Revenue Code of 1986, (the "Code"), placed certain
restrictions on the use of net operating loss carryforwards acquired through
purchase transactions. Accordingly, a full valuation allowance was in place,
against these amounts, at June 30, 1998. During 1999, the Code was modified,
regarding the use of net operating loss carryforwards acquired in purchase
transactions, allowing the Company to reverse the valuation allowance placed
against these amounts. Because the valuation allowance was recorded as a
component of purchase accounting at the acquisition date, the reversal of the
valuation allowance resulted in a corresponding reduction in goodwill.
The reconciliation of the expected tax expense (computed by applying the
Federal statutory tax rate to income before income taxes) to actual tax expense
was as follows:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JUNE 30, OCTOBER 1, 1996
---------------------------- INCEPTION) TO
1999 1998 JUNE 30, 1997
--------- --------- --------------
<S> <C> <C> <C>
Expected Federal income tax expense . $ 5,831 $ 3,468 $ 782
State income taxes, less Federal
benefit ........................... 1,028 603 470
Non-deductible amortization of excess
cost of net assets acquired ....... 1,150 914 349
Tax credits ......................... (213) (200) (10)
Other, net .......................... (133) (42) (49)
------- ------- -------
$ 7,663 $ 4,743 $ 1,542
======= ======= =======
</TABLE>
Income taxes paid during fiscal 1999, 1998 and the period October 1, 1996
(inception) through June 30, 1997 amounted to $7,726, $3,960 and $178,
respectively.
49
<PAGE> 52
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. OPERATING LEASES
The Company rents office space and equipment under non-cancelable operating
leases. Total rent expense charged to operations was $1,548, $1,027 and $394 for
fiscal 1999, 1998 and the period October 1, 1996 (inception) to June 30, 1997,
respectively.
Future minimum lease commitments for all non-cancelable leases as of June
30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
----------- ------
<S> <C> <C>
2000............................................ $ 1,954
2001............................................ 1,370
2002............................................ 1,220
2003............................................ 1,064
2004............................................ 263
Thereafter...................................... 134
---------
Total minimum lease payments.................... $ 6,005
=========
</TABLE>
12. SHAREHOLDERS' EQUITY
Preferred Stock
On inception, the Board of Directors authorized 1,000 shares of preferred
stock with a par value of $.01 per share. There were no shares issued or
outstanding at any time during the period from inception to June 30, 1999.
Common Stock
During the period from October 1, 1996 (inception) through June 30, 1997,
five employees purchased 430 shares of the Company's common stock. The Chief
Executive Officer of the Company purchased 375 shares of the Company's common
stock on January 10, 1997 at the fair market value of $1.92 per share. The other
shares were purchased on various dates from February 28, 1997 through June 10,
1997 at the fair market value of $2.80 per share.
On January 2, 1997, the Board of Directors declared a four-for-one stock
split of the Company's common stock to shareholders of record on January 2,
1997. All references in the financial statements to per share amounts have been
retroactively restated to reflect the change in the number of common shares
outstanding as a result of the stock split. Accordingly, $126 was transferred
from additional paid-in capital to common stock, representing the par value of
additional shares issued.
On November 14, 1997, the Company completed the Offering of 5,000 shares of
its common stock. Subsequent to the Offering an additional 750 shares were
issued pursuant to the exercise of an over-allotment provision, for a total
issuance of 5,750 shares (see Note 4). Simultaneously with the completion of the
Offering, all 813 shares of mandatorily redeemable common stock were converted
into common stock (see Note 13).
During the year ended June 30, 1999, the Company issued 1,758 shares of
common stock, in connection with fiscal 1999, 1998 and 1997 acquisitions (see
Note 6).
50
<PAGE> 53
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Treasury Stock
On January 2, 1997, the Company repurchased 563 shares of mandatorily
redeemable common stock from a former owner of an acquired business. Upon
repurchase, the mandatorily redeemable common stock became a component of
permanent equity. Accordingly, the 563 shares and the related par value and
additional paid-in capital associated with these shares were reflected in the
accompanying consolidated statement of shareholders' equity as treasury stock,
stated at cost. On December 1, 1997, 563 shares were reissued from the treasury
as part of the acquisition purchase price of AmeriCare. At June 30, 1998, there
were no shares held in the treasury. During the year ended June 30, 1999, the
Company repurchased 24 shares of common stock from a former owner of an acquired
business.
Deferred Compensation
On August 8 and September 5, 1997, the Company granted options to certain
executives, in conjunction with compensation agreements, 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 was 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 $124. This amount is
recognized as compensation expense over the vesting period of five years, on a
straight-line basis. The unamortized portion of deferred compensation is
recorded as a reduction to shareholders' equity. At June 30, 1999 and 1998, the
remaining unamortized portion of deferred compensation amounted to $78 and $103,
respectively.
13. MANDATORILY REDEEMABLE COMMON STOCK
In connection with the acquisitions described in Note 1, 1,376 shares (as
adjusted for the stock split -- see Note 12) of common stock were issued subject
to an agreement which provides certain registration rights with respect to the
common stock, as well as the right, two years from the date of acquisition, to
put the shares to the Company at a price of $16.00 per share. The put option was
rendered inoperative due to the Company's completion of the Offering prior to
December 31, 1998.
Of the 1,376 shares, 750 (as adjusted for the stock split), 375 and 155
were issued, as of the date of acquisition, to the selling shareholders of
Resource One, ESA and TPI, respectively, at the fair market value of $1.20 per
share (as adjusted for the stock split) for Resource One and $2.48 for ESA and
TPI. Subsequent to the date of acquisition, contingent and non-contingent
payments of 41, 44, and 11 shares were issued with respect to the Resource One,
ESA and Prostaff acquisitions, respectively, at the fair market value of $2.80
per share.
The mandatorily redeemable common stock was recorded at the fair value at
the date of issuance. The excess of the put price over the carrying value was
accreted by periodic charges to retained earnings or additional paid-in capital,
as applicable, over a two year period. As of June 30, 1997, 813 shares of
mandatorily redeemable common stock were outstanding. During fiscal 1998 and the
period from October 1, 1996 (inception) to June 30, 1997, the Company recorded
$1,185 and $1,033, respectively, of accretion to retained earnings and
additional paid-in capital. On November 11, 1997, in conjunction with the
Offering, all 813 shares were converted into common stock.
51
<PAGE> 54
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. BENEFIT PLANS
Stock Option Plan:
On February 28, 1997, the Company's Board of Directors adopted and its
shareholders approved the Company's 1997 Stock Option Plan (the "Plan") under
which 625 shares of common stock were reserved for issuance upon the exercise of
stock options. On November 24, 1997, the Plan was amended to increase the number
of shares reserved for issuance to 1,625, and limit the maximum number of
options which may be granted to any person under the Plan during any fiscal year
to 200 shares. On December 8, 1998, the Plan was amended to increase the number
of shares reserved for issuance to 3,125. As of the same date, the Company
repriced all outstanding options with prices in excess of $6.00 to $5.81 per
share. The new option price was determined based upon the fair market value per
share at December 8, 1998. Accordingly, no compensation expense was recognized
since the exercise price was equal to the market value per share. Under the
Plan, substantially all options are granted for a term of up to 10 years at
prices equal to the fair value at the date of grant. Options granted generally
are exercisable over a five year period, although vesting can be accelerated if
the Company's stock price achieves stated levels.
The following summarizes the activity of the Plan:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED JUNE 30, OCTOBER 1, 1996
------------------------------------------ (INCEPTION) TO
1999 1998 JUNE 30, 1997
------------------ ---------------- ------------------
<S> <C> <C> <C>
Options:
Outstanding at the beginning of the year.................... 1,314 371 --
Granted................................................... 1,156 1,091 375
Exercised................................................. (2) (8) --
Canceled.................................................. (145) (140) (4)
----------------- ------------------ --------
Outstanding at the end of the year........................ 2,323 1,314 371
================= ================== ========
Option price per share ranges:
Granted................................................... $ 4.50 - 6.50 $ 2.80 -- 9.13 $ 2.80
Exercised................................................. $ 2.80 $ 2.80 $ --
Outstanding at the end of the year........................ $ 2.80 - 9.13 $ 2.80 -- 9.13 $ 2.80
Options exercisable at end of year........................ 179 83 --
Exercisable option price ranges........................... $ 2.80 - 9.13 $ 2.80 $ --
Options available for grant at end of year under
the 1997 stock option plan............................. 792 303 254
</TABLE>
52
<PAGE> 55
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Plan. The table below sets forth the pro
forma information as if the Company had adopted the compensation recognition
provisions of SFAS 123:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED JUNE 30, OCTOBER 1, 1996
---------------------------- (INCEPTION) TO
1999 1998 JUNE 30, 1997
------------- ------------- ----------------
<S> <C> <C> <C>
Increase (decrease) to:
Net income ............................... $ (982) $ (342) $ 13
Net income per share -- basic and assuming
dilution .............................. $ (.03) $ (.01) --
Assumptions:
Expected life (years) .................... 2.2 - 6.3 3.2 -- 7.5 4.6 -- 6.6
Risk-free interest rate .................. 4.4% 5.8% 6.1% -- 6.5%
Volatility ............................... 93.0% 57.7% 0%
Dividend yield ........................... N/A N/A N/A
</TABLE>
The compensation recognition for the period ended June 30, 1997 was
calculated assuming a fair market value for the Company's common stock equal to
the assumed share value as of the date of the initial public offering. Certain
options were grouped together for purposes of valuation based upon vesting
periods and the date of grant. The weighted average fair value of the stock
options, calculated using the Black-Scholes option pricing model, granted during
the fiscal year ended June 30 1999, 1998 and 1997 was $4.47, $5.63 and $0.82,
respectively. The weighted average remaining contractual life of all options
granted as of June 30, 1999 is 9.2 years.
Retirement Plans:
The Company and the Parent co-sponsor a defined contribution 401(k) plan
covering substantially all of the worksite employees of the Parent and certain
employees of the Company. The contributions for fiscal 1999, 1998 and for the
period October 1, 1996 (inception) to June 30, 1997 made on behalf of the Parent
and the Company were $5,193, $4,508 and $1,612, respectively. The Company and
the Parent also co-sponsored a non-qualified supplemental benefit plan covering
certain key employees. This plan was terminated in March 1999. The matching
contributions made on behalf of the Parent and the Company were $845, $859 and
$166 for fiscal 1999, 1998 and the period October 1, 1996 (inception) to June
30, 1997, respectively.
The Company's subsidiaries maintain defined contribution 401(k) plans
covering certain of their employees and third party worksite employees. The
Company contributes, on behalf of each participating client, varying amounts
based on client elections. The Company's contributions for fiscal 1999, 1998 and
the period from October 1, 1996 (inception) to June 30, 1997 were $850, $456 and
$85, respectively.
15. COMMITMENTS AND CONTINGENCIES
Commitments:
In July 1999, the Company entered into agreements with a nationally
recognized software and technology provider and a leading information management
consulting firm to develop and implement an enterprise wide information system
for operating and financial applications. The cost of this commitment, including
computer hardware, software and other related costs, approximates $2,700 and is
projected to be expended during fiscal 2000.
53
<PAGE> 56
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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 relationship created by PEOs. 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 ("IRS") has conducted a market segment study of the PEO industry (the
"Market Segment Study") focusing on selected PEOs (not including the Company)
for the purpose of examining the relationship among PEOs, their clients,
worksite employees, and the worksite owners. IRS officials indicate that the
Market Segment Study is near completion and suggest that an announcement of the
IRS' position with respect to PEOs has been delayed pending the outcome of
legislation that has been proposed by the PEO industry. If the IRS concludes
that PEOs are not "employers" of certain worksite employees for purposes of the
Internal Revenue 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. The Company believes that, although unfavorable to the
Company, a prospective application by the IRS of an adverse conclusion would not
have a material effect on its financial position and results of operations. A
retrospective application by the IRS could have a material adverse effect on the
Company's business, financial position, results of operations and liquidity.
While the Company believes that a retrospective disqualification is unlikely,
there can be no assurance as to the ultimate resolution of these issues.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED JUNE 30, 1999
<S> <C> <C> <C> <C>
Net revenues ...................................... $374,394 $384,029 $397,037 $389,162
Gross profit ...................................... 16,622 16,717 15,902 14,760
Income from operations ............................ 3,913 4,872 4,446 3,810
Net income ........................................ 2,052 2,573 2,344 2,027
Net income per share - basic ...................... $ .07 $ .09 $ .08 $ .07
Net income per share - assuming dilution .......... $ .07 $ .09 $ .08 $ .07
Weighted average shares outstanding:
Basic ........................................... 29,185 29,185 28,254 27,967
Assuming dilution ............................... 30,766 29,886 29,296 28,935
YEAR ENDED JUNE 30, 1998
Net revenues ...................................... $363,882 $338,367 $302,751 $266,757
Gross profit ...................................... 12,505 11,302 9,412 8,328
Income from operations ............................ 3,645 2,840 2,287 2,126
Net income ........................................ 1,921 1,479 1,119 937
Historical net income per share, after accretion
adjustment -- basic and assuming dilution ....... $ .07 $ .05 $ .03 $ --
Pro forma net income per share, excluding accretion
adjustment -- basic and assuming dilution ...... $ .07 $ .05 $ .05 $ .04
Weighted average shares outstanding:
Basic ........................................... 27,635 27,544 23,869 21,009
Assuming dilution ............................... 28,018 27,674 24,031 21,009
</TABLE>
Results for the fourth quarter of fiscal 1999 include a $910 pretax
provision for restructure (see Note 3). Historical net income per share is
computed by dividing net income, net of the accretion of mandatorily redeemable
common stock, by the weighted average number of shares outstanding. Pro forma
net income per share excludes the accretion of mandatorily redeemable common
stock (see Note 1).
54
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of NovaCare Employee Services, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index appearing under Item 14(a)(1) on page 57 present fairly, in
all material respects, the financial position of NovaCare Employee Services,
Inc. and its subsidiaries at June 30, 1999 and 1998, and the results of their
operations and their cash flows for the years ended June 30, 1999 and 1998 and
the period from October 1, 1996 (date of inception) to June 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
July 30, 1999, except for paragraphs two and three of Note 2, as to which the
date is September 8, 1999
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Registrant has had no changes in or disagreements with accountants on
accounting and financial disclosure of the type referred to in Item 304 of
Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1 -- Business -- Executive
Officers of the Registrant" and the table and text under the caption "Name of
Nominee and Biographical Information" and "Section 16(a) Reporting Requirements"
of the Proxy Statement to be filed with respect to the 1999 annual meeting of
shareholders to be held on December 14, 1999 (the "Proxy Statement"), which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the table and text under the
captions "Compensation of Executive Officers of the Company", "Compensation of
Directors of the Company", "Compensation Committee Interlocks and Insider
Participation" and "Employment Agreements" of the Proxy Statement, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, see the table and text under the
captions "Shares of Common Stock Owned Beneficially as of August 31, 1999" and
"Information Concerning Certain Stockholders" of the Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the text under the caption
"Certain Transactions" of the Proxy Statement, which information is incorporated
herein by reference.
56
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
(1) FINANCIAL STATEMENTS:
NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES (THE
"COMPANY")
Consolidated Balance Sheets at June 30, 1999 and 1998 35
Consolidated Statements of Operations for the years ended
June 30, 1999 and 1998 and the period October 1, 1996 (inception)
to June 30, 1997 36
Consolidated Statements of Shareholders' Equity for the
period October 1, 1996 (inception) to June 30, 1999 37
Consolidated Statements of Cash Flows for the years ended
June 30, 1999 and 1998 and the period October 1, 1996 (inception)
to June 30, 1997 38
Notes to Consolidated Financial Statements 39
Report of Independent Accountants 55
(2) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION
S-K):
The exhibits required to be filed are listed in the index to
exhibits 59
</TABLE>
(b) Current Reports on Form 8-K:
The Company filed no current reports on Form 8-K during the fourth quarter
ended June 30, 1999
57
<PAGE> 60
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoint
E. Martin Gibson and Loren J. Hulber as attorneys-in-fact with full power of
substitution, severally, to execute in the name and on behalf of the Registrant
and each such person, individually and in each capacity stated below, one or
more amendments to the annual report which amendments may make such changes in
the report as the attorney-in-fact acting in the premises deems appropriate and
to file any such amendment to the report with the Securities and Exchange
Commission.
---------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By:/s/ THOMAS D. SCHUBERT
---------------------------------
THOMAS D. SCHUBERT
(SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ E. MARTIN GIBSON Chairman of the Board and September 27, 1999
- ------------------------------ Director
(E. MARTIN GIBSON)
/S/ LOREN J. HULBER President, Chief Executive September 27, 1999
- ------------------------------ Officer and Director
(LOREN J. HULBER)
/S/ THOMAS D. SCHUBERT Senior Vice President and September 27, 1999
- ------------------------------ Chief Financial Officer
(THOMAS D. SCHUBERT)
/S/ EDWIN A. NEUMANN Vice President of Finance and September 27, 1999
- ------------------------------ Chief Accounting Officer
(EDWIN A. NEUMANN))
/S/ HARVEY V. FINEBERG, M.D. Director September 27, 1999
- ------------------------------
(HARVEY V. FINEBERG, M.D.)
/S/ JOHN H. FOSTER Director September 27, 1999
- ------------------------------
(JOHN H. FOSTER)
/S/ TIMOTHY E. FOSTER Director September 27, 1999
- ------------------------------
(TIMOTHY E. FOSTER)
/S/ STEPHEN E. O'NEIL Director September 27, 1999
- ------------------------------
(STEPHEN E. O'NEIL)
/S/ WILLIAM F. WELD, ESQ. Director September 27, 1999
- ------------------------------
(WILLIAM F. WELD, ESQ.)
</TABLE>
58
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
------ ------------------------------------------------------------------------ ------
<S> <C> <C>
2(a) Stock Purchase Agreement dated September 16, 1996 by and among
Resource One, Inc., Professional Insurance Planners of Florida,
Inc., Human Resources One, Inc., Rx One, Inc., William Mayville,
Bernard Clinton Byrd, Jr. and Nova Resource, Inc. (incorporated by
reference to Exhibit 2(a) to the Company's Registration Statement
on Form S-1 (No. 333-35071)) --
2(b) Amendment dated April 8, 1997 to the stock purchase agreement
dated as of September 16, 1996 by and among Resource One, Inc.,
Professional Insurance Planners of Florida, Inc., Human Resource
One, Inc., Rx One, Inc., William E. Mayville, Bernard Clinton
Byrd, Jr. and NovaSource, Inc (incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form S-1
(No. 333-35071)) --
2(c) Stock Purchase Agreement dated January 24, 1997 by and among
Employee Services of America, Inc., Employee Services of Florida,
Inc., Employers Risk Management, Inc., Employee Benefits
Management, Inc., Employers Diversified Services, Inc., and Nova
Resource, Inc. (incorporated by reference to Exhibit 2(c) to the
Company's Registration Statement on Form S-1 (No. 333-35071)) --
2(d) Stock Purchase Agreement dated January 31, 1997 by and among the
TPI Group, LTD., Deborah M. Skinner, John Skinner III, Malvern
Tippett, Carolyn Tippett, Terry DeLong, Quansoo-TPI L.L.C. and
NovaSource, Inc. (incorporated by reference to Exhibit 2(d) to the
Company's Registration Statement on Form S-1 (No. 333-35071)) --
2(e) Stock Purchase Agreement dated December 1, 1997 by and among
AmeriCare Employers Group, Inc., Paralign Staffing Technologies,
Inc., Ronald N. Shostack, Kerran L. Shostack, Ian Ackerman,
Theresa Conroy, Zanza Personnel, Inc. and NovaCare Employee
Services, Inc. (incorporated by reference to Exhibit 2 to the
Company's current report on Form 8-K dated February 2, 1998) --
3(a) Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Registration Statement
on Form S-1 (No. 333-35071)) --
3(b) By-laws of the Company, as amended to date (incorporated by
reference to Exhibit 3(b) to the Company's Registration Statement
on Form S-1 (No. 333-35071)) --
4(a) 1997 Stock Option Plan (incorporated by reference to Exhibit 4(a)
to the Company's Registration Statement on Form S-1 (No.
333-35071)) --
4(b) Amendment No. 1 to the 1997 Stock Option Plan, dated as of
November 24, 1997 (incorporated by reference to Exhibit 4(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997) --
4(c) Amended and Restated 1997 Stock Option Plan (incorporated by
reference to Exhibit 4 to the Company's Registration Statement on
Form S-8 (No. 4 (c) 333-70995)) --
10(a) Employment Agreement dated as of January 10, 1997 between the
Company and Loren J. Hulber (incorporated by reference to Exhibit
10(a) to the Company's Registration Statement on Form S-1 (No.
333-35071)) --
10(b) Amendment dated as of July 1, 1998 to the Employment Agreement
dated January 10, 1997 between the Company and Loren J. Hulber
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998) --
10(c) Amendment dated as of January 27, 1999 to the Employment Agreement
dated January 10, 1997 between the Company and Loren J. Hulber
(incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1998) --
10(d) Stock Purchase Agreement dated as of February 10, 1997 between the
Company and Loren J. Hulber (incorporated by reference to Exhibit
10(b) to the Company's Registration Statement on Form S-1
(No.333-35071)) --
10(e) Stock Purchase Agreement dated as of April 23, 1997 between the
Company and Andrew Stith (incorporated by reference to Exhibit
10(i) to the Company's Registration Statement on Form S-1 (No.
333-35071)) --
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
<S> <C> <C>
10(f) Stock Purchase Agreement dated as of June 10, 1997 between the
Company and Thomas D. Schubert (incorporated by reference to
Exhibit 10(k) to the Company's Registration Statement on Form S-1
(No. 333-35071)) --
10(g) Employment Agreement dated as of December 8, 1998 between the
Company and Christina D. Harris (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.) --
10(h) Employment Agreement dated as of December 8, 1998 between the
Company and Kenneth J. Jankowski (incorporated by reference to
Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.) --
10(i) Employment Agreement dated as of December 8, 1998 between the
Company and Aven A. Kerr (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998) --
10(j) Employment Agreement dated as of December 8, 1998 between the
Company and Thomas D. Schubert (incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.) --
10(k) Employment Agreement dated as of December 8, 1998 between the
Company and Andrew W. Stith (incorporated by reference to Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999) --
10(l) Agreement dated as of January 25, 1997 between NovaCare, Inc. and
NovaCare Employee Services, Inc. (incorporated by reference to
Exhibit 10(m) to the Company's Registration Statement on Form S-1
(No. 333-35071)) --
10(m) Agreement dated as of January 25, 1997 between NovaCare, Inc. and
NovaCare Employee Services, Inc. (incorporated by reference to
Exhibit 10(n) to the Company's Registration Statement on Form S-1
(No. 333-35071)) --
10(n) Amended and Restated Agreement dated as of July 1, 1998 between
NovaCare, Inc. and NovaCare Employee Services, Inc. (incorporated
by reference to Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.) --
10(o) Agreement dated as of July 1, 1999 between NovaCare, Inc. and
NovaCare Employee Services, Inc.
10(p) Agreement dated as of July 1, 1999 between NovaCare, Inc. and
NovaCare Employee Services, Inc.
10(q) Client Service Agreement dated as of July 1, 1999 between Hanger
Orthopedic Group, Inc. and NovaCare Employee Services, Inc.
10(r) Trademark Agreement dated as of February 28, 1997 between the
Company and NovaMark, Inc. (incorporated by reference to Exhibit
10(o) to the Company's Registration Statement on Form S-1 (No.
333-35071)) --
10(s) (i) $25,000,000 Revolving Credit Facility Credit Agreement by and
among NovaCare Employee Services, Inc., and certain of its
subsidiaries and the banks party thereto and PNC Bank, National
Association, as agent, dated as of November 17, 1997 (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1997) --
(ii) Revolving Credit Agreement First Amendment dated as of March
30, 1998 by and among NovaCare Employee Services, Inc. and certain
of its subsidiaries and PNC Bank, N.A., SunTrust Bank of Central
Florida, N.A., Bank One of Kentucky, N.A. and AMSouth Bank
incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998) --
(iii) Revolving Credit Agreement Second Amendment dated as of July
7, 1998 by and among NovaCare Employee Services, Inc. and certain
of its subsidiaries and PNC Bank, N.A., SunTrust Bank of Central
Florida, N.A., Bank One of Kentucky, N.A., and AMSouth Bank
(incorporated by reference to Exhibit 10(p) (iii) to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.) --
10(t) Agreement and Plan of Merger dated as of September 8, 1999 between
Plato Holdings, Inc., New Plato Acquisition, Inc. and NovaCare
Employee Services, Inc. (incorporated by reference to Exhibit 2(a)
to the Company's current report on Form 8-K dated September 8,
1999) --
10(u) Short Form Merger Option Agreement dated as of September 8, 1999
between Plato Holdings, Inc., New Plato Acquisition, Inc. and
NovaCare Employee Services, Inc. (incorporated by reference to
Exhibit 2(b) to the Company's current report on Form 8-K dated
September 8, 1999.)
21 Subsidiaries of the Company
23 Consent of Independent Accountants
24 Power of Attorney (See "Power of Attorney" in Form 10-K) --
27 Financial Data Schedules
</TABLE>
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for distribution
to shareholders of the Company. The Company will furnish a copy of any such
exhibits to any shareholder requesting the same.
60
<PAGE> 1
Exhibit 10(o)
SUBSCRIBER SERVICE AGREEMENT
This Subscriber Service Agreement (the "Agreement") is made as of 1st
day of July, 1999 (the "Effective Date") by and between NovaCare, Inc., a
Delaware corporation with its principal place of business at 1016 W. Ninth
Avenue, King of Prussia, Pennsylvania 19406 ("Subscriber"), and NovaCare
Employee Services, Inc. ("NovaCare"), a Delaware corporation with its principal
place of business at the Valley Forge Corporate Center, 2621 Van Buren Avenue,
Norristown, Pennsylvania 19403. This Agreement modifies and supersedes all prior
agreements between Subscriber and NovaCare with respect to Worksite Employees
(as that term is defined in Section 1 of this Agreement).
W I T N E S S E T H:
WHEREAS, NovaCare has expertise in employment relations matters,
including payroll, benefits procurement and management, workers' compensation
insurance management (including risk assessment, injury prevention and claims
management), recruiting, human resources management (including consulting and
intervention to resolve employment-related issues) and training and development;
WHEREAS, Subscriber has outsourced certain human resource functions to
NovaCare in order to improve service and reduce costs by taking advantage of the
expertise of a focused human resources business;
WHEREAS, Subscriber and NovaCare wish to supersede their existing
subscriber service agreement and enter into this agreement for the provision of
services to Subscriber's corporate support services personnel (the "Support
Services Group"); and
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises herein contained, and intending legally to be bound, the
parties have agreed as follows:
1. Parties' Intent
Subscriber and NovaCare understand and intend that, under this
Agreement, NovaCare will assume certain rights and duties of a co-employer with
respect to employees principally located at Subscriber's headquarters in King of
Prussia, Pennsylvania and who provide corporate support services on behalf of
Subscriber (an employee in the Support Services Group, as determined by
Subscriber, shall hereinafter be referred to as a "Worksite Employee").
2. Term and Termination.
<PAGE> 2
2.1 Initial Term. The initial term (the "Initial Term") of
this Agreement shall be from July 1, 1999 through December 31, 1999 unless
sooner terminated pursuant to Section 2.3 below.
2.1.2 Renewal Term. Subscriber shall have the right to extend
this Agreement for an additional six-month term if, as of January 1, 2000, the
number of Worksite Employees covered under this Agreement does not exceed 50.
2.1.3 Termination.
2.1.3.1 By NovaCare. NovaCare may terminate this Agreement
upon notice to Subscriber, in the event that:
(a) Subscriber fails to pay any sums due hereunder, and such
failure continues for three (3) business days after written notice thereof is
sent to Subscriber, certified or registered mail, return receipt requested;
(b) Subscriber fails at any time to procure or maintain any
insurance coverage required by this Agreement;
(c) Subscriber fails to perform or observe any duty,
obligation or covenant contained in this Agreement other than those set forth in
subparagraph (a) or subparagraph (b) above, and such failure continues for ten
(10) days after written notice thereof is sent to Subscriber, certified or
registered mail, return receipt requested;
(d) Subscriber becomes insolvent (that is, unable to pay its
debts as they mature or in accordance with customary business practice) or
commits an act of bankruptcy, or if any bankruptcy or insolvency proceeding is
instituted by or against Subscriber and is consented to or acquiesced in by
Subscriber or remains for thirty (30) days undismissed;
(e) Subscriber is dissolved;
(f) any representation, warranty or statement of material fact
made or furnished to NovaCare or NovaCare's representatives by or on behalf of
the Subscriber, or any document, instrument or other paper submitted to NovaCare
or NovaCare's representatives by or on behalf of Subscriber, is false or
misleading in any material respect;
(g) NovaCare determines, and obtains an opinion of counsel to
the effect, that all or a substantial portion of its receipts hereunder are or
will become subject to a sales, value added, gross receipts or similar tax in a
particular jurisdiction as to which it exercises its right to terminate;
2
<PAGE> 3
(h) changes in federal, state or local law, regulation or
controlling legal interpretation occur that make it legally impossible or
economically impractical for NovaCare to carry out its obligations hereunder in
the jurisdiction(s) as to which it exercises its right to terminate;
(i) Subscriber fails to comply with any reasonable directive
regarding health and safety from NovaCare, NovaCare's workers' compensation
carrier, or any government agency with jurisdiction over a health or safety
matter; or
(j) Subscriber misrepresents workers' compensation or Fair
Labor Standards Act classification or inaccurately reports employee payroll
hours, pay rate or salary.
2.1.3.2 By Subscriber. Subscriber may terminate this Agreement
upon notice to NovaCare in the event that:
(a) NovaCare fails to pay any sums required to be paid
hereunder by NovaCare as co-employer of the Worksite Employees
(i) to or on behalf of a Worksite Employee or
(ii) to a governmental agency, insurance carrier,
third party administrator or other third party, and such failure continues for
seven (7) business days after written notice thereof is sent to NovaCare,
certified or registered mail, return receipt requested;
(b) NovaCare fails at any time to procure or maintain
insurance coverage required by this Agreement;
(c) NovaCare fails to meet the following service performance
standards, and such failure continues for a period of sixty (60) days after
written notice thereof is sent to NovaCare, certified or registered mail, return
receipt requested:
(i) employee status change transactions (new hires,
wage and salary actions, changes in status from full-time to part-time or on or
off leave and terminations) (hereinafter referred to as "Status Transactions")
received in a form acceptable to NovaCare by the established payroll cut-off
date and time (the "Payroll Cut-off") for a payroll will be processed for that
payroll;
(ii) payroll data received by NovaCare's designated
representative by the Payroll Cut-off will be processed to deliver payroll on
time ninety-eight percent (98%) of the time, except for natural disasters,
errors caused by Subscriber personnel or other circumstances beyond NovaCare's
control, and ninety-eight
3
<PAGE> 4
percent (98%) of paychecks will correctly reflect information transmitted from
the Subscriber;
(iii) new hire and status change benefit forms
("Benefit Forms") will be submitted to the third party administrator responsible
for the applicable benefit plan within one (1) week of receipt by NovaCare's
designated representative. If NovaCare acts as the plan administrator, it will
update its file and provide confirmation;
(iv) seventy-five percent (75%) of incoming calls to
the employee service center 1-800 phone number, during established business
hours, will be answered immediately and incoming calls reaching voice mail will
be returned by the end of the following business day; and for open enrollment
periods, the calls will be returned within three business days.
(v) NovaCare will conduct quarterly feedback sessions
with Subscriber's designees and provide client training regarding how to
properly process payroll inputs. Significant service issues reasonably raised in
writing by Subscriber in such quarterly feedback sessions shall be addressed to
Subscriber's reasonable satisfaction within sixty days after the feedback
session in which such service issues are raised; provided, that, to the extent
that the service issues relate to and/or are caused by Subscriber's policies,
procedures and/or processes, NovaCare's responsibility shall consist of
addressing the suggested actions to cure the service issue and the related cost
and time frame to implement the cure.
(d) NovaCare becomes insolvent (that is, unable to pay its
debts as they mature or in accordance with customary business practice) or
commits an act of bankruptcy, or applies for, consents to, or acquiesces in the
appointment of a trustee or a receiver for it or any of its property, or, in the
absence of such application, consent or acquiescence, a trustee or receiver is
appointed for NovaCare or for a substantial part of its property and is not
discharged within thirty days thereof, or if any bankruptcy or insolvency
proceeding, or any dissolution or liquidation proceeding, is instituted by or
against NovaCare and is consented to or acquiesced in by NovaCare or remains or
thirty (30) days undismissed;
(e) there occurs the termination, cessation or liquidation of
NovaCare's business;
(f) NovaCare fails to perform or observe any material duty,
obligation or covenant contained in this Agreement other than those set forth in
subparagraph (a), subparagraph (b) or subparagraph (c) above, and such failure
continues for ten (10) days after written notice thereof is sent to NovaCare,
certified or registered mail, return receipt requested, unless such cure cannot
reasonably be achieved within such timeframe, using commercially reasonable
efforts, in which case the applicable cure period shall be as is reasonable
under the circumstances;
4
<PAGE> 5
3. Fees.
3.1 Calculation of Fees
For the Initial Term, the fees shall be determined in accordance with
this Section 3.1.
3.1.1 Payroll Fees. The following Subscriber payments will be
processed by NovaCare and billed to Subscriber:
a) gross earnings, including salary, wages, bonus, vacation
time, paid time off, sick time, commissions and severance pay (before
deductions, whether before tax or after tax) paid to Worksite Employees;
(b) the employer's portion of FICA and FUTA attributable to
gross earnings in accordance with such regulations;
(c) the employer's portion of contributions to the
NCES/NovaCare, Inc. 401(k) Retirement Savings Plan ("the 401(k) Plan"); and
(d) the net amount of expense reimbursement and any other cash
payment to a Worksite Employee that is included in a paycheck at the request of
Subscriber but is not includable in gross earnings for federal or state tax
purposes.
3.1.2 Benefits/Risk Management Fees. For Benefits/Risk
Management Responsibilities assumed hereunder, which are more specifically
described in Section 4.2 herein, Subscriber shall pay Benefits/Risk Management
Fees to NovaCare equal to the estimated costs of procuring and managing such
responsibilities (the "Section 3.1.2 Estimated Costs"), plus a fixed fee (the
"Section 3.1.2 Fixed Fee"), all of which are more specifically described on
Schedule 3.1.2 attached hereto. If NovaCare's actual costs to perform the
Benefits/Risk Management Responsibilities exceed the Section 3.1.2 Estimated
Costs by more than 15%, Subscriber shall pay to NovaCare an additional amount
equal to the amount by which such actual costs exceed the Section 3.1.2
Estimated Costs; if NovaCare's actual costs to perform the Benefits/Risk
Management Responsibilities are less than the Section 3.1.2 Estimated Costs by
more than 15%, NovaCare shall reimburse Subscriber an amount equal to the
difference between the Section 3.1.2 Estimated Costs and NovaCare's actual
costs.
3.1.3 Administrative Fees. For Administrative Responsibilities
assumed hereunder, which are more specifically described in Section 4.3 herein,
Subscriber shall pay Administrative Fees to NovaCare equal to the estimated
costs of handling such responsibilities (the "Section 3.1.3 Estimated Costs"),
plus a fixed fee (the "Section 3.1.3 Fixed Fee"), all of which are more
specifically described on Schedule 3.1.3 attached hereto. If NovaCare's actual
costs to perform the Administrative
5
<PAGE> 6
Responsibilities exceed the Section 3.1.3 Estimated Costs by more than 15%,
Subscriber shall pay to NovaCare an additional amount equal to the amount by
which such actual costs exceed the Section 3.1.3 Estimated Costs; if NovaCare's
actual costs to perform the Administrative Responsibilities are less than the
Section 3.1.3 Estimated Costs by more than 15%, NovaCare shall reimburse
Subscriber an amount equal to the difference between the Section 3.1.3 Estimated
Costs and NovaCare's actual costs.
3.1.4 Additional Fees. Subscriber may request NovaCare to
assume additional responsibilities pursuant to Section 4.4 below (hereinafter
referred to as "Additional Responsibilities"). The fee for such Additional
Responsibilities shall be set forth in a schedule to this Agreement (Schedule
3.1.4).
3.1.5 Fees Not Included. Fees set forth above do not include
Subscriber special requests, potential transition set-up activities or potential
wind down costs. Fees for these services, as well as Recruiting and HR
consulting are not included herein, but will be negotiated once the scope of
such services are defined.
3.1.6 Cancellation Fee.Subscriber shall pay to NovaCare a fee
of $665,000 in consideration for NovaCare's agreement to terminate the Amended
and Restated Subscriber Services Agreement, dated July 1, 1998; such fee shall
be payable at the rate of $110,833 per month for six consecutive months, on the
last business day of each month, beginning with the month of July 1999.
3.2 Fees for Renewal Term. The fees to be paid by Subscriber to
NovaCare for services provided hereunder during the Renewal Term, if any, shall
be equal to NovaCare's cost to provide such services, plus a fee equal to one
and one-half percent of such costs.
3.3 Payment of Fees.
3.3.1 Administrative and Benefits/Risk Management Fees. On or
before each payroll date, Subscriber shall fund an account with the amount of
the Administrative Fees and Benefits/Risk Management Fees (the "Payroll
Account") in advance of each payroll payment date. NovaCare shall have the right
to draw against the Payroll Account an amount equal to the Payroll Fees and
Benefits/Management Fees for the applicable payroll payment date. Subscriber
agrees to collect, verify and transmit to NovaCare's administrative office, no
less than seven (7) business days before each NovaCare payroll date, any
information required to determine correctly and accurately the amount of the
payment due NovaCare. If Subscriber defaults in paying the amounts due NovaCare
and NovaCare continues to pay wages for Worksite Employees at a rate not below
the statutory minimum wage, Subscriber shall fully indemnify and hold NovaCare
harmless from any and all claims made by employees for wages in excess of the
amount paid by NovaCare and any and all legal fees and expenses incurred in
defense of such claims. Additionally, Subscriber must immediately inform
NovaCare of any situation in which payment will not be immediately forthcoming
and thereafter, at the
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request of NovaCare, Subscriber shall terminate the employment of persons for
whom payment by Subscriber to NovaCare will not be made.
3.3.2 Subscriber is responsible for all sales, franchise and
use taxes applicable to the states in which business is being conducted.
4. NovaCare's Responsibilities.
4.1 Payroll Responsibilities. NovaCare shall be responsible
for and shall perform the following functions ("Payroll Responsibilities") with
respect to Worksite Employees in consideration of the payment of Payroll Fees:
(i) Payment of wages based on hours, wage and salary
rates and other information supplied by Subscriber, including application of
set-offs owed to Subscriber and implementation of garnishment orders;
(ii) Calculation of Paid Time Off (in accordance
with Subscriber's policies);
(iii) Payment of sign-on, relocation and other
bonuses;
(iv) Collection, reporting and payment of applicable
federal, state and local payroll taxes (exclusive of state unemployment
insurance);
(v) Payment of the employer's portion of
contributions to the 401(k); and
(vi) Payment of expense reimbursement and any other
non-wage payments to Worksite Employees, as requested by Subscriber.
4.2 Benefits Responsibilities. NovaCare shall be responsible
for and shall perform the following functions with respect to Worksite Employees
in consideration of the payment of Benefits/Risk Management Fees:
(i) Collection of employee contributions, payment of
premiums and administration under the benefit plans;
(ii) Funding of benefit plans that require funding
within the time required by law;
(iii) Reporting and payment of applicable state
unemployment insurance;
(iv) Administration of unemployment compensation
claims; and
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(v) Payment of workers' compensation insurance
premiums and administration and management of workers' compensation claims,
including payment of claims not paid by an insurance carrier or other third
party.
4.3 Administrative Responsibilities. NovaCare shall be
responsible for and shall perform the following functions with respect to
Worksite Employees in consideration of the payment of Administrative Fees:
(i) Completion, reporting and maintenance of payroll
and Plan records, with the exception of records of hours worked, which shall be
collected, verified and maintained by Subscriber, provided that Subscriber shall
make available to NovaCare copies of such records of hours worked as NovaCare
may require for the purpose of maintaining the Plans;
(ii) Analysis, transfer and integration of payroll
and benefits for (a)Worksite Employees newly employed as a result of
Subscriber's acquisitions of businesses employing those individuals, and(b)
Worksite Employees whose employment is terminated;
(iii) Operation of an employee service center
providing Worksite Employees with access for the purpose of making changes and
resolving questions relating to Plans and paychecks;
(iv) Provision of reports within fifteen (15) days
after the last day of each calendar month showing its performance compared to
the performance standards established in Section 2.1.3.2 c (i) - (v), in form
reasonably satisfactory to Subscriber.
(v) Provision of standardized reports, on a mutually
determined basis, as reasonably requested by Subscriber, including, without
limitation, reports regarding payroll, turnover, employee rosters; and provision
of specialized forms, in form and content reasonably requested by Subscriber,
subject to the capacity of the mutually determined systems to produce requested
formats, prepared and delivered in a reasonably prompt timeframe;
(vi) Record Maintenance - maintain accurate and
complete personnel files for active and terminated employees to the extent such
information is provided by Subscriber, including all information required by
state and federal law and by the policies and procedures of Subscriber,
including, but not limited to, information relating to performance appraisals,
I-9 forms, records of disciplinary action, staff certification and licensure;
ensure compliance with applicable records retention requirements; respond to
Subscriber's requests for copies of such records in a reasonably prompt
timeframe and/or as reasonably requested by Subscriber;
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(vii) Database Management - maintain accurate and
complete employee information and history on human resource information system,
based on information provided by Subscriber.
4.4 Additional Responsibilities. NovaCare may assume
additional responsibilities not covered by Sections 4.1-4.3 above. Any such
additional responsibilities shall be provided pursuant to a written addendum to
this Agreement, executed by both parties, setting forth the services to be
provided and the fee for such services.
4.5 Year End Reporting. Notwithstanding an earlier expiration
of the term of this Agreement, NovaCare shall be responsible for all calendar
year-end reporting that is required of Subscriber, consistent with Subscriber's
and NovaCare's past practices.
5. Rights, Duties and Obligations of Subscriber.
5.1 Supervision of Employees. Subscriber will be responsible
for supervision and direction of Worksite Employees in carrying out the work of
Subscriber's business, and shall provide all instrumentalities (including
uniforms, tools, equipment and other supplies) necessary to the performance of
job functions.
5.2 Reports of Hours Worked. Subscriber shall (i) maintain
accurate records of actual time worked, (ii) make accurate reports of time
worked by Worksite Employees to NovaCare in accordance with the requirements of
the Fair Labor Standards Act and any applicable similar state law, (iii) submit
actual time worked in a mutually determined format and (iv) verify the accuracy
of such reports. Subscriber shall maintain the records required to be kept under
this Section 5.2 for seven (7) years.
5.3 Employment Decisions. Any common-law employee of
Subscriber shall be deemed a Worksite Employee hereunder. Subscriber shall
determine employment eligibility of all Worksite Employees. If a Worksite
Employee is required to possess or maintain a license, or to be supervised by a
supervisor who is required to possess or maintain a license, Subscriber shall be
responsible for verifying such licensure or providing such required supervision.
In taking any adverse action with respect to the pay, conditions of employment
or employment status of a Worksite Employee (an "Adverse Action"), Subscriber
shall comply with applicable law governing employment. Worksite Employees who
are supervisory employees shall act in that capacity in compliance with
applicable law. Supervisors' actions alleged to be in violation of law are
outside the scope of their responsibility as NovaCare employees and supervisory
employees acting in violation of law shall be deemed to be acting solely as
agents of Subscriber.
5.4 Employee Benefit Plans. Subscriber shall not adopt,
establish, maintain, operate or contribute to any "employee benefit plan" as
defined in Section 3(3)
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of the Employee Retirement Income Security Act of 1974, as amended, without the
express written consent of NovaCare.
5.5 Financial Controls. Subscriber accepts sole responsibility
for accounting and other financial control policies (and fidelity bonding
requirements) applicable to Worksite Employees or their conduct.
5.6 Compliance With Law. Subscriber accepts sole
responsibility for compliance with the following provisions of law applicable to
Worksite Employees:
(i) the Occupational Safety and Health Act (OSHA) and
related or similar federal, state or local regulations and the employer's common
law duty to supervise the worksite and provide a safe working environment;
(ii) government contracting requirements under a)
Executive Order 11246, b) the Vocational Rehabilitation Act of 1973, c) the
Vietnam Era Veterans' Readjustment Assistance Act of 1974, d) the Walsh-Healy
Public Contracts Act, e) the Davis-Bacon Act, f) the Service Contract Act of
1965, and g) any and all similar, related, or like federal, state, or local
laws, regulations, ordinances, and statutes;
(iii) Worker Adjustment and Retraining Notification
Act ("WARN");
(iv) laws affecting assignment of and ownership of
intellectual property rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights and trade
secrets;
(v) the Immigration Reform and Control Act of
1986, except as otherwise provided in Section 6.1 (iv); and
(vi) the Fair Labor Standards Act, Title VII of
the Civil Rights Act of 1964, as amended, the Family and Medical Leave Act, the
Age Discrimination in Employment Act, as amended, the Americans With
Disabilities Act (including provisions thereunder relating to Subscriber's
premises), the National Labor Relations Act and any other federal, state, county
or local laws, regulations, ordinances, and statutes which govern the employer/
employee relationship.
5.7 Safety. Subscriber shall report all accidents in which
Worksite Employees are injured immediately (by telephone within one working day
of Subscriber's knowledge of an injury, and in writing by fax within forty-eight
(48) hours) to NovaCare or NovaCare's designee. Subscriber shall cooperate in
any safety inspection or investigation of a worksite injury conducted by or on
behalf of NovaCare. Subscriber shall reasonably cooperate with NovaCare in
returning injured Worksite Employees to work in available modified-duty
positions and in making reasonable accommodations under applicable disability
laws, subject to receipt of an appropriate medical release.
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Where required by applicable state law, NovaCare shall retain a right
of direction and control over the management of safety, risk and hazard control
involving Worksite Employees. However, liability for employee safety is a
responsibility of Subscriber, who controls the worksites and their business
operations. Subscriber acknowledges that it is responsible for maintaining a
safe working environment, providing proper training in compliance with federal
or state law or regulation, and establishing and maintaining such safety
programs, safety policies, and safety committees as may be required by law.
NovaCare, NovaCare's workers' compensation and liability insurance carriers or
their assignees have the right to survey the Subscriber's worksites to look for
unsafe conditions or unsafe acts which may lead to accidents. However, the
retention of such right by NovaCare does not relieve Subscriber of any
obligations that it has pursuant to the federal Occupational Safety and Health
Act (OSHA) or any other federal, state or local law intended to provide
employees at Subscriber's worksites with a safe work environment.
5.8 COBRA. NovaCare shall be responsible for administering
continued health care coverage required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA Coverage") to each employee and
former employee (and their dependents) of the Subscriber who is eligible for
such COBRA Coverage on the effective date hereof. Subject to Section 7.1 and
Subscriber's reimbursement obligation (as set forth below), upon termination of
this Agreement, NovaCare shall administer COBRA Coverage for each Worksite
Employee, former Worksite Employee, their dependents and any individual entitled
to COBRA Coverage under the preceding sentence (collectively, the "COBRA
Participants") who are eligible for such coverage.
5.9. Provision of Information. Subscriber shall provide to
NovaCare such true and accurate information as NovaCare may request as necessary
to comply with requirements of law with respect to Subscriber's ownership and
organizational structure and compensation packages of its senior executives and
structure and operation of benefit plans offered to Worksite Employees by
Subscriber.
5.10. Changes in Policies and Procedures.Subscriber shall
negotiate with NovaCare all changes to policies, processes and procedures
affecting all services provided by NovaCare under this Agreement. NovaCare shall
effect such changes on mutually agreed upon time frames, staffing and costs.
6. Rights, Duties and Obligations of NovaCare.
6.1 Compliance With Law. Provided that Subscriber has given to
NovaCare all information required hereunder, NovaCare accepts sole
responsibility for compliance with the following provisions of law applicable to
Worksite Employees:
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(i) all rules and regulations governing the reporting,
collecting and payment of federal and state payroll taxes on wages paid under
this Agreement, including, but not limited to, a) federal income tax withholding
provisions of the Internal Revenue Code, b) state and/or local income tax
withholding provisions, if applicable, c) Federal Insurance Contributions Act
(FICA), d) Federal Unemployment Tax Act (FUTA), and e) applicable state
unemployment tax provisions;
(ii) except as provided below, applicable workers'
compensation laws including, but not limited to, a) procuring workers'
compensation insurance, b) completing and filing all required reports, and c)
administering, managing, and otherwise processing claims and related procedures
provided that Subscriber agrees to reimburse NovaCare for any monies found due,
whether by audit or otherwise as a result of any workers' compensation
classification information provided by Subscriber to NovaCare;
(iii) Internal Revenue Code Section 4980B, subject to the
provisions of Section 5.8;
(iv) Section 1324A(b) of the Immigration Reform and Control
Act of 1986, assuming that Subscriber has provided to NovaCare all necessary and
accurate documentation required by such law;
(v) the Consumer Credit Protection Act, Title III; and
(vi) the Fair Labor Standards Act, 29 U.S.C. Sections 201 et
seq., based solely on information provided by Subscriber pursuant to Section 5.2
hereof.
7. Effect of Termination.
7.1 COBRA. In the event of termination of this Agreement, the
Subscriber shall immediately provide coverage under a "group health plan" (as
defined in Section 4980B(g)(2) of the Code) to all Worksite Employees, former
Worksite Employees, and their dependents who were eligible for coverage under
any NovaCare group health plan immediately before such event. The Subscriber's
group health plan provided under the preceding sentence shall not contain any
exclusion or limitation with respect to any pre-existing condition applicable to
any Worksite Employee, former Worksite Employee or their dependents.
7.2 Accrued Pay. If this Agreement is terminated and if the
affected employees are entitled to the payment of any accrued bonus, vacation,
sick or personal leave, Subscriber shall be liable for the payment thereof and
will make such payments directly to NovaCare. If, however, Subscriber continues
to employ such affected employee(s) after termination of this Agreement, the
Subscriber shall be liable to the employee(s) for same and NovaCare shall have
no obligation therefor.
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7.3 Survival. The indemnification, contribution duty to
cooperate and limitation of liability provisions of this Agreement shall survive
the expiration of this Agreement or other termination of this Agreement
indefinitely.
7.4 Duration of Obligations.
7.4.1 Upon the termination of this Agreement for any reason, the
parties shall continue to have the following obligations through and including
the termination date:
(i) NovaCare shall have the obligation for wages and
benefits payable to the employees through and including the termination date. If
NovaCare makes any payment, authorized by Subscriber or otherwise required by
law, to any of the employees after this Agreement has been terminated, NovaCare
shall be entitled to full reimbursement for such expenditures;
(ii) Except as otherwise provided herein, all
obligations of NovaCare under this Agreement to maintain workers' compensation
insurance coverage and health care coverage on behalf of the Worksite Employees
shall cease, effective as of the termination date. All such employees shall be
immediately informed by Subscriber that they are no longer covered by NovaCare's
workers' compensation policy. Subscriber shall immediately assume all federal,
state and local obligations of an employer to the employees which are not in
conflict with state or federal law, and shall immediately assume full
responsibility for providing workers' compensation coverage. NovaCare shall
immediately be released from such obligations as are permitted by law, except
that NovaCare shall remain responsible for the cost of claims for workers'
compensation incurred prior to the date of termination. It is the intent of the
parties that, to the extent allowed by law, they be placed in their respective
positions immediately before their entry into this Agreement in the event of a
termination or Subscriber's failure to pay NovaCare; and
(iii) Subscriber shall have the obligation to pay all
fees payable in accordance with the provisions of this Agreement, which are
attributable to the period ending on the termination date.
7.4.2 Upon any termination of this Agreement by Subscriber other than
(a) pursuant to the provisions of Section 2.3.2 or (b) in accordance with
Section 12.14 herein, in addition to the obligations set forth in Section 7.4.1,
Subscriber shall have the obligation to pay to NovaCare such amount as is
necessary so that Subscriber fully complies with the Minimum Fee Guarantee set
forth in Section 3.1.6 herein; provided, that any such payment shall be made in
equal monthly installments over the remaining period ending June 30, 2003.
8. Indemnification.
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8.1 Indemnification by Subscriber. Subscriber agrees to indemnify, hold
harmless, protect and defend NovaCare, its subsidiaries and affiliates and each
of their officers, directors, agents, attorneys and employees from any claims,
expenses (including court costs and attorneys' fees), damages and liabilities
(including severance payments to Worksite Employees) (collectively hereinafter
referred to as "Damages"), from claims, actions, suits, judgments or settlements
arising out of negligence, malpractice, tortious conduct, violation of any
statute, law, or regulation, criminal or dishonest activity by any Worksite
Employee, product liability related to products manufactured or distributed by
Subscriber, Subscriber's breach of any of its obligations or warranties under
this Agreement, or any action by Subscriber or its agents which may result in a
violation of any law or regulation, including, but not limited to, Damages
allegedly arising out of an Adverse Action or out of worksite conditions or
actions of any kind. If such indemnification is for any reason not available or
insufficient to hold NovaCare harmless, Subscriber agrees to contribute to the
losses involved in such proportion as is appropriate to reflect the relative
benefits received (or anticipated to be received) by Subscriber and by NovaCare
with respect to the matters contemplated by this Agreement or, if such
allocation is judicially determined to be unavailable, in such proportion as is
appropriate to reflect not only such relative benefits, but also other equitable
considerations such as the relative fault of Subscriber, on the one hand, and of
NovaCare, on the other hand; provided, however, that Subscriber shall be
responsible for all losses which in the aggregate are in excess of the amount of
all Fixed Fees (as adjusted) received by NovaCare from Subscriber in connection
with the services to be provided hereunder during the term of this Agreement.
NovaCare shall give Subscriber prompt written notice of any claim for which
indemnification will be sought hereunder, shall cooperate in the investigation
and defense of any such claim and shall not settle or compromise any such claim
without the approval of Subscriber unless Subscriber fails to provide evidence
of ability to pay a judgment in excess of the proposed settlement amount.
8.2 Indemnification by NovaCare. NovaCare assumes responsibility for
the payment of wages to the Worksite Employees without regard to payments by
Subscriber to NovaCare, although in doing so NovaCare does not waive or limit
any claim against Subscriber. NovaCare agrees to indemnify, hold harmless,
protect and defend Subscriber, its subsidiaries and affiliates and each of their
officers, directors, agents, attorneys and employees from and against any
claims, expenses (including attorneys' fees and court costs), damages and
liabilities from claims, actions, suits, judgments or settlements arising out of
NovaCare's breach of its obligations or warranties under this Agreement or any
action by NovaCare or its agents or employees (other than Worksite Employees)
which may result in a violation of any law or regulation, except violations
resulting from conduct of Worksite Employees or worksite conditions. Subscriber
shall give NovaCare prompt written notice of any claim for which indemnification
will be sought hereunder, and shall cooperate in the investigation and defense
of any such claim and shall not settle or compromise any such claim without the
approval of NovaCare. Where Subscriber has followed or complied with a request
or recommendation of NovaCare or otherwise properly relied on information
supplied by
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NovaCare, it shall be relieved of responsibility for back pay and
damages for such actions (unless Subscriber has failed to comply with its
obligations hereunder to provide accurate information to NovaCare) and NovaCare
shall indemnify and hold Subscriber harmless from and against any and all
liabilities arising therefrom.
8.3 Subrogation. Each party hereby waives any claim in its favor
against the other party by way of subrogation or indemnification which may arise
during the term of this Agreement for any and all loss of or damage to any of
its property, or for bodily injury or death, which loss, damage, or bodily
injury or death is covered by insurance to the extent that such loss or damage
is recovered under such policies of insurance as required herein. The
subrogation and indemnification concept set forth in this provision is intended
to apply only to insurance matters, and nothing in this provision is intended to
alter the indemnification rights set forth elsewhere in this Agreement. Each
party shall assure that its insurance policies contain provisions authorizing
waiver of subrogation consistent with this Section 7.3.
9. Representations and Warranties.
9.1 Fair Labor Standards Act. Subscriber agrees not to
withhold a payment to NovaCare absent NovaCare's express permission, or in any
manner, or by any device, act in violation of, cause, or seek to cause a
violation of any applicable federal, state or local law, ordinance, or
regulation pertaining to the terms, conditions, and services of this Agreement.
Subscriber further warrants that it shall not make any taxable payment of any
kind, except profit-sharing or pension plan distributions pursuant to the terms
of a qualified plan, to any employee covered by this Agreement, and that any
such payment shall be a breach of this Agreement, and at the election of
NovaCare, grounds for immediate termination of this Agreement.
9.2 Employment Matters. Subscriber warrants that there are no
collective bargaining agreements binding upon Subscriber or affecting Worksite
Employees, and that there are no pending governmental investigations or any
lawsuit material in nature related to Worksite Employees, the working conditions
of the Worksite Employees, the products or services produced or provided by
Worksite Employees or any other matters affecting the performance of NovaCare
under this Agreement except as otherwise disclosed to NovaCare. Subscriber
warrants that all hazardous materials, if any, on its premises are maintained,
stored and disposed of in accordance with applicable law. Subscriber agrees to
provide any and all protective safety equipment required for safe performance of
job duties or required under local, state or federal law.
9.3 Primary Obligor for Worksite Employee Compensation.
Notwithstanding anything else in this Agreement to the contrary, the parties
agree that Subscriber, and not NovaCare, shall have the primary responsibility
for any and all compensation due to Worksite Employees.
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9.4 APB Opinion No. 25. The parties agree, and each represent
and warrant to the other, that only Subscriber may use the rules of APB Opinion
No. 25 to account for the equity compensation paid to a Worksite Employee.
9.5 Confidentiality. NovaCare and Subscriber each acknowledge
and agree that it may obtain knowledge of "confidential information" as
hereinafter defined concerning the other party. As used herein, "confidential
information" means any information, (including, without limitation, manuals,
trade secrets, protocol, methods, formula, pattern, device, plans, process,
drawings, designs, specifications, schematics, prototypes and other compilation
of information or technical know-how) which is, or is designed to be, used in
the business of such party, and is private or confidential and is not generally
known or available to the public. Subscriber and NovaCare each agree that it
will not, either during the term of this Agreement or thereafter until the
expiration of a period of ten (10) years following the termination of this
Agreement, use or disclose any such confidential information except as otherwise
specifically contemplated in this Agreement.
10. Workers' Compensation. NovaCare shall provide workers' compensation
insurance for Worksite Employees in compliance with applicable law. Workers
performing services for Subscriber not covered by this Agreement and not on
NovaCare's payroll shall not be covered by NovaCare's workers' compensation
insurance. NovaCare will not provide workers' compensation coverage to any
employee for whom Subscriber is not reporting hours of payroll. Subscriber
further agrees to require any independent contractor it utilizes to provide
evidence of workers' compensation coverage before the independent contractor
commences work at the worksite. Subscriber acknowledges that NovaCare's workers'
compensation carrier or NovaCare is entitled to periodically audit the employee
classification lists for each Subscriber location to make sure that employees
are classified properly for workers' compensation purposes. In the event that
during such an audit, or at any other time, NovaCare finds that Worksite
Employees have been misclassified and such misclassification resulted from
information supplied to NovaCare by Subscriber, Subscriber will promptly
reimburse NovaCare, upon invoice, for charges which otherwise would have been
payable by Subscriber had such employee been properly classified. NovaCare
retains the responsibility for the management of workers' compensation claims,
claim filings and related procedures. Subscriber agrees to cooperate with
NovaCare in that regard, including in regard to the notification of injuries
required by this Agreement or by law.
11. Insurance. During the Initial Term of this Agreement and any
Renewal Term, Subscriber shall obtain and maintain the following types of
insurance:
11.1 Automobile. Subscriber shall obtain and maintain
automobile insurance for all owned, non-owned, and hired vehicles used in
connection with the work performed on its premises or in connection with its
business, and will cause its insurance carrier to issue a Certificate of
Insurance evidencing same to NovaCare, naming NovaCare as an additional named
insured and allowing not less than thirty (30) days'
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notice of cancellation or material change. The policy shall insure against
liability for bodily injury and property damage, with a minimum combined single
limit of Five Hundred Thousand Dollars ($500,000) and Uninsured Motorist or PIP
equivalent coverage of at least the minimum limits required by the State where a
"no fault" law shall apply.
11.2 General Liability. Subscriber shall obtain and maintain
general liability insurance, and cause its insurance carrier to issue a
Certificate of Insurance evidencing same to NovaCare, naming NovaCare as an
additional named insured and allowing not less than thirty (30) days' notice of
cancellation or material change. The minimum requirement shall be One Million
Dollars ($1,000,000) combined single limit, Three Million Dollars ($3,000,000)
aggregate limit, including, but not limited to, where applicable, premises,
operations, products, completed operations, contract and broad form property
damage, independent contractors, personal injury, host liquor, and full liquor
liability. If Subscriber renders professional services, it shall obtain and
maintain throughout the term, and any succeeding terms of this Agreement,
professional liability coverage as applicable, and will cause its insurance
carrier to issue a Certificate of Insurance evidencing same to NovaCare allowing
not less than thirty (30) days' notice of cancellation or material change.
Unless otherwise agreed to, such policy shall have a combined single limit of
not less than One Million Dollars ($1,000,000), Three Million Dollars
($3,000,000) aggregate limit.
Subscriber agrees that NovaCare shall not provide any general
liability insurance coverage for products liability, completed operations or
professional liability for any Worksite Employee or the Subscriber. Subscriber
shall further agree that NovaCare shall have no obligation to provide any form
of automobile insurance coverage on behalf of any Worksite Employee or for
Subscriber.
12. Miscellaneous.
12.1 Third Party Rights. This Agreement is intended solely for
the mutual benefit of the parties hereto and does not create any rights of any
kind in a third party. Each party hereto reserves the right and from time to
time to assign its rights, duties and obligations hereunder to any affiliate,
provided that the assigning party shall guarantee the performance and liability
of any such affiliate. Any such assignment may be limited to a portion of such
party's obligations arising in one or more jurisdictions.
12.2 Limitation of Liability. NovaCare's liability for actual
damages from any cause whatsoever, shall be limited to the fees (other than
Payroll Fees) paid by Subscriber with respect to the preceding calendar year
under this Agreement (or, if this Agreement shall have been in effect for less
than twelve months, the foregoing limitation shall be based on the fees paid by
Subscriber to NovaCare relating to the previous twelve-month period pursuant to
the predecessor agreement between the parties, as applicable to the employees of
the Support Services Group). This limitation will apply, regardless of the form
of action, whether in contract or tort, including negligence.
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This limitation will not apply to claims by either party for bodily injury or
damage to real property or tangible personal property for which the other party
may be legally liable. In no event will NovaCare be liable for any lost profits,
lost savings, incidental damages or consequential damages, even if NovaCare has
been advised of the possibility of such damages.
12.3 Integration. This Agreement constitutes the entire
agreement between the parties with regard to the subject matter hereof and
supersedes any and all agreements (including the Initial Agreement), whether
oral or written, between the parties with respect to its subject matter.
12.4 Waiver. Failure by either party at any time to require
performance by the other party or to claim a breach of any provision of this
Agreement will not be construed as a waiver of any subsequent breach nor affect
the effectiveness of this Agreement, nor any part thereof, nor prejudice either
party as regards to any subsequent action.
12.5 Governing Law. This Agreement shall be subject to the
laws of the Commonwealth of Pennsylvania.
12.6 Dispute Resolution.
12.6.1 Arbitration. The parties shall attempt
amicably to resolve disagreements by negotiating with each other. In the event
that the matter is not amicably settled through negotiation, any controversy,
dispute or disagreement arising out of or relating to this Agreement (a
"Controversy") shall be resolved exclusively by binding arbitration, which shall
be conducted by a single arbitrator in the Philadelphia, PA area, in accordance
with the J-A-M-S/ENDISPUTE Streamlined (in the case of a dispute within the
scope of the Streamlined Rules and Procedures) or Comprehensive Arbitration
Rules and Procedures (the "Rules"). The parties agree that notwithstanding
anything to the contrary contained in the Rules, the arbitrator shall not award
consequential, exemplary, incidental, punitive or special damages.
12.6.2 Procedure. It is agreed that if any party
shall desire relief of any nature whatsoever from any other party as a result of
any Controversy, such party will initiate such arbitration proceedings within a
reasonable time, but in no event more than twelve (12) months after the facts
underlying said Controversy first arise or become known to the party seeking
relief (whichever is later). The failure of such party to institute such
proceedings within said period shall be deemed a full waiver of any claim for
such relief. The parties shall bear equally all costs of said arbitration (other
than their own attorney's fees and costs). The parties agree that the decision
and award of the Arbitrator shall be final and conclusive upon the parties, in
lieu of all other legal, equitable (except as provided in 12.5.3. below) or
judicial proceedings between them, and that no appeal or judicial review of the
award or decision of the Arbitrator shall be taken,
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but that such award or decision may be entered as a judgment and enforced in any
court having jurisdiction over the party against whom enforcement is sought.
12.6.3. Equitable Relief. The parties recognize
that irreparable injury may result from a breach of this Agreement and that
money damages may be inadequate to fully remedy the injury. Therefore, either
party may, in any such instance, seek and obtain from a court of competent
jurisdiction one or more preliminary or permanent orders designed to maintain
the status quo ante pending arbitration by (i) restraining and enjoining any act
that would constitute a breach or (ii) compelling the performance of any
obligation that, if not performed, would constitute a breach. Any relief awarded
under this paragraph shall be dissolved upon issuance of the Arbitrator's
decision and order.
12.7 Subscriber Intellectual Property Rights. Subscriber shall
own any and all intellectual property rights incident to any and all process,
products, inventions and discoveries that are created or invented by a Worksite
Employee and who was directed by Subscriber to create or develop such process,
product, discovery or invention. Subscriber shall bear any and all costs
associated with any copyrights, trademarks or patents that Subscriber chooses to
obtain to protect Subscriber's intellectual property rights.
12.8 Duty to Cooperate. In the event that an employee or a
government agency or entity files any type of claim, lawsuit or charge against
NovaCare, Subscriber or both, alleging a violation of any law or failure to do
something which was otherwise required by law, Subscriber and NovaCare mutually
agree to cooperate with each other in the defense of any such claim, lawsuit or
charge. NovaCare and Subscriber will make available to each other upon request
any and all documents that either party has in its possession which relate to
any such claim, lawsuit or charge. However, neither party shall have the duty to
cooperate with the other if the dispute is between the parties themselves, nor
shall this provision preclude the raising of cross claims or third party claims
between Subscriber and NovaCare.
12.9 Severability. Should any term, warranty, covenant,
condition, or provision of this Agreement be held to be invalid or
unenforceable, the balance of this Agreement shall remain in force and shall
stand as if the unenforceable part did not exist. The captions in this Agreement
are provided for convenience only and are not part of the terms and conditions
of this Agreement.
12.10 Modification and Implementation. Any modifications to
this Agreement must be in writing and executed by NovaCare and Subscriber to be
enforceable.
12.11 No Partnership. Nothing set forth herein shall be deemed
to create a partnership or joint venture between Subscriber and NovaCare and no
fiduciary duty shall arise from the relationship created herein.
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12.12 Notification of Termination to Employees. NovaCare will
notify all Worksite Employees covered by this Agreement of that status after
Subscriber provides the names of such persons to NovaCare. NovaCare will also
provide each Worksite Employee with any required notice pursuant to applicable
state law or such person's status under this Agreement and shall obtain from
such person any required acknowledgment of such status. If for any reason this
Agreement is terminated, NovaCare will notify all Worksite Employees of whom it
is aware of the termination of this Agreement and Subscriber shall also notify
all Worksite Employees of the termination of this Agreement and shall inform
them that they are no longer covered by NovaCare's benefits or workers'
compensation policy.
12.13 Real Property Leases. As soon as reasonably practicable
after the date hereof, Subscriber and NovaCare shall use their best efforts to
cause all "Subscriber Leases" (as defined herein) to be assigned or replaced, as
applicable, so that NovaCare retains the obligations under such leases, directly
with the landlord, and that Subscriber is released therefrom. For purposes
hereof, a "Subscriber Lease" shall mean any and all real estate leases covering
premises used by NovaCare in the operation of its business, for which Subscriber
has a leasehold interest, whether as landlord, tenant, sublessor or
sub-sublessor.
12.14 Assignment. Each party shall have the right to assign
its rights and obligations under this Agreement to any successor to all or
substantially all of its assets or business.
12.15 Intention of the Parties. The intention of the parties
with respect to allocation between them of rights, duties and obligations is as
set forth in this Agreement. To the extent that the law of any state requires a
different form of agreement to effect the intention of the parties, the parties
agree to negotiate in good faith and to execute separate agreements applicable
to such state.
12.16 Counterparts. This Agreement may be signed in one or
more counterparts, each of which when executed shall be deemed an original and
together shall constitute one and the same instrument
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NOVACARE, INC., NOVACARE EMPLOYEE
A Delaware corporation SERVICES, INC.
/s/ Robert E. Healy Jr. 6/23/99 /s/ Thomas D. Schubert 6/24/99
- ------------------------------------ ---------------------------------------
Signature Date Signature Date
Robert E. Healy, Jr. Thomas D. Schubert
- ----------------------------------- ---------------------------------------
Printed or Typed Name Printed or Typed Name
Sr. Vice President Finance and
Administration and Chief Financial
Officer SVP - CFO
- ---------------------------------- ---------------------------------------
Title Title
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Schedule 3.1.2
Benefits/Risk Management Fees
FOR THE PERIOD ENDING DECEMBER 31, 1999:
Section 3.1.2 Estimated Costs: $455,000
Section 3.1.2 Fixed Fee: $227,500
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Schedule 3.1.3
Administrative Fees
FOR THE PERIOD ENDING DECEMBER 31, 1999:
Section 3.1.3 Estimated Costs: $315,000
Section 3.1.3 Fixed Fee: $157,500
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Schedule 3.1.4
Additional Responsibilities Fee
FOR THE PERIOD ENDING DECEMBER 31, 1999:
None
24
<PAGE> 1
Exhibit 10(p)
SUBSCRIBER SERVICE AGREEMENT
This Subscriber Service Agreement (the "Agreement") is made as of 1st
day of July, 1999 (the "Effective Date") by and between NovaCare, Inc., a
Delaware corporation with its principal place of business at 1016 W. Ninth
Avenue, King of Prussia, Pennsylvania 19406 ("Subscriber"), and NovaCare
Employee Services, Inc. ("NovaCare"), a Delaware corporation with its principal
place of business at the Valley Forge Corporate Center, 2621 Van Buren Avenue,
Norristown, Pennsylvania 19403. This Agreement modifies and supersedes all prior
agreements between Subscriber and NovaCare with respect to Worksite Employees
(as that term is defined in Section 1 of this Agreement).
W I T N E S S E T H:
WHEREAS, NovaCare has expertise in employment relations matters,
including payroll, benefits procurement and management, workers' compensation
insurance management (including risk assessment, injury prevention and claims
management), recruiting, human resources management (including consulting and
intervention to resolve employment-related issues) and training and development;
WHEREAS, Subscriber has outsourced certain human resource functions to
NovaCare in order to improve service and reduce costs by taking advantage of the
expertise of a focused human resources business;
WHEREAS, Subscriber and NovaCare wish to supersede their existing
subscriber service agreement and enter into this agreement for the provision of
services to Subscriber's Physical Rehabilitation and Occupational Health
Division (the "PROH Division"); and
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises herein contained, and intending legally to be bound, the
parties have agreed as follows:
1. Parties' Intent
Subscriber and NovaCare understand and intend that, under this
Agreement, NovaCare will assume certain rights and duties of a co-employer with
respect to employees located at Subscriber worksites or at worksites at which
Subscriber provides services as part of the PROH Division (an employee of the
PROH Division, as determined by Subscriber, shall hereinafter be referred to as
a "Worksite Employee").
2. Term and Termination.
<PAGE> 2
2.1 Initial Term. The initial term (the "Initial Term") of
this Agreement shall be from July 1, 1999 through June 30, 2003 unless sooner
terminated pursuant to Section 2.3 below.
2.1.2 Renewal Term. This Agreement shall automatically renew
for an additional one-year term (a "Renewal Term") upon the expiration of the
Initial Term and each subsequent Renewal Term, unless written notice of
non-renewal is given by either party at least nine (9) months prior to the
expiration of the Initial or any Renewal Term.
2.1.3 Termination.
2.1.3.1 By NovaCare. NovaCare may terminate this
Agreement upon notice to Subscriber, in the event that:
(a) Subscriber fails to pay any sums due hereunder,
and such failure continues for three (3) business days after written notice
thereof is sent to Subscriber, certified or registered mail, return receipt
requested;
(b) Subscriber fails at any time to procure or
maintain any insurance coverage required by this Agreement;
(c) Subscriber fails to perform or observe any duty,
obligation or covenant contained in this Agreement other than those set forth in
subparagraph (a) or subparagraph (b) above, and such failure continues for ten
(10) days after written notice thereof is sent to Subscriber, certified or
registered mail, return receipt requested;
(d) Subscriber becomes insolvent (that is, unable to
pay its debts as they mature or in accordance with customary business practice)
or commits an act of bankruptcy, or applies for, consents to, or acquiesces in
the appointment of a trustee or a receiver for it or any of its property, or, in
the absence of such application, consent or acquiescence, a trustee or receiver
is appointed for Subscriber or for a substantial part of its property and is not
discharged within thirty days thereof, or if any bankruptcy or insolvency
proceeding, or, except as otherwise contemplated in Section 12.14 herein, any
dissolution or liquidation proceeding, is instituted by or against Subscriber
and is consented to or acquiesced in by Subscriber or remains for thirty (30)
days undismissed;
(e) except as otherwise contemplated in Section
12.14, there occurs the termination, cessation or liquidation of the
Subscriber's business;
(f) any representation, warranty or statement of
material fact made or furnished to NovaCare or NovaCare's representatives by or
on behalf of the Subscriber, or any document, instrument or other paper
submitted to
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<PAGE> 3
NovaCare or NovaCare's representatives by or on behalf of Subscriber, is false
or misleading in any material respect;
(g) NovaCare determines, and obtains an opinion of
counsel to the effect, that all or a substantial portion of its receipts
hereunder are or will become subject to a sales, value added, gross receipts or
similar tax in a particular jurisdiction as to which it exercises its right to
terminate;
(h) changes in federal, state or local law,
regulation or controlling legal interpretation occur that make it legally
impossible or economically impractical for NovaCare to carry out its obligations
hereunder in the jurisdiction(s) as to which it exercises its right to
terminate;
(i) Subscriber fails to comply with any reasonable
directive regarding health and safety from NovaCare, NovaCare's workers'
compensation carrier, or any government agency with jurisdiction over a health
or safety matter; or
(j) Subscriber misrepresents workers' compensation
or Fair Labor Standards Act classification or inaccurately reports employee
payroll hours, pay rate or salary.
2.1.3.2 By Subscriber. Subscriber may terminate this
Agreement upon notice to NovaCare in the event that:
(a) NovaCare fails to pay any sums required to be
paid hereunder by NovaCare as co-employer of the Worksite Employees
(i) to or on behalf of a Worksite Employee
or
(ii) to a governmental agency, insurance
carrier, third party administrator or other third party, and such failure
continues for seven (7) business days after written notice thereof is sent to
NovaCare, certified or registered mail, return receipt requested;
(b) NovaCare fails at any time to procure or
maintain insurance coverage required by this Agreement;
(c) NovaCare fails to meet the following service
performance standards, and such failure continues for a period of sixty (60)
days after written notice thereof is sent to NovaCare, certified or registered
mail, return receipt requested:
(i) employee status change transactions (new
hires, wage and salary actions, changes in status from full-time to part-time or
on or off leave and terminations) (hereinafter referred to as "Status
Transactions") received in a
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<PAGE> 4
form acceptable to NovaCare by the established payroll cut-off date and time
(the "Payroll Cut-off") for a payroll will be processed for that payroll;
(ii) payroll data received by NovaCare's
designated representative by the Payroll Cut-off will be processed to deliver
payroll on time ninety-eight percent (98%) of the time, except for natural
disasters, errors caused by Subscriber personnel or other circumstances beyond
NovaCare's control, and ninety-eight percent (98%) of paychecks will correctly
reflect information transmitted from the Subscriber;
(iii) new hire and status change benefit
forms ("Benefit Forms") will be submitted to the third party administrator
responsible for the applicable benefit plan within one (1) week of receipt by
NovaCare's designated representative. If NovaCare acts as the plan
administrator, it will update its file and provide confirmation;
(iv) seventy-five percent (75%) of incoming
calls to the employee service center 1-800 phone number, during established
business hours, will be answered immediately and incoming calls reaching voice
mail will be returned by the end of the following business day; and for open
enrollment periods, the calls will be returned within three business days.
(v) NovaCare will conduct quarterly
feedback sessions with Subscriber's designees and provide client training
regarding how to properly process payroll inputs. Significant service issues
reasonably raised in writing by Subscriber in such quarterly feedback sessions
shall be addressed to Subscriber's reasonable satisfaction within sixty days
after the feedback session in which such service issues are raised; provided,
that, to the extent that the service issues relate to and/or are caused by
Subscriber's policies, procedures and/or processes, NovaCare's responsibility
shall consist of addressing the suggested actions to cure the service issue and
the related cost and time frame to implement the cure.
(d) NovaCare becomes insolvent (that is, unable to
pay its debts as they mature or in accordance with customary business
practice) or commits an act of bankruptcy, or applies for, consents to, or
acquiesces in the appointment of a trustee or a receiver for it or any of its
property, or, in the absence of such application, consent or acquiescence, a
trustee or receiver is appointed for NovaCare or for a substantial part of its
property and is not discharged within thirty days thereof, or if any bankruptcy
or insolvency proceeding, or any dissolution or liquidation proceeding, is
instituted by or against NovaCare and is consented to or acquiesced in by
NovaCare or remains or thirty (30) days undismissed;
(e) there occurs the termination, cessation or
liquidation of NovaCare's business;
4
<PAGE> 5
(f) NovaCare fails to perform or observe any
material duty, obligation or covenant contained in this Agreement other than
those set forth in subparagraph (a), subparagraph (b) or subparagraph (c) above,
and such failure continues for ten (10) days after written notice thereof is
sent to NovaCare, certified or registered mail, return receipt requested, unless
such cure cannot reasonably be achieved within such timeframe, using
commercially reasonable efforts, in which case the applicable cure period shall
be as is reasonable under the circumstances;
3. Fees.
3.1 Calculation of Fees
For each twelve month period under this Agreement, commencing July 1 of
each year and ending June 30 of each year during the term, the fees shall be
determined in accordance with this Section 3.1.
3.1.1 Payroll Fees. The following Subscriber
payments will be processed by NovaCare and billed to Subscriber:
a) gross earnings, including salary, wages, bonus,
vacation time, paid time off, sick time, commissions and severance pay (before
deductions, whether before tax or after tax) paid to Worksite Employees;
(b) the employer's portion of FICA and FUTA
attributable to gross earnings in accordance with such regulations;
(c) the employer's portion of contributions to the
NCES/NovaCare, Inc. 401(k) Retirement Savings Plan ("the 401(k) Plan"); and
(d) the net amount of expense reimbursement and any
other cash payment to a Worksite Employee that is included in a paycheck at the
request of Subscriber but is not includable in gross earnings for federal or
state tax purposes.
3.1.2 Benefits/Risk Management Fees. For
Benefits/Risk Management Responsibilities assumed hereunder, which are more
specifically described in Section 4.2 herein, Subscriber shall pay Benefits/Risk
Management Fees to NovaCare equal to the estimated costs of procuring and
managing such responsibilities (the "Section 3.1.2 Estimated Costs"), plus an
annual fixed fee (the "Section 3.1.2 Fixed Fee"), which shall be equal to
twenty-five percent (25%) of such costs. At least 60 days before the beginning
of each Subscriber fiscal year beginning with the fiscal year ending June 30,
2000, Subscriber and NovaCare shall meet to mutually determine the scope and
anticipated costs of the Benefits/Risk Management Responsibilities for the next
succeeding fiscal year and the Section 3.1.2 Estimated
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<PAGE> 6
Costs for such fiscal year based on the increase or decrease, as the case may
be, in the scope of such responsibilities as compared with the prior fiscal
year. Any costs in excess of the Section 3.1.2 Estimated Costs for a fiscal year
shall be added to and be deemed part of the Section 3.1.2 Estimated Costs (for
purposes of payment of such costs and for purposes of the calculation of the
Section 3.1.2 Fixed Fee) for such period only if such additional costs are
approved, in advance, by Subscriber. NovaCare shall calculate, on a semi-annual
basis, the actual costs incurred by NovaCare in performing the Benefits/Risk
Management Responsibilities for such semi-annual period (the "Actual Section
3.1.2 Costs"). To the extent that the Actual Section 3.1.2 Costs for such
semi-annual period are less than the Section 3.1.2 Estimated Costs for such
period, NovaCare shall pay to Subscriber, as a "Section 3.1.2 Rebate," an amount
equal to 50% of such difference. The Section 3.1.2 Rebate shall be paid, if
applicable, within 60 days after each semi-annual period and, in connection
therewith, each party shall have the opportunity to review the work papers
relating to the calculation thereof. The Section 3.1.2 Estimated Costs and the
Section 3.1.2 Fixed Fee, as determined by the parties pursuant hereto, shall be
attached to this Agreement each year as Schedule 3.1.2.
3.1.3 Administrative Fees. For Administrative Responsibilities assumed
hereunder, which are more specifically described in Section 4.3 herein,
Subscriber shall pay Administrative Fees to NovaCare equal to the estimated
costs of handling such responsibilities (the "Section 3.1.3 Estimated Costs"),
plus an annual fixed fee (the "Section 3.1.3 Fixed Fee"), which shall be equal
to thirty percent (30%) of the Section 3.1.3 Net Estimated Costs (as defined
below); provided that the total number of Worksite Employees employed during
each calendar month (derived by adding the number of Worksite Employees who
start employment as new hires during the month and the number of Worksite
Employees terminated during the month, to the number of Worksite Employees
actually employed on the first day of the month) is within the "Worksite
Employee Range." If the number of Worksite Employees falls beneath the Worksite
Employee Range during any given calendar month, the Section 3.1.3 Estimated
Costs for that month shall be reduced by a monthly dollar amount (the "Section
3.1.3 Adjustment Amount") for each incremental change between 1 and 1,000
Worksite Employees. If the number of Worksite Employees exceeds the Worksite
Employee Range during any given calendar month, the Section 3.1.3 Estimated
Costs for that month shall be increased by the Section 3.1.3 Adjustment Amount
for each incremental change between one (1) and one thousand (1,000) Worksite
Employees. (For example, if the number of Worksite Employees in a month falls to
a level that is 950 employees below the Worksite Employee Range, the Section
3.1.3 Estimated Costs for that month would be reduced by the Section 3.1.3
Adjustment Amount; on the other hand, if the number of Worksite Employees in a
month reached a level that is 1,100 employees above the Worksite Employee Range,
the Section 3.1.3 Estimated Costs for that month would be increased by twice the
Section 3.1.3 Adjustment Amount.) The Section 3.1.3 Estimated Costs as adjusted,
upward or downward, based on the foregoing provisions, shall be referred to as
the "Section 3.1.3 Net Estimated Costs." At least 60 days before the beginning
of each Subscriber fiscal year beginning with the fiscal year ending June 30,
2000, Subscriber and NovaCare shall meet to mutually determine the scope and
anticipated costs of the Administrative Responsibilities for the next succeeding
fiscal year, the Section 3.1.3 Estimated Costs for such fiscal year based on the
increase or decrease, as the case may
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<PAGE> 7
be, in the scope of such responsibilities as compared with the prior fiscal
year, the Worksite Employee Range and the Section 3.1.3 Adjustment Amount. Any
costs in excess of the Section 3.1.3 Estimated Costs for a fiscal year shall be
added to and be deemed part of the Section 3.1.3 Net Estimated Costs (for
purposes of payment of such costs and for purposes of the calculation of the
Section 3.1.3 Fixed Fee) for such period only if such additional costs are
approved, in advance, by Subscriber. NovaCare shall calculate, on a semi-annual
basis, the actual costs incurred by NovaCare in performing the Administrative
Responsibilities for such semi-annual period (the "Actual Section 3.1.3 Costs").
To the extent that the Actual Section 3.1.3 Costs for any semi-annual period are
less than the Section 3.1.3 Net Estimated Costs (as adjusted based on number of
Worksite Employees) for such period, NovaCare shall pay to Subscriber, as a
"Section 3.1.3 Rebate," an amount equal to 50% of such difference. The Section
3.1.3 Rebate shall be paid, if applicable, within 60 days after each semi-annual
period and, in connection therewith, each party shall have the opportunity to
review the work papers relating to the calculation thereof. The Section 3.1.3
Estimated Costs, the Section 3.1.3 Fixed Fee, the Worksite Employee Range and
the Section 3.1.3 Adjustment Amount as determined by the parties pursuant
hereto, shall be attached to this Agreement each year as Schedule 3.1.3.
3.1.4 Additional Fees. Subscriber may request NovaCare to assume
additional responsibilities pursuant to Section 4.4 below (hereinafter referred
to as "Additional Responsibilities"). The fee for such Additional
Responsibilities shall be set forth in a schedule to this Agreement (Schedule
3.1.4).
3.1.5 Fees Not Included. Fees set forth above do not include Subscriber
special requests, potential transition set-up activities or potential wind down
costs. Fees for these services, as well as Recruiting and HR consulting are not
included herein, but will be negotiated once the scope of such services are
defined.
3.1.6 Minimum Fee Guarantee. During each of the consecutive
twelve-month periods under this Agreement ending June 30, 2000, June 30, 2001,
June 30, 2002 and June 30, 2003, the parties agree that, if the aggregate of the
Fixed Fees paid to NovaCare pursuant to Sections 3.1.2 through 3.1.4 for any
such period (without regard to any Rebates) is less than the guaranteed fee
applicable to such period, as described on Schedule 3.1.6, Subscriber shall pay
to NovaCare an amount equal to such shortfall (in such case, a "Section 3.1.6
Shortfall Payment"). Any such Section 3.1.6 Shortfall Payment shall be paid, if
applicable, within 60 days after the end of each of the aforementioned fiscal
years. Each party shall have the opportunity to review the work papers relating
to the calculation of any such Section 3.1.6 Shortfall Payment.
3.2 Payment of Fees.
3.2.1 Administrative and Benefits/Risk Management Fees. On or
before each payroll date, Subscriber shall fund an account with the amount of
the Administrative Fees and Benefits/Risk Management Fees (the "Payroll
Account") in
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advance of each payroll payment date. NovaCare shall have the right to draw
against the Payroll Account an amount equal to the Payroll Fees and
Benefits/Management Fees for the applicable payroll payment date. Subscriber
agrees to collect, verify and transmit to NovaCare's administrative office, no
less than seven (7) business days before each NovaCare payroll date, any
information required to determine correctly and accurately the amount of the
payment due NovaCare. If Subscriber defaults in paying the amounts due NovaCare
and NovaCare continues to pay wages for Worksite Employees at a rate not below
the statutory minimum wage, Subscriber shall fully indemnify and hold NovaCare
harmless from any and all claims made by employees for wages in excess of the
amount paid by NovaCare and any and all legal fees and expenses incurred in
defense of such claims. Additionally, Subscriber must immediately inform
NovaCare of any situation in which payment will not be immediately forthcoming
and thereafter, at the request of NovaCare, Subscriber shall terminate the
employment of persons for whom payment by Subscriber to NovaCare will not be
made.
3.2.2 Subscriber is responsible for all sales, franchise and use
taxes applicable to the states in which business is being conducted.
4. NovaCare's Responsibilities.
4.1 Payroll Responsibilities. NovaCare shall be responsible for
and shall perform the following functions ("Payroll Responsibilities") with
respect to Worksite Employees in consideration of the payment of Payroll Fees:
(i) Payment of wages based on hours, wage and salary rates and
other information supplied by Subscriber, including application of set-offs owed
to Subscriber and implementation of garnishment orders;
(ii) Calculation of Paid Time Off (in accordance with
Subscriber's policies);
(iii) Payment of sign-on, relocation and other bonuses;
(iv) Collection, reporting and payment of applicable federal,
state and local payroll taxes (exclusive of state unemployment insurance);
(v) Payment of the employer's portion of contributions to the
401(k); and
(vi) Payment of expense reimbursement and any other non-wage
payments to Worksite Employees, as requested by Subscriber.
4.2 Benefits Responsibilities. NovaCare shall be responsible for
and shall perform the following functions with respect to Worksite Employees in
consideration of the payment of Benefits/Risk Management Fees:
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(i) Collection of employee contributions, payment of premiums
and administration under the benefit plans;
(ii) Funding of benefit plans that require funding within the
time required by law;
(iii) Reporting and payment of applicable state unemployment
insurance;
(iv) Administration of unemployment compensation claims; and
(v) Payment of workers' compensation insurance premiums and
administration and management of workers' compensation claims, including payment
of claims not paid by an insurance carrier or other third party.
4.3 Administrative Responsibilities. NovaCare shall be responsible for
and shall perform the following functions with respect to Worksite Employees in
consideration of the payment of Administrative Fees:
(i) Completion, reporting and maintenance of payroll and Plan
records, with the exception of records of hours worked, which shall be
collected, verified and maintained by Subscriber, provided that Subscriber shall
make available to NovaCare copies of such records of hours worked as NovaCare
may require for the purpose of maintaining the Plans;
(ii) Analysis, transfer and integration of payroll and
benefits for (a) Worksite Employees newly employed as a result of Subscriber's
acquisitions of businesses employing those individuals, and(b) Worksite
Employees whose employment is terminated;
(iii) Operation of an employee service center providing
Worksite Employees with access for the purpose of making changes and resolving
questions relating to Plans and paychecks;
(iv) Provision of reports within fifteen (15) days after the
last day of each calendar month showing its performance compared to the
performance standards established in Section 2.1.3.2 c (i) - (v), in form
reasonably satisfactory to Subscriber.
(v) Provision of standardized reports, on a mutually
determined basis, as reasonably requested by Subscriber, including, without
limitation, reports regarding payroll, turnover, employee rosters; and provision
of specialized forms, in form and content reasonably requested by Subscriber,
subject to the capacity of the mutually
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determined systems to produce requested formats, prepared and delivered in a
reasonably prompt timeframe;
(vi) Record Maintenance - maintain accurate and complete
personnel files for active and terminated employees to the extent such
information is provided by Subscriber, including all information required by
state and federal law and by the policies and procedures of Subscriber,
including, but not limited to, information relating to performance appraisals,
I-9 forms, records of disciplinary action, staff certification and licensure;
ensure compliance with applicable records retention requirements; respond to
Subscriber's requests for copies of such records in a reasonably prompt
timeframe and/or as reasonably requested by Subscriber;
(vii) Database Management - maintain accurate and complete
employee information and history on human resource information system, based on
information provided by Subscriber.
4.4 Additional Responsibilities. NovaCare may assume
additional responsibilities not covered by Sections 4.1-4.3 above. Any such
additional responsibilities shall be provided pursuant to a written addendum to
this Agreement, executed by both parties, setting forth the services to be
provided and the fee for such services.
5. Rights, Duties and Obligations of Subscriber.
5.1 Supervision of Employees. Subscriber will be responsible
for supervision and direction of Worksite Employees in carrying out the work of
Subscriber's business, and shall provide all instrumentalities (including
uniforms, tools, equipment and other supplies) necessary to the performance of
job functions.
5.2 Reports of Hours Worked. Subscriber shall (i) maintain
accurate records of actual time worked, (ii) make accurate reports of time
worked by Worksite Employees to NovaCare in accordance with the requirements of
the Fair Labor Standards Act and any applicable similar state law, (iii) submit
actual time worked in a mutually determined format and (iv) verify the accuracy
of such reports. Subscriber shall maintain the records required to be kept under
this Section 5.2 for seven (7) years.
5.3 Employment Decisions. Any common-law employee of
Subscriber shall be deemed a Worksite Employee hereunder. Subscriber shall
determine employment eligibility of all Worksite Employees. If a Worksite
Employee is required to possess or maintain a license, or to be supervised by a
supervisor who is required to possess or maintain a license, Subscriber shall be
responsible for verifying such licensure or providing such required supervision.
In taking any adverse action with respect to the pay, conditions of employment
or employment status of a Worksite Employee (an "Adverse Action"), Subscriber
shall comply with applicable law governing employment. Worksite Employees who
are supervisory employees shall act in that capacity in
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compliance with applicable law. Supervisors' actions alleged to be in violation
of law are outside the scope of their responsibility as NovaCare employees and
supervisory employees acting in violation of law shall be deemed to be acting
solely as agents of Subscriber.
5.4 Employee Benefit Plans. Subscriber shall not adopt,
establish, maintain, operate or contribute to any "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended, without the express written consent of NovaCare.
5.5 Financial Controls. Subscriber accepts sole responsibility
for accounting and other financial control policies (and fidelity bonding
requirements) applicable to Worksite Employees or their conduct.
5.6 Compliance With Law. Subscriber accepts sole
responsibility for compliance with the following provisions of law applicable to
Worksite Employees:
(i) the Occupational Safety and Health Act (OSHA)
and related or similar federal, state or local regulations and the employer's
common law duty to supervise the worksite and provide a safe working
environment;
(ii) government contracting requirements under a)
Executive Order 11246, b) the Vocational Rehabilitation Act of 1973, c) the
Vietnam Era Veterans' Readjustment Assistance Act of 1974, d) the Walsh-Healy
Public Contracts Act, e) the Davis-Bacon Act, f) the Service Contract Act of
1965, and g) any and all similar, related, or like federal, state, or local
laws, regulations, ordinances, and statutes;
(iii) Worker Adjustment and Retraining Notification
Act ("WARN");
(iv) laws affecting assignment of and ownership of
intellectual property rights including, but not limited to, inventions, whether
patentable or not, and patents resulting therefrom, copyrights and trade
secrets;
(v) the Immigration Reform and Control Act of 1986,
except as otherwise provided in Section 6.1 (iv); and
(vi) the Fair Labor Standards Act, Title VII of the
Civil Rights Act of 1964, as amended, the Family and Medical Leave Act, the Age
Discrimination in Employment Act, as amended, the Americans With Disabilities
Act (including provisions thereunder relating to Subscriber's premises), the
National Labor Relations Act and any other federal, state, county or local laws,
regulations, ordinances, and statutes which govern the employer/employee
relationship.
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5.7 Safety. Subscriber shall report all accidents in which
Worksite Employees are injured immediately (by telephone within one working day
of Subscriber's knowledge of an injury, and in writing by fax within forty-eight
(48) hours) to NovaCare or NovaCare's designee. Subscriber shall cooperate in
any safety inspection or investigation of a worksite injury conducted by or on
behalf of NovaCare. Subscriber shall reasonably cooperate with NovaCare in
returning injured Worksite Employees to work in available modified-duty
positions and in making reasonable accommodations under applicable disability
laws, subject to receipt of an appropriate medical release.
Where required by applicable state law, NovaCare
shall retain a right of direction and control over the management of safety,
risk and hazard control involving Worksite Employees. However, liability for
employee safety is a responsibility of Subscriber, who controls the worksites
and their business operations. Subscriber acknowledges that it is responsible
for maintaining a safe working environment, providing proper training in
compliance with federal or state law or regulation, and establishing and
maintaining such safety programs, safety policies, and safety committees as may
be required by law. NovaCare, NovaCare's workers' compensation and liability
insurance carriers or their assignees have the right to survey the Subscriber's
worksites to look for unsafe conditions or unsafe acts which may lead to
accidents. However, the retention of such right by NovaCare does not relieve
Subscriber of any obligations that it has pursuant to the federal Occupational
Safety and Health Act (OSHA) or any other federal, state or local law intended
to provide employees at Subscriber's worksites with a safe work environment.
5.8 COBRA. NovaCare shall be responsible for administering
continued health care coverage required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA Coverage") to each employee and
former employee (and their dependents) of the Subscriber who is eligible for
such COBRA Coverage on the effective date hereof. Subject to Section 7.1 and
Subscriber's reimbursement obligation (as set forth below), upon termination of
this Agreement, NovaCare shall administer COBRA Coverage for each Worksite
Employee, former Worksite Employee, their dependents and any individual entitled
to COBRA Coverage under the preceding sentence (collectively, the "COBRA
Participants") who are eligible for such coverage.
5.9. Provision of Information. Subscriber shall provide to
NovaCare such true and accurate information as NovaCare may request as necessary
to comply with requirements of law with respect to Subscriber's ownership and
organizational structure and compensation packages of its senior executives and
structure and operation of benefit plans offered to Worksite Employees by
Subscriber.
5.10. Changes in Policies and Procedures.Subscriber shall
negotiate with NovaCare all changes to policies, processes and procedures
affecting all services provided by NovaCare under this Agreement. NovaCare shall
effect such changes on mutually agreed upon time frames, staffing and costs.
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6. Rights, Duties and Obligations of NovaCare.
6.1 Compliance With Law. Provided that Subscriber has given to
NovaCare all information required hereunder, NovaCare accepts sole
responsibility for compliance with the following provisions of law applicable to
Worksite Employees:
(i) all rules and regulations governing the
reporting, collecting and payment of federal and state payroll taxes on wages
paid under this Agreement, including, but not limited to, a) federal income tax
withholding provisions of the Internal Revenue Code, b) state and/or local
income tax withholding provisions, if applicable, c) Federal Insurance
Contributions Act (FICA), d) Federal Unemployment Tax Act (FUTA), and e)
applicable state unemployment tax provisions;
(ii) except as provided below, applicable workers'
compensation laws including, but not limited to, a) procuring workers'
compensation insurance, b) completing and filing all required reports, and c)
administering, managing, and otherwise processing claims and related procedures
provided that Subscriber agrees to reimburse NovaCare for any monies found due,
whether by audit or otherwise as a result of any workers' compensation
classification information provided by Subscriber to NovaCare;
(iii) Internal Revenue Code Section 4980B, subject
to the provisions of Section 5.8;
(iv) Section 1324A(b) of the Immigration Reform and
Control Act of 1986, assuming that Subscriber has provided to NovaCare all
necessary and accurate documentation required by such law;
(v) the Consumer Credit Protection Act, Title III;
and
(vi) the Fair Labor Standards Act, 29 U.S.C.
Sections 201 et seq., based solely on information provided by Subscriber
pursuant to Section 5.2 hereof.
7. Effect of Termination.
7.1 COBRA. In the event of termination of this Agreement, the
Subscriber shall immediately provide coverage under a "group health plan" (as
defined in Section 4980B(g)(2) of the Code) to all Worksite Employees, former
Worksite Employees, and their dependents who were eligible for coverage under
any NovaCare group health plan immediately before such event. The Subscriber's
group health plan provided under the preceding sentence shall not contain any
exclusion or limitation with respect to any pre-existing condition applicable to
any Worksite Employee, former Worksite Employee or their dependents.
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7.2 Accrued Pay. If this Agreement is terminated and if the
affected employees are entitled to the payment of any accrued bonus, vacation,
sick or personal leave, Subscriber shall be liable for the payment thereof and
will make such payments directly to NovaCare. If, however, Subscriber continues
to employ such affected employee(s) after termination of this Agreement, the
Subscriber shall be liable to the employee(s) for same and NovaCare shall have
no obligation therefor.
7.3 Survival. The indemnification, contribution duty to
cooperate and limitation of liability provisions of this Agreement shall survive
the expiration of this Agreement or other termination of this Agreement
indefinitely.
7.4 Duration of Obligations.
7.4.1 Upoin the termination of this Agreement for any reason,
the parties shall continue to have the following obligations through
and including the termination date:
(i) NovaCare shall have the obligation for wages and
benefits payable to the employees through and including the termination date. If
NovaCare makes any payment, authorized by Subscriber or otherwise required by
law, to any of the employees after this Agreement has been terminated, NovaCare
shall be entitled to full reimbursement for such expenditures;
(ii) Except as otherwise provided herein, all
obligations of NovaCare under this Agreement to maintain workers' compensation
insurance coverage and health care coverage on behalf of the Worksite Employees
shall cease, effective as of the termination date. All such employees shall be
immediately informed by Subscriber that they are no longer covered by NovaCare's
workers' compensation policy. Subscriber shall immediately assume all federal,
state and local obligations of an employer to the employees which are not in
conflict with state or federal law, and shall immediately assume full
responsibility for providing workers' compensation coverage. NovaCare shall
immediately be released from such obligations as are permitted by law, except
that NovaCare shall remain responsible for the cost of claims for workers'
compensation incurred prior to the date of termination. It is the intent of the
parties that, to the extent allowed by law, they be placed in their respective
positions immediately before their entry into this Agreement in the event of a
termination or Subscriber's failure to pay NovaCare; and
(iii) Subscriber shall have the obligation to pay
all fees payable in accordance with the provisions of this Agreement, which are
attributable to the period ending on the termination date.
7.4.2 Upon any termination of this Agreement by
Subscriber other than (a) pursuant to the provisions of Section 2.3.2 or (b) in
accordance with Section 12.14 herein, in addition to the obligations set forth
in Section 7.4.1, Subscriber shall have the obligation to pay to NovaCare such
amount as is necessary so that
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Subscriber fully complies with the Minimum Fee Guarantee set forth in Section
3.1.6 herein; provided, that any such payment shall be made in equal monthly
installments over the remaining period ending June 30, 2003.
8. Indemnification.
8.1 Indemnification by Subscriber. Subscriber agrees to
indemnify, hold harmless, protect and defend NovaCare, its subsidiaries and
affiliates and each of their officers, directors, agents, attorneys and
employees from any claims, expenses (including court costs and attorneys' fees),
damages and liabilities (including severance payments to Worksite Employees)
(collectively hereinafter referred to as "Damages"), from claims, actions,
suits, judgments or settlements arising out of negligence, malpractice, tortious
conduct, violation of any statute, law, or regulation, criminal or dishonest
activity by any Worksite Employee, product liability related to products
manufactured or distributed by Subscriber, Subscriber's breach of any of its
obligations or warranties under this Agreement, or any action by Subscriber or
its agents which may result in a violation of any law or regulation, including,
but not limited to, Damages allegedly arising out of an Adverse Action or out of
worksite conditions or actions of any kind. If such indemnification is for any
reason not available or insufficient to hold NovaCare harmless, Subscriber
agrees to contribute to the losses involved in such proportion as is appropriate
to reflect the relative benefits received (or anticipated to be received) by
Subscriber and by NovaCare with respect to the matters contemplated by this
Agreement or, if such allocation is judicially determined to be unavailable, in
such proportion as is appropriate to reflect not only such relative benefits,
but also other equitable considerations such as the relative fault of
Subscriber, on the one hand, and of NovaCare, on the other hand; provided,
however, that Subscriber shall be responsible for all losses which in the
aggregate are in excess of the amount of all Fixed Fees (as adjusted) received
by NovaCare from Subscriber in connection with the services to be provided
hereunder during the term of this Agreement. NovaCare shall give Subscriber
prompt written notice of any claim for which indemnification will be sought
hereunder, shall cooperate in the investigation and defense of any such claim
and shall not settle or compromise any such claim without the approval of
Subscriber unless Subscriber fails to provide evidence of ability to pay a
judgment in excess of the proposed settlement amount.
8.2 Indemnification by NovaCare. NovaCare assumes
responsibility for the payment of wages to the Worksite Employees without regard
to payments by Subscriber to NovaCare, although in doing so NovaCare does not
waive or limit any claim against Subscriber. NovaCare agrees to indemnify, hold
harmless, protect and defend Subscriber, its subsidiaries and affiliates and
each of their officers, directors, agents, attorneys and employees from and
against any claims, expenses (including attorneys' fees and court costs),
damages and liabilities from claims, actions, suits, judgments or settlements
arising out of NovaCare's breach of its obligations or warranties under this
Agreement or any action by NovaCare or its agents or employees (other than
Worksite Employees) which may result in a violation of any law or regulation,
except
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violations resulting from conduct of Worksite Employees or worksite conditions.
Subscriber shall give NovaCare prompt written notice of any claim for which
indemnification will be sought hereunder, and shall cooperate in the
investigation and defense of any such claim and shall not settle or compromise
any such claim without the approval of NovaCare. Where Subscriber has followed
or complied with a request or recommendation of NovaCare or otherwise properly
relied on information supplied by NovaCare, it shall be relieved of
responsibility for back pay and damages for such actions (unless Subscriber has
failed to comply with its obligations hereunder to provide accurate information
to NovaCare) and NovaCare shall indemnify and hold Subscriber harmless from and
against any and all liabilities arising therefrom.
8.3 Subrogation. Each party hereby waives any claim in its
favor against the other party by way of subrogation or indemnification which may
arise during the term of this Agreement for any and all loss of or damage to any
of its property, or for bodily injury or death, which loss, damage, or bodily
injury or death is covered by insurance to the extent that such loss or damage
is recovered under such policies of insurance as required herein. The
subrogation and indemnification concept set forth in this provision is intended
to apply only to insurance matters, and nothing in this provision is intended to
alter the indemnification rights set forth elsewhere in this Agreement. Each
party shall assure that its insurance policies contain provisions authorizing
waiver of subrogation consistent with this Section 7.3.
9. Representations and Warranties.
9.1 Fair Labor Standards Act. Subscriber agrees not to
withhold a payment to NovaCare absent NovaCare's express permission, or in any
manner, or by any device, act in violation of, cause, or seek to cause a
violation of any applicable federal, state or local law, ordinance, or
regulation pertaining to the terms, conditions, and services of this Agreement.
Subscriber further warrants that it shall not make any taxable payment of any
kind, except profit-sharing or pension plan distributions pursuant to the terms
of a qualified plan, to any employee covered by this Agreement, and that any
such payment shall be a breach of this Agreement, and at the election of
NovaCare, grounds for immediate termination of this Agreement.
9.2 Employment Matters. Subscriber warrants that there are no
collective bargaining agreements binding upon Subscriber or affecting Worksite
Employees, and that there are no pending governmental investigations or any
lawsuit material in nature related to Worksite Employees, the working conditions
of the Worksite Employees, the products or services produced or provided by
Worksite Employees or any other matters affecting the performance of NovaCare
under this Agreement except as otherwise disclosed to NovaCare. Subscriber
warrants that all hazardous materials, if any, on its premises are maintained,
stored and disposed of in accordance with applicable law. Subscriber agrees to
provide any and all protective safety equipment required for safe performance of
job duties or required under local, state or federal law.
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9.3 Primary Obligor for Worksite Employee Compensation.
Notwithstanding anything else in this Agreement to the contrary, the parties
agree that Subscriber, and not NovaCare, shall have the primary responsibility
for any and all compensation due to Worksite Employees.
9.4 APB Opinion No. 25. The parties agree, and each represent
and warrant to the other, that only Subscriber may use the rules of APB Opinion
No. 25 to account for the equity compensation paid to a Worksite Employee.
9.5 Confidentiality. NovaCare and Subscriber each acknowledge
and agree that it may obtain knowledge of "confidential information" as
hereinafter defined concerning the other party. As used herein, "confidential
information" means any information, (including, without limitation, manuals,
trade secrets, protocol, methods, formula, pattern, device, plans, process,
drawings, designs, specifications, schematics, prototypes and other compilation
of information or technical know-how) which is, or is designed to be, used in
the business of such party, and is private or confidential and is not generally
known or available to the public. Subscriber and NovaCare each agree that it
will not, either during the term of this Agreement or thereafter until the
expiration of a period of ten (10) years following the termination of this
Agreement, use or disclose any such confidential information except as otherwise
specifically contemplated in this Agreement.
10. Workers' Compensation. NovaCare shall provide workers' compensation
insurance for Worksite Employees in compliance with applicable law. Workers
performing services for Subscriber not covered by this Agreement and not on
NovaCare's payroll shall not be covered by NovaCare's workers' compensation
insurance. NovaCare will not provide workers' compensation coverage to any
employee for whom Subscriber is not reporting hours of payroll. Subscriber
further agrees to require any independent contractor it utilizes to provide
evidence of workers' compensation coverage before the independent contractor
commences work at the worksite. Subscriber acknowledges that NovaCare's workers'
compensation carrier or NovaCare is entitled to periodically audit the employee
classification lists for each Subscriber location to make sure that employees
are classified properly for workers' compensation purposes. In the event that
during such an audit, or at any other time, NovaCare finds that Worksite
Employees have been misclassified and such misclassification resulted from
information supplied to NovaCare by Subscriber, Subscriber will promptly
reimburse NovaCare, upon invoice, for charges which otherwise would have been
payable by Subscriber had such employee been properly classified. NovaCare
retains the responsibility for the management of workers' compensation claims,
claim filings and related procedures. Subscriber agrees to cooperate with
NovaCare in that regard, including in regard to the notification of injuries
required by this Agreement or by law.
11. Insurance. During the Initial Term of this Agreement and any
Renewal Term, Subscriber shall obtain and maintain the following types of
insurance:
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11.1 Automobile. Subscriber shall obtain and maintain
automobile insurance for all owned, non-owned, and hired vehicles used in
connection with the work performed on its premises or in connection with its
business, and will cause its insurance carrier to issue a Certificate of
Insurance evidencing same to NovaCare, naming NovaCare as an additional named
insured and allowing not less than thirty (30) days' notice of cancellation or
material change. The policy shall insure against liability for bodily injury and
property damage, with a minimum combined single limit of Five Hundred Thousand
Dollars ($500,000) and Uninsured Motorist or PIP equivalent coverage of at least
the minimum limits required by the State where a "no fault" law shall apply.
11.2 General Liability. Subscriber shall obtain and maintain
general liability insurance, and cause its insurance carrier to issue a
Certificate of Insurance evidencing same to NovaCare, naming NovaCare as an
additional named insured and allowing not less than thirty (30) days' notice of
cancellation or material change. The minimum requirement shall be One Million
Dollars ($1,000,000) combined single limit, Three Million Dollars ($3,000,000)
aggregate limit, including, but not limited to, where applicable, premises,
operations, products, completed operations, contract and broad form property
damage, independent contractors, personal injury, host liquor, and full liquor
liability. If Subscriber renders professional services, it shall obtain and
maintain throughout the term, and any succeeding terms of this Agreement,
professional liability coverage as applicable, and will cause its insurance
carrier to issue a Certificate of Insurance evidencing same to NovaCare allowing
not less than thirty (30) days' notice of cancellation or material change.
Unless otherwise agreed to, such policy shall have a combined single limit of
not less than One Million Dollars ($1,000,000), Three Million Dollars
($3,000,000) aggregate limit.
Subscriber agrees that NovaCare shall not provide
any general liability insurance coverage for products liability, completed
operations or professional liability for any Worksite Employee or the
Subscriber. Subscriber shall further agree that NovaCare shall have no
obligation to provide any form of automobile insurance coverage on behalf of any
Worksite Employee or for Subscriber.
12. Miscellaneous.
12.1 Third Party Rights. This Agreement is intended solely for
the mutual benefit of the parties hereto and does not create any rights of any
kind in a third party. Each party hereto reserves the right and from time to
time to assign its rights, duties and obligations hereunder to any affiliate,
provided that the assigning party shall guarantee the performance and liability
of any such affiliate. Any such assignment may be limited to a portion of such
party's obligations arising in one or more jurisdictions.
12.2 Limitation of Liability. NovaCare's liability for actual
damages from any cause whatsoever, shall be limited to the fees (other than
Payroll Fees) paid by Subscriber with respect to the preceding calendar year
under this Agreement (or,
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if this Agreement shall have been in effect for less than twelve months, the
foregoing limitation shall be based on the fees paid by Subscriber to NovaCare
relating to the previous twelve-month period pursuant to the predecessor
agreement between the parties, as applicable to the employees of the PROH
Division). This limitation will apply, regardless of the form of action, whether
in contract or tort, including negligence. This limitation will not apply to
claims by either party for bodily injury or damage to real property or tangible
personal property for which the other party may be legally liable. In no event
will NovaCare be liable for any lost profits, lost savings, incidental damages
or consequential damages, even if NovaCare has been advised of the possibility
of such damages.
12.3 Integration. This Agreement constitutes the entire
agreement between the parties with regard to the subject matter hereof and
supersedes any and all agreements (including the Initial Agreement), whether
oral or written, between the parties with respect to its subject matter.
12.4 Waiver. Failure by either party at any time to require
performance by the other party or to claim a breach of any provision of this
Agreement will not be construed as a waiver of any subsequent breach nor affect
the effectiveness of this Agreement, nor any part thereof, nor prejudice either
party as regards to any subsequent action.
12.5 Governing Law. This Agreement shall be subject to the
laws of the Commonwealth of Pennsylvania.
12.6 Dispute Resolution.
12.6.1 Arbitration. The parties shall attempt
amicably to resolve disagreements by negotiating with each other. In the event
that the matter is not amicably settled through negotiation, any controversy,
dispute or disagreement arising out of or relating to this Agreement (a
"Controversy") shall be resolved exclusively by binding arbitration, which shall
be conducted by a single arbitrator in the Philadelphia, PA area, in accordance
with the J- A- M- S/ENDISPUTE Streamlined (in the case of a dispute within the
scope of the Streamlined Rules and Procedures) or Comprehensive Arbitration
Rules and Procedures (the "Rules"). The parties agree that notwithstanding
anything to the contrary contained in the Rules, the arbitrator shall not award
consequential, exemplary, incidental, punitive or special damages.
12.6.2 Procedure. It is agreed that if any party
shall desire relief of any nature whatsoever from any other party as a result of
any Controversy, such party will initiate such arbitration proceedings within a
reasonable time, but in no event more than twelve (12) months after the facts
underlying said Controversy first arise or become known to the party seeking
relief (whichever is later). The failure of such party to institute such
proceedings within said period shall be deemed a full waiver of any claim for
such relief. The parties shall bear equally all costs of said arbitration (other
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than their own attorney's fees and costs). The parties agree that the decision
and award of the Arbitrator shall be final and conclusive upon the parties, in
lieu of all other legal, equitable (except as provided in 12.5.3. below) or
judicial proceedings between them, and that no appeal or judicial review of the
award or decision of the Arbitrator shall be taken, but that such award or
decision may be entered as a judgment and enforced in any court having
jurisdiction over the party against whom enforcement is sought.
12.6.3. Equitable Relief. The parties recognize that
irreparable injury may result from a breach of this Agreement and that money
damages may be inadequate to fully remedy the injury. Therefore, either party
may, in any such instance, seek and obtain from a court of competent
jurisdiction one or more preliminary or permanent orders designed to maintain
the status quo ante pending arbitration by (i) restraining and enjoining any act
that would constitute a breach or (ii) compelling the performance of any
obligation that, if not performed, would constitute a breach. Any relief awarded
under this paragraph shall be dissolved upon issuance of the Arbitrator's
decision and order.
12.7 Subscriber Intellectual Property Rights.
Subscriber shall own any and all intellectual property rights incident to any
and all process, products, inventions and discoveries that are created or
invented by a Worksite Employee and who was directed by Subscriber to create or
develop such process, product, discovery or invention. Subscriber shall bear any
and all costs associated with any copyrights, trademarks or patents that
Subscriber chooses to obtain to protect Subscriber's intellectual property
rights.
12.8 Duty to Cooperate. In the event that an
employee or a government agency or entity files any type of claim, lawsuit or
charge against NovaCare, Subscriber or both, alleging a violation of any law or
failure to do something which was otherwise required by law, Subscriber and
NovaCare mutually agree to cooperate with each other in the defense of any such
claim, lawsuit or charge. NovaCare and Subscriber will make available to each
other upon request any and all documents that either party has in its possession
which relate to any such claim, lawsuit or charge. However, neither party shall
have the duty to cooperate with the other if the dispute is between the parties
themselves, nor shall this provision preclude the raising of cross claims or
third party claims between Subscriber and NovaCare.
12.9 Severability. Should any term, warranty,
covenant, condition, or provision of this Agreement be held to be invalid or
unenforceable, the balance of this Agreement shall remain in force and shall
stand as if the unenforceable part did not exist. The captions in this Agreement
are provided for convenience only and are not part of the terms and conditions
of this Agreement.
12.10 Modification and Implementation. Any
modifications to this Agreement must be in writing and executed by NovaCare and
Subscriber to be enforceable.
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12.11 No Partnership. Nothing set forth herein shall
be deemed to create a partnership or joint venture between Subscriber and
NovaCare and no fiduciary duty shall arise from the relationship created herein.
12.12 Notification of Termination to Employees.
NovaCare will notify all Worksite Employees covered by this Agreement of that
status after Subscriber provides the names of such persons to NovaCare. NovaCare
will also provide each Worksite Employee with any required notice pursuant to
applicable state law or such person's status under this Agreement and shall
obtain from such person any required acknowledgment of such status. If for any
reason this Agreement is terminated, NovaCare will notify all Worksite Employees
of whom it is aware of the termination of this Agreement and Subscriber shall
also notify all Worksite Employees of the termination of this Agreement and
shall inform them that they are no longer covered by NovaCare's benefits or
workers' compensation policy.
12.13 Real Property Leases. As soon as reasonably
practicable after the date hereof, Subscriber and NovaCare shall use their best
efforts to cause all "Subscriber Leases" (as defined herein) to be assigned or
replaced, as applicable, so that NovaCare retains the obligations under such
leases, directly with the landlord, and that Subscriber is released therefrom.
For purposes hereof, a "Subscriber Lease" shall mean any and all real estate
leases covering premises used by NovaCare in the operation of its business, for
which Subscriber has a leasehold interest, whether as landlord, tenant,
sublessor or sub-sublessor.
12.14 Assignment. Subscriber shall have the right to
assign its rights and obligations under this Agreement to any successor to all
or substantially all of Subscriber's assets or business. In addition, in the
event that Subscriber conducts a corporate transaction (including, for example,
a sale, merger, liquidation into successor entities, spin-off, split-off,
carve-out or otherwise) in which the PROH Division (or a substantial portion
thereof) is transferred to or into a third party entity, Subscriber shall have
the right to substitute for this Agreement substantially similar agreements with
such third party(s) such that the aggregate of such contracts with NovaCare and
with such third party(s) provide for an annual Minimum Fee Guarantee similar to
that set forth in Section 3.1.6 for each of the twelve month periods ending June
30, 2000, June 30, 2001, June 30, 2002, and June 30, 2003, as set forth in
Schedule 3.1.6. NovaCare may assign its rights and obligations under this
Agreement to any successor to substantially all of its business.
12.15 Intention of the Parties. The intention of the
parties with respect to allocation between them of rights, duties and
obligations is as set forth in this Agreement. To the extent that the law of any
state requires a different form of agreement to effect the intention of the
parties, the parties agree to negotiate in good faith and to execute separate
agreements applicable to such state.
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12.16 Counterparts. This Agreement may be signed in
one or more counterparts, each of which when executed shall be deemed an
original and together shall constitute one and the same instrument
NOVACARE, INC., NOVACARE EMPLOYEE
A Delaware corporation SERVICES, INC.
/s/ Robert E. Healy Jr. 5/25/99 /s/ Loren J. Hulber 5/25/99
------------------------------------- ---------------------------------------
Signature Date Signature Date
Robert E. Healy Jr. Loren J. Hulber
- -------------------------------------- --------------------------------------
Printed or Typed Name Printed or Typed Name
Sr. VP Financial and Administration
and Chief Financial Officer President and CEO
- -------------------------------------- --------------------------------------
Title Title
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Schedule 3.1.2
Benefits/Risk Management Fees
FOR THE FISCAL YEAR ENDING JUNE 30, 2000:
Section 3.1.2 Estimated Costs: $10,750,000
Section 3.1.2 Fixed Fee: $2,690,000
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Schedule 3.1.3
Administrative Fees
FOR THE FISCAL YEAR ENDING JUNE 30, 2000:
Section 3.1.3 Estimated Costs: $1,760,000
Section 3.1.3 Fixed Fee: $540,000
Worksite Employee Range: 4,500 to 5,500
Section 3.1.3 Adjustment Amount: $20,000 per month
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Schedule 3.1.4
Additional Responsibilities Fee
FOR THE FISCAL YEAR ENDING JUNE 30, 2000:
None
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Schedule 3.1.6
Minimum Fee Guarantee
Fiscal year ending June 30, 2000: $3,200,000
Fiscal year ending June 30, 2001: $3,400,000
Fiscal year ending June 30, 2002: $3,500,000
Fiscal year ending June 30, 2003: $3,700,000
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Exhibit 10(q)
CLIENT SERVICE AGREEMENT
This Client Service Agreement (the "Agreement") is made as of the 1st
day of July, 1999 (the "Effective Date") by and between Hanger Orthopedic Group,
Inc., a Delaware corporation with its principal place of business at 7700 Old
Georgetown Road, Bethesda, Maryland 20814 and its subsidiaries ("Client"), and
NovaCare Employee Services, Inc. ("NCES"), a Delaware corporation with its
principal place of business at the Valley Forge Corporate Center, 2621 Van Buren
Avenue, Norristown, Pennsylvania 19403.
WITNESSETH
WHEREAS, the Client is acquiring all the issued and outstanding shares
of NovaCare Orthotics and Prosthetics, Inc., a Delaware corporation ("NovaCare
O&P ");
WHEREAS, NCES has expertise in providing comprehensive outsourced human
resource solutions, including payroll, benefits procurement and management,
human resource guidance, workers' compensation insurance management (including
risk assessment, injury prevention and claims management);
WHEREAS, NovaCare O&P has previously outsourced to NCES certain
services functions, and co-employed the employees of NovaCare O&P (the "Worksite
Employees"); and
WHEREAS, the Client is desirous of contracting with NCES in order to
enable the Client to access certain services as hereinafter described from NCES
for the benefit of the Worksite Employees.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises herein contained, and intending legally to be bound, the
parties hereby agree as follows:
1. Parties' Intent
Client and NCES understand and intend that, under this Agreement, NCES
will assume certain rights and duties of a co-employer to assist the Client in
the provision of certain services to Worksite Employees located at NovaCare O&P
Client worksites.
2. Term and Termination.
2.1 Initial Term. The initial term (the "Initial Term") of this
Agreement shall be from July 1, 1999 through December 31, 1999.
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2.1.2 Renewal Term. This Agreement may be renewed by Client at its
option upon the same terms and conditions for two additional six-month terms
(each a "Renewal Term") upon the delivery of written notice by the Client to
NCES at least thirty (30) sixty (60) days prior to the expiration of the Initial
Term and any subsequent Renewal Term.
2.1.3 Termination.
2.1.3.1 By NCES. NCES may terminate this Agreement
upon delivery of written notice to Client in the event that:
(a) Client fails to pay any sums due hereunder, and
such failure continues for three (3) business days after written notice thereof
is received by Client via either national overnight delivery service (e.g.,
Federal Express) or certified or registered mail, return receipt requested,
postage prepaid. NCES agrees that Client's payment of such sum in no way affects
Client's right to challenge NCES thereafter and pursue its rights pursuant to
the dispute resolution provision contained in this Agreement.
(b) Client fails at any time after the receipt of
written notice thereof from NCES to promptly procure or maintain any insurance
coverage required to be procured and/or maintained by the Client under this
Agreement;
(c) Client fails to perform or observe any duty,
obligation or covenant contained in this Agreement other than those set forth in
subparagraph (a) or subparagraph (b) above, and such failure continues for ten
(10) calendar days after written notice thereof is received by Client via either
national overnight delivery service (e.g., Federal Express) or certified or
registered mail, return receipt requested, postage prepaid; provided, however,
in the event Client promptly commences efforts to cure such matter within such
10-day period and thereafter Client continues to diligently pursue such cure
efforts, then such claimed failure by Client to perform under this Agreement
shall not be a basis for which NCES may attempt to terminate this Agreement;
(d) Client becomes insolvent (that is, unable to pay
its debts as they mature or in accordance with customary business practice) or
commits an act of bankruptcy, or applies for, consents to, or acquiesces in the
appointment of a trustee or a receiver for it or any of its property, or, in the
absence of such application, consent or acquiescence, a trustee or receiver is
appointed for Client or for a substantial part of its property and is not
discharged within thirty (30) days thereof, or if any bankruptcy, insolvency,
dissolution or liquidation proceeding is instituted by or against Client and is
consented to or acquiesced in by Client or is not dismissed within thirty (30)
days;
(e) there occurs the termination, cessation or
liquidation of the Client's business;
(f) any representation, warranty or statement of
material fact made in this Agreement by Client is false or misleading in any
material respect;
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(g) changes in federal, state or local law,
regulation or controlling legal interpretation occur that make it legally
impossible or economically impractical for NCES to carry out its obligations
hereunder in the jurisdiction(s) as to which it exercises its right to
terminate; provided, however, that in the case of a claim by NCES that it is
economically impractical for NCES to carry out its obligations hereunder, then
in such event the termination of this Agreement by NCES shall not be effective
until sixty (60) days after NCES has delivered written notice of such desired
termination by NCES to the Client provided Client reaffirms that it shall pay
NCES all sums due under this Agreement during the sixty (60) day period;
(h) Client fails to comply within a reasonable
period of time, as dictated by the circumstances, after receipt by the Client of
written notice from NCES with any reasonable written directive from (i) NCES
regarding health and safety, which NCES directive is required by law to be
complied with by the Client, (ii) NCES' workers' compensation carrier with
respect to Worksite Employees, or (iii) any government agency with jurisdiction
over the subject health or safety matter applicable to Worksite Employees; or
(i) Client willfully or materially misrepresents
workers' compensation or Fair Labor Standards Act classification or willfully or
materially inaccurately reports employee payroll hours, pay rate or salary.
2.1.3.2 By Client. Client may terminate this Agreement upon
delivery of written notice to NCES in the event that:
(a) NCES fails to pay any sums required to be paid
hereunder by NCES as co-employer of the Worksite Employees (i) to or on behalf
of any Worksite Employee or (ii) to a governmental agency, insurance carrier,
third party administrator or other third party;
(b) NCES fails at any time to procure or maintain
insurance coverage required to be procured and/or maintained by NCES under this
Agreement;
(c) NCES becomes insolvent (that is, unable to pay
its debts as they mature or in accordance with customary business practice) or
commits an act of bankruptcy, or applies for, consents to, or acquiesces in the
appointment of a trustee or a receiver for it or any of its property, or, in the
absence of such application, consent or acquiescence, a trustee or receiver is
appointed for NCES or for a substantial part of its property and is not
discharged within thirty days thereof, or if any bankruptcy or insolvency
proceeding, or any dissolution or liquidation proceeding, is instituted by or
against NCES and is consented to or acquiesced in by NCES or is not dismissed
within thirty (30) days;
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(d) there occurs the termination, cessation or
liquidation of NCES' business;
(e) any representation, warranty or statement of
material fact made or furnished to Client or Client's representatives by or on
behalf of NCES, or any document, instrument or other paper submitted to Client
or Client's representatives by or on behalf of NCES, is false or misleading in
any material respect; or
(f) NCES fails to perform or observe any material
duty, obligation or covenant contained in this Agreement other than those set
forth in subparagraph (a), subparagraph (b) or subparagraph (c) above, and such
failure continues for ten (10) calendar days after written notice thereof is
sent to NCES by overnight delivery service (e.g., Federal Express) or by
certified or registered mail, return receipt requested, postage prepaid, unless
such cure cannot reasonable be achieved within such timeframe, using
commercially reasonable efforts, in which case the applicable cure period shall
be as is reasonable under the circumstances;
3. Fees.
3.1 Calculation of Fees
For the Initial Term and the Renewal Terms under this Agreement,
commencing July 1, 1999, the fees shall be determined in accordance with this
Section 3.1.
3.1.1 Payroll Fees. The following Client payments will be
processed by NCES and billed to Client:
(a) gross earnings, including salary, wages, bonus, vacation
time, paid time off, sick time, commissions and severance pay (before
deductions, whether before tax or after tax, all of which deductions, including
but not limited to deductions for employee contributions to retirement or 401(k)
plans, and employee loan repayments, advances and garnishments, shall be made by
NCES and promptly remitted by NCES to the Client or such third-party as
designated by the Client, with the Client hereby designating INVESCO as the
third-party administrator of the 401(k) plan to cover the Worksite Employees to
whom NCES must promptly remit all employee contributions to the 401(k) plan)
paid to Worksite Employees;
(b) the employer's portion due under the Federal Insurance
Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) and State
Unemployment Tax Act (SUTA) attributable to gross earnings in accordance with
regulations promulgated under each such Acts;
(c) the employer's portion of any employee benefit plan
contributions, which amount shall be promptly remitted by NCES to the
appropriate third-party designated by the Client which is administering each
particular employee benefit plan for
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the benefit of the Worksite Employees (with the Client hereby designating
INVESCO as the third-party administrator of the 401(k) plan to cover the
Worksite Employees to whom NCES must promptly remit all employer contributions
to the 401(k) plan) in accordance with applicable law; and
(d) the net amount of expense reimbursement and any other cash
payment to a Worksite Employee that is included in a paycheck at the request of
Client but is not includable in gross earnings for federal or state tax
purposes.
3.1.2 Benefits/Risk Management Fees. For Benefits/Risk Management
Responsibilities assumed hereunder, which are more specifically described in
Section 4.2 herein, Client shall pay NCES the fees identified in Schedule 3.1.2.
3.1.3 Administrative Fees. For Administrative Responsibilities
assumed hereunder, which are more specifically described in Section 4.3 herein,
Client shall pay NCES the fees identified in Schedule 3.1.3.
3.1.4 Additional Fees. Client may request NCES to assume
additional responsibilities pursuant to Section 4.4 below (hereinafter referred
to as "Additional Responsibilities"). The fee for such Additional
Responsibilities shall be set forth in a schedule to this Agreement (Schedule
3.1.4).
3.2 Payment of Fees.
3.2.1 Payroll and Benefits/Risk Management Fees. On or before
each payroll date, Client shall fund an account with the amount of the Payroll
Fees and Benefits/Risk Management Fees (the "Payroll Draw Account") in advance
of each payroll payment date applicable to Worksite Employees. NCES shall have
the right to draw against the Payroll Draw Account an amount equal to the
Payroll Fees and Benefits/Management Fees applicable to Worksite Employees for
the applicable payroll payment date. The Payroll Draw Account shall be the sole
property of the Client and NCES shall only have the right under this Agreement
to make appropriate withdrawals therefrom for the purposes herein described.
Client agrees to collect, verify and transmit to NCES' administrative office, no
less than seven (7) business days before each NCES payroll date applicable to
Worksite Employees, any information in the possession of the Client which is
required by NCES to determine correctly and accurately the amount of the payment
due to be paid by NCES to or on behalf of Worksite Employees. If Client defaults
in paying the amounts due to be paid by Client into the Payroll Draw Account and
NCES nevertheless continues to pay wages for Worksite Employees at the rates due
to such Worksite Employees, then the Client shall promptly reimburse NCES for
the shortfall amount due in the Payroll Draw Account. Additionally, Client
agrees to promptly inform NCES of any situation in which payment will not be
made by the Client into the Payroll Draw Account, in which case NCES shall not
be required to make payments from the Payroll Draw Account in excess of the
amount in the Payroll Draw
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Account. NCES shall be responsible for the creation and delivery to the Client
of all information relating to all NCES withdrawals from the Payroll Draw
Account.
3.2.2 Client is responsible for all sales, franchise and use
taxes applicable to the states in which business is being conducted. If NCES
pays such taxes on behalf of Client, NCES shall include such amounts in its
invoice for services.
4. NCES's Responsibilities.
4.1 Payroll Responsibilities. NCES shall be responsible for and shall
perform the following functions ("Payroll Responsibilities") on behalf of
NovaCare O&P Client with respect to all Worksite Employees in consideration of
the payment of Payroll Fees:
(i) Payment and distribution of wages based on hours, wage and
salary rates and other information supplied by Client, including application of
set-offs owed to Client and implementation of garnishment orders, together with
the withholding of all applicable wage deductions, including but not limited to
deductions for employee contributions to retirement or 401(k) plans, and
employee loan repayments, advances and garnishments, which deductions shall be
made by NCES and promptly remitted by NCES to the Client or such appropriate
third-party as designated by the Client, with the Client hereby designating
INVESCO as the third-party administrator of the 401(k) plan to cover the
Worksite Employees to whom NCES must promptly remit all employee contributions
to the 401(k) plan from the Worksite Employees;
(ii) Calculation of Paid Time Off (in accordance with Client's
policies);
(iii) Payment of sign-on, relocation and other bonuses;
responsibility for monitoring situations in which such payments are owed back to
Client and taking reasonable steps to collect or offset such amounts from
subsequent pay;
(iv) Collection, reporting and payment of applicable federal,
state and local payroll taxes (including state unemployment insurance as
provided under Section 4.2(iii) hereof);
(v) Calculation and payment of the employer's portion of any
employee welfare benefit plan contributions;
(vi) Payment of expense reimbursement and any other non-wage
payments to Worksite Employees, as requested by Client; and
(vii) Payment of any and all accrued paid time off earned by any
Worksite Employee who is covered under this Agreement.
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4.2 Benefits Administration Responsibilities. NCES shall be responsible
for and shall perform the following functions on behalf of NovaCare O&P Client
with respect to Worksite Employees in consideration of the payment of Benefits
Fees:
(i) Collection of employee contributions, payment of premiums and
administration under the Plans;
(ii) Funding of Plans that require funding within the time
required by law;
(iii) Reporting and payment of applicable state unemployment
insurance;
(iv) Administration of unemployment compensation claims; and
(v) Payment of workers' compensation insurance premiums and
administration and management of workers' compensation claims, including payment
of claims not paid by an insurance carrier or other third party and the payment
of all additional monies which may become due with respect to workers'
compensation insurance, whether due by audit or otherwise;
4.3 Human Resource Administrative Responsibilities. NCES shall be
responsible for and shall perform the following functions on behalf of NovaCare
O&P Client with respect to Worksite Employees in consideration of the payment of
Administrative Fees:
(i) Completion, reporting and maintenance of payroll and Plan
records, with the exception of records of hours worked, which shall be
collected, verified and maintained by Client, provided that Client shall make
available to NCES copies of such records of hours worked as NCES may require for
the purpose of maintaining the Plans;
(ii) Analysis, transfer and integration of payroll and benefits
for (a) all additional persons, if any, who are designated as new and additional
Worksite Employees in writing by the Client to NCES, and (b) Worksite Employees
whose employment is terminated;
(iii) Operation of an employee service center for Client
management and Worksite Employees with access for the purpose of making changes
and resolving questions relating to Plans and paychecks, including the
maintenance of a toll free "800" telephone number which may be utilized by
Worksite Employees and the Client for purposes of reporting and processing
claims and reports relating to Plans, benefits and paychecks, with NCES agreeing
to respond to the Client or the subject Worksite Employee no later than the next
business day following each inquiry, report and/or call made by the Client or
such Worksite Employee to this employee service center;
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(iv) Provision of standardized reports, on a mutually determined
basis, as reasonably requested by Client, reports regarding payroll, human
resources reports, turnover, employee rosters and workers' compensation claims
experience reports; and provision of specialized forms, in form and content
reasonably requested by Client, subject to the capacity of the mutually
determined systems to produce requested formats, prepared and delivered in a
reasonably prompt timeframe, with samples of such reports and their applicable
detail of information being attached as Schedule 4.3(iv) hereto.
(v) Record Maintenance - maintain accurate and complete personnel
files for active and terminated employees to the extent such information is
provided by Client or otherwise available to NCES, including all information
required by state and federal law and by the policies and procedures of Client,
including, but not limited to, information relating to performance appraisals,
I-9 forms, records of disciplinary action and staff certification and all
employee status changes, with all such records being maintained within the
timeframes and contents as required by federal law and the guidelines of the
Internal Revenue Service.
(vi) NCES shall make changes, which are reasonably requested by
the Client and acceptable to NCES, to the database of information relating to
the Worksite Employees which is maintained by NCES.
(vii) NCES represents to the Client that all systems and
information maintained by NCES which affect the Client, NovaCare O&P and/or the
Worksite Employees shall be Y2K compliant.
(viii) NCES shall provide the Client with complete electronic
tape back-up copies in the retrievable format in which such data is currently
stored by NCES (in a non-ASCII format) of the payroll, human resources and
benefits systems of NCES which relate to the Worksite Employees, with such
complete electronic tape back-up copies to be provided by NCES to the Client at
the following times: (i) within thirty (30) days of the commencement of this
Agreement; upon the commencement of the Initial Term, (ii) sixty (60) days prior
to the expiration of any term whether Initial or Renewal on March 31, June 30,
September 30 and December 31 of each calendar year during the Initial Term and
all Renewal Terms under this Agreement, and (iii) within five (5) ten (10)
business days of the termination of this Agreement.
(ix) NCES agrees that NCES shall not process under this
Agreement, and the Client shall not be liable in any manner for, any payroll,
medical, dental or other benefit costs or expenses relating to any matter
involving any Worksite Employees which occurs prior to July 1, 1999.
(x) NCES agrees to complete and provide to the Client an SAS
70 report upon each of (i) the commencement of the Initial Term, (ii) promptly
after December 31, 1999 for the period then ended on December 31, 1999, (iii)
for each annual calendar period thereafter during any Renewal Term, and (iv)
within five (5) business days of the termination of this Agreement.
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(xi) NCES agrees to be responsible to properly administer in a
timely manner all obligations of the Client with respect to the Worksite
Employees to issue certificate of creditable coverage on all group health plans
under the Health Insurance Portability and Accountability Act (HIPPA).
4.4 Additional Responsibilities. NCES may assume additional
responsibilities not covered by Sections 4.1-4.3 above if requested in writing
by the Client. Any such additional responsibilities shall be provided pursuant
to a written addendum to this Agreement, executed by both parties, setting forth
the services to be provided and the fee for such services.
5. Rights, Duties and Obligations of Client.
5.1 Supervision of Employees. Client and its subsidiaries, including
NovaCare O&P, will be solely responsible for the supervision, direction and
termination of Worksite Employees in carrying out the work of Client's business,
and shall provide all instrumentalities (including uniforms, tools, equipment
and other supplies) which in the sole opinion of Client are necessary to the
performance by the Worksite Employees of their job functions with Client and its
subsidiaries, including NovaCare O&P.
5.2 Reports of Hours Worked. In order for NCES to make accurate
payments to Worksite Employees on behalf of Client, Client shall (i) maintain
accurate records of actual time worked by Worksite Employees,(ii) make accurate
reports of time worked by Worksite Employees to NCES in accordance with the
requirements of the Fair Labor Standards Act and any applicable similar state
law, (iii) submit actual time worked in a mutually determined format and (iv)
verify the accuracy of such reports. Client shall maintain the records required
to be kept under this Section 5.2 for such period of time as Client deems
necessary or in accordance with Client's record retention policies, provided,
however, such policies are consistent with applicable law.
5.3 Employment Decisions. Any common-law employee or contractual
employee of NovaCare O&P Client shall be deemed a Worksite Employee hereunder.
Client shall determine employment eligibility of all Worksite Employees. If a
Worksite Employee is required to possess or maintain a license, or to be
supervised by a supervisor who is required to possess or maintain a license,
Client shall be responsible for verifying such licensure or providing such
required supervision. In taking any adverse action with respect to the pay,
conditions of employment or employment status of a Worksite Employee (an
"Adverse Action"), Client shall comply with applicable law governing employment.
Worksite Employees who are supervisory employees shall be required to comply
with applicable law.
5.4 Employee Benefit Plans. NCES and Client mutually agrees to adopt,
as its own, the Welfare Benefits and Flexible Benefits Programs identified in
Schedule 5.4 for the benefit of Worksite Employees. NCES and Client shall be
solely liable for the costs associated with the actual benefits provided by each
of them under such plans.
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5.5 Financial Controls. Client accepts sole responsibility for
accounting and other financial control policies (and fidelity bonding
requirements) applicable to the Worksite Employees or their conduct, other than
the duties that NCES has agreed to provide under the terms of this Agreement.
5.6 Compliance With Law. Client accepts sole responsibility for
compliance with all provisions of law applicable to Worksite Employees, other
than those laws relating to the duties that NCES has agreed to provide to Client
under the terms of this Agreement.
5.7 Safety. Client shall report to NCES all accidents in which a
Worksite Employee is injured promptly (by telephone to NCES's insurance
carrier's (Liberty Mutual) toll free "800" telephone number within one working
day of Client's knowledge of an injury, and report such injury in writing by fax
within forty-eight (48) hours) to NCES or NCES's designee. Client shall
cooperate in any safety inspection or investigation of a worksite injury
conducted by or on behalf of NCES. Client shall reasonably cooperate with NCES
in returning injured Worksite Employees to work in available modified duty
positions and in making reasonable accommodation under applicable disability
laws and the requirements thereunder. NCES retains a right of direction and
control regarding the management of safety as same affects any Worksite Employee
so long as the exercise of such right by NCES does not unreasonably interfere
with the business conducted by the Client and NovaCare O&P through the Worksite
Employees.
5.8 COBRA. NCES shall be responsible for all obligations to provide
continued health care coverage required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA Coverage") to each current and
former Worksite Employee (and their dependents, if applicable) who is eligible
for such COBRA Coverage on the effective date hereof.
5.9. Provision of Information. Client shall provide to NCES such true
and accurate information as NCES may request as necessary to comply with
requirements of law with respect to Client's ownership and organizational
structure and compensation packages of its senior executives and structure and
operation of benefit plans offered to Worksite Employees by Client. NCES shall
provide to the Client such true and accurate information as the Client may
request as necessary to comply with requirements of law, rules or regulations to
which the Client is subject and with respect to Client's financial and legal
reporting requirements.
5.10. Changes in Policies and Procedures. Client shall notify NCES of
all changes by Client or NovaCare O&P to policies, processes and procedures
affecting all services provided by NCES under this Agreement. NCES shall not be
required to provide any greater services to the Worksite Employees for the
benefit of the Client or NovaCare O&P than the level and type of services
provided under the terms of this Agreement and
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the Schedules attached hereto, unless otherwise agreed to in writing and signed
by both the Client and NCES.
6. Rights, Duties and Obligations of NCES.
6.1 Compliance With Law. Provided that Client has given to NCES all
information required hereunder, NCES accepts sole responsibility for compliance
on behalf of the Client and NovaCare O&P with the following provisions of law
applicable to Worksite Employees:
(i) all rules and regulations governing the reporting, collecting
and payment of federal and state payroll taxes on wages paid under this
Agreement, including, but not limited to, a) federal income tax withholding
provisions of the Internal Revenue Code, b) state and/or local income tax
withholding provisions, if applicable, c) Federal Insurance Contributions Act
(FICA), d) Federal Unemployment Tax Act (FUTA), and e) applicable state
unemployment tax provisions;
(ii) applicable workers' compensation laws including, but not
limited to, a) procuring workers' compensation insurance and the payment of all
costs, premiums, charges and expenses relating thereto, including such insurance
required by monopolistic states (being states which require workers compensation
insurance to be obtained from such state itself), b) completing and filing all
required reports, and c) administering, managing, and otherwise processing
claims and related procedures, with NCES being solely liable for any and all
monies which are found or claimed as due with respect to Worksite Employees,
whether such additional money is found to be due by audit or otherwise;
(iii) Internal Revenue Code Section 4980B, subject to the
provisions of Section 5.8;
(iv) Section 1324A(b) of the Immigration Reform and Control Act
of 1986, assuming that Client has provided to NCES all necessary and accurate
documentation required by such law;
(v) the Consumer Credit Protection Act, Title III; and
(vi) the Fair Labor Standards Act, 29 U.S.C. Sections 201 et
seq., based solely on information provided by Client pursuant to Section 5.2
hereof.
7. Effect of Termination.
7.1 COBRA. In the event of termination of this Agreement, the
Client shall immediately provide coverage under a "group health plan" (as
defined in Section 4980B(g)(2) of the Code) to all applicable Worksite Employees
and their dependents who were eligible for coverage under any NCES group health
plan immediately before such
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event. The Client's group health plan provided under the preceding sentence
shall not contain any exclusion or limitation with respect to any pre-existing
condition applicable to any Worksite Employees or their dependents.
7.2 Accrued Pay. If this Agreement is terminated, the Client will be
liable for the provision to Worksite Employees of such services, including any
accrued pay whether for unused sick, vacation or other paid time off, as Client
is required to provides to its employees; provided, however, that nothing
hereunder shall excuse NCES from its obligation to either complete the
performance of any of its duties hereunder which NCES has commenced to perform
prior to such termination of this Agreement or provide all necessary assistance
to the Client to complete such duties formerly performed by NCES under this
Agreement, all so that neither the Worksite Employees norNCESare adversely
affected by the non-performance of such duties by Client.
7.3 Survival. The indemnification, contribution and duty to cooperate
provisions of this Agreement shall survive the expiration of this Agreement or
other termination of this Agreement indefinitely.
7.4 Duration of Obligations.
7.4.1 Upon the termination of this Agreement for any reason,
the parties shall continue to have the following obligations through and
including the termination date:
(i) NCES shall have the obligation to pay all wages and benefits
payable to the Worksite Employees from the amounts provided by NovaCare O&P
therefor through and including the termination date. If NCES makes any payment,
authorized by Client or otherwise required by law, to any of the Worksite
Employees after this Agreement has been terminated, NCES shall be entitled to
full reimbursement for such expenditures;
(ii) Except as otherwise provided herein, all obligations of NCES
under this Agreement to maintain any workers' compensation insurance or health
care coverages on behalf of the Worksite Employees shall cease, effective as of
the termination date, or as otherwise provided under the terms of the insurance
or health care coverages being provided by NCES to the Worksite Employees. If
applicable, all such Worksite Employees shall be immediately informed by Client
that they are no longer covered by any workers' compensation insurance or health
care policies of NCES. NCES shall immediately be released from such obligations
as are permitted by law, except that NCES shall remain responsible for the
management and cost of workers' compensation claims that have been incurred no
later than the effective date of the termination of this Agreement; and
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(iii) Client and NCES each shall have the obligation to pay all
fees payable by each of them in accordance with the provisions of this
Agreement, which are attributable to the period ending on the termination date.
8. Indemnification.
8.1 Indemnification. NCES and the Client (each an
"Indemnifying Party") each agree to indemnify, hold harmless, protect and defend
the other party (the "Indemnified Party"), and its respective subsidiaries,
affiliates, officers, directors, agents, attorneys and employees from any
claims, expenses (including court costs and attorneys' fees), damages and
liabilities (collectively hereinafter referred to as "Damages"), from claims,
actions, suits, judgments or settlements arising out of negligence, malpractice,
tortious conduct, violation of any statute, law, or regulation by the
Indemnifying Party, , the breach of any of obligations or warranties of the
Indemnifying Party under this Agreement, or any action by the Indemnifying Party
or its agents which may result in a violation of any law or regulation,
including, but not limited to, Damages allegedly arising out actions of any
kind. The Indemnified Party shall give the Indemnifying Party prompt written
notice of any claim for which indemnification will be sought hereunder, shall
cooperate in the investigation and defense of any such claim and shall not
settle or compromise any such claim without the approval of the Indemnifying
Party unless the Indemnifying Party fails to provide evidence of ability to pay
a judgment in excess of the proposed settlement amount. Notwithstanding anything
herein to the contrary, NCES agrees that NCES shall be solely liable for all
costs, expenses, charges, liabilities and Damages of any type which relate to
workers' compensation matters., including but not limited to losses of any type,
including loss adjustment expense, within any workers compensation deductible
amount.
8.2 Indemnification by NCES. NCES assumes responsibility for
the payment of wages to the Worksite Employees without regard to payments by
Client to NCES, although in doing so NCES does not waive or limit any claim
against Client. NCES agrees to indemnify, hold harmless, protect and defend
Client, its subsidiaries and affiliates and each of their officers, directors,
agents, attorneys and employees from and against any claims, expenses (including
attorneys' fees and court costs), damages and liabilities from claims, actions,
suits, judgments or settlements arising out of NCES's breach of its obligations
or warranties under this Agreement or any action by NCES or its agents or
employees (other than Worksite Employees) which may result in a violation of any
law or regulation, except violations resulting from conduct of Worksite
Employees or worksite conditions. Client shall give NCES prompt written notice
of any claim for which indemnification will be sought hereunder, and shall
cooperate in the investigation and defense of any such claim and shall not
settle or compromise any such claim without the approval of NCES. Where Client
has followed or complied with a request or recommendation of NCES or otherwise
properly relied on information supplied by NCES, it shall be relieved of any
responsibility and any damages for such actions (unless Client has failed to
comply with its obligations hereunder to provide accurate information to NCES)
and NCES shall indemnify and hold Client harmless from and against any and all
liabilities arising therefrom.
13
<PAGE> 14
9. Representations and Warranties.
9.1 Fair Labor Standards Act. NCES agrees not to withhold, except for
any withholding that are order pursuant to a garnishment, child or domestic
support order, or tax levie, a payment to any Worksite Employee absent express
permission from the Client, or in any manner, or by any device, act in violation
of, cause, or seek to cause a violation of any applicable federal, state or
local law, ordinance, or regulation pertaining to the terms, conditions, and
services of this Agreement. Client further warrants that it shall not make any
taxable payment of any kind, except profit-sharing or pension plan distributions
pursuant to the terms of a qualified plan, to any Worksite Employee covered by
this Agreement, and that any such payment shall be a breach of this Agreement,
and at the election of NCES, grounds for immediate termination of this
Agreement.
9.2 Employment Matters. NCES and Client warrant that there are no
collective bargaining agreements binding upon either party that affect the
Worksite Employees, and that there are no pending governmental investigations or
any lawsuit material in nature related to the Worksite Employees, the working
conditions of the Worksite Employees, the products or services produced or
provided by the Worksite Employees or any other matters affecting the
performance of either party under this Agreement except as otherwise disclosed
in writing to the affected party in a Schedule attached to this Agreement.
Client warrants that all hazardous materials, if any, on its premises are
maintained, stored and disposed of in accordance with applicable law. Client
agrees to provide any and all protective safety equipment required for safe
performance of job duties or required under local, state or federal law.
9.3 Primary Obligor for Worksite Employee Compensation. Accept as
otherwise provided in this Agreement, the parties agree that the Client, and not
NCES, shall have the primary responsibility for any and all compensation due to
Worksite Employees; provided, however, that such compensation shall, during the
term of this Agreement, be paid by NCES in a timely manner from the funds
provided to NCES by the Client for such purposes under the terms of this
Agreement.
9.4 APB Opinion No. 25. The parties agree, and each represent and
warrant to the other, that only Client may use the rules of APB Opinion No. 25
to account for the equity compensation paid to a Worksite Employee.
9.5 Confidentiality. NCES and Client each acknowledge and agree that it
may obtain knowledge of "confidential information" as hereinafter defined
concerning the other party. As used herein, "confidential information" means any
information, (including, without limitation, manuals, trade secrets, protocol,
methods, formula, pattern, device, plans, process, drawings, designs,
specifications, schematics, prototypes and other compilation of information or
technical know-how) which is, or is designed to be, used in the business of such
party, and is private or confidential and is not generally known or available to
the public. Client and NCES each agree that it will not, either during the term
of this Agreement or thereafter until the expiration of a period of ten (10)
years
14
<PAGE> 15
following the termination of this Agreement, use or disclose any such
confidential information except as otherwise specifically contemplated in this
Agreement.
10. Workers' Compensation. NCES shall provide all necessary workers'
compensation insurance for Worksite Employees in compliance with applicable law.
Workers performing services for the Client not covered by this Agreement and who
are not co-employees of NCES shall not be covered by NCES' workers' compensation
insurance.
11. Insurance. During the Initial Term of this Agreement and any Renewal Term,
NCES shall obtain and maintain the following types of insurance:
11.1 Automobile. Each party shall obtain and maintain automobile
liability insurance for all owned, non-owned, and hired vehicles used in
connection with the work performed on its premises or in connection with its
business, and will cause its insurance carrier to issue a Certificate of
Insurance evidencing same to the other party, naming the other party as a
certificate holder and allowing not less than thirty (30) days' notice of
cancellation or material change. The policy shall insure against liability for
bodily injury and property damage, with a minimum combined single limit of One
Million Dollars ($1,000,000) and Uninsured Motorist or PIP equivalent coverage
of at least the minimum limits required by the State where a "no fault" law
shall apply.
11.2 General Liability. Client and NCES shall each obtain and maintain
throughout the Initial Term and any applicable Renewal Term of this Agreement
general liability insurance and cause their respective insurance carriers to
name each other as certificate holders and which certificate shall provide for
not less than thirty (30) days' prior written notice to the affected party of
any cancellation or material change. The minimum requirement shall be One
Million Dollars ($1,000,000) combined single limit, and Three Million Dollars
($3,000,000) aggregate limit. If Client renders professional services, it shall
obtain and maintain throughout the term, and any succeeding terms of this
Agreement, professional liability coverage as applicable, and will cause its
insurance carrier to issue a Certificate of Insurance evidencing same to NCES
allowing not less than thirty (30) days' notice of cancellation or material
change. Unless otherwise agreed to, such policy shall have a combined single
limit of not less than One Million Dollars ($1,000,000), Three Million Dollars
($3,000,000) aggregate limit.
Client agrees that NCES shall not provide any general liability
insurance coverage for products liability, completed operations or professional
liability for any Worksite Employee or the Client. Client shall further agree
that NCES shall have no obligation to provide any form of automobile insurance
coverage on behalf of any Worksite Employee or for Client.
12. Miscellaneous.
15
<PAGE> 16
12.1 Third Party Rights. This Agreement is intended solely for the
mutual benefit of the parties hereto and does not create any rights of any kind
in a third party.
121.2 Integration. This Agreement and the Schedules attached hereto and
incorporated as if set forth in full herein constitutes the entire agreement
between the parties with regard to the subject matter hereof and supersedes any
and all agreements, whether oral or written, between the parties with respect to
its subject matter.
12.3 Waiver. Failure by either party at any time to require performance
by the other party or to claim a breach of any provision of this Agreement will
not be construed as a waiver of any subsequent breach nor affect the
effectiveness of this Agreement, nor any part thereof, nor prejudice either
party as regards to any subsequent action.
121.4 Governing Law. This Agreement shall be subject to the laws of the
State of Delaware; provided, however, that the parties agree that subject matter
jurisdiction, personal jurisdiction and venue shall be in a Federal court of
competent jurisdiction which is located in or nearest to the city of
Philadelphia, Pennsylvania.
12.5 Dispute Resolution.
12.5.1 Arbitration. The parties shall attempt amicably to
resolve disagreements by negotiating with each other. In the event that the
matter is not amicably settled through negotiation, any controversy, dispute or
disagreement arising out of or relating to this Agreement (a "Controversy")
shall be resolved exclusively by binding arbitration, which shall be conducted
by a three-person panel of arbitrators in the Philadelphia, PA area, in
accordance with the J-A-M-S/ENDISPUTE Streamlined (in the case of a dispute
within the scope of the Streamlined Rules and Procedures) or Comprehensive
Arbitration Rules and Procedures (the "Rules"). The parties agree that
notwithstanding anything to the contrary contained in the Rules, the arbitrators
shall not award consequential, exemplary, incidental, punitive or special
damages unless the party found to be at fault has been negligent or willful in
its acts or omissions. The prevailing party shall further be entitled to payment
by the non-prevailing party of reasonable legal fees and all costs incurred by
the prevailing party in such arbitration proceedings.
12.5.2 Procedure. It is agreed that if any party shall desire
relief of any nature whatsoever from any other party as a result of any
Controversy, such party will initiate such arbitration proceedings within a
reasonable time, but in no event more than twelve (12) months after the facts
underlying said Controversy first become known to the party seeking relief. The
failure of such party to institute such proceedings within said period shall be
deemed a full waiver of any claim for such relief. The non-prevailing party
shall reimburse the prevailing party for reasonable costs of said arbitration.
The parties agree that the decision and award of the arbitrators shall be final
and conclusive upon the parties, in lieu of all other legal, equitable (except
as provided in 12.5.3. below) or judicial proceedings between them, and that no
appeal or judicial review of the award or decision of the arbitrators shall be
taken, but that such award or decision may be
16
<PAGE> 17
entered as a judgment and enforced in any court having jurisdiction over the
party against whom enforcement is sought.
12.5.3. Equitable Relief. The parties recognize that
irreparable injury may result from a breach of this Agreement and that money
damages may be inadequate to fully remedy the injury. Therefore, either party
may, in any such instance, seek and obtain from a court of competent
jurisdiction one or more preliminary or permanent orders designed to maintain
the status quo ante pending the results of the arbitration proceedings by (i)
restraining and enjoining any act that would constitute a breach or (ii)
compelling the performance of any obligation that, if not performed, would
constitute a breach. Any relief awarded under this paragraph shall be dissolved
upon issuance of the arbitrators' decision and order.
12.6 Client Intellectual Property Rights. The Client shall own any and
all intellectual property rights incident to any and all process, products,
inventions and discoveries that are created or invented by a Worksite Employee.
The Client shall bear any and all costs associated with any copyrights,
trademarks or patents that Client chooses to obtain to protect Client's
intellectual property rights.
12.7 Duty to Cooperate. In the event that a Worksite Employee or a
government agency or entity files any type of claim, lawsuit or charge against
NCES, Client or both, alleging a violation of any law or failure to do something
which was otherwise required by law, the Client and NCES mutually agree to
cooperate with each other in the defense of any such claim, lawsuit or charge.
NCES and the Client will make available to each other upon request any and all
documents that either party has in its possession which relate to any such
claim, lawsuit or charge, unless such document relates to a claim that wither
party may have against the other party. However, neither party shall have the
duty to cooperate with the other if the dispute is between the parties
themselves, nor shall this provision preclude the raising of cross claims or
third party claims between the Client and NCES.
12.8 Severability. Should any term, warranty, covenant, condition, or
provision of this Agreement be held to be invalid or unenforceable, the balance
of this Agreement shall remain in force and shall stand as if the unenforceable
part did not exist. The captions in this Agreement are provided for convenience
only and are not part of the terms and conditions of this Agreement.
12.9 Modification and Implementation. Any modifications to this
Agreement must be in writing and executed by NCES and the Client to be
enforceable.
12.10 No Partnership. Nothing set forth herein shall be deemed to
create a partnership or joint venture between the Client and NCES and no
fiduciary duty shall arise from the relationship created herein.
17
<PAGE> 18
12.11 Notification of Termination to Employees; Non-solicitation. If
for any reason this Agreement is terminated, NCES will notify all Worksite
Employees of whom it is aware of the termination of this Agreement and the
cessation of services by NCES. NCES agrees that during the term of this
Agreement and from and after its termination for any reason, NCES and any party
controlled by NCES shall not, without the prior written consent of the Client
and except as otherwise provided in this Agreement, knowingly solicit for hire
any of the Worksite Employees, nor interfere with the continued employment of
such persons solely by the Client. In the event of the termination of this
Agreement for any reason, NCES agrees that it shall thereafter refrain from
claiming or asserting any employment relationship with any Worksite Employee,
except only to the limited extent as may be necessary for NCES to complete the
provision of any services or benefits to any Worksite Employees.
12.12 Assignment. Neither party may assign this Agreement nor any
rights or duties hereunder without the prior written consent of the other party
and any attempted assignment without the prior written consent by the other
party shall be null and void and constitute a material breach of this Agreement;
provided, however, that a change in control or ownership of the stock of NCES
shall not be deemed to be an assignment of this Agreement for which consent by
the Client will be required.
12.13 Intention of the Parties. The intention of the parties with
respect to allocation between them of rights, duties and obligations is as set
forth in this Agreement. To the extent that the law of any state requires a
different form of agreement to effect the intention of the parties, the parties
agree to negotiate in good faith and to execute separate agreements applicable
to such state.
12.14 Counterparts. This Agreement may be signed in one or more
counterparts, each of which when executed shall be deemed an original and
together shall constitute one and the same instrument
12.15 Conflict. The parties agree that in the event of any conflict or
inconsistencies between the terms and provisions of this Agreement and the terms
and provisions of the Stock Purchase Agreement, dated April 2, 1999, as amended
on May 19, 1999 and June ___, 1999, then in such event the terms and provisions
of such Stock Purchase Agreement shall control.
(Signatures appear on the following page)
18
<PAGE> 19
Hanger Orthopedic Group, Inc. NovaCare Employee Services, Inc.
for itself and as Agent for its
Subsidiaries
By: ________________________________ By:______________________________
Richard A. Stein Aven A. Kerr
Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Operating Officer
____________________________________ __________________________________
Date Date
<PAGE> 20
[LIST AND ATTACH ALL EXHIBITS AND SCHEDULES]
20
<PAGE> 21
Hanger Orthopedic Group, Inc. NovaCare Employee Services, Inc.
for itself and as Agent for its
Subsidiaries
By: By: /s/ Aven A. Kerr
--------------------------------- ---------------------------------
Richard A. Stein Aven A. Kerr
Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Operating Officer
July 1, 1999
- ------------------------------------ ------------------------------------
Date Date
<PAGE> 22
Hanger Orthopedic Group, Inc. NovaCare Employee Services, Inc.
for itself and as Agent for its
Subsidiaries
By: /s/ Richard A. Stein By:
--------------------------------- ---------------------------------
Richard A. Stein Aven A. Kerr
Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Operating Officer
- ------------------------------------ ------------------------------------
Date Date
<PAGE> 23
[LIST AND ATTACH ALL EXHIBITS AND SCHEDULES]
20
<PAGE> 24
Schedule 3.1.2
Schedule 3.1.3
NOVACARE EMPLOYEE SERVICES, INC.
SERVICE CONTRACT TERM SHEET
JULY 1, 1999 THROUGH DECEMBER 31, 1999
1. MONTHLY PAYROLL, BENEFIT AND HUMAN RESOURCE ADMINISTRATION FEE PER WORKSITE
EMPLOYEE - $55
1. Payroll Responsibilities. NovaCare Employee Services, Inc. (NCES) shall
be responsible for the following payroll functions with respect to Worksite
Employees:
(i) Payment of wages based on hours, wage and salary rates and other
information supplied by Hanger Orthopedic Group, Inc. ("Client").
(ii) Calculation of Paid Time Off (in accordance with Client's
policies);
(iv) Collection, reporting and payment of applicable federal, state and
local payroll taxes; and
(v) Implementation of all garnishment orders, coordination of proper
deductions of all monies owed under promissory notes from Worksite Employees,
processing of expense reports, and all other reporting required by state and
federal agencies, such as new hire reporting.
2. Benefits Administration Responsibilities. NCES shall be responsible for
the following benefit administration functions with respect to Worksite
Employees:
(i) Collection of employee contributions, payment of premiums and
administration under the benefit administration plans;
(ii) Reporting and payment of applicable state unemployment insurance;
(iii) Administration of unemployment compensation claims;
(iv) Payment of workers' compensation insurance premiums and
administration and management of workers' compensation claims, including
payment of claims not paid by an insurance carrier or other third party.
<PAGE> 25
Schedule 3.1.2
Schedule 3.1.3
(v) Coordination of all leave of absence programs, including but not
limited to family medical leave and disability leave; administration of all
state required benefit plans, such as short term disability plans; COBRA and
HIPPA administration; and processing all 5500 tax filings required for all
benefit plans; and
(vi) Providing the Client with a list of all the benefits and plans being
administered and/or provided by NCES to the Worksite Employees, and the delivery
within thirty (30) days of executing this agreement, by NCES to the Client, of
complete copies of all benefit contracts and plans covering the Worksite
Employees with proof that NCES is the contract holder thereof.
3. Human Resource Administrative Responsibilities. NCES shall be
responsible for the following administrative functions with respect to Worksite
Employees:
(i) Completion, reporting and maintenance of payroll and benefit plan
records, with the exception of records of hours worked, which shall be
collected, verified and maintained by Client, provided that Client shall make
available to Nova Care copies of such records of hours worked as NCES may
require for the purpose of maintaining the benefit plans:
(ii) Analysis, transfer and integration of payroll and benefits for (a)
Worksite Employees newly employed and the integration of all persons hired by
NovaCare O & P during the term of the Agreement between the Client and NCES,
and (b) Worksite Employees whose employment is terminated;
(iii) Operation of an employee service center providing Worksite Employees
with access for the purpose of making changes and resolving questions related
to benefit plans and paychecks;
(iv) Develop, maintain and implement a system designed to report (a)
service of payroll "On time" delivery and accuracy; and (b) responsiveness to
incoming 1-800 calls to service centers in each case in a report having a
format reasonably satisfactory to Client.
(v) Provision of reports within ten (10) days after the last day of each
calendar month showing its performance compared to the performance standards to
be established, in a form to be agreed upon;
(vi) Provision of reasonable standardized reports such as referenced in
Section 4.3(v) and illustrated in the samples attached as Schedule 4.3(iv);
<PAGE> 26
Schedule 3.1.2
Schedule 3.1.3
(vii) Record Maintenance - maintain accurate and complete personnel
files for active and terminated employees to the extent such information is
provided by Client, including all information required by state and federal
law and by the policies and procedures of Client, including, but not
limited to, information relating to performance appraisals, I-9 forms,
records of disciplinary action, staff certification and licensure; ensure
compliance with applicable records retention requirements; respond to
Client's requests for copies of such records in a reasonably prompt
timeframe and/or as reasonably requested by Client; and
(viii) Database Management - maintain accurate and complete employee
information and history on human resource information system, based on
information provided by Client.
II. MONTHLY BENEFIT/RISK MANAGEMENT CHARGE PER WSE - $92.50. Fee for
procurement and management of the benefit and risk management programs for
the Worksite Employees. Benefit management program will include health,
vision, dental, life insurance, workers' compensation and state
unemployment tax plans.
III. PASS THROUGH COSTS: Fees do not include or contemplate actual costs
incurred for remittance of premium payments or claims incurred in
association with the Insured (Life, LTD, Dental, HMO) or self-insured
(medical, dental) benefit plans. Payment for such premiums or claims shall
be the responsibility of the Client; NCES will bill the Client for such
costs in the second week of each month. Should this agreement terminate,
Client shall retain responsibility for payment of all claims properly
surfaced through a designated run-off period, in keeping with the
provisions of the applicable insurance contracts.
IV. WIND DOWN FEES: Should the parties terminate this agreement effective
12/31/99, Client agrees to reimburse NCES actual employer wind down costs
in an amount not to exceed $50,000, payable within 30 days of the
termination date of this agreement, unless such date is December 31, 2000
or later, in which case no wind down fees shall be applicable.
V. 401K PLAN SHUT DOWN FEES: In return for the administration of terminating
the 401K plan (which results from prior O & P acquisitions), Client agrees
to pay NCES $9,500 per month for a period of six months, commencing July 1,
1999 and ending December 31, 1999 for a total of $57,000.00. Payment shall
be rendered by Client effective the first of each month.
<PAGE> 27
Schedule 3.1.2
Schedule 3.1.3
VI. EXCLUDED SERVICES
1. Fees do not include recruiting or HR consulting services. Fees for
these services to be negotiated once scope of services is defined.
2. Fees do not include activities associated with requests for additional
hardware, networking or programming which fall outside the scope of
set-ups in place as of July 1, 1999. Fees for such services shall be
negotiated at the time of request on a time and materials project
basis.
3. Fees do not include costs of activities associated with the provision
of a Benefits Open Enrollment Process. Should the parties agree to
extend this agreement, for a minimum of an additional 6 months,
thereby necessitating NCES to engage in the procurement, plan design
and administration of a benefits open enrollment period, Client and
NCES shall negotiate and agree to fees for which Client shall be
responsible for such procurement, design and administration.
4. Fees do not include naming Client as an additional insured on any of
its commercial insurance policies or for the procurement of any
additional commercial insurance coverage. The term "commercial
insurance" does not include benefits or workers' compensation
insurance.
6. Fees do not include the cost of establishing an 800 number for
Worksite Employees calls, nor do they include any monthly service
charges associated therewith.
VII. TERM: To begin with Buyer's acquisition and last for a minimum of six
months.
VIII. GUARANTEED MINIMUM: Fees will be charged based upon a minimum number of
Worksite Employees not to be less than 2,000 during the agreement term.
XI. PAYMENT TERMS: Client will wire transfer to NCES, the day prior to
payroll distribution, all payroll, payroll related taxes, one-half of the
monthly benefit and payroll administrative fee prior to delivery of each
payroll.
X. TERMINATION PROVISIONS: In the event of termination of this agreement,
NCES will supply client with a copy of electronic files of current
legally pertinent employee data. Hard copies of existing employee files
may also be provided to Client, as long as Client and NCES can agree in
writing to the amount Client shall reimburse NCES for such provision
including but not limited to costs of copying, packaging, associated
labor, postage and delivery.
<PAGE> 1
EXHIBIT 21
NOVACARE EMPLOYEE SERVICES, INC.
SUBSIDIARIES OF THE COMPANY
Do-All Services, Inc.
Employee Benefits Management, Inc.
Employers' Risk Management, Inc.
NCES ES, Inc.
NCES Finance, Inc.
NCES Holdings, Inc.
NCES Licensing, Inc.
NCES of New Mexico, Inc.
NovaCare Administrative Employee Services of New York, Inc.
NovaCare Administrative Employee Services, Inc.
NovaCare Employee Services Club Staff, Inc.
NovaCare Employee Services Easy Staff, Inc.
NovaCare Employee Services Northeast, Inc.
NovaCare Employee Services Resource One, Inc.
NovaCare Employee Services TPI, Inc.
NovaCare Employee Services West, Inc.
NovaCare Employee Services of America, Inc.
NovaCare Employee Services of Boston, Inc.
NovaCare Employee Services of New York, Inc.
NovaCare Employee Services of Orlando, Inc.
Paralign Staffing Technologies, Inc.
Pay America, Inc.
Professional Employer Systems, Inc.
Professional Insurance Planners of Florida, Inc.
Staff Leasing, Inc.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-47001) of NovaCare Employee Services, Inc. of
our report dated July 30, 1999, except for paragraphs two and three of Note 2,
as to which the date is September 8, 1999, appearing on page 55 of this Form
10-K.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1999.
</LEGEND>
<CIK> 0001045536
<NAME> NOVACARE EMPLOYEE SERVICES, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,394
<SECURITIES> 0
<RECEIVABLES> 44,543
<ALLOWANCES> (1,051)
<INVENTORY> 0
<CURRENT-ASSETS> 54,132
<PP&E> 8,577
<DEPRECIATION> (2,354)
<TOTAL-ASSETS> 144,614
<CURRENT-LIABILITIES> 60,304
<BONDS> 0
0
0
<COMMON> 291
<OTHER-SE> 79,504
<TOTAL-LIABILITY-AND-EQUITY> 144,614
<SALES> 0
<TOTAL-REVENUES> 1,544,622
<CGS> 0
<TOTAL-COSTS> 1,523,277<F1>
<OTHER-EXPENSES> 3,472<F2>
<LOSS-PROVISION> 733
<INTEREST-EXPENSE> 481
<INCOME-PRETAX> 16,659
<INCOME-TAX> 7,663
<INCOME-CONTINUING> 8,996
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,996
<EPS-BASIC> .31
<EPS-DILUTED> .30
<FN>
<F1>"TOTAL COSTS" CONSISTS OF COST OF SERVICES, SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, AND PROVISION FOR RESTRUCTURE.
<F2>"OTHER EXPENSES" CONSISTS OF AMORTIZATION OF EXCESS COST OF NET ASSETS ACQUIRED
OFFSET BY INTEREST INCOME.
</FN>
</TABLE>
