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[NOVACARE LOGO]
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
Commission file number 1-10875
NOVACARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3247827
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1016 WEST NINTH AVENUE, KING OF PRUSSIA, PA 19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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Registrant's telephone number, including area code: (610) 992-7200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE, INC.
5 1/2% CONVERTIBLE SUBORDINATED NEW YORK STOCK EXCHANGE, INC.
DEBENTURES DUE 2000
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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. [ ]
AS OF AUGUST 31, 1995, 65,580,226 SHARES OF COMMON STOCK WERE OUTSTANDING,
AND THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NON-AFFILIATES WAS APPROXIMATELY $518,316,810. (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 1995 ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON OCTOBER 26, 1995.
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NOVACARE, INC. AND SUBSIDIARIES
FORM 10-K -- FISCAL YEAR ENDED JUNE 30, 1995
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
Rehabilitation Industry Background........................ 1
Business Strategy......................................... 2
Contract Therapy Services................................. 3
Outpatient Rehabilitation Services........................ 5
Orthotic and Prosthetic Services.......................... 6
Value-added Services...................................... 6
Statistical Data.......................................... 7
Competition............................................... 8
Reimbursement/Government Relations........................ 9
Government Regulation..................................... 11
Insurance................................................. 12
Employees................................................. 12
Executive Officers of the Registrant...................... 13
2 Properties.................................................. 14
3 Legal Proceedings........................................... 15
4 Submission of Matters to a Vote of Security Holders......... 15
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
6 Selected Financial Data..................................... 16
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
8 Financial Statements and Supplementary Data................. 23
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 40
III 10 Directors and Executive Officers of the Registrant.......... 40
11 Executive Compensation...................................... 40
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 40
13 Certain Relationships and Related Transactions.............. 40
IV 14 Exhibits, Financial Statement Schedules and Reports of Form
8-K....................................................... 41
Signatures.......................................................................... 42
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PART I
ITEM 1. BUSINESS
THE COMPANY
NovaCare, Inc. (together, unless the context otherwise requires, with its
majority-owned subsidiaries, "NovaCare" or the "Company") was organized and
formed in 1985 and is the leading national provider of medical rehabilitation
services outside the medical rehabilitation hospital setting. Rehabilitation is
the process that restores individuals disabled by trauma or disease to their
optimal level of functionality and self-sufficiency. NovaCare's comprehensive
medical rehabilitation services include (i) providing rehabilitation therapy and
subacute services on a contract basis, primarily to nursing facilities and other
health care institutions, (ii) operating medical rehabilitation hospitals (until
April 1, 1995, the effective date of the sale of such hospitals, discussed
later), (iii) providing outpatient rehabilitation services through a national
network of patient care centers and (iv) delivering orthotic and prosthetic
("O&P") rehabilitation services through a national network of patient care
centers.
Effective April 1, 1995, the Company sold the stock of a subsidiary which
owned all eleven of the Company's medical rehabilitation hospitals, in a
transaction valued at $242.9 million. In connection with the sale, the Company
reduced its long-term debt by $151.7 million and invested the remaining net
proceeds in short-term investments. The sale substantially enhanced the
Company's liquidity, reducing its net-debt-to-capitalization ratio to less than
10% at June 30, 1995.
REHABILITATION INDUSTRY BACKGROUND
Depending on an individual's diagnostic and therapeutic needs,
rehabilitation services are delivered in a variety of settings, including
rehabilitation hospitals, rehabilitation units in general hospitals, nursing
facilities, comprehensive outpatient rehabilitation facilities, rehabilitation
agencies and clinics, schools and patients' homes.
These services are provided by physiatrists and other qualified
rehabilitation physicians, occupational, physical and respiratory therapists,
rehabilitation nurses, speech-language pathologists, audiologists,
psychologists, social workers, orthotists, prosthetists, recreational
therapists, music therapists and rehabilitation counselors.
Recent industry analysis suggests that medical rehabilitation is a $12-15
billion industry, projected to grow at a rate of 10-12% per year through the end
of the decade. The industry's growth has been fueled primarily by the following
factors:
Demand for services. Advances in technology and the aging population
continue to drive demand. The need for rehabilitation services is
significant. Technological advances in medical care have improved survival
rates for patients who have suffered severe injury or disease. The U.S.
Bureau of the Census reported in a 1991 survey that 33 million Americans
had a disability and could not perform basic physical activity or needed
assistance to do so. The Bureau of the Census statistics also show that the
fastest growing segment of the population is the group over 65 years of
age. This group has the highest requirement for rehabilitation services.
Approximately 75% of strokes and 70% of amputations occur in persons over
the age of 65. Almost 50% of Americans over 75 years of age currently
require some form of rehabilitation. Demand has also increased as a result
of higher quality of life expectations among disabled individuals.
Cost-effectiveness of services. A major factor in the growth of the
rehabilitation industry is the recognition by payors (insurance companies,
managed care plans, employers, government programs and individual patients)
of the benefits of rehabilitation in reducing lifetime costs of care. A
recent study by the Health Insurance Association of America suggested that
$11.00 in medical costs were saved for every $1.00 spent on rehabilitation,
while a recent study by the Insurance Company of North America found that
$17.00 in total outlays could be saved for every $1.00 spent on
rehabilitation. Efforts to reduce workers' compensation expenses have also
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stimulated demand for rehabilitation of injured workers and work-hardening
and injury-prevention programs in the work place.
Reimbursement for services. Rehabilitation services are covered for
payment by Medicare and Medicaid and are typically covered by commercial
health insurance policies, including managed care plans. Under the Omnibus
Budget Reconciliation Act of 1987, nursing facilities that participate in
the Medicare program are required to offer physical therapy, occupational
therapy and speech-language pathology services to improve the functionality
of patients.
BUSINESS STRATEGY
The Company's management has formally set forth the Company's
values -- what NovaCare stands for, what motivates its employees, and what sets
NovaCare apart -- and communicated them and discussed them with each of its
employees. These values include the Company's:
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Credo Helping Make Life a Little Better
Purpose To effectively meet the rehabilitation needs of our patients through clinical
leadership
Beliefs Respect for the Individual
Service to the Customer
Pursuit of Excellence
Commitment to Personal Integrity
</TABLE>
It is management's belief that a strong commitment to these values will
enable the Company's employees to build the business and their careers, and that
these values are a foundation upon which NovaCare's business plans are built.
Emphasis on Rehabilitation Services
NovaCare's overall long-term strategy is to maintain its position as the
largest provider of low-cost, clinically excellent, medical rehabilitation
services outside the medical rehabilitation hospital setting. The Company's
strategy is based on the belief that:
- These services will continue to experience steady or growing demand
because, in the long term, health care payor cost-containment efforts are
likely to drive patients toward lower-cost services outside the medical
rehabilitation hospital setting.
- The continued aging of the population will increase the demand for
medical rehabilitation services, as the elderly consume a
disproportionate amount of rehabilitation care.
- Purchasers of medical rehabilitation services will increase their
emphasis on clinical outcomes in the selection of rehabilitation
providers.
- Substantial cost reductions in the delivery of rehabilitation services
will result from clinical improvements and innovation.
- Larger providers of rehabilitation services are better positioned to
provide clinical leadership, realize economies of scale to contain costs,
attract quality management personnel and train and recruit therapists.
- Rehabilitation care is not capital intensive, allowing for internal
growth without the use of substantial capital resources.
Internal Growth
The Company has experienced substantial growth in the past few years,
largely from acquisitions. Management has curtailed its acquisition plans in
order to preserve liquidity in light of anticipated regulatory changes relating
to contract therapy services, the largest portion of the Company's business,
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and recent government efforts to reform health care. See
"Reimbursement/Government Relations," discussed later. In addition, the
increasing penetration of managed care in the outpatient rehabilitation customer
base is expected to affect the historical increases in profitability experienced
by the outpatient rehabilitation business. Management believes the industry has
yet to fully reflect the effects of these uncertainties in the pricing of
businesses available to be acquired.
Management's immediate strategic focus is to concentrate on fundamental
management issues, such as the Company's positioning for the anticipated changes
in the reimbursement structure, the development of relationships with managed
care networks and the training and retention of effective management personnel,
that will enhance the Company's internal growth during this period of
uncertainty in the industry.
The Company has substantially enhanced its sales and marketing efforts in
the contract therapy services business to replace the anticipated loss of
business from Beverly Health and Rehabilitation ("Beverly") (see "Contract
Therapy Services," discussed later) and other national multi-facility nursing
home companies. In the second half of fiscal 1995 the Company has achieved new
contract sales with estimated annual revenues in excess of those lost due to
contract cancellations.
Cost Containment
A central aspect of the Company's strategy is to position itself as a
low-cost provider of rehabilitation services. Clinical improvements and
innovation are expected to lower the cost of rehabilitation service delivery.
The Company's management is devoting a substantial portion of its efforts to
such clinical objectives in addition to managing other costs. Management
believes its efforts in these areas will allow the Company to operate
successfully in an increasingly fixed-reimbursement environment.
Quality Outcome Measurement
Management believes that payors will ultimately demand that low cost be
accompanied by proof of quality outcomes. The Company has committed resources to
develop systems that capture outcomes in a useable format. Management believes
that, as payors become more sophisticated and require providers to prove the
delivery of quality service, the Company's commitment to outcomes measurement,
coupled with its emphasis on clinical performance, will enhance its competitive
position.
CONTRACT THERAPY SERVICES
NovaCare provides multi-disciplinary rehabilitation therapy services on a
contract basis, principally to nursing facilities. The multi-disciplinary team
comprises physical therapists, occupational therapists, and speech-language
pathologists working together to improve the ability of patients to perform the
activities of daily living. Physical therapy effects improved muscular and
neural responses in an effort to improve patients' physical strength and range
of motion. Occupational therapy is the evaluation and treatment of physical,
cognitive and psychosocial performance deficits in activities of daily living.
Speech-language pathology is the diagnosis and treatment of speech, language,
voice and swallowing disorders.
NovaCare is the largest contract therapy provider to the long-term care
industry with a market share of approximately 13%, as measured by net revenues.
As of June 30, 1995, NovaCare provided these services in more than 2,000
facilities located in 40 states. For the year ended June 30, 1995, contract
therapy services represented 65% of the Company's net revenues and 75% of
earnings before interest, taxes, depreciation, amortization, nonrecurring
charges and minority interest ("Adjusted EBITDA"), exclusive of operations
relating to the medical rehabilitation hospital division.
Analysts estimate that the market for therapy services delivered under
contract to nursing facilities is approximately $4 billion. A recent
management-sponsored survey indicated that 73% of nursing facility
rehabilitation services are performed on a contract basis.
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The long-term care industry has typically contracted for therapy services
for the following reasons:
Insufficient caseload. The average nursing facility of approximately
100 beds has insufficient and/or irregular caseload, which makes it
uneconomical to operate its own therapy program with the full-time
employment of therapists and the associated costs of administration.
Supply of therapists. There is an inadequate supply of therapists and
the work force is characterized by high turnover. Consistent staffing
levels are difficult to maintain, which jeopardizes service levels and
quality.
Expertise. Therapy revenues represent a relatively small percentage
of a nursing facility's total revenues and operating activities.
Reimbursement and regulatory complexities concerning appropriate
utilization, documentation, denials management and quality oversight, if
inadequately administered, can seriously erode the profitability of therapy
programs staffed by and managed by employees of the nursing facility. As a
result, nursing facilities frequently choose to contract for specialized
expertise.
In the current unsettled environment, NovaCare believes that it is
well-positioned to compete effectively with other contractors due to: (i) a
nationwide recruiting organization and substantial staffing capabilities, (ii) a
multi-disciplinary team approach to therapy that is designed to deliver a high
level of quality, (iii) reimbursement and regulatory expertise to assist nursing
facility operators in their dealings with third-party payors, principally
Medicare, (iv) sophisticated management information systems to assist operators
in analyzing clinical outcomes, therapy utilization, claim denials, staffing and
marketing and educational activities and (v) marketing support to increase the
visibility of nursing facilities as a setting for quality rehabilitation.
The supply of therapists is growing at a rate of less than 5% per year, yet
the demand for therapists is growing at 8% to 10% per year. The Bureau of Labor
Statistics estimates that the shortage of therapists will continue into the
first decade of the next century. The principal limitations on the supply of
therapists are the lack of funding to increase the number and size of
educational programs and increasingly stringent accreditation requirements.
Despite this imbalance, NovaCare has been successful in hiring a
disproportionate number of therapists due in part to its "employer of choice"
programs and systems support. The number of full-time-equivalent therapists
employed in the Company's contract therapy business increased 11% during fiscal
1995 to 5,654.
Employer of Choice Programs. NovaCare's employer of choice
initiatives comprise defined career ladders for clinicians, clinical
training and competitive compensation programs and benefits as well as
management and technological support designed to attract and retain
therapists. At June 30, 1995, NovaCare employed 53 recruiters, which
management believes is the largest clinical recruiting organization in the
U.S. Over the past two years, one-fifth of the therapists in NovaCare's
contract therapy business joined NovaCare as a result of employee
referrals.
Systems Support. In fiscal 1995, NovaCare enhanced its proprietary
information system, NovaNet PLUS, which is designed to streamline
administrative activities, capture information of value to customers and
reduce therapist record-keeping burdens. Management believes that this
innovative system and NovaCare's leadership in outcomes measurement
continue to increase NovaCare's attractiveness as an employer of
therapists.
Employee turnover in the rehabilitation industry is high relative to other
industries because of the supply/demand imbalance. Also affecting turnover is
the aggressive recruiting that occurs within the industry and the demographics
of the largely young, female and mobile therapist population. Furthermore,
therapist turnover rates in nursing facilities are traditionally higher than in
other therapy settings due to the increased difficulties in treating geriatric
patients. Total therapist turnover was 38% in fiscal 1995, compared with 32% in
1994. In part, this was due to a restructuring of the business during
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the second half of fiscal 1994 that temporarily disrupted most clinicians'
supervisory relationships. Also, contract turnover during fiscal 1995 (20%
annualized) had a destabilizing effect on the therapists' work environment.
These occurrences resulted in both employee-initiated and Company-initiated
terminations. Management believes the turnover effects of the restructuring have
substantially decreased but the effects of contract turnover will continue
throughout fiscal 1996.
NovaCare contracts predominantly with nursing home companies for the
provision of rehabilitation therapy to their patients. Contracts are generally
written for a period of two years and include automatic renewals for one year.
Contracts are typically terminable upon 30 to 90 days notice by either party.
Nursing facility operators have from time to time attempted to provide
therapy services on an in-house basis, with varying degrees of success. A recent
multi-year study of the costs of in-house programs compared with the costs of
contract therapy indicated higher average therapy costs per patient care hour in
nursing facilities with in-house programs. The study surveyed over 15,000
nursing facilities and examined several years of Medicare cost reports for
nursing facilities with in-house therapy programs. Nevertheless, a number of
national multi-facility nursing home companies have begun, or have announced
that they plan to begin, to discontinue contracting for therapists and to staff
and manage the function directly, effectively taking therapy programs
"in-house." A recent management-sponsored survey indicated that 7% (based on
number of beds) of such companies plan to transition to providing services on an
in-house basis within the next two years. These recent decisions appear to be
related, at least in part, to a desire to gain greater clinical control over
therapy programs rather than due to cost-containment initiatives. This trend has
been exacerbated by the recent consolidation activity in the nursing home
industry.
In the third quarter of fiscal 1995, the Company announced it had reached
an agreement with its largest customer, Beverly, to transition Beverly to an
in-house provider of therapy services over the next two years. Beverly
facilities covered under the agreement represented approximately $77 million of
the Company's annual net revenues in fiscal 1995. Management currently
anticipates a reduction of approximately half of such net revenues will occur in
the last six months of fiscal 1996 as a result of the in-house transition.
However, management is currently unable to reliably predict whether
circumstances may change, either positively or negatively, to alter this
assessment.
NovaCare is compensated for its contract services on a fee-for-service
basis, and generally collects payment for services from the nursing facility,
which in turn may receive reimbursement from Medicare, Medicaid, private
insurance or the patient. Payments from Medicare and Medicaid are subject to
complex regulations. Medicare regulations are subject to anticipated changes
that may have a material effect on the contract therapy services business. See
"Reimbursement/Government Relations," discussed later. NovaCare generally
indemnifies its customers against medical denials of reimbursement by third
party payors, including Medicare. NovaCare has established internal utilization
and documentation standards and systems to minimize denials. During the past two
fiscal years, on average, less than 2% of NovaCare's services were ultimately
denied payment.
OUTPATIENT REHABILITATION SERVICES
Management believes that NovaCare is the largest provider of freestanding
outpatient rehabilitation services in the U.S., with a national network of 400
centers, comprising stand-alone clinics, hospital-based clinics and employer
on-site clinics. Through these settings, licensed physical and occupational
therapists develop individual treatment plans to rehabilitate patients
recovering from musculoskeletal trauma and/or surgery. For the year ended June
30, 1995, outpatient rehabilitation services represented 24% of the Company's
consolidated net revenues and 36% of consolidated Adjusted EBITDA, exclusive of
operations related to the medical rehabilitation hospital division.
Outpatient rehabilitation services include general rehabilitation, which is
designed to return injured and post-operative patients to their optimal
functional capacity; sports rehabilitation, which is designed to minimize the
"down-time" of injured sports participants and safely return them to sports
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activities; industrial rehabilitation and work hardening, which are designed to
reduce work-related injuries and rehabilitate and strengthen injured patients to
allow a rapid, safe return to normal job activities; and hospital-based
services, which involve the provision of inpatient and outpatient rehabilitation
services on a contract basis to acute care hospitals.
Patients are generally referred by physicians (most commonly orthopedists,
physiatrists, primary care physicians, internists and neurologists), managed
care insurers, workers' compensation insurers, case managers, industrial
companies and rehabilitation nurses. In a number of states, patients can obtain
outpatient therapy services by "direct access," that is, without a physician's
referral.
Analysts estimate that the outpatient rehabilitation industry approximates
$7 billion and is growing at a rate of 4-6% per year. NovaCare's share of the
industry total, based on fiscal 1995 revenues, is approximately 3%. The size of
the industry segment of private clinics not affiliated with hospitals is
estimated at $4 billion. The private clinics market is highly fragmented, with
the nine largest firms comprising less than 20% of the market.
ORTHOTIC AND PROSTHETIC SERVICES
NovaCare is the largest custom O&P patient care services organization in
the U.S. with approximately 8% market share. Services are provided by 324
orthotists and prosthetists, referred to as practitioners, through 125 patient
care centers. For the year ended June 30, 1995, O&P services represented 11% of
the Company's consolidated net revenues and 9% of consolidated Adjusted EBITDA,
exclusive of operations related to the medical rehabilitation hospital division.
Orthotic rehabilitation involves the fitting, design and fabrication and
use of custom-made braces and support devices for treatment of musculoskeletal
conditions resulting from illness, injury or congenital anomalies. Prosthetic
rehabilitation involves the fitting, fabrication and use of custom-made
artificial limbs typically required by people who have suffered the loss of a
limb from vascular diseases, diabetes, cancer or trauma. During fiscal 1995, the
Company acquired Sabolich Prosthetic and Research Center, a nationally renowned
leader in prosthetic research, design and patient care, providing services at
four patient care centers throughout the U.S.
The principal referral source for O&P rehabilitation services is the
orthopedic surgeon. However, other specialized physicians, such as physiatrists
and vascular surgeons, and managed care payors have emerged as important
referral sources. Secondary referral sources include physical therapists,
orthopedic nurses, orthopedic technicians and other rehabilitation
professionals.
The O&P rehabilitation industry is estimated to be a $1 billion industry.
According to industry sources, O&P patient care services in the United States
are currently provided through more than 1,100 patient care centers.
VALUE-ADDED SERVICES
The Company recently established a separate division focusing on the
delivery of management and consulting services to health care and long-term care
institutions. Such services currently include subacute program development and
management and nursing facility rehabilitation program management and
consulting. Additional services are being developed. Prior to the establishment
of a separate division these services were reported as a component of contract
therapy services.
Subacute Services
NovaCare manages subacute programs for nursing facilities on a contract
basis. Subacute care is defined as a level of care for patients with medically
stable but frequently complex conditions requiring extensive nursing services,
rehabilitation services and physician oversight in an inpatient setting. These
patients do not require the intensity or scope of services found in an acute
care hospital. Subacute care providers bridge the gap between more costly acute
care settings and lower cost nursing facilities, which typically lack the
intensive integrated services required for these higher acuity
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patients. At June 30, 1995, NovaCare managed distinct subacute units in 58
nursing facilities, with 23 additional units in various stages of development or
under consideration.
Subacute care is a rapidly growing industry. Analysts estimate that the
subacute industry is approximately $4 billion today, and is projected to be a
$10-15 billion industry by the end of the decade. Demand for subacute services
is driven by the desire of payors to contain the costs of health care and by
Medicare's prospective payment system, which encourages the early discharge of
patients from acute care hospitals.
Rehabilitation Program Consulting
The Company provides rehabilitation program consulting and management
services to nursing home operators through its Cannon & Associates organization.
The Company had arrangements to provide such services to 539 nursing homes at
June 30, 1995.
STATISTICAL DATA
The table below sets forth certain operating statistics for rehabilitation
services during the last three years ended June 30. Because of the shortage of
therapists and unmet demand, previously discussed, billable hours relating to
contract therapy services fluctuate principally as a result of (i) the number of
full-time-equivalent employees ("FTE's") available for service and (ii)
productivity as measured by the number of billable hours per FTE per week.
Employee turnover is one factor that adversely affects productivity.
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1995 1994 1993
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CONTRACT SERVICES
Facilities Served........................................... 2,019 2,142 1,901
Billable Hours (000s)....................................... 8,266 7,625 5,513
FTE's:
Physical Therapists....................................... 2,573 2,259 1,561
Occupational Therapists................................... 1,897 1,698 1,280
Speech-Language Pathologists.............................. 1,184 1,154 931
Billable Hours/FTE/Week
Physical Therapists....................................... 33.5 33.3 32.1
Occupational Therapists................................... 25.3 26.5 26.5
Speech-Language Pathologists.............................. 23.8 25.5 25.8
Total Employee Turnover..................................... 38% 32% 27%
OUTPATIENT SERVICES
Number of Patient Care Centers.............................. 400 305 137
Visits (000s)............................................... 2,363 1,450 576
Visits/FTE/Day.............................................. 13.1 12.6 12.8
O&P SERVICES
Number of Patient Care Centers.............................. 125 121 116
Patients Billed (000s)...................................... 162 147 143
</TABLE>
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The table below sets forth the percentage of net revenues by payor source
for the years ended June 30. Contract billings are those contract therapy
services billings to providers of services (e.g., nursing homes that have
contracted directly with Medicare). These services are principally to patients
insured by Medicare.
<TABLE>
<CAPTION>
1995 1994 1993
--- --- ---
<S> <C> <C> <C>
Contract billings................................................ 52% 54% 55%
Private insurance, self pay...................................... 26% 23% 21%
Medicare and Medicaid............................................ 18% 20% 22%
Managed Care..................................................... 4% 3% 2%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
COMPETITION
The health care industry in general, and rehabilitation in particular, are
highly competitive and subject to continual changes in methods of service
delivery and provider selection. Rehabilitation is largely a local market
business and competition varies considerably among markets. NovaCare competes in
the geographic markets where it provides contract therapy services and where its
outpatient rehabilitation and O&P rehabilitation patient care centers are
located. The primary competitive factors in such local markets are quality of
patient care services, charges for services and responsiveness to meeting the
needs of patients, customer health care facilities, referral sources and payors.
Key competitive factors in the contract therapy services business include
the ability to provide therapy staff to meet the therapy needs at customer
facilities and the ability to provide management and clinical support to such
staff. NovaCare competes in local markets with other national and regional and
local contract therapy providers. NovaCare believes that its ability to recruit
therapists allows it to compete successfully with other contract therapy
providers in the markets where NovaCare provides services. The demographics of
potential customers are expected to change as some larger nursing home chains
attempt to take their services in-house. This may increase the competition for
remaining customers. Although the Company intends to expand its customer
contracts in the nursing home industry, the successful development of such
in-house programs by a large number of customers could adversely affect the
Company's ability to maintain its contract therapy services business at present
levels. See "Contract Therapy Services," previously discussed.
In the outpatient rehabilitation business, key competitive factors include
the ability to develop and maintain relationships with referral sources and to
provide sufficient geographic coverage to allow the Company, alone or with other
providers, to compete successfully for patients from managed care payors,
workers' compensation payors and employers in manufacturing and service
industries. The Company competes in local markets with other national and
regional and local outpatient therapy service providers, as well as
hospital-based outpatient clinics and physician-directed therapy practices. Some
of these competitors may have greater patient referral, personnel and geographic
resources in certain local markets than does the Company. Management believes
that the Company competes successfully within its local markets based on a
reputation with referral sources for quality and service, an ability to provide
geographic coverage and competitive prices.
Competition in the O&P business is marked by an ability to compete for
patient referrals from physicians, rehabilitation professionals, hospitals and
payor sources. Competition in the O&P industry is highly fragmented; however,
there are several regional providers with multiple facilities in certain local
markets. The primary competitive factors in the industry are quality of patient
care services, staffing, geographic coverage, reimbursement support and, to a
lesser extent, pricing. Many practitioners generate patient referrals due to
long-term relationships with referring physicians. Referral source relationships
often continue through a multi-generational succession of practices. Management
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believes the Company competes successfully within local markets because of
strong referral relationships and quality of patient care services.
National and local sponsorship and support of organizations for injured and
disabled individuals enhance NovaCare's visibility and competitive position. In
addition, NovaCare has developed affiliations with academic institutions and has
provided funding for the development of a number of university physical therapy
and occupational therapy programs.
REIMBURSEMENT/GOVERNMENT RELATIONS
Reimbursement for medical rehabilitation services is available through
Medicare, Medicaid, commercial insurance, managed care programs, veterans
benefits, workers' compensation and other government programs. Medicare is a
federally funded health program which provides health insurance coverage for
certain disabled persons and persons age 65 or older. Medicaid is a health
insurance program, jointly funded by the federal and state governments, which
provides health insurance coverage for certain financially or medically needy
persons regardless of age. Medicaid benefits supplement Medicare benefits for
financially needy persons age 65 or older. Congress has provided, through the
Medicare program, for coverage of contract therapy services, outpatient
rehabilitation services and O&P devices and patient care services. Medicare
reimbursement rules are different for a number of these services. Moreover, in
many states Medicaid reimburses for rehabilitation services for eligible
recipients. A substantial portion of NovaCare's business, in effect, is
reimbursed by Medicare, and a small portion by Medicaid. As a result,
regulations regarding Medicare and Medicaid eligibility, certification and
reimbursement are important to NovaCare's activities and changes in these
programs or regulations could adversely affect NovaCare's business.
The 104th Congress will consider health care reform and balanced budget
proposals. Consideration is expected on measures which will control health care
costs. Legislative changes to slow the annual rate of growth of Medicare and
Medicaid are expected. Such changes may impact reimbursement for rehabilitation.
Contract Therapy Services
Contract therapy services are covered and reimbursed in one of two ways.
NovaCare may bill a facility, which, in turn, invoices the third-party payor,
such as Medicare, or NovaCare may provide services through its own certified
rehabilitation agency, which directly bills the third-party payor. In most
cases, NovaCare bills the facility.
Medicare reimburses the nursing facility for contract therapy services on a
cost basis, and reimbursement levels are determined based on a reasonable-cost
standard. Specific guidelines exist for evaluating the reasonable cost of
physical therapy. General guidelines exist for evaluating the reasonable cost of
occupational therapy and speech-language pathology services. When a nursing
facility contracts with a third party, such as NovaCare, for physical therapy
services, a standard rate system applies. This system is called
salary-equivalency. The physical therapy salary-equivalency rates have been
adjusted annually based on a 1983 standard but do not adequately reflect salary
inflation since 1983. As a result, physical therapy contract services are
essentially a break-even business for many contractors, including NovaCare.
The Health Care Financing Administration ("HCFA"), the federal agency
responsible for the rules governing Medicare and Medicaid, has indicated it
intends to issue specific reimbursement guidelines for occupational therapy and
speech-language pathology services and to recalculate and update the existing
guidelines for physical therapy services. Proposed rules governing such
guidelines are expected for public comment in the last quarter of calendar year
1995. Final rules are expected to be promulgated in the second quarter of
calendar year 1996.
Management believes that, when occupational therapy and speech-language
pathology services guidelines are established, HCFA will recalculate and update
the physical therapy salary-equivalency
9
<PAGE> 12
guidelines in consideration of the substantial increases in salary and services
standards since these guidelines were last revised. Because the nature and
magnitude of these changes are not certain at this time, there are no assurances
with respect to the impact such changes may have on NovaCare. NovaCare is
actively involved with industry trade groups working to ensure that such final
rules are based on timely, accurate and relevant data. Management is taking
steps which it believes will help to mitigate any adverse economic impact of
these changes. There can be no assurance that future (i) legislation, either
health care or budgetary, (ii) regulatory changes or (iii) interpretations of
regulations, will not have a material adverse effect on the future operations of
the Company.
Until such time as salary-equivalency guidelines are formally promulgated,
contract occupational therapy and speech-language pathology services are
evaluated based upon the reasonableness of costs incurred by the provider under
a "prudent buyer" standard. During the past two years, HCFA has issued several
directives to its fiscal intermediaries instructing them on how to ensure
therapy costs are reasonable. One such advisory issued in April 1995 was
controversial as it included a series of data tables with incomplete
instructions. Responding to concerns raised by the nursing home and
rehabilitation sectors, HCFA clarified its guidance in a June 1995 directive
reiterating that fiscal intermediaries must apply the "prudent buyer" principle
when evaluating whether a facility's costs are substantially out-of-line.
Intermediaries are instructed to consider relevant facts and circumstances
concerning a facility's contracting costs. The attention being given by HCFA to
these instructions has increased scrutiny of contracting practices. NovaCare is
working with its customers to resolve issues raised by fiscal intermediaries in
cost report audits.
Over the past 15 years, numerous proposals for some form of prospective
payment system have been suggested for nursing facilities. NovaCare is part of
an ongoing industry effort that works closely with federal regulators in
assessing alternatives to present reimbursement systems. Legislation has been
introduced in the 104th Congress to implement a comprehensive prospective
payment system for nursing homes including a separate payment for ancillary
services, including therapy services. This measure and related ideas may be
considered as part of Medicare reforms and/or cost containment legislation.
NovaCare is actively involved in the trade groups assisting the Congress in
evaluating these payment strategies.
NovaCare also receives reimbursement by Medicare for a portion of its
contract therapy services provided through certified rehabilitation agencies.
See "Government Regulation," discussed later. NovaCare's certified
rehabilitation agencies file annual cost reports under the Medicare program
which are used to determine cost settlements for the prior year and interim
payment rates for the upcoming year. Funds received under various state programs
and Medicare are subject to audit with respect to proper application of the
various payment formulas. These audits can result in retroactive adjustments of
payments received from the program by NovaCare. If, as a result of such audits,
it is determined that overpayments for services were made to NovaCare, the
excess amount must be repaid by NovaCare to the government. If, on the other
hand, it is determined that an underpayment was made, the government agency will
make an additional payment to NovaCare.
Outpatient Rehabilitation Services
The principal sources of reimbursement for outpatient rehabilitation are
managed care plans, commercial and workers' compensation insurance, motor
vehicle insurance and individual patients. Medicare and other government health
insurance programs represent approximately 11% of revenues.
Workers' compensation is a statutorily defined employee benefit which
varies on a state-by-state basis. Workers' compensation laws generally require
employers to pay for employees' costs of medical treatment, lost wages, legal
fees and other costs associated with work-related injuries and disabilities and,
in certain jurisdictions, mandatory vocational rehabilitation. Companies provide
such coverage to their employees through either the purchase of insurance from
private insurance companies, participation in state-administered funds or
through self-insurance. Workers' compensation represented approximately 32% of
fiscal 1995 outpatient rehabilitation revenues.
10
<PAGE> 13
Managed care plans represented approximately 12% of fiscal 1995 outpatient
rehabilitation revenues. NovaCare receives revenues under managed care plans
either on a discounted fee-for-service basis or, in a growing number of cases,
on the basis of capitated fees per covered member per month.
NovaCare receives reimbursement by Medicare for outpatient rehabilitation
services primarily through NovaCare's certified rehabilitation agencies. See
"Government Regulation," discussed later.
Orthotics and Prosthetics Services
O&P rehabilitation patient care services are reimbursed primarily by
commercial insurance, managed care plans, individual patients, workers'
compensation, Medicare and other government programs. In fiscal 1995, Medicare
and other government programs, including Medicaid, represented approximately 41%
of NovaCare's revenues for O&P patient care services. Medicare reimbursement is
based on fee schedules established by HCFA. See "Government Regulation,"
discussed later.
GOVERNMENT REGULATION
The health care industry, including rehabilitation services, is subject to
extensive federal, state and local regulation. The various layers of regulation
affect NovaCare's business by requiring licensure or certification of its
employees and facilities and controlling reimbursements for services provided.
Government and other third-party payors' health care policies and programs have
been subject to changes in payment and methodologies for a number of years.
Efforts to reform the nation's health care system could induce additional
changes. See "Reimbursement/Government Relations," previously discussed.
NovaCare operates certified rehabilitation agencies to facilitate billing
for outpatient services and a portion of its contract therapy services. In order
to receive Medicare reimbursement directly, outpatient centers must be certified
by Medicare as rehabilitation agencies or comprehensive outpatient
rehabilitation facilities, or the therapists must be certified as independently
practicing therapists. The certification criteria relate to the type of facility
and its equipment, record keeping, staffing and service as well as compliance
with all state and local laws. In addition, certain states require facilities to
obtain state licensure as a health facility as a requirement for reimbursement.
As of June 30, 1995, NovaCare operated 20 and 55 certified rehabilitation
agencies for contract therapy services and outpatient rehabilitation services,
respectively. Management believes its operations are structured to comply with
all applicable rules and regulations.
In order to participate in the Medicare program, NovaCare's O&P patient
care centers are required to secure and maintain a supplier number. This process
requires certain disclosures and procedural requirements, which change
periodically. All of NovaCare's O&P patient care centers presently maintain such
a supplier number.
In most states, the employment of therapists by business corporations is a
permissible practice. However, several states, including states in which
NovaCare operates outpatient centers, have enacted legislation or regulations or
have interpreted existing physical or occupational therapy licensing laws to
restrict business corporations, such as NovaCare, from practicing physical or
occupational therapy through the direct employment of therapists. Management
believes its operations are structured to comply with applicable laws and
regulations.
Various state and federal laws and regulations govern relationships between
providers of health care services and physicians, including employment or
service contracts and investment relationships. These laws and regulations
include the fraud and abuse provisions of the Medicare and Medicaid statutes,
which prohibit the payment, receipt or offering of any direct or indirect
remuneration for the referral of or to induce a referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment and the self-referral provisions of federal and
state law which generally prohibit referrals by a physician to persons with whom
the physician has
11
<PAGE> 14
certain types of financial relationships. Violations of these provisions may
result in civil or criminal penalties for individuals or entities and/or
exclusion from participation in the Medicare and Medicaid programs. Management
believes it is in compliance with these laws and regulations and has established
a broad-based compliance program to ensure conformity to these rules as well as
to other laws and regulations.
INSURANCE
The Company maintains professional liability insurance in amounts deemed
appropriate by management based upon historical claims and the nature and risks
of the business. The Company also maintains property and general liability
insurance for the customary risks inherent in the operation of businesses in
general. While NovaCare believes its insurance policies to be adequate in amount
and coverage for its current operations, there can be no assurance that any
future claims will not exceed the limits of those policies or that such
insurance will continue to be available.
EMPLOYEES
As of June 30, 1995, NovaCare had approximately 11,000 employees.
NovaCare's employees are not represented by any labor union. Management believes
that its relationships with its employees are favorable.
12
<PAGE> 15
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of NovaCare are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
---------------------------- ---------------------------------------------------------- ---
<S> <C> <C>
John H. Foster.............. Chairman of the Board, Chief Executive Officer and 53
Director
Timothy E. Foster........... President, Chief Operating Officer and Director 43
C. Arnold Renschler, M.D.... Senior Vice President and Chief Clinical Officer and 53
Director
Daryl A. Dixon.............. President and General Manager, Contract Services Division 35
Ronald G. Hiscock........... President and General Manager, Orthotic and Prosthetic 44
Division
James C. New................ President and General Manager, Outpatient Rehabilitation 50
Division
Peter D. Bewley............. Senior Vice President, General Counsel and Secretary 49
Bruce J. Colburn............ Senior Vice President, Chief Financial Officer and 40
Treasurer
Laurence F. Lane............ Senior Vice President, Regulatory Affairs 50
Arthur T. Locilento, Jr..... Senior Vice President, Human Resources 52
Scott Marber................ Senior Vice President, Corporate Sales and Marketing 39
Susan J. Campbell........... Vice President, Communications and Investor Relations 44
James T. Walmsley........... Vice President, Reimbursement 45
</TABLE>
No family relationships exist among any of the directors or executive
officers of NovaCare. Executive officers serve at the discretion of the NovaCare
Board of Directors.
JOHN H. FOSTER has been Chairman of the Board and Chief Executive Officer
of NovaCare since December 1984. Mr. Foster is also Chairman of the Board and
Chief Executive Officer of Apogee, Inc., a national mental health services
company; a Director of The Pet Practice, Inc., a veterinary services company;
and a Director of Corning Incorporated, an international corporation with
business interests in specialty materials, communications, laboratory services
and consumer products. Mr. Foster is founder and Chairman of the Board of Foster
Management Company, an investment advisor, and general partner of various
venture capital investment funds. He was also the founder, Chairman of the Board
and Chief Executive Officer of RehabClinics, Inc., which was acquired by
NovaCare in February 1994, and founder, Chairman of the Board and Chief
Executive Officer of Orthopedic Services, Inc., which was acquired by NovaCare
in March 1992.
TIMOTHY E. FOSTER has been President and Chief Operating Officer since
October 1994. He served as Senior Vice President, Finance and Administration and
Chief Financial and Accounting Officer of NovaCare from November 1988 to October
1994, Treasurer of NovaCare from March 1992 to October 1994, and has been a
Director of NovaCare since December 1984. Mr. Foster currently serves as a
Director of Apogee, Inc., a national mental health services company, a position
he has had since February 1995.
C. ARNOLD RENSCHLER, M.D. has been Senior Vice President and Chief Clinical
Officer of NovaCare since May 1994 and has been a Director of NovaCare since
1990. He currently acts as President and General Manager of the Company's
Value-added Services Division. Dr. Renschler served as President and General
Manager, Medical Rehabilitation Hospital Division of NovaCare from January 1994
to May 1995. Between July 1992 and January 1994, he served as President and
General Manager of NovaCare's Contract Services Division. Dr. Renschler was
President and Chief Operating Officer of NovaCare from January 1990 until
September 1992.
DARYL A. DIXON has been President and General Manager of NovaCare's
Contract Services Division since January 1994. He joined NovaCare in February
1992 as Regional Vice President in the Contract Services Division and was Vice
President, Operations of the Contract Services Division from November 1992 until
January 1994. From 1982 to 1992, he held various positions at Manor HealthCare,
Inc., a nursing home management company.
RONALD G. HISCOCK has been President and General Manager of NovaCare's
Orthotics and Prosthetics Division since April 1995. He joined NovaCare in June
1992 as the East Region President
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<PAGE> 16
for the Orthotics and Prosthetics Division and was the Division's Vice President
of Operations from July 1994 through March 1995. Prior to joining NovaCare, he
spent 23 years in senior management positions with Sears Roebuck & Company and
Montgomery Ward.
JAMES C. NEW has been President and General Manager of NovaCare's
Outpatient Rehabilitation Division since February 1994. From May 1991 to
February 1994, he was President and Chief Operating Officer of RehabClinics,
Inc., which was acquired by NovaCare in February 1994. From 1988 to 1991, he was
President and Chief Operating Officer of Greater Atlantic Health Services, Inc.,
a health maintenance organization.
PETER D. BEWLEY has been Senior Vice President, General Counsel and
Secretary of NovaCare since May 1994. Most recently, Mr. Bewley was at Johnson &
Johnson, where he was Associate General Counsel since 1977.
BRUCE J. COLBURN has been Senior Vice President, Chief Financial Officer
and Treasurer since May 1995. Most recently, Mr. Colburn was Senior Vice
President and Chief Financial Officer of Primary Health Systems, L.P., an acute
care hospital management company, and remains a limited partner. In 1994, Mr.
Colburn was Senior Vice President, Finance of OrNda Healthcorp, an acute care
hospital management company, and prior to that held various financial officer
positions with American Healthcare Management, Inc. (acquired by OrNda
Healthcorp in 1994). From 1985 to 1990, Mr. Colburn served as an executive with
Ernst & Young's National Accounting and Auditing Group.
LAURENCE F. LANE has been Senior Vice President, Regulatory Affairs of
NovaCare since October 1994. From November 1986 to October 1994 he was Vice
President, Regulatory Affairs.
ARTHUR T. LOCILENTO, JR. has been Senior Vice President, Human Resources of
NovaCare since October 1994. From March 1988 to October 1994, he was Vice
President, Human Resources.
SCOTT MARBER has been Senior Vice President, Corporate Sales and Marketing
since August 1995. From 1990 to 1995, Mr. Marber was at Olsten Kimberly
QualityCare, a provider of home health care services, where he was Vice
President of Sales and National Accounts. From 1986 to 1990, he was Vice
President, Sales and Marketing for Private Healthcare Systems, a managed care
partnership between certain providers of health care services and insurance
companies.
SUSAN J. CAMPBELL has been Vice President, Communications and Investor
Relations of NovaCare since April 1995. She joined NovaCare in March 1993 as
Director of Investor Relations and was Vice President, Investor Relations from
April 1994 to April 1995. Ms. Campbell was Vice President, Investor Relations,
First Fidelity Bancorporation from 1982 to 1993.
JAMES T. WALMSLEY has been Vice President, Reimbursement of NovaCare since
January 1994 and Director of Reimbursement since April 1992. Prior to joining
NovaCare, he was Vice President, Reimbursement and Regulatory Affairs for
National Medical Enterprise's Specialty Hospital Division. From 1982 to 1990, he
worked in the Management Consulting Services Group of Price Waterhouse.
ITEM 2. PROPERTIES
NovaCare's principal executive offices are located at 1016 West Ninth
Avenue, King of Prussia, Pennsylvania, where NovaCare leases approximately
78,072 square feet of office space. The lease for this office space expires in
July 2005. NovaCare leases other office and center space at approximately 550
locations in various cities within the United States. Such space aggregates
approximately 1,200,000 square feet under lease arrangements which typically are
three years or less in duration.
NovaCare leases expire at various times through 2020. NovaCare anticipates
that it will be able to renew its leases upon their expiration or lease other
facilities on comparable terms if leases are not renewed. NovaCare believes that
it has adequate capacity for its present needs and planned expansion in the near
future.
NovaCare also has sublease agreements for approximately 13,000 square feet
of office space, expiring June to September 2000, with companies in which
NovaCare's Chairman of the Board and Chief Executive Officer is a Director
and/or an Executive Officer.
14
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
NovaCare is a party to various claims, legal actions and complaints arising
in the ordinary course of business. In the opinion of management and legal
counsel, all such matters are adequately covered by insurance, or, if not
covered, are without merit or are of such kind, or involve such amounts, that
unfavorable disposition would not have a material adverse effect on the
financial position or results of operations of NovaCare.
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
NovaCare's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol NOV. On August 31, 1995, there were 2,471 holders of record of
common stock.
The following table sets forth the high and low sales prices per share of
common stock as reported on the NYSE Composite Tape for the relevant periods.
<TABLE>
<CAPTION>
COMMON STOCK
PRICES
------------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED JUNE 30, 1995
First Quarter............................................ $16.88 $10.63
Second Quarter........................................... 11.25 7.13
Third Quarter............................................ 9.88 7.38
Fourth Quarter........................................... 9.50 7.38
YEAR ENDED JUNE 30, 1994
First Quarter............................................ $14.88 $11.50
Second Quarter........................................... 15.63 11.75
Third Quarter............................................ 18.88 14.00
Fourth Quarter........................................... 19.13 15.75
</TABLE>
With the exception of 2-for-1 stock splits of common stock effected in the
form of stock dividends in June 1987 and July 1991, no other dividends have been
paid or declared on common stock since NovaCare's initial public offering on
November 5, 1986. NovaCare does not expect to declare any cash dividends on
common stock in the foreseeable future.
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
NovaCare's consolidated financial statements and the accompanying notes
presented elsewhere herein.
NOVACARE, INC. AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $905,359 $789,745 $582,342 $392,278 $252,532
Adjusted EBITDA(1).......................... $116,703 $136,476 $ 96,737 $ 68,537 $ 41,805
Income from operations...................... $143,881 $108,208 $ 78,819 $ 54,527 $ 32,562
Net interest (expense) income............... $(17,893) $(11,773) $ (2,841) $ 1,355 $ (910)
Income before income taxes.................. $125,584 $ 95,892 $ 75,542 $ 55,461 $ 31,338
Income taxes................................ $ 63,660 $ 37,678 $ 27,906 $ 18,868 $ 11,199
Net income.................................. $ 61,924 $ 58,214 $ 47,636 $ 36,593 $ 20,139
Net income applicable to common stock(2).... $ 61,924 $ 58,214 $ 47,585 $ 36,483 $ 19,942
Net income per common share................. $ .95 $ .90 $ .79 $ .64 $ .39
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $255,126 $194,324 $265,908 $ 97,608 $ 95,983
Total assets................................ $852,557 $850,541 $611,567 $312,566 $232,123
Total indebtedness.......................... $225,015 $344,602 $206,415 $ 37,528 $ 27,968
Total liabilities........................... $364,922 $434,837 $282,587 $ 88,587 $ 58,615
Stockholders' equity........................ $487,635 $415,704 $328,980 $223,979 $173,508
</TABLE>
---------------
(1) Adjusted EBITDA represents earnings before interest, income taxes,
depreciation, amortization of excess cost of net assets acquired, merger and
other nonrecurring items and minority interest.
(2) Gives effect to dividends, whether or not declared, on 10% mandatorily
redeemable preferred stock issued by a consolidated subsidiary in fiscal
1991 which was redeemed in fiscal 1993 and on 10% cumulative preferred stock
issued by a consolidated subsidiary in fiscal 1990 which was redeemed in
fiscal 1991.
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During fiscal 1995, the Company's net income, excluding the after-tax
effect of nonrecurring items, declined to $40.1 million compared with $63.1
million in fiscal 1994. Nonrecurring items in fiscal 1995 consisted of an $88.2
million pretax gain on the sale of the of the stock of a subsidiary, a $29.9
million pretax restructuring charge and a $1.0 million pretax charge relating to
the settlement of certain shareholder litigation.
Hospitals Division Sale
Effective April 1, 1995, the Company sold the stock of a subsidiary, which
owned all eleven of the Company's medical rehabilitation hospitals, in a
transaction valued at $242.9 million. In fiscal 1995 this subsidiary contributed
$110.6 million to consolidated net revenues and $19.4 million to consolidated
earnings before interest, taxes, depreciation, amortization, nonrecurring items,
and minority interest. The transaction resulted in a pretax gain on sale of
$88.2 million. In connection with the sale the Company reduced its long-term
debt by $151.7 million and invested the remaining net proceeds in short-term
investments for general corporate purposes.
Restructuring Charge
As discussed in Note 2 to the accompanying consolidated financial
statements, the Company recorded a pretax restructuring charge of $29.9 million
related to a plan, adopted and approved in the fourth quarter of fiscal 1995, to
consolidate specific administrative functions, including certain finance
operations, and to consolidate, and to a lesser extent, close certain
underperforming locations. The plan was developed in a effort to reduce the
costs of providing services in certain locations and reduce overall
administrative costs. Of the total restructuring charge, $14.5 million relates
to amounts to be paid in cash, of which $2.7 million was paid in the fourth
quarter of fiscal 1995. The noncash portion of the charge relates to the
write-off of certain assets, principally goodwill related to facilities closed
or to be closed. The Company estimates that the plan, when fully implemented
will reduce or eliminate approximately $12 million to $15 million of annual
expenses.
Shareholder Litigation
Following the Company's announcement in September 1994 that first quarter
fiscal 1995 earnings would not meet analyst's expectations, the price of the
Company's stock dropped sharply and a suit was filed against the Company and its
Chairman alleging that the Company's first quarter fiscal 1995 operating
problems were not disclosed early enough. The Company and the Chairman denied
the allegations and mounted a vigorous defense. Settlement of the suit in March
1995 resulted in a $1 million pretax charge representing both settlement and
legal costs.
RESULTS OF OPERATIONS
General Trends
During the periods discussed below, the Company's results of operations
have been affected by certain industry trends, sale of the Company's medical
rehabilitation hospital business and changes in the Company's debt structure.
17
<PAGE> 20
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Industry Trends
During the past year, the Company and other rehabilitation providers faced,
and will continue to face, a number of risks creating an environment of
uncertainty as to the future growth and profitability of the industry. These
risks include (i) the potential impact of any Congressional proposals addressing
health care reform and a "balanced budget," (ii) pending regulatory pressure to
reduce certain reimbursement rates, discussed later, (iii) increasing
competition among providers of rehabilitation services for existing business and
(iv) increased penetration in the outpatient setting by managed care payors,
with attendant lower rates of reimbursement. Additionally, national
multi-facility nursing home companies are showing an increasing tendency to
provide therapy services in-house rather than to contract for such services.
The 104th Congress will consider health care reform and balanced budget
proposals. Consideration is expected on measures which will control health care
costs. Legislative changes to slow the annual rate of growth of Medicare and
Medicaid are expected. Such changes may impact reimbursement for rehabilitation.
There can be no assurance that future (i) legislation, either health care or
budgetary, (ii) regulatory changes or (iii) interpretations of regulations, will
not have a material adverse effect on the future operations of the Company.
HCFA is in the process of reviewing existing reimbursement requirements for
contract therapy services and is expected to propose salary-equivalency
guidelines for speech-language pathology and occupational therapy services in
the last quarter of calendar year 1995. Management believes that, if
speech-language pathology and occupational therapy services guidelines are
established, HCFA will recalculate and update the physical therapy
salary-equivalency guidelines in consideration of the substantial increases in
salary and services standards since these guidelines were last revised. Final
rules are expected to be promulgated in the second quarter of calendar year
1996. NovaCare is actively involved with industry trade groups working to ensure
that such final rules are based on timely, accurate and relevant data. Because
the nature and magnitude of these changes are not certain at this time, there
are no assurances with respect to the impact such changes may have on NovaCare.
Management is taking steps which it believes will help to mitigate any adverse
economic impact of these changes.
Until such time as salary-equivalency guidelines are formally promulgated,
contract occupational therapy and speech-language pathology services are
evaluated based upon the reasonableness of costs incurred by the provider under
a "prudent buyer" standard. During the past two years, HCFA has issued several
directives to its fiscal intermediaries instructing them on how to ensure
therapy costs are reasonable. One advisory issued in April 1995 was
controversial as it included a series of data tables with incomplete
instructions. Responding to concerns raised by the nursing home and
rehabilitation sectors, HCFA clarified its guidance in a June 1995 directive
reiterating that fiscal intermediaries must apply the "prudent buyer" principle
when evaluating whether a facility's costs are substantially out-of-line.
Intermediaries are instructed to consider relevant facts and circumstances
concerning a facility's contracting costs. The attention being given by HCFA to
these instructions has increased scrutiny of contracting practices. NovaCare is
working with its customers to resolve issues raised by fiscal intermediaries in
cost report audits.
18
<PAGE> 21
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Year Ended June 30, 1995 Compared with the Year Ended June 30, 1994.
Net revenues for the year ended June 30, 1995 increased over the prior year
by $115.6 million or 14.6% to $905.4 million and earnings before interest,
taxes, depreciation, amortization, nonrecurring items and minority interest
("Adjusted EBITDA") decreased by $19.8 million or 14.5% to $116.7 million.
Because of the net nonrecurring pretax gain of $57.4 million, the Company
reported net income for the year ended June 30, 1995, of $61.9 million compared
with net income of $58.2 million for the year ended June 30, 1994. Fiscal 1994
included pretax nonrecurring charges $5.8 million related to a merger
transaction. Excluding the after-tax effect of nonrecurring items, the Company's
net income declined to $40.1 million for fiscal 1995 compared with $63.1 million
for fiscal 1994.
The principal reasons for the net revenues increase during this period were
(i) an increase in contract therapy services billable hours of 641,000 hours or
8.4%, combined with an aggregate increase in net revenue per billable hour of
approximately 3%, (ii) an increase in outpatient rehabilitation visits of
913,000 visits or 63.0% resulting primarily from 25 acquisitions in fiscal 1995
and the full effect of 42 acquisitions during fiscal 1994 and (iii) an increase
in O&P patients billed of 15,000 or 10.2% combined with an aggregate increase in
net revenue per patient of 12.4%. These increases were offset by a decrease in
the net revenues applicable to the medical rehabilitation hospital division of
$26.4 million due to its sale effective April 1, 1995, compared with a full year
of operations recorded in fiscal 1994.
The decrease in Adjusted EBITDA for the year ended June 30, 1995, as
contrasted with the increase in net revenues, principally resulted from an
increase in the costs of contract therapy services as a percentage of net
revenues. The increase resulted primarily from (i) salary rate increases for
therapists well in excess of aggregate net revenues per billable hour rate
increases, (ii) an overall decrease in therapist productivity primarily due to
increased employee turnover and contract turnover and (iii) a decrease in the
percentage of billable hours in the higher-margin occupational therapy and
speech-language pathology services. To a lesser extent, the decrease in Adjusted
EBITDA resulted from the decrease in the Adjusted EBITDA applicable to the
medical rehabilitation hospital division of $6.0 million due to its sale
effective April 1, 1995, compared with a full year of operations recorded in
fiscal 1994 and from an increase in corporate expenses.
Depreciation and amortization for the year ended June 30, 1995 increased by
$7.7 million as compared with the prior year, primarily due to the placing in
service of certain internally-developed software during the year and the
full-year effect of acquisitions made during fiscal 1994.
Interest expense, net of investment income, increased $6.1 million compared
with the year-earlier period principally as a result of increased borrowings
under the Credit Facility to fund acquisitions partially offset by an increase
in short-term investments in the fourth quarter of fiscal 1995 in connection
with the sale of the Company's medical rehabilitation hospital division,
previously discussed.
Income tax expense as a percentage of pretax income increased to 50.7% for
the year ended June 30, 1995 from 39.3% for the previous year. The increase in
the rate principally resulted from a higher rate of state income taxes related
to net nonrecurring items and the nondeductible write-off of goodwill in
connection with the restructuring charge recorded in fiscal 1995.
Year Ended June 30, 1994 Compared with the Year Ended June 30, 1993.
Net revenues for the year ended June 30, 1994 increased over the prior year
by $207.4 million or 35.6% to $789.7 million and Adjusted EBITDA increased by
$39.7 million or 41.1% to $136.5 million. The Company reported net income for
the year ended June 30, 1994 of $58.2 million compared with
19
<PAGE> 22
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
net income of $47.6 million for the year ended June 30, 1993. Fiscal 1994 and
1993 included pretax nonrecurring charges $5.8 million and $5.7 million,
respectively, relating to merger transactions and other nonrecurring items.
The principal reasons for the net revenues increase during this period are
(i) an increase in contract therapy services billable hours of 2.1 million hours
or 38.3%, offset by an aggregate decrease in net revenue per billable hour of
approximately 6%, (ii) an increase in outpatient rehabilitation visits of
874,000 visits or 151.7% resulting primarily from 42 acquisitions during fiscal
1994 and the full effect of 27 acquisitions in the prior fiscal year and (iii)
an increase in net revenues attributable to the medical rehabilitation hospital
division of $34.1 million due principally to the acquisition of Rehabilitation
Hospital Corporation of America ("RHCA") in October 1993.
The substantial increase in Adjusted EBITDA for the year ended June 30,
1994 principally resulted from increases in net revenues. Additional factors
affecting the increase included (i) substantially higher margins relating to
outpatient centers acquired, (ii) substantially higher margins relating to the
RHCA acquisition, and (iii) leveraging of corporate overhead resulting in only a
2% increase in corporate expenses despite the 35.6% increase in overall net
revenues.
Depreciation and amortization for the year ended June 30, 1994 increased by
$10.3 million as compared with the prior year, primarily due to acquisitions.
Interest expense, net of investment income, increased $8.9 million compared
with the year-earlier period principally as a result of financed acquisitions.
Income tax expense as a percentage of pretax income increased to 39.3% for
the year ended June 30, 1994 from 36.9% for the previous year. The increase in
the rate principally resulted from the increased amortization of nondeductible
goodwill in connection with acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company working capital increased $60.8 million to
$255.1 million compared with $194.3 million at June 30, 1994. Exclusive of
working capital relating to the medical rehabilitation hospital division,
working capital increased during this period by $86.5 million. The increase in
working capital principally resulted from (i) approximately $85 million of cash,
in excess of amounts used to repay indebtedness, generated from the sale of the
hospital division, (ii) the liquidation in the fourth quarter of fiscal 1995 of
the $22.4 million portfolio long-term municipal securities at a nominal loss and
(iii) an increase in other current assets of $16.9 million principally relating
to amounts receivable in connection with the hospital division sale offset by an
increase in accounts payable and accrued expenses principally relating to the
recording of the restructuring charge liability and current income taxes
payable.
Prior to the sale of the hospital division, the Company's cash portion of
working capital was managed primarily through a revolving credit arrangement,
whereby excess cash generated through operations or otherwise was used to reduce
amounts outstanding under the existing $175.0 million Revolving Credit Facility
Credit Agreement (the "Credit Facility"). When cash requirements arose, the
Credit Facility was drawn upon for such needs. The Credit Facility was
classified as long-term debt on the Company's balance sheet. In connection with
the sale, the Company paid all outstanding amounts drawn on the Credit Facility.
Prospectively, excess cash has been invested in short-term securities and
management intends to continue to invest excess cash in short-term securities.
The Company used $29.5 million of cash for capital expenditures, including
capitalized software costs, in fiscal 1995 compared with $28.0 million in fiscal
1994 and anticipates spending up to
20
<PAGE> 23
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
$34.1 million in fiscal 1996. Capital expenditures generally relate to costs
incurred in connection with internally-developed software and normal leasehold
renovations and equipment replacement. In fiscal 1995, the Company also paid
$60.9 million for acquisitions, principally relating to 25 acquired outpatient
rehabilitation centers, and $10.8 million on earnout arrangements relating to
previous acquisitions. The Company currently does not plan to pursue
acquisitions of businesses to the extent of amounts paid for such purposes in
fiscal 1995; however, such plans are subject to change. In addition, cash
payments relating to earnout arrangements are expected to amount to $12.2
million in fiscal 1996, subject to the fulfillment of various requirements in
the existing earnout arrangements. In fiscal 1995, cash payments for capital
expenditures, businesses acquired and earnouts were principally financed through
use of the Credit Facility.
In connection with the sale of the hospital division, the Company is in the
process of amending the Credit Facility, upon which no amounts are currently
drawn, to reflect the sale and other matters. At June 30, 1995, commitment
availability had been reduced by $6.3 million for issued letters of credit.
The Company believes that 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 are subject to
inflationary increases, particularly therapist salary increases, which
historically have exceeded other medical industry salary rate increases due to
the existing supply shortage of therapists. The Company has historically been
unable to substantially offset inflationary increases through charge increases,
but has somewhat mitigated the effect by expanding services and increasing
operating efficiencies. In the existing regulatory environment and to the extent
that inflation occurs in the future, the Company will unlikely be able to pass
on the increased costs associated with providing health care services to
customers insured by government or managed care payors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of " ("SFAS121"),
which the Company is required to adopt no later than the first quarter of fiscal
year 1997. SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
intangible assets to be disposed of. Management does not believe the adoption of
SFAS 121 will have a material effect on the Company's financial position or
results of operations.
FORWARD OUTLOOK
Future trends for net revenues and profitability continue to be difficult
to predict. The Company faces a number of risks. See "Results of
Operations -- Industry Trends," previously discussed.
Nursing facility operators have from time to time attempted to provide
therapy services on an in-house basis, with varying degrees of success. A recent
multi-year study of the costs of in-house programs compared with the costs of
contract therapy indicated higher average therapy costs per patient care hour in
nursing facilities with in-house programs. The study surveyed over 15,000
nursing facilities and examined several years of Medicare cost reports for
nursing facilities with in-house therapy programs. Nevertheless, a number of
national multi-facility nursing home companies have
21
<PAGE> 24
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
begun, or have announced that they plan to begin, to discontinue contracting for
therapists and to staff and manage the function directly, effectively taking
therapy programs "in-house." A recent management-sponsored survey indicated that
7% (based on number of beds) of such companies plan to transition to providing
services on an in-house basis within the next two years. These recent decisions
appear to be related, at least in part, to a desire to gain greater clinical
control over therapy programs rather than due to cost-containment initiatives.
This trend has been exacerbated by the recent consolidation activity in the
nursing home industry.
In the third quarter of fiscal 1995, the Company announced it had reached
an agreement with its largest customer, Beverly, to transition Beverly to an
in-house provider of therapy services over the next two years. Beverly
facilities covered under the agreement represented approximately $77 million of
the Company's annual net revenues in fiscal 1995. Management currently
anticipates a reduction of approximately half of such net revenues will occur in
the last six months of fiscal 1996 as a result of the in-house transition.
However, management is currently unable to reliably predict whether
circumstances may change, either positively or negatively, to alter this
assessment.
Outpatient rehabilitation services net revenues applicable to managed care
payors represented 12.0% of total outpatient net revenues. The Company expects
this percentage to increase in fiscal 1995, adversely affecting net revenues per
visit. The Company's strategy is to continue to develop relationships with
managed care networks in order to increase volume and gain market share.
Over the past year, NovaCare's stock price has been subject to significant
volatility. If net revenues or earnings fail to meet expectations of the
investment community, there could be an immediate and significant adverse impact
on the trading price for the Company's stock. Because of stock market forces
beyond NovaCare's control and the nature of NovaCare's business, such changes
can be sudden.
The Company believes it has positioned itself for long-term success.
However, due to the existing material uncertainties surrounding government
regulation, net revenues and profitability trends cannot be precisely determined
at this time.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $158,636 $ 38,024
Marketable securities................................................ -- 35,104
Accounts receivable, net of allowance in 1995 and 1994 of $19,718 and
$32,731, respectively............................................. 192,652 215,727
Inventories.......................................................... 11,213 7,996
Deferred income taxes................................................ 16,748 13,946
Other current assets................................................. 34,571 24,208
-------- --------
Total current assets......................................... 413,820 335,005
Marketable securities, net............................................. -- 53,318
Property and equipment, net............................................ 63,659 93,739
Excess cost of net assets acquired, net................................ 352,115 342,938
Deferred income taxes.................................................. 1,470 517
Other assets, net...................................................... 21,493 25,024
-------- --------
$852,557 $850,541
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements............................ $ 32,684 $ 61,518
Accounts payable and accrued expenses................................ 93,088 72,997
Income taxes payable................................................. 32,922 6,166
-------- --------
Total current liabilities.................................... 158,694 140,681
Financing arrangements, net of current portion......................... 192,331 283,084
Deferred income taxes.................................................. 8,147 3,211
Other.................................................................. 5,750 7,861
-------- --------
Total liabilities............................................ 364,922 434,837
-------- --------
Stockholders' equity:
Common stock, $.01 par value; authorized 200,000 shares, issued
65,476 in 1995 and issued 64,228 shares in 1994................... 656 643
Additional paid-in capital........................................... 250,857 240,619
Retained earnings.................................................... 238,149 176,225
-------- --------
489,662 417,487
Less: Common stock in treasury (at cost), 187 shares in 1995 and 17
shares in 1994............................................. (1,614) (305)
Deferred compensation........................................ (413) (662)
Valuation allowance on securities available for sale......... -- (816)
-------- --------
Total stockholders' equity................................... 487,635 415,704
-------- --------
$852,557 $850,541
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
23
<PAGE> 26
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net revenues............................................... $905,359 $789,745 $582,342
Operating costs:
Salaries, wages and benefits............................. 576,764 462,378 328,416
Rental expense........................................... 36,365 27,613 21,250
Supply costs............................................. 21,797 18,285 18,459
Other.................................................... 137,812 130,540 107,716
Provision for uncollectible accounts..................... 15,918 14,453 9,764
Depreciation............................................. 19,253 15,289 8,602
Amortization of excess cost of net assets acquired....... 10,937 7,225 3,589
Merger and other nonrecurring items...................... (57,368) 5,754 5,727
-------- -------- --------
Income from operations................................ 143,881 108,208 78,819
Investment income.......................................... 5,405 5,304 4,880
Interest expense........................................... (23,298) (17,077) (7,721)
Minority interest.......................................... (404) (543) (436)
-------- -------- --------
Income before income taxes............................ 125,584 95,892 75,542
Income taxes............................................... 63,660 37,678 27,906
-------- -------- --------
Net income............................................ $ 61,924 $ 58,214 $ 47,636
======== ======== ========
Net income applicable to common stock................. $ 61,924 $ 58,214 $ 47,585
======== ======== ========
Net income per common share........................... $ .95 $ .90 $ .79
======== ======== ========
Weighted average number of common shares
outstanding......................................... 65,163 64,663 60,167
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
24
<PAGE> 27
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
SHARES STOCK ADDITIONAL DEFERRED
----------------- ($.01 PAR TREASURY PAID-IN RETAINED COMP- VALUATION
ISSUED TREASURY VALUE) STOCK CAPITAL EARNINGS ENSATION ALLOWANCE
------ -------- ------------ -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992......... 54,389 (160) $543 $ (189) $154,235 $ 68,688 $ (508) $ --
Issued in connection with
employee benefit plans......... 630 100 6 118 8,105 -- (3) --
Issued in connection with
acquisitions................... 799 -- 8 -- 9,281 -- -- --
Sale of common stock in initial
public offering, net of
issuance costs (RehabClinics,
Inc.).......................... 5,600 -- 56 -- 39,056 -- -- --
Sale of common stock............. 738 -- 8 -- 2,633 -- (924) --
Amortization of deferred
compensation................... -- -- -- -- -- -- 282 --
Accrued dividend on mandatorily
redeemable preferred stock..... -- -- -- -- -- (51) -- --
Net income....................... -- -- -- -- -- 47,636 -- --
------ -------- ----- -------- ---------- -------- -------- ----------
Balance at June 30, 1993......... 62,156 (60) 621 (71) 213,310 116,273 (1,153) --
Adjustment for pooling of
interests...................... 554 -- 6 (1) 7,247 1,738 155 --
Issued in connection with
employee benefit plans......... 367 60 4 72 4,552 -- -- --
Issued in connection with
acquisitions................... 1,151 -- 12 -- 15,510 -- -- --
Valuation allowance resulting
from the application of SFAS
No. 115........................ -- -- -- -- -- -- -- (816)
Repurchase of common stock....... -- (17) -- (305) -- -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- 336 --
Net income....................... -- -- -- -- -- 58,214 -- --
------ -------- ----- -------- ---------- -------- -------- ----------
BALANCE AT JUNE 30, 1994......... 64,228 (17) 643 (305) 240,619 176,225 (662) (816)
ISSUED IN CONNECTION WITH
EMPLOYEE BENEFIT PLANS......... 302 52 4 453 3,497 -- -- --
ISSUED IN CONNECTION WITH
ACQUISITIONS................... 946 29 9 250 6,741 -- -- --
VALUATION ALLOWANCE RESULTING
FROM THE APPLICATION OF SFAS
NO. 115........................ -- -- -- -- -- -- -- 816
REPURCHASE OF COMMON STOCK....... -- (251) -- (2,012) -- -- -- --
AMORTIZATION OF DEFERRED
COMPENSATION................... -- -- -- -- -- -- 249 --
NET INCOME....................... -- -- -- -- -- 61,924 -- --
------ -------- ----- -------- ---------- -------- -------- ----------
BALANCE AT JUNE 30, 1995......... 65,476 (187) $656 $(1,614) $250,857 $238,149 $ (413) $ --
====== ======== ===== ======== ========== ========= ========= ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
25
<PAGE> 28
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 61,924 $ 58,214 $ 47,636
Adjustments to reconcile net income to net cash flows from operating
activities:
Gain on sale of hospital operations.......................................... (88,243) -- --
Depreciation and amortization................................................ 30,190 22,514 12,191
Minority interest............................................................ 404 543 436
Provision for uncollectible accounts......................................... 15,918 14,453 9,764
Deferred income taxes........................................................ (1,525) (2,704) (2,850)
Noncash portion of nonrecurring items........................................ 15,415 667 1,315
Changes in assets and liabilities, net of effects from acquisitions:
Accounts and notes receivable.............................................. (31,164) (44,875) (55,399)
Other current assets....................................................... (1,487) (6,074) (3,190)
Accounts payable and accrued expenses...................................... 10,279 (9,662) 19,586
Income taxes payable....................................................... 28,982 2,498 1,071
Other, net................................................................. 2,925 (1,888) (1,188)
--------- --------- ---------
Net cash flows provided by operating activities............................ 43,618 33,686 29,372
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Marketable securities:
Purchase of marketable securities(1)......................................... -- (146,496) (502,845)
Proceeds from sales of marketable securities(1).............................. -- 171,872 432,026
Purchase of available for sale securities.................................... (61) -- --
Proceeds from sales of available for sale securities......................... 38,206 -- --
Maturities of held-to-maturity securities.................................... 50,006 -- --
--------- --------- ---------
Net cash proceeds from (outlay for) marketable securities.................. 88,151 25,376 (70,819)
--------- --------- ---------
Acquisition of businesses:
Payments for businesses acquired, net of cash acquired....................... (60,929) (134,973) (39,772)
Additional payments for businesses acquired in prior years................... (10,830) (14,799) (2,551)
--------- --------- ---------
Net cash outlay for acquisitions of businesses............................. (71,759) (149,772) (42,323)
--------- --------- ---------
Additions to property and equipment............................................ (22,238) (17,727) (12,257)
Capitalized software costs..................................................... (7,291) (10,234) (2,471)
Proceeds from sale of hospital operations...................................... 206,838 -- --
Other, net..................................................................... (5,513) (6,771) (4,964)
--------- --------- ---------
Net cash provided by (used in) investing activities........................ 188,188 (159,128) (132,834)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and credit agreements............................. 74,077 184,208 181,447
Payment of long-term debt and credit agreements................................ (187,206) (122,409) (36,589)
Proceeds from common stock issued and exercise of warrants..................... 1,935 3,529 45,195
Redemption of preferred stock.................................................. -- -- (1,261)
--------- --------- ---------
Net cash flows (used in) provided by financing activities.................. (111,194) 65,328 188,792
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 120,612 (60,114) 85,330
Cash and cash equivalents, beginning of year................................... 38,024 102,324 16,994
Adjustments for poolings of interests.......................................... -- (4,186) --
--------- --------- ---------
Cash and cash equivalents, end of year......................................... $ 158,636 $ 38,024 $ 102,324
========= ========= =========
</TABLE>
---------------
(1) Security classification prior to adoption of FAS 115.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
26
<PAGE> 29
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include
the accounts of NovaCare, Inc., its majority-owned subsidiaries and companies
effectively controlled through management agreements (collectively, "NovaCare"
or the "Company"). All significant intercompany accounts and transactions have
been eliminated. Certain amounts in the 1994 and 1993 consolidated financial
statements have been reclassified to conform with the 1995 presentation.
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.
Net Revenues: Net revenues are reported at the net realizable amounts from
customers, third party payors, and others for services rendered. Net revenues
generated from Medicare and Medicaid reimbursement programs represented 18%,
20%, and 22% of the Company's net revenues for fiscal 1995, 1994, and 1993,
respectively. Settlement amounts due to or receivable from Medicare and Medicaid
programs are determined by fiscal intermediaries. The difference between the
final determination and estimated amounts accrued is accounted for as an
adjustment to revenues in the year of final determination. Management believes
that adequate provision has been made in the consolidated financial statements
for potential adjustments.
Investments: As of June 30, 1994, NovaCare adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"). The effect of SFAS 115 is dependent upon
classification of the investment and, in certain cases, determination as to the
nature of the decline in market value below the cost basis of an investment.
Investments with maturities of greater than one year are classified as
noncurrent. Realized gains and losses on the sales of securities are computed
using the specific identification method.
Inventories: Inventories consist of orthotic and prosthetic merchandise
held for resale, work in process and raw materials, and are carried at the lower
of cost, determined on the first-in, first-out basis, or market.
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 seven years for
property and equipment and 30 to 40 years for buildings. Assets under capital
leases and leasehold improvements are amortized over the lesser of the lease
term or the asset's estimated useful life. Property and equipment also includes
external and incremental internal costs incurred to develop major business
systems. Capitalized software costs are amortized on a straight-line basis over
three to five years.
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, is amortized on a straight-line basis over a 40 year period. The
Company performs an annual assessment of the recoverability of goodwill based on
estimated future cash flows.
Other Assets: Other assets consist principally of deferred financing fees,
investments in affordable income housing partnerships and notes receivable.
Deferred financing fees are amortized over the term of the related debt
obligations and are included as a component of interest expense. Investments
27
<PAGE> 30
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
in affordable income housing partnerships are recorded at cost and are subject
to an annual assessment as to carrying value.
Income Taxes: The Company follows Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an
asset and liability approach that requires the recognition of 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 Common Share: Net income per common share has been computed
by dividing net income applicable to common stock by the weighted average number
of common shares outstanding during the year, giving effect to dilutive stock
options and warrants. Net income applicable to common stock in fiscal 1993 gives
effect to dividends, whether or not declared, on the 10% mandatorily redeemable
preferred stock during the period such stock was outstanding.
Recently Issued Accounting Standards: In March 1995, the Financial
Accounting Standards Board issued 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"), which the Company is required to adopt
no later than the first quarter of fiscal year 1997. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain intangibles to be disposed of.
Management does not believe the adoption of SFAS 121 will have a material effect
on the Company's financial position or results of operations.
2. MERGER AND OTHER NONRECURRING ITEMS
The following table sets forth the Company's merger and other nonrecurring
charges for each of the three years in the period ended June 30, 1995.
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ ------
<S> <C> <C> <C>
Gain on sale of hospital operations.................... $(88,243) $ -- $ --
Settlement of shareholder litigation................... 1,000 -- --
Productivity and cost reduction program:
Employee severance costs............................. 7,042 -- 1,741
Lease terminations................................... 6,847 -- 1,348
Asset write-offs..................................... 15,415 -- 1,315
Other................................................ 571 -- 1,323
Merger expenses:
Professional fees.................................... -- 2,305 --
Name change.......................................... -- 1,600 --
Printing and filing fees............................. -- 775 --
Other................................................ -- 1,074 --
-------- ------ ------
$(57,368) $5,754 $5,727
======== ====== ======
</TABLE>
Effective April 1, 1995, the Company sold its rehabilitation hospitals to
HEALTHSOUTH Corporation for $242,888 which consisted of cash of $232,394 and
debt and cash assumed by HEALTHSOUTH of $19,156 and $8,662, respectively. Of the
cash portion of the purchase price, $16,894 was unpaid at June 30, 1995 and is
included as a component of other current assets. Substantially all of this
amount was received in July 1995. Had the sale of the rehabilitation hospitals
taken place on July 1, 1993 pro forma unaudited net revenues for the fiscal
years ended June 30, 1995 and 1994 would have been
28
<PAGE> 31
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$794,904 and $653,349, respectively and pro forma unaudited income from
operations, adjusted for nonrecurring items, would have been $72,250 and
$95,391, respectively.
The gain is partially offset by a charge for productivity and cost
reduction programs in certain operations of the Company, including costs to
close certain contract services facilities, orthotic and prosthetic branches,
and outpatient centers in selected markets. The program also contemplates
consolidation of certain finance and other administrative functions. The asset
write-offs consist of goodwill in the amount of $10,713 associated with
facilities, branches or centers the Company is closing and certain fixed assets
related to those facilities in the amount of $4,702, the remainder of the
charges are cash in nature.
Employee severance costs incurred in the productivity and cost reduction
program of $7,042 represent the accumulation of termination benefits set forth
in the Company's severance policy, of which $1,797 was paid as of June 30, 1995.
At June 30, 1995, approximately $11,730 remained accrued for facility,
branch and clinic closure and administrative consolidation costs. The Company
anticipates all activities will be completed by June 30, 1996.
As described in Note 3, during fiscal 1994 the Company acquired all of the
outstanding common stock of RehabClinics, Inc. ("RCI") in a transaction
accounted for as a pooling of interests. Certain nonrecurring expenses were
incurred as a result of the merger. Substantially all charges were cash in
nature.
In 1993, the Company initiated a reorganization of certain of its business
units to reduce its cost structure. This reorganization consisted of the
consolidation of certain orthotic and prosthetic patient care and fabrication
centers, the closing of certain community re-entry programs and the
consolidation of certain functions at the corporate headquarters.
3. MERGER AND ACQUISITION TRANSACTIONS
During fiscal 1995, the Company acquired 25 businesses which provide
outpatient rehabilitation services, one business which provides orthotic and
prosthetic rehabilitation services and two businesses which provide contract
therapy services.
On February 4, 1994, the Company issued approximately 14,000 shares of its
common stock to acquire all of the outstanding common stock of RCI. The merger
has been accounted for as a pooling of interests and, accordingly, the Company's
financial statements and notes thereto have been restated to combine the
accounts and operations of the Company and of RCI for all periods presented.
During fiscal year 1994, the Company purchased all the common stock of
Rehabilitation Hospital Corporation of America ("RHCA"). The principal
stockholder of RHCA was a limited partnership in which the Company's chairman of
the board and chief executive officer was a general partner. The Company also
acquired 42 businesses which provide outpatient rehabilitation services, five
businesses which provide orthotic and prosthetic rehabilitation services, and
two businesses which provide contract therapy services. The acquisitions were
accounted for as purchases and, accordingly, the aggregate purchase price was
allocated to assets and liabilities acquired based on their fair values at the
date of acquisition. The results of operations of businesses acquired have been
included in the consolidated results of the Company from the effective date of
each acquisition.
29
<PAGE> 32
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma consolidated results of operations of the
Company give effect to each of the acquisitions, accounted for as purchases, as
if they occurred on July 1, 1993:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Net revenues................................................... $911,285 $915,100
Net income..................................................... 62,293 67,097
Net income per common share.................................... $ .96 $ 1.04
</TABLE>
The above pro forma information, which is inclusive of the results of the
medical rehabilitation hospitals, is not necessarily indicative of the results
of operations that would have occurred had the acquisitions been made as of July
1, 1993, or of the results which may occur in the future.
Information with respect to businesses acquired in purchase transactions
was as follows (the allocation for fiscal 1995 acquisitions is preliminary):
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Excess cost of net assets acquired............................. $379,605 $362,932
Less: accumulated amortization................................. (27,490) (19,994)
-------- --------
$352,115 $342,938
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Cash paid (net of cash acquired)............................... $ 60,929 $134,973
Value of common stock issued................................... -- 9,767
Notes issued................................................... 12,620 7,257
Other consideration............................................ 1,377 1,658
-------- --------
74,926 153,655
Liabilities assumed............................................ 7,027 89,455
-------- --------
81,953 243,110
Fair value of assets acquired, principally accounts receivable
and property and equipment................................... 7,891 98,630
-------- --------
Cost in excess of fair value of net assets
acquired........................................... $ 74,062 $144,480
======== ========
</TABLE>
Certain purchase agreements require additional payments if specific
financial targets and non-financial conditions are met. Aggregate contingent
payments in connection with these acquisitions at June 30, 1995 of approximately
$35,715 in cash and 1,105 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. During the
fiscal years ended June 30, 1995, 1994 and 1993, the Company paid $10,830,
$14,799 and $2,551, respectively, in cash and issued 975, 348 and 341 shares of
common stock, respectively, in connection with businesses acquired in prior
years.
30
<PAGE> 33
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. INVESTMENTS IN CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following represents the fair value, cost basis and gross unrealized
holding gains and losses for each major security type as of June 30, 1994. The
fair value of marketable securities is estimated based upon quoted market prices
for those investments.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1994
-------------------------------------------------------------
FAIR COST GROSS UNREALIZED GROSS UNREALIZED
VALUE BASIS HOLDING GAINS HOLDING LOSSES
------- ------- ---------------- ----------------
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury securities.............. $49,165 $49,675 $ -- $ 510
------- ------- ---- -------
Available for sale:
Municipal bonds....................... 37,267 38,098 10 841
Preferred stock unit trusts........... 1,171 1,149 45 23
Asset backed securities............... 309 316 -- 7
------- ------- ---- -------
38,747 39,563 55 871
------- ------- ---- -------
Total marketable securities............. $87,912 $89,238 $ 55 $1,381
======= ======= ==== =======
</TABLE>
Investments in U.S. Treasury securities represented 56% of the total
investments at June 30, 1994. Securities of no other issuer exceeded 10% of
total investments during fiscal years 1995 or 1994.
For the years ended June 30, 1995, 1994 and 1993, investment income
consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Interest income........................................ $5,700 $ 4,965 $ 4,010
Dividend income........................................ -- -- 804
Gross realized gain on sales of marketable
securities........................................... 67 392 1,566
Gross realized loss of sales of marketable
securities........................................... (362) (1,553) --
Reserve for loss on marketable securities.............. -- 1,500 (1,500)
------ ------- -------
$5,405 $ 5,304 $ 4,880
====== ======= =======
</TABLE>
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------
1995 1994
------- ------
<S> <C> <C>
Finished goods.................................................... $ 857 $ 944
Work in process................................................... 1,447 434
Raw materials..................................................... 8,909 6,618
------- ------
$11,213 $7,996
======= ======
</TABLE>
31
<PAGE> 34
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Land and buildings............................................. $ 4,576 $ 32,367
Property, equipment and furniture.............................. 64,086 68,360
Capitalized software........................................... 21,641 17,252
Leasehold improvements......................................... 7,866 11,183
-------- --------
98,169 129,162
Less: accumulated depreciation and amortization................ (34,510) (35,423)
-------- --------
$ 63,659 $ 93,739
======== ========
</TABLE>
7. FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Convertible subordinated debentures (5.5%), due January 2000... $175,000 $175,000
Revolving credit facility (prime rate plus .5% or LIBOR plus
.88%), expiring May 27, 1997................................. -- 69,563
Reverse repurchase agreements (5.65%), payable through
September 30, 1995........................................... 18,000 43,281
Subordinated promissory notes (5% to 9%), payable through
2005......................................................... 26,867 30,580
West Virginia commercial development revenue bonds (9.5% to
12%), payable through 2015................................... -- 17,715
Notes (6% to 12%), payable through November 2000............... 720 3,736
Capitalized lease obligations, payable through 2000............ 4,428 4,680
Other obligations.............................................. -- 47
-------- --------
225,015 344,602
Less: current portion.......................................... 32,684 61,518
-------- --------
$192,331 $283,084
======== ========
</TABLE>
The Company has in place a revolving credit facility with a syndicate of
lenders providing for a total commitment of up to $175,000, upon which no
amounts are currently drawn. The Company currently is in the process of amending
the revolving credit facility to reflect the recent sale of the hospital
division and other matters. The Company is charged a fee of .25% per annum on
the unused portion of the commitment. At June 30, 1995, total credit
availability had been reduced by $6,260 for issued letters of credit.
During fiscal 1995 and 1994, the Company entered into reverse repurchase
agreements with primary government dealers. In the reverse repurchase
agreements, the Company sold U.S. government securities subject to an agreement
to repurchase those securities at a mutually agreed upon date and price, which
approximates market. These transactions were accounted for as loans to the
Company collateralized by the underlying securities which are held by the
primary government dealers. The
32
<PAGE> 35
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
agreements required the Company to maintain investments in U.S. government
securities with market value, including accrued interest, to be at least 102% of
the dollar amount sold as collateral.
On January 20, 1993, the Company issued $175,000 of convertible
subordinated debentures due January 15, 2000, priced at par to yield 5.5%. The
debentures are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $26.65 per share. Subsequent to
January 14, 1996, the debentures are redeemable, in whole or in part, at the
option of the Company. There is no sinking fund applicable to the debentures.
The fair value of the Company's convertible subordinated debentures based
on quoted market prices at June 30, 1995 and 1994 was $151,375 and $160,125,
respectively. The estimated fair value of all other debt and financing
arrangements approximates carrying value.
At June 30, 1995, aggregate annual maturities of financing arrangements
were as follows for the next five fiscal years and thereafter:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------
<S> <C>
1996.............................................................. $ 32,684
1997.............................................................. 7,279
1998.............................................................. 5,087
1999.............................................................. 3,359
2000.............................................................. 176,491
Thereafter........................................................ 115
--------
$225,015
========
</TABLE>
Interest paid on debt during fiscal 1995, 1994 and 1993 amounted to
$20,377, $17,258 and $4,895, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
Accounts payable......................................... $15,721 $12,899
Accrued compensation and benefits........................ 37,984 38,532
Accrued costs of productivity and cost improvement
program................................................ 11,730 --
Accrued interest......................................... 5,158 5,424
Other.................................................... 22,495 16,142
------- -------
$93,088 $72,997
======= =======
</TABLE>
The balance for the productivity and cost improvement program relates
solely to the 1995 program discussed in Note 2.
33
<PAGE> 36
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $53,258 $36,988 $27,930
State............................................... 11,927 3,394 2,826
------- ------- -------
65,185 40,382 30,756
------- ------- -------
Deferred:
Federal............................................. (1,182) (2,410) (2,223)
State............................................... (343) (294) (627)
------- ------- -------
(1,525) (2,704) (2,850)
------- ------- -------
$63,660 $37,678 $27,906
======= ======= =======
</TABLE>
The components of net deferred tax assets as of June 30, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Cash basis accounting for tax purposes........................... $ 661 $ 796
Accruals and reserves not currently deductible for tax
purposes....................................................... 8,334 12,660
Acquired operating loss carryforward............................. -- 3,464
Restructuring reserve............................................ 8,413 --
Other............................................................ 810 2,185
------- -------
Gross deferred tax assets.............................. 18,218 19,105
------- -------
Expenses capitalized for financial statement purposes............ (3,608) (771)
Depreciation and capital leases.................................. (3,207) (3,618)
Other, net....................................................... (1,332) --
------- -------
Gross deferred tax liabilities......................... (8,147) (4,389)
------- -------
Valuation allowance on acquired operating loss carry
forward.............................................. -- (3,464)
------- -------
Net deferred tax asset................................. $10,071 $11,252
======= =======
</TABLE>
34
<PAGE> 37
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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>
YEARS ENDED JUNE 30,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Expected federal income tax expense................... $43,954 $33,562 $25,684
State income taxes, less federal benefit.............. 7,530 1,767 2,041
Non-deductible nonrecurring items..................... 9,178 1,217 --
Non-deductible amortization of excess cost of net
assets acquired..................................... 2,370 1,954 1,222
Dividend exclusion and non-taxable interest income.... (401) (676) (636)
Change in valuation allowance......................... -- -- (864)
Other, net............................................ 1,029 (146) 459
------- ------- -------
$63,660 $37,678 $27,906
======= ======= =======
</TABLE>
Income taxes paid during fiscal 1995, 1994 and 1993 amounted to $37,604,
$37,817 and $28,501, respectively.
10. LEASES
The Company is obligated under capital leases for office space and office,
transportation and therapy equipment. One capital lease obligation for office
space expires in fiscal 2016. All other capital leases expire over the next five
years. Hospital facility land and buildings were principally leased under
operating leases.
Included in property and equipment in the accompanying Consolidated Balance
Sheets are the following assets held under capital leases:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
Property, equipment and furniture................................ $ 7,265 $13,157
Less: accumulated amortization................................... (2,498) (8,856)
------- -------
$ 4,767 $ 4,301
======= =======
</TABLE>
The Company also rents office space and office, transportation and therapy
equipment under non-cancelable operating leases. In an effort to leverage its
purchasing power with lessors, the Company has leased and concurrently subleased
certain office space to companies that are related through ownership by the
Company's Chairman and Chief Executive Officer. The Company is fully reimbursed
for its lease costs for the aforementioned office space under noncancelable
sublease agreements.
35
<PAGE> 38
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Future minimum lease commitments for all non-cancelable leases as of June
30, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUB-LEASE
FISCAL YEAR LEASES LEASES RECEIVABLES
----------------------------------------------------- ------- --------- -----------
<S> <C> <C> <C>
1996................................................. $ 1,995 $20,268 $ 399
1997................................................. 1,679 17,968 267
1998................................................. 866 15,654 264
1999................................................. 230 13,693 277
2000................................................. 16 10,666 203
Thereafter........................................... 116 8,554 --
------- -------- -------
Total minimum lease payments......................... 4,902 $86,803 $ 1,410
======== =======
Less: amount representing interest................... 474
-------
Present value of minimum payments under
capital lease obligations.......................... $ 4,428
=======
</TABLE>
11. BENEFIT PLANS
Stock Option Plan:
The Company's 1986 Stock Option Plan, as amended, provides for issuance of
options to purchase up to 5,800 shares of common stock to employees, officers
and directors. Under the plan, substantially all options are granted for a term
of up to 10 years at prices equal to the fair market value at the date of grant
and are generally exercisable at the rate of 20% per year, on a cumulative
basis, commencing principally one year after the date of grant.
The following summarizes the activity of this stock option plan:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year............. 2,771 2,239 2,253
Granted...................................... 1,162 1,068 601
Exercised.................................... (77) (277) (426)
Canceled..................................... (1,207) (259) (189)
----------- ------------ ------------
Outstanding at end of year................... 2,649 2,771 2,239
=========== ============ ============
Option price per share ranges:
Outstanding at beginning of year............. $ .09-$23.50 $ .09-$23.50 $ .09-$29.13
Granted...................................... 7.25- 13.00 10.16- 16.75 16.50- 23.50
Exercised.................................... .09- 14.38 .09- 16.50 .09- 19.50
Outstanding at end of year................... .09- 21.00 .09- 23.50 .09- 23.50
Options exercisable at end of year............. 1,109 897 773
Exercisable option price ranges................ $ .09-$21.00 $ .09-$23.50 $ .09-$20.58
Options available for grant at end of year
under the 1986 Stock Option Plan............. 2,114 1,957 966
</TABLE>
36
<PAGE> 39
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Deferred Compensation:
Deferred compensation represents common stock issued to certain key
employees wherein the recipient becomes fully vested at the end of a five-year
period. Compensation expense is charged to income over the vesting period.
Other Stock Awards:
During fiscal 1994, the Company granted certain of its officers 2,750
non-qualified options to purchase the Company's common stock at an exercise
price equal to 150% of the fair market value on the grant date. In prior years,
the Company granted certain of its officers non-qualified options to purchase
the Company's common stock at exercise prices equal to the fair market value on
the grant date. Certain of these options were awarded to an officer, who is also
a stockholder, in lieu of compensation.
The following summarizes the other stock award activity:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year............ 4,708 1,958 1,862
Granted..................................... -- 2,750 300
Exercised................................... (4) -- (204)
----------- ----------- -----------
Outstanding at end of year.................. 4,704 4,708 1,958
=========== =========== ===========
Option price per share:
Outstanding at beginning of year............ $2.55-$19.50 $2.25-$17.00 $2.25-$17.00
Granted..................................... -- 19.50 15.38
Exercised................................... 2.25 -- 2.25
Outstanding at end of year.................. 2.25- 19.50 2.25- 19.50 2.25- 17.00
Options exercisable at end of year............... 1,914 1,118 758
Exercisable option price ranges.................. $2.25-$19.50 $2.25-$17.00 $2.25-$15.38
</TABLE>
Retirement Plans:
The Company has defined contribution 401(k) plans covering substantially
all of its employees. Company contributions for fiscal 1995, 1994 and 1993 were
$3,878, $3,715 and $2,160, respectively. In fiscal 1992, the Company established
a non-qualified supplemental benefit plan covering certain key employees. The
Company's matching contribution was $302, $192 and $161 for fiscal 1995, 1994
and 1993, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the financial position or results of operations of
the Company.
37
<PAGE> 40
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. SHAREHOLDER RIGHTS PLAN
Under the terms of a Shareholder Rights Plan adopted in 1995, the Company's
Board of Directors declared a dividend distribution of one right for each
outstanding common share. The rights may not be exercised or traded apart from
the common shares to which they are attached until 10 days after a person or
group has acquired, obtained the right to acquire, or commenced a tender offer
for, at least 20% of the Company's outstanding common shares. In such event,
each right will become exercisable for one common share for a price of $27. If a
person or group acquires, or obtains the right to acquire, 20% or more of the
Company's outstanding common shares, each right will become exercisable for
common shares worth $54 and the rights held by the acquiror will become null and
void. If the Company is involved in a merger and its common shares are changed
or exchanged, or if more than 50% of its assets or earnings power is sold or
transferred, each right will become exercisable for common stock of the acquiror
worth $54. The rights will expire on March 20, 2000 unless earlier redeemed by
the Company for $.001 per right. Subject to its right to extend the redemption
period, the Company may redeem the rights at any time until any person or group
has acquired, or obtained the right to acquire, at least 20% of the Company's
outstanding common shares.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995:
Net revenues.................................. $201,450 $240,898 $232,201 $230,810
Income from operations........................ 78,049 21,456 21,310 23,066
Net income.................................... 33,036 8,953 8,887 11,048
Net income per common share................... $ .51 $ .14 $ .14 $ .17
YEAR ENDED JUNE 30, 1994:
Net revenues.................................. $213,182 $204,000 $196,132 $176,431
Income from operations........................ 32,764 29,524 21,404 24,516
Net income.................................... 19,226 15,956 9,337 13,695
Net income per common share................... $ .30 $ .25 $ .14 $ .21
</TABLE>
Income from operations for all periods reflects the amortization of excess
cost of net assets acquired as a component of income from operations to conform
to the 1995 presentation. Results for the fourth quarter of fiscal 1995 included
a pretax gain of $88,243 on the sale of hospital operations and $29,875 charge
related to a productivity and cost improvement program. Results for the third
quarter of fiscal 1995 included a $1,000 charge for settlement of certain
shareholder litigation.
38
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
NovaCare, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 41 present fairly, in all material
respects, the financial position of NovaCare, Inc. and its subsidiaries at June
30, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1995, 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.
PRICE WATERHOUSE LLP
Philadelphia, PA
August 3, 1995
39
<PAGE> 42
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 1995 annual meeting of
stockholders to be held on October 26, 1995 (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 "Executive Compensation", "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 September 1, 1995" 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.
40
<PAGE> 43
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:
(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
Consolidated Balance Sheets at June 30, 1995 and 1994............... 23
Consolidated Statements of Operations for each of the three years in
the period ended June 30, 1995...................................... 24
Consolidated Statements of Changes in Stockholders' Equity for each
of the three years in the period ended June 30, 1995................ 25
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 1995...................................... 26
Notes to Consolidated Financial Statements.......................... 27
Report of Independent Accountants................................... 39
(2) FINANCIAL STATEMENT SCHEDULES:
VIII --Valuation and Qualifying Accounts for each of the three years
in the period ended June 30, 1995................................... 43
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
The exhibits required to be filed are listed in the index to
Exhibits............................................................ 44
</TABLE>
(b) Current Reports on Form 8-K:
During the quarter ended June 30, 1995, the Company filed a current
report on Form 8-K dated May 19, 1995, with respect to Item 2 and Item
7(b) with respect to the Disposition of Assets and Proforma Financial
Information.
41
<PAGE> 44
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoint
John H. Foster and Timothy E. Foster 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, INC.
By: /s/ BRUCE J. COLBURN
------------------------------------
(BRUCE J. COLBURN,
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
TREASURER AND CHIEF ACCOUNTING
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
----------------------------------------------- ----------------------------------- -------------------
<C> <S> <C>
/s/ JOHN H. FOSTER Chairman of the Board, Chief September 12, 1995
----------------------------------------------- Executive Officer and Director
(JOHN H. FOSTER)
/s/ TIMOTHY E. FOSTER President, Chief Operating Officer September 12, 1995
----------------------------------------------- and Director
(TIMOTHY E. FOSTER)
/s/ BRUCE J. COLBURN Senior Vice President, Chief September 12, 1995
----------------------------------------------- Financial Officer, Treasurer and
(BRUCE J. COLBURN) Chief Accounting Officer
/s/ C. ARNOLD RENSCHLER, M.D. Senior Vice President, Chief September 12, 1995
----------------------------------------------- Clinical Officer, Director
(C. ARNOLD RENSCHLER, M.D.)
/s/ E. MARTIN GIBSON Director September 12, 1995
-----------------------------------------------
(E. MARTIN GIBSON)
/s/ SIRI S. MARSHALL Director September 12, 1995
-----------------------------------------------
(SIRI S. MARSHALL)
/s/ STEPHEN E. O'NEIL Director September 12, 1995
-----------------------------------------------
(STEPHEN E. O'NEIL)
/s/ GEORGE W. SIGULER Director September 12, 1995
-----------------------------------------------
(GEORGE W. SIGULER)
/s/ ROBERT G. STONE, JR. Director September 12, 1995
-----------------------------------------------
(ROBERT G. STONE, JR.)
/s/ DANIEL C. TOSTESON, M.D. Director September 12, 1995
-----------------------------------------------
(DANIEL C. TOSTESON, M.D.)
</TABLE>
42
<PAGE> 45
SCHEDULE VIII
NOVACARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
-------------------------------------- ---------- ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995:
Allowance for uncollectible
accounts......................... $ 17,692 15,918 643(2) 18,230 $16,023
Allowance for Medicare denials and
other allowances................. $ 15,039 -- 5,887(3) 17,231 $ 3,695
Year ended June 30, 1994:
Allowance for uncollectible
accounts......................... $ 11,303(1) 14,453 647(2) 8,711 $17,692
Allowance for Medicare denials and
other allowances................. $ 13,324 -- 67,151(3) 65,436 $15,039
Year ended June 30, 1993:
Allowance for uncollectible
accounts......................... $ 8,178 9,764 313(2) 7,125 $11,130
Allowance for Medicare denials and
other allowances................. $ 7,388 -- 38,912(3) 32,976 $13,324
</TABLE>
---------------
(1) Differs from balance at end of prior period due to changes in fiscal year of
merged subsidiary from December 31 to June 30.
(2) Allowances for doubtful accounts related to acquired receivables.
(3) Charged against net revenues.
43
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
--------- --------------------------------------------------------------------- -----------
<S> <C> <C>
2 Stock Purchase Agreement dated as of February 3, 1995 by and among --
NovaCare, Inc., NC Resources, Inc., and HEALTHSOUTH Corporation
(incorporated by reference to Exhibit 2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
3(a)* Certificate of Incorporation of the Company, as amended to date --
(incorporated by reference to Exhibit 3(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1992).
3(b) By-laws of the Company, as amended to date.
4(a)* Stock Option Plan, as amended to date (incorporated by reference to --
Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year
ended June 30, 1994).
4(b)* Form of Indenture dated as of January 15, 1993 between the Company --
and Pittsburgh National Bank relating to 5 1/2% Convertible
Subordinated Debentures Due 2000 (incorporated by reference to
Exhibit 4 to Registration Statement on Form S-3 No. 33-55710).
4(c) Rights Agreement dated as of March 9, 1995 by and between NovaCare, --
Inc. and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 99(a) to the Company's current
report on Form 8-K dated March 14, 1995).
10(a)* Form of Warrant Certificate (incorporated by reference to Exhibit --
10(a) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1994).
10(b)* Employment Agreement dated as of December 10, 1993 between the --
Company and James C. New (incorporated by reference to Exhibit 10(d)
to the Company's Annual Report on Form 10-K for the year ended June
30, 1994).
10(c) Employment Agreement dated July 1, 1994 between the Company and John --
H. Foster (incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995).
10(d) Amendment dated February 2, 1995 to the Employment Agreement dated as --
of July 1, 1994 between the Company and John H. Foster (incorporated
by reference to Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995).
10(e)* Employment Agreement dated as of January 3, 1994 between the Company --
and C. Arnold Renschler, M.D. (incorporated by reference to Exhibit
10(f) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1994).
10(f) Amendment dated May 25, 1995 to the Employment Agreement between the
Company and C. Arnold Renschler, M.D. dated as of January 3, 1994.
10(g) Employment Agreement between the Company and Timothy E. Foster dated --
as of December 2, 1994 (incorporated by reference to Exhibit 10(c) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994).
10(h) (i) Revolving Credit Facility Agreement dated as of May 27, 1994 by --
and among NovaCare and certain of its subsidiaries and PNC Bank,
First Union National Bank of North Carolina, Mellon Bank, N.A.,
Nations Bank of North Carolina, N.A., CoreStates Bank, N.A. and
National Westminster Bank, N.A. (incorporated by reference to Exhibit
10(g) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1994).
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
--------- --------------------------------------------------------------------- -----------
<S> <C> <C>
(ii) Revolving Credit Facility Credit Agreement First Amendment dated --
as of September 20, 1994 by and among NovaCare and certain of its
subsidiaries and PNC Bank, N.A., First Union National Bank of North
Carolina, Mellon Bank,. N.A., Nations Bank of North Carolina, N.A.,
CoreStates Bank, N.A., and National Westminster Bank, N.A.
(incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994).
(iii) Revolving Credit Facility Agreement Second Amendment dated as --
of November 28, 1994 by and among NovaCare and certain of its
subsidiaries and PNC Bank, N.A., First Union National Bank of North
Carolina, Mellon Bank, N.A., Nations Bank of North Carolina, N.A.,
CoreStates Bank, N.A., National Westminster Bank, N.A., and Fleet
Bank of Massachusetts, N.A. (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1994).
10(i) Employment Agreement dated as of January 6, 1995 between the Company
and Daryl A. Dixon and Promissory Note of Daryl A. Dixon in favor of
the Company dated January 6, 1995.
10(j)* Supplemental Benefits Plan (incorporated by reference to Exhibit --
10(h) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1994).
13 Annual Report to Stockholders for the fiscal year ended June 30,
1995.
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 stockholders of the Company. The Company will furnish a copy of any of such
exhibits to any stockholder requesting the same.
Exhibits denoted by an asterisk were filed prior to the Company's adoption
of filing via EDGAR.
45
<PAGE> 1
EXHIBIT 3-B
NOVACARE, INC.
--------------------
BY-LAWS
--------------------
As in effect on February 2, 1995
<PAGE> 2
NOVACARE, INC.
BY-LAWS
ARTICLE I
Offices
The registered office of the Corporation shall be in the City of
Dover, County of Kent, State of Delaware.
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as may from time to time be
designated by the Board of Directors.
ARTICLE II
Books
The books and records of the Corporation may be kept (except as
otherwise provided by the laws of the State of Delaware) outside of the State
of Delaware and at such place or places as may from time to time be designated
by the Board of Directors.
ARTICLE III
Stockholders
Section 1. Annual Meetings. The annual meeting of the
stockholders of the Corporation for the election of Directors and the
transaction of such other business as may properly come before said meeting
shall be held at the principal business office of the Corporation or at such
other place or places either within or without the State of Delaware as may be
designated by the Board of Directors and stated in the notice of
2
<PAGE> 3
the meeting, on the first Monday of May in each year, if not a legal holiday,
and, if a legal holiday, then on the next day not a legal holiday, at 10:00
o'clock in the forenoon, or such other day as shall be determined by the Board
of Directors.
Written notice of the place designated for the annual meeting of the
stockholders of the Corporation shall be delivered personally or mailed to each
stockholder entitled to vote thereat not less than ten (10) and not more than
sixty (60) days prior to said meeting, but at any meeting at which all
stockholders shall be present, or of which all stockholders not present have
waived notice in writing, the giving of notice as above described may be
dispensed with. If mailed, said notice shall be directed to each stockholder
at his address as the same appears on the stock ledger of the Corporation
unless he shall have filed with the Secretary of the Corporation a written
request that notices intended for him be mailed to some other address, in which
case it shall be mailed to the address designated in such request.
Section 2. Special Meetings. Special meetings of the
stockholders of the Corporation shall be held whenever called in the manner
required by the laws of the State of Delaware for purposes as to which there
are special statutory provisions, and for other purposes whenever called by
resolution of the Board of Directors, or by the Chairman of the Board, or by
the President, or by the holders of a majority of the outstanding shares of
capital stock of the Corporation the holders of which are entitled to vote on
matters that are to be voted on at such meeting. Any such special meeting of
stockholders may be held at the principal business office of the Corporation or
at such other place or places, either within or without the State of
3
<PAGE> 4
Delaware, as may be specified in the notice thereof. Business transacted at
any special meeting of stockholders of the Corporation shall be limited to the
purposes stated in the notice thereof.
Except as otherwise expressly required by the laws of the State of
Delaware, written notice of each special meeting, stating the day, hour and
place, and in general terms the business to be transacted thereat, shall be
delivered personally or mailed to each stockholder entitled to vote thereat not
less than ten (10) and not more than sixty (60) days before the meeting. If
mailed, said notice shall be directed to each stockholder at his address as the
same appears on the stock ledger of the Corporation unless he shall have filed
with the Secretary of the Corporation a written request that notices intended
for him be mailed to some other address, in which case it shall be mailed to
the address designated in said request. At any special meeting at which all
stockholders shall be present, or of which all stockholders not present have
waived notice in writing, the giving of notice as above described may be
dispensed with.
Section 3. List of Stockholders. The officer of the Corporation
who shall have charge of the stock ledger of the Corporation shall prepare and
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours for a period of at least ten (10) days prior to
the meeting, either at a place within the
4
<PAGE> 5
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 4. Quorum. At any meeting of the stockholders of the
Corporation, except as otherwise expressly provided by the laws of the State of
Delaware, the Certificate of Incorporation or these By-Laws, there must be
present, either in person or by proxy, in order to constitute a quorum,
stockholders owning a majority of the issued and outstanding shares of the
capital stock of the Corporation entitled to vote at said meeting. At any
meeting of stockholders at which a quorum is not present, the holders of, or
proxies for, a majority of the stock which is represented at such meeting,
shall have power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 5. Organization. The Chairman of the Board, or in his
absence the President, or in his absence any Vice President, shall call to
order meetings of the stockholders and shall act as chairman of such meetings.
The Board of Directors or
5
<PAGE> 6
the stockholders may appoint any stockholder or any Director or officer of the
Corporation to act as chairman of any meeting in the absence of the Chairman of
the Board, the President and all of the Vice Presidents.
The Secretary of the Corporation shall act as secretary of all
meetings of the stockholders, but in the absence of the Secretary the presiding
officer may appoint any other person to act as secretary of any meeting.
Section 6. Voting. Except as otherwise provided in the
Certificate of Incorporation or these By-Laws, each stockholder of record of
the Corporation shall, at every meeting of the stockholders of the Corporation,
be entitled to one (1) vote for each share of stock standing in his name on the
books of the Corporation on any matter on which he is entitled to vote, and
such votes may be cast either in person or by proxy, appointed by an instrument
in writing, subscribed by such stockholder or by his duly authorized attorney,
and filed with the Secretary before being voted on, but no proxy shall be voted
after three (3) years from its date, unless said proxy provides for a longer
period. If the Certificate of Incorporation provides for more or less than one
(1) vote for any share of capital stock of the Corporation, on any matter, then
any and every reference in these By-Laws to a majority or other proportion of
capital stock shall refer to such majority or other proportion of the votes of
such stock.
The vote on all elections of Directors and on any other questions
before the meeting need not be by ballot, except upon demand of any
stockholder.
When a quorum is present at any meeting of the stockholders of the
Corporation, the vote of the holders of a majority of the capital stock
entitled to vote
6
<PAGE> 7
at such meeting and present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which,
under any provision of the laws of the State of Delaware or of the Certificate
of Incorporation, a different vote is required in which case such provision
shall govern and control the decision of such question.
Section 7. Consent. Except as otherwise provided by the
Certificate of Incorporation, whenever the vote of the stockholders at a
meeting thereof is required or permitted to be taken in connection with any
corporate action by any provision of the laws of the State of Delaware or of
the Certificate of Incorporation, such corporate action may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding capital stock of the Corporation having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have
not consented thereto in writing.
Section 8. Judges. At every meeting of the stockholders of the
Corporation at which a vote by ballot is taken, the polls shall be opened and
closed, the proxies and ballots shall be received and taken in charge, and all
questions touching the qualifications of voters, the validity of proxies and
the acceptance or rejection of votes shall be decided by, two (2) judges. Said
judges shall be appointed by the Board of
7
<PAGE> 8
Directors before the meeting, or, if no such appointment shall have been made,
by the presiding officer of the meeting. If for any reason any of the judges
previously appointed shall fail to attend or refuse or be unable to serve,
judges in place of any so failing to attend, or refusing or unable to serve,
shall be appointed in like manner.
ARTICLE IV
Directors
Section 1. Number, Election and Term of Office. The business and
affairs of the Corporation shall be managed by the Board of Directors. The
number of Directors which shall constitute the whole Board shall be not less
than three (3) nor more than twelve (12). Within such limits, the number of
Directors may be fixed from time to time by vote of the stockholders or of the
Board of Directors, at any regular or special meeting, subject to the
provisions of the Certificate of Incorporation. Directors need not be
stockholders. Directors shall be elected at the annual meeting of the
stockholders of the Corporation, except as provided in Section 2 of this
Article, to serve until the next annual meeting of stockholders and until their
respective successors are duly elected and have qualified.
In addition to the powers by these By-Laws expressly conferred upon
them, the Board may exercise all such powers of the Corporation as are not by
the laws of the State of Delaware, the Certificate of Incorporation or these
By-Laws required to be exercised or done by the stockholders.
Section 2. Vacancies and Newly Created Directorships. Except as
hereinafter provided, any vacancy in the office of a Director occurring for any
reason
8
<PAGE> 9
other than the removal of a Director pursuant to Section 3 of this Article, and
any newly created Directorship resulting from any increase in the authorized
number of Directors, may be filled by a majority of the Directors then in
office or by a sole remaining Director. In the event that any vacancy in the
office of a Director occurs as a result of the removal of a Director pursuant
to Section 3 of this Article, or in the event that vacancies occur
contemporaneously in the offices of all of the Directors, such vacancy or
vacancies shall be filled by the stockholders of the Corporation at a meeting
of stockholders called for the purpose. Directors chosen or elected as
aforesaid shall hold office until the next annual meeting of stockholders and
until their respective successors are duly elected and have qualified.
Section 3. Removals. At any meeting of stockholders of the
Corporation called for the purpose, the holders of a majority of the shares of
capital stock of the Corporation entitled to vote at such meeting may remove
from office, with or without cause, any or all of the Directors.
Section 4. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place, either within or
without the State of Delaware, as shall from time to time be determined by
resolution of the Board.
Section 5. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or by the President or any
two Directors on notice given to each Director, and such meetings shall be held
at the principal business office of the Corporation or at such other place or
places, either within or without the State of Delaware, as shall be specified
in the notices thereof.
9
<PAGE> 10
Section 6. Annual Meetings. The first meeting of each newly
elected Board of Directors shall be held as soon as practicable after each
annual election of Directors and on the same day, at the same place at which
regular meetings of the Board of Directors are held, or at such other time and
place as may be provided by resolution of the Board. Such meeting may be held
at any other time or place which shall be specified in a notice given, as
hereinafter provided, for special meetings of the Board of Directors.
Section 7. Notice. Notice of any meeting of the Board of
Directors requiring notice shall be given to each Director by mailing the same,
addressed to him at his residence or usual place of business, at least
forty-eight (48) hours, or shall be sent to him at such place by facsimile
transmission, courier, telegraph, cable or wireless, or shall be delivered
personally or by telephone, at least twelve (12) hours, before the time fixed
for the meeting. At any meeting at which every Director shall be present or at
which all Directors not present shall waive notice in writing, any and all
business may be transacted even though no notice shall be given.
Section 8. Quorum. At all meetings of the Board of Directors,
the presence of one-third or more of the Directors constituting the Board shall
constitute a quorum for the transaction of business. Except as may be
otherwise specifically provided by the laws of the State of Delaware, the
Certificate of Incorporation or these By-Laws, the affirmative vote of a
majority of the Directors present at the time of such vote shall be the act of
the Board of Directors if a quorum is present. If a quorum shall not be
present at any meeting of the Board of Directors, the Directors present thereat
may
10
<PAGE> 11
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present.
Section 9. Consent. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if all members of the Board consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board.
Section 10. Telephonic Meetings. Unless otherwise restricted by
the Certificate of Incorporation or these By-Laws, members of the Board of
Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment by means of which all persons
participating in such meeting can hear each other, and participation in a
meeting pursuant to this Section 10 shall constitute presence in person at such
meeting.
Section 11. Compensation of Directors. Directors, as such, shall
not receive any stated salary for their services, but, by resolution of the
Board, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board; provided that
nothing herein contained shall be construed to preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor.
Section 12. Resignations. Any Director of the Corporation may
resign at any time by giving written notice to the Board of Directors or to the
Chairman of the Board or to the President or the Secretary of the Corporation.
Any such resignation shall
11
<PAGE> 12
take effect at the time specified therein, or, if the time be not specified,
upon receipt thereof; and unless otherwise specified therein, acceptance of
such resignation shall not be necessary to make it effective.
Section 13. Right to Advancement of Expenses. Any right to
indemnification conferred upon the Directors pursuant to the Certificate of
Incorporation of the Corporation, these By-Laws, the laws of the State of
Delaware or otherwise shall include the right to be paid by the Corporation the
expenses incurred in defending any action, suit or proceeding, whether civil,
criminal, administrative or investigative, in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that if the laws
of the State of Delaware require, an advancement of expenses incurred by a
Director in his or her capacity as a Director (and not in any other capacity in
which service was or is rendered by such Director) shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
Director, to repay all amounts so advanced if it shall ultimately be determined
by final judicial decision from which there is no further right to appeal that
such Director is not entitled to be indemnified for such expenses under this
Section 13 or otherwise. The right to advancement of expenses conferred in
this Section 13 shall be a contract right and such right shall continue to any
person entitled to such right who has ceased to be a Director and shall inure
to the benefit of such person's heirs, executors and administrators.
12
<PAGE> 13
ARTICLE V
Officers
Section 1. Number, Election and Term of Office. The officers of
the Corporation shall be a Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Treasurer, and may at the discretion of the Board
of Directors include one or more Assistant Treasurers and Assistant
Secretaries. The officers of the Corporation shall be elected annually by the
Board of Directors at its meeting held immediately after the annual meeting of
the stockholders, and shall hold their respective offices until their
successors are duly elected and have qualified. Any number of offices may be
held by the same person. The Chairman of the Board may from time to time
appoint such other officers and agents as the interest of the Corporation may
require and may fix their duties and terms of office.
Section 2. Chairman of the Board. The Chairman of the Board
shall be the chief executive officer of the Corporation and shall have general
and active management of the business of the Corporation, and shall see that
all orders and resolutions of the Board are carried into effect. He shall
ensure that the books, reports, statements, certificates and other records of
the Corporation are kept, made or filed in accordance with the laws of the
State of Delaware. He shall preside at all meetings of the Board of Directors
and at all meetings of the stockholders. He shall cause to be called regular
and special meetings of the stockholders and of the Board of Directors in
accordance with these By-Laws. He may sign, execute and deliver in the name of
the Corporation all deeds, mortgages, bonds, contracts or other
13
<PAGE> 14
instruments authorized by the Board of Directors, except in cases where the
signing, execution or delivery thereof shall be expressly delegated by the
Board of Directors or by these By-Laws to some other officer or agent of the
Corporation or where any of them shall be required by law otherwise to be
signed, executed or delivered. He may sign, with the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary, certificates of stock of
the Corporation. He shall appoint and remove, employ and discharge, and fix
the compensation of all servants, agents, employees and clerks of the
Corporation other than the duly elected or appointed officers, subject to the
approval of the Board of Directors. In addition to the powers and duties
expressly conferred upon him by these By-Laws, he shall, except as otherwise
specifically provided by the laws of the State of Delaware, have such other
powers and duties as shall from time to time be assigned to him by the Board of
Directors.
Section 3. President. The President shall be the chief
operating officer, or, if the office of Chairman of the Board shall be vacant,
the chief executive officer of the Corporation. At the request of the Chairman
of the Board, or in the case of his absence or inability to act, or if the
office of Chairman of the Board shall be vacant, the President shall perform
the duties of the Chairman of the Board, and when so acting, shall have all the
powers of the Chairman of the Board. He may sign, with the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary, certificates
of stock of the Corporation. In addition to the powers and duties expressly
conferred upon him by these By-Laws, he shall, except as otherwise specifically
provided by the laws of the State of Delaware, have such other powers
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<PAGE> 15
and duties as shall from time to time be assigned to him by the Chairman of the
Board or by the Board of Directors.
Section 4. Vice Presidents. The Vice Presidents shall perform
such duties as the Chairman of the Board, the President or the Board of
Directors shall require. Any Vice President shall, during the absence or
incapacity of the President, assume and perform his duties.
Section 5. Secretary. The Secretary may sign all certificates
of stock of the Corporation. He shall record all the proceedings of the
meetings of the Board of Directors and of the stockholders of the Corporation
in books to be kept for that purpose. He shall have custody of the seal of the
Corporation and may affix the same to any instrument requiring such seal when
authorized by the Board of Directors, and when so affixed he may attest the
same by his signature. He shall keep the transfer books, in which all
transfers of the capital stock of the Corporation shall be registered, and the
stock books, which shall contain the names and addresses of all holders of the
capital stock of the Corporation and the number of shares held by each; and he
shall keep such stock and transfer books open daily during business hours to
the inspection of every stockholder and for transfer of stock. He shall notify
the Directors and stockholders of their respective meetings as required by law
or by these By-Laws, and shall perform such other duties as may be required by
law or by these By-Laws, or which may be assigned to him from time to time by
the Board of Directors.
15
<PAGE> 16
Section 6. Assistant Secretaries. The Assistant Secretaries
shall, during the absence or incapacity of the Secretary, assume and perform
all functions and duties which the Secretary might lawfully do if present and
not under any incapacity.
Section 7. Treasurer. The Treasurer shall have charge of the
funds and securities of the Corporation. He may sign all certificates of
stock. He shall keep full and accurate accounts of all receipts and
disbursements of the Corporation in books belonging to the Corporation and
shall deposit all monies and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
Board of Directors. He shall disburse the funds of the Corporation as may be
ordered by the Board, and shall render to the Chairman of the Board or the
President or the Directors, whenever they may require it, an account of all his
transactions as Treasurer and an account of the business and financial position
of the Corporation.
Section 8. Assistant Treasurers. The Assistant Treasurers
shall, during the absence or incapacity of the Treasurer, assume and perform
all functions and duties which the Treasurer might lawfully do if present and
not under any incapacity.
Section 9. Treasurer's Bond. The Treasurer and Assistant
Treasurers shall, if required so to do by the Board of Directors, each give a
bond (which shall be renewed every six (6) years) in such sum and with such
surety or sureties as the Board of Directors may require.
Section 10. Transfer of Duties. The Board of Directors or the
Chairman of the Board in its or his absolute discretion may transfer the power
and duties, in whole or
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<PAGE> 17
in part, of any officer to any other officer, or persons, notwithstanding the
provisions of these By-Laws, except as otherwise provided by the laws of the
State of Delaware.
Section 11. Vacancies. If the office of Chairman of the Board,
President, Vice President, Secretary or Treasurer, or of any other officer or
agent becomes vacant for any reason, the Board of Directors may choose a
successor to hold office for the unexpired term.
Section 12. Removals. At any meeting of the Board of Directors
called for the purpose, any officer or agent of the Corporation may be removed
from office, with or without cause, by the affirmative vote of a majority of
the entire Board of Directors.
Section 13. Compensation of Officers. The officers shall receive
such salary or compensation as may be determined by the Board of Directors.
Section 14. Resignations. Any officer or agent of the
Corporation may resign at any time by giving written notice to the Board of
Directors or to the Chairman of the Board or the President or the Secretary of
the Corporation. Any such resignation shall take effect at the time specified
therein or, if the time be not specified, upon receipt thereof; and unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.
ARTICLE VI
Contracts, Checks and Notes
Section 1. Contracts. Unless the Board of Directors shall
otherwise specifically direct, all contracts of the Corporation shall be
executed in the name of the Corporation by the Chairman of the Board, the
President or a Vice President.
17
<PAGE> 18
Section 2. Checks and Notes. All checks, drafts, bills of
exchange and promissory notes and other negotiable instruments of the
Corporation shall be signed by such officers or agents of the Corporation as
may be designated by the Board of Directors.
ARTICLE VII
Stock
Section 1. Certificates of Stock. The certificates for shares
of the stock of the Corporation shall be in such form, not inconsistent with
the Certificate of Incorporation, as shall be prepared or approved by the Board
of Directors. Every holder of stock in the Corporation shall be entitled to
have a certificate signed by, or in the name of the Corporation by, the
Chairman of the Board, the President or a Vice President, and by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary certifying
the number of shares owned by him and the date of issue; and no certificate
shall be valid unless so signed. All certificates shall be consecutively
numbered and shall be entered in the books of the Corporation as they are
issued.
Where a certificate is countersigned (1) by a transfer agent other
than the Corporation or its employee, or, (2) by a registrar other than the
Corporation or its employee, any other signature on the certificate may be
facsimile. In case any officer, transfer agent or
18
<PAGE> 19
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
All certificates surrendered to the Corporation shall be cancelled
and, except in the case of lost or destroyed certificates, no new certificates
shall be issued until the former certificates for the same number of shares of
the same class of stock shall have been surrendered and cancelled.
Section 2. Transfer of Stock. Upon surrender to the Corporation
or the transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
ARTICLE VIII
Registered Stockholders
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and, accordingly, shall
not be bound to recognize any equitable or other claim to, or interest in, such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of the
State of Delaware.
ARTICLE IX
Lost Certificates
Any person claiming a certificate of stock to be lost or destroyed,
shall make an affidavit or affirmation of the fact and advertise the same in
such manner as the Board
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<PAGE> 20
of Directors may require, and the Board of Directors may, in its discretion,
require the owner of the lost or destroyed certificate, or his legal
representative, to give the Corporation a bond in a sum sufficient, in the
opinion of the Board of Directors, to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss of any such
certificate. A new certificate of the same tenor and for the same number of
shares as the one alleged to be lost or destroyed may be issued without
requiring any bond when, in the judgment of the Directors, it is proper so to
do.
ARTICLE X
Fixing of Record Date
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a
meeting, or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
20
<PAGE> 21
ARTICLE XI
Dividends
Subject to the relevant provisions of the Certificate of
Incorporation, dividends upon the capital stock of the Corporation may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the
capital stock of the Corporation, subject to the provisions of the Certificate
of Incorporation.
Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sums as the Directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the Corporation, or for such other purpose as
the Directors shall think conducive to the interest of the Corporation, and the
Directors may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE XII
Waiver of Notice
Whenever any notice whatever is required to be given by statute or
under the provisions of the Certificate of Incorporation or these By-Laws, a
waiver thereof in writing signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be equivalent
thereto.
21
<PAGE> 22
ARTICLE XIII
Seal
The corporate seal of the Corporation shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware."
ARTICLE XIV
Amendments
Subject to the provisions of the Certificate of Incorporation, these
By-Laws may be altered, amended or repealed or new By-Laws may be adopted by
the stockholders or by the Board of Directors, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment or repeal of the By-Laws or of adoption of new By-Laws be contained
in the notice of such special meeting.
22
<PAGE> 1
EXHIBIT 10-F
[NOVACARE LETTERHEAD]
May 26, 1995
C. Arnold Renschler, M.D.
408 Barbara Lane
Bryn Mawr, PA 19010
Dear Arnie:
This confirms our understanding with respect to the terms of your continued
employment by NovaCare (the "Company"). The terms and conditions of your
agreement with the Company dated as of January 3, 1994 (the "Agreement"), a
copy of which is attached hereto and which is incorporated herein by reference,
are hereby ratified and affirmed except as specifically modified below:
1. The first and last sentences of Paragraph 2 of the Agreement are deleted in
their entirety and the following is substituted in place of the first
sentence:
"2. Position, Duties. The Employee shall serve as the Company's
Senior Vice President, Chief Clinical Officer and President and General
Manager, NewCo, a professional services consulting and management division,
yet to be named."
2. You have been granted, subject to the approval of the Compensation
Committee of the Board of Directors, a non qualified stock option, pursuant
to the NovaCare 1986 Stock Option Plan (the "Plan"), to purchase 110,000
shares of NovaCare common stock at $7.375, the exercise price at the close
of business yesterday. Such options shall vest over five years in annual
cumulative installments of 20% per year, commencing May 25, 1996, and shall
become fully vested immediately (1) if you are directed to report, without
your prior written approval, to someone other than John H. Foster or
Timothy E. Foster, or (2) if there is a change of control of the Company.
"Change of control" for purposes of this paragraph shall mean that voting
control of twenty percent or more of the common shares of the Company vests
in a person (as defined in Section 13(d)(3) of the Securities Exchange Act
of 1934) other than a group of which you are a member. You remain eligible
for annual option grants pursuant to paragraph 3.4 of the Agreement.
3. Paragraph 8.1 of the Agreement is amended by substituting for the first
portion of the second sentence thereof ending with "... or (b)" the
following:
<PAGE> 2
C. Arnold Renschler, M.D.
May 26, 1995
Page 2
"The Employee agrees that, in consideration of his employment
hereunder, the Employee will not, for a period of one (1) year commencing
on the date of termination for any reason of his employment with the
Company, (a) engage, directly or indirectly, whether as principal, agent,
distributor, representative, consultant, stockholder (other than an
investment of not more than 5% of the stock or equity of any corporation
the stock of which is publicly traded), employee or otherwise, in any
activity or business venture which is competitive with any business
conducted or proposed to be conducted by the Company as of the date of
termination of his employment with the Company (it being understood and
agreed that the Employee shall not be considered to have violated the
foregoing covenant if, subsequent to his employment by the Company, he
engages in the skilled nursing facility, including sub-acute services
(other than contract sub-acute services), assisted living or senior living
housing business or the physician services (other than contract
rehabilitation management) business), or (b) ..."
Except as modified above, the Agreement remains in full force and effect.
If you agree to the foregoing, please sign the enclosed executed copy of this
letter and return it to me.
Sincerely,
/s/ TIMOTHY E. FOSTER
---------------------
Timothy E. Foster
Agreed to:
/s/ C. ARNOLD RENSCHLER, Date: 5/26/95
--------------------------------- --------------
C. Arnold Renschler, M.D.
073
Enclosure
<PAGE> 1
EXHIBIT 10(i)
EMPLOYMENT AGREEMENT
AGREEMENT dated as of the 6th day of January, 1995 by and between
NOVACARE, INC., a Delaware corporation (the "Company"), and DARYL A. DIXON (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Executive has heretofore been employed in the
Contract Services Division of the Company, and the Company wishes to continue to
retain the Executive and the Executive wishes to continue to serve the Company,
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto hereby agree as follows:
1. EMPLOYMENT, TERM, AUTOMATIC EXTENSION.
1.1 Employment. The Company agrees to employ the Executive, and
the Executive agrees to serve in the employ of the Company, for the term set
forth in Section 1.2, in the positions and with the responsibilities, duties and
authority set forth in Section 2 and on the other terms and conditions set forth
in this Agreement.
1.2 Term. The term of the Executive's employment under this
Agreement shall commence on the date hereof and shall terminate on the fifth
anniversary of the date hereof, unless extended or sooner terminated in
accordance with this Agreement.
1.3 Automatic Extension. As of the fourth anniversary hereof, and
as of each subsequent anniversary (each, an "Automatic Renewal Date"), unless
either party shall have given a notice of non-extension prior to such Automatic
Renewal Date, the term of this Agreement shall be extended automatically for a
period of one year to the anniversary of the expiration date of the then current
term of this Agreement. Once a notice of non-extension shall have been given by
either party, there shall be no further automatic extension of this Agreement.
2. POSITION, DUTIES.
The Executive shall serve the Company in the position of
President and General Manager - Contract Services Division. The Executive shall
perform, faithfully and diligently, such duties, and shall have such
responsibilities, appropriate to said position, as shall be assigned to him from
time to time by the Chief Executive Officer, the Chief Operating Officer and the
Board of Directors of the Company. The Executive shall report to the Chief
Operating Officer of the Company. The Executive shall devote his full business
time and attention to the performance of his duties and responsibilities
hereunder.
<PAGE> 2
2
3. SALARY, INCENTIVE BONUS, STOCK OPTIONS.
3.1 Salary. During the term of this Agreement, in consideration
of the performance by the Executive of the services set forth in Section 2 and
his observance of the other covenants set forth herein, the Company shall pay to
the Executive, and the Executive shall accept, a base salary at the rate of
$300,000 per annum, payable in accordance with the standard payroll practices of
the Company. The Executive shall be entitled to such increases in base salary,
commencing January 1, 1996 and thereafter during the term hereof, as shall be
determined by the Chief Operating Officer and approved by the Compensation
Committee of the Board of Directors of the Company in their sole discretion,
taking account of the performance of the Contract Services Division, the Company
and the Executive, and other factors generally considered relevant to the
salaries of officers holding similar positions with enterprises comparable to
the Company. In no event shall the base salary of the Executive be decreased
during the term of this Agreement.
3.2 Bonus. (a) In addition to the base salary provided for in
Section 3.1, the Executive shall have a bonus opportunity of fifty percent (50%)
of his base salary (the "Target Bonus") with respect to each fiscal year of the
Company ending during the term of this Agreement, as determined by the Contract
Services Division Executive Compensation Plan (the "Plan"). The determination as
to the amount, if any, of the bonus which the Executive has earned shall be in
the sole discretion of the Company, based on the success of the Executive in
meeting annual objectives under the Plan; provided, however, that for the 1995
and 1996 fiscal years of the Company, the Executive shall be entitled to a
guaranteed bonus in an amount equal to sixty percent (60%) of the Target Bonus
for the applicable fiscal year. The bonus shall be payable upon or within a
reasonable period of time after the receipt of the Company's audited financial
statements for the applicable fiscal year in accordance with the Company's
normal practices.
(b) In the event of the termination of employment of the
Executive pursuant to Section 6.1 (Death), 6.2 (Disability), Section 6.4
(Without Cause) or 6.5 (Voluntary Termination) of this agreement, the Executive
(or his estate or other legal representative) shall be entitled to a bonus for
the fiscal year in which such termination takes place in an amount equal to the
product of (i) the bonus or guaranteed bonus for such fiscal year determined
pursuant to Section 3.2, multiplied by (ii) a fraction, the numerator of which
is the number of days from the beginning of such fiscal year to the date of
termination, and the denominator of which is 365. In the event of the
termination of employment of the Executive pursuant to Section 6.3 (Due Cause)
of this Agreement, the Executive shall
<PAGE> 3
3
not be entitled to a bonus for the fiscal year of the Company in which such
termination takes place. The Executive shall not be entitled to a bonus for any
fiscal year of the Company subsequent to the fiscal year in which the
termination of his employment takes place.
3.3 Stock Options. As of the date (the "Grant Date") of the
meeting of the Compensation Committee of the Board of Directors next following
the execution of this Agreement, the Company shall grant to the Executive
incentive stock options to purchase 25,000 shares of the Company's common stock,
par value $.01 per share ("Options"), at an exercise price per share equal to
the market value of the Company's common stock on the Grant Date. The Options
shall:
(i) have a term of ten (10) years from the
Grant Date;
(ii) become exercisable as to 20% of the shares
covered thereby on the first anniversary of the Grant Date, as to an additional
20% of such shares on each of the next three anniversaries of the Grant Date and
as to the final 20% of such shares on a date thirty (30) days prior to the fifth
anniversary of this agreement;
(iii) become exercisable in full upon a Change in
Control of the Company (as hereinafter defined), whether or not the employment
of the Executive shall be terminated.
The Options shall be granted under the 1986 Stock Option Plan of the Company and
shall be evidenced by a Stock Option Certificate embodying the foregoing terms
and other terms and conditions of such Stock Option Plan not inconsistent with
the foregoing terms. For purposes of this Agreement, a Change in Control of the
Company shall be deemed to have occurred if:
(A) a "person" (meaning an individual, a
partnership, or other group or association as defined in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, other than the Executive or a
group including the Executive), either (i) acquires twenty percent (20%) or more
of the combined voting power of the outstanding securities of the Company having
a right to vote in elections of directors and such acquisition shall not have
been approved within sixty (60) days following such acquisition by a majority of
the Continuing Directors (as hereinafter defined) then in office or (ii)
acquires fifty percent (50%) or more of the combined voting power of the
outstanding securities of the Company having a right to vote in elections of
directors; or
<PAGE> 4
4
(B) Continuing Directors shall for any reason
cease to constitute a majority of the Board of Directors of the Company; or
(C) all or substantially all of the business
and/or assets of the Company is disposed of by the Company to a party or
parties other than a subsidiary or other affiliate of the Company, in which
the Company owns less than a majority of the equity, pursuant to a partial or
complete liquidation of the Company, sale of assets (including stock of a
subsidiary of the Company) or otherwise.
For purposes of this Agreement, the term "Continuing Director"
shall mean a member of the Board of Directors of the Company who either was a
member of the Board of Directors on the date hereof or who subsequently became a
Director and whose election, or nomination for election, was approved by a vote
of at least two-thirds of the Continuing Directors then in office.
4. EXPENSE REIMBURSEMENT.
During the term of this Agreement, the Company shall reimburse
the Executive for all reasonable and necessary out-of-pocket expenses incurred
by him in connection with the performance of his duties hereunder, upon the
presentation of proper accounts therefor in accordance with the Company's
policies.
5. BENEFITS.
5.1 Benefit Plans. During the term of this Agreement, the
Executive will be eligible to participate in all employee benefit plans and
programs (including, without limitation Supplemental Benefits Plan, 401(k) Plan,
group life, disability, hospitalization, surgical and major medical insurance
plans of the Company) offered by the Company from time to time to its senior
executive officers, subject to the provisions of such plans and programs as in
effect from time to time.
5.2 Vacation. The Executive shall be entitled to four (4)
weeks vacation per annum.
5.3 Professional Licensure & Association Dues. During the term
of this Agreement, the Company shall pay the Executive's professional licensure
and association dues and costs associated with continuing education credits
including travel and living expenses.
5.4 Loan. (a) The Company agrees to make a loan to the Executive
in the principal amount of $450,000. Such loan shall be made promptly following
the execution of this Agreement, shall bear no interest, and shall be payable in
equal annual
<PAGE> 5
5
installments of $90,000 over five years and in full on the fifth
anniversary of the date hereof. The loan shall be evidenced by a Promissory Note
to be executed by the Executive embodying the foregoing terms and other standard
terms and conditions. Notwithstanding the foregoing, $90,000 of the principal
amount of such loan shall be forgiven on each anniversary of the date hereof
(beginning on the first anniversary) that the Executive is employed by the
Company until the fifth anniversary hereof (when the full amount of the loan
will have been forgiven).
(b) On the first business day of 1996, 1997, 1998, 1999,
2000 and 2001, the Company shall pay to the Executive the Additional Payment set
forth in the second column of Schedule A attached hereto opposite such year, in
reimbursement of a portion (equal to such Additional Payment) of the additional
federal, state and local income, health insurance and other taxes to which it is
projected he will become subject as a result of the interest-free loan from the
Company referred to in this Section 5.4. In the event of the termination of the
Executive's employment pursuant to Section 6.1 (Death) or Section 6.2
(Disability), a pro rata portion of the Additional Payment applicable to the
calendar year during which termination occurred shall become due and payable
thirty (30) days after the date of termination. In the event of termination of
the Executive's employment pursuant to Section 6.4 (Without Cause) the Company
shall continue to pay Additional Payments pursuant to Schedule A.
6. TERMINATION OF EMPLOYMENT.
6.1 Death. In the event of the death of the Executive, the
Company shall pay to the estate or other legal representative of the Executive
the base salary provided for in Section 3.1 (at the annual rate then in effect)
accrued to the date of the Executive's death and not theretofore paid to the
Executive. Any unpaid balance of the loan referred to in Section 5.4 shall be
forgiven on the date of termination of employment. Rights and benefits of the
estate or other legal representative of the Executive (a) with respect to stock
options shall be determined in accordance with the applicable option grant and
(b) under the benefit plans and programs of the Company shall be determined in
accordance with the provisions of such plans and programs. Neither the estate or
other legal representative of the Executive nor the Company shall have any
further rights or obligations under this Agreement.
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall be
entitled to payment of benefits under the Company's Supplemental Benefits Plan
disability provision, the employment of the Executive hereunder may be
terminated by the Company or the Executive. In the event of such termination,
the Company shall pay to the Executive the
<PAGE> 6
6
difference between disability income and the base salary then in effect for
twenty-four (24) months following termination. Any unpaid balance of the loan
referred to in Section 5.4 shall be forgiven on the date of termination of
employment. Rights and benefits of the Executive (a) with respect to stock
options shall be determined in accordance with the applicable option grant and
(b) under the other benefit plans and programs of the Company shall be
determined in accordance with the terms and provisions of such plans and
programs. Neither the Executive nor the Company shall have any further rights or
obligations under this Agreement, except as provided in Sections 7, 8 and 9.
6.3 Due Cause. The employment of the Executive hereunder may be
terminated by the Company at any time for Due Cause (as hereinafter defined). In
the event of such termination, the Company shall pay to the Executive the base
salary provided for in Section 3.1 (at the annual rate then in effect) accrued
to the date of such termination and not theretofore paid to the Executive. Any
unpaid balance of the loan referred to in Section 5.4 shall be paid by the
Executive to the Company within sixty (60) days after the date of termination of
employment. Rights and benefits of the Executive or his transferee (a) with
respect to stock options shall be determined in accordance with the applicable
option grant and (b) under the benefit plans and programs of the Company shall
be determined in accordance with the provisions of such plans and programs. For
purposes hereof, "Due Cause" shall include (a) the Executive's willful and
continuing failure to discharge his duties and responsibilities under this
Agreement or (b) any material act of dishonesty involving the Company or (c)
conviction of (i) a felony or (ii) any crime or offense involving moral
turpitude. After the satisfaction of any claim of the Company against the
Executive incidental to such Due Cause, neither the Executive nor the Company
shall have any further rights or obligations under this Agreement, except as
provided in Sections 7, 8 and 9.
6.4 Termination by the Company Without Cause. The Company may
terminate the Executive's employment at any time for whatever reason it deems
appropriate or without reason; provided, however, that in the event that such
termination is not pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due
Cause) or 6.5 (Voluntary Termination), the Company shall pay to the Executive
severance pay in the form of salary continuation for a period of two (2) years
commencing on the date of termination, at a rate equal to the base salary
provided for in Section 3.1 (at the annual rate then in effect). The Executive
shall be under no obligation to seek other employment and shall be under no
obligation to offset any amounts earned from such other employment (whether as
an employee, a consultant or otherwise) against such payments. During the two
(2) year severance pay period referred to in this Section 6.4, the Company shall
continue to carry the group life, disability, Supplemental
<PAGE> 7
7
Benefits Plan (excluding Company match payable during severance period),
hospitalization, surgical and major medical insurance coverage for the Executive
which were being provided to the Executive immediately prior to the termination
of his employment (or such other benefits as shall be provided to senior
executives of the Company in lieu of such benefits from time to time during such
two (2) year period) on the same basis, including Company payment of premiums
and Company contributions, as such benefits are provided to other senior
executives of the Company. Any unpaid balance of the loan referred to in Section
5.4 shall continue to be forgiven by the Company in installments as provided in
Section 5.4 (but without regard to the requirement that the Executive be
employed by the Company). Rights and benefits of the Executive or his transferee
(a) with respect to stock options shall be determined in accordance with the
applicable option grant and (b) under the other benefit plans and programs of
the Company shall be determined in accordance with the provisions of such plans
and programs. Neither the Executive nor the Company shall have any further
rights or obligations under this Agreement, except as provided in Sections 7, 8
and 9.
6.5 Voluntary Termination. The Executive may terminate his
employment with the Company at any time upon thirty (30) days' prior written
notice to the Company. In the event of such termination, the Company shall pay
to the Executive the base salary provided for in Section 3.1 (at the annual rate
then in effect) accrued to the date of such termination and not theretofore paid
to the Executive. Any unpaid balance of the loan referred to in Section 5.4
shall be paid by the Executive to the Company within sixty (60) days after the
date of termination of employment. Rights and benefits of the Executive or his
transferee (a) with respect to stock options shall be determined in accordance
with the applicable stock option grant and (b) under the benefit plans and
programs of the Company shall be determined in accordance with the provisions of
such plans and programs. Neither the Executive nor the Company shall have any
further rights or obligations under this Agreement, except as provided in
Sections 7, 8 and 9.
7. CONFIDENTIAL INFORMATION.
7.1 Nondisclosure. The Executive shall, during the term of this
Agreement and at all times thereafter, treat as confidential and, except as
required in the performance of his duties and responsibilities under this
Agreement, not disclose, publish or otherwise make available to the public or to
any individual, firm or corporation any confidential information (as hereinafter
defined).
7.2 Confidential Information Defined. For the purposes hereof,
the term "confidential information" shall mean all information acquired by the
Executive in the course of the
<PAGE> 8
8
Executive's employment with the Company in any way concerning the products,
projects, activities, business or affairs of the Company or the Company's
customers, including, without limitation, all information concerning trade
secrets and the products or projects of the Company and/or any improvements
therein, all sales and financial information concerning the Company, all
customer and supplier lists, all information concerning projects in research and
development or marketing plans for any such products or projects, and all
information in any way concerning the products, projects, activities, business
or affairs of customers of the Company which is furnished to the Executive by
the Company or any of its agents or customers, as such; provided, however, that
the term "confidential information" shall not include information which (a)
becomes generally available to the public other than as a result of a disclosure
by the Executive, (b) was available to the Executive on a non-confidential basis
prior to his employment with the Company or (c) becomes available to the
Executive on a non-confidential basis from a source other than the Company or
any of its agents or customers provided that such source is not bound by a
confidentiality agreement with the Company or any of such agents or customers.
8. INTERFERENCE WITH THE COMPANY.
8.1 Restrictions. The Executive acknowledges that the services to
be rendered by him to the Company are of a special and unique character. In
order to induce the Company to enter into this Agreement, and in consideration
of his employment hereunder, the Executive agrees, for the benefit of the
Company, that he will not, during the period of his employment with the Company
and thereafter, for the Applicable Period (as hereinafter defined) commencing on
the date of termination of his employment with the Company:
(a) engage, directly or indirectly, (x) whether as
principal, consultant, employee, partner, agent, stockholder, limited partner or
other investor (other than an investment of (i) not more than five percent (5%)
of the stock or equity of any corporation the capital stock of which is publicly
traded or (ii) not more than five percent (5%) of the ownership interest of any
partnership or other entity) or otherwise, within the United States of America,
with any firm or person in any activity or business venture which is in
competition with any line or lines of business being conducted by the Company or
any subsidiary of the Company at the date of termination of the Executive's
employment with the Company, accounting for ten percent (10%) or more of the
Company's consolidated gross sales, revenues or earnings before taxes for the
fiscal year ended immediately prior to the conduct in question ("Competing
Business"), except that, as to any entity whose business is diversified and that
has derived during each of the preceding three calendar years less
<PAGE> 9
9
than fifty percent (50%) of its revenues from Competing Business, the Executive
may so engage in that part of the business that is not Competing Business,
provided that the Company, prior to the Executive's having accepted such
engagement, shall receive separate written assurances satisfactory to the
Company from such entity and from the Executive that the Executive will not
render services directly or indirectly to the part(s) of the entity engaged in
Competing Business or (y) as a principal, consultant, employee, partner, agent,
stockholder, limited partner or other investor of or with Manor Care, Inc. (the
"Competition Restriction); or
(b) solicit or entice or endeavor to solicit or entice
away from the Company any person who was an "officer" (as such term is used in
Rule 16a-1 under Section 16 of the Securities Exchange Act of 1934) of the
Company, either for his own account or for any individual, firm or corporation,
whether or not such person would commit any breach of his contract of employment
by reason of leaving the service of the Company (the "Solicitation
Restriction"); or
(c) employ, directly or indirectly, any person who was
an officer (as defined above) of the Company at any time during the one year
period ending on the date of termination of the Executive's employment with the
Company, except that this restriction shall not apply in the case of any person
whose employment shall have been terminated by the Company (the "Hiring
Restriction").
8.2 Time Periods. As used in this Section 8, the term
"Applicable Period" shall mean:
(a) twelve (12) months in the case of a termination
of employment pursuant to Section 6.3 (Due Cause) or Section 6.5 (Voluntary
Termination);
(b) twenty-four (24) months as to the Competition
and Solicitation Restrictions and twelve (12) months as to the Hiring
Restriction in the case of a termination of employment pursuant to Section 6.4
(Without Due Cause) or in the case of a termination of employment upon or
following expiration of the term of this Agreement; and
(c) twenty-four (24) months as to the Competition and
Solicitation Restrictions and twelve (12) months as to the Hiring Restriction in
the case of a termination pursuant to Section 6.2 (Disability), but only if the
Company gives notice to the Executive within thirty (30) days of the date of
termination of employment of its intention to enforce such restrictions against
the Executive, and subject to the Company's continued payment to the Executive
during such twenty-four (24) month
<PAGE> 10
10
period of the base salary provided for in Section 3.1 (at the annual rate in
effect at the date of termination).
8.3 Payment in the Event of Breach. In the event that the
Executive shall breach the Competition Restriction referred to in Section
8.1(a)(y) (relating to Manor Care, Inc.), the Executive shall repay to the
Company on demand an amount equal to the sum of (i) the unpaid balance of the
loan referred to in Section 5.4, plus (ii) the amount of the loan theretofore
forgiven by the Company pursuant to Section 5.4, plus (iii) the amount
theretofore paid to the Executive by the Company pursuant to Section 5.4(b). The
Executive acknowledges and agrees that the loan, forgiveness of the loan and
payments to be made to him, all as provided in Section 5.4, are made by the
Company in consideration of the agreement by the Executive to the Competition
Restriction referred to in Section 8.1(a)(y) (relating to Manor Care, Inc.) and,
accordingly, that the payment to be made by him to the Company pursuant to this
Section 8.3 in the event of the breach of such covenant by the Executive is fair
and reasonable. Further, it is understood and agreed that the foregoing payment
shall be in addition to, and not in lieu of, any other right or remedy which the
Company may have at law or in equity against the Executive in the event of
breach of such covenant.
9. EQUITABLE RELIEF.
In the event of a breach or threatened breach by the Executive of
any of the provisions of Sections 7 or 8 of this Agreement, the Executive hereby
consents and agrees that the Company shall be entitled to an injunction or
similar equitable relief from any court of competent jurisdiction restraining
the Executive from committing or continuing any such breach or threatened breach
or granting specific performance of any act required to be performed by the
Executive under any of such provisions, without the necessity of showing any
actual damage or that money damages would not afford an adequate remedy and
without the necessity of posting any bond or other security. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
at law or in equity which it may have.
<PAGE> 11
11
10. SUCCESSORS AND ASSIGNS.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign
this Agreement or any part thereof without the prior written consent of a
majority of the Board of Directors of the Company; provided, however, that
nothing herein shall preclude one or more beneficiaries of the Executive from
receiving any amount that may be payable following the occurrence of his legal
incompetency or his death and shall not preclude the legal representative of his
estate from receiving such amount or from assigning any right hereunder to the
person or persons entitled thereto under his will or, in the case of intestacy,
to the person or persons entitled thereto under the laws of intestacy applicable
to his estate. The term "beneficiaries", as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Executive
(in the event of his incompetency) or the Executive's estate.
11. GOVERNING LAW.
This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the Commonwealth of
Pennsylvania applicable to contracts to be performed entirely within such state.
In the event that a court of any jurisdiction shall hold any of the provisions
of this Agreement to be wholly or partially unenforceable for any reason, such
determination shall not bar or in any way affect the Company's right to relief
as provided for herein in the courts of any other jurisdiction. Such provisions,
as they relate to each jurisdiction, are, for this purpose, severable into
diverse and independent covenants. Service of process on the parties hereto at
the addresses set forth herein shall be deemed adequate service of such process.
<PAGE> 12
12
12. ENTIRE AGREEMENT.
This Agreement contains all the understandings and
representations between the parties hereto pertaining to the subject matter
hereof and supersedes all undertakings and agreements, whether oral or in
writing, if any there be, previously entered into by them with respect thereto.
13. AMENDMENT, MODIFICATION, WAIVER.
No provision of this Agreement may be amended or modified unless
such amendment or modification is agreed to in writing and signed by the
Executive and by a duly authorized representative of the Company other than the
Executive. Except as otherwise specifically provided in this Agreement, no
waiver by either party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or any prior or subsequent time, nor shall the failure of or delay by
either party hereto in exercising any right, power or privilege hereunder
operate as a waiver thereof to preclude any other or further exercise thereof or
the exercise of any other such right, power or privilege.
14. ARBITRATION.
Any controversy or claim arising out of or relating to this
Agreement, or any breach thereof, shall, except as provided in Section 9, be
settled by arbitration in accordance with the rules of the American Arbitration
Association then in effect and judgment upon such award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
arbitration shall be held in the area where the Company then has its principal
place of business. The arbitration award shall include attorneys' fees and costs
to the prevailing party.
15. NOTICES.
Any notice to be given hereunder shall be in writing and
delivered personally or sent by certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or at
such other address as such party may subsequently designate by like notice:
If to the Company:
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: Chief Operating Officer
<PAGE> 13
13
If to the Executive:
Daryl A. Dixon
6 Trotter Way
Collegeville, PA 19426
16. SEVERABILITY.
Should any provision of this Agreement be held by a court or
arbitration panel of competent jurisdiction to be enforceable only if modified,
such holding shall not affect the validity of the remainder of this Agreement,
the balance of which shall continue to be binding upon the parties hereto with
any such modification to become a part hereof and treated as though originally
set forth in this Agreement. The parties further agree that any such court or
arbitration panel is expressly authorized to modify any such unenforceable
provision of this Agreement in lieu of severing such unenforceable provision
from this Agreement in its entirety, whether by rewriting the offending
provision, deleting any or all of the offending provision, adding additional
language to this Agreement, or by making such other modifications as it deems
warranted to carry out the intent and agreement of the parties as embodied
herein to the maximum extent permitted by law. The parties expressly agree that
this Agreement as so modified by the court or arbitration panel shall be binding
upon and enforceable against each of them. In any event, should one or more of
the provisions of this Agreement be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions hereof, and if such provision or provisions are not
modified as provided above, this Agreement shall be construed as if such
invalid, illegal or unenforceable provisions had never been set forth herein.
17. WITHHOLDING.
Anything to the contrary notwithstanding, all payments required
to be made by the Company hereunder to the Executive or his beneficiaries,
including his estate, shall be subject to withholding of such amounts relating
to taxes as the Company may reasonably determine it should withhold pursuant to
any applicable law or regulation. In lieu of withholding such amounts, in whole
or in part, the Company, may, in its sole discretion, accept other provision for
payment of taxes as permitted by law, provided it is satisfied in its sole
discretion that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.
<PAGE> 14
14
18. SURVIVORSHIP.
The respective rights and obligations of the parties hereunder
shall survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.
19. TITLES.
Titles of the sections and paragraphs of this Agreement are
intended solely for convenience and no provision of this Agreement is to be
construed by reference to the title of any section or paragraph.
* * *
<PAGE> 15
15
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
NOVACARE, INC.
By /s/ TIMOTHY E. FOSTER
--------------------------
Timothy E. Foster
President and Chief
Operating Officer
/s/ DARYL A. DIXON
------------------------------
Daryl A. Dixon
<PAGE> 16
16
SCHEDULE A
<TABLE>
<CAPTION>
Year Additional Payment
---- ------------------
<S> <C>
1996 $8,741.25
1997 6,993.00
1998 5,244.75
1999 3,496.50
2000 1,748.25
</TABLE>
<PAGE> 17
PROMISSORY NOTE
$450,000 January 6, 1995
FOR VALUE RECEIVED, the undersigned, DARYL A. DIXON (the
"Borrower"), hereby promises to pay to NOVACARE, INC., a Delaware corporation
(the "Lender"), the principal sum of Four Hundred Fifty Thousand Dollars
($450,000), without interest. Principal shall be payable in five equal annual
installments of $90,000 on January 6 of each year beginning January 6, 1996 and
ending January 6, 2000. Any principal that is not paid when due (whether at the
stated maturity, by acceleration or otherwise) shall thereafter bear interest at
the rate of seven percent (7%) per annum until paid in full.
All payments hereunder shall be made in money of the United
States of America which at the time of payment is legal tender for the payment
of public and private debts, at the offices of the Lender, 1016 West Ninth
Avenue, King of Prussia, Pennsylvania 19406 (or at such other office as the
Lender may from time to time designate by notice to the Borrower).
Section 1. Prepayment.
1.1 Optional. This Promissory Note may be prepaid in full or in
part, at any time and without notice, at the option of the Borrower, without
charge, premium or penalty therefor.
1.2 Mandatory. This Promissory Note shall be prepaid within sixty
(60) days after termination of the employment of the Borrower with the Lender.
Section 2. Events of Default, Etc.
2.1 Events of Default. If any one or more of the following
events ("Events of Default") shall happen:
(a) default shall be made by the Borrower in the payment of
principal or interest under this Promissory Note when and as the same shall
become due and payable; or
(b) default shall be made by the Borrower in the due performance
or observation of any other covenant, agreement or provision contained in this
Promissory Note to be performed or observed by the Borrower, or a breach shall
exist in any representation or warranty by the Borrower contained herein and
such default or breach shall continue for a period of ten (10) days after notice
to the Borrower with respect thereto; or
(c) the Borrower shall:
(i) admit in writing his inability to pay his debts
generally as they become due;
<PAGE> 18
2
(ii) file a petition in bankruptcy under the bankruptcy
laws of the United States or any other jurisdiction (as such laws are
now or in the future amended) or any admission seeking the relief
therein provided;
(iii) make an assignment for the benefit of his
creditors;
(iv) consent to the appointment of a receiver or
trustee for all or a substantial part of his property or to the filing
of a petition against him under said bankruptcy laws; or
(v) be adjudicated a bankrupt; or
(d) a proceeding shall have been instituted seeking a decree or
order for relief in respect of the Borrower in an involuntary case under
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or for the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Borrower or for any
substantial part of his property and such proceeding shall remain undismissed or
unstayed and in effect for a period of thirty (30) days or such court shall
enter a decree or order granting the relief sought in such proceeding; or
(e) a court of competent jurisdiction shall assume custody of
or sequester all or substantially all the property of the Borrower; or
(f) an attachment shall be made on any substantial part of
the property of the Borrower;
then in each and every case the Lender may (unless every such Event of Default
shall have been made good and cured) by notice in writing to the Borrower
declare the unpaid principal of this Promissory Note to be forthwith due and
payable and thereupon such principal together with interest accrued to the date
of payment shall become so due and payable without presentation, protest or
further demand or notice of any kind, all of which are hereby expressly waived;
provided that in the case of an Event of Default specified in subsections (c),
(d), (e) or (f) above, no notice to the Borrower shall be required and upon the
occurrence of such Event of Default the unpaid principal of this Promissory Note
together with interest accrued to the date of payment shall become immediately
due and payable.
2.2 Collection Costs. The Borrower covenants that if default be
made in any payment on this Promissory Note, the Borrower will pay to the Lender
such further amount, to the extent lawful, as shall be sufficient to cover the
cost and
<PAGE> 19
3
expense of collection, including reasonable compensation to counsel of
the Lender for all services rendered in that connection.
2.3 Cumulative Powers. All powers and remedies given hereunder to
the Lender shall, to the extent permitted by law, be deemed cumulative and shall
not be exclusive of any other powers and remedies available to the Lender
hereunder, by judicial proceedings or otherwise, to enforce the performance or
observance of the covenants and agreements contained in this Promissory Note,
and every power and remedy given hereunder or by law to the Lender may be
exercised from time to time, and as often as shall be deemed expedient by the
Lender.
Section 3. Miscellaneous.
3.1 No Waiver. No waiver by the Lender of any breach hereof or
default hereunder shall be deemed a waiver of any preceding or succeeding breach
or default and no failure of the Lender to exercise any right or privilege
hereunder shall be deemed a waiver of the Lender's rights to exercise the same
or any other right or privilege at any subsequent time or times.
3.2. Notice. Each notice or communication required or
permitted hereunder shall be deemed validly given and received if delivered
personally or if sent by registered or certified mail, return receipt
requested, addressed as follows:
(a) If to the Lender:
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
(b) If to the Borrower:
6 Trotter Way
Collegeville, PA 19426
or to such other address as the party to whom notice is to be given may
subsequently designate by like notice. A notice given in accordance with the
preceding sentence shall be deemed to have been duly given upon receipt, if
delivered personally, or upon mailing, if given by registered or certified mail,
return receipt requested.
3.3 Waiver of Presentment and Notice of Dishonor. The Borrower
and all endorsers, guarantors and any other parties that may be liable under
this Promissory Note hereby waive presentment, notice of dishonor, protest and
all other demands and notices in connection with the delivery, acceptance,
performance or enforcement of this Promissory Note.
<PAGE> 20
4
3.4. Binding Effect. This Promissory Note shall be binding
upon the Borrower and his heirs, personal representatives, successors and
assigns and shall inure to the benefit of the Lender and its successors and
assigns.
3.5. Governing Law. This Promissory Note shall be construed
and enforced in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the principles of conflicts of law thereof.
3.6. Contemporaneous Agreement. This Note is being delivered
in conjunction with a certain Employment Agreement dated this date between
Lender and Borrower and is subject to certain terms and conditions set forth
in the Employment Agreement.
3.7. Headings. The headings of the Sections and subparagraphs
of this Promissory Note are inserted for convenience only and shall not
constitute a part hereof.
IN WITNESS WHEREOF, the Borrower has duly executed and delivered
this Promissory Note as of the date first above written.
/s/ DARYL A. DIXON
-----------------------------------
Daryl A. Dixon
<PAGE> 1
NOVACARE
1995
ANNUAL REPORT
[FIGURE 1]
<PAGE> 2
NOVACARE'S CREDO,
PURPOSE AND BELIEFS
Our values are the strong foundation upon which we build our company. They are
also the basis upon which we establish our reputation.
Our Credo, Helping Make Life a Little Better, exemplifies all that we do. It
is our guiding principle, our North Star. From clinician to staff support
person, we are united in this commitment.
Our purpose, to effectively meet the rehabilitation needs of our patients
through clinical leadership, represents our philosophy and reason for being.
Everything we do supports our purpose. We are dedicated to patient care and
clinical leadership.
Our beliefs reflect the values we strive to uphold each day: Respect for the
individual, Service to the customer, Pursuit of excellence, Commitment to
personal integrity. These four characteristics define the NovaCare employee and
our relationships with our patients, our customers and co-workers.
NOVACARE, INC.
NovaCare, Inc. is the leading post-acute rehabilitation company in the United
States and is the nation's largest employer of rehabilitation professionals.
NovaCare's 10,000 clinicians treat nearly 40,000 patients per day in nursing
homes, outpatient rehabilitation centers, orthotic and prosthetic patient care
centers and hospitals. Rehabilitation therapy and subacute services are
provided both directly and under contract with other health care facilities in
43 states.
NovaCare has the leading market share in operating rehabilitation programs for
nursing homes, serving 2,000 facilities; offers the largest network of
outpatient rehabilitation centers, numbering 400; and holds the number one
position in orthotic and prosthetic patient care services with 125 centers.
NovaCare's objective is to realize economies of scale within the medical
rehabilitation industry and be the value leader--providing the highest level of
clinical outcomes at the lowest possible cost. NovaCare is committed to
clinical excellence and leadership in the development of practices and
technology that will improve the lives of individuals requiring rehabilitation.
<PAGE> 3
FINANCIAL HIGHLIGHTS NovaCare, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In thousands, except per share data. For the years ended June 30, 1995 1994 % Change
===============================================================================================================================
<S> <C> <C> <C>
NET REVENUES $ 905,359 $ 789,745 +15
NET INCOME 61,924 58,214 +6
NET INCOME PER COMMON SHARE 0.95 0.90 +6
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 65,163 64,663 +1
Before merger and other nonrecurring items 1995 1994 % Change
===============================================================================================================================
NET INCOME $ 40,072 $ 63,053 -36
NET INCOME PER COMMON SHARE 0.61 0.98 -38
As of June 30, 1995 1994 % Change
===============================================================================================================================
TOTAL ASSETS $ 852,557 $ 850,541 --
TOTAL LIABILITIES 364,922 434,837 -16
STOCKHOLDERS' EQUITY 487,635 415,704 +17
Ratios 1995 1994
===============================================================================================================================
ADJUSTED EBITDA MARGIN 13% 17%
RETURN ON AVERAGE EQUITY BEFORE MERGER
AND OTHER NONRECURRING ITEMS 9% 17%
</TABLE>
(1) Adjusted EBITDA margin represents earnings before interest, income taxes,
depreciation, amortization of excess cost of net assets acquired, and merger
and other nonrecurring items.
(1)
<PAGE> 4
[FIGURE 2]
John H. Foster, (right),
Chairman and Chief Executive Officer
and Timothy E. Foster,
President and Chief Operating Officer
FISCAL 1995 HAS BEEN A
CHALLENGING YEAR--A YEAR
OF DEPRESSED MARGINS IN
OUR LARGEST DIVISION,
CONTRACT SERVICES, WHERE
WE OPERATE REHABILITATION
THERAPY PROGRAMS IN
NURSING FACILITIES.
TO OUR SHAREHOLDERS:
Fiscal 1995 has been a challenging year--a year of depressed margins in our
largest division, contract services, where we operate rehabilitation therapy
programs in nursing facilities. As a result, earnings before nonrecurring items
decreased to $.61 per share from $.98 per share in fiscal 1994. Reported
earnings of $.95 per share reflected profits from the sale of our
rehabilitation hospital division, partially offset by restructuring charges.
The $243-million hospital division sale generated an attractive return on
investment and an $88-million pretax profit. This enabled us to repay all bank
debt while substantially increasing cash-on-hand, leaving us with the
industry's strongest balance sheet.
A 1995 OVERVIEW
The problems in our contract services division are both industry-related and
internal. A restructuring of this division in 1994 destabilized relationships
with our clinicians, managers and customers. This resulted in increased
therapist and customer turnover and lower therapist productivity.
STABILIZING CONTRACT SERVICES
During the year we focused on stabilizing our workforce. We reduced therapist
staff in over-staffed markets, terminated lower profitability contracts and
developed new therapist orientation, clinical training and support programs.
Our 500 supervisors will undergo manager training this year. We just completed
the roll-out of our proprietary information system, NovaNet PLUS, which will
support our therapists, customers and managers with enhanced analytical
capabilities and record keeping, including patient outcomes tracking.
By the end of fiscal 1995, we had improved productivity, as measured by patient
care time, to within four percent of historic levels, and had reduced
annualized therapist-initiated turnover to 30% from a peak of 35% at mid-year.
Customer turnover, however, remained unacceptably high. Total revenues
increased because our sales force successfully replaced lost contracts, but in
the transition, productivity suffered. We expect our clinical, management
training and systems initiatives, together with a new focus on smaller
customers, to firm up our customer base.
(2)
<PAGE> 5
STRENGTH IN OTHER DIVISIONS
Revenues in our outpatient rehabilitation division increased by 74% over fiscal
1994, reflecting acquisitions early in the year. During the year, we introduced
WIN(TM) (for "Work Injury Network"), which includes work-injury rehabilitation
and prevention programs we manage for more than 1,500 companies. Results so far
indicate that companies who partner with NovaCare through WIN(TM) spend
substantially less than the national average on workers' compensation costs.
Another success in our outpatient business was the expansion of our managed
care relationships. We ended the year with nearly 375 regional and national
contracts.
Revenues from our orthotics and prosthetics patient care centers increased 22%
in fiscal 1995, reflecting strong internal growth and the acquisition in August
1994 of Sabolich Prosthetics, a premier research organization and prosthetics
provider. In 1995 we received extensive national media attention for a
breakthrough technological advancement in prosthetics--a device that gives
amputees the ability to feel pressure and sense hot and cold.
We continued to expand our subacute services in 1995, ending the year with a
total of 58 subacute programs that we manage for nursing facilities. Subacute
care, which serves patients who no longer need the extensive services of a more
costly acute care hospital but are too ill to return home, is one of the health
care industry's fastest growing areas.
LOOKING AHEAD
Fiscal 1996 will be a year of aligning our internal operations to meet customer
needs--a time to fine-tune our operations and stabilize results, to realize
economies of scale and to better position our contract services business for
changes taking place in that industry.
MULTIPLE CHALLENGES IN CONTRACT SERVICES
After ten years of growth characterized by demand for services that far
outstripped the available supply of therapists, the contract services industry
today faces serious challenges: Planned adoption of "salary equivalency" rates
to limit Medicare reimbursement for speech-language pathology and occupational
therapy creates uncertainty as to revenues and profitability; some larger
nursing homes are choosing to employ their own therapists rather than contract
for services; managed care payors are driving prices and utilization down; and,
consolidation in the nursing home and contract services industries is
disrupting long-standing relationships.
FISCAL 1996 WILL BE A YEAR
TO BETTER POSITION OUR
CONTRACT SERVICES BUSINESS
FOR CHANGES TAKING PLACE
IN THAT INDUSTRY.
[FIGURE 3]
(3)
<PAGE> 6
KEYS TO FUTURE SUCCESS
Considered together, the challenges in our industry suggest that the successful
players will be the customer-focused, low-cost providers. We believe our
commitment to investing in clinical leadership, technology and systems,
training, and outcomes measurement will continue to distinguish NovaCare as the
enduring industry leader.
Service to the customer--meeting the needs of the health care provider,
referral source, payor and patient--is a principal tenet of our organization.
Over the course of the year, through customer discussions and market research,
we have studied customer needs and new opportunities in this changing
environment. In response, we recently created a new division to develop and
deliver management and consulting services to help health care institutions
enhance their post-acute programs.
Today's health care customers measure service in terms of value--maximum
outcomes at the lowest possible cost. With leading market share positions in
each of our core businesses, we are able to make critical investments in
systems and technology to increase our clinical and administrative efficiency
and track and report patient outcomes. This year, our NovaNet PLUS system was
recognized by Microsoft Corporation for innovation in the health care industry.
We are therefore well-positioned to recognize economies of scale and deliver
value to the customer.
A major thrust in 1996, to ensure we are the customer-focused, low-cost
provider, is to reduce expenditures throughout the organization. We will
consolidate and/or close locations that are not sufficiently profitable or that
don't fit our strategic marketing focus. And, we will seek to realize economies
available through centralization of certain administrative functions. These
savings will be reinvested in clinical programs and systems and training
projects to keep NovaCare at the forefront in customer service and clinical
efficiency.
We pride ourselves on being clinical leaders. Clinical leadership supports the
long-term growth of our business and advances the rehabilitation industry.
Clinical innovations attract and retain customers, enhance clinical efficiency
and improve the lives of patients. With 85% of our employees directly involved
in patient care, efficiencies at the clinical level are closely tied to
low-cost provider status. Because clinical leadership is vital to profitable
growth, we will continue to commit resources to enhance the professional
contributions of our employees and to refine and expand our services.
COMPANIES WHO
PARTNER WITH NOVACARE
THROUGH WIN(TM) (FOR
"WORK INJURY NETWORK")
SPEND SUBSTANTIALLY LESS
THAN THE NATIONAL
AVERAGE ON WORKERS'
COMPENSATION COSTS.
[FIGURE 4]
(4)
<PAGE> 7
Finally, training is key to the success of any enduring service organization.
At NovaCare, new employees must learn and internalize our values, culture and
best practices. New clinical practices and systems enhancements must be taught.
And, because there are no other large-scale practices from which to attract
experienced managers, we must train and develop our managers from within. Once
developed, they are a unique resource--a competitive advantage.
TEN YEARS OF ACCOMPLISHMENT
NovaCare marked its tenth anniversary in 1995. As we look back over our first
decade, we are truly gratified by our accomplishments. Ten years ago on May 10,
1985, NovaCare had its start as a speech-language pathology company named
InSpeech, Inc., with 150 employees. Today, we hold leading market positions in
contract services, outpatient rehabilitation and orthotics and prosthetics, and
are the nation's largest employer of rehabilitation professionals.
We were particularly pleased, in celebration of our tenth anniversary, to be
able to make a grant to the Harvard School of Public Health to help establish a
professorship of health policy and management. The gift celebrates not only the
end of a successful first decade but our ongoing commitment to clinical
leadership and the measurement of clinical outcomes in rehabilitation.
We look forward to our second decade with confidence. We are the clinical,
technological and market leader in an industry that is growing 10-12% per year.
Fueling this growth is a population of senior Americans that is projected to
double over the next four decades.
THE CHALLENGE OF THE FUTURE
It has been a fantastic decade. One that, of course, we wish we were ending on
a stronger earnings note. Nevertheless, our financial position is solid. We're
confident in our ability to make the necessary adjustments to resume our
growth.
Adding to our confidence is the appointment in October of Timothy E. Foster to
president and chief operating officer of NovaCare. Tim is one of our founding
directors and was most recently NovaCare's chief financial officer. His
in-depth knowledge of our customers, employees and industry is particularly
important today with the transitions taking place in our industry.
WE RECEIVED EXTENSIVE
MEDIA ATTENTION FOR A
BREAKTHROUGH TECHNOLOGICAL
ADVANCEMENT IN PROSTHETICS
-- A DEVICE THAT GIVES
AMPUTEES THE ABILITY TO
FEEL PRESSURE AND SENSE HOT
AND COLD.
[FIGURE 5]
(5)
<PAGE> 8
Amidst the turmoil and demands of change, we have a necessary constant--our
NovaCare values--developed by a team of employees in 1988, following an earlier
difficult period of disruption and change. Expressed as our credo, purpose and
beliefs, our values are our guide to doing the right thing for our patients,
customers, employees and investors. We've found over the years that doing the
right thing often takes a little longer. And, this is certainly not the time
for quick fixes. It's the time to do the right things to create an organization
that's right for the next, inevitable round of changes in the health care
industry.
On behalf of your board and management, I offer my appreciation to you, our
shareholders, for your continuing confidence and support. We also extend our
sincere thanks to our employees. It is through their past and future efforts
that we will be able to continue Helping Make Life a Little Better.
/s/ JOHN H. FOSTER
------------------------------------
John H. Foster
Chairman and Chief Executive Officer
September 12, 1995
WE LOOK FORWARD TO OUR
SECOND DECADE WITH
CONFIDENCE. WE ARE THE
CLINICAL, TECHNOLOGICAL AND
MARKET LEADER IN AN
INDUSTRY THAT IS GROWING
10-12% PER YEAR.
[FIGURE 6]
(6)
<PAGE> 9
CONSOLIDATED BALANCE SHEETS NovaCare, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In thousands, as of June 30, 1995 1994
=====================================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $158,636 $ 38,024
MARKETABLE SECURITIES -- 35,104
ACCOUNTS RECEIVABLE, NET 192,652 215,727
INVENTORIES 11,213 7,996
DEFERRED INCOME TAXES 16,748 13,946
OTHER CURRENT ASSETS 34,571 24,208
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 413,820 335,005
MARKETABLE SECURITIES, NET -- 53,318
PROPERTY AND EQUIPMENT, NET 63,659 93,739
EXCESS COST OF NET ASSETS ACQUIRED, NET 352,115 342,938
DEFERRED INCOME TAXES 1,470 517
OTHER ASSETS, NET 21,493 25,024
---------------------------------------------------------------------------------------------------------------------
$852,557 $850,541
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF FINANCING ARRANGEMENTS $ 32,684 $ 61,518
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 93,088 72,997
INCOME TAXES PAYABLE 32,922 6,166
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 158,694 140,681
FINANCING ARRANGEMENTS, NET OF CURRENT PORTION 192,331 283,084
DEFERRED INCOME TAXES 8,147 3,211
OTHER LIABILITIES 5,750 7,861
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 364,922 434,837
---------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE; AUTHORIZED 200,000 SHARES,
ISSUED 65,476 IN 1995 AND ISSUED 64,228 SHARES IN 1994 656 643
ADDITIONAL PAID-IN CAPITAL 250,857 240,619
RETAINED EARNINGS 238,149 176,225
---------------------------------------------------------------------------------------------------------------------
489,662 417,487
LESS: COMMON STOCK IN TREASURY (AT COST), 187 SHARES IN 1995
AND 17 SHARES IN 1994 (1,614) (305)
DEFERRED COMPENSATION (413) (662)
VALUATION ALLOWANCE ON SECURITIES AVAILABLE FOR SALE -- (816)
---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 487,635 415,704
---------------------------------------------------------------------------------------------------------------------
$852,557 $850,541
=====================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
(7)
<PAGE> 10
CONSOLIDATED STATEMENTS OF OPERATIONS NovaCare, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In thousands, except per share data, for the years ended June 30, 1995 1994 1993
=============================================================================================================================
<S> <C> <C> <C>
NET REVENUES $905,359 $789,745 $582,342
OPERATING COSTS:
SALARIES, WAGES AND BENEFITS 576,764 462,378 328,416
RENTAL EXPENSE 36,365 27,613 21,250
SUPPLY COSTS 21,797 18,285 18,459
OTHER 137,812 130,540 107,716
PROVISION FOR UNCOLLECTIBLE ACCOUNTS 15,918 14,453 9,764
DEPRECIATION 19,253 15,289 8,602
AMORTIZATION OF EXCESS COST OF NET ASSETS ACQUIRED 10,937 7,225 3,589
MERGER AND OTHER NONRECURRING EXPENSES (57,368) 5,754 5,727
-----------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 143,881 108,208 78,819
INVESTMENT INCOME 5,405 5,304 4,880
INTEREST EXPENSE (23,298) (17,077) (7,721)
MINORITY INTEREST (404) (543) (436)
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 125,584 95,892 75,542
INCOME TAXES 63,660 37,678 27,906
-----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 61,924 $ 58,214 $ 47,636
=============================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 61,924 $ 58,214 $ 47,585
=============================================================================================================================
NET INCOME PER COMMON SHARE $ .95 $ .90 $ .79
=============================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 65,163 64,663 60,167
=============================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
(8)
<PAGE> 11
NOVACARE, INC. AND SUBSIDIARIES
DIRECTORS
JOHN H. FOSTER
Chairman of the Board and
Chief Executive Officer
TIMOTHY E. FOSTER
President and Chief Operating Officer
E. MARTIN GIBSON
Retired Chairman and
Chief Executive Officer,
Corning Lab Services, Inc.
SIRI S. MARSHALL
Senior Vice President,
General Counsel and Secretary,
General Mills, Inc.
STEPHEN E. O'NEIL
Private Investor
C. ARNOLD RENSCHLER, M.D.
Senior Vice President and
Chief Clinical Officer
GEORGE W. SIGULER
Managing Director, Mitchell Hutchins
Institutional Investors, Inc.
ROBERT G. STONE, JR.
Retired Chairman of the Board,
Kirby Corporation
DANIEL C. TOSTESON, M.D.
Dean of the Faculty of Medicine,
Harvard Medical School
MANAGEMENT
Office of the Chairman
JOHN H. FOSTER
Chairman of the Board and
Chief Executive Officer
TIMOTHY E. FOSTER
President and Chief Operating Officer
JAMES C. NEW
President and General Manager,
Outpatient Rehabilitation Division
C. ARNOLD RENSCHLER, M.D.
Senior Vice President and
Chief Clinical Officer
SENIOR MANAGERS
PETER D. BEWLEY
Senior Vice President,
General Counsel and Secretary
SUSAN J. CAMPBELL
Vice President, Communications and
Investor Relations
BRUCE J. COLBURN
Senior Vice President, Chief Financial Officer
and Treasurer
DARYL A. DIXON
President and General Manager,
Contract Services Division
RONALD G. HISCOCK
President and General Manager,
Orthotics & Prosthetics Division
LAURENCE F. LANE
Senior Vice President,
Regulatory Affairs
ARTHUR T. LOCILENTO, JR.
Senior Vice President,
Human Resources
SCOTT MARBER
Senior Vice President,
Corporate Sales and Marketing
PAUL K. ROSS
Senior Vice President, Information Systems
JAMES T. WALMSLEY
Vice President, Reimbursement
Note: No family relationships exist among any of the directors or officers.
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, PA 19406
(610) 992-7200
STOCK TRADING
NovaCare, Inc., common stock and 5.5%
convertible subordinated debentures, due in
2000, are traded on the New York Stock
Exchange under the symbols "NOV" and
"NOV/2000," respectively.
INFORMATION REQUESTS
Investors, analysts and others seeking
information should contact:
NovaCare's Communications and
Investor Relations Department,
(610) 992-7495
SHAREHOLDER RECORDS
Shareholders desiring to change the name,
address or ownership of stock or to report
lost certificates should contact:
American Stock Transfer Company
40 Wall Street, 46th Floor
New York, NY 10005
(718) 921-8200
<PAGE> 12
[NOVACARE LOGO]
-------------------------
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
<PAGE> 1
EXHIBIT 21
SUBSIDIARY LISTING
Affiliated Physical Therapists, Ltd.
ASK Colorado Health Care Services, P.C.
Atlantic Rehabilitation Services, Inc.
Boca Rehab Agency, Inc.
Buendel Physical Therapy, Inc.
C.O.A.S.T. Institute Physical Therapy, Inc.
CR Services Corp.
Cannon and Associates, Inc.
Cenla Physical Therapy & Rehabilitation Agency, Inc.
Center for Physical Therapy & Sports Rehabilitation, Inc.
CenterTherapy, Inc.
Coplin Physical Therapy Associates, Inc.
Crowley Physical Therapy Clinics, Inc.
Douglas Avery & Associates, Ltd.
Douglas C. Claussen, R.P.T., Physical Therapy, Inc.
FD Capital Corporation
Francis Naselli, Jr. & Stewart Rich Physical Therapists, Inc.
Galaxy Service Corporation
Georgia Physical Therapy of West Georgia, Inc.
Georgia Physical Therapy, Inc.
Greater Sacramento Physical Therapy Associates, Inc.
Gulf Breeze Physical Therapy, Inc.
Gulf Coast Hand Specialist, Inc.
Hand Therapy and Rehabilitation Associates, Inc.
Hand Therapy Associates, Inc.
Hawley Physical Therapy, Inc.
Heartland Rehabilitation, Inc.
<PAGE> 2
SUBSIDIARY LISTING
Indianapolis Physical Therapy and Sports Medicine, Inc.
Irwin Lehrhoff & Associates, Inc. (OR)
Irwin Lehrhoff & Associates, Inc. (TX)
Jana B. Mason L.P.T., Inc.
Jana B. Mason Therapy Associates, Inc.
Jim All, Inc.
Kesinger Physical Therapy, Inc.
Life Dimensions of California, Inc.
Life Dimensions, Inc.
Lynn M. Carlson, Inc.
McFarlen & Associates, Inc.
MedStat, P.C.
Mill River III, Inc.
Mill River Management, Inc.
Mitchell Tannenbaum I, Inc.
Mitchell Tannenbaum II, Inc.
Mitchell Tannenbaum III, Inc.
Monmouth Rehabilitation, Inc.
NACC, Inc.
National Rehab Services
NC Occupational Therapy, P.C.
NC Physical Therapy, P.C.
NC (Wisconsin), S.C.
NC Resources, Inc.
New Mexico Physical Therapists, Inc.
Northside Physical Therapy, Inc.
NovaCare (Arizona), Inc.
<PAGE> 3
SUBSIDIARY LISTING
NovaCare (Colorado), Inc.
NovaCare (Illinois), Inc.
NovaCare (Texas), Inc.
NovaCare Easton & Moran Physical Therapy, Inc.
NovaCare Management Business Trust
NovaCare Management Services, Inc.
NovaCare Northside Therapy, Inc.
NovaCare Orthotics & Prosthetics East, Inc.
NovaCare Orthotics & Prosthetics Holdings, Inc.
NovaCare Orthotics & Prosthetics West, Inc.
NovaCare Orthotics & Prosthetics, Inc.
NovaCare Outpatient Rehabilitation, Inc.
NovaCare Outpatient Rehabilitation I, Inc.
NovaCare Rehab Agency of Alabama, Inc.
NovaCare Rehab Agency of Florida, Inc.
NovaCare Rehab Agency of Georgia, Inc.
NovaCare Rehab Agency of Illinois, Inc.
NovaCare Rehab Agency of North Carolina, Inc.
NovaCare Rehab Agency of Northern California
NovaCare Rehab Agency of Ohio, Inc.
NovaCare Rehab Agency of Oklahoma, Inc.
NovaCare Rehab Agency of Pennsylvania, Inc.
NovaCare Rehab Agency of South Carolina, Inc.
NovaCare Rehab Agency of Southern California
NovaCare Rehab Agency of Virginia, Inc.
NovaCare Rehabilitation Agency of Tennessee, Inc.
NovaCare Rehabilitation Agency of Wisconsin, Inc.
<PAGE> 4
SUBSIDIARY LISTING
NovaCare SMC, Inc.
NovaCare Service Corp.
NovaCare Speech Therapy and Audiology, Inc.
NovaCare, Inc.
NovaCare, Inc. (Delaware)
O & P Services, Inc.
OSI Midwest, Inc.
Ortho Rehab Associates, Inc.
Orthopedic and Sports Physical Therapy of Cupertino, Inc.
Peters, Starkey, Todrank Physical Therapy Corporation
Physical Focus, Inc.
Physical Rehabilitation Partners, Inc.
Physical Therapy Institute, Inc.
Quad City Management, Inc.
Quad City Regional Spine Institute, P.C.
R.E. Huck Co.
RCI (Colorado), Inc.
RCI (Exertec), Inc.
RCI (Illinois), Inc.
RCI (Michigan), Inc.
RCI (S.P.O.R.T.), Inc.
RCI (WRS), Inc.
RCI Nevada, Inc.
Rebound Oklahoma, Inc.
Redwood Pacific Therapies, Inc.
Rehab Advantage, Inc.
Rehab Managed Care of Arizona, Inc.
<PAGE> 5
SUBSIDIARY LISTING
Rehab Provider Network - California, Inc.
Rehab Provider Network - Delaware, Inc.
Rehab Provider Network - Illinois, Inc.
Rehab Provider Network - Indiana, Inc.
Rehab Provider Network - Louisiana, Inc.
Rehab Provider Network - Maryland, Inc.
Rehab Provider Network - Michigan, Inc.
Rehab Provider Network - New Jersey, Inc.
Rehab Provider Network - Ohio, Inc.
Rehab Provider Network - Oklahoma, Inc.
Rehab Provider Network - Pennsylvania, Inc.
Rehab Provider Network - Virginia, Inc.
Rehab Provider Network - Washington, D.C., Inc.
Rehab Provider Network of Florida, Inc.
Rehab Provider Network of Georgia, Inc.
Rehab Provider Network of Nevada, Inc.
Rehab World, Inc.
Rehab/Work Hardening Management Associates, Ltd.
RehabClinics (Coast), Inc.
RehabClinics (New Jersey), Inc.
RehabClinics (PTA), Inc.
RehabClinics (SPT), Inc.
RehabClinics Abilene, Inc.
RehabClinics Dallas, Inc.
RehabClinics Pennsylvania, Inc.
RehabClinics, Inc.
Robert M. Bacci, R.P.T. Physical Therapy, Inc.
<PAGE> 6
SUBSIDIARY LISTING
S.T.A.R.T., Inc.
SG Rehabilitation Agency, Inc.
SG Speech Associates, Inc.
Southwest Medical Supply Company, Inc.
Southwest Physical Therapy, Inc.
Southwest Therapists, Inc.
Sporthopedics Sports and Physical Therapy Centers, Inc.
Sports Therapy and Arthritis Rehabilitation, Inc.
Sprint Physical Therapy, P.C.
Star Physical Therapy, Inc.
Start to Finish Physical Therapy, P.C.
Stephenson-Holtz, Inc.
The Center for Physical Therapy and Rehabilitation, Inc.
Theodore Dashnaw Physical Therapy, Inc.
Therex, P.C.
TJ Corporation I, L.L.C.
Union Square Center for Rehabilitation & Sports Medicine, Inc.
Vanguard Rehabilitation, Inc.
Wayzata Physical Therapy Center, Inc.
West Suburban Health Partners, Inc.
Western Rehab Services, Inc.
Workers Rehabilitation Services, Inc.
Young's Orthopedic Service, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-88744; 33-88745; 33-88746) of NovaCare, Inc. of
our report dated August 3, 1995 appearing on page 39 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia
September 12, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of June 30, 1995 and the Condensed
Consolidated Statement of Operations for the year ended June 30, 1995 and is
qualified in its entirety by reference to such statements in Form 10-K for the
fiscal period ended June 30, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 158,636
<SECURITIES> 0
<RECEIVABLES> 212,370
<ALLOWANCES> 19,718
<INVENTORY> 11,213
<CURRENT-ASSETS> 413,820
<PP&E> 98,169
<DEPRECIATION> 34,510
<TOTAL-ASSETS> 852,557
<CURRENT-LIABILITIES> 158,694
<BONDS> 192,331
<COMMON> 656
0
0
<OTHER-SE> 486,979
<TOTAL-LIABILITY-AND-EQUITY> 852,557
<SALES> 0
<TOTAL-REVENUES> 905,359
<CGS> 0
<TOTAL-COSTS> 772,738<F1>
<OTHER-EXPENSES> (32,179)<F2>
<LOSS-PROVISION> 15,918
<INTEREST-EXPENSE> 23,298
<INCOME-PRETAX> 125,584
<INCOME-TAX> 63,660
<INCOME-CONTINUING> 61,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,924
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
<FN>
<F1>"Total Costs" consist of salaries, wages and benefits, rent expense, supply
costs and other.
<F2>"Other expenses" consist of depreciation, amortization, merger and other
nonrecurring items, minority interest and investment income.
</FN>
</TABLE>
