<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
NOVACARE, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
NovaCare, Inc.
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:(1)
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
--------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
--------------------------------------------------------------------------------
(3) Filing party:
--------------------------------------------------------------------------------
(4) Date filed:
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---------------
(1) Set forth the amount on which the filing fee is calculated and state
how it was determined.
<PAGE> 2
[NOVACARE LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held October 26, 1995
King of Prussia, Pennsylvania
September 19, 1995
To the Holders of Common Stock of
NovaCare, Inc.:
The Annual Meeting of the Stockholders of NovaCare, Inc. (the "Company")
will be held at The Park Ridge at Valley Forge Hotel, 480 North Gulph Road, King
of Prussia, Pennsylvania, on Thursday, October 26, 1995 at 10:00 A.M., local
time, to consider and act upon the following matters:
1. Election of directors for the ensuing year.
2. Approval of grant of options to Timothy E. Foster, President and
Chief Operating Officer.
3. Ratification of selection of independent accountants.
4. Such other business as may properly come before the meeting or any
adjournments thereof.
Only stockholders of record at the close of business on September 5, 1995
are entitled to notice of and to vote at the meeting.
By order of the Board of Directors,
Peter D. Bewley
Secretary
Stockholders are cordially invited to attend the meeting in person. Whether
or not you plan to attend, please mark, sign and date the enclosed proxy and
mail it promptly in the enclosed return envelope so that your vote can be
recorded. The envelope does not require any postage if mailed in the United
States.
<PAGE> 3
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors of NovaCare, Inc. (the
"Company") for use at the 1995 Annual Meeting of Stockholders (the "Meeting") to
be held on October 26, 1995, and at any adjournments thereof. If properly signed
and returned to the Company and not revoked, the proxy will be voted in
accordance with the instructions it contains. The persons named in the
accompanying proxy will vote the proxy for the Board of Directors' slate of
directors and as recommended by the Board of Directors unless contrary
instructions are given. This Proxy Statement and the enclosed proxy are first
being sent to stockholders on or about September 19, 1995. The Company's
principal executive offices are located at 1016 West Ninth Avenue, King of
Prussia, Pennsylvania 19406.
Any proxy may be revoked at any time before it is exercised. The casting of
a ballot at the Meeting by a stockholder who may theretofore have given a proxy
will not have the effect of revoking that proxy.
Only stockholders of record at the close of business on September 5, 1995
are entitled to vote at the Meeting or any adjournments thereof. As of September
5, 1995, the Company had 65,414,993 outstanding shares of common stock, $.01 par
value (the "Common Stock"), each holder of which is entitled to one vote per
share with respect to each matter to be voted on at the Meeting. The Company has
no class or series of stock outstanding other than the Common Stock.
Directors are elected by plurality vote. Approval of the grant of options
to Timothy E. Foster and ratification of the selection of independent
accountants for the Company will require the affirmative vote of a majority of
the Common Stock voting on the proposal, provided that with respect to the
approval of the grant of options to Timothy E. Foster, the total votes cast
represent more than 50% of the total outstanding shares of Common Stock as of
September 5, 1995. With respect to such proposals abstentions will be included,
but broker non-votes will not be included, in the calculation of the number of
holders who are present and voting at the Meeting.
<PAGE> 4
I. ELECTION OF DIRECTORS
Nine directors will be elected at the Meeting. It is the intention of each
of the persons named in the accompanying proxy to vote the shares represented
thereby in favor of the nine nominees listed in the following table, unless
contrary instructions are given. All of such nominees are presently serving as
directors. In case any of the nominees is unable or declines to serve, such
persons reserve the right to vote the shares represented by such proxy for
another person duly nominated by the Board of Directors in his or her stead or,
if no other person is so nominated, to vote such shares only for the remaining
nominees. The Board of Directors has no reason to believe that any person named
will be unable or will decline to serve. The directors elected by the
stockholders will serve until the 1996 Annual Meeting of Stockholders and until
their respective successors are duly elected and shall have qualified. Certain
information concerning the nominees for election as directors is set forth
below. Such information was furnished by them to the Company.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION SEPTEMBER 1, 1995(1) OF CLASS
----------------------------------------------------------------- -------------------- --------
<S> <C> <C>
JOHN H. FOSTER, age 53, has been Chairman of the Board and Chief
Executive Officer of the Company since December 1984. Mr. Foster
is a director of Corning Incorporated, an international
corporation with business interests in specialty materials,
communications, laboratory services and consumer products. Mr.
Foster also since March 1991 has been Chairman of the Board and
Chief Executive Officer of Apogee, Inc., a national mental health
services company incorporated in 1991. Mr. Foster is a director
of The Pet Practice, Inc., a national veterinary services
company. Mr. Foster is founder and Chairman of Foster Management
Company, an investment advisor, and general partner of various
venture capital investment funds. 4,943,955(2) 7.3%
TIMOTHY E. FOSTER, age 43, has been President and Chief Operating
Officer of the Company since October 1994 and a director of the
Company since December 1984. He served as Senior Vice
President, Finance and Administration and Chief Financial Officer
of the Company from November 1988 to October 1994, Treasurer of
the Company from March 1992 to October 1994 and Secretary of the
Company from September 1987 to May 1994. From September 1986 to
November 1988, he was Senior Vice President, Operations of the
Company. From 1983 to 1986, Mr. Foster specialized in the
management of health care service businesses as Vice President of
Foster Management Company and as a general partner of investment
funds managed by it. From 1981 to 1983, Mr. Foster was Vice
President and Treasurer of General Electric Venture Capital
Corporation. Mr. Foster currently serves as a director of Apogee,
Inc., a position he has had since February 1993. 334,050(3) *
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION SEPTEMBER 1, 1995(1) OF CLASS
----------------------------------------------------------------- -------------------- --------
<S> <C> <C>
C. ARNOLD RENSCHLER, M.D., age 53, has been Senior Vice President
and Chief Clinical Officer of the Company since May 1994 and a
director of the Company since January 1990. From January 1994
until April 1995, he served as President and General Manager of
the Company's Medical Rehabilitation Hospital Division. From July
1992 until January 1994, he served as President and General
Manager of the Company's Contract Services Division. Dr.
Renschler was President and Chief Operating Officer of the
Company from January 1990 until September 1992. Dr. Renschler
served as President and Chief Operating Officer of Manor Care,
Inc. from 1985 through 1989, and President and Chief Executive
Officer of Manor HealthCare, Inc. from 1982 to 1989. He joined
Manor Care, Inc. as Vice President of Corporate Development in
1981 and served as a member of the board of directors of Manor
Care, Inc. from 1975 through January 1990. Dr. Renschler was
Assistant Professor of Pediatrics at Johns Hopkins University
from 1979 to 1981. Prior to that time, Dr. Renschler was engaged
in the private practice of medicine. 351,940(4) *
E. MARTIN GIBSON, age 57, has been a director of the Company
since March 1992. Mr. Gibson, who is retired, served as
Chairman and Chief Executive Officer of Corning Lab Services,
Inc., a subsidiary of Corning Incorporated, from 1991 until
December 1994. For more than five years prior to that time, he
was a Group President of Corning Incorporated. He currently
serves as Chairman of the Board of International Technology
Corp., an environmental management company, and a director of
Hardinge Brothers, Inc., a manufacturer of machine tools, and as
Chairman of the Board of Trustees of Elmira College. 8,000(5) *
SIRI S. MARSHALL, age 47, has been a director of the Company
since May 1994. Ms. Marshall has been Senior Vice President,
General Counsel and Secretary of General Mills, Inc., a food
manufacturing company, since October 1994. Ms. Marshall was
Senior Vice President, General Counsel and Secretary of Avon
Products, Inc., a manufacturer and marketer of beauty products,
fashion jewelry and fragrances, from December 1992 to October
1994. She was Vice President-Legal Affairs and Secretary of Avon
Products, Inc. from November 1990 to December 1992 and Vice
President-Legal and Government Affairs of Avon Products, Inc.
from April 1989 to October 1990. 2,300(6) *
STEPHEN E. O'NEIL, age 62, has been a director of the Company
since December 1984. Mr. O'Neil has practiced law since July
1988 and has been a private investor since 1981. For more than
five years prior to September 1981, he held various positions
with City Investing Company, a diversified holding company,
including Vice Chairman from January 1980 to July 1981. He is a
director of Brown-Forman Corporation, Castle Convertible Fund,
Inc., Spectra Fund, Inc., Alger Fund, Inc. and Alger American
Funds. 17,300(7) *
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION SEPTEMBER 1, 1995(1) OF CLASS
----------------------------------------------------------------- -------------------- --------
<S> <C> <C>
GEORGE W. SIGULER, age 48, has been a director of the Company
since September 1986. Mr. Siguler has been a managing director
of Mitchell Hutchins Institutional Investors Inc. since September
1991. From 1990 until September 1991, Mr. Siguler was President
of Associated Capital Investors, Inc., an investment management
company. Mr. Siguler is a director of Business Mortgage
Investors, Inc. and Venture Lending and Leasing, Inc. 10,600(8) *
ROBERT G. STONE, JR., age 72, has been a director of the Company
since November 1993. Since 1983, Mr. Stone has been Chairman of
the Board of Kirby Corporation, a company which is engaged,
through its subsidiaries, in inland and offshore marine
transportation and diesel repairs. Mr. Stone is a director of The
Chubb Corporation, First Boston Investment Funds, Inc., BHP
Petroleum Company, The Japan Fund, Inc., Core Industries, Inc.,
Tandem Computers Incorporated, Tejas Gas Corporation, The
Pittston Company, Russell Reynolds Associates, Inc., Corning
Incorporated and various funds managed by Scudder, Stevens &
Clark, Inc. He is also Chairman of the Board of Trustees of
Mystic Seaport Museum, a trustee of International House and the
National Rowing Foundation and a Fellow of Harvard College. 101,439(9) *
DANIEL C. TOSTESON, M.D., age 70, has been a director of the
Company since April 1991. Since 1977, Dr. Tosteson has been Dean
of the Faculty of Medicine and Caroline Shields Walker
Professor of Physiology for Harvard University and President of
Harvard Medical Center. Dr. Tosteson has been President of
Massachusetts Biomedical Research Corporation since 1989 and was
a member of the Board of Trustees of Duke University from 1987
until 1995. Dr. Tosteson was a director of Shawmut National
Corporation from 1987 until 1989. From 1985 until 1990, Dr.
Tosteson was a member of the Health Sciences Advisory Board for
E.I. duPont de Nemours and Company. 11,400(10) *
</TABLE>
---------------
* Less than one percent.
(1) As of September 1, 1995, each director had sole voting and investment power
with respect to all shares shown in the table as beneficially owned by him
or her except as indicated below.
(2) Includes 1,690,000 shares presently issuable upon exercise of options. Also
includes 59,200 shares held by a limited partnership of which Mr. Foster is
a general partner and warrants to purchase an aggregate of 800,000 shares
held by certain limited partnerships of which Mr. Foster is a general
partner or a general partner of a general partner.
(3) Includes 321,600 shares presently issuable upon exercise of options.
(4) Includes 332,000 shares presently issuable upon exercise of options.
(5) Includes 5,400 shares presently issuable upon exercise of options.
(6) Includes 300 shares presently issuable upon exercise of options.
(7) Includes 6,600 shares presently issuable upon exercise of options and 2,400
shares owned by a private company of which Mr. O'Neil is president and
shareholder.
(8) Consists of 10,600 shares presently issuable upon exercise of options.
4
<PAGE> 7
(9) Includes 1,600 shares presently issuable upon exercise of options. Does not
include 54,382 shares held by Mr. Stone's spouse and 158,501 shares held by
trusts of which Mr. Stone is a trustee, as to all of which shares Mr. Stone
disclaims beneficial ownership.
(10) Consists of 11,400 shares presently issuable upon exercise of options.
No family relationship exists among any of the directors or executive
officers of the Company.
During the fiscal year ended June 30, 1995, the Board met six times and
convened twice by means of unanimous written consent. Each of the nominees
listed above presently serving as a director of the Company attended at least
75% of the meetings of the Board and meetings of any committees of the Board on
which such person served which were held during the time that such person
served.
The Board has a Compensation Committee, an Audit Committee and a Nominating
Committee. The members of the Compensation Committee are Robert G. Stone, Jr.,
who serves as Chairman, E. Martin Gibson, Siri S. Marshall and Stephen E.
O'Neil. The Compensation Committee makes recommendations to the full Board as to
the compensation of senior management and administers the Company's 1986 Stock
Option Plan and determines the persons who are to receive options and the number
of shares subject to each option. The Compensation Committee met three times and
convened 10 times by means of unanimous written consent during the fiscal year
ended June 30, 1995.
The members of the Audit Committee are Stephen E. O'Neil, who serves as
Chairman, E. Martin Gibson, Siri S. Marshall and George W. Siguler. The Audit
Committee acts as a liaison between the Board and the independent accountants
and annually recommends to the Board the appointment of the independent
accountants. The Audit Committee reviews with the independent accountants the
planning and scope of the audits of the financial statements, the results of
those audits and the adequacy of internal accounting controls and monitors other
corporate and financial policies. The Audit Committee met two times during the
fiscal year ended June 30, 1995.
The members of the Nominating Committee are Robert G. Stone, Jr., who
serves as Chairman, John H. Foster, George W. Siguler and E. Martin Gibson. The
Nominating Committee is authorized to review, approve and recommend persons for
election as directors. The Nominating Committee did not meet or convene by means
of unanimous written consent during the fiscal year ended June 30, 1995. It will
consider nominations by stockholders, which should be submitted in writing to
the Chairman of the Committee addressed in care of the Secretary, NovaCare,
Inc., 1016 West Ninth Avenue, King of Prussia, Pennsylvania 19406.
COMPENSATION OF DIRECTORS OF NOVACARE
The Company provides each director with an annual retainer of $10,000 and
an annual grant of options to purchase 10,000 shares of Common Stock. The
Company pays each director a fee of $1,000 per meeting attended, plus
out-of-pocket expenses. In addition, committee members receive a fee of $1,000,
plus out-of-pocket expenses, for each non-telephonic committee meeting attended
which is not scheduled in conjunction with a meeting of the full Board, and a
fee of $500, plus out-of-pocket expenses, for each non-telephonic committee
meeting attended in conjunction with a meeting of the full Board.
COMPENSATION OF EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information for the fiscal years ended June
30, 1995, 1994 and 1993 concerning the compensation paid or awarded to the Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company.
5
<PAGE> 8
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
----------------------------------- COMPENSATION
OTHER AWARDS
ANNUAL ------------
NAME AND COMPENSATION OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#) COMPENSATION($)(2)
-------------------------- ---- --------- -------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
John H. Foster............ 1995 $ 553,022 $ 0 -- 0 $204,247
Chairman of the Board 1994 521,916 274,770 -- 2,100,000 30,364
and Chief Executive 1993 384,816 0 $ 55,804 100,000 12,214
Officer
C. Arnold Renschler, 1995 320,958 216,703 -- 145,000 38,699
M.D. ...................
Senior Vice President and 1994 310,792 143,405 -- 25,000 26,728
Chief Clinical 1993 284,403 168,523 -- 50,000 32,357
Officer(3)
Timothy E. Foster......... 1995 393,480 0 -- 25,000 27,441
President and Chief 1994 323,013 110,000 -- 525,000 19,690
Operating Officer(4) 1993 219,246 0 -- 25,000 22,055
James C. New.............. 1995 236,888 71,400 -- 65,638 15,905
President and General 1994 188,048 169,300 -- 52,000 102,777
Manager -- Outpatient 1993 155,919 50,220 -- -- 51,101
Rehabilitation
Division(5)
Daryl A. Dixon............ 1995 291,077 94,500 -- 104,171 22,766
President and General 1994 234,442 28,400 -- 12,000 42,601
Manager -- Contract 1993 198,717 59,339 -- 55,000 34,277
Services Division(6)
</TABLE>
---------------
(1) For John H. Foster, the amount for fiscal 1993 includes payment of $21,000
as an automobile allowance and an amount of $25,632 for personal use of the
Company's aircraft. Amounts for all other named executive officers did not
exceed $50,000 or 10% of compensation.
(2) Other than the forgiveness of $140,000 of a loan to John H. Foster during
fiscal year 1995 and an amount of $19,244 payable in connection therewith
pursuant to the terms of his employment agreement and bonus payments to
James C. New of $100,000 in fiscal 1994 and $50,000 in fiscal 1993 in
connection with the merger of RehabClinics, Inc. ("RCI") with a wholly owned
subsidiary of the Company, these amounts represent contributions to the
Company's 401(k) plan and its supplemental deferred compensation plan.
(3) Dr. Renschler has been Senior Vice President and Chief Clinical Officer
since May 1994. He served as President and General Manager -- Medical
Rehabilitation Hospital Services Division from January 1994 to April 1995,
President and General Manager -- Contract Services Division from July 1992
to January 1994 and President and Chief Operating Officer of the Company
from January 1990 until September 1992. Dr. Renschler's 1995 bonus figure
includes a special bonus of $110,000 received in connection with the sale of
the Company's rehabilitation hospitals in April 1995.
(4) Timothy E. Foster became President and Chief Operating Officer of the
Company in October 1994. Prior to such time he served as Senior Vice
President -- Finance and Administration, Chief Financial Officer and
Treasurer of the Company for the periods described above and, until May
1994, as Secretary of the Company.
(5) James C. New became an executive officer of the Company in February 1994 in
connection with the merger of RCI with a wholly owned subsidiary of the
Company which was accounted for as a pooling of interests. The compensation
for Mr. New gives effect to the merger in that his 1993 compensation amounts
are as of December 31, 1992. Mr. New's annual salary of $82,039 for the
six-month period ended June 30, 1993 has not been included in the
compensation table. This presentation conforms to that of the combined
results of operations of the Company.
(6) Daryl A. Dixon became President and General Manager -- Contract Services
Division in January 1994. He served as Vice President -- Operations of the
Contract Services Division from December 1993 and prior to such time served
as a Regional Vice President in the Contract Services Division.
6
<PAGE> 9
The following table sets forth the grants of stock options to the executive
officers named in the Summary Compensation Table during the fiscal year ended
June 30, 1995. The amounts shown for each of the named executive officers as
potential realizable values are based on arbitrarily assumed annualized rates of
stock price appreciation of five percent and ten percent over the exercise price
of the options during the full terms of the options. No gain to the optionees is
possible without an increase in stock price which will benefit all stockholders
proportionately. These potential realizable values are based solely on
arbitrarily assumed rates of appreciation required by applicable Securities and
Exchange Commission regulations. Actual gains, if any, on option exercises and
holdings of Common Stock are dependent on the future performance of the Common
Stock and overall stock market conditions. There can be no assurance that the
potential realizable values shown in this table will be achieved.
OPTION GRANTS IN FISCAL YEAR 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
----------------------------------- --------- ------------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John H. Foster..................... 0 -- -- -- -- --
C. Arnold Renschler, M.D........... 110,000 11% $ 7.38 5/25/05 $510,195 $1,292,889
35,000 13.00 8/05/04 286,150 725,134
Timothy E. Foster.................. 25,000 2% 7.25 12/02/04 113,988 288,858
James C. New....................... 25,000 5% 13.00 8/05/04 204,393 517,953
40,638 8.88 2/02/05 226,820 574,787
Daryl A. Dixon..................... 75,000 8% 13.00 8/05/04 613,178 1,553,858
29,171 8.88 2/02/05 162,818 412,597
</TABLE>
The following table sets forth the number and value of options exercised by
the executive officers of the Company named in the Summary Compensation Table
during the fiscal year ended June 30, 1995 and the number and value as of June
30, 1995 of options held by such executive officers at June 30, 1995.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
OPTIONS AT JUNE 30,
JUNE 30, 1995(#) 1995($)(1)
------------------- -----------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME UPON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
------------------------------------ --------------- -------- ------------------- -----------------
<S> <C> <C> <C> <C>
John H. Foster...................... 0 $0 1,650,000/2,000,000 $162,500/$ 0
C. Arnold Renschler, M.D............ 0 0 305,000/ 220,000 292,500/ 96,250
Timothy E. Foster................... 0 0 306,800/ 509,800 42,670/ 21,875
James C. New........................ 0 0 0/ 40,638 0/ 0
Daryl A. Dixon...................... 0 0 39,400/ 86,771 0/ 0
</TABLE>
---------------
(1) In-the-money options are those for which the fair market value of the
underlying Common Stock exceeds the exercise price of the option. The value
of in-the-money options is determined in accordance with regulations of the
Securities and Exchange Commission by subtracting the aggregate exercise
price of the option from the aggregate year-end value of the underlying
Common Stock.
7
<PAGE> 10
OPTION EXCHANGE
In February 1995, the Board approved an option exchange whereby holders of
options to purchase Common Stock under the Company's 1986 Stock Option Plan (the
"Plan") were allowed to acquire additional options to purchase shares of Common
Stock in exchange for the surrender by such individuals of certain presently
existing options under the Plan held by the participants, pursuant to a formula
of exchange which took into account the vesting schedule and exercise price of
the surrendered options. Under the exchange program, 605,929 options were
surrendered and 332,834 new options were granted. The options granted as a
result of the exchange will be exercisable in cumulative annual installments of
20% commencing one year from date of grant and in no event may be exercisable
later than 10 years from the date of grant. The exchange program was calculated
to have no dilutive effect on the Company's outstanding shares of Common Stock.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
NUMBER OF NUMBER OF OPTION
SECURITIES MARKET PRICE EXERCISE SECURITIES TERM
UNDERLYING OF STOCK PRICE NEW UNDERLYING REMAINING
1988 AND 1995 OPTIONS AT TIME OF AT TIME OF EXERCISE OPTIONS AFTER AT DATE
NAME DATE REPRICED REPRICING($)(1) REPRICING($) PRICE($)(1) REPRICING OF REPRICING
----------------------------- -------- ---------- ------------ --------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Timothy E. Foster............ 11/3/88 11,764 $ 2.25 4.25 $2.25 11,764 8 yrs 2 mos
President & COO 11/3/88 8,000 2.25 5.25 2.25 8,000 8 yrs 2 mos
11/3/88 8,000 2.25 9.50 2.25 8,000 8 yrs 2 mos
11/3/88 4,000 2.25 10.63 2.25 4,000 8 yrs 8 mos
11/3/88 19,000 2.25 3.88 2.25 19,000 9 yrs
11/3/88 10,000 2.25 3.25 2.25 10,000 9 yrs 6 mos
11/3/88 6,000 2.25 3.88 2.25 6,000 9 yrs 11 mos
James C. New................. 2/2/95 52,000 8.88 14.25 8.88 26,109 9 yrs
President & GM 2/2/95 25,000 8.88 13.00 8.88 14,529 9 yrs 6 mos
Outpatient Rehab Div.
Daryl A. Dixon............... 2/2/95 15,000 8.88 23.50 8.88 4,171 7 yrs 10 mos
President & GM 2/2/95 75,000 8.88 13.00 8.88 25,000 9 yrs 6 mos
Contract Services Div.
Ronald G. Hiscock............ 2/2/95 5,000 8.88 13.00 8.88 2,906 9 yrs 6 mos
President & GM
Orthotics & Prosthetics
Div.
Laurence F. Lane............. 2/2/95 18,000 8.88 16.50 8.88 8,351 7 yrs 5 mos
Sr. VP -- Regulatory Affairs 2/2/95 25,000 8.88 13.00 8.88 14,529 9 yrs 6 mos
11/3/88 20,000 2.25 4.25 2.25 20,000 8 yrs 2 mos
11/3/88 2,080 2.25 10.63 2.25 2,080 8 yrs 8 mos
11/3/88 18,000 2.25 3.88 2.25 18,000 9 yrs
11/3/88 3,000 2.25 4.13 2.25 3,000 9 yrs 3 mos
11/3/88 5,000 2.25 3.25 2.25 5,000 9 yrs 6 mos
11/3/88 4,000 2.25 3.88 2.25 4,000 9 yrs 11 mos
Arthur T. Locilento, Jr. .... 2/2/95 22,000 8.88 16.50 8.88 10,206 7 yrs 5 mos
Sr. VP -- Human Resources 2/2/95 15,000 8.88 13.00 8.88 8,717 9 yrs 6 mos
11/3/88 20,000 2.25 3.88 2.25 20,000 9 yrs 4 mos
11/3/88 4,000 2.25 3.88 2.25 4,000 9 yrs 11 mos
Susan J. Campbell............ 2/2/95 2,250 8.88 16.50 8.88 1,044 7 yrs 5 mos
VP -- Communications 2/2/95 2,000 8.88 11.63 8.88 1,413 8 yrs 6 mos
& Investor Relations 2/2/95 1,500 8.88 13.00 8.88 872 9 yrs 6 mos
James T. Walmsley............ 2/2/95 250 8.88 16.50 8.88 116 7 yrs 5 mos
VP -- Reimbursement 2/2/95 7,500 8.88 16.50 8.88 3,480 7 yrs 5 mos
2/2/95 10,000 8.88 13.00 8.88 5,812 9 yrs 6 mos
Robert E. Healy, Jr. ........ 11/3/88 20,000 2.25 3.75 2.25 20,000 9 yrs 3 mos
VP and Controller (as of 11/3/88 800 2.25 3.88 2.25 800 9 yrs 11 mos
11/3/88)
Dennis G. Sherman............ 11/3/88 60,000 2.25 10.00 2.25 60,000 8 yrs 9 mos
VP -- Operations (as of 11/3/88 18,500 2.25 3.88 2.25 18,500 9 yrs
11/3/88)
11/3/88 5,000 2.25 3.25 2.25 5,000 9 yrs 6 mos
11/3/88 4,000 2.25 3.88 2.25 4,000 9 yrs 11 mos
Jeffrey W. Rose.............. 11/3/88 12,000 2.25 4.25 2.25 12,000 8 yrs 2 mos
President & COO (as of
11/3/88)
</TABLE>
---------------
(1) Reflecting a 2-for-1 stock split in July 1991.
8
<PAGE> 11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert G. Stone, Jr., as Chairman, Stephen E. O'Neil and E. Martin Gibson
served on the Compensation Committee of the Board of Directors for the entire
1995 fiscal year, and Siri S. Marshall joined the Compensation Committee in May
1995. In October 1994, John H. Foster, Chairman and Chief Executive Officer of
the Company, became a director of Corning Incorporated, at which time Mr. Gibson
served as a director of Corning Incorporated and Chairman and Chief Executive
Officer of Corning Lab Services, Inc., a subsidiary of Corning Incorporated. Mr.
Gibson retired from his positions at Corning Incorporated and Corning Lab
Services, Inc. in December 1994.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors (the "Committee")
presently is composed of four independent non-employee directors. The Committee
is responsible for setting and monitoring the effectiveness of the compensation
provided to the Company's officers, directors and senior management employees.
In its decision-making, the Committee is guided by a compensation
philosophy designed to reward employees for the achievement of organizational
goals and for the maximization of stockholder return. Specific levels of pay and
incentive opportunity are determined by the competitive market for executive
talent and, where appropriate, the need to invest in the future growth of the
business.
To determine the appropriate levels of compensation for different executive
and management positions, the Committee uses survey data provided by independent
external consulting firms. The most recent survey data was provided by The Hay
Group, a leading national consulting firm. The Hay Group maintains a database of
compensation information from hundreds of companies in a wide variety of
industries. This information is updated on an ongoing basis. For the Company,
competitive market data was extracted from this database which included
companies of similar size and complexity which are drawn from health care and
related industries. The survey group is consistent with the peer group used in
the performance graph found in this Proxy Statement. The data provided by this
survey (the "Hay Survey") was used during the year to evaluate the Company's
executive and management compensation status across all operating divisions and
provided the basis for fiscal year 1995 compensation planning.
The compensation program, which provides incentives for executives to
achieve the short-term and long-term goals of the Company, comprises three
components: base salary, cash incentives and stock option awards.
During fiscal year 1995, the executive salary ranges which were implemented
during fiscal year 1994 for all management and executive positions (excluding
the Chairman and Chief Executive Officer and the President and Chief Operating
Officer) were used to administer all three components of the compensation
program. The structure provided by these ranges allowed the Company to
consistently and fairly manage the reward system, to encourage inter-divisional
transfers, to manage compensation expenses and to control participation in
supplemental benefits programs.
Base Salary
Consistent with all salary programs of the Company, executive base salaries
are targeted at the 50th percentile of the competitive market. Annual salary
adjustments, including that of the Chairman and Chief Executive Officer, are
based on individual performance and are controlled by the same percentage
increase guidelines used for all employees.
Incentive Compensation
Based on organizational level and performance, incentive opportunities are
available to a wide range of Company employees. These programs are effective in
reinforcing both the overall values of the Company and the specific operating
goals of the various business units.
9
<PAGE> 12
Executive incentive plans are designed to focus executive attention on the
key performance goals of the Company, to identify the expected levels of
performance and to reward individuals who meet or exceed such expectations. The
amounts of incentive awards are determined by the overall financial performance
of the Company and the achievement of individual weighted performance goals.
For the Chairman and Chief Executive Officer and the President and Chief
Operating Officer, the key measure of performance in fiscal year 1995 was
earnings per share (exclusive of non-recurring items). The targeted amount of
incentive compensation opportunity for the Chairman and Chief Executive Officer
and the President and Chief Operating Officer was based on a fixed percentage of
the Company's net income. Actual awards, which cannot exceed this fixed
percentage, were determined by a formula which compares actual earnings per
share performance to budgeted earnings per share. If actual earnings per share
was less than 90% of budgeted earnings per share, no awards were available to
the Chairman and Chief Executive Officer or the President and Chief Operating
Officer.
For other executives and management employees, including the other
executives named in this Proxy Statement, incentive awards were also
performance-driven. To earn certain incentive awards based on financial
performance, the Company's performance must at a minimum reach 90% of the
financial performance targets established by the Board of Directors, at which
level of performance 45% of the targeted incentive opportunity would be earned.
Earned awards increased proportionally and reached 100% at achievement of 100%
of the financial performance goal. Financial performance awards over 100%
increased on a formula basis up to 150% of the targeted incentive opportunity at
110% of such performance goal; awards were capped at 150% of the targeted
amount. Other incentive awards are based on the achievement of individual
weighted performance goals.
Stock Option Awards
The Company's 1986 Stock Option Plan (the "Plan") was approved by the Board
of Directors and the stockholders of the Company to provide incentives for key
employees of the Company and its subsidiaries by encouraging their ownership of
Common Stock and to aid the Company in retaining such key employees, upon whose
efforts the Company's success and future growth depends, and attracting other
such employees.
Options typically are granted annually. Individual grant sizes are
determined based on a variety of factors, which include practices for similar
positions in the market and organizational and individual performance. At the
discretion of the Committee, and based on the recommendation of management,
options may also be used as an incentive for candidates recruited to fill key
positions, or as special retention incentives for employees with significant
future potential.
All options under the Plan are granted at 100% of the fair market value on
date of grant. The term of the option is 10 years from the date of grant and
vested options can be exercised at any time during such period. Options
generally vest and become exercisable in cumulative annual installments of 20%
over five years commencing one year after the date of grant. If an employee
leaves the Company before options are vested, the unexercised options are
forfeited and may be reissued under the Plan.
Stock Option Exchange Opportunity
During fiscal year 1995, the Compensation Committee approved a one-time
exchange of certain existing options to purchase Common Stock for new options
with an exercise price of $8.88 per share, the market price of the Common Stock
on the date of grant, which would become exercisable in cumulative annual
installments of 20% commencing one year after the date of grant. The Chairman
and Chief Executive Officer and the President and Chief Operating Officer were
excluded from the exchange program and did not participate. The exchange, which
eligible option holders could accept or decline, was based on a formula that
considered both the original exercise prices and the vesting status of the
options to be exchanged. Of the 573 holders of options eligible to participate,
172 of such holders exchanged existing options for new options. Because of the
formula nature of the exchange, 605,929 existing options were surrendered and
332,834 new options were granted at an aggregate exchange rate of 0.547 new
options for each old option. The exchange program was calculated to have no
dilutive effect to the Company's outstanding shares of Common Stock.
10
<PAGE> 13
This opportunity was approved to allow option holders to exchange
out-of-the-money options for a lesser number of options with an exercise price
at current market value, to encourage retention of managers by restarting the
five-year option vesting period, and to replenish the option pool with the
returned shares. All new options were granted with an exercise price set at fair
market value in accordance with the provisions of the Plan.
The Compensation Committee believes that the option exchange opportunity,
which allowed option holders to acquire a lesser number of options with a lower
exercise price in exchange for the forfeiture of vested exercise rights, was in
the best interests of both the option holders and the Company's stockholders.
Compensation of Chief Executive Officer
For fiscal year 1995, John H. Foster, Chairman of the Board and Chief
Executive Officer of the Company, received $738,025 in aggregate cash
compensation comprising $553,022 in base salary and $185,003 in relocation
reimbursement and other benefits due under Mr. Foster's employment agreement.
Mr. Foster's incentive compensation was targeted at a bonus of one percent of
net income if the Company's earnings per share performance for the 1995 fiscal
year met 100% of budgeted earnings per share, subject to adjustments for
extraordinary items. No incentive award was paid based on fiscal year 1995
performance. Mr. Foster did not receive a salary increase in fiscal year 1995.
The decisions of the Committee depend significantly on quantitative market
data and recommendations of impartial third party consultants. The Committee
believes its decisions are consistent with the Company's business objectives and
performance expectations and have been made in the best interests of the Company
and its stockholders.
THE COMPENSATION COMMITTEE
Robert G. Stone, Jr., Chairman
E. Martin Gibson
Siri S. Marshall
Stephen E. O'Neil
Notwithstanding anything set forth in any of the Company's previous filings
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which might incorporate future filings,
including this Proxy Statement, in whole or in part, the preceding report and
the performance graph that follows shall not be incorporated by reference into
any such filings.
11
<PAGE> 14
PERFORMANCE GRAPH
The following performance graph compares the cumulative total stockholder
return of the Company's Common Stock to the S&P 500 Composite Stock Index and
the S&P Healthcare Index for the period from June 30, 1990 through June 30,
1995. The graph assumes that $100 was invested in each of the Company's Common
Stock, the S&P 500 and the companies listed on the S&P Healthcare Index on June
30, 1990 and that any dividends were reinvested.
COMPARISON OF FIVE YEARS CUMULATIVE TOTAL RETURN
FOR THE YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NOVACARE, S&P 500 S&P HEALTH-
(FISCAL YEAR COVERED) INC. COMPOSITE CARE
<S> <C> <C> <C>
1990 $ 100 $ 100 $ 100
1991 $ 138 $ 107 $ 124
1992 $ 159 $ 122 $ 134
1993 $ 129 $ 138 $ 117
1994 $ 153 $ 140 $ 117
1995 $ 78 $ 177 $ 171
</TABLE>
EMPLOYMENT AGREEMENTS
In December 1993, the Company entered into an agreement with James C. New,
President and General Manager -- Outpatient Rehabilitation Division of the
Company. (At such time, Mr. New was also President and Chief Operating Officer
of RCI, which was acquired by the Company in February 1994.) The agreement
provides for Mr. New to receive a base salary of $210,000, subject to review in
accordance with the policies of the Company, and to be eligible to receive a
bonus equal to 50% of his base salary (the "target bonus") upon the achievement
of certain annual objectives. The amount of such target bonus for which Mr. New
shall be eligible shall be determined by the executive compensation plan of the
Company in effect from time to time and may exceed 100% of such target bonus
figure. Mr. New also received a grant of options to purchase 52,000 shares of
common stock at an exercise price of $14.25 per share exercisable in cumulative
annual installments of 20% commencing in February 1995. Pursuant to such
agreement, upon the termination of Mr. New's employment with the Company without
cause, Mr. New shall be entitled to receive his base salary until he secures
other employment for a period of up to 12 months.
In July 1994, the Company entered into an employment agreement with John H.
Foster, Chairman of the Board and Chief Executive Officer of the Company. The
agreement provides for a five-year term of employment and provides for automatic
one-year extensions commencing one year prior to termination in December 1998
and continuing on each subsequent anniversary until either party shall give the
other notice of
12
<PAGE> 15
non-extension. The agreement provides for Mr. Foster to receive an annual base
salary of $508,000, subject to increases in accordance with the policies of the
Company, and to be eligible for an annual cash bonus equal to one percent of the
Company's consolidated net income excluding extraordinary gains and losses (the
"target bonus"), based on the percentage of budgeted net income attained by the
Company for a fiscal year. The amount of such target bonus for which Mr. Foster
shall be eligible ranges from 45% for achievement by the Company of 90% of
budgeted net income to 100% for achievement by the Company of 100% or greater of
budgeted net income. See "Compensation Committee Report" above. In the event of
Mr. Foster's death, disability or voluntary termination, he shall be entitled to
pro-rated bonus compensation for the fiscal year of such event. Mr. Foster also
received a grant of options to purchase 2,000,000 shares of Common Stock at an
exercise price of $19.50 per share, or 150% of the market price on the effective
date of grant. Such options have a term of 10 years, are exercisable in
cumulative annual installments of 20%, and become exercisable in full in the
event of a change of control of the Company, of Mr. Foster's death or disability
or of the termination of Mr. Foster's employment with the Company without due
cause. The agreement further provides Mr. Foster with a non-interest bearing
relocation expense loan of $700,000 to be forgiven in five annual installments
of $140,000 each, additional payments in connection with such loan aggregating
$115,466 over such five-year period, the use of the Company's private aircraft
and certain split-dollar life insurance benefits. The agreement also provides
that if Mr. Foster is terminated by the Company without cause or if Mr. Foster
resigns subsequent to a change in control of the Company, a material diminution
of his position, authority or compensation or his removal by the Company as
Chairman of the Board, then Mr. Foster shall be entitled to his base salary and
certain other benefits for a period of two years from the date of such event and
to bonus compensation in an amount equal to (a) his pro-rated bonus compensation
for the fiscal year of such resignation or termination, plus (b) a final bonus
calculated, depending on the date of such resignation or termination, to equal
his bonus payment for the previous fiscal year or the greater of his bonus
payment for the previous fiscal year or the entire then-current fiscal year and
an additional payment, on the first anniversary of the payment of such final
bonus, equal to one-half of such final bonus. The agreement also provides that
Mr. Foster shall be entitled to the advance of certain expenses in connection
with legal proceedings arising in connection with his service as an officer or
director of the Company.
In January 1994, the Company entered into an employment agreement with C.
Arnold Renschler, M.D., Senior Vice President and Chief Clinical Officer and, at
such time, President and General Manager -- Medical Rehabilitation Hospital
Division of the Company. The agreement provides for Dr. Renschler to receive an
annual base salary of $307,000, subject to increases in accordance with the
policies of the Company, and to be eligible to receive a bonus equal to a target
of 60% of his base salary (the "target bonus") and options to purchase shares of
Common Stock based on a target amount of 35,000 shares upon the achievement of
certain annual objectives. The amount of such target bonus for which Dr.
Renschler shall be eligible shall be determined by the executive compensation
plan of the Company in effect from time to time and may exceed 100% of such
target bonus figure. The agreement also provides that in the event that Dr.
Renschler's employment with the Company is terminated for other than death,
disability or due cause, that the Company shall pay Dr. Renschler his base
salary for a period of 12 months. The agreement further provides that a grant to
Dr. Renschler of options to purchase 250,000 shares of Common Stock at an
exercise price of $6.50 per share exercisable in cumulative annual installments
of 20% commencing in January 1991 shall become fully vested in the event that
anyone other than John H. Foster or Dr. Renschler shall become Chairman of the
Board and Chief Executive Officer of the Company or Dr. Renschler's employment
with the Company is terminated for other than due cause. In May 1995, the
agreement was amended in recognition of Dr. Renschler's pending appointment as
President and General Manager -- Value-Added Services Division and provides for
an additional grant of options to purchase 110,000 shares of Common Stock at an
exercise price of $7.38 per share, exercisable in cumulative annual installments
of 20% commencing in May 1996, which options shall become fully vested in the
event that Dr. Renschler shall be directed to report to someone other than John
H. Foster or Timothy E. Foster or there is a change of control of the Company.
In December 1994, the Company entered into an employment agreement with
Timothy E. Foster, President and Chief Operating Officer of the Company. The
agreement provides for a four-year term of employment and provides for automatic
one-year extensions commencing one year prior to termination in December 1998
and continuing on each subsequent anniversary until either party shall give the
other notice of
13
<PAGE> 16
non-extension. The agreement provides for Mr. Foster to receive an annual base
salary of $425,000, subject to increases in accordance with the policies of the
Company, and to be eligible for an annual cash bonus equal to 0.3% of the
Company's consolidated net income excluding extraordinary gains and losses for
the 1995 fiscal year and 0.5% of such figure in each subsequent fiscal year (the
"target bonus"), based on the percentage of budgeted net income attained by the
Company for a fiscal year. The amount of such target bonus for which Mr. Foster
shall be eligible ranges from 45% for achievement by the Company of 90% of
budgeted net income to 100% for achievement by the Company of 100% or greater of
budgeted net income. See "Compensation Committee Report" above. In the event of
Mr. Foster's death, disability or voluntary termination, he shall be entitled to
pro-rated bonus compensation for the fiscal year of such event. Mr. Foster also
received a grant of options to purchase 25,000 shares of Common Stock at an
exercise price of $7.25 per share, subject to stockholder approval. Such options
have a term of 10 years, are exercisable in cumulative annual installments of
20% and become exercisable in full in the event of a change of control of the
Company, of Mr. Foster's death or disability or of the termination of Mr.
Foster's employment with the Company without due cause. Mr. Foster shall also be
eligible to receive, subject to stockholder approval, annual grants of options
to purchase 50,000 shares of Common Stock. The agreement further provides Mr.
Foster the use of the Company's private aircraft and certain other benefits. The
agreement also provides that if Mr. Foster is terminated by the Company without
cause or if Mr. Foster resigns subsequent to a change in control of the Company,
a material diminution of his position, authority or compensation or the
Company's failure to cause Mr. Foster's election to the Board of Directors, then
Mr. Foster shall be entitled to his base salary and certain other benefits for a
period of two years from the date of such event and bonus compensation in an
amount equal to (a) his pro-rated bonus compensation for the fiscal year of such
resignation or termination plus (b) a final bonus calculated, depending on the
date of such resignation or termination, to equal his bonus payment for the
previous fiscal year or the greater of his bonus payment for the previous fiscal
year or the entire then-current fiscal year and an additional payment, on the
first anniversary of the payment of such final bonus, equal to one-half of such
final bonus. The agreement also provides that Mr. Foster shall be entitled to
the advance of certain expenses in connection with legal proceedings arising in
connection with his service as an officer or director of the Company.
In January 1995, the Company entered into an employment agreement with
Daryl A. Dixon, President and General Manager -- Contract Services Division of
the Company. The agreement provides for a five-year term of employment and
provides for automatic one-year extensions commencing one year prior to
termination and continuing on each subsequent anniversary until either party
shall give the other notice of non-extension. The agreement provides for Mr.
Dixon to receive an annual base salary of $300,000, subject to increases in
accordance with the policies of the Company, and to be eligible for an annual
cash bonus equal to 50% of his base salary (the "target bonus"), with a minimum
bonus of 60% of such target bonus for the 1995 and 1996 fiscal years. The amount
of such target bonus for which Mr. Dixon shall be eligible shall be determined
by the executive compensation plan of the Company in effect from time to time
and may exceed 100% of such target bonus figure. In the event of Mr. Dixon's
death, disability, voluntary termination or termination by the Company without
cause, he shall be entitled to pro-rated bonus compensation for the fiscal year
of such event. The agreement provides for a grant of options to purchase 25,000
shares of common stock at an exercise price of $8.88 per share, which options
are exercisable in cumulative annual installments of 20% commencing in January
1996 and which become fully vested in the event of a change of control of the
Company. The agreement also provides for a loan by the Company to Mr. Dixon in
the amount of $450,000, bearing no interest and payable in equal annual
installments of $90,000 over five years, with such loan to be forgiven in
$90,000 installments on each payment date provided that Mr. Dixon is employed by
the Company, or forgiven in its entirety in the event of Mr. Dixon's death or
disability; in addition, on such payment dates Mr. Dixon shall receive
additional payments over such five-year period aggregating $26,224. The
agreement also provides that if Mr. Dixon is terminated by the Company without
cause, he shall be entitled to his base salary and certain other benefits for a
period of two years, and the unpaid balance of such loan shall be forgiven by
the Company in installments without regard to the requirement that Mr. Dixon be
employed by the Company.
14
<PAGE> 17
CERTAIN TRANSACTIONS
Since January 1993, the Company has subleased office space to certain
companies controlled by John H. Foster, Chairman of the Board and Chief
Executive Officer of the Company, in his capacity as chairman of the board,
chief executive officer or general partner of the principal stockholders of such
companies. The Company will pay base rent at an annual rate of $14.00 per square
foot through December 1997 and $17.50 per square foot from January 1998 through
December 2002. The companies controlled by Mr. Foster will pay base rent at a
rate equal to the Company's cost, including reimbursement for leasehold
improvements made by the Company, through December 2002 for their respective
areas under sublease as follows: Foster Management Company, 8,419 square feet;
Apogee, Inc., 11,324 square feet; and Hearing Health Services, Inc., 4,007
square feet.
As of January 1993, the Company has engaged Mitchell Hutchins Institutional
Investors Inc. ("MHII") to advise the Company in the investment of the Company's
cash and other investment assets. George W. Siguler, a director of the Company,
is a managing director of MHII. The Company pays fees to MHII at a per annum
rate, payable quarterly, equal to .125% of the market value of the assets
invested through MHII. From July 1, 1994 to June 30, 1995, the Company has
incurred fees aggregating $30,000 to MHII for its services.
Timothy E. Foster, President and Chief Operating Officer and a director of
the Company, serves as a director of Hearing Health Services, Inc. and Apogee,
Inc.; Stephen E. O'Neil, a director and member of the Compensation and Audit
Committees of the Company, serves as a director of Hearing Health Services,
Inc.; and James C. New, President and General Manager -- Outpatient
Rehabilitation Division, serves as a director of The Pet Practice, Inc. Each of
the foregoing companies is controlled by John H. Foster.
During fiscal year 1995, the Company provided relocation loans aggregating
$671,000 at an interest rate of 5.5% to Peter D. Bewley, who joined the Company
in May 1994 and is currently Senior Vice President, General Counsel and
Secretary of the Company. Mr. Bewley repaid all amounts due under such loans in
full in August 1995. In October 1994, the Company provided a loan of $15,000 at
an interest rate of prime plus 0.5% to James T. Walmsley, Vice President --
Reimbursement of the Company, all of which loan is presently outstanding, the
principal of and interest on which shall be forgiven in three equal annual
installments provided that Mr. Walmsley remains employed with the Company. In
August 1995, the Company provided a relocation loan in the amount of $97,000 at
an interest rate of prime plus 1% to Scott Marber, Senior Vice President, Sales
and Marketing of the Company, all of which loan is presently outstanding.
15
<PAGE> 18
INFORMATION CONCERNING CERTAIN STOCKHOLDERS
The shareholdings as of September 1, 1995 of the only person known to the
Company to own beneficially more than 5% of the outstanding shares of the Common
Stock other than John H. Foster, whose shareholdings are set forth above under
"I. Election of Directors" and whose address is 1016 W. Ninth Avenue, King of
Prussia, Pennsylvania 19406, and the shareholdings as of September 1, 1995 of
all directors and officers of the Company as of such date as a group (according
to information furnished by them to the Company) are set forth in the following
table. The shareholdings of the five named executive officers of the Company
(except for James C. New and Daryl A. Dixon, whose shareholdings are set forth
in the table below) are set forth above under "I. Election of Directors."
Except as indicated in the footnotes to the table, all of such shares are owned
with sole voting and investment power.
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK OWNED PERCENT
NAME BENEFICIALLY OF CLASS
--------------------------------------------------- ----------- --------
<S> <C> <C>
GeoCapital Corporation............................. 4,297,803 6.6%
767 Fifth Avenue
New York, New York
All Directors and Officers as a Group (19
persons)......................................... 6,046,251(1)(2) 8.8%
James C. New....................................... 107,324(3) *
Daryl A. Dixon..................................... 54,050(4) *
</TABLE>
---------------
* Less than one percent.
(1) See footnotes 2 through 10 on pages 4 and 5.
(2) Includes 93,700 shares presently issuable upon exercise of options, 637
shares presently issuable upon conversion of debentures owned by an
executive officer, and 2,250 shares presently issuable upon conversion of
debentures held by the spouse of an executive officer as custodian for their
children.
(3) Includes 500 shares owned by Mr. New's spouse.
(4) Includes 52,800 shares presently issuable upon exercise of options and 25
shares owned by Mr. Dixon's spouse.
II. APPROVAL OF THE GRANT TO TIMOTHY E. FOSTER OF
OPTIONS TO PURCHASE COMMON STOCK
Subject to the approval of the stockholders of the Company, in connection
with the execution of an employment agreement between the Company and Timothy E.
Foster in December 1994 pursuant to which Mr. Foster shall serve as President
and Chief Operating Officer of the Company, the Compensation Committee of the
Board of Directors granted to Mr. Foster options to purchase 25,000 shares of
Common Stock at an exercise price of $7.25 per share, the fair market value for
the Common Stock as of the date of such grant. Such options are exercisable in
annual cumulative installments of 20% per year commencing on December 2, 1995
and will expire 10 years from the date of grant. In addition, the employment
agreement provides that Mr. Foster shall be eligible for annual grants of
options to purchase 50,000 shares of Common Stock. As of September 13, 1995, the
market price for the Company's Common Stock was $7.75 per share. Upon issuance
of such options, there are no federal income tax consequences to the Company or
Mr. Foster. Upon exercise of the options, Mr. Foster will realize taxable income
to the extent of the difference between the exercise price and the market price
for the Common Stock on the date of exercise, and the Company will have a
deductible expense equal to Mr. Foster's realized taxable income.
The purpose of such grants of options is to provide Mr. Foster with an
incentive to create significant appreciation in value for the stockholders of
the Company. The Board of Directors seeks approval of the initial grant of
25,000 shares to Mr. Foster, and of subsequent annual grants of 50,000 options
as contemplated by the employment agreement, in light of previous stockholder
approval at the February 3, 1994 Annual Meeting of Stockholders of a special
one-time grant to Mr. Foster for options to purchase 500,000 shares of Common
Stock, at an exercise price of $19.50 per share, or 150% of the market value per
share of the Common Stock on the date of grant. One of the bases of such grant
was that no additional options would be granted to
16
<PAGE> 19
Mr. Foster for the next five fiscal years. At the time of such grant, Mr. Foster
served as Senior Vice President -- Finance and Administration and Chief
Financial Officer of the Company. Since such time, Mr. Foster has been promoted
to President and Chief Operating Officer of the Company. In light of such
promotion and of the additional responsibilities assumed by Mr. Foster in his
new position, the Board believes that the additional option grants, which will
allow Mr. Foster to receive incentive-based equity compensation on an ongoing
basis not greater than that contemplated for his predecessor as President and
Chief Operating Officer, will accrue to the benefit of NovaCare and its
stockholders by providing Mr. Foster with appropriate incentives to be achieved
as a result of a significant increase in stockholder value.
The following table sets forth the benefits that may be received by Timothy
E. Foster if the grant (and the future grants) of options to purchase Common
Stock is approved.
NEW PLAN BENEFITS
GRANT OF OPTIONS TO PURCHASE COMMON STOCK
TO TIMOTHY E. FOSTER(1)
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE($) NUMBER OF UNITS
----------------------------------------------- --------------- ---------------
<S> <C> <C>
Timothy E. Foster.............................. -- 225,000(2)
President and Chief Operating Officer
</TABLE>
---------------
(1) Under this grant of options to Timothy E. Foster, no options or other
benefits will accrue to the Chairman of the Board and Chief Executive
Officer, any current directors, any executive officers, or any other current
employees of the Company other than Mr. Foster.
(2) Consists of options to purchase 25,000 shares of Common Stock granted in
December 1994 and options to purchase 50,000 shares of Common Stock to be
granted at the discretion of the Compensation Committee of the Board of
Directors with respect to the next four succeeding fiscal years.
The Board of Directors believes that the grants are in the best interests
of the Company. THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE GRANTS OF OPTIONS TO TIMOTHY E.
FOSTER. It is the intention of the persons named in the accompanying form of
Proxy to vote the shares represented thereby in favor of the approval of grants
of options unless otherwise instructed therein. If the grants are not approved,
the Board of Directors will consider the appropriateness of alternative
compensation for Mr. Foster.
III. RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected Price Waterhouse LLP to serve as independent
accountants for the Company for the fiscal year ending June 30, 1996.
Price Waterhouse LLP has served as independent accountants for the Company
since 1989 and, although it is not required to do so, the Board is submitting
its selection of the Company's independent accountants for ratification at the
Meeting, in order to ascertain the views of stockholders regarding such
selection. If the selection is not ratified, the Board will reconsider its
selection.
THE BOARD RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR RATIFICATION
OF THE SELECTION OF PRICE WATERHOUSE LLP TO AUDIT THE FINANCIAL STATEMENTS OF
THE COMPANY FOR THE COMPANY'S FISCAL YEAR ENDING JUNE 30, 1996. It is the
intention of the persons named in the accompanying form of proxy to vote the
shares represented thereby in favor of such ratification unless otherwise
instructed therein.
A representative of Price Waterhouse LLP will be present at the Meeting
with the opportunity to make a statement if such representative desires to do so
and will be available to respond to appropriate questions.
17
<PAGE> 20
IV. OTHER MATTERS
The Board does not know of any other matters which may be brought before
the Meeting. However, if any such other matters are properly presented for
action, it is the intention of the persons named in the accompanying form of
proxy to vote the shares represented thereby in accordance with their judgment
on such matters.
V. MISCELLANEOUS
All costs relating to the solicitation of proxies of holders of Common
Stock will be borne by the Company. Proxies may be solicited by officers,
directors and regular employees of the Company and its subsidiaries personally,
by mail or by telephone or otherwise. The Company may pay brokers and other
persons holding shares of stock in their names or those of their nominees for
their reasonable expenses in sending soliciting material to their principals.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the Meeting in person are urged to mark, sign and date the
accompanying proxy and mail it in the enclosed return envelope, which requires
no postage if mailed in the United States, so that their votes can be recorded.
SECTION 16(a) REPORTING REQUIREMENTS
Under Section 16(a) of the Exchange Act, directors and executive officers
of the Company are required to make certain filings on a timely basis with the
Securities and Exchange Commission. One executive officer, James C. New, failed
to report 500 shares of Common Stock as owned by his spouse on his statement on
Form 3 filed in March 1994, and for the fiscal year ended June 30, 1995, Mr. New
failed to make a timely filing of a statement on Form 4 regarding a transaction
in the Company's stock. Mr. New has subsequently filed the necessary reports.
CERTAIN LEGAL PROCEEDINGS
George W. Siguler, a director of the Company, was formerly Vice Chairman
and a director of Monarch Capital Corporation, a financial services holding
company, which was placed in bankruptcy pursuant to a petition filed in June
1991.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the next Annual Meeting
of Stockholders of the Company must be received by the Company by May 22, 1996
in order to be considered for inclusion in the Company's proxy statement
relating to such meeting.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, which has been filed with the Securities and Exchange
Commission, will be sent without charge to stockholders to whom this Proxy
Statement is mailed upon written request to the Vice President, Communications
and Investor Relations, NovaCare, Inc., 1016 West Ninth Avenue, King of Prussia,
Pennsylvania 19406.
September 19, 1995
18
<PAGE> 21
APPENDIX A
With respect to "II. Approval of the Grant to Timothy E. Foster of
Options to Purchase Common Stock" set forth in the Proxy Statement, a
description of the Company's obligations with respect thereto is set forth in
that certain Employment Agreement between the Company and Timothy E. Foster
dated as of December 2, 1994, which is hereby incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994.
<PAGE> 22
[NOVACARE LOGO]
King of Prussia, Pennsylvania
September 19, 1995
To the Participants in the NovaCare
1986 Stock Option Plan and Related Plans:
Enclosed herewith are copies of (i) the NovaCare, Inc. Annual Report for
the fiscal year ended June 30, 1995 (including NovaCare's Annual Report on Form
10-K for such fiscal year) and (ii) the Proxy Statement delivered to holders of
NovaCare common stock in connection with the Annual Meeting (the "Meeting") of
Stockholders of NovaCare, Inc. to be held on October 26, 1995.
Although holders of options to purchase NovaCare common stock under the
NovaCare 1986 Stock Option Plan and related plans are not entitled to vote at
the Meeting with respect to such options, pursuant to the rules of the
Securities and Exchange Commission, NovaCare is required to deliver to such
holders the enclosed materials, which are provided herewith for your review and
information.
<PAGE> 23
[NOVACARE LOGO]
King of Prussia, Pennsylvania
September 19, 1995
Holders of NovaCare, Inc. 5 1/2% Convertible
Subordinated Debentures Due 2000:
Enclosed herewith are copies of (i) the NovaCare, Inc. Annual Report for
the fiscal year ended June 30, 1995 (including NovaCare's Annual Report on Form
10-K for such fiscal year) and (ii) the Proxy Statement delivered to holders of
NovaCare common stock in connection with the Annual Meeting (the "Meeting") of
Stockholders of NovaCare, Inc. to be held on October 26, 1995.
Although holders of NovaCare, Inc. 5 1/2% Convertible Subordinated
Debentures Due 2000 are not entitled to vote at the Meeting with respect to such
Debentures, pursuant to the rules of the Securities and Exchange Commission,
NovaCare is required to deliver to such holders the enclosed materials, which
are provided herewith for your review and information.
<PAGE> 24
[NOVACARE LOGO]
King of Prussia, Pennsylvania
September 19, 1995
To the Participants in the NovaCare, Inc.
401(k) Retirement Savings Plan:
In connection with the Annual Meeting of Stockholders of NovaCare, Inc. to
be held on October 26, 1995, participants in the NovaCare, Inc. 401(k)
Retirement Savings Plan who have elected to purchase NovaCare stock are invited
to review the enclosed Proxy Statement.
Participants who desire to instruct the Plan trustee as to how they wish to
vote shares of stock in which participants have an ownership interest through
the Plan are invited to complete and return the enclosed instruction card.
Shares of stock held through the Plan will be voted by the trustee as indicated
on all returned instruction cards. Shares held through the Plan for which no
instruction cards are returned will be voted as determined by the trustee.
Sincerely,
Bernard F. Thompson
Trustee
<PAGE> 25
--------------------------------------------------------------------------------
NOVACARE, INC.
PROXY -- ANNUAL MEETING OF STOCKHOLDERS -- OCTOBER 26, 1995
The undersigned, a stockholder of NOVACARE, INC., does hereby appoint
JOHN H. FOSTER and TIMOTHY E. FOSTER, or either of them, his or her proxies,
with full power of substitution or resubstitution, to appear and vote all
shares of Common Stock of the Company which the undersigned is entitled to vote
at the Annual Meeting of Stockholders to be held on Thursday, October 26, 1995
at 10:00 A.M., local time, or at any adjournment thereof, upon such matters as
may properly come before the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby instructs said proxies or their substitutes to
vote as specified below on each of the following matters and in accordance with
their judgment on any other matters which may properly come before the Meeting.
<TABLE>
<S> <C>
1. Election of Directors, FOR all nominees listed below / / WITHHOLD AUTHORITY / /
(except as marked to the contrary below) to vote for all nominees listed below
</TABLE>
John H. Foster, Timothy E. Foster, C. Arnold Renschler, M.D.,
E. Martin Gibson, Siri S. Marshall, Stephen E. O'Neil, George W. Siguler,
Robert G. Stone, Jr. and Daniel C. Tosteson, M.D.
(INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name in the space provided below.)
--------------------------------------------------------------------------------
2. Approval of grant of options to Timothy E. Foster
FOR / / AGAINST / / ABSTAIN / /
(Continued and to be Completed on the Reverse Side)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Continued From Other Side)
3. Ratification of Price Waterhouse LLP as independent accountants
FOR / / AGAINST / / ABSTAIN / /
The Board of Directors favors a vote "FOR" each item.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS INDICATED THEY WILL BE VOTED IN FAVOR OF THE ITEM(S) FOR WHICH NO DIRECTION
IS INDICATED.
IMPORTANT: Before returning this Proxy, please sign your name or names on the
line(s) below exactly as shown thereon. Executors, administrators, trustees,
guardians or corporate officers should indicate their full titles when signing.
Where shares are registered in the name of joint tenants or trustees, each joint
tenant or trustee should sign.
Dated: , 1995
-----------------------
(L.S.)
------------------------------
(L.S.)
------------------------------
Stockholder(s) Sign Here
PLEASE MARK, SIGN, DATE AND
RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED
ENVELOPE.
--------------------------------------------------------------------------------
<PAGE> 26
--------------------------------------------------------------------------------
NOVACARE, INC.
INSTRUCTION CARD -- ANNUAL MEETING OF STOCKHOLDERS -- OCTOBER 26, 1995
The undersigned, a participant in the NOVACARE, INC. 401(k) Retirement
Savings Plan (the "Plan"), does hereby instruct Bernard F. Thompson, with full
power of substitution or resubstitution, to appear and vote all shares of
Common Stock of the Company in which the undersigned has a beneficial interest
pursuant to the Plan at the Annual Meeting of Stockholders to be held on
Thursday, October 26, 1995 at 10:00 A.M., local time, or at any adjournment
thereof, upon such matters as may properly come before the Meeting.
THIS INSTRUCTION CARD IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<TABLE>
<S> <C>
1. Election of Directors, FOR all nominees listed below / / WITHHOLD AUTHORITY / /
(except as marked to the contrary below) to vote for all nominees listed below
</TABLE>
John H. Foster, Timothy E. Foster, C. Arnold Renschler, M.D.,
E. Martin Gibson, Siri S. Marshall, Stephen E. O'Neil, George W. Siguler,
Robert G. Stone, Jr. and Daniel C. Tosteson, M.D.
(INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name in the space provided below.)
--------------------------------------------------------------------------------
2. Approval of grant of options to Timothy E. Foster
FOR / / AGAINST / / ABSTAIN / /
(Continued and to be Completed on the Reverse Side)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Continued From Other Side)
3. Ratification of Price Waterhouse LLP as independent accountants
FOR / / AGAINST / / ABSTAIN / /
The Board of Directors favors a vote "FOR" each item.
THE SHARES REPRESENTED BY THIS INSTRUCTION CARD WILL BE VOTED AS INSTRUCTED. IF
NO INSTRUCTION IS INDICATED THEY WILL BE VOTED IN FAVOR OF THE ITEM(S) FOR WHICH
NO INSTRUCTION IS INDICATED.
IMPORTANT: Please sign your name or names on the line(s) below exactly as shown
thereon. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
Dated: , 1995
------------------------
Signature(s) (L.S.)
------------------
(L.S.)
------------------------------
PLEASE MARK, SIGN, DATE AND RETURN
THIS INSTRUCTION CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
-------------------------------------------------------------------------------
