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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, 1996
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 SEPTEMBER 6, 1996, 62,461,021 SHARES OF COMMON STOCK WERE
OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD
BY NON-AFFILIATES WAS APPROXIMATELY $557,543,691. (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 1996 ANNUAL MEETING OF SHAREHOLDERS TO BE
HELD ON OCTOBER 31, 1996.
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NOVACARE, INC. AND SUBSIDIARIES
FORM 10-K -- FISCAL YEAR ENDED JUNE 30, 1996
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
Company Strategy...................................... 2
Outpatient Services................................... 4
Occupational Health Services.......................... 5
Integrated Delivery Systems........................... 6
Long-Term Care Services............................... 6
Professional Employer Organizations................... 9
Competition........................................... 9
Reimbursement/Government Relations.................... 10
Government Regulation................................. 12
Insurance............................................. 13
Employees............................................. 13
Executive Officers of the Registrant.................. 14
2 Properties................................................... 16
3 Legal Proceedings............................................ 16
4 Submission of Matters to a Vote of Security Holders.......... 16
II 5 Market for Registrant's Common Equity and Related Shareholder
Matters.................................................... 16
6 Selected Financial Data...................................... 17
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 18
8 Financial Statements and Supplementary Data.................. 25
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 41
III 10 Directors and Executive Officers of the Registrant........... 41
11 Executive Compensation....................................... 41
12 Security Ownership of Certain Beneficial Owners and
Management................................................. 41
13 Certain Relationships and Related Transactions............... 41
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. ("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. Over
80% of individuals receiving rehabilitation services return to the community in
productive endeavors or to active retirement. NovaCare's comprehensive medical
rehabilitation services include: (i) providing rehabilitation therapy, subacute
and rehabilitation program consulting and management services on a contract
basis to health care institutions, primarily long-term care facilities, and (ii)
providing outpatient, orthotic and prosthetic ("O&P") and occupational health
rehabilitation services through a national network of patient care centers and
integrated delivery systems comprising health care providers and payors. The
Company operated medical rehabilitation hospitals until April 1, 1995, the
effective date of the sale of such hospitals, discussed in Part II to this Form
10-K. For the fiscal year ended June 30, 1995, the medical rehabilitation
hospitals represented 12% of the Company's consolidated net revenues.
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 acute care hospitals,
long-term care facilities, outpatient rehabilitation facilities, rehabilitation
agencies and clinics, schools and patients' homes. These services are provided
by a variety of healthcare professionals including physiatrists and other
qualified rehabilitation physicians, occupational, physical and respiratory
therapists, rehabilitation nurses, speech-language pathologists, audiologists,
psychologists, social workers, orthotists, prosthetists, recreational
therapists, rehabilitation counselors and others.
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 service. 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.
Recent studies suggest that from $11.00 to $30.00 in medical costs are
saved for every dollar spent on rehabilitation. Efforts to reduce workers'
compensation expenses have also stimulated demand for rehabilitation of
injured workers and workhardening and injury-prevention programs in the
work place.
Reimbursement for services. The reimbursement for patients in acute
care hospitals encourages their rapid discharge while they remain in need
of rehabilitation 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, long-term care facilities that participate in
the Medicare program are required to offer physical
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therapy, occupational therapy and speech-language pathology services to
improve the functionality of patients.
COMPANY STRATEGY
Values Based Business
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 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
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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
developed.
Emphasis on Rehabilitation Services
NovaCare's rehabilitation services strategy is to integrate its expert
rehabilitation and specialty health care services with managed care, hospital
and long-term care delivery systems. The Company's strategy is formulated to
maintain NovaCare's position as the largest provider of low-cost, clinically
excellent, medical rehabilitation services outside the medical rehabilitation
hospital setting. The strategy is based on the belief that:
- Medical rehabilitation services will continue to experience steady or
growing demand because health care payor cost-containment efforts will
continue to drive patients toward lower-cost services.
- Managed care is expected to grow at the rate of 15% per year over the
next decade, demanding high quality health care services at a reasonable
cost.
- In geographic markets, large integrated delivery systems comprising
healthcare providers and payors will be networked as referral sources to
facilitate integrated patient care and to ease administration for payors
and providers.
- The 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 cost-effective clinical outcomes in the selection of
rehabilitation providers.
- Costs can be lowered through clinical and systems innovations coupled
with "flat" organizations having broad spans of control.
- Medical rehabilitation services, outside the medical rehabilitation
hospital setting are not capital intensive, allowing for responsiveness
to changes in reimbursement or market conditions and for internal
growth, without the use of substantial capital resources.
Plan for Growth
The Company experienced significant growth in the years prior to fiscal
1996, largely from acquisitions. During the past year, management curtailed its
acquisition activity in order to restructure the organization in light of
anticipated regulatory changes relating to long-term care services, recent
government efforts to reform
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health care (see "Reimbursement/Government Relations," discussed later), and the
increasing penetration of managed care in the outpatient rehabilitation customer
base.
The new organization is substantially complete, resulting in significantly
reduced overhead costs, highly centralized administrative support services to
all NovaCare's businesses, and the flexibility to respond to business growth and
industry changes.
The Company's plan for growth has four principal components: (i) expansion
of its national network of outpatient rehabilitation and O&P centers, (ii)
development of a national network of occupational health services capabilities,
(iii) affiliation with integrated delivery systems in targeted geographic
markets, and (iv) entry into the professional employer organization industry.
Expansion of Outpatient Rehabilitation and O&P Services. NovaCare plans to
expand the Company's extensive network of outpatient rehabilitation and O&P
sites in targeted geographic markets through acquisitions and start-up centers.
Management believes that the size and density of NovaCare's outpatient services
network in many markets positions the Company favorably to affiliate with
integrated delivery systems and to compete for referrals from managed care
organizations and industrial customers.
Development of Occupational Health Services. Occupational health services
are integrated systems of care for injured or ill workers covered by workers'
compensation insurance. The system includes a network of physician practices
specializing in occupational healthcare who oversee the workers' initial
evaluation, care planning, and clinical progress through their return to work.
Treatment of patients is generally performed in healthcare centers comparably
equipped to NovaCare's outpatient rehabilitation centers.
The Company plans to acquire established occupational health services
practices in targeted geographic markets. The Company believes such acquisitions
will compliment the Company's expansion of outpatient services, capitalize on
patient flow synergies and further position NovaCare for affiliation with
integrated delivery systems, managed care referrals and industrial customers.
Affiliation with Integrated Delivery Systems ("IDS's"). NovaCare intends
to affiliate its rehabilitation services, principally outpatient and
occupational health services, with leading healthcare IDS's in targeted
geographic markets. Management believes that as the largest combined outpatient
rehabilitation and O&P services network in the United States and an emerging
occupational health services network, NovaCare is in the best position to meet
the needs of an IDS. NovaCare offers the attributes that an IDS looks for in a
partner: (i) dispersed outpatient services capabilities, (ii) excellent clinical
reputation and outcomes, (iii) sophisticated systems capabilities to track and
measure patient progress through their plans of care, and (iv) a strong
financial position to support expansion of network growth.
Entry into the Professional Employer Organization ("PEO") Industry. PEO's
provide small and medium-sized businesses with an outsourcing solution to the
complexities and costs related to employment management. The employment
management services provided by a PEO include human resource and payroll
administration, employment regulatory compliance management, workers'
compensation coverage, healthcare and other employee benefits. A PEO establishes
a co-employer relationship with its clients and contractually assumes
substantial employer responsibilities with respect to work-site employees.
NovaCare's plan is to acquire PEO's in the same targeted markets in which
the Company intends to be affiliated with integrated delivery systems.
NovaCare's ability to manage both a meaningful portion of the healthcare
services and the employee workforce in a local market affords the following
benefits: (i) reduced workers' compensation costs, (ii) increased access to
patient flow for NovaCare's medical rehabilitation centers and its integrated
delivery system partners, and (iii) increased leverage in negotiating the
purchase of healthcare and other benefits.
As a large employer, managing 14,500 geographically dispersed employees in
2,300 sites in 43 states, NovaCare provides a comprehensive range of
employment-related services. Management believes that additional economies of
scale can be attained by entering into agreements with numerous small to medium-
sized employers to perform employment-related functions of the quality and cost
typically not available to businesses of that size. Management also believes
that a PEO affords an attractive solution for long-term care
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facilities which, as an industry, have the highest workers' compensation claims
in the United States. The Company's existing customer base of small- and
medium-sized long-term care facilities in which the Company provides therapy
services on a contract basis, discussed later, offers a potential source for
NovaCare to contract PEO services.
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 to flatten and increase the flexibility of the organization
to respond to change and its investment in common, efficiency enhancing clinical
and administrative systems will allow the Company to operate successfully in an
increasingly challenging reimbursement environment.
Clinical Leadership and Outcomes
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.
OUTPATIENT SERVICES
During fiscal year 1996, NovaCare merged its outpatient services
businesses, comprising outpatient rehabilitation and O&P services, under a
common management team to take advantage of administrative and operational
economies of scale and in light of the evolution of rehabilitation services
toward IDS's. For the fiscal years ended June 30, 1996 and 1995, outpatient
services represented 37% and 31% respectively, of the Company's consolidated net
revenues.
Outpatient Rehabilitation Services
Management believes that NovaCare is a leading provider of freestanding
outpatient rehabilitation services in the United States, with a national network
of 326 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 injury and/or surgery.
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
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
$11 billion and is growing at a rate of 8-10% per year. NovaCare's share of the
industry total, based on fiscal 1996 revenues, is approximately 2%.
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Orthotic and Prosthetic Services
NovaCare is the largest custom O&P patient care services organization in
the U.S. with approximately 10% market share. Services are provided by 363
orthotists and prosthetists, referred to as practitioners, through 130 patient
care centers.
Orthotic rehabilitation involves the fitting, design, 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 ("Sabolich"), a
nationally renowned leader in prosthetic research, design and patient care,
providing services at four patient care centers throughout the U.S. The
breakthrough technology and research provided by Sabolich is believed by
management to clinically differentiate NovaCare in O&P services worldwide.
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 $1.0 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.
OCCUPATIONAL HEALTH SERVICES
Occupational health services comprise the treatment for work-related
injuries and illnesses, physical and rehabilitation therapy, pre-placement
physical examinations and evaluations, case management, diagnostic testing and
other employer-requested or government-mandated services. The most common work
related injuries are soft tissue injuries, lacerations, moderate trauma injuries
to the spine or extremities, and exposure to hazardous materials. Treatments are
provided by licensed physicians, registered nurses and physical therapists. The
physicians are generally trained and experienced in occupational and industrial
medicine or have other medical backgrounds compatible with occupational related
injuries.
The occupational health services market is highly fragmented. Industry
analysts estimate that there are more than 2,000 occupational healthcare
locations in the United States, representing a $30 billion industry. The Company
believes that, due to increasing business and regulatory complexity, capital
requirements and the development of IDS networks, an increasing number of
physicians specializing in occupational health services are seeking to affiliate
with large healthcare service organizations.
The dollar amount of workers' compensation claims has increased
significantly in recent years, resulting in escalating employer costs. The
increase is attributable to: (i) an increase in work-related injuries and
illnesses, (ii) the rise in the cost of healthcare, and (iii) the requirement
that employers pay the majority of lost wages, replacement wages, legal and
other benefit expenses. In the aggregate, workers' compensation costs amounted
to $63 billion annually in the United States in 1993. Occupational health
services is an employers' solution to controlling workers' compensation costs
attributable to medical costs and lost time from work.
NovaCare currently manages work injury rehabilitation and prevention
programs for employers through on-site programs and outpatient care through the
Company's outpatient services. NovaCare performs work-site analysis to assess
workplace risk, provide work-site safety programs and help employers comply with
work-related state and federal requirements. By acquiring practices in targeted
markets, NovaCare plans to expand its linkage with workers needing occupational
rehabilitation, enhance the patient volume of outpatient rehabilitation through
occupational health referrals, and increase the attractiveness of the Company to
potential IDS partners.
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INTEGRATED DELIVERY SYSTEMS
IDS's are a vertical integration of healthcare providers, physicians and
payors who mutually benefit by networking to (i) increase patient referral
opportunities and access to services, (ii) lower administrative and capital
costs, and (iii) control the quality of patient care. Membership in an IDS is
generally on the basis of a contractual or shared ownership agreement. Under a
contractual agreement, the IDS member is essentially a vendor with an exclusive
or non-exclusive short-term commitment to participate in the IDS. Shared
ownership arrangements are typically in the form of a joint venture wherein the
IDS member enters into a long-term (5 years or more) exclusive commitment and
shares in IDS profits and losses. Such an arrangement is essentially a
partnership with shared control and specific dissolution terms. NovaCare intends
to pursue IDS memberships principally on a shared ownership basis.
NovaCare plans to enter IDS arrangements in targeted geographic markets in
which the Company currently has an existing network of outpatient services
sites, or through acquisitions or start-ups, and will have a significant enough
presence in a targeted market to engage in an IDS affiliation. Targeted markets
are selected on the basis of demographics, ability to retain market share,
pricing levels, labor costs, synergies with potential partners operationally and
culturally, and the ability to affect IDS affiliation due to the provider,
physician and payor structure in the market.
In fiscal 1996, the Company entered into its inaugural IDS joint venture in
Atlanta with Columbia/HCA,
the largest healthcare provider in the United States. NovaCare and Columbia/HCA
contributed their outpatient rehabilitation sites to a newly formed company
under joint ownership. NovaCare provides management services to the joint
venture, which is made up of 18 outpatient sites formerly owned entirely by
NovaCare or Columbia/HCA. In addition, the joint venture manages rehabilitation
at eight Columbia/HCA hospital-based sites.
LONG-TERM CARE SERVICES
NovaCare's long-term care services portfolio consists of contract therapy,
management, consulting and temporary staffing services delivered principally to
long-term care providers. For the fiscal years ended June 30, 1996 and 1995,
long-term care services represented 63% and 57%, respectively, of the Company's
consolidated net revenues.
Contract Therapy Services
NovaCare provides multi-disciplinary rehabilitation therapy services on a
contract basis, principally to long-term care 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 11%, as measured by fiscal 1996
net revenues. As of June 30, 1996, NovaCare provided these services in more than
1,800 facilities located in 42 states.
Analysts estimate that the market for therapy services delivered under
contract to long-term care facilities is approximately $4.5 billion. A 1995
management-sponsored survey indicated that 73% of long-term care facility
rehabilitation services are performed on a contract basis.
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 fluctuating caseload, which makes it
uneconomical to operate its own therapy program with the full-time
employment of therapists and the associated costs of administration.
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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 long-term care
facility. As a result, nursing facilities frequently choose to contract for
specialized expertise.
In the current unsettled reimbursement environment (See
"Reimbursement/Government Relations", discussed later), NovaCare believes that
it is well-positioned to compete effectively with other contract therapy
companies due to: (i) its highly centralized administrative functions and
flexible organization structure which can respond to business growth and
industry change, (ii) a nationwide recruiting organization and substantial
staffing capabilities, (iii) a multi-disciplinary team approach to therapy that
is designed to deliver a high level of quality and efficient care, (iv)
sophisticated management information systems to assist clinicians and management
in analyzing clinical outcomes, therapy utilization, claim denials, staffing and
educational activities, (v) a clinical support network to provide timely expert
clinical advice to care providers, (vi) a nationwide sales organization to
secure customer contracts in support of business growth and (vii) reimbursement
and regulatory expertise to assist nursing facility operators in their dealings
with third-party payors, principally Medicare.
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 clinical and systems support networks. The number of
full-time-equivalent therapists hired in the Company's contract therapy business
during fiscal 1996 was 2,298.
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,
1996, NovaCare employed 34 recruiters, which management believes is the largest
clinical recruiting organization in the U.S. Over the past two years, one-fifth
of the therapists who joined NovaCare's contract therapy business choose
NovaCare as a result of employee referrals.
Clinical Support. A network of local and national clinical experts is
available to all clinicians as support resources in all aspects of the clinical
practice. Responses to inquiries are generally within 24 hours.
Systems Support. NovaCare's proprietary information system, NovaNet PLUS,
reduces therapist record-keeping burdens, streamlines administrative activities
and captures information of value to clinicians, management and customers.
Integrated outcomes measurement, currently collected outside NovaNet PLUS, will
be incorporated into the system in fiscal 1997. Management believes that this
innovative system continues to increase NovaCare's attractiveness as an employer
of therapists.
Clinical Leadership. NovaCare and Harvard School of Public Health have
jointly undertaken a leadership role in devising a standard system for measuring
the effectiveness of rehabilitation outcomes for geriatric patients. Once
identified, the outcomes measurement system will serve as the standard to
determine the treatment and payment for rehabilitation services to the geriatric
population. Management believes that NovaCare's leadership in outcomes
measurement will enhance the Company's visibility in the clinical community and
its attractiveness as an employer.
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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 a highly mobile
therapist population. Furthermore, therapist turnover rates in long-term care
facilities are traditionally higher than in other therapy settings
During fiscal 1996, and to a lesser extent in fiscal 1995, NovaCare reduced
its dependence on large chains of long-term care facilities. The percentage of
NovaCare's net revenues attributable to large long-term care chains declined to
23% at June 30, 1996 from 27% in fiscal 1994. Of the remaining contracts with
large national chains, those considered by management to represent an in-house
transition threat has declined to 9% of NovaCare's net revenues at June 30,
1996. Of the revenue attributable to the transition from outsourcing with
NovaCare to providing therapy services in-house, most notably that of Beverly
Health and Rehabilitation in fiscal 1996, the majority of this business was
replaced with new, mostly regional and independent customers, diversifying the
Company's customer base. The change in the Company's customer base necessitated
work-site redeployment of therapists. The destabilizing effect on the work
environment was the principal reason why therapist turnover was 44% in fiscal
1996 compared with 38% in 1995. Management believes that the employee turnover
effects of contract turnover will decrease due to the decreased dependency on
the large long-term care chains representing an in-house threat.
Nursing facility operators have from time to time provided 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 long-term care
facilities with in-house programs. The study surveyed over 15,000 long-term care
facilities and examined several years of Medicare cost reports for long-term
care facilities with in-house therapy programs. Nevertheless, a number of
national multi-facility long-term care companies have directly hired therapists
to staff and manage their therapy program in-house. These in-house decisions
appear to be based, at least in part, on a desire to gain greater clinical
control over therapy programs, overriding economic concerns. This trend has been
exacerbated by the recent consolidation activity in the nursing home industry.
Management does not expect the in-house trend to have a significant impact on
future results due to the Company's reduced dependency on national
multi-facility long-term care companies which represent an in-house threat and
the economic opportunity outsourcing provides.
NovaCare contracts predominantly with regional and local long-term care
companies and independently-owned nursing facilities 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.
NovaCare is compensated for its contract services on a fee-for-service
basis, and generally collects payment for services from the long-term care
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 long-term care 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
three fiscal years, on average, less than 2% of NovaCare's services were
ultimately denied payment.
Management and Consulting Services
The Company focuses on the delivery of expert management and specialty
consulting services to health care and long-term care institutions. Such
services currently include long-term care facility rehabilitation program
management and consulting and subacute program development and management.
Rehabilitation Program Management and Consulting. The Company provides
rehabilitation program consulting and management services to long-term care
facility operators. Due to regulatory and reimbursement complexities in the
long-term care industry, these services assist long-term care providers with
utilization, documentation, receivables and denials management, cost reporting
and quality oversight. The
8
<PAGE> 11
Company had arrangements to provide such services to 624 long-term care
facilities at June 30, 1996 as compared with 539 at June 30, 1995.
Subacute Program Development and Management. NovaCare manages subacute
programs for long-term care 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 patients. At June 30, 1996, NovaCare managed
distinct subacute units in 39 long-term care facilities, with 22 additional
units in various stages of development or under consideration.
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. Subacute
care is a $4 billion industry, which has not grown at the rate anticipated due
to changes in reimbursement for such services.
Temporary Staffing
Given the demand for outsourced temporary staffing in long-term care
facilities, especially within large nursing home chains which have taken therapy
services in-house, NovaCare entered the temporary staffing business in fiscal
1996. The Company's NovaPro division utilizes NovaCare's existing resources to
recruit and train therapists for temporary assignment positions in selected
markets. NovaPro is reimbursed and the therapist paid based on hours worked.
PROFESSIONAL EMPLOYER ORGANIZATIONS
The PEO industry has experienced significant growth in recent years.
Analysts estimate that gross revenues in the PEO industry will grow at a
compound annual rate of approximately 30% for the next five years. The Company
believes that the growth in the number of small businesses in the United States,
the low market penetration of the PEO industry, and the increasing willingness
of businesses to outsource non-core activities and functions has contributed to
the growing demand for PEO services.
The PEO industry is highly fragmented. Industry data indicates that there
were approximately 1,100 PEO's in operation in 1995. The Company believes that
increasing regulatory complexity and the increasing capital requirements
associated with developing larger service delivery infrastructures and
management information systems should lead to significant consolidation
opportunities in the PEO industry.
Demand for Services. The PEO industry evolved in response to the
increasing employment and benefit costs and the complexity of the legal and
regulatory environment for small and medium-sized employers. According to the
U.S. Small Business Administration, there were approximately 5.1 million
businesses in the United States with fewer than 500 employees in 1992.
Collectively, these businesses employed an estimated 49 million employees, and
represented approximately $1.1 trillion in aggregate annual payroll, implying a
potential market size for PEO services of $1.3 trillion (assuming an average
mark-up of approximately 20%).
Cost-effectiveness of Service. The Company believes its services will
assist business owners in: (i) managing escalating costs associated with
workers' compensation, health insurance coverage, workplace safety programs, and
employee-related litigation, (ii) providing employees with competitive health
care and related benefits that are more characteristic of large employers, and
(iii) reducing the time and effort required by business owners and executives to
deal with the complexities of employment management.
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 long-term care services and where its
outpatient services patient care centers are
9
<PAGE> 12
located. The primary competitive factors in such local markets are: (i) quality
of patient care services, (ii) charges for services, (iii) responsiveness to
meeting the needs of patients, customer health care facilities, referral sources
and payors, and (iv) increasingly, networked integration with other healthcare
providers and payors.
Key competitive factors in the long-term care 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, regional and
local contract therapy providers. NovaCare believes that its ability to recruit
therapists, manage geographically dispersed service professionals and provide
expert clinical support, allows it to compete successfully with other contract
therapy providers in the markets where NovaCare provides services. The
demographics of potential customers has and will continue to change as some
large long-term care facility chains choose to take their therapy services in-
house. This may increase the competition for remaining customers. The Company
has diversified its customer base in the long-term care industry to replace
business lost because of such in-house programs (See "Contract Therapy
Services," previously discussed).
In the outpatient services business, key competitive factors include the
ability to develop and maintain relationships with referral sources (physicians,
rehabilitation professionals, hospitals and payors) 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, regional and local
outpatient rehabilitation 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. Competition in the O&P industry is highly
fragmented; however, there are several regional providers with multiple
facilities in certain local markets. Management believes that the Company
competes successfully within its local markets based on a reputation for quality
and service, an ability to provide geographic coverage and competitive prices,
affiliation with an IDS network, and technologically superior O&P product
offerings.
In the occupational health services industry, the market is highly
fragmented and competitive. Competitors include independent physicians,
hospitals, insurance companies, HMO's, managed care providers and networks of
primary care physician specialists. The ability to compete successfully is
dependent upon the same key factors critical to success in the outpatient
services business.
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, 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.
Congress has had under consideration, and is likely to consider again,
health care reform and balanced budget proposals. Consideration is expected on
measures to control health care costs. Legislative changes to
10
<PAGE> 13
slow the annual rate of growth of Medicare and Medicaid expenditures are
expected. Such changes may impact reimbursement for rehabilitation.
Contract Therapy Services
Contract therapy services are covered and reimbursed in one of two ways. In
most cases, NovaCare bills a facility, which, in turn, invoices a third-party
payor, such as Medicare. NovaCare also provides services through its own
certified rehabilitation agencies, which directly bills a third-party payor,
such as Medicare.
Medicare reimburses the long-term care 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 and there are general guidelines for
evaluating the reasonable cost of occupational therapy and speech-language
pathology services. With respect to physical therapy, the specific guideline
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
1996. Final rules are expected to be promulgated in the second quarter of
calendar year 1997.
Management believes that, when occupational therapy and speech-language
pathology 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. 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 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 three years, HCFA has issued several
directives to its fiscal intermediaries instructing them on how to ensure
therapy costs are reasonable. Intermediaries have been 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 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 5% 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
11
<PAGE> 14
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 and Occupational Health Services
The principal sources of reimbursement for outpatient and occupational
health services are managed care plans, commercial and workers' compensation
insurance, motor vehicle insurance and individual patients.
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 27% of
fiscal 1996 outpatient and occupational health revenues.
Managed care plans represented approximately 13% of fiscal 1996 outpatient
and occupational health 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 and occupational
healthcare services primarily through NovaCare's certified rehabilitation
agencies and on a fee schedule basis for O&P services. See "Government
Regulation," discussed later. Medicare and other government health insurance
programs represent approximately 8% of revenues.
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 long-term care services. In order
to receive Medicare reimbursement directly, outpatient centers must be certified
by Medicare as rehabilitation agencies or comprehensive outpatient
rehabilitation facilities. 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, 1996, 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, have enacted legislation or regulations or have interpreted
existing licensing laws to restrict business corporations, such as NovaCare,
from practicing therapy
12
<PAGE> 15
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 the 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 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, 1996, NovaCare had approximately 14,500 employees.
NovaCare's employees are not represented by any labor union. Management believes
that its relationships with its employees are favorable.
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<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of NovaCare who served during the fiscal year are as
follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------------------- ----------------------------------------------------------- ---
<S> <C> <C>
John H. Foster.............. Chairman of the Board, Chief Executive Officer and Director 54
Timothy E. Foster........... President, Chief Operating Officer and Director 44
C. Arnold Renschler, Senior Vice President and Chief Clinical Officer and
M.D. ..................... Director 54
Daryl A. Dixon.............. President and General Manager, Contract Services Division 36
Ronald G. Hiscock........... President and General Manager, Outpatient Division 45
Peter D. Bewley............. Senior Vice President, General Counsel and Secretary 50
Robert E. Healy, Jr. ....... Senior Vice President, Finance and Administration and Chief
Financial Officer 43
Laurence F. Lane............ Senior Vice President, Regulatory Affairs 51
Arthur T. Locilento, Jr. ... Senior Vice President, Human Resources 53
Susan J. Campbell........... Vice President, Communications and Investor Relations 45
Barry M. Carlstedt.......... President and General Manager, Hospital Development Group 37
Richard A. McDonald......... Vice President, Treasurer 49
Barry E. Smith.............. Vice President, Controller, and Chief Accounting Officer 43
James T. Walmsley........... Vice President, Reimbursement 46
Steven M. Wise.............. Vice President, Information Systems and Chief Information
Officer 40
</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; 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.
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. was Senior Vice President and Chief Clinical
Officer of NovaCare since May 1994 and was a director of NovaCare from 1990
until his resignation effective July 19, 1996. He was President and General
Manager of Polaris. 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 was 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
Outpatient Rehabilitation Division since February 1996 and 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 for the
Orthotics and Prosthetics Division and was the Division's Vice President of
Operations from July 1994
14
<PAGE> 17
through March 1995. Prior to joining NovaCare, he spent 23 years in senior
management positions with Sears Roebuck and Company and Montgomery Ward.
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.
ROBERT E. HEALY, JR. has been Senior Vice President, Finance and
Administration and Chief Financial Officer since December 1995. From January
1994 to December 1995 he was Vice President Chief Financial Officer of
NovaCare's Contract Services Division. He served as Vice President Finance and
Chief Accounting Officer of the Company from March 1992 to January 1994, and
Vice President and Controller of the Company from February 1988 to March 1992.
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.
SUSAN J. CAMPBELL has been Vice President, Communications and Investor
Relations of NovaCare since April 1995. She joined NovaCare in March 1992 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 1992.
BARRY M. CARLSTEDT has been President and General Manager, Hospital
Development Group since March 1996. From June 1995 to March 1996, he was Region
President of outpatient rehabilitation services. Prior to joining NovaCare in
June 1995, he was President and Chief Executive Officer of Associated
Rehabilitation Services, Inc.
RICHARD A. MCDONALD has been Vice President, Treasurer since August 1996
and was Director, Treasury Services from May 1995 until August 1996. Prior to
joining the Company, he was a financial consultant to Continental Medical
Systems, Inc. He served as an assistant treasurer with American Healthcare
Management from 1990 until 1994.
BARRY E. SMITH has been Controller and Chief Accounting Officer of the
Company since December 1995 and has been Vice President of Finance of the
Contract Services Division since March 1995. He was Vice President of Finance of
the Medical Rehabilitation Hospital Division from February 1994 through the sale
date of the division, April 1995. From May 1992 through February 1994 he served
in various positions in NovaCare's Corporate Finance Department. Prior to
joining NovaCare, Mr. Smith was Manager of Internal Audit for SPS Technologies,
Inc., since September 1990.
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.
STEVEN M. WISE has been Vice President Information Systems and Chief
Information Officer since December 1995. He joined NovaCare in 1993 as Director,
Systems and Programming, for the contract therapy services business. Prior to
joining NovaCare, he was employed at Ortho-McNeil Pharmaceutical Company where
he held various management positions in business systems development.
15
<PAGE> 18
ITEM 2. PROPERTIES
NovaCare's principal executive offices are located at 1016 West Ninth
Avenue, King of Prussia, Pennsylvania, where NovaCare leases approximately
93,246 square feet of office space. The lease for this office space expires in
June 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 24,748 square feet
of office space, expiring February 2003 with companies in which NovaCare's
Chairman of the Board and Chief Executive Officer is a Director and/or an
Executive Officer.
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 SHAREHOLDER MATTERS
NovaCare's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol NOV. On September 6, 1996, there were 2,261 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, 1996
First Quarter............................................ $ 9.50 $ 6.25
Second Quarter........................................... 8.50 5.13
Third Quarter............................................ 8.25 5.25
Fourth Quarter........................................... 7.63 6.25
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
</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
16
<PAGE> 19
public offering on November 5, 1986. NovaCare does not expect to declare any
cash dividends on common stock in the foreseeable future.
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,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $793,038 $905,359 $789,745 $582,342 $392,278
Gross profit.............................. 217,558 265,127 260,738 187,831 125,089
Income from operations.................... 37,499 143,881 108,208 78,819 54,527
Net interest (expense) income............. (7,537) (17,893) (11,773) (2,841) 1,355
Income before income taxes................ 29,866 125,584 95,892 75,542 55,461
Income taxes.............................. 14,585 63,660 37,678 27,906 18,868
Net income................................ 15,281 61,924 58,214 47,636 36,593
Net income applicable to common
stock(1)............................... 15,281 61,924 58,214 47,585 36,483
Net income per common share............... .24 .95 .90 .79 .64
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $223,712 $255,126 $194,324 $265,908 $ 97,608
Total assets.............................. 789,731 852,557 850,541 611,567 312,566
Total indebtedness........................ 192,215 225,015 344,602 206,415 37,528
Total liabilities......................... 305,337 364,922 434,837 282,587 88,587
Shareholders' equity...................... 484,394 487,635 415,704 328,980 223,979
</TABLE>
- ---------------
(1) 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.
17
<PAGE> 20
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 1996, the Company's net income declined to $15.3 million
compared to $61.9 million in fiscal 1995. Excluding nonrecurring items, the
Company's net income declined to $30.9 million from $40.1 million in fiscal
1995. Nonrecurring items in fiscal 1996 included the after-tax impact of a $13.4
pretax restructuring charge and a $10.5 million pretax charge for a change in
estimate. Nonrecurring items in fiscal 1995 consisted of an $88.2 million pretax
gain on the sale of the medical rehabilitation hospitals, a $29.9 million pretax
restructuring charge and a $1.0 million pretax charge relating to the settlement
of certain shareholder litigation.
Change in Estimate
In the third quarter of fiscal 1996, the Company recorded a $10.5 million
charge to revenues to fully reflect payor allowances that had not been
sufficiently recognized by certain billing systems during the first three
quarters of fiscal 1996 and prior years. The Company has implemented a new
methodology for estimating allowances pending implementation of a fully
integrated billing and allowance system in the upcoming fiscal year.
Restructuring Charge
As discussed in Note 2 to the accompanying Consolidated Financial
Statements, in fiscal 1996 the Company recorded a $13.4 million provision for
restructure pertaining to the consolidation and reorganization of outpatient and
orthotic and prosthetic ("O&P") services and certain administrative functions.
During fiscal 1996, the Company continued to implement the productivity and cost
reduction program initiated in fiscal 1995, the provision for which amounted to
$29.9 million. The 1995 program, consisting of closing certain contract services
offices, O&P branches and outpatient centers in selected markets, and the
consolidation of certain finance and other administrative functions, is
substantially complete. The plan initiated in fiscal 1996 will be substantially
complete by the third quarter of fiscal 1997. The Company estimates that these
plans, when fully implemented, will reduce or eliminate in the aggregate
approximately $30 million to $35 million of annual expenses.
Of the total restructuring charges, $19.6 million relates to amounts to be
paid in cash. The noncash portion of the charge relates to the write-off of
certain assets, principally goodwill, related to facilities closed or to be
closed.
Sale of Medical Rehabilitation Hospitals
Effective April 1, 1995, the Company sold its medical rehabilitation
hospitals in a transaction valued at $242.9 million. The transaction resulted in
a pretax gain on the sale of $88.2 million. The medical rehabilitation hospitals
contributed $110.6 million and $137.1 million in net revenues, $31.3 million and
$39.8 million in gross profit and $15.1 million and $18.7 million in income from
operations in fiscal 1995 and 1994, respectively.
18
<PAGE> 21
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Proforma Results of Operations
The following table displays the proforma results of operations had the
sale of the medical rehabilitation hospitals occurred July 1, 1993 and excluding
restructuring charges:
<TABLE>
<CAPTION>
1996(1) 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues....................................... $793,039 $794,716 $652,656
Gross profit....................................... $217,558 $233,844 $220,924
Income from operations............................. $ 50,869 $ 71,379 $ 95,278
</TABLE>
- ---------------
(1) Includes the $10.5 million charge for a change in estimate
RESULTS OF OPERATIONS
General Trends
During the periods discussed below, the Company's results of operations
have been affected by certain industry trends, nonrecurring items as discussed
earlier under "Overview" and changes in the Company's capital structure
discussed later under "Liquidity and Capital Resources".
Industry Trends
During the past year, the Company and other rehabilitation providers faced,
and will continue to face, a number of uncertainties. These uncertainties
include: (i) the potential impact of any Congressional proposals addressing
health care reform and a "balanced budget," (ii) pending regulatory pressure to
revise 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 lower rates of reimbursement.
In light of these uncertainties, management curtailed its acquisition
activities in fiscal 1996 in order to restructure the organization. The new
organization is substantially complete, resulting in significantly reduced
overhead costs, highly centralized administrative support services to all the
Company's businesses, and the flexibility to respond to business growth and
industry change.
During fiscal 1996, and to a lesser extent in fiscal 1995, large nursing
home chains transitioned from outsourcing rehabilitation therapy services to
providing such services in-house. Although a recent study indicated higher
average therapy costs per patient care hour in long-term care facilities with
in-house programs compared with facilities with contract therapy services, the
in-house trend appears to be based, at least in part, on a desire to gain
greater clinical control over therapy programs.
Responding to this trend, the Company reduced its dependence on large
chains of long-term care facilities. The percentage of NovaCare's net revenues
attributable to large long-term care chains declined to 23% at June 30, 1996
from 27% in fiscal 1994. Of the remaining contracts with large national chains,
those considered by management to represent an in-house transition threat has
declined to 9% of NovaCare's net revenues at June 30, 1996. Of the revenue
attributable to the transition from outsourcing with NovaCare to providing
therapy services in-house, most notably that of Beverly Health and
Rehabilitation in fiscal 1996, the majority of this business was replaced with
new, mostly regional and independent customers, diversifying the Company's
customer base.
Year Ended June 30, 1996 Compared with the Year Ended June 30, 1995.
Net revenues for the year ended June 30, 1996 decreased from the prior year
by $112.3 million or 12% to $793.0 million and income from operations decreased
by $106.4 million or 74% to $37.5 million. As previously
19
<PAGE> 22
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
described, the results of operations were effected by a change in estimate,
restructuring charges and the sale of the medical rehabilitation hospitals.
Excluding all of these items, net revenues increased $8.8 million or 1%, gross
profit decreased $5.8 million or 3% and income from operations decreased $10.0
million or 14% in fiscal 1996 compared with fiscal 1995, respectively.
The $8.8 million increase in net revenues in fiscal 1996 resulted from: (i)
an increase in contract therapy services revenues resulting principally from a
1.3% increase in net revenue per billable hour combined with a 0.3% increase in
contract therapy services billable hours, (ii) a 6.0% increase in O&P net
revenue per patient combined with a 2.6% increase in O&P patients billed, (iii)
an increase in long-term care management and consulting services, and (iv) a
3.0% increase in outpatient rehabilitation visits due primarily to the
acquisition of 25 businesses in fiscal 1995, offset by a $4.1% decrease in
outpatient rehabilitation net revenue per visit.
The $5.8 million decrease in gross profit in fiscal 1996 resulted
principally from increased costs of competitive compensation and benefits, and
decreased productivity and pricing pressure in outpatient rehabilitation
services. Further, income from operations decreased an additional $4.2 million
resulting principally from an increase in depreciation offset somewhat by cost
reduction programs undertaken during the year. The increase in depreciation was
due to the full year effect of assets acquired in fiscal 1995 and placing in
service certain internally developed software during fiscal 1996.
Interest expense, net of interest income, decreased $10.4 million compared
with the prior period principally due to full payments of amounts borrowed under
the Company's credit facility and increased cash invested as a result of the
sale of the medical rehabilitation hospitals.
Income tax expense as a percentage of pretax income decreased to 48.8% for
the year ended June 30, 1996 from 50.7% for the previous year. The principal
reasons for the effective rate being higher than the statutory federal rate were
state income taxes, non-deductible nonrecurring items and nondeductible
amortization of excess cost of net assets acquired ("amortization"). See Note 9
to the Consolidated Financial Statements for the reconciliation of expected tax
expense to actual tax expense.
Year Ended June 30, 1995 Compared with the Year Ended June 30, 1994.
Net revenues for the year ended June 30, 1995 increased $115.6 million or
15%, gross profit increased $4.4 million or 2% and income from operations
increased $35.7 million or 33% from fiscal 1994. Excluding the medical
rehabilitation hospital's operations and nonrecurring items, net revenues
increased $142.1 million or 22%, gross profit increased $12.9 million or 6% and
income from operations decreased $23.9 million or 25% in fiscal 1995 compared
with 1994, respectively.
The principal reasons for the net revenues increase during this period
were: (i) an increase in contract therapy services billable hours of or 8.4%,
combined with an aggregate increase in net revenue per billable hour of
approximately 3.0%, (ii) an increase in outpatient rehabilitation visits of
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 10.6% combined with an aggregate increase in net revenue per
patient billable hour of 12.4%.
The decrease in gross profit for the year ended June 30, 1995, as
contrasted with the increase in net revenues, resulted principally 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. Further, operating income decreased $23.9
million resulting principally from (i) administrative expenses and amortization
of businesses acquired in fiscal 1995 and the full year effect of businesses
acquired in fiscal 1994,
20
<PAGE> 23
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
(ii) increased administrative expenses in support of acquisitions, and (iii)
increased depreciation primarily due to the placing in service of certain
internally-developed software during the year.
Interest expense, net of interest income, increased $6.1 million compared
with the year-earlier period principally as a result of increased borrowings
under the Company's 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 hospitals,
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 principal
reasons for the effective rate being higher than the statutory federal rate were
state income taxes, non-deductible nonrecurring items and nondeductible
amortization of excess cost of net assets acquired ("amortization"). See Note 9
to the Consolidated Financial Statements for the reconciliation of expected tax
expense to actual tax expense.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, cash and cash equivalents totaled $95.7 million, a
decrease of $62.9 million from $158.6 million at June 30, 1995. Cash generated
from operating activities rose to $57.7 million in 1996 from $43.6 million and
$33.7 million in fiscal 1995 and 1994, respectively. This $14.1 million increase
in cash flows from operating activities from fiscal 1995 to 1996 resulted
principally from the $9.0 million use of cash in fiscal 1995 by the medical
rehabilitation hospitals prior to their sale and the following items (each
before the effect on cash flows of the sale of the medical rehabilitation
hospitals and nonrecurring items): (i) an $11.6 million increase in depreciation
and amortization, non-cash charges, discussed previously, (ii) a $16.1 million
increase in income taxes due to the timing of payments for income taxes in
fiscal 1996 compared with fiscal 1995, (iii) an $11.4 million decrease in
accounts payable and accrued expenses due primarily to the timing of
compensation related expenses, and (iv) a $6.3 million decrease in net income.
The $9.9 million increase in cash flows from operating activities from
fiscal 1994 to 1995 resulted principally from a $20.8 million decrease in cash
flows from the medical rehabilitation hospitals from fiscal 1994 to 1995 prior
to their sale and the following items (each net of the effects of cash flows
from the medical rehabilitation hospitals prior to their sale and nonrecurring
items): (i) an $8.8 million increase in depreciation and amortization, described
previously, (ii) a $22.9 million decrease in accounts receivable due primarily
to improved collection experience in fiscal 1995, (iii) a $9.3 million increase
in accounts payable and accrued expenses due primarily to the timing of
compensated related expenses and (iv) an $18.1 million decrease in net income.
Investing activities, net of the effects of the sale of the medical
rehabilitation hospital operations and the proceeds from the sale of marketable
securities of $88.2 million and $25.4 million in fiscal 1995 and 1994,
respectively, consumed $51.7 million in cash during fiscal 1996 compared to
$106.9 million and $184.5 million in fiscal 1995 and 1994, respectively. Cash
paid for acquisitions decreased significantly to $20.8 million in fiscal 1996
from $71.7 and $149.8 million in fiscal 1995 and 1994, respectively, as the
Company curtailed its acquisition activity in fiscal 1996 to focus on its
organization restructure. Capital expenditures remained relatively constant
during the three year period ended June 30, 1996 at $26.6 million, $29.5 million
and $28.0 million as the Company continued to invest in internally and
externally developed software and equipment needed for technological efficiency
in clinical and administrative activities in support of clinical programs and
outcomes, cost reduction initiatives and future growth plans.
The Company used $55.7 million and $111.2 million for financing activities
in 1996 and 1995 respectively, while $65.3 million was provided in fiscal 1994.
Major financing activities in fiscal 1996 included stock repurchases of
approximately 3.4 million shares for $24.9 million and the repayment of
approximately $33.4 million of debt. In 1995, the Company borrowed $74.1 million
principally to fund acquisition activity.
21
<PAGE> 24
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Upon receipt of the proceeds from the sale of the medical rehabilitation
hospitals, the Company repaid the entire amount then outstanding under the
Company's line of credit. In fiscal 1994, the Company's $61.8 million net
borrowings were used principally to fund acquisitions and capital expenditures.
In fiscal 1996, the Company's Board of Directors approved a three-year
growth strategy for the Company. The strategy contemplates expansion of existing
outpatient rehabilitation and O&P operations as well as the development of
occupational health operations and a professional employer organization ("PEO")
and affiliation with integrated delivery systems in targeted markets through
acquisition start-ups, and joint ventures. Given the Company's cash position of
$95.7 million at June 30, 1996 and debt capacity as suggested by its favorable
debt to total capital ratio of 28.4%, it is anticipated that the Company will
take advantage of its underleveraged position and ability to borrow under its
existing line of credit. Cash payments for acquired businesses under this
strategy are expected to be approximately $100 million in fiscal 1997. Capital
expenditures are expected to be approximately $23 million in fiscal 1997 as the
Company acquires property and equipment for the establishment of start-up
outpatient and orthotic and prosthetic facilities in selected markets and
continues to invest in systems to enhance clinical productivity, outcomes
measurement and administrative efficiencies.
The Company believes that the cash flows generated by the Company's
operations together with its existing cash and availability of credit 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, it is unlikely that the Company will be
able to pass on the increased costs associated with providing health care
services to customers insured by government or managed care payors. However,
management believes that the Company will be able to somewhat offset this impact
through business expansion, increasing operating efficiencies and affiliation
with integrated delivery systems (see "Forward Outlook").
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for employee stock options and similar instruments and must be either
adopted or the proforma income statement effects must be disclosed in notes to
the financial statements no later than the first quarter fiscal 1997. The
Company intends to elect disclosure of the proforma income statement effects of
SFAS 123, therefore the new Statement will not affect the Company's financial
position or results of operations.
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 established 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.
22
<PAGE> 25
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
FORWARD OUTLOOK
The medical rehabilitation industry is projected to grow at a rate of
10-12% per year through the end of the decade based on recent industry analysis.
The industry's growth is fueled by the: (i) demand for services due to
technological advances and the aging population, (ii) cost effectiveness of
rehabilitation services, and (iii) an acute care hospital reimbursement system
which encourages rapid discharge while the patient remains in need of
rehabilitation services. Concurrent with rehabilitation industry growth, managed
care is expected to grow 15% per year over the next decade, demanding high
quality health care services at a reasonable cost. In geographic markets, large
hospital-based integrated delivery systems comprising healthcare providers and
payors will be networked as referral sources to facilitate integrated patient
care and ease of administration for payors and providers. Medical rehabilitation
services companies, such as NovaCare, with networks of rehabilitation services
centers, are in the best position to meet the needs of integrated delivery
systems.
The PEO industry provides small- and medium-sized businesses with an
outsourcing solution to the complexities and costs related to employment
management. The Company believes that: (i) the growth in the number of small
businesses in the United States, the low market penetration of the PEO industry,
and the willingness of business to outsource non-core activities and functions
has contributed to the growing demand for PEO services, and (ii) increasing
regulatory complexity and capital requirements associated with developing larger
service delivery infrastructures and management information systems should lead
to significant consolidation opportunities in the PEO industry.
As a large employer managing geographically dispersed employees in
approximately 2,300 work-sites in 43 states, NovaCare already provides a
comprehensive range of employment-related services. NovaCare plans to acquire
PEO's in the same targeted markets in which the Company intends to be affiliated
with integrated delivery systems. The Company believes that its ability to
manage a meaningful portion of both the healthcare services and employer
workforce in a local market, afford the following benefits: (i) reduced workers'
compensation costs, (ii) increased access to patient flow for NovaCare's medical
rehabilitation centers and integrated delivery system partners, and (iii)
increased economies of scale in negotiating the purchase of healthcare insurance
and other benefits and leveraging the administrative costs associated with
employment management.
The Health Care Financing Administration, 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 1996. Final rules are
expected to be promulgated in the second quarter of calendar year 1997. NovaCare
is actively involved with industry trade groups working to ensure that such
final rules are based on timely, accurate and relevant data.
In the current unsettled reimbursement environment, NovaCare believes that
it is well-positioned to compete effectively with other contract therapy
companies due to: (i) its highly centralized administrative functions and
flexible organization structure which can respond to business growth and
industry change (ii) a nationwide recruiting organization and substantial
staffing capabilities, (iii) a multi-disciplinary team approach to therapy that
is designed to deliver a high level of quality and efficient care, (iv)
sophisticated management information systems to assist clinicians and management
in analyzing clinical outcomes, therapy utilization, claim denials, staffing and
educational activities, (v) a clinical support network to provide timely expert
clinical advice to care providers, (vi) a nationwide sales organization to
secure customer contracts in support of business growth, and (vii) reimbursement
and regulatory expertise to assist nursing facility operators in their dealings
with third-party payors, principally Medicare.
23
<PAGE> 26
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Although the in-house transition of large long-term care chains to in-house
programs will likely continue in the near-term, the impact on the Company is not
expected to be significant due to the Company's reduced dependency on national
multi-facility long-term care companies which represent an in-house threat and
the economic opportunity outsourcing provides.
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.
CAUTIONARY STATEMENT
Except for historical information, matters discussed in this Form 10-K are
forward-looking statements that are based on management's estimates, assumptions
and projections. Important factors that could cause results to differ materially
from those expected by management include the timing and nature of reimbursement
changes (including imposition of and changes in salary equivalency rates for
Medicare, changes in workers' compensation and other governmental rate and
reimbursement systems changes), the number and productivity of clinicians,
decisions by chain customers as to whether to take therapy and other services
in-house, pricing of managed care and other third party contracts, the direction
and success of competitors, management retention and development, management's
success in developing and introducing new products and lines of business and
unanticipated market changes.
24
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 95,724 $158,636
Accounts receivable, net of allowance in 1996 and 1995 of $18,995 and
$19,718, respectively............................................. 192,636 192,652
Inventories.......................................................... 13,948 11,213
Deferred income taxes................................................ 14,875 16,748
Other current assets................................................. 14,976 34,571
-------- --------
Total current assets......................................... 332,159 413,820
Property and equipment, net............................................ 63,319 63,659
Excess cost of net assets acquired, net................................ 354,117 352,115
Investment in joint ventures........................................... 11,984 --
Deferred income taxes.................................................. 2,332 1,470
Other assets, net...................................................... 25,820 21,493
-------- --------
$789,731 $852,557
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements............................ $ 8,173 $ 32,684
Accounts payable and accrued expenses................................ 93,854 93,088
Income taxes payable................................................. 6,420 32,922
-------- --------
Total current liabilities......................................... 108,447 158,694
Financing arrangements, net of current portion......................... 184,042 192,331
Deferred income taxes.................................................. 9,625 8,147
Other.................................................................. 3,223 5,750
-------- --------
Total liabilities............................................ 305,337 364,922
-------- --------
Commitments and contingencies.......................................... -- --
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares, issued
66,091 shares in 1996 and issued 65,476 shares in 1995............ 661 656
Additional paid-in capital........................................... 253,918 250,857
Retained earnings.................................................... 253,430 238,149
-------- --------
508,009 489,662
Less: Common stock in treasury (at cost), 3,190 shares in 1996 and
187 shares in 1995......................................... (23,465) (1,614)
Deferred compensation........................................ (150) (413)
-------- --------
Total shareholders' equity................................... 484,394 487,635
-------- --------
$789,731 $852,557
======== ========
</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 OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues............................................... $793,038 $905,359 $789,745
Cost of services........................................... 575,480 640,232 529,007
-------- -------- --------
Gross profit.......................................... 217,558 265,127 260,738
Selling, general and administrative expenses............... 140,456 151,759 125,098
Provision for uncollectible accounts....................... 16,359 15,918 14,453
Amortization of excess cost of net assets acquired......... 9,874 10,937 7,225
Provision for restructure and other nonrecurring items..... 13,370 (57,368) 5,754
-------- -------- --------
Income from operations................................ 37,499 143,881 108,208
Investment income.......................................... 4,999 5,405 5,304
Interest expense........................................... (12,536) (23,298) (17,077)
Minority interest.......................................... (96) (404) (543)
-------- -------- --------
Income before income taxes............................ 29,866 125,584 95,892
Income taxes............................................... 14,585 63,660 37,678
-------- -------- --------
Net income............................................ $ 15,281 $ 61,924 $ 58,214
======== ======== ========
Net income per common share........................... $ .24 $ .95 $ .90
======== ======== ========
Weighted average number of common shares
outstanding......................................... 64,325 65,163 64,663
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
26
<PAGE> 29
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK
SHARES ISSUED ($.01 ADDITIONAL DEFERRED
----------------- PAR TREASURY PAID-IN RETAINED COMPEN- VALUATION
COMMON TREASURY VALUE) STOCK CAPITAL EARNINGS SATION ALLOWANCE
------ -------- ------ -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 ) --
Issued in connection with employee
benefit plans....................... 199 198 1 1,624 1,336 -- -- --
Issued in connection with
acquisitions........................ 416 203 4 1,478 1,725 -- -- --
Repurchase of common stock............ -- (3,404) -- (24,953) -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 263 --
Net income............................ -- -- -- -- -- 15,281 -- --
------ ------ ---- -------- -------- -------- ----- -----
Balance at June 30, 1996.............. 66,091 (3,190) $661 $(23,465) $253,918 $253,430 $ (150 ) $ --
====== ====== ==== ======== ======== ======== ===== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
27
<PAGE> 30
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 15,281 $ 61,924 $ 58,214
Adjustments to reconcile net income to net cash flows from
operating activities:
Gain on sale of medical rehabilitation hospitals................. -- (88,243) --
Depreciation and amortization.................................... 33,159 30,190 22,514
Minority interest................................................ 96 404 543
Provision for uncollectible accounts............................. 16,359 15,918 14,453
Deferred income taxes............................................ 3,631 (1,525) (2,704)
Noncash portion of nonrecurring items............................ 8,256 15,415 667
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts and notes receivable.................................. (12,676) (31,164) (44,875)
Other current assets........................................... (2,029) (1,487) (6,074)
Accounts payable and accrued expenses.......................... (6,152) 10,279 (9,662)
Income taxes payable........................................... 1,553 28,982 2,498
Other, net..................................................... 220 2,925 (1,888)
-------- --------- ---------
Net cash flows provided by operating activities................ 57,698 43,618 33,686
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Marketable securities:
Purchase of investments.......................................... -- -- (146,496)
Proceeds from sales of investments............................... -- 88,151 171,872
-------- --------- ---------
Net cash proceeds from marketable securities................... -- 88,151 25,376
-------- --------- ---------
Payments for businesses acquired, net of cash acquired............. (20,764) (71,759) (149,772)
Additions to property, equipment and capitalized software.......... (26,621) (29,529) (27,961)
Net (payment for) proceeds from sale of medical rehabilitation
hospitals........................................................ (13,208) 206,838 --
Other, net......................................................... (4,326) (5,513) (6,771)
-------- --------- ---------
Net cash (used in) provided by investing activities............ (64,919) 188,188 (159,128)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and credit agreements................. 133 74,077 184,208
Payment of long-term debt and credit agreements.................... (33,769) (187,206) (122,409)
Proceeds from common stock issued.................................. 2,898 3,947 3,529
Payment for purchase of treasury stock............................. (24,953) (2,012) --
-------- --------- ---------
Net cash flows (used in) provided by financing activities...... (55,691) (111,194) 65,328
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... (62,912) 120,612 (60,114)
Cash and cash equivalents, beginning of year....................... 158,636 38,024 102,324
Adjustments for pooling of interests............................... -- -- (4,186)
-------- --------- ---------
Cash and cash equivalents, end of year............................. $ 95,724 $ 158,636 $ 38,024
======== ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
28
<PAGE> 31
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: NovaCare, Inc. is a national provider of
comprehensive medical rehabilitation services through a system comprising: (1)
rehabilitation therapy, subacute and rehabilitation programs and management
services on a contract basis to health care institutions, primarily long-term
care facilities; and (2) a national network of outpatient rehabilitation and
orthotic and prosthetic clinics and integrated delivery systems comprising
health care providers and payors.
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"). Investments in 20% or more of the voting stock of an
affiliate are accounted for under the equity method. All significant
intercompany accounts and transactions have been eliminated. Certain amounts in
the fiscal 1995 and 1994 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
During the third quarter of fiscal 1996, the Company recorded a $10.5 million
charge to net revenues to reflect payor allowances that had not been
sufficiently recognized by certain billing systems.
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 or contain an
investor put option which can be exercised at par within 90 days of acquisition.
These investments are carried at cost, which approximates fair value.
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 12%, 18%
and 20% of the Company's net revenues for fiscal 1996, 1995, and 1994,
respectively. Settlement amounts due to or receivable from Medicare and Medicaid
programs are determined by fiscal intermediaries. Management believes that
adequate provision has been made in the consolidated financial statements for
potential adjustments resulting from such determinations.
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
29
<PAGE> 32
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 in
affordable income housing partnerships are recorded at cost and are subject to
an annual assessment as to carrying value.
Income Taxes: The Company records deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.
Net Income Per 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.
Recently Issued Accounting Standards: In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 defines
a fair value based method of accounting for employee stock options and similar
instruments and must be adopted or the proforma income statement effects must be
disclosed in notes to the financial statements no later than the first quarter
of fiscal year 1997. The Company intends to elect disclosure of the proforma
income statement effects of SFAS 123, therefore the new Statement will not
affect the Company's financial position or results of operations.
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. PROVISION FOR RESTRUCTURE AND OTHER NONRECURRING ITEMS
The following table sets forth the Company's provision for restructure and
other nonrecurring items for each of the three years in the period ended June
30, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- ------
<S> <C> <C> <C>
Productivity and cost reduction programs:
Employee severance costs............................ $ 2,931 $ 7,042 $ --
Lease terminations.................................. 4,032 6,847 --
Asset write-offs, net of estimated sale proceeds.... 5,965 15,415 --
Other............................................... 442 571 --
Gain on sale of medical rehabilitation hospitals...... -- (88,243) --
Settlement of shareholder litigation.................. -- 1,000 --
Merger expenses:
Professional fees................................... -- -- 2,305
Name change......................................... -- -- 1,600
Printing and filing fees............................ -- -- 775
Other............................................... -- -- 1,074
------ ------ ------
$13,370 $(57,368) $5,754
====== ====== ======
</TABLE>
30
<PAGE> 33
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
During the third quarter of fiscal 1996, the Company recorded a provision
for restructure pertaining to the consolidation and reorganization of its
outpatient and orthotic & prosthetic operations and certain administrative
functions. The provision reflects the cost of exiting and combining facilities,
along with severance for work force reductions. Employee severance costs
incurred in the provision represent the accumulation of termination benefits set
forth in the Company's severance policy for approximately 340 employees. The
outpatient and orthotic and prosthetics consolidation and reorganization will be
substantially completed by March 31, 1997.
During fiscal 1996, the Company continued to implement the productivity and
cost reduction program initiated in fiscal 1995. The program, consisting of
closing certain contract services offices, orthotic and prosthetic branches, and
outpatient centers in selected markets, and the consolidation of certain finance
and other administrative functions is substantially complete. The Company
completed the employee reduction portion of the program by terminating 660
employees and also wrote off assets consisting 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.
Lease termination costs will continue to be incurred through fiscal 1997 as
sub-lease and closure arrangements are finalized in facilities and offices
closed.
At June 30, 1996, approximately $8,241 remained accrued for facility,
branch and clinic closure and administrative consolidation costs. Of the $8,241
accrued, approximately $5,959 relates to the fiscal 1996 provision for
restructure. The remainder relates to the provision for restructure taken in the
fourth quarter of fiscal 1995. The remaining amount in the 1995 fiscal plan
relates to remaining lease obligations on facilities which have been closed and
the costs associated with the closure of certain facilities which were sold in
conjunction with the restructure.
Effective April 1, 1995, the Company sold its medical rehabilitation
hospitals for $242,888 which consisted of cash of $232,394 and debt and cash
assumed by the purchaser of $19,156 and $8,662, respectively. Of the cash
portion of the purchase price, $16,894 was unpaid at June 30, 1995 and was
included as a component of other current assets. Substantially all of this
amount was received in July 1995. Had the sale of the medical 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 $794,716 and $652,656,
respectively and pro forma unaudited income from operations would have been
$40,504 and $89,524, respectively.
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.
3. MERGER, ACQUISITION AND JOINT VENTURE TRANSACTIONS
During fiscal year 1996, the Company acquired seven businesses which
provide outpatient rehabilitation services and six businesses which provide
orthotic and prosthetic rehabilitation services. During the fiscal year, the
Company also acquired 50% of the shares of GP Therapy, LLC, a joint venture with
Columbia/HCA, and 40% of Gil/Balsano Consulting, LLC. The carrying value of
these investments is $11,984. The difference between the cost of the investment
and the underlying equity in net assets of the joint venture has been assigned
to goodwill.
During fiscal year 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.
Proforma results including these acquisitions and joint ventures would not
be significantly different from those actually recorded.
31
<PAGE> 34
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Information with respect to businesses acquired in purchase transactions
was as follows (the allocation for fiscal 1996 acquisitions is preliminary):
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Excess cost of net assets acquired............................. $391,324 $379,605
Less: accumulated amortization................................. (37,207) (27,490)
-------- --------
$354,117 $352,115
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
------------------
1996 1995
------ -------
<S> <C> <C>
Cash paid (net of cash acquired).................................. $5,850 $60,929
Notes issued...................................................... 990 12,620
Other consideration............................................... 19 1,377
------ -------
6,859 74,926
Liabilities assumed............................................... 617 7,027
------ -------
7,476 81,953
Fair value of assets acquired, principally accounts receivable and
property and equipment.......................................... 1,430 7,891
------ -------
Cost in excess of fair value of net assets acquired............. $6,046 $74,062
====== =======
</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, 1996 of approximately
$25,850 in cash and 495 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, 1996, 1995 and 1994, the Company paid $14,914,
$10,830 and $14,799, respectively, in cash and issued 619, 975 and 348 shares of
common stock, respectively, in connection with businesses acquired in prior
years.
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
As of June 30, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). Accordingly, amounts for fiscal 1994 shown on the
Statement of Cash Flows do not reflect the security classifications required by
SFAS 115. During fiscal 1995, the Company changed its investment portfolio from
securities classified under SFAS 115 as available for sale and held-to-maturity
securities to instruments considered cash equivalents. Proceeds from available
for sale and held-to-maturity securities were $38,145 and $50,006, respectively,
for fiscal 1995.
For the years ended June 30, 1996, 1995 and 1994, investment income
consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Interest income......................................... $4,999 $5,700 $ 4,965
Gross realized gain on sales of marketable securities... -- 67 392
Gross realized loss of sales of marketable securities... -- (362) (1,553)
Reserve for loss on marketable securities............... -- -- 1,500
------ ------ -------
$4,999 $5,405 $ 5,304
====== ====== =======
</TABLE>
32
<PAGE> 35
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Finished goods................................................... $ 863 $ 857
Work in process.................................................. 3,355 1,447
Materials and supplies........................................... 9,730 8,909
------- -------
$13,948 $11,213
======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land and buildings............................................. $ 3,573 $ 4,576
Property, equipment and furniture.............................. 65,401 64,086
Capitalized software........................................... 31,515 21,641
Leasehold improvements......................................... 15,124 7,866
-------- --------
115,613 98,169
Less: accumulated depreciation and amortization................ (52,294) (34,510)
-------- --------
$ 63,319 $ 63,659
======== ========
</TABLE>
7. FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Convertible subordinated debentures (5.5%), due January 2000... $175,000 $175,000
Reverse repurchase agreements (5.65%), payable through
September 30, 1995........................................... -- 18,000
Subordinated promissory notes (5% to 9%), payable through
2002......................................................... 15,516 26,867
Notes (6% to 12%), payable through November 2000............... 172 720
Capitalized lease obligations, payable through 2000............ 1,527 4,428
-------- --------
192,215 225,015
Less: current portion.......................................... 8,173 32,684
-------- --------
$184,042 $192,331
======== ========
</TABLE>
The Company has in place a revolving credit facility with a syndicate of
lenders providing for a total commitment of up to $150,000 upon which no amounts
are currently drawn. The Company is charged a fee of .25% per annum on the
unused portion of the commitment. At June 30, 1996, total credit availability
had been reduced by $520 for issued letters of credit.
During fiscal 1995, 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
33
<PAGE> 36
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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, 1996 and 1995 was $154,875 and $151,375,
respectively. The estimated fair value of all other debt and financing
arrangements approximates carrying value.
At June 30, 1996, aggregate annual maturities of financing arrangements
were as follows for the next five fiscal years and thereafter:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------
<S> <C>
1997.............................................................. $ 8,173
1998.............................................................. 4,404
1999.............................................................. 3,134
2000.............................................................. 176,234
2001.............................................................. 117
Thereafter........................................................ 153
--------
$192,215
========
</TABLE>
Interest paid on debt during fiscal 1996, 1995 and 1994 amounted to
$11,730, $20,377 and $17,258, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Accounts payable......................................... $ 8,026 $15,721
Accrued compensation and benefits........................ 51,472 37,984
Accrued costs of productivity and cost improvement
programs............................................... 8,241 11,730
Accrued interest......................................... 4,868 5,158
Other.................................................... 21,247 22,495
------- -------
$93,854 $93,088
======= =======
</TABLE>
The balance for the productivity and cost improvement program relates to
the 1996 and 1995 programs discussed in Note 2.
34
<PAGE> 37
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 8,048 $53,258 $36,988
State............................................... 2,906 11,927 3,394
------- ------- -------
10,954 65,185 40,382
------- ------- -------
Deferred:
Federal............................................. 3,301 (1,182) (2,410)
State............................................... 330 (343) (294)
------- ------- -------
3,631 (1,525) (2,704)
------- ------- -------
$14,585 $63,660 $37,678
======= ======= =======
</TABLE>
The components of net deferred tax assets as of June 30, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accruals and reserves not currently deductible for tax
purposes....................................................... $10,484 $ 8,334
Restructuring reserve............................................ 6,043 8,413
Cash basis accounting for tax purposes........................... -- 661
Other............................................................ 680 810
------- -------
Gross deferred tax assets................................... 17,207 18,218
------- -------
Expenses capitalized for financial statement purposes............ (6,274) (3,608)
Depreciation and capital leases.................................. (2,589) (3,207)
Other, net....................................................... (762) (1,332)
------- -------
Gross deferred tax liabilities.............................. (9,625) (8,147)
------- -------
Net deferred tax asset...................................... $ 7,582 $10,071
======= =======
</TABLE>
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,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Expected federal income tax expense................... $10,453 $43,954 $33,562
State income taxes, less federal benefit.............. 2,108 7,530 1,767
Non-deductible nonrecurring items..................... 1,027 9,178 1,217
Non-deductible amortization of excess cost of net
assets acquired..................................... 2,011 2,370 1,954
Dividend exclusion and non-taxable interest income.... (395) (401) (676)
Other, net............................................ (619) 1,029 (146)
------- ------- -------
$14,585 $63,660 $37,678
======= ======= =======
</TABLE>
Income taxes paid during fiscal 1996, 1995 and 1994 amounted to $38,699,
$37,604 and $37,817, respectively.
35
<PAGE> 38
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. LEASES
The Company is obligated under capital leases for office space and office,
transportation and therapy equipment. All other capital leases expire over the
next five years.
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,
-------------------
1996 1995
------- -------
<S> <C> <C>
Property, equipment and furniture................................ $ 3,196 $ 7,265
Less: accumulated amortization................................... (1,605) (2,498)
------- -------
$ 1,591 $ 4,767
======= =======
</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 control 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.
Future minimum lease commitments for all non-cancelable leases as of June
30, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUB-LEASE
FISCAL YEAR LEASES LEASES RECEIVABLES
------------------------------------------------------ ------- --------- -----------
<S> <C> <C> <C>
1997.................................................. $ 979 $21,304 $ 374
1998.................................................. 438 17,803 328
1999.................................................. 91 15,551 356
2000.................................................. 16 10,204 361
2001.................................................. 9 5,967 187
Thereafter............................................ 132 7,412 286
------ ------- ------
Total minimum lease payments.......................... 1,665 $78,241 $ 1,892
======= ======
Less: amount representing interest.................... 138
------
Present value of minimum payments under capital lease
obligations......................................... $ 1,527
======
</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.
In May 1996, the Board approved an option exchange whereby option holders
were allowed to acquire new options to purchase shares of common stock in
exchange for the surrender by such option holders of certain existing options
held by them under the plan. The exchange formula took into account the vesting
schedule and exercise price of the surrendered options. Under the exchange
program, 1,157 options were surrendered and 888 new options were granted. The
options granted as a result of the exchange vest over five years, although
vesting can be accelerated if the Company's stock price achieves certain levels.
36
<PAGE> 39
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summarizes the activity of this stock option plan:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year...... 2,649 2,771 2,239
Granted............................... 2,592 1,162 1,068
Exercised............................. (71) (77) (277)
Canceled.............................. (1,982) (1,207) (259)
----------- ----------- -----------
Outstanding at end of year............ 3,188 2,649 2,771
=========== =========== ===========
Option price per share ranges:
Outstanding at beginning of year...... $ .09-$21.00 $ .09-$23.50 $ .09-$23.50
Granted............................... 5.75- 7.50 7.25- 13.00 10.16- 16.75
Exercised............................. .09- 9.13 .09- 14.38 .09- 16.50
Outstanding at end of year............ $ .12-$20.58 $ .09-$21.00 $ .09-$23.50
Options exercisable at end of year...... 363 1,109 897
Exercisable option price ranges......... $ .09-$20.58 $ .09-$21.00 $ .09-$23.50
Options available for grant at end of
year under the 1986 Stock Option
Plan.................................. 982 1,601 1,807
</TABLE>
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 May 1996, the Board also decided, subject to shareholder approval,
to offer the Chairman and President of the Company a comparable exchange to the
exchange offered to the option holders of the 1986 Stock Option Plan. Under the
exchange, the Chairman received fewer options than would have been warranted
under the 1986 Stock Option Plan formula of exchange while the President was
offered an exchange and additional options, resulting in a net reduction of
outstanding options of 909. The new options were at the same price and with the
same vesting term as the options issued pursuant to the exchange described
above, except that 3,317 options of the 3,500 total options issued have a seven
year term.
37
<PAGE> 40
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summarizes the other stock award activity:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year.............. 4,704 4,708 1,958
Granted....................................... 3,500 -- 2,750
Exercised..................................... -- (4) --
Canceled...................................... (4,650) -- --
------------ ----------- -----------
Outstanding at end of year.................... 3,554 4,704 4,708
============ =========== ===========
Option price per share:
Outstanding at beginning of year.............. $ 2.25-$19.50 $2.25-$19.50 $2.25-$17.00
Granted....................................... 6.88 -- 19.50
Exercised..................................... -- 2.25 --
Canceled...................................... 10.44- 19.50
Outstanding at end of year.................... 2.25- 6.88 2.25- 19.50 2.25- 19.50
Options exercisable at end of year.............. 54 1,914 1,118
Exercisable option price ranges................. $ 2.25-$ 4.88 $2.25-$19.50 $2.25-$17.00
</TABLE>
Retirement Plans:
The Company has defined contribution 401(k) plans covering substantially
all of its employees. Company contributions for fiscal 1996, 1995 and 1994 were
$3,634, $3,878, and $3,715, respectively. In fiscal 1992, the Company
established a non-qualified supplemental benefit plan covering certain key
employees. The Company's matching contribution was $582, $302 and $192 for
fiscal 1996, 1995 and 1994, 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.
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.
38
<PAGE> 41
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996:
Net revenues.................................. $202,551 $191,393 $200,957 $198,137
Gross profit............................... 57,382 45,490 57,506 57,180
Income from operations........................ 16,428 (9,549) 15,123 15,497
Net income (loss)............................. 8,411 (8,580) 7,447 8,003
Net income (loss) per common share............ $ .13 $ (.13) $ .12 $ .12
YEAR ENDED JUNE 30, 1995:
Net revenues.................................. $201,450 $240,898 $232,201 $230,810
Gross profit............................... 62,494 69,959 65,444 67,230
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
</TABLE>
Results from the third quarter of fiscal 1996 included a $13,370 provision
for restructure and a $10,462 charge to fully reflect payor allowances that had
not been sufficiently recognized by certain billing systems. 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.
39
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders 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, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1996, 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
July 31, 1996
40
<PAGE> 43
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 1996 annual meeting of
shareholders to be held on October 31, 1996 (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 6, 1996" and
"Information Concerning Certain Shareholders" 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
(1) FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1996 and 1995................ 25
Consolidated Statements of Operations for the three years in the
period ended June 30, 1996........................................... 26
Consolidated Statements of Changes in Shareholders' Equity for the
three years in the period ended June 30, 1996........................ 27
Consolidated Statements of Cash Flows for the three years in the
period ended June 30, 1996........................................... 28
Notes to Consolidated Financial Statements........................... 29
Report of Independent Accountants.................................... 40
(2) FINANCIAL STATEMENT SCHEDULES:
VIII -- Valuation and Qualifying Accounts for the three years in the
period ended June 30, 1996........................................... 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: (None)
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/ ROBERT E. HEALY, JR.
------------------------------------
(ROBERT E. HEALY, JR.,
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION
AND CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ----------------------------------- -------------------
<C> <S> <C>
/s/ JOHN H. FOSTER Chairman of the Board, Chief September 23, 1996
- ----------------------------------------------- Executive Officer and Director
(JOHN H. FOSTER)
/s/ TIMOTHY E. FOSTER President, Chief Operating Officer September 23, 1996
- ----------------------------------------------- and Director
(TIMOTHY E. FOSTER)
/s/ ROBERT E. HEALY, JR. Senior Vice President, Finance and September 23, 1996
- ----------------------------------------------- Administration and Chief Financial
(ROBERT E. HEALY, JR.) Officer
/s/ BARRY E. SMITH Vice President, Controller, and September 23, 1996
- ----------------------------------------------- Chief Accounting Officer
(BARRY E. SMITH)
/s/ E. MARTIN GIBSON Director September 23, 1996
- -----------------------------------------------
(E. MARTIN GIBSON)
/s/ SIRI S. MARSHALL Director September 23, 1996
- -----------------------------------------------
(SIRI S. MARSHALL)
/s/ STEPHEN E. O'NEIL Director September 23, 1996
- -----------------------------------------------
(STEPHEN E. O'NEIL)
/s/ GEORGE W. SIGULER Director September 23, 1996
- -----------------------------------------------
(GEORGE W. SIGULER)
/s/ ROBERT G. STONE, JR. Director September 23, 1996
- -----------------------------------------------
(ROBERT G. STONE, JR.)
/s/ DANIEL C. TOSTESON, M.D. Director September 23, 1996
- -----------------------------------------------
(DANIEL C. TOSTESON, M.D.)
</TABLE>
42
<PAGE> 45
SCHEDULE VIII
NOVACARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(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, 1996:
Allowance for uncollectible
accounts.......................... $ 16,023 16,359 1,187(2) (20,818) $ 12,751
Allowance for Medicare denials and
other allowances.................. $ 3,695 -- 9,018(3) (6,469) $ 6,244
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
</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 (incorporated by reference --
to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
4(a) Stock Option Plan, as amended to date.
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) 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(b) 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(c)* 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 Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10(d)* Amendment dated May 25, 1995 to the Employment Agreement between the --
Company and C. Arnold Renschler, M.D. dated as of January 3, 1994
(incorporated by reference to Exhibit 10(f) to the Company Annual
Report on Form 10-K for the year ended June 30, 1995).
10(e) 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(f) Amendment dated as of July 1, 1996 to the employment agreement dated
December 2, 1994 between the Company and Timothy E. Foster.
10(g)* 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 (incorporated by reference to
Exhibit 10(i) to the Company's Annual Report on Form 10-K for the
year ended June 30, 1995).
10(h) Employment agreement dated as of January 24, 1996 between the Company --
and Ronald G. Hiscock (incorporated by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
10(i) Employment agreement dated as of March 17, 1995 between the Company
and Robert E. Healy, Jr.
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- --------- --------------------------------------------------------------------- -----------
<S> <C> <C>
10(j) (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).
(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).
(iv) Revolving Credit Facility Agreement Third Amendment dated as of --
May 15, 1995 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., Nationsbank, N.A. (Carolina), CoreStates Bank,
N.A., NatWest 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 September 30,
1995).
(v) Revolving Credit Facility Agreement Fourth Amendment dated as of --
May 19, 1995 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., Nationsbank, N.A. (Carolina), CoreStates Bank,
N.A., NatWest Bank, N.A., and Fleet Bank of Massachusetts
(incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995).
(vi) Revolving Credit Facility Agreement Fifth Amendment dated as of
June 30, 1996 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., Nationsbank, N.A. (Carolina), CoreStates Bank,
N.A. and Fleet Bank of Massachusetts.
(vii) Revolving Credit Facility Agreement Sixth Amendment dated as of
June 30, 1996 by and among NovaCare and certain of its subsidiaries
and PNC Bank, N.A., CoreStates Bank, N.A., First Union National Bank
of North Carolina, Fleet Bank of Massachusetts, N.A., Mellon Bank,
N.A. and Nationsbank, N.A.
10(k)* 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 Shareholders for the fiscal year ended June 30,
1996.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Power of Attorney (see "Power of Attorney" in Form 10-K). --
27 Financial Data Schedules.
</TABLE>
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for distribution
to shareholders of the Company. The Company will furnish a copy of any 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 4(a)
NOVACARE, INC.
1986 Stock Option Plan
(as amended May 17, 1996)
1. Purposes of Plan. The purposes of this Plan, which
shall be known as the 1986 Stock Option Plan and is hereinafter referred to as
the "Plan", are (i) to provide incentives for key employees of NovaCare, Inc.
(the "Company") and its subsidiary or parent corporations (within the
respective meanings of Section 425(f) and 425(e) of the Internal Revenue Code
of 1986, as amended (the "Code"), and referred to herein as "Subsidiary" and
"Parent", respectively) by encouraging their ownership of the common stock,
$.01 par value, of the Company (the "Stock") and (ii) to aid the Company in
retaining such key employees, upon whose efforts the Company's success and
future growth depends, and attracting other such employees.
2. Administration. The Plan shall be administered by
the Stock Option Committee (the "Committee") of the Board of Directors, as
hereinafter provided. For purposes of administration, the Committee, subject
to the
<PAGE> 2
2
terms of the Plan, shall have plenary authority to establish such rules and
regulations, make such determinations and interpretations, and take such other
administrative actions as it deems necessary or advisable. All determinations
and interpretations made by the Committee shall be final, conclusive and
binding on all persons, including Optionees (as hereinafter defined) and their
legal representatives and beneficiaries.
The Committee shall be appointed from time to time by the
Board of Directors and shall consist of not fewer than three of its members.
Unless otherwise determined by the Board of Directors, no member of the Board
of Directors who serves on the Committee shall be eligible to participate in
the Plan. The Board of Directors shall designate one of the members of the
Committee as its Chairman. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and signed by all
members shall be as effective as if it had been made by a majority vote at a
<PAGE> 3
3
meeting duly called and held. The Committee may appoint a secretary (who need
not be a member of the Committee). No member of the Committee shall be liable
for any act or omission with respect to his service on the Committee, if he
acts in good faith and in a manner he reasonably believes to be in or not
opposed to the best interests of the Company. Service on the Committee shall
constitute service as a director of the Company for all purposes.
3. Stock Available for Options. There shall be
available for options under the Plan a total of 5,800,000 shares of Stock,
subject to any adjustments which may be made pursuant to Section 5(f). Shares
of Stock used for purposes of the Plan may be either authorized and unissued
shares, or previously issued shares held in the treasury of the Company, or
both. Shares of Stock covered by options which have terminated or expired
prior to exercise shall be available for further options hereunder.
4. Eligibility. Options under the Plan may be granted
to key employees of the Company or any Subsidiary or Parent, including officers
or directors of the Company or any Subsidiary or Parent. Options may be
granted to
<PAGE> 4
4
eligible employees whether or not they hold or have held options previously
granted under the Plan or otherwise granted or assumed by the Company. In
selecting employees for options, the Committee may take into consideration any
factors it may deem relevant, including its estimate of the employee's present
and potential contributions to the success of the Company and its Subsidiaries.
Service as a director or officer of the Company or any Parent or Subsidiary
shall be considered employment for purposes of the Plan. In the event the
Company becomes obligated to grant options, through the assumption of, or in
substitution for, outstanding awards previously granted by an acquired company
or a company with which the Company combines, options may be granted to a
non-continuing director of such acquired or combining company who does not
become an employee or director of the Company or any Subsidiary or Parent.
5. Terms and Conditions of Options. The Committee
shall, in its discretion, prescribe the terms and conditions of the options to
be granted hereunder, which
<PAGE> 5
5
terms and conditions need not be the same in each case, subject to the
following:
(a) Option Price. Except in the case of an
option granted in assumption of or substitution for an outstanding award of a
company acquired by the Company or with which the Company combines, the price
at which each share of Stock covered by an option granted under the Plan may be
purchased shall be determined by the Committee and shall not be less than the
market value per share of Stock on the date of grant of an option as determined
pursuant to Section 5(c). The date of the grant of an option shall be the date
specified by the Committee in its grant of the option.
(b) Option Period. The period for exercise of an
option shall in no event be more than ten years from the date of grant.
Options may, in the discretion of the Committee, be made exercisable in
installments during the option period. Any shares not purchased on any
applicable installment date may be purchased thereafter at any time before the
expiration of the option period.
<PAGE> 6
6
(c) Exercise of Options. In order to exercise an
option, the holder thereof (the "Optionee") shall deliver to the Company
written notice specifying the number of shares of Stock to be purchased,
together with cash or a certified or bank cashier's check payable to the order
of the Company in the full amount of the purchase price therefor; provided
that, for the purpose of assisting an Optionee to exercise an option, the
Company may make loans to the Optionee or guarantee loans made by third parties
to the Optionee, on such terms and conditions as the Board of Directors may
authorize; and provided further that such purchase price may be paid in shares
of Stock owned by the Optionee having a market value on the date of exercise
equal to the aggregate purchase price, or in a combination of cash and Stock.
For purposes of the Plan, the market value per share of Stock shall be the last
sale price regular way on the date of reference, or, in case no sale takes
place on such date, the average of the closing high bid and low asked prices
regular way, in either case on the principal national securities exchange on
which the Stock is listed or admitted to trading, or if the Stock is not listed
<PAGE> 7
7
or admitted to trading on any national securities exchange, the last sale price
reported on the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") on such date, or the
average of the closing high bid and low asked prices of the Stock in the
over-the-counter market reported on NASDAQ on such date, whichever is
applicable, or if there are no such prices reported on NASDAQ on such date, as
furnished to the Committee by any New York Stock Exchange member selected from
time to time by the Committee for such purpose. If there is no bid or asked
price reported on any such date, the market value shall be determined by the
Committee in accordance with the regulations promulgated under Section 2031 of
the Code, or by any other appropriate method selected by the Committee. If the
Optionee so requests, shares of Stock purchased upon exercise of an option may
be issued in the name of the Optionee or another person. An Optionee shall
have none of the rights of a stockholder until the shares of Stock are issued
to him. An option may not be exercised for less than ten shares of Stock, or
the
<PAGE> 8
8
number of shares of Stock remaining subject to such option, whichever is
smaller.
(d) Effect of Termination of Employment. An
option may not be exercised after the Optionee has ceased to be in the
full-time employ of the Company or any Subsidiary or Parent, except in the
following circumstances:
(i) If the Optionee's employment is terminated by action of
his employer, or by reason of disability or retirement under any
retirement plan maintained by the Company or any Subsidiary or Parent,
the option may be exercised by the Optionee within three months after
such termination, but only as to any shares exercisable on the date the
Optionee's employment so terminates;
(ii) In the event of the death of the Optionee during the
three month period after termination of employment covered by (i) above,
the person or persons to whom his rights are transferred by will or the
laws of descent and distribution shall have a period of one year from
<PAGE> 9
9
the date of his death to exercise any options which were exercisable by
the Optionee at the time of his death;
(iii) In the event of the death of the Optionee while
employed, the option shall thereupon become exercisable in full, and the
person or persons to whom the Optionee's rights are transferred by will
or the laws of descent and distribution shall have a period of one year
from the date of the Optionee's death to exercise such option. The
provisions of the foregoing sentence shall apply to any outstanding
options which are incentive stock options to the extent permitted by
Section 422A(b)(7) of the Code and such outstanding options in excess
thereof shall, immediately upon the occurrence of the event described in
the foregoing sentence, be treated for all purposes of the plan as
nonstatutory stock options and shall be immediately exercisable as such
as provided in the foregoing sentence.
<PAGE> 10
10
(iv) If the Optionee is not an employee or director of the
Company or any Subsidiary or Parent and is a non-continuing director of
a company acquired by the Company or with which the Company has combined
and the Company has become obligated to grant options to such Optionee
as a result of such acquisition or combination.
In no event shall any option be exercisable more than ten years
from the date of grant thereof. Nothing in the Plan or in any option granted
pursuant to the Plan (in the absence of an express provision to the contrary)
shall confer on any individual any right to continue in the employ of the
Company or any Subsidiary or Parent or interfere in any way with the right of
the Company to terminate his employment at any time.
(e) Nontransferability of Options. During the
lifetime of an Optionee, options held by such Optionee shall be exercisable
only by him. No option shall be transferable other than by will or the laws of
descent and distribution.
<PAGE> 11
11
(f) Adjustments for Change in Stock Subject to Plan
and Other Events. In the event of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger, consolidation, rights
offering, or any other change in the corporate structure or shares of the
Company, (i) except as provided in (ii) below, the Committee shall make such
adjustments, if any, as it deems appropriate in the number and kind of shares
subject to the Plan, in the number and kind of shares covered by outstanding
options, or in the option price per share, or both and (ii) the Board of
Directors of the Company shall make such adjustments, if any, as it deems
appropriate in the maximum number of shares which may be subject to options
granted to all directors of the Company and in the maximum number of shares
which may be subject to options granted to each director, in each case
pursuant to Section 5(i), in the number and kind of shares covered by
outstanding options, or in the option price per share, or both, with respect to
options held by directors of the Company.
In connection with any merger or consolidation in which the
Company is not the surviving corporation or any
<PAGE> 12
12
sale or transfer by the Company of all or substantially all of its assets or
any tender offer or exchange offer for or the acquisition, directly or
indirectly, by any person or group of all or a majority of the then outstanding
voting securities of the Company, all outstanding options granted to any
Optionee on or before December 31, 1989 or to a Director during the period of
his directorship at any time before or after December 31, 1989 shall become
exercisable in full, notwithstanding any other provision of the Plan or of any
such outstanding options granted thereunder, on and after (i) the fifteenth day
prior to the effective date of such merger, consolidation, sale, transfer,
acquisition or change in control or (ii) the date of commencement of such
tender offer or exchange offer, as the case may be. The Committee may, in its
sole discretion determine that certain other options granted after December 31,
1989 shall become exercisable in full under such circumstances determined by
the Committee. The provisions of this paragraph shall apply to any outstanding
options which are incentive stock options to the extent permitted by Section
422A(b)(7) of the Code and such outstanding options in excess thereof shall,
<PAGE> 13
13
immediately upon the occurrence of the event described in clause (i) or (ii) of
the foregoing sentence, be treated for all purposes of the Plan as nonstatutory
stock options and shall be immediately exercisable as such as provided in the
foregoing sentence. Notwithstanding the foregoing, in no event shall any
option be exercisable after the date of termination of the exercise period of
such option specified in Sections 5(b), 5(d) and 5(i)(2).
(g) Registration, Listing and Qualification of
Shares of Stock. Each option shall be subject to the requirement that if at
any time the Board of Directors shall determine that the registration, listing
or qualification of the shares of Stock covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of shares of Stock
thereunder, no such option may be exercised unless and until such registration,
listing, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors. The
<PAGE> 14
14
Company may require that any person exercising an option shall make such
representations and agreements and furnish such information as it deems
appropriate to assure compliance with the foregoing or any other applicable
legal requirement.
(h) Other Terms and Conditions. The Committee may
impose such other terms and conditions, not inconsistent with the terms hereof,
on the grant or exercise of options, as it deems advisable.
(i) Terms and Conditions of Options Granted to
Directors. Notwithstanding any provision contained in this Plan to the
contrary, in the event that the Board of Directors shall determine to authorize
grants of options to members of the Committee pursuant to Section 2, then, the
terms and conditions of options granted under the Plan to any director of the
Company shall be as follows:
(1) The price at which each share of Stock subject to an
option may be purchased shall, subject to any adjustments which may be made
pursuant to Section 5(f), in no event be less than the market value per share
of Stock on the date of grant, and provided further that in the event
<PAGE> 15
15
the option is intended to be an incentive stock option pursuant to Section 6
and the Optionee owns on the date of grant securities possessing more than 10%
of the total combined voting power of all classes of securities of the Company
or of any Parent or Subsidiary, the price per share shall not be less than 110%
of the market value per share of Stock on the date of grant.
(2) The option may be exercised to purchase shares of Stock covered
by the option:
A. in accordance with the following schedule:
<TABLE>
<CAPTION>
Cumulative Percentage of Aggregate Number of
Shares of Stock Covered by Option Which May
Exercise Period be Purchased
--------------- -------------------------------------------
<S> <C>
Within 1st year from date
of grant..................... 0%
Beginning one year from date
of grant..................... 33-1/3%
Beginning two years from date
of grant..................... 66-2/3%
Beginning three years from date
of grant..................... 100%
</TABLE>
<PAGE> 16
16
less, in the case of each exercise period, the number of shares of Stock, if
any, previously purchased under the option; or
B. in accordance with a price-triggered vesting schedule
that permits exercise of specific increments of options upon achievement of
identified target prices above the exercise price in accordance with the terms
of similar options approved within ninety days prior to the Directors' option
grant date by the Stock Option Committee for members of the Company's
management.
Any option granted under this subparagraph (i)(2) shall
terminate and no shares of Stock may be purchased thereunder more than ten
years after the date of grant, provided that if the option is intended to be an
incentive stock option pursuant to Section 6 and the Optionee owns on the date
of grant stock possessing more than 10% of the total combined voting power of
all classes of securities of the Company or of any Parent or Subsidiary, the
Option shall not be exercisable after the fifth anniversary of the date of
grant.
<PAGE> 17
17
(3) The maximum number of shares of Stock which may be
subject to options granted to all directors pursuant the Plan shall be
1,750,000 shares in the aggregate and the maximum number of shares of Stock
which may be subject to options granted to any director pursuant to the Plan
(including any options granted under the Plan to a director in his position as
an officer or employee of the Company) shall be 500,000 shares.
6. Provisions Applicable to Incentive Stock Options. The
Committee may, in its discretion, grant options under the Plan to eligible
employees which constitute "incentive stock options" (within the meaning of
Section 422A(b) of the Code), provided, however, that (a) no such incentive
stock options granted before January 1, 1987 shall (i) be exercisable while
there is "outstanding" (within the meaning of Section 422A(c)(7) of the
Internal Revenue Code of 1954) any incentive stock option previously granted to
the holder thereof to purchase Stock of the Company, or of any Parent or
Subsidiary, or of any predecessor of any such corporations, or (ii) cover a
number of shares in excess of the maximum number of shares
<PAGE> 18
18
permitted to be covered pursuant to the provisions of Section 422A(b)(8) of the
Internal Revenue Code of 1954, (b) the aggregate fair market value of the Stock
with respect to which incentive stock options granted after 1986 are
exercisable for the first time by the Optionee during any calendar year shall
not exceed the limitation set forth in Section 422A(b)(7) of the Code, and
provided further that Section 5(d)(ii) hereof shall not apply to any incentive
stock option.
7. Amendment and Termination. Unless the Plan shall
theretofore have been terminated as hereinafter provided, the Plan shall
terminate on, and no option shall be granted hereunder after, December 31,
1996; provided, however, that the Board of Directors may at any time prior to
that date terminate the Plan. The Board of Directors may at any time amend the
Plan; provided, however, that, except as contemplated in Section 5(f), the
Board of Directors shall not, without approval by a majority of the votes cast
by the stockholders of the Company at a meeting of stockholders at which a
proposal to amend the Plan is voted upon, (i) increase the maximum number of
shares of Stock for
<PAGE> 19
19
which options may be granted under the Plan, (ii) change the minimum option
prices, (iii) extend the period during which options may be granted or
exercised, or (iv) except as otherwise provided in the Plan, amend the
requirements as to the class of employees eligible to receive options. No
termination or amendment of the Plan may, without the consent of an Optionee,
adversely affect the rights of such Optionee under any option held by such
Optionee.
8. Effectiveness of Plan. The Plan will not be made
effective unless approved by a majority of the votes cast by the stockholders
of the Company at a meeting of stockholders duly called and held for such
purpose, and no option granted hereunder shall be exercisable prior to such
approval.
9. Other Actions. Nothing contained in the Plan shall be
construed to limit the authority of the Company to exercise its corporate
rights and powers, including but not by way of limitation, the right of the
Company to grant or assume options for proper corporate purposes other than
under the Plan with respect to any employee or other person, firm, corporation
or association.
<PAGE> 1
EXHIBIT 10(f)
EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of the
first day of July, 1996 by and between NOVACARE, INC., a Delaware corporation
(the "Company"), and TIMOTHY E. FOSTER (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive has served as President and
Chief Operating Officer of the Company since October 1994;
WHEREAS, the Company and the Executive entered into an
Employment Agreement dated as of December 2, 1994; and
WHEREAS, the Company and the Executive wish to amend and
restate said agreement to set forth the terms and conditions on which the
Executive will continue to serve in his current positions.
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 third
anniversary of the date hereof, unless extended or sooner terminated in
accordance with this Agreement.
1.3 Automatic Extension. As of June 30, 1998, and as of each
subsequent June 30 (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.
<PAGE> 2
2. POSITION, DUTIES.
The Executive shall serve in the positions of President and
Chief Operating Officer of the Company. The Executive shall perform, faithfully
and diligently, such duties, and shall have such responsibilities, appropriate
to said positions, as shall be assigned to him from time to time by the Chief
Executive Officer and the Board of Directors of the Company. The Executive shall
report to the Chief Executive Officer of the Company. The Executive shall devote
such time and attention to the performance of his duties and responsibilities
hereunder as shall be necessary for the proper discharge thereof, as determined
by the Chief Executive Officer of the Company.
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 $500,000 per annum, payable in accordance with the
standard payroll practices of the Company. The Executive shall be entitled to
such increases in base salary during the term hereof as shall be determined by
the Chief Executive Officer of the Company 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 Company and the Executive, the size of
the Company from time to time, 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 Incentive Bonuses. (a) In addition to the base salary
provided for in Section 3.1, the Company shall pay to the Executive an incentive
bonus with respect to each fiscal year of the Company ending during the term of
this Agreement in accordance with this Section 3.2. The incentive bonus for each
fiscal year under this Section 3.2 shall be the greater of the amounts
determined under clause (X) or clause (Y):
(X) an amount equal to the product of the Net Income (as
hereinafter defined) of the Company multiplied by the Applicable Percentage (as
hereinafter defined); provided that no incentive bonus shall be payable under
this Section 3.2 with respect to a fiscal year in which Net Income is less than
ninety percent (90%) of Budgeted Net Income (as hereinafter defined).
<PAGE> 3
For purposes of this clause (X):
(i) the term "Net Income" shall mean, for any fiscal year of
the Company, the consolidated after-tax profit of the Company and its
wholly-owned subsidiaries for such year, without regard to extraordinary
non-operating profits and losses such as gain from sale of operating units, as
shown in the audited financial statements of the Company for such fiscal year.
In the event of any change in the fiscal year of the Company, appropriate
adjustments shall be made to the provisions of this Section 3.2 in order to
carry out the essential intent and principles of this Section 3.2;
(ii) the term "Applicable Percentage" shall mean one half of
one percent (0.5%) of Net Income for each fiscal year of the Company, beginning
with the fiscal year ending June 30, 1996; provided that in any Fiscal Year in
which Net Income is between 90% and 99% of Budgeted Net Income, the Applicable
Percentage shall be the Applicable Percentage for such Fiscal Year determined
without regard to this proviso multiplied by the "Adjustment Percentage" in the
table below opposite the percentage (rounded down to the nearest complete
percentage point) of Budgeted Net Income attained as Net Income in such Fiscal
Year:
<TABLE>
<CAPTION>
Percentage of Budgeted
Net Income Attained Adjustment Percentage
<S> <C> <C>
90% 45%
91% 51%
92% 56%
93% 62%
94% 67%
95% 73%
96% 78%
97% 84%
98% 89%
99% 95%
</TABLE>
(iii) the term "Budgeted Net Income" shall mean, for any
fiscal year of the Company, net income as set forth in the annual business plan
of the Company for such fiscal year as prepared by the Company's management and
approved by the Board of Directors of the Company; and
(iv) the term "extraordinary non-operating profits and losses
such as gain from sale of operating units" shall include capital transaction
outside the normal course of
<PAGE> 4
business but shall not include restructuring charges, charges to increase
accounts receivable reserves or similar charges which relate to the operations
of the Company or its business units.
(Y) an amount of up to $100,000 for the fiscal year
of the Company ending June 30, 1996, and an amount of up to $160,000 for the
fiscal year of the Company ending June 30, 1997, based on achievement of the
applicable performance measures set forth in Exhibit A to this Agreement.
(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), 6.5 (Voluntary Termination), 6.6 (Constructive Termination) or
6.7 (Change of Control) 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
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 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
pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due Cause) or 6.5
(Voluntary Termination) takes place.
(c) The bonus payable to the Executive (or his estate
or other legal representative) for any fiscal year of the Company pursuant to
this Section 3.2 shall be paid by the Company within ten (10) days of receipt by
the Company of the audited financial statements of the Company for such fiscal
year.
3.3 Stock Options. (a) On May 3, 1996, the Company granted to
the Executive options (the "Options") to purchase 1,000,000 shares of the
Company's common stock, par value $.01 per share ("Common Stock"), at an
exercise price per share equal to the market value of the Common Stock on the
date of grant. The options were not granted under the 1986 Stock Option Plan
(the "1986 Plan"), and are subject to stockholder approval. The Options:
(i) have a term of seven (7) years from the
date of grant;
<PAGE> 5
(ii) become exercisable as follows (but only after
November 3, 1996):
(A) 20% on the first to occur of the first
anniversary of the date of grant or the average price (as defined in the Stock
Option Certificate) of the common stock of NovaCare achieving $8 per share;
(B) 40% on the first to occur of the second
anniversary of the date of grant or the average price of the common stock of
NovaCare achieving $10 per share;
(C) 60% on the first to occur of the third
anniversary of the date of grant or the average price of the common stock of
NovaCare achieving $12 per share;
(D) 80% on the first to occur of the fourth
anniversary of the date of grant or the average price of the common stock of
NovaCare achieving $14 per share;
(E) 100% on the first to occur of the fifth
anniversary of the date of grant or the average price of the common stock of
NovaCare achieving $16 per share;
(iii) except as provided in clause (iv) of this
Section 3.3, remain exercisable for a period of twelve (12) months commencing on
the date of termination of employment of the Executive, but only as to those
shares as to which the Options were exercisable at the date of termination; and
(iv) become exercisable in full upon a Change in
Control of the Company (as defined in Section 6.7), whether or not the
employment of the Executive shall be terminated, and upon the termination of the
employment of the Executive pursuant to Section 6.1 (Death), Section 6.2
(Disability) or Section 6.4 (Without Due Cause) and, in any such case, shall
remain exercisable for the balance of the ten year term.
The Options are or shall be evidenced by a Stock Option
Certificate or other appropriate documentation embodying the foregoing terms and
other standard terms and conditions not inconsistent with the foregoing terms.
(b) The Executive has heretofore been granted options
to purchase 500,000 shares of Common Stock pursuant to the Company's Option
Exchange Program, which grant was approved by the Compensation Committee of the
Board of Directors of the Company on May 2, 1996. The Executive has heretofore
also been
<PAGE> 6
granted options to purchase an aggregate of 7,200 shares of Common Stock
pursuant to the 1986 Plan.
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, PERQUISITES.
5.1 Generally. During the term of this Agreement, the
Executive will be eligible to participate in all employee benefit plans and
programs offered by the Company from time to time to its employees of comparable
seniority, subject to the provisions of such plans and programs as in effect
from time to time.
5.2 Perquisites. (a) During the term of this Agreement, the
Company shall provide the Executive with the use of the Company's private
corporate jet for personal travel in connection with two vacations annually;
provided that the Company shall have no obligation to provide the Executive with
the use of a private corporate jet under this Section 5.2 during any period that
the Company does not own or lease a private corporate jet.
(b) During the term of this Agreement, the Company shall also
provide the Executive with the following: (i) a telephone in his automobile (for
which the Company shall pay for all installation, service and other charges),
(ii) first class airfare for travel in connection with the performance of his
duties hereunder, (iii) a corporate credit card of the Executive's choosing and
(iv) a four-week paid vacation each year.
6. TERMINATION OF EMPLOYMENT.
6.1 Death. In the event of the death of the Executive, the
Company shall (i) pay to the estate or other legal representative of the
Executive (a) 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 and (b) any incentive bonus which shall be or become
payable pursuant to Section 3.2. Rights and benefits of the estate or other
legal representative or transferee of the Executive (a) with respect to the
Options shall be determined in accordance with Section 3.3 and (b) under the
benefit plans and
<PAGE> 7
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, except as provided in Section 15.
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall be
unable to perform his normal duties hereunder for a period of six (6)
consecutive months, then, at any time following the conclusion of such six (6)
month period, the employment of the Executive hereunder may be terminated by the
Company or the Executive, upon thirty (30) days' notice to the other. In the
event of such termination, the Company shall (a) 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 and (b) pay to the
Executive any incentive bonus which shall be or become payable under Section
3.2. Rights and benefits of the Executive or his transferee (a) with respect to
the Options shall be determined in accordance with Section 3.3 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, 9 and 15.
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. The Company shall also pay to the Executive any incentive bonus which
shall be or become payable to the Executive under Section 3.2 with respect to
any fiscal year of the Company ended prior to the date of such termination.
Rights and benefits of the Executive or his transferee (a) with respect to the
Options shall be determined in accordance with Section 3.3 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 mean (i) willful, gross neglect or willful, gross misconduct in the
Executive's discharge of his duties and responsibilities under this Agreement,
or (ii) the Executive's conviction of a felony; provided, however, that the
Executive shall be given written notice by the Chief Executive Officer of the
Company that it intends to terminate the Executive's employment for Due Cause,
which written notice shall specify the
<PAGE> 8
act or acts upon which the Chief Executive Officer of the Company intends so to
terminate the Executive's employment, and the Executive shall then be given the
opportunity, within fifteen (15) days of his receipt of such notice, to have a
meeting with the Chief Executive Officer of the Company to discuss such act or
acts. If the basis of such written notice is other than an act or acts described
in clause (ii), the Executive shall be given seven (7) days after such meeting
within which to cease or correct the performance (or nonperformance) giving rise
to such written notice and, upon failure of the Executive within such seven (7)
days to cease or correct such performance (or nonperformance), the Executive's
employment by the Company shall automatically be terminated hereunder for 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, 9 and 15.
6.4 Termination by the Company Without Cause. (a) 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:
(A) on the date of termination, the base salary
provided for in Section 3.1 (at the annual rate then in effect) accrued to the
date of termination and not theretofore paid to the Executive;
(B) severance pay, in the form of salary
continuation for a period ("Severance Pay 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);
(C) any incentive bonus which shall be or become
payable to the Executive pursuant to Section 3.2;
(D) on a date (the "Payment Date") within ten
(10) days of receipt by the Company of the audited financial statements of the
Company for the fiscal year in which such termination shall have occurred, an
amount equal to the Final Bonus (as hereinafter defined) and, on the first
anniversary of the Payment Date, an amount equal to one-half of the Final Bonus.
As used herein, (X) if the date of termination of the Executive's employment
shall occur during the first six months of any fiscal year of the Company, the
term "Final Bonus" shall mean an amount equal to the bonus earned by the
Executive for the last completed
<PAGE> 9
fiscal year of the Company preceding the date of termination of his employment
and (Y) if the date of termination of the Executive's employment shall occur
during the last six months of any fiscal year of the Company, the term "Final
Bonus" shall mean an amount equal to the greater of (i) the bonus earned by the
Executive for the last completed fiscal year of the Company preceding the date
of termination of his employment or (ii) the bonus for the fiscal year in which
the termination of employment occurs, as determined pursuant to Section 3.2(a)
and before prorating pursuant to Section 3.2(b).
(b) During the Severance Pay Period, the Executive shall
diligently seek other full-time employment which is suitable and appropriate in
light of his background, experience, seniority and stature. Amounts payable to
the Executive pursuant to Section 6.4(a)(B) and 6.4(a)(D) shall be offset by
amounts earned from other employment (whether as an employee, a consultant or
otherwise) during the Severance Pay Period (provided that the Executive shall in
no event be required to refund any amounts which he has previously received from
the Company and provided, further, that there shall be no offset for the amounts
earned by the Executive during the Severance Period from positions held by the
Executive prior to commencement of the Severance Period).
(c) Rights and benefits of the Executive or his transferee (a)
with respect to the Options shall be determined in accordance with Section 3.3
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, 9 and 15.
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 (unless such termination
is within one year following a Change in Control of the Company, in which case
the provisions of Section 6.7 hereof shall be applicable), 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. The Company shall also pay to the Executive any incentive
bonus which shall be or become payable pursuant to Section 3.2. Rights and
benefits of the Executive or his transferee (a) with respect to the Options
shall be determined in accordance with Section 3.3 and (b) under the benefit
plans and programs of the Company shall be determined in accordance with
<PAGE> 10
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, 9 and 15.
6.6 Constructive Termination. Anything herein to the
contrary notwithstanding, if the Company:
(A) demotes the Executive to a lesser
position than provided in Section 2;
(B) causes a material change in the nature
or scope of the authorities, powers, functions, duties, or responsibilities
attached to the Executive's position as described in Section 2;
(C) decreases the Executive's base salary,
changes the bonus formula provided for in Section 3 or eliminates any of the
benefits or perquisites provided for in Section 5; or
(D) fails to cause the election of the
Executive to the Board of Directors of the Company;
then, within thirty (30) days after learning of the action (or inaction), the
Executive may advise the Company in writing that the action (or inaction)
constitutes a termination of his employment by the Company pursuant to Section
4.4 (Without Cause), in which event the Company shall have thirty (30) days (the
"Correction Period") in which to correct such action (or inaction). If the
Company does not correct such action (or inaction) during the Correction Period,
such action (or inaction) shall (unless consented to in writing by the
Executive) constitute a termination of the Executive's employment by the Company
pursuant to Section 6.4 (Without Cause) effective on the first business day
following the end of the Correction Period.
6.7 Termination of Employment Following a Change in Control.
Anything herein to the contrary notwithstanding, the Executive may terminate his
employment with the Company during the one (1) year period following a Change in
Control, and such termination shall constitute a termination of the Executive's
employment by the Company pursuant to Section 6.4 (Without Cause); provided,
however, that the amounts referred to in paragraphs (A) and (B) of Section 6.4
shall be paid to the Executive in a lump sum on the date of termination and the
amounts referred to in paragraph (D) of Section 6.4 shall be paid to the
Executive in a lump sum on the Payment Date; and further provided that the
Executive shall be under no obligation to seek other employment and shall be
under no obligation to offset any
<PAGE> 11
amounts earned from such other employment (whether as an employee, a consultant
or otherwise) against such payments. 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
(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, 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.
6.8 Acceleration of Payments. In the event that the Company
shall fail to pay to the Executive any amount payable pursuant to this Section 6
at the time such payment is due, all amounts to be paid to the Executive (or his
estate or legal representative) pursuant to this Section 6, Section 3 and any
other provision of this Agreement shall become immediately due and payable
without any further action by the Executive (or his estate or legal
representative).
<PAGE> 12
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 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:
<PAGE> 13
(a) engage, directly or indirectly, whether as
principal, consultant, employee, partner, stockholder, limited partner or other
investor (other than a passive 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 (the "Competition
Restriction"); or
(b) solicit or entice or endeavor to solicit or
entice away from the Company any person who was an employee of the Company at
job grade numbering 32 or higher, 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 employee of the Company at job grade numbering 32 or higher 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) twenty-four (24) months in the case of a
termination of employment pursuant to Section 6.3 (Due Cause), Section 6.4
(Without Due Cause), Section 6.6 (Constructive Termination), or Section 6.7
(Change in Control); and
(b) twenty-four (24) months in the case of a
termination pursuant to Section 6.2 (Disability) or Section 6.5 (Voluntary
Termination), 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 period of
the base salary provided for in Section 3.1 (at the annual rate in effect at the
date of termination).
<PAGE> 14
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.
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.
<PAGE> 15
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.
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
<PAGE> 16
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. ADVANCE OF DEFENSE EXPENSES.
In the event of any action, proceeding or claim against the
Executive arising out of his serving or having served in his capacity as an
officer and/or director of the Company, which in the Executive's sole judgment
requires him to retain counsel (such choice of counsel to be made in his sole
and absolute discretion) or otherwise expend his personal funds for his defense
in connection therewith, the Company shall be obligated to advance to the
Executive (or pay directly to his counsel) counsel fees and other costs
associated with the Executive's defense of such action, proceeding or claim;
provided, however, that in such event the Executive shall first agree in
writing, without posting bond or collateral, to repay all sums paid or advanced
to him pursuant to this Section 15 in the event that the final disposition of
such action, proceeding or claim is one for which the Executive would not be
entitled to indemnification pursuant to the provisions of the laws of the State
of Delaware or the Certificate of Incorporation or By-laws of the Company.
16. 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 Executive Officer
If to the Executive:
Timothy E. Foster
1235 Page Terrace
Villanova, Pennsylvania 19085
17. SEVERABILITY.
Should any provision of this Agreement be held by a court or
arbitration panel of competent jurisdiction to be
<PAGE> 17
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.
18. 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.
19. 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.
<PAGE> 18
20. 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.
21. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which taken together shall constitute
one and the same instrument.
* * *
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
NOVACARE, INC.
By
---------------------------------
John H. Foster
Chairman of the Board
-----------------------------------
Timothy E. Foster
The foregoing Agreement has been
Approved by the Compensation Committee
of the Board of Directors:
- ----------------------------------
Robert G. Stone
Chairman of Compensation Committee
<PAGE> 20
EXHIBIT A
FISCAL YEAR
ENDING APPLICABLE PERFORMANCE MEASURES
June 30, 1996 Aggregate Contract Services,
Polaris and Corporate EBITDA
(before restructure charges,
extraordinary items and
intercompany eliminations) for the
six months ended June 30, 1996 of
not less than $26 million
June 30, 1997 Total Company consolidated EBITDA
for the twelve months ended June
30, 1997 before restructure charges
and extraordinary items of not less
than $82 million
<PAGE> 1
EXHIBIT 10(i)
March 17, 1995
Mr. Robert E. Healy, Jr.
1929 Black Rock Rd.
Paoli, PA 19301
Dear Rob:
This letter will confirm our agreement relative to your role and
compensation as Vice President and Chief Financial Officer of the Contract
Services Division. The agreements we reached are as follows:
- RESPONSIBILITIES - You will assume responsibility for certain division
staff departments for such time as determined by me. These functions
and their managers are:
- Human Resources - Kathy Kehoe
- Sales and Marketing - Rick Smith
- Clinical Services - Denise Mayhan
- Customer Relations - Hal Price
- Information Services - Steve Wise
- BASE SALARY - You will be paid $7,307.69 bi-weekly. That annualizes to
a salary of $190,000.00 effective February 17, 1995. You will be
eligible for a salary review in January, 1996.
- INCENTIVE - You will continue to be eligible for a bonus of 35% of your
base salary as determined by the performance of the Contract Services
Division and personal goals which you and I have negotiated.
- EQUITY - You will continue to be eligible to participate in the 1986
Stock Option Plan as determined by division performance and your
performance against personal goals subject to approval by the Board of
Directors.
<PAGE> 2
Mr. Robert E. Healy, Jr.
March 17, 1995
Page 2
- SEVERANCE - Should your employment be terminated for reasons other than
cause, NovaCare will continue to pay your base salary for a period of
twelve (12) months or until you find comparable employment which ever
comes first. All other provisions of the Contract Services Division
Severance Policies will also be in effect in the event of your
termination including the execution of an Agreement and General
Release. For purposes of this agreement, due cause shall include (a)
the Employee's willful and continuing failure to discharge his duties,
or (b) the Employee's commission of a felony or any crime or offense
involving moral turpitude.
It is understood that the Employee's employment is at will. The Employee
or the Company may terminate the Employee's employment at any time. The
Employee and the Company acknowledge that there is no implied or actual
employment contract for a period of time.
I believe that these are the issues that we discussed. Let me again
confirm your importance to the Contract Services Division executive team.
Your support, loyalty and counsel are appreciated. You have been Helping
Make Life a Little Better for this business. Please acknowledge your
acceptance by signing a copy of this letter and returning it to me.
Sincerely,
/s/________________________
Daryl A. Dixon
President and General Manager
Contract Services Division
DAD/mp
/s/________________________ ___________________
Robert E. Healy, Jr. Date
cc: Tim Foster
<PAGE> 1
Exhibit 10(j)(vi)
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
June 30, 1996
PNC Bank, National Association,
as Agent
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Attn: Marcie Knittel, Vice President
RE: Fifth Amendment to Credit Agreement (the "Fifth
Amendment")
Dear Marcie:
We refer to that certain Credit Agreement, dated as of May 27,
1994, as amended (the "Credit Agreement"), by and among NovaCare, Inc.
("NovaCare") and certain of its Subsidiaries, the Banks party thereto and PNC
Bank, National Association, as agent for the Banks ("Agent"). Defined terms
used herein, not otherwise defined herein, shall have the meanings given to
them under the Credit Agreement as amended hereby.
The Borrowers and Guarantors, the Banks and the Agent hereby
desire to amend the Credit Agreement, as hereinafter provided.
The parties hereto in consideration of their mutual covenants
and agreements hereinafter set forth, and intending to be legally bound hereby,
covenant and agree as follows:
AGREEMENT
1. Amendment of Credit Agreement
The parties hereto do hereby modify and amend the Credit
Agreement as follows:
(a) Cover page is hereby amended by deleting in line 1
the number "$175,000,000" and inserting in lieu thereof the number
"150,000,000".
(b) Recital paragraph 1, page 1, is hereby amended by
deleting in line 3 the number "$175,000,000" and inserting in lieu thereof the
number "$150,000,000".
<PAGE> 2
(c) Upon the effectiveness of this Fifth Amendment and
for periods subsequent to such effective date, NatWest Bank N.A. (which has
merged with and into Fleet Bank, N.A., with Fleet Bank, N.A. as the surviving
entity) shall no longer be a Bank.
2. Amendment to Schedules.
(a) Schedules. Schedule 1.01(B) [List of Banks,
Commitments and Closing Fees] to the Agreement is hereby amended and restated
in its entirety in the form of such Schedule attached hereto.
3. Conditions of Effectiveness.
The effectiveness of this Fifth Amendment is expressly conditioned
upon the occurrence and completion of all of the following: (i) the Agent's
receipt of counterparts of this Fifth Amendment duly executed by the Borrowers,
the Guarantors and the Banks; (ii) the Agent's receipt of a certificate signed
by the Secretary or Assistant Secretary of the Borrowers and Guarantors,
certifying as to all action taken by the Borrowers and Guarantors to authorize
the execution, delivery and performance of this Fifth Amendment; (iii) an
opinion of Peter D. Bewley, General Counsel of the Loan Parties reasonably
satisfactory to the Agent regarding this Fifth Amendment; and (iv) receipt by
Fleet Bank, N.A. of all principal due and payable to Fleet Bank, N.A. together
with accrued interest thereon and any outstanding fees payable through and
including the effective date of this Fifth Amendment.
This Fifth Amendment shall be dated as of and shall be
effective as of the date and year first above written which shall be the date
of satisfaction of all conditions precedent to effectiveness as set forth in
this Section 3.
4. Consent of All Banks.
Pursuant to Section 11.01(b) of the Credit Agreement, this
Fifth Amendment shall require the written consent of all of the Banks.
5. Full Force and Effect.
Except as expressly modified and amended by this Fifth
Amendment, the Credit Agreement and the other Loan Documents are hereby
ratified and confirmed and shall remain in full force and effect.
6. Costs, Expenses, Disbursements.
The Borrowers hereby agree to reimburse the Agent and the
Banks on demand for all costs, expenses and disbursements relating to this
Fifth Amendment which are payable by the Borrowers as provided in Section 10.05
of the Credit Agreement.
- 2 -
<PAGE> 3
7. Counterparts.
This Fifth Amendment may be executed by different parties
hereto in any number of separate counterparts, each of which, when so executed
and delivered, shall be an original, and all of such counterparts shall
together constitute one and the same instrument.
8. Governing Law.
This Fifth Amendment shall be deemed to be a contract under
the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
- 3 -
<PAGE> 4
[Signature Page 1 of 7 to Fifth Amendment]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Fifth Amendment as of the day and year
first above written.
<TABLE>
<S> <C>
BORROWERS AND GUARANTORS:
ATTEST: NOVACARE, INC., a Delaware corporation, and each of the other BORROWERS listed
on Schedule 6.01(c) of the Credit Agreement (which Schedule is attached hereto
as Exhibit I) and each of the GUARANTORS listed on Schedule 6.01(c) of the
Credit Agreement (which Schedule is attached hereto as Exhibit I), other than
those listed below
By: By:
----------------------- ------------------------------
[Name],
--------------------------
[Seal] the________________________[Title] of each Borrower and Guarantor listed on
Schedule 6.01(c) of the Credit Agreement (which Schedule is attached hereto as
Exhibit I), other than those listed below, which is a corporation and of each
general partner of each Borrower and Guarantor which is a partnership
ATTEST: NACC, INC., a Delaware Corporation
By: By:
----------------------- ------------------------------
[Name],
--------------------------
[Seal] the________________________[Title] of NACC, Inc.
</TABLE>
<PAGE> 5
[Signature Page 2 of 7 to Fifth Amendment]
<TABLE>
<S> <C>
ATTEST: CR SERVICES CORP., a Delaware corporation
By: By:
----------------------- ------------------------------
[Name],
--------------------------
[Seal] the________________________[Title] of
CR Services Corp.
Address for Notices for each of the
foregoing Borrowers and Guarantors:
1016 West Ninth Avenue
King of Prussia, PA 19406
Telecopier No. (610) 992-3328
Attention: Chief Financial Officer
Telephone No. (610) 992-7200
</TABLE>
<PAGE> 6
[Signature Page 3 of 7 to Fifth Amendment]
[INTENTIONALLY BLANK]
<PAGE> 7
[Signature Page 4 of 7 to Fifth Amendment]
AGENT:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By:
--------------------------------
Title:
-----------------------------
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
BANKS:
PNC BANK, NATIONAL ASSOCIATION
By:
--------------------------------
Title:
-----------------------------
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
<PAGE> 8
[Signature Page 5 of 7 to Fifth Amendment]
CORESTATES BANK, N.A.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
1339 Chestnut Street
P.O. Box 7618
FC 1-8-3-22
Philadelphia, PA 19101
Telecopier No. (215) 786-7721
Attention: Jennifer W. Leibowitz
Assistant Vice President
Telephone No. (215) 786-3972
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:
------------------------------
Name: James F. Young
Title: Assistant Vice President
Address for Notices:
One First Union Center
301 S. Giles Street
Charlotte, NC 28288-0735
Telecopier No. (704) 374-4092
Attention: James F. Young,
Assistant Vice President
Telephone No. (704) 383-0507
<PAGE> 9
[Signature Page 6 of 7 to Fifth Amendment]
FLEET BANK OF MASSACHUSETTS, N.A.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
Health Care and Non Profit Group
Fleet Center MA BOF 04A
75 State Street
Boston, MA 02109-1810
Telecopier No. (617) 346-1646
Attention: Amy Fredericks
Vice President
Telephone No. (617) 346-1629
MELLON BANK, N.A.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
Healthcare Banking
Plymouth Meeting/Exec. Campus
610 W. Germantown Pike
Suite 200/AIM #19E-0246
Plymouth Meeting, PA 19462
Telecopier No. (610) 941-4136
Attention: Carol Paige
Vice President
Telephone No. (610) 941-8409
<PAGE> 10
[Signature Page 7 of 7 to Fifth Amendment]
NATIONSBANK, N.A.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
6610 Rockledge Drive
1st Floor
Bethesda, MD 20817-1876
Telecopier No. (301) 571-0719
Attention: Michael B. Andry
Vice President
Telephone No. (301) 571-0710
FLEET BANK, N.A.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
1133 Avenue of the Americas
40th Floor
New York, NY 10036
Telecopier No. (212) 703-1744
Attention: W. Wakefield Smith
Vice President
Telephone No. (212) 703-1714
<PAGE> 11
Exhibit 10(j)(vii)
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
June 30, 1996
PNC Bank, National Association,
as Agent
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Attn: Marcie Knittel, Vice President
RE: Sixth Amendment to Credit Agreement (the "Sixth Amendment")
Dear Marcie:
We refer to that certain Credit Agreement, dated as of May 27,
1994, as amended (the "Credit Agreement"), by and among NovaCare, Inc.
("NovaCare") and certain of its Subsidiaries, the Banks party thereto and PNC
Bank, National Association, as agent for the Banks ("Agent"). Defined terms
used herein, not otherwise defined herein, shall have the meanings given to
them under the Credit Agreement as amended hereby.
The Borrowers and Guarantors, the Banks and the Agent hereby
desire to amend the Credit Agreement, as hereinafter provided.
The Borrowers have requested that the Banks waive the
limitation set forth in Section 8.02(j)(ii) of the Credit Agreement for the
limited purpose of permitting Nova Care to repurchase up to $55 million of its
common stock during the fiscal year beginning July 1, 1995 and ending June 30,
1996.
The parties hereto in consideration of their mutual covenants
and agreements hereinafter set forth, and intending to be legally bound hereby,
covenant and agree as follows:
AGREEMENT
1. Amendment and Restatement. Articles I through XI of the
Credit Agreement are hereby amended and restated in their entirety as of the
date hereof to read as set forth on Exhibit I hereto (The cover page, opening
paragraph and recitals to the Agreement are also included in Exhibit I for
convenience).
<PAGE> 12
2. Amendment to Exhibits and Schedules.
(a) Exhibits. The following Exhibits to the Credit
Agreement are hereby amended and restated in their entirety in the forms of
such Exhibits attached hereto:
Exhibit 1.01(P)(1)(E) Permitted Poolings Notice Certificate
Exhibit 1.01(P)(1)(F) Permitted Poolings Approval
Certificate - Agent
Exhibit 1.01(P)(1)(G) Permitted Poolings Approval
Certificate - Required Banks
Exhibit 1.01(P)(2) Permitted Purchases Approval
Certificate - Required Banks
Exhibit 8.01(m)(iii) Compliance Certificate
(b) Schedules. The following Schedules to the Credit
Agreement are hereby amended and restated in their entirety in the forms of
such Schedules attached hereto:
Schedule 1.01(E) Excluded Entities
Schedule 6.01(c) Subsidiaries
3. Closing Fees.
The Borrowers, jointly and severally, agree to pay to the Agent for
the account of each Bank, as consideration for this Sixth Amendment, a
nonrefundable fee equal to the amount set forth across from such Bank's name on
Exhibit II hereto, payable on or before the Sixth Amendment Effective Date.
4. Dissolution of NovaCare Management.
NovaCare represents and warrants that it has caused the dissolution of
NovaCare Management in accordance with the provisions of Section 8.02(d) of the
Credit Agreement and delivered evidence of such dissolution to the Agent, in
form and substance satisfactory to the Agent.
5. Waivers.
(a) Waiver - Section 8.02(j)(ii)
The Banks hereby waive the percentage limitation set forth in
Section 8.02(j)(ii) of the Credit Agreement which prohibits payments by
NovaCare for stock repurchases or redemptions exceeding twenty-five percent
(25%) of consolidated net income earned in respect of any fiscal year for the
sole, limited purpose of permitting Nova Care to repurchase, during the fiscal
year beginning July 1, 1995 and ending June 30, 1996, up to an aggregate
maximum amount
- 2 -
<PAGE> 13
of $55 million of its capital stock (such $55 million maximum amount to be
based upon the close price of the stock on each date of repurchase as quoted on
the New York Stock Exchange), so long as no Event of Default or Potential Event
of Default shall have occurred or be continuing or shall exist after giving
effect to any and all such repurchases.
(b) Waiver - Compliance Certificate for Quarter Ended
March 31, 1996
It is acknowledged that the compliance certificate delivered
to the Banks by the Borrowers for the quarter ended March 31, 1996, as required
by Section 8.01(m)(iii) of the Credit Agreement, was prepared and calculations
set forth therein were made in accordance with the Credit Agreement as amended
and restated by this Sixth Amendment. The Banks hereby waive the requirement
of the Borrowers to provide a compliance certificate pursuant to Section
8.01(m)(iii) of the Credit Agreement for the quarter ended March 31, 1996
prepared and calculated in accordance with the Credit Agreement in effect at
the time of delivery of such compliance certificate for such fiscal quarter.
6. Conditions of Effectiveness.
The effectiveness of this Sixth Amendment and Waiver is expressly
conditioned upon the occurrence and completion of all of the following: (i)
receipt by the Agent of the nonrefundable fee set forth in that certain letter
agreement among the Agent and the Borrowers with respect to this Sixth
Amendment; (ii) receipt by the Agent on behalf of the Banks of the
nonrefundable fees equal to the aggregate of the amounts set forth on Exhibit
II hereto; (iii) the Agent's receipt of counterparts of this Sixth Amendment
duly executed by the Borrowers, the Guarantors and the Banks; (iv) the Agent's
receipt of a certificate signed by the Secretary or Assistant Secretary of the
Borrowers and Guarantors, certifying as to all action taken by the Borrowers
and Guarantors to authorize the execution, delivery and performance of this
Sixth Amendment; (v) an opinion of Peter D. Bewley, General Counsel of the Loan
Parties, reasonably satisfactory to the Agent regarding this Sixth Amendment,
and (vi) with respect to each new Guarantor or new Borrower (a "Joining
Subsidiary") documentation as required under Section 11.18 of the Credit
Agreement, including without limitation the completion of the following: (1)
executing and delivering to the Agent (A) in the case of a Joining Subsidiary
which becomes a Borrower, a Revolving Credit Note in the form of Exhibit
1.01(R) to the Credit Agreement, payable to each Bank, (B) a joinder to the
Credit Agreement in form satisfactory to the Agent, (C) a counterpart signature
page to the Guaranty Agreement executed by certain Loan Parties which is in the
form of Exhibit 1.01(G)(1) to the Credit Agreement,, in the case of a Joining
Subsidiary which becomes a Borrower, and Exhibit 1.01(G)(2) to the Credit
Agreement, in the case of a Joining Subsidiary which becomes a Guarantor, (D)
if it owns stock or other ownership interests in any Qualifying Subsidiary, a
joinder to the Pledge Agreement executed by certain Loan Parties which is in
the form of Exhibit 1.01(P)(4) to the Credit Agreement, 1.01(P)(5) to the
Credit Agreement, or 1.01(P)(6) to the Credit Agreement, as applicable, and
delivering, as applicable, the original certificates evidencing such stock or
other ownership interest if it is certificated with appropriate stock powers or
other assignments signed in blank and UCC-1 financing statements necessary to
perfect the security interests of the Agent for the benefit of the Banks
therein, (E) a joinder to the Subordination
- 3 -
<PAGE> 14
Agreement (Intercompany) executed by certain Loan Parties which is in the form
of Exhibit 1.01(S) to the Credit Agreement, (F) a joinder to the Agency
Agreement executed by certain Loan Parties appointing NovaCare as agent; (2)
delivering to the Agent an opinion of Peter D. Bewley, General Counsel of the
Loan Parties, reasonably satisfactory to the Agent regarding such Joining
Subsidiary and such joinder; (3) delivering to the Agent certified copies of
its organizational documents and other documents as requested by the Agent; and
(4) the Loan Party which owns the stock or other ownership interest of the
Joining Subsidiary shall execute and deliver to the Agent for the benefit of
the Banks a Pledge Agreement in the form of Exhibit 1.01(P)(4), 1.01(P)(5) or
1.01(P)(6) to the Credit Agreement, as applicable, and the original
certificates evidencing such stock or other ownership interest if it is
certificated with appropriate stock powers or other assignments signed in blank
and UCC-1 financing statements necessary to perfect the security interests of
the Agent for the benefit of the Banks therein, and (G) updated Schedules to
the Credit Agreement and the other Loan Documents, if any, to update such
schedules with respect to each Joining Subsidiary, such updated Schedules to be
in form and substance satisfactory to the Required Banks.
This Sixth Amendment shall be dated as of and shall be
effective as of the date and year first above written subject to satisfaction
of all conditions precedent to effectiveness as set forth in this Section 5,
which date shall be the Sixth Amendment Effective Date.
7. Consent of All Banks.
Pursuant to Section 11.01(b) of the Credit Agreement, this
Sixth Amendment shall require the written consent of all of the Banks.
8. Full Force and Effect.
Each of the following documents shall remain in full force and
effect on and after the date of this Amendment:
(a) each of the Schedules attached to the Credit
Agreement except for Schedules which are being amended and restated hereby;
(ii) each of the Exhibits attached to the Credit
Agreement except for Exhibits which are being amended and restated hereby; and
(iii) the Notes, the Guaranty Agreements, the
Pledge Agreements, the Agent's Fee Letter, the Subordination Agreement
(Intercompany), the Borrower Agency Agreement and all other Loan Documents
(except for Articles I through XI of the Agreement and the Exhibits and
Schedules thereto listed in Paragraph 2 hereof, each of which are being amended
and restated hereby) remain in full force and effect on and after the date
hereof. On and after the date hereof, each reference in the Credit Agreement
to "this Agreement", "hereunder" or words of like import shall mean and be a
reference to the Credit Agreement, as amended by this Amendment, and each
reference in each other Loan Document to the "Credit Agreement" shall
- 4 -
<PAGE> 15
mean and be a reference to the Credit Agreement, as previously amended and as
amended by this Amendment. No novation is intended by this Sixth Amendment.
The parties hereto do not amend or waive any provisions of the
Agreement or the other Loan Documents except as expressly set forth herein.
9. Costs, Expenses, Disbursements.
The Borrowers hereby agree to reimburse the Agent and the
Banks on demand for all costs, expenses and disbursements relating to this
Sixth Amendment which are payable by the Borrowers as provided in Section 10.05
of the Credit Agreement.
10. Counterparts.
This Sixth Amendment may be executed by different parties
hereto in any number of separate counterparts, each of which, when so executed
and delivered, shall be an original, and all of such counterparts shall
together constitute one and the same instrument.
11. Governing Law.
This Sixth Amendment shall be deemed to be a contract under
the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
[INTENTIONALLY BLANK]
- 5 -
<PAGE> 16
[Signature Page 1 of 7 to Sixth Amendment]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Sixth Amendment as of the day and year
first above written.
<TABLE>
<S> <C>
BORROWERS AND GUARANTORS:
ATTEST: NOVACARE, INC., a Delaware corporation, and each of the other BORROWERS listed
on Schedule 6.01(c) of the Credit Agreement (which Schedule is attached hereto
as Exhibit [III]) and each of the GUARANTORS listed on Schedule 6.01(c) of the
Credit Agreement (which Schedule is attached hereto as Exhibit [III]), other
than those listed below
By: By:
----------------------- ------------------------------
[Name],
--------------------------
[Seal] the________________________[Title] of each Borrower and Guarantor listed on
Schedule 6.01(c) of the Credit Agreement (which Schedule is attached hereto as
Exhibit [III]), other than those listed below, which is a corporation and of
each general partner of each Borrower and Guarantor which is a partnership
ATTEST: NACC, INC., a Delaware Corporation
By: By:
----------------------- ------------------------------
[Name],
--------------------------
[Seal] the [Title] of NACC, Inc.
------------------------
</TABLE>
<PAGE> 17
[Signature Page 2 of 7 to Sixth Amendment]
<TABLE>
<S> <C>
ATTEST CR SERVICES CORP., a Delaware corporation
By: By:
----------------------- ------------------------------
[Name],
--------------------------
[Seal] the ________________________[Title] of
CR Services Corp.
Address for Notices for each of the
foregoing Borrowers and Guarantors:
1016 West Ninth Avenue
King of Prussia, PA 19406
Telecopier No. (610) 992-3328
Attention: Chief Financial Officer
Telephone No. (610) 992-7200
</TABLE>
<PAGE> 18
[Signature Page 3 of 7 to Sixth Amendment]
[INTENTIONALLY BLANK]
<PAGE> 19
[Signature Page 4 of 7 to Sixth Amendment]
AGENT:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By:
--------------------------------
Title:
-----------------------------
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
BANKS:
PNC BANK, NATIONAL ASSOCIATION
By:
--------------------------------
Title:
-----------------------------
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
<PAGE> 20
[Signature Page 5 of 7 to Sixth Amendment]
CORESTATES BANK, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
1339 Chestnut Street
P.O. Box 7618
FC 1-8-3-22
Philadelphia, PA 19101
Telecopier No. (215) 786-7721
Attention: Jennifer W. Leibowitz
Assistant Vice President
Telephone No. (215) 786-3972
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:
--------------------------------
Name: James F. Young
Title: Assistant Vice President
Address for Notices:
One First Union Center
301 S. Giles Street
Charlotte, NC 28288-0735
Telecopier No. (704) 374-4092
Attention: James F. Young,
Assistant Vice President
Telephone No. (704) 383-0507
<PAGE> 21
[Signature Page 6 of 7 to Sixth Amendment]
FLEET BANK OF MASSACHUSETTS, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
Health Care and Non Profit Group
Fleet Center MA BOF 04A
75 State Street
Boston, MA 02109-1810
Telecopier No. (617) 346-1634
Attention: Amy Fredericks
Vice President
Telephone No. (617) 346-1646
MELLON BANK, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
Healthcare Banking
Plymouth Meeting/Exec. Campus
610 W. Germantown Pike
Suite 200/AIM #19E-0246
Plymouth Meeting, PA 19462
Telecopier No. (610) 941-4136
Attention: Carol Paige
Vice President
Telephone No. (610) 941-8409
<PAGE> 22
[Signature Page 7 of 7 to Sixth Amendment]
NATIONSBANK, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
6610 Rockledge Drive
1st Floor
Bethesda, MD 20817-1876
Telecopier No. (301) 571-0719
Attention: Michael B. Andry
Vice President
Telephone No. (301) 571-0710
<PAGE> 23
EXHIBIT I
AMENDED AND RESTATED ARTICLES
I THROUGH XI OF CREDIT AGREEMENT
<PAGE> 24
SCHEDULE 6.01(c)
REVISED JUNE 30,1996
SUBSIDIARIES
I. SUBSIDIARY CORPORATIONS
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Advance Orthotics, Inc. Texas G 50,000 common shares, no par 50,000 NovaCare Orthotics &
value Prosthetics West, Inc.
Affiliated Physical Therapists, Ltd. Arizona G 120,091 common shares, $1 par 35,600 RehabClinics, Inc.
value 83,067 preferred shares,
$1 par value
Atlantic Rehabilitation Services, New Jersey G 1,000 shares, no par value 20 RehabClinics, Inc.
Inc.
Boca Rehab Agency, Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
Bowman-Shelton Orthopedic Oklahoma G 3,000 common shares, 3,000 NovaCare Orthotics &
Service, Incorporated $1.00 par value Prosthetics East, Inc.
Buendel Physical Therapy, Inc. Florida G 750 common shares, $10.00 par 100 RehabClinics, Inc.
value
Cannon & Associates, Inc. Delaware G 10,000 common shares, no par 3,000 NovaCare, Inc. (PA)
value
1,286 cumulative redeemable
preferred shares, $.01 par
value
Cenla Physical Therapy Louisiana G 10,000 shares, no par value 2,000 RehabClinics, Inc.
& Rehabilitation Agency, Inc.
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Center for Physical Therapy and New Mexico G 500,000 common shares, no par 1,000 RehabClinics, Inc.
Sports Rehabilitation, Inc. value
CenterTherapy, Inc. Minnesota G 50,000 Class A voting shares, 475 Class RehabClinics, Inc.
$.01 par value, 50,000 Class B A voting
non-voting shares, $.01 par
value
Coplin Physical Therapy Associates, Minnesota G 2,500 common shares, no par 100 RehabClinics, Inc.
Inc. value
CR Services Corp. Delaware G 1,000 common shares, $.01 par 100 NovaCare, Inc. (DE)
value
Crowley Physical Therapy Clinic, Inc. Louisiana G 10,000 common shares, no par 500 RehabClinics, Inc.
value
Douglas Avery and Associates, Ltd. Virginia G 500 Series A Voting Common 100 RehabClinics, Inc.
Shares, $10.00 par value
300 Series B Non-Voting Common
Shares, $.01 par value
Douglas C. Claussen, R.P.T., Physical California G 50,000 shares, no par value 10,187 RehabClinics, Inc.
Therapy, Inc.
Francis Naselli, Jr. & Stewart Rich Pennsylvania G 1,000 common shares, no par 1,000 RehabClinics, Inc.
Physical Therapists, Inc. value
Galaxy Service Corporation Illinois -- 1,200 Class A common shares, no RCI (S.P.O.R.T.),
par value Inc. (60%)
Gallery Physical Therapy Minnesota G 1,048.85 common shares, no 1,048.85 RehabClinics, Inc.
Center, Inc. par value
</TABLE>
2
<PAGE> 26
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Georgia Physical Therapy of West Georgia G 5,000,000 common shares, $.01 1,000,200 RehabClinics, Inc.
Georgia, Inc. par value
Georgia Physical Therapy, Inc. Georgia G 100,000 shares, $.50 par value 1,000 RehabClinics, Inc.
Greater Sacramento Physical Therapy California G 100,000 common shares No par 38,250 RehabClinics, Inc.
Associates, Inc. value 11,250 Peters, Starkey &
Todrank Physical
Therapy Corporation
Gulf Breeze Physical Therapy, Inc. Florida G 7,500 common shares, $1.00 par 200 RehabClinics, Inc.
value
Gulf Coast Hand Specialists, Inc. Florida G 7,500 common shares, $1.00 par 100 RehabClinics, Inc.
value
Hand Therapy and Rehabilitation California G 10,000 common shares, no par 6,000 RehabClinics, Inc.
Associates, Inc. value
Hand Therapy Associates, Inc. Arizona G 1,000,000 common shares, $10 250 RehabClinics, Inc.
par value
Hawley Physical Therapy, Inc. California G 100,000 common shares, no par 20,000 RehabClinics, Inc.
value
Heartland Rehabilitation, Inc. Indiana G 1,000 common shares, no par 100 NovaCare, Inc. (PA)
value
Indianapolis Physical Therapy and Indiana G 400,000 common shares, no par 267,808 RehabClinics, Inc.
Sports Medicine, Inc. value
Jim All, Inc. Texas -- 1,000,000 shares, $1.00 par 1,000 NovaCare Orthotics &
value Prosthetics West, Inc.
</TABLE>
3
<PAGE> 27
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Kesinger Physical Therapy, Inc. California G 10,000 common shares, no par 1,000 RehabClinics, Inc.
value
Life Dimensions of California, Inc. California G 1,000 shares, no par value 50 NovaCare, Inc. (PA)
Lynn M. Carlson, Inc. Arizona G 1,000,000 common shares, $1 par 6,400 RehabClinics, Inc.
value
McFarlen & Associates, Inc. Texas -- 100,000 common shares, $.10 par 1,000 NovaCare Orthotics &
value Prosthetics West, Inc.
Michigan Therapy Centre, Inc. Michigan G 50,000 common shares, $.01 par 11,765 RehabClinics, Inc.
value
Mill River Management, Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
Mitchell Tannenbaum I, Inc. Illinois G 1,000 common shares, no par 100 RCI (S.P.O.R.T.), Inc.
value
Mitchell Tannenbaum II, Inc. Illinois G 1,000 common shares, no par 100 RCI (S.P.O.R.T.), Inc.
value
Mitchell Tannenbaum III, Inc. Illinois G 1,000 common shares, no par 100 RCI (S.P.O.R.T.), Inc.
value
Monmouth Rehabilitation, Inc. New Jersey G 100 shares, no par value 80 RehabClinics, Inc.
NACC, Inc. Delaware B 1,000 common shares, $.01 par 25 RehabClinics, Inc.
value 25 NovaCare Orthotics &
Prosthetics, Inc.
125 NovaCare, Inc. (PA)
</TABLE>
4
<PAGE> 28
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
National Rehab Services California G 1,000,000 common shares, no par 5,000 NovaCare, Inc. (PA)
value
NC Cash Management, Inc. Delaware G 1,000 common shares, $.01 100 NC Resources, Inc.
par value
NC Resources, Inc. Delaware G 1,000 common shares, $.01 par 100 NovaCare, Inc. (DE)
value
New Mexico Physical Therapists, Inc. New Mexico G 50,000 common shares, $1.00 par 559 RehabClinics, Inc.
value
Northside Physical Therapy, Inc. Ohio G 500 common shares, without par 100 RehabClinics, Inc.
value
NovaCare (Arizona), Inc. Arizona G 1,000 shares, no par value 1,000 NovaCare, Inc. (PA)
NovaCare (Colorado), Inc. Delaware G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
value
NovaCare (Illinois), Inc. Illinois G 1,000 shares, no par value 1,000 NovaCare, Inc. (PA)
NovaCare (Texas), Inc. Texas G 100 common shares, $.01 par 100 NovaCare, Inc. (PA)
value
NovaCare, Inc. Pennsylvania G 5,000 common shares, no par 1,000 NC Resources, Inc.
value
NovaCare Management Company, Inc. Delaware G 1,000 common shares, $.01 par 100 NovaCare Orthotics &
value Prosthetics, Inc.
NovaCare Management Services, Inc. Delaware G 1,000 common shares, $.01 par 100 NovaCare, Inc. (DE)
value
NovaCare Northside Therapy, Inc. Minnesota G 2,500 shares, $10.00 par value 100 NovaCare, Inc. (PA)
</TABLE>
5
<PAGE> 29
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
NovaCare Orthotics & Prosthetics Delaware G 1,000 common shares, $.01 par 1,000 NovaCare Orthotics &
East, Inc. value Prosthetics Holdings,
Inc.
NovaCare Orthotics & Prosthetics Delaware G 1,000 shares, $.01 par value 1,000 NovaCare Orthotics &
Holdings, Inc. Prosthetics, Inc.
NovaCare Orthotics & Prosthetics California G 5,000,000 shares, $.10 par 689,681 NovaCare Orthotics &
West, Inc. value Prosthetics Holdings,
Inc.
NovaCare Orthotics & Prosthetics, Delaware G 1,000 common shares, $.01 par 1,000 NC Resources, Inc.
Inc. value
NovaCare Outpatient Rehabilitation I, Kansas G 100,000 common shares, no par 1,250 RehabClinics, Inc.
Inc. value
NovaCare Outpatient Rehabilitation, Kansas G 500,000 common shares, $1 par 10,851 RehabClinics, Inc.
Inc. value
NovaCare Rehab Agency of Alabama, Alabama G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Inc. value
NovaCare Rehab Agency of Florida, Florida G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Inc. value
NovaCare Rehab Agency of Georgia, Georgia G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Inc. value
NovaCare Rehab Agency of Illinois, Illinois G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Inc. value
NovaCare Rehab Agency of North North Carolina G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Carolina, Inc. value
NovaCare Rehab Agency of Northern California G 9,000 common shares, $1.00 par 100 NovaCare, Inc. (PA)
California, Inc. value
</TABLE>
6
<PAGE> 30
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
NovaCare Rehab Agency of Ohio, Inc. Ohio G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
value
NovaCare Rehab Agency of Oklahoma, Oklahoma G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Inc. value
NovaCare Rehab Agency of Pennsylvania G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Pennsylvania, Inc. value
NovaCare Rehab Agency of Southern California G 9,000 common shares, $1.00 par 100 NovaCare, Inc. (PA)
California, Inc. value
NovaCare Rehab Agency of South South Carolina G 1,000 shares, $.01 1,000 NovaCare, Inc. (PA)
Carolina, Inc. par value
NovaCare Rehab Agency of Tennessee, Tennessee G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (PA)
Inc. value
NovaCare Rehab Agency of Virginia, Virginia G 1,000 common shaer, $.01 par 1,000 NovaCare, Inc. (PA)
Inc value
NovaCare Rehabilitation Agency of Wisconsin G 9,000 shares, $1.00 par value 10 NovaCare, Inc. (PA)
Wisconsin, Inc.
NovaCare Rehabilitation, Inc. Minnesota G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
NovaCare Service Corp. Delaware G 1,000 common shares, $.01 par 1,000 NovaCare, Inc. (DE)
value
Ortho Rehab Associates, Inc. Florida G 1,000 common shares, $1.00 par 100 RehabClinics, Inc.
value
Orthopedic and Sports Physical California G 100,000 common shares, no par 3,000 RehabClinics, Inc.
Therapy of Cupertino, Inc. value
</TABLE>
7
<PAGE> 31
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
OSI Midwest, Inc. Nebraska -- 10,000 common shares, $1.00 par 7,651 NovaCare Orthotics &
value Prosthetics Holdings,
Inc.
Peters, Starkey & Todrank Physical California G 50,000 common shares, no par 91 RehabClinics, Inc.
Therapy Corporation value
Physical Focus Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
Physical Rehabilitation Partners, Louisiana G 5,000 common shares, no par 106.12 RehabClinics, Inc.
Inc. value
Physical Therapy Institute, Inc. Louisiana G 500 common shares, no par value 500 RehabClinics, Inc.
Quad City Management, Inc. Iowa G 100,000 common shares, no par 1,000 RehabClinics, Inc.
value
RCI (Colorado), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RCI (Exertec), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RCI (Illinois), Inc. Delaware G 100 common shares, 100 RehabClinics, Inc.
no par value
RCI (Michigan), Inc. Delaware G 1,000 Shares, $.01 par value 1,000 RehabClinics, Inc.
RCI (S.P.O.R.T.), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RCI (WRS), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
</TABLE>
8
<PAGE> 32
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
RCI Nevada, Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
Rebound Oklahoma, Inc. Oklahoma G 500 shares, $1.00 par value 500 RehabClinics, Inc.
Redwood Pacific Therapies,Inc. California G 100,000 common shares, no par 15,120 RehabClinics, Inc.
value
Rehab Managed Care of Arizona, Inc. Delaware B 1,000 common shares, $.01 par 100 RehabClinics, Inc.
value
Rehab Provider Network Florida G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
of Florida, Inc. value
Rehab Provider Network - California, California G 100 common shares, $.10 par 100 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Delaware, Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Georgia, Georgia G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Illinois, Illinois G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Indiana, Indiana G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Maryland, Maryland G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Michigan, Michigan G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
</TABLE>
9
<PAGE> 33
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Rehab Provider Network - New Jersey, New Jersey G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Ohio, Inc. Ohio G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
Rehab Provider Network - Oklahoma, Oklahoma G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Pennsylvania G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Pennsylvania, Inc. value
Rehab Provider Network - Virginia, Virginia G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Inc. value
Rehab Provider Network - Washington, District of G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
D.C., Inc. Columbia value
Rehab Provider Network of Colorado G 100 common shares, 100 RehabClinics, Inc.
Colorado, Inc. $.01 par value
Rehab Provider Network of Nevada, Nevada G 100 shares, $1.00 par value 100 RehabClinics, Inc.
Inc.
Rehab Provider Network of New Mexico G 1,000 common shares, 1,000 RehabClinics, Inc.
New Mexico, Inc. $.01 par value
Rehab Provider Network of Texas G 1,000 common shares, 1,000 RehabClinics, Inc.
Texas, Inc. $.01 par value
Rehab Provider Network of Wisconsin G 1,000 common shares, 1,000 RehabClinics, Inc.
Wisconsin, Inc. $.01 par value
Rehab/Work Hardening Management Pennsylvania G 500 shares, no par value 500 RehabClinics, Inc.
Associates, Ltd.
</TABLE>
10
<PAGE> 34
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Rehab World, Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics (COAST), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics (New Jersey), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics (PTA), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics (SPT), Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics Abilene, Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics Dallas, Inc. Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
value
RehabClinics Pennsylvania, Inc. Pennsylvania G 1,000 shares, no par value 1,000 RehabClinics (SPT),
Inc.
RehabClinics, Inc. Delaware G 1,000 common shares, $.01 par 1,000 NC Resources, Inc.
value
Robert M. Bacci, R.P.T. Physical California G 100,000 shares 5,000 RehabClinics, Inc.
Therapy, Inc. no par value
Robin Aids Prosthetics, Inc. California G 50,000 common shares, no par 50,000 NovaCare Orthotics &
value Prosthetics West, Inc.
S.T.A.R.T., Inc. Massachusetts G 12,500 common shares, no par 200 RehabClinics, Inc.
value
</TABLE>
11
<PAGE> 35
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
SG Rehabilitation Agency, Inc. Pennsylvania G 100,000 common shares, $10.00 100 NovaCare, Inc. (PA)
par value
SG Speech Associates, Pennsylvania G 100,000 common shares, $10.00 100 NovaCare, Inc. (PA)
Inc. par value
Southwest Medical Supply Company New Mexico G 10,000 common shares, $1.00 par 10,000 RehabClinics, Inc.
value
Southwest Physical Therapy, Inc. New Mexico G 500,000 shares, 12,500 RehabClinics, Inc.
no par value
Southwest Therapists, Inc. New Mexico G 5 common shares, no par value 5 RehabClinics, Inc.
Sporthopedics Sports and Physical California G 10,000 common shares, no par 8,000 RehabClinics, Inc.
Therapy Centers, Inc. value
Sports Therapy and Arthritis Delaware G 1,000 common shares, $.01 par 1,000 RehabClinics, Inc.
Rehabilitation, Inc. value
Star Physical Therapy Inc. Florida G 1,000 shares, $1.00 par value 60 RehabClinics, Inc.
Stephenson-Holtz, Inc. California G 100,000 common shares no par 10,000 RehabClinics, Inc.
value
The Center for Physical Therapy and New Mexico G 500,000 shares, no par value 1,000 RehabClinics, Inc.
Rehabilitation, Inc.
Theodore Dashnaw Physical Therapy, California G 100 common shares, no par value 30 RehabClinics, Inc.
Inc.
</TABLE>
12
<PAGE> 36
<TABLE>
<CAPTION>
Borrower/ Authorized No. Shares
Subsidiary Jurisdiction Guarantor Capital Issued Shareholder(s)
---------- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Union Square Center for California G 1,000 shares, no par value 500 RehabClinics, Inc.
Rehabilitation & Sports Medicine,
Inc.
Vanguard Rehabilitation, Inc. Arizona G 1,000,000 common shares, $1.00 64,500 RehabClinics, Inc.
par value
Wayzata Physical Therapy Center, Inc. Minnesota G 2,500 common shares, no par 1,000 RehabClinics, Inc.
value
West Suburban Health Partners, Inc. Minnesota G 25,000 common shares, $1.00 par 990 RehabClinics, Inc.
value
Western Rehab Services, Inc. Arizona G 100,000 common shares, no par 1,000 NovaCare, Inc. (PA)
value
Workers Rehabilitation Services, Inc. Illinois -- 10,000 common shares, no par RCI (WRS), Inc. (60%)
value
</TABLE>
13
<PAGE> 37
II. PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Name Jurisdiction Partnership Interest
---- ------------ --------------------
<S> <C> <C>
Advanced Orthopedic Services, Ltd. Texas 99% limited partnership interest owned by RehabClinics Dallas,
Inc. who is also the general partner
1% limited partnership interest owned by RehabClinics, Inc.
Galaxy North Limited Partnership Illinois 60% owned by RCI (S.P.O.R.T.), Inc.
Galaxy West Limited Partnership Illinois 60% owned by RCI (S.P.O.R.T.), Inc.
Land Park Physical Therapy California 50% owned by RehabClinics, Inc.
50% owned by Union Square Center for Rehabilitation & Sports
Medicine, Inc.
McFarlen & Associates I Texas 99.9% owned by OSI Midwest, Inc.
McFarlen & Associates II Texas 99.9% owned by OSI Midwest, Inc.
McFarlen & Associates III Texas 99.9% owned by OSI Midwest, Inc.
McFarlen & Associates IV Texas 99.9% owned by OSI Midwest, Inc.
Northwest Suburban Worker Rehabilitation
Services Limited Illinois 66 2/3% owned by RCI (WRS), Inc.
Partnership
Orthomedics - Voner (Rancho) California 50% owned by NovaCare Orthotics & Prosthetics Holdings, Inc.
Orthomedics - Voner (Whittier) California 50% owned by NovaCare Orthotics & Prosthetics Holdings, Inc.
T.J. Partnership Delaware 75% owned by RehabClinics (PTA), Inc.
West Suburban Worker Rehabilitation Illinois 66 2/3% owned by RCI (WRS), Inc.
Services Limited Partnership
</TABLE>
14
<PAGE> 38
III. LIMITED LIABILITY CORP.
<TABLE>
<CAPTION>
Name Jurisdiction Partnership Interest
---- ------------ --------------------
<S> <C> <C>
TJ Corporation I, L.L.C. Delaware RCI (Illinois), Inc. - 75% interest
WorkCare, L.L.C. Delaware NovaCare, Inc. - 88% interest
</TABLE>
IV. OPTIONS TO PURCHASE
1. RCI (WRS), Inc., a Delaware corporation owns 66 2/3% of Worker
Rehabilitation Services, Inc., an Illinois Corporation ("WRS"). WRS
is a general and limited partner of Northwest Suburban Worker
Rehabilitation Services Limited Partnership, an Illinois limited
partnership currently owning a 66 2/3% interest. RCI (WRS), Inc. will
acquire the remaining corporate and partnership interests on December
30, 1994 and December 30, 1995 in the amount of 16 2/3% and 16 2/3%
each year.
2. RCI (WRS), Inc., a Delaware corporation owns 66 2/3% of Worker
Rehabilitation Services, Inc., an Illinois Corporation ("WRS"). WRS
is a general and limited partner of West Suburban Worker
Rehabilitation Services Limited Partnership, an Illinois limited
partnership currently owning a 66 2/3% interest. RCI (WRS), Inc. will
acquire the remaining corporate and partnership interests on December
30, 1994 and December 30, 1995 in the amount of 16 2/3% and 16 2/3%
each year.
3. RCI (S.P.O.R.T.), Inc., a Delaware corporation owns 60% of Galaxy
Service Corporation, an Illinois corporation ("GSC"). GSC owns a 75%
participating general partnership interest in Galaxy North Limited
Partnership, an Illinois limited partnership (the "Partnership"). GSC
will acquire the remaining 40% interest in GSC on December 31, 1994
and December 31, 1995 in the amount of 20% each year and the remaining
10% limited partnership interests in the Partnership December 31, 1994
and December 31, 1995 in amount of 5% per year.
4. RCI (S.P.O.R.T.), Inc., a Delaware corporation owns 60% of Galaxy
Service Corporation, an Illinois corporation ("GSC"). GSC owns a 75%
participating general partnership interest in Galaxy Worth Limited
Partnership, an Illinois limited partnership (the "Partnership"). GSC
will acquire the remaining 40% interest in GSC on December 31, 1994
and December 31, 1995 in the amount of 20% each year and the remaining
10% limited partnership interests in the Partnership December 31, 1994
and December 31, 1995 in amount of 5% per year.
5. Orthomedics - Voner (Rancho), a California general partnership. A 50%
interest is held NovaCare Orthotics & Prosthetics Holdings, a Delaware
wholly owned subsidiary of NovaCare Orthotics & Prosthetics, Inc., a
Delaware wholly owned subsidiary of NovaCare, Inc. (Delaware). The
remaining 50% is owned by Mr. Voner.
15
<PAGE> 39
6. Orthomedics - Voner (Whittier), a California general partnership. A
50% interest is held NovaCare Orthotics & Prosthetics Holdings, a
Delaware wholly owned subsidiary of NovaCare Orthotics & Prosthetics,
Inc., a Delaware wholly owned subsidiary of NovaCare, Inc. (Delaware).
The remaining 50% is owned by Mr. Voner.
16
<PAGE> 40
EXHIBIT 10(j)
[TO BE USED IF POOLING
CONSIDERATION IS LESS THAN $250
MILLION]
EXHIBIT 1.01(P)(1)(E)
PERMITTED POOLINGS NOTICE CERTIFICATE
, 19
-------------------- --
PNC BANK, NATIONAL ASSOCIATION
as Agent for the Banks party
to the Credit Agreement Referred to Below
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of May 27, 1994 (as
amended, supplemented or modified from time to time, the "Credit Agreement")
among NOVACARE, INC., a Delaware corporation ("NovaCare"), each of the other
Borrowers and the Guarantors that are parties thereto (the "Loan Parties"), the
Banks party thereto and PNC BANK, NATIONAL ASSOCIATION, as Agent for such
Banks. This Certificate is delivered pursuant to clause (E) of the definition
of Permitted Poolings contained in Section 1.01 of the Credit Agreement in
connection with the proposed pooling of interests described below. Unless
otherwise defined herein, terms defined in the Credit Agreement are used herein
with the same meanings.
I, __________________________, [President/Chief Executive
Officer/Chief Financial Officer] of NovaCare, do hereby certify as of the date
hereof, as follows:
(1) Description of Proposed Pooling. NovaCare desires to
engage in a pooling of interests (the "Proposed Pooling") under the terms set
forth below. The Proposed Pooling shall be a Permitted Pooling.
(a) The Pooling Partner is ______________________
[name], a ___________________________________
[type of entity and jurisdiction of
organization].
(b) The Proposed Pooling is scheduled to close on
__________________, 19___ (the "Pooling
Date").
<PAGE> 41
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 2
(c) The assets and businesses of the Pooling
Partner are located in _____________________
[list locations and describe assets or
business in those locations].
(d) The Proposed Pooling is an [Asset
Acquisition/Stock Acquisition] structured as
follows (describe structure of the pooling):
______________________________________________
___.
(2) (A) Pooling Consideration (Clauses (A)
and (E) of definition of Permitted Pooling). The
Proposed Pooling shall be accounted for under GAAP as
a "pooling of interests." The consideration to be
paid by the Loan Parties in connection with the
Proposed Pooling consists solely of shares of stock
of NovaCare, cash payments in lieu of fractional
shares and cash payments to dissenting shareholders.
The Pooling Consideration is $________ which is less
than $250,000,000, the maximum Pooling Consideration
permitted under clause (E) of the definition of
Permitted Pooling. The Pooling Consideration is
computed as follows:
(i) NovaCare is issuing shares of its
capital stock as follows:
<TABLE>
<CAPTION>
Market Value Per
Share as of
_______, 19__
(must be within
# 120 days of the Total
Class Shares Issue Pooling Date) Value
----- ------ ----- ------------ -----
<S> <C> <C> <C> <C>
$
------- ------- -------- ------------- --------
$
------- ------- -------- ------------- --------
Total $
========
<CAPTION>
<S> <C>
(ii) Cash in lieu of fractional shares or
with respect to dissenters' rights
to the extent that the amount
thereof can be determined on or
before the date which is fifteen
(15) Business Days prior to the
Pooling Date $
--------
(iii) Sum of (i) and (ii) (must be less
than or equal to $250,000,000) $
--------
</TABLE>
<PAGE> 42
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 3
(B) Permitted Pooling Compliance. (Clause (L)
of the definition of Permitted Pooling) On
the Pooling Date and after giving effect to
the proposed acquisition, the Pooling
Consideration, when aggregated with the
Pooling Consideration of all other Permitted
Poolings which occurred during the period
beginning on the Effective Date through and
including the date of determination, is
$____________, which is less than or equal to
the amount of $500,000,000.
(3) Lines of Business (Clause (B) of definition of
Permitted Pooling). The Pooling Partner is engaged in the business of
________________________________________ _________________________________. All
of the net revenues of the Pooling Partner during its last completed fiscal year
were derived from Permitted Lines of Business.
(4) Events of Default or Potential Default (Paragraph (C)
of definition of Permitted Pooling). On the Pooling Date and after giving
effect to the Proposed Pooling and any new Revolving Credit Loans to be
requested or debt to be assumed in connection therewith, no event shall have
occurred and be continuing which constitutes an Event of Default or Potential
Default.
(5) Joinder of Pooling Partner and its Subsidiaries and
Pledge of their Stock (Paragraph (D) of definition of Permitted Pooling). The
following is a complete list of the corporations, partnerships or other
entities: (i) whose stock or other ownership interests will be acquired by one
or more Loan Parties in the Proposed Pooling, (ii) which have been or will be
formed by the Loan Parties pursuant to the Proposed Pooling, (iii) which are
Subsidiaries or Minority Subsidiaries of the entities listed in (i) and (ii)
above:
<TABLE>
<CAPTION>
Person who Is the Entity
Type of holds Stock or Joining the
Entity and other Percentage of Credit
Name of Jurisdiction of ownership total Agreement
Entity Organization Interests ownership held (yes/no)
------ ------------ --------- -------------- --------
<S> <C> <C> <C> <C>
--------- ----------- ---------- ---------- ----------
--------- ----------- ---------- ---------- ----------
--------- ----------- ---------- ---------- ----------
</TABLE>
We are simultaneously delivering to the Agent Guaranty Agreements, Pledge
Agreements, an opinion of counsel and certified copies of organizational
documents, pursuant to which each entity listed above which is a Qualified
Subsidiary shall join the Credit Agreement as a Guarantor and the stock of such
Qualified Subsidiary shall be pledged to the Agent for the benefit of the
Banks, in each instance on the Pooling Date. (The procedures for such joinders
are described in Section 11.18 of the Credit Agreement. A Qualifying
Subsidiary is an entity of which NovaCare or
<PAGE> 43
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 4
NovaCare's Subsidiaries hold 80% or more of the ownership interests as more
fully set forth in the Credit Agreement.)
(6) Financial Covenant Compliance (Paragraph (E) of
definition of Permitted Pooling). On the Pooling Date and after giving effect
to the Proposed Pooling and any new Revolving Credit Loans to be requested in
connection therewith, but otherwise on the basis of the most recent financial
statements of NovaCare and its Subsidiaries delivered pursuant to Section
8.01(m) of the Credit Agreement and of the Pooling Partner and its Subsidiaries
as attached hereto pursuant to Paragraph (9), the Loan Parties shall be in
compliance with the following financial covenants on a pro forma basis for the
effects of the Proposed Pooling:
(A) Funded Debt to Capitalization. (Section
8.02(m)). On the Pooling Date, the ratio of
(i) Consolidated Funded Debt to (ii)
Capitalization shall be _________ to 1.0.
Such ratio must not be more than the
following ratios for the following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
June 30, 1996 .50 to 1.0
July 1, 1996 and
thereafter .45 to 1.0
</TABLE>
(a) Consolidated Funded Debt, the
numerator of the foregoing ratio, is
determined as follows:
Indebtedness of NovaCare and its
Subsidiaries to persons other than
NovaCare and its Subsidiaries on the
Pooling Date in respect of, without
duplication:
<TABLE>
<S> <C>
(i) Borrowed money $
-------
(ii) Amounts raised under or
liabilities in respect of any
note purchase or acceptance
credit facility $
-------
(iii) Reimbursement obligations under
any letter of credit,
currency swap agreement,
interest rate swap, cap,
collar or floor agreement or
other interest rate
management device $
-------
(iv) Other transactions (including
without limitation forward
sale or purchase
</TABLE>
<PAGE> 44
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 5
<TABLE>
<S> <C>
agreements, capitalized leases and
conditional sales agreements)
having the commercial effect
of a borrowing of money
entered into to finance
operations or capital
requirements (but not
including trade payables and
accrued expenses incurred in
the ordinary course of
business which are not
represented by a promissory
note) $
-------
(v) Any guaranty of indebtedness for borrowed money $
-------
(vi) Sum of (i) through (v) equals
Consolidated Funded Debt $
-------
(b) Capitalization, the denominator of the foregoing ratio,
is determined as follows as of the Pooling Date:
(i) Consolidated Funded Debt
(amount from clause (vi) of
Paragraph (a) above) $
-------
(ii) Consolidated Net Worth, which
is total stockholders' equity
of NovaCare and its
Subsidiaries as of the
Pooling Date $
-------
(iii) Sum of (i) and (ii) equals
Capitalization $
-------
</TABLE>
(B) Funded Debt to Cash Flow From Operations.
(Section 8.02(n)). The ratio of (i)
Consolidated Funded Debt on the Pooling Date
to (ii) Consolidated Cash Flow from
Operations for the four fiscal quarters
ending immediately prior to the Pooling Date
is _______ to 1.0. Such ratio must not be
more than the following ratios for the
following periods:
<PAGE> 45
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 6
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1994 through
June 30, 1995 3.00 to 1.00
July 1, 1995 through
December 31, 1995 2.75 to 1.00
January 1, 1996 and
thereafter 2.50 to 1.00
</TABLE>
<TABLE>
<S> <C>
(a) Consolidated Funded Debt, the numerator of
the foregoing ratio (amount from clause (vi)
of Paragraph 6(A)(a) above) $
-------
(b) Consolidated Cash Flow from Operations, the
denominator of the foregoing ratio, for the
four fiscal quarters ending immediately prior
to the Pooling Date is determined as follows:
(i) Net Income $
-------
(ii) Depreciation $
-------
(iii) Amortization $
-------
(iv) Other non-cash charges to net income $
-------
(v) Interest Expense $
-------
(vi) Income Tax Expense $
-------
(vii) Sum of (i), (ii), (iii), (iv), (v) and (vi) $
-------
(viii) Non-cash credits to net income $
-------
(ix) Item (vii) reduced by item (viii)
equals Consolidated Cash Flow from
Operations $
-------
</TABLE>
<PAGE> 46
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 7
(7) Indebtedness Assumed (Sections 8.02(a)(vi)).
(a) Proposed Pooling. The following is a list of
Indebtedness of the Pooling Partner and its
Subsidiaries (if any) which will be assumed
or otherwise will remain outstanding
following the Proposed Pooling:
<TABLE>
<CAPTION>
Entity which will Collateral
be liable security securing
therefor after the Indebtedness Amount of
Creditor Pooling (if any) Indebtedness
-------- ------- -------- ------------
<S> <C> <C> <C>
$
---------- ------------ ------------ ----------
$
---------- ------------ ------------ ----------
$
---------- ------------ ------------ ----------
Total $
==========
</TABLE>
We are simultaneously sending you copies of
the agreements governing the Indebtedness
listed above.
(b) Aggregate Limit (Section 8.02(a)(vi)). The
sum of the Indebtedness to be assumed in
connection with the Proposed Pooling
described in paragraph (a) above together
with Indebtedness assumed by the Loan Parties
in connection with Permitted Poolings during
the current fiscal year is $________ which is
less than $100,000,000, the maximum amount
permitted to be assumed during the current
fiscal year. The amount of such Indebtedness
is computed as follows:
<TABLE>
<S> <C>
(i) Total from paragraph (a) above $
--------
(ii) Indebtedness either (1) previously
assumed by acquiring Loan Parties in
Permitted Poolings during the
current fiscal year, or (2) of
Pooling Partners and their
Subsidiaries whose stock or other
ownership interests were previously
acquired in Permitted Poolings
during the current fiscal year,
including, in the case of both (1)
and (2), any Indebtedness which has
been repaid since the date of the
pooling as well as debt which
remains outstanding on the date of
this certificate:
</TABLE>
<PAGE> 47
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 8
<TABLE>
<CAPTION>
Loan Party which assumed Collateral
Indebtedness or Pooling Date of securing the
Partner whose stock was Permitted Indebtedness Amount of
acquired Pooling (if any) Indebtedness
-------- ------- ---------- ------------
<S> <C> <C> <C>
----------------- -------- ---------- ----------
----------------- -------- ---------- ----------
----------------- -------- ---------- ----------
Total $
---------
(iii) Sum of (i) plus (ii) (may not exceed
$100,000,000) $
=========
</TABLE>
(c) Lease Obligations. Listed below are the
future minimum lease payments under each
non-cancellable lease of the Pooling Partner
and its Subsidiaries (if any) (i) which will
be assumed or otherwise will remain
outstanding after the Proposed Pooling, and
(ii) under which the annual lease payments
exceed $250,000:
<TABLE>
<CAPTION>
Future Minimum
Lessor Expiration Date Lease Payments
------ --------------- --------------
<S> <C> <C>
---------------- ---------------- ----------------
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Total $
===============
</TABLE>
(8) Attached Financial Statements. Attached hereto are
true and correct copies of (i) the consolidated balance sheets and income
statements of Pooling Partner and its Subsidiaries for the prior three fiscal
years and the interim statements ending on ______________, (ii) any financial
projections with respect to the Pooling Partner and its Subsidiaries received
from Pooling Partner or prepared by the Loan Parties, and (iii) any revised
budgets, and accompanying forecasts and projections prepared by NovaCare
projecting its and its Subsidiaries' operations on a consolidated basis and
separately for each line of business which have not previously been delivered to
the Banks.
(9) Representations and Warranties. After giving effect
to the Proposed Pooling, any new Revolving Credit Loans to be requested or debt
to be assumed in connection
<PAGE> 48
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 9
therewith, the representations and warranties contained in Article VI of the
Credit Agreement will be true on and as of the Pooling Date with the same
effect as though such representations and warranties had been made on and as of
the Pooling Date (except representations and warranties which expressly relate
solely to an earlier date or time, which representations and warranties shall
have been true and correct on and as of the specific dates or times referred to
therein) and the Loan Parties shall have performed and complied with all
covenants and conditions of the Credit Agreement.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate this _____ day of ___________, 19__.
NOVACARE, INC.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
<PAGE> 49
LIST OF ENCLOSURES
NovaCare is enclosing the following with this Certificate:
<TABLE>
<CAPTION>
Check if
Enclosed
--------
<S> <C> <C>
1. Joinder documentation described in Paragraph 5
--------
2. Agreements governing assumed Indebtedness described in Paragraph 7(a)
--------
3. Financial Statements of the Pooling Partner and its Subsidiaries described in Paragraph
8(i)
--------
4. Financial projections of the Pooling Partner and its Subsidiaries described in Paragraph
8(ii)
--------
5. Budget, forecasts and projections described in Paragraph 8(iii)
--------
</TABLE>
<PAGE> 50
ENCLOSURE #2
ASSUMED INDEBTEDNESS AGREEMENTS
NovaCare to attach agreements governing assumed Indebtedness
described in Paragraph 7(a).
<PAGE> 51
[TO BE USED IF (i) POOLING
CONSIDERATION EXCEEDS $250
MILLION AND (ii) NOVACARE HAS
NOT MADE ANY OTHER POOLINGS
FOR CONSIDERATION EXCEEDING
$250 MILLION DURING CURRENT
FISCAL YEAR]
EXHIBIT 1.01(P)(1)(F)
PERMITTED POOLINGS APPROVAL CERTIFICATE - AGENT
, 19
-------------------- --
PNC BANK, NATIONAL ASSOCIATION
as Agent for the Banks party
to the Credit Agreement Referred to Below
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of May 27, 1994 (as
amended, supplemented or modified from time to time, the "Credit Agreement")
among NOVACARE, INC., a Delaware corporation ("NovaCare"), each of the other
Borrowers and the Guarantors that are parties thereto (the "Loan Parties"), the
Banks party thereto and PNC BANK, NATIONAL ASSOCIATION, as Agent for such
Banks. This Certificate is delivered pursuant to clause (F) of the definition
of Permitted Poolings contained in Section 1.01 of the Credit Agreement in
connection with the proposed pooling of interests described below. Unless
otherwise defined herein, terms defined in the Credit Agreement are used herein
with the same meanings.
I, __________________________, [President/Chief Executive
Officer/Chief Financial Officer] of NovaCare, do hereby certify as of the date
hereof, as follows:
(1) Description of Proposed Pooling. NovaCare desires to
engage in a pooling of interests (the "Proposed Pooling") under the terms set
forth below. The Proposed Pooling shall be a Permitted Pooling.
<PAGE> 52
(a) The Pooling Partner is ______________________
[name], a ___________________________________
[type of entity and jurisdiction of
organization].
(b) The Proposed Pooling is scheduled to close on
__________________, 19___ (the "Pooling
Date").
(c) The assets and businesses of the Pooling
Partner are located in _____________________
[list locations and describe assets or
business in those locations].
(d) The Proposed Pooling is an [Asset
Acquisition/Stock Acquisition] structured as
follows (describe structure of the pooling):
____________________________________________.
(2) Pooling Considerations And Permitted Pooling
Compliance
(A) Pooling Consideration (Clauses (A)
and (F) of definition of Permitted
Pooling). The Proposed Pooling
shall be accounted for under GAAP as
a "pooling of interests." The
consideration to be paid by the Loan
Parties in connection with the
Proposed Pooling consists solely of
shares of stock of NovaCare, cash
payments in lieu of fractional
shares and cash payments to
dissenting shareholders. The
Pooling Consideration is $________
which is more than $250,000,000.
The Pooling Consideration is
computed as follows:
(i) NovaCare is issuing shares
of its capital stock as
follows:
<TABLE>
<CAPTION>
Market Value Per Share
as of _________, 19___
# (must be within 120 Total
Class Shares Issue days of the Pooling Date) Value
----- ------ ----- ------------------------- -----
<S> <C> <C> <C> <C>
$
--------- ---------- ---------- ------------- ---------
$
--------- ---------- ---------- ------------- ---------
Total $
========
</TABLE>
- 2 -
<PAGE> 53
(ii) Cash in lieu of fractional
shares or with respect to
dissenters' rights to the
extent that the amount thereof
can be determined on or before
the date which is fifteen (15)
Business Days prior to the
Pooling Date $_______
(iii) Sum of (i) and (ii) (must be
less than or equal to
$250,000,000) $_______
(B) Permitted Pooling Compliance. (Clause
(L) of the definition of Permitted
Pooling) On the Pooling Date and after
giving effect to the proposed
acquisition, the Pooling Consideration,
when aggregated with the Pooling
Consideration of all other Permitted
Poolings which occurred during the
period beginning on the Effective Date
through and including the date of
determination, is $______, which is
less than or equal to the amount of
$500,000,000.
(3) Lines of Business (Clause (B) of definition of
Permitted Pooling). The Pooling Partner is engaged in the business of
____________________________ ____________________________________________. All
of the net revenues of the Pooling Partner during its last completed fiscal year
were derived from Permitted Lines of Business.
(4) Events of Default or Potential Default (Paragraph (C)
of definition of Permitted Pooling). On the Pooling Date and after giving
effect to the Proposed Pooling and any new Revolving Credit Loans to be
requested or debt to be assumed in connection therewith, no event shall have
occurred and be continuing which constitutes an Event of Default or Potential
Default.
(5) Joinder of Pooling Partner and its Subsidiaries and
Pledge of their Stock (Paragraph (D) of definition of Permitted Pooling). The
following is a complete list of the corporations, partnerships or other
entities: (i) whose stock or other ownership interests will be acquired by one
or more Loan Parties in the Proposed Pooling, (ii) which have been or will be
formed by the Loan Parties pursuant to the Proposed Pooling, (iii) which are
Subsidiaries or Minority Subsidiaries of the entities listed in (i) and (ii)
above:
- 3 -
<PAGE> 54
<TABLE>
<CAPTION>
Is the
Person who Entity
Type of holds its Joining
Entity and Stock or Percentage the
Jurisdic- other of total Credit
Name of tion of ownership ownership Agreement
Entity Organization Interests held (yes/no)
------ ------------ --------- ---- --------
<S> <C> <C> <C> <C>
-------- ---------- ---------- --------- --------
-------- ---------- ---------- --------- --------
-------- ---------- ---------- --------- --------
</TABLE>
We are simultaneously delivering to the Agent Guaranty Agreements, Pledge
Agreements, an opinion of counsel and certified copies of organizational
documents, pursuant to which each entity listed above which is a Qualified
Subsidiary shall join the Credit Agreement as a Guarantor and the stock of such
Qualified Subsidiary shall be pledged to the Agent for the benefit of the
Banks, in each instance on the Pooling Date. (The procedures for such joinders
are described in Section 11.18 of the Credit Agreement. A Qualifying
Subsidiary is an entity of which NovaCare or NovaCare's Subsidiaries hold 80%
or more of the ownership interests as more fully set forth in the Credit
Agreement.)
(6) Financial Covenant Compliance (Paragraph (F) of
definition of Permitted Pooling). On the Pooling Date and after giving effect
to the Proposed Pooling and any new Revolving Credit Loans to be requested in
connection therewith, but otherwise on the basis of the most recent financial
statements of NovaCare and its Subsidiaries delivered pursuant to Section
8.01(m) of the Credit Agreement and of the Pooling Partner and its Subsidiaries
as attached hereto pursuant to Paragraph (9), the Loan Parties shall be in
compliance with the following financial covenants on a pro forma basis for the
effects of the Proposed Pooling:
(A) Funded Debt to Capitalization.
(Section 8.02(m)). On the Pooling
Date, the ratio of (i) Consolidated
Funded Debt to (ii) Capitalization
shall be _________ to 1.0. Such
ratio must not be more than the
following ratios for the following
periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
June 30, 1996 .50 to 1.0
July 1, 1996 and
thereafter .45 to 1.0
</TABLE>
(a) Consolidated Funded Debt, the numerator
of the foregoing ratio, is determined as
follows:
- 4 -
<PAGE> 55
Indebtedness of NovaCare and its Subsidiaries
to persons other than NovaCare and its
Subsidiaries on the Pooling Date in respect
of, without duplication:
<TABLE>
<S> <C>
(i) Borrowed money $
-------
(ii) Amounts raised under or liabilities in
respect of any note purchase or
acceptance credit facility $
-------
(iii) Reimbursement obligations under
any letter of credit, currency swap
agreement, interest rate swap, cap,
collar or floor agreement or other
interest rate management device $
-------
(iv) Other transactions (including without
limitation forward sale or purchase
agreements, capitalized leases and
conditional sales agreements) having
the commercial effect of a borrowing
of money entered into to finance
operations or capital requirements (but
not including trade payables and
accrued expenses incurred in
the ordinary course of
business which are not
represented by a promissory
note)
(v) Any guaranty of indebtedness for
borrowed money $
-------
(vi) Sum of (i) through (v) equals
Consolidated Funded Debt $
-------
(b) Capitalization, the denominator of the
foregoing ratio, is determined as follows as
of the Pooling Date:
(i) Consolidated Funded Debt (amount
from clause (vi) of Paragraph (a)
above) $
-------
(ii) Consolidated Net Worth, which is
total stockholders' equity of NovaCare
</TABLE>
- 5 -
<PAGE> 56
<TABLE>
<S> <C>
and its Subsidiaries as of the Pooling
Date $
-------
(iii) Sum of (i) and (ii) equals
Capitalization $
-------
</TABLE>
(B) Funded Debt to Cash Flow From
Operations. (Section 8.02(n)). The
ratio of (i) Consolidated Funded
Debt on the Pooling Date to (ii)
Consolidated Cash Flow from
Operations for the four fiscal
quarters ending immediately prior to
the Pooling Date is _______ to 1.0.
Such ratio must not be more than the
following ratios for the following
periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1994 through
June 30, 1995 3.00 to 1.00
July 1, 1995 through
December 31, 1995 2.75 to 1.00
January 1, 1996 and
thereafter 2.50 to 1.00
</TABLE>
<TABLE>
<S> <C>
(a) Consolidated Funded Debt, the numerator of the
foregoing ratio (amount from clause (vi) of
Paragraph 6(A)(a) above) $
-------
(b) Consolidated Cash Flow from Operations, the
denominator of the foregoing ratio, for the four
fiscal quarters ending immediately prior to the
Pooling Date is determined as follows:
(i) Net Income $
-------
(ii) Depreciation $
-------
(iii) Amortization $
-------
(iv) Other non-cash charges
to net income $
-------
(v) Interest Expense $
-------
</TABLE>
- 6 -
<PAGE> 57
<TABLE>
<S> <C>
(vi) Income Tax Expense $
-------
(vii) Sum of (i), (ii),
(iii), (iv), (v) and (vi) $
-------
(viii) Non-cash credits to net income $
-------
(ix) Item (vii) reduced by
item (viii) equals
Consolidated Cash Flow from
Operations $
-------
</TABLE>
(7) Indebtedness Assumed (Sections 8.02(a)(vi)).
(a) Proposed Pooling. The following is a list of
Indebtedness of the Pooling Partner and its
Subsidiaries (if any) which will be assumed
or otherwise will remain outstanding
following the Proposed Pooling:
<TABLE>
<CAPTION>
Collateral
Entity which security
will be liable securing the Amount
therefor after Indebtedness of
Creditor Pooling (if any) Indebtedness
-------- ------- -------- ------------
<S> <C> <C> <C>
$
---------------- -------------- -------------- -------------
$
---------------- -------------- -------------- -------------
$
---------------- -------------- -------------- -------------
Total $
=============
</TABLE>
We are simultaneously sending you copies of
the agreements governing the Indebtedness
listed above.
(b) Aggregate Limit (Section 8.02(a)(vi)). The
sum of the Indebtedness to be assumed in
connection with the Proposed Pooling
described in paragraph (a) above together
with Indebtedness assumed by the Loan Parties
in connection with Permitted Poolings during
the current fiscal year is $________ which is
less than $100,000,000, the maximum amount
permitted to be assumed during the current
fiscal year. The amount of such Indebtedness
is computed as follows:
<TABLE>
<S> <C>
(i) Total from paragraph (a) above $
---------
</TABLE>
- 7 -
<PAGE> 58
(ii) Indebtedness either
(1) previously assumed by
acquiring Loan Parties in
Permitted Poolings during the
current fiscal year, or (2)
of Pooling Partners and their
Subsidiaries whose stock or
other ownership interests
were previously acquired in
Permitted Poolings during the
current fiscal year,
including, in the case of
both (1) and (2), any
Indebtedness which has been
repaid since the date of the
pooling as well as debt which
remains outstanding on the
date of this certificate:
<TABLE>
<CAPTION>
Loan Party
which assumed Collateral
Indebtedness or securing
Pooling Partner Date of the
whose stock Permitted Indebted- Amount of
was acquired Pooling ness (if any) Indebtedness
------------ ------- ------------- ------------
<S> <C> <C> <C>
$
---------------- -------------- ------------------ ------------
$
---------------- -------------- ------------------ ------------
$
---------------- -------------- ------------------ ------------
Total $
------------
(iii) Sum of (i) plus (ii) (may not exceed
$100,000,000) $
------------
</TABLE>
(c) Lease Obligations. Listed below are the
future minimum lease payments under each
non-cancellable lease of the Pooling Partner
and its Subsidiaries (if any) which (i) will
be assumed or otherwise will remain
outstanding after the Proposed Pooling, and
(ii) under which the annual lease payments
exceed $250,000:
<TABLE>
<CAPTION>
Future
Minimum
Lessor Expiration Date Lease Payments
------ --------------- --------------
<S> <C> <C>
---------- --------------- -------------
---------- --------------- -------------
---------- --------------- -------------
Total $
=============
</TABLE>
- 8 -
<PAGE> 59
(8) Attached Financial Statements. Attached hereto are
true and correct copies of (i) the consolidated balance sheets and income
statements of Pooling Partner and its Subsidiaries for the prior three fiscal
years and the interim statements ending on ______________, (ii) any financial
projections with respect to the Pooling Partner and its Subsidiaries received
from Pooling Partner or prepared by the Loan Parties, and (iii) any revised
budgets, and accompanying forecasts and projections prepared by NovaCare
projecting its and its Subsidiaries' operations on a consolidated basis and
separately for each line of business which have not previously been delivered to
the Banks.
(9) Representations and Warranties. After giving effect
to the Proposed Pooling, any new Revolving Credit Loans to be requested or debt
to be assumed in connection therewith, the representations and warranties
contained in Article VI of the Credit Agreement will be true on and as of the
Pooling Date with the same effect as though such representations and warranties
had been made on and as of the Pooling Date (except representations and
warranties which expressly relate solely to an earlier date or time, which
representations and warranties shall have been true and correct on and as of the
specific dates or times referred to therein) and the Loan Parties shall have
performed and complied with all covenants and conditions of the Credit
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate this _____ day of ___________, 19__.
NOVACARE, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
ACKNOWLEDGED AND AGREED TO
AND PROPOSED POOLING APPROVED
THIS _____ DAY OF ____________, 19___
PNC BANK, NATIONAL ASSOCIATION,
as Agent
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
- 9 -
<PAGE> 60
LIST OF ENCLOSURES
NovaCare is enclosing the following with this Certificate:
<TABLE>
<CAPTION>
Check if
Enclosed
--------
<S> <C> <C>
(1) Joinder documentation described in Paragraph 5
--------
(2) Agreements governing assumed Indebtedness described in Paragraph 7(a)
--------
(3) Financial Statements of the Pooling Partner and its Subsidiaries described
in Paragraph 8(i)
--------
(4) Financial projections of the Pooling Partner and its Subsidiaries described in
Paragraph 8(ii)
--------
(5) Budget, forecasts and projections described in Paragraph 8(iii)
--------
</TABLE>
- 10 -
<PAGE> 61
[TO BE USED IF (i) POOLING
CONSIDERATION EXCEEDS $250
MILLION AND (ii) NOVACARE HAS
MADE ONE OR MORE POOLINGS FOR
CONSIDERATION EXCEEDING $250
MILLION DURING CURRENT FISCAL
YEAR]
EXHIBIT 1.01(P)(1)(G)
PERMITTED POOLINGS APPROVAL CERTIFICATE - REQUIRED BANKS
, 19
-------------------- --
PNC BANK, NATIONAL ASSOCIATION
as Agent for the Banks party
to the Credit Agreement Referred to Below
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of May 27, 1994 (as
amended, supplemented or modified from time to time, the "Credit Agreement")
among NOVACARE, INC., a Delaware corporation ("NovaCare"), each of the other
Borrowers and the Guarantors that are parties thereto (the "Loan Parties"), the
Banks party thereto and PNC BANK, NATIONAL ASSOCIATION, as Agent for such
Banks. This Certificate is delivered pursuant to clause (G) of the definition
of Permitted Poolings contained in Section 1.01 of the Credit Agreement in
connection with the proposed pooling of interests described below. Unless
otherwise defined herein, terms defined in the Credit Agreement are used herein
with the same meanings.
I, __________________________, [President/Chief Executive
Officer/Chief Financial Officer] of NovaCare, do hereby certify as of the date
hereof, as follows:
(1) Description of Proposed Pooling. NovaCare desires
to engage in a pooling of interests (the "Proposed Pooling") under the terms
set forth below. The Proposed Pooling shall be a Permitted Pooling.
<PAGE> 62
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 2
(a) The Pooling Partner is ______________________
[name], a ___________________________________
[type of entity and jurisdiction of
organization].
(b) The Proposed Pooling is scheduled to close
on __________________, 19___
(the "Pooling Date").
(c) The assets and businesses of the Pooling
Partner are located in _____________________
[list locations and describe assets or
business in those locations].
(d) The Proposed Pooling is an [Asset
Acquisition/Stock Acquisition] structured as
follows (describe structure of the pooling):
______________________________________________
___.
(2) Pooling Consideration and Permitted Pooling
Compliance
(A) Pooling Consideration (Clauses (A)
and (G) of definition of Permitted
Pooling). The Proposed Pooling
shall be accounted for under GAAP as
a "pooling of interests." The
consideration to be paid by the Loan
Parties in connection with the
Proposed Pooling consists solely of
shares of stock of NovaCare, cash
payments in lieu of fractional
shares and cash payments to
dissenting shareholders. The
Pooling Consideration is $________
which exceeds $250,000,000. The
Pooling Consideration is computed as
follows:
(i) NovaCare is issuing shares of
its capital stock as follows:
<PAGE> 63
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 3
<TABLE>
<CAPTION>
Market Value
Per Share as
of ________,
19__ (must
be within 120
# days of the Total
Class Shares Issue Pooling Date) Value
----- ------ ----- ------------- -----
<S> <C> <C> <C> <C>
$
-------- ---------- --------- ------------- ---------
$
-------- ---------- --------- ------------- ---------
Total $
========
</TABLE>
<TABLE>
<S> <C>
(ii) Cash in lieu of fractional shares or with
respect to dissenters' rights to the
extent that the amount
thereof can be determined on
or before the date which is
fifteen (15) Business Days
prior to the Pooling Date $
---------
(iii) Sum of (i) and (ii) (must be less than or
equal to $250,000,000) $
---------
</TABLE>
(B) Permitted Pooling Compliance (Clause
(L) of the definition of Permitted
Pooling) On the Pooling Date and
after giving effect to the proposed
acquisition, the Pooling
Consideration, when aggregated with
the Pooling Consideration of all
other Permitted Poolings which
occurred during the period beginning
on the Effective Date through and
including the date of determination,
is $___________, which is less than
or equal to the amount of
$500,000,000.
(3) Lines of Business (Clause (B) of definition of
Permitted Pooling). The Pooling Partner is engaged in the business of
_________________________________________ _________________________________. All
of the net revenues of the Pooling Partner during its last completed fiscal year
were derived from Permitted Lines of Business.
(4) Events of Default or Potential Default (Paragraph (C)
of definition of Permitted Pooling). On the Pooling Date and after giving
effect to the Proposed Pooling and any new Revolving Credit Loans to be
requested or debt to be assumed in connection therewith, no
<PAGE> 64
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 4
event shall have occurred and be continuing which constitutes an Event of
Default or Potential Default.
(5) Joinder of Pooling Partner and its Subsidiaries and
Pledge of their Stock (Paragraph (D) of definition of Permitted Pooling). The
following is a complete list of the corporations, partnerships or other
entities: (i) whose stock or other ownership interests will be acquired by one
or more Loan Parties in the Proposed Pooling, (ii) which have been or will be
formed by the Loan Parties pursuant to the Proposed Pooling, (iii) which are
Subsidiaries or Minority Subsidiaries of the entities listed in (i) and (ii)
above:
<TABLE>
<CAPTION>
Is the
Person who Entity
Type of holds its Joining
Entity and Stock or Percentage the
Jurisdiction other of total Credit
Name of of ownership ownership Agreement
Entity Organization Interests held (yes/no)
------ ------------ --------- ---- --------
<S> <C> <C> <C> <C>
----------- ------------- ------------- ----------- ----------
----------- ------------- ------------- ----------- ----------
----------- ------------- ------------- ----------- ----------
</TABLE>
We are simultaneously delivering to the Agent Guaranty Agreements, Pledge
Agreements, an opinion of counsel and certified copies of organizational
documents, pursuant to which each entity listed above which is a Qualified
Subsidiary shall join the Credit Agreement as a Guarantor and the stock of such
Qualified Subsidiary shall be pledged to the Agent for the benefit of the
Banks, in each instance on the Pooling Date. (The procedures for such joinders
are described in Section 11.18 of the Credit Agreement. A Qualifying
Subsidiary is an entity of which NovaCare or NovaCare's Subsidiaries hold 80%
or more of the ownership interests as more fully set forth in the Credit
Agreement.)
(6) Financial Covenant Compliance (Paragraph (G) of
definition of Permitted Pooling). On the Pooling Date and after giving effect
to the Proposed Pooling and any new Revolving Credit Loans to be requested in
connection therewith, but otherwise on the basis of the most recent financial
statements of NovaCare and its Subsidiaries delivered pursuant to Section
8.01(m) of the Credit Agreement and of the Pooling Partner and its Subsidiaries
as attached hereto pursuant to Paragraph (9), the Loan Parties shall be in
compliance with the following financial covenants on a pro forma basis for the
effects of the Proposed Pooling:
<PAGE> 65
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 5
(A) Funded Debt to Capitalization. (Section
8.02(m)). On the Pooling Date, the ratio of
(i) Consolidated Funded Debt to (ii)
Capitalization shall be _________ to 1.0.
Such ratio must not be more than the
following ratios for the following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
June 30, 1996 .50 to 1.0
July 1, 1996 and
thereafter .45 to 1.0
</TABLE>
(a) Consolidated Funded Debt, the numerator of
the foregoing ratio, is determined as follows:
Indebtedness of NovaCare and its Subsidiaries
to persons other than NovaCare and its
Subsidiaries on the Pooling Date in respect
of, without duplication:
<TABLE>
<S> <C>
(i) Borrowed money $
---------
(ii) Amounts raised under or
liabilities in respect of any
note purchase or acceptance
credit facility $
---------
(iii) Reimbursement obligations under
any letter of credit,
currency swap agreement,
interest rate swap, cap,
collar or floor agreement or
other interest rate
management device $
---------
(iv) Other transactions (including
without limitation forward
sale or purchase agreements,
capitalized leases and
conditional sales agreements)
having the commercial effect
of a borrowing of money
entered into to finance
operations or capital
requirements (but not
including trade payables and
</TABLE>
<PAGE> 66
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 6
<TABLE>
<S> <C>
accrued expenses incurred in the
ordinary course of business
which are not represented by
a promissory note) $
---------
(v) Any guaranty of indebtedness for borrowed money $
---------
(vi) Sum of (i) through (v) equals Consolidated
Funded Debt $
---------
(a) Capitalization, the denominator of the
foregoing ratio, is determined as follows as
of the Pooling Date:
(i) Consolidated Funded Debt
(amount from clause (vi) of
Paragraph (a) above) $
---------
(ii) Consolidated Net Worth, which
is total stockholders' equity
of NovaCare and its
Subsidiaries as of the
Pooling Date $
---------
(iii) Sum of (i) and (ii) equals Capitalization $
---------
</TABLE>
(B) Funded Debt to Cash Flow From
Operations. (Section 8.02(n)). The
ratio of (i) Consolidated Funded
Debt on the Pooling Date to (ii)
Consolidated Cash Flow from
Operations for the four fiscal
quarters ending immediately prior to
the Pooling Date is _______ to 1.0.
Such ratio must not be more than the
following ratios for the following
periods:
<PAGE> 67
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 7
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1994 through
June 30, 1995 3.00 to 1.00
July 1, 1995 through
December 31, 1995 2.75 to 1.00
January 1, 1996
and thereafter 2.50 to 1.00
(a) Consolidated Funded Debt, the numerator
of the foregoing ratio (amount from
clause (vi) of Paragraph 6(A)(a) above) $
-----------
</TABLE>
(b) Consolidated Cash Flow from Operations, the
denominator of the foregoing ratio, for the
four fiscal quarters ending immediately prior
to the Pooling Date is determined as follows:
<TABLE>
<S> <C>
(i) Net Income $
--------
(ii) Depreciation $
--------
(iii) Amortization $
--------
(iv) Other non-cash charges to net income $
--------
(v) Interest Expense $
--------
(vi) Income Tax Expense $
--------
(vii) Sum of (i), (ii), (iii), (iv), (v) and (vi) $
--------
(viii) Non-cash credits to net income $
--------
(ix) Item (vii) reduced by item
(viii) equals Consolidated
Cash Flow from Operations $
--------
</TABLE>
(7) Indebtedness Assumed (Sections 8.02(a)(vi)).
<PAGE> 68
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 8
(a) Proposed Pooling. The following is a list of
Indebtedness of the Pooling Partner and its
Subsidiaries (if any) which will be assumed
or otherwise will remain outstanding
following the Proposed Pooling:
<TABLE>
<CAPTION>
Collateral
Entity which security
will be liable securing the Amount
therefor after Indebtedness of
Creditor Pooling (if any) Indebtedness
-------- ------- -------- ------------
<S> <C> <C> <C>
$
-------------- -------------- ------------ -----------
$
-------------- -------------- ------------ -----------
$
-------------- -------------- ------------ -----------
Total $
===========
</TABLE>
We are simultaneously sending you copies of
the agreements governing the Indebtedness
listed above.
(b) Aggregate Limit (Section 8.02(a)(vi)). The
sum of the Indebtedness to be assumed in
connection with the Proposed Pooling
described in paragraph (a) above together
with Indebtedness assumed by the Loan Parties
in connection with Permitted Poolings during
the current fiscal year is $________ which is
less than $100,000,000, the maximum amount
permitted to be assumed during the current
fiscal year. The amount of such Indebtedness
is computed as follows:
<TABLE>
<S> <C>
(i) Total from paragraph (a) above $
-------
(ii) Indebtedness either (1)
previously assumed by
acquiring Loan Parties in
Permitted Poolings during the
current fiscal year, or (2)
of Pooling Partners and their
Subsidiaries whose stock or
other ownership interests
were previously acquired in
Permitted Poolings during the
current fiscal year,
including, in the case of
both (1) and (2), any
Indebtedness which has been
repaid since the date of the
pooling as well
</TABLE>
<PAGE> 69
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 9
as debt which remains
outstanding on the date of
this certificate:
<TABLE>
<CAPTION>
Loan Party which
assumed Indebtedness Date of Collateral securing
or Pooling Partner Permitted the Indebtedness Amount of
whose stock was acquired Pooling (if any) Indebtedness
------------------------ ------- -------- ------------
<S> <C>
$
--------------------------------------- -------------------------- ------------------------------ -------------------------
$
--------------------------------------- -------------------------- ------------------------------ -------------------------
$
--------------------------------------- -------------------------- ------------------------------ -------------------------
Total $
-------------------------
(ii) Sum of (i) plus (ii) (may not exceed
$100,000,000) $
-------------
</TABLE>
(c) Lease Obligations. Listed below are the
future minimum lease payments under each
non-cancellable lease of the Pooling Partner
and its Subsidiaries (if any) (i) which will
be assumed or otherwise will remain
outstanding after the Proposed Pooling, and
(ii) under which the annual lease payments
exceed $250,000:
<TABLE>
<CAPTION>
Future
Minimum
Lessor Expiration Date Lease Payments
------ ---------------- ------------------
<S> <C> <C>
---------------------- --------------- ------------------
---------------------- --------------- ------------------
---------------------- --------------- ------------------
Total $
================
</TABLE>
(8) Attached Financial Statements. Attached hereto are
true and correct copies of (i) the consolidated balance sheets and income
statements of Pooling Partner and its Subsidiaries for the prior three fiscal
years and the interim statements ending on ______________, (ii) any financial
projections with respect to the Pooling Partner and its Subsidiaries received
from Pooling Partner or prepared by the Loan Parties, and (iii) any revised
<PAGE> 70
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 10
budgets, and accompanying forecasts and projections prepared by NovaCare
projecting its and its Subsidiaries' operations on a consolidated basis and
separately for each line of business which have not previously been delivered
to the Banks.
(9) Representations and Warranties. After giving effect
to the Proposed Pooling, any new Revolving Credit Loans to be requested or debt
to be assumed in connection therewith, the representations and warranties
contained in Article VI of the Credit Agreement will be true on and as of the
Pooling Date with the same effect as though such representations and warranties
had been made on and as of the Pooling Date (except representations and
warranties which expressly relate solely to an earlier date or time, which
representations and warranties shall have been true and correct on and as of the
specific dates or times referred to therein) and the Loan Parties shall have
performed and complied with all covenants and conditions of the Credit
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate this _____ day of ___________, 19__.
NOVACARE, INC.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
<PAGE> 71
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 11
<TABLE>
<S> <C>
NovaCare is enclosing the following with this Certificate:
(1) Joinder documentation described in Paragraph 5
--------
(2) Agreements governing assumed Indebtedness described in
Paragraph 7(a)
--------
(3) Financial Statements of the Pooling Partner and its
Subsidiaries described in Paragraph 8(i)
--------
(4) Financial projections of the Pooling Partner and its
Subsidiaries described in Paragraph 8(ii)
--------
(5) Budget, forecasts and projections described in
Paragraph 8(iii)
--------
</TABLE>
<PAGE> 72
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 12
ACKNOWLEDGED AND AGREED TO AND PROPOSED
POOLING APPROVED BY EACH BANK WHICH HAS
EXECUTED THIS CERTIFICATE BELOW AS OF
THE______DAY OF
, 19 .
--------------------- ---
PNC BANK, NATIONAL ASSOCIATION
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
CORESTATES BANK, N.A.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
MELLON BANK, N.A.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
<PAGE> 73
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 13
NATIONSBANK N.A.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
FLEET BANK OF MASSACHUSETTS, N.A.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
<PAGE> 74
[TO BE USED FOR CERTAIN PERMITTED PURCHASES]
EXHIBIT 1.01(P)(2)
PERMITTED PURCHASES APPROVAL CERTIFICATE -
REQUIRED BANKS
, 19
--------------- --
PNC BANK, NATIONAL ASSOCIATION
as Agent for the Banks party
to the Credit Agreement Referred to Below
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of May _____, 1994
(as amended, supplemented or modified from time to time, the "Credit
Agreement") among NOVACARE, INC., a Delaware corporation ("NovaCare"), each of
the other Borrowers and the Guarantors that are parties thereto (the "Loan
Parties"), the Banks party thereto and PNC BANK, NATIONAL ASSOCIATION, as Agent
for such Banks. This Certificate is delivered pursuant to clause (D) of the
definition of Permitted Purchase contained in Section 1.01 of the Credit
Agreement in connection with the proposed purchase transaction described below.
Unless otherwise defined herein, terms defined in the Credit Agreement are used
herein with the same meanings.
I, ______________, [President/Chief Executive Officer/Chief
Financial Officer] of NovaCare, do hereby certify as of the date hereof, as
follows:
(1) Description of Proposed Permitted Purchase. NovaCare
desires that ____________________ [List Loan Party(s) that will be making the
Acquisition] (the "Acquiring Loan Party") [acquire the assets/acquire the stock
or other ownership interest/merge with/or merge into] ____________________
[Insert name of entity whose assets are being acquired or whose stock or other
ownership interest is being acquired] (the "Seller") (the "Acquisition").
(i) The Seller is ____________________ [type of
entity and jurisdiction of organization].
(ii) The Acquisition is scheduled to close on
____________________, 19___ (the "Purchase
Date").
<PAGE> 75
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 2
(iii) The assets and businesses of the Seller are
located in ____________________ [list
locations and describe assets or business in
those locations].
(iv) The Acquisition shall be an [Asset
Acquisition/Stock Acquisition] (see Section
1.01 of the Credit Agreement for definition
of these terms).
(2) Purchase Price; Assumed Indebtedness. (Clause (D) of
definition of Permitted Purchase).
(A) Purchase Price. The Purchase Price in
connection with the proposed Acquisition is
$_______________ computed in accordance with
GAAP as set forth below.
<TABLE>
<S> <C>
(i) Cash to be paid at Closing $
-------
(ii) Amount of deferred payments $
-------
(iii) Stock, securities or other
consideration to be given by Loan
Parties (describe):
____________________ $
-------
(iv) Other amounts to be added or
subtracted (describe):
____________________ $
-------
Total $
-------
</TABLE>
(B) Assumed Indebtedness - This Acquisition. The
following is a list of (1) the Indebtedness
to be assumed by the Loan Parties in
connection with the Acquisition, and (2) the
Indebtedness of the Seller which shall remain
outstanding following the Acquisition (this
number (2) applies only if the Acquisition is
a Stock Acquisition):
<PAGE> 76
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 3
<TABLE>
<CAPTION>
Collateral
security
Obligor securing the
on the Indebtedness Amount of
Creditor Indebtedness (if any) Indebtedness
-------- ------------ -------- ------------
<S> <C> <C> <C>
$
----------- ----------- ----------- -----------
$
----------- ----------- ----------- -----------
$
----------- ----------- ----------- -----------
Total: $
==========
</TABLE>
We are simultaneously sending you copies of
the agreements governing the Indebtedness
listed above.
(C) Assumed Indebtedness - Aggregate Limitations
(Section 8.02(a)(vi)). The amount of
Indebtedness of the Loan Parties described in
Section 8.02(a)(vi) of the Credit Agreement
shall be $__________ on the Purchase Date
which is less than $20,000,000, the maximum
permitted amount. The amount of such
Indebtedness is computed as follows:
<TABLE>
<S> <C>
(i) Purchase Money Security Interests
entered into in the ordinary course
of business $
-------
(ii) Indebtedness Assumed in Permitted
Purchases - Indebtedness (including
extensions and renewals thereof)
either (1) assumed by Loan Parties
pursuant to acquisitions of the
assets of other persons (by
purchase, merger or otherwise) in
Permitted Purchases (including the
proposed Acquisition) between the
Closing Date and the Purchase Date
or (2) of corporations, partnerships
or other entities whose stock,
partnership interests or other
ownership interests were acquired by
Loan Parties (by purchase, merger or
otherwise) in Permitted Purchases
between the Closing Date and the
Purchase Date, which in the case of
either (1) or (2) above remains
outstanding on the Purchase Date:
</TABLE>
<PAGE> 77
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 4
<TABLE>
<S> <C>
(a) Indebtedness assumed in the
proposed Acquisition (from
paragraph (B) above) $
---------
(b) Indebtedness assumed in prior
Permitted Purchases:
</TABLE>
<TABLE>
<CAPTION>
Collateral
Loan Party which is Date of securing the
now liable on the Permitted Indebtedness Indebtedness
Indebtedness Purchase (if any) Outstanding
------------ -------- -------- -----------
<S> <C>
$
----------- ----------- ----------- ----------
$
----------- ----------- ----------- ----------
$
----------- ----------- ----------- ----------
Total $
==========
(c) Sum of (a) plus (b) $
----------
(iii) Sum of Lines (i) and (ii)(c) (may not exceed
$20,000,000) $
----------
</TABLE>
(D) Lease Obligations. Listed below are the
future minimum lease payments under each
non-cancellable lease of the Seller and its
Subsidiaries (if any) (i) which will be
assumed or otherwise will remain outstanding
after the Acquisition, and (ii) under which
the annual lease payments exceed $250,000:
<TABLE>
<CAPTION>
Future Minimum
Lessor Expiration Date Lease Payments
------ --------------- --------------
<S> <C> <C>
------------------------- -------------- --------------
------------------------- -------------- --------------
------------------------- -------------- --------------
Total $
=============
</TABLE>
<PAGE> 78
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 5
(3) Lines of Business (Clause (A) of definition of
Permitted Purchase). The Seller is engaged in the business of
_____________________________________________, which complies with Section
8.02(g) of the Credit Agreement.
(4) Events of Default or Potential Default (Paragraph (B)
of definition of Permitted Purchase). On the Purchase Date and after giving
effect to the Acquisition and any new Revolving Credit Loans to be requested or
debt to be assumed in connection therewith, no event shall have occurred and be
continuing which constitutes an Event of Default or Potential Default.
(5) Joinder of the Seller and its Subsidiaries and Pledge
of their Stock (Paragraph (C) of definition of Permitted Purchase). The
following is a complete list of the corporations, partnerships or other
entities: (i) whose stock or other ownership interests will be acquired by one
or more Loan Parties in the Acquisition, (ii) which have been or will be formed
by the Loan Parties pursuant to the Acquisition, (iii) which are Subsidiaries
or Minority Subsidiaries of the entities listed in (i) and (ii) above:
<TABLE>
<CAPTION>
Person who Is the Entity
Type of holds its Stock Joining the
Entity and or other Percentage of Credit
Name of Jurisdiction of ownership total ownership Agreement
Entity Organization Interests held (yes/no)
------ ------------ --------- ---- --------
<S> <C> <C> <C> <C>
---------- ---------- ---------- ----------- ---------
---------- ---------- ---------- ----------- ---------
---------- ---------- ---------- ----------- ---------
</TABLE>
We are simultaneously delivering to the Agent Guaranty Agreements, Pledge
Agreements, an opinion of counsel and certified copies of organizational
documents, pursuant to which each entity listed above which is a Qualified
Subsidiary shall join the Credit Agreement as a Guarantor and the stock of such
Qualified Subsidiary shall be pledged to the Agent for the benefit of the
Banks, in each instance on the Purchase Date. (The procedures for such
joinders are described in Section 11.18 of the Credit Agreement. A Qualifying
Subsidiary is an entity of which NovaCare or
<PAGE> 79
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 6
NovaCare's Subsidiaries hold 80% or more of the ownership interests as more
fully set forth in the Credit Agreement.)
(6) Financial Covenant Compliance (Paragraph (E) of
definition of Permitted Purchase). On the Purchase Date and after giving
effect to the Acquisition and any new Revolving Credit Loans to be requested or
debt to be assumed in connection therewith, but otherwise on the basis of the
most recent financial statements of NovaCare and its Subsidiaries delivered
pursuant to Section 8.01(m) of the Credit Agreement and of the Seller and its
Subsidiaries as attached hereto pursuant to Paragraph (8), the Loan Parties
shall be in compliance with the following financial covenants:
(A) Funded Debt to Capitalization. (Section
8.02(m)). On the Purchase Date, the ratio of
(i) Consolidated Funded Debt to (ii)
Capitalization shall be __________ to 1.0.
Such ratio must not be more than the
following ratios for the following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
June 30, 1996 .50 to 1.0
July 1, 1996 and
thereafter .45 to 1.0
</TABLE>
(a) Consolidated Funded Debt, the
numerator of the foregoing ratio, is
determined as follows:
Indebtedness of NovaCare and its
Subsidiaries to persons other than
NovaCare and its Subsidiaries on the
Purchase Date in respect of, without
duplication:
<TABLE>
<S> <C>
(i) Borrowed money $
--------
(ii) Amounts raised under or
liabilities in respect of any
note purchase or acceptance
credit facility $
--------
(iii) Reimbursement obligations under
any letter of credit,
currency swap agreement,
interest rate swap, cap,
</TABLE>
<PAGE> 80
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 7
<TABLE>
<S> <C>
collar or floor agreement or other interest
rate management device $
--------
(iv) Other transactions (including
without limitation forward
sale or purchase agreements,
capitalized leases and
conditional sales agreements)
having the commercial effect
of a borrowing of money
entered into to finance
operations or capital
requirements (but not
including trade payables and
accrued expenses incurred in
the ordinary course of
business which are not
represented by a promissory
note) $
--------
(v) any guaranty of indebtedness for
borrowed money $
--------
(vi) Sum of (i) through (v) equals Consolidated
Funded Debt $
--------
(b) Capitalization, the denominator of
the foregoing ratio, is determined
as follows as of the Purchase Date:
(i) Consolidated Funded Debt
(amount from clause (vi) of
Paragraph (a) above) $
--------
(ii) Consolidated Net Worth, which
is total stockholders' equity
of NovaCare and its
Subsidiaries as of the
Purchase Date $
--------
(iii) Sum of (i) and (ii) equals Capitalization $
--------
</TABLE>
(B) Funded Debt to Cash Flow From Operations.
(Section 8.02(n)). The ratio of (i)
Consolidated Funded Debt on the Purchase Date
to (ii) Consolidated Cash Flow from
Operations for the four fiscal quarters
ending immediately prior to the Purchase Date
is
<PAGE> 81
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 8
__________ to 1.0. Such ratio must not be
more than the following ratios for the
following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1994 through
June 30, 1995 3.00 to 1.00
July 1, 1995 through
December 31, 1995 2.75 to 1.00
January 1, 1996 and
thereafter 2.50 to 1.00
(a) Consolidated Funded Debt, the
numerator of the foregoing ratio
(amount from clause (vi) of
Paragraph 6(A)(a) above) $
---------
(b) Consolidated Cash Flow from
Operations, the denominator of the
foregoing ratio, for the four fiscal
quarters ending immediately prior to
the Purchase Date is determined as
follows:
(i) Net Income $
---------
(ii) Depreciation $
---------
(iii) Amortization $
---------
(iv) Other non-cash charges to net income $
---------
(v) Interest Expense $
---------
(vi) Income Tax Expense $
---------
(vii) Sum of (i), (ii), (iii), (iv), (v)
and (vi) $
---------
(viii) Non-cash credits to net income $
---------
</TABLE>
<PAGE> 82
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 9
<TABLE>
<S> <C>
(ix) Item (vii) reduced by item
(viii) equals Consolidated
Cash Flow from Operations $
---------
</TABLE>
(7) Permitted Purchase Compliance. (Clause (E) of
definition of Permitted Purchase). On the Purchase Date and after giving
effect to the Acquisition, the Purchase Price for such Acquisition, when
aggregated with the Purchase Price of all other Permitted Purchases which
occurred during the period beginning on the Effective Date through and
including the date of determination is $_______________, which is less than or
equal to the amount of $160,000,000.
(8) Attached Financial Statements. Attached hereto are
true and correct copies of (i) the consolidated balance sheets and income
statements of Seller and its Subsidiaries for their immediately preceding
fiscal year and all other financial statements delivered by the Seller in
connection with the Acquisition which consist of the following _________
[list]; (ii) any financial projections with respect to the Seller and its
Subsidiaries received from the Seller or prepared by the Loan Parties; and
(iii) any revised budgets, and accompanying forecasts and projections prepared
by NovaCare projecting its and its Subsidiaries' operations on a consolidated
basis and separately for each line of business which have not previously been
delivered to the Banks.
(9) Representations and Warranties. After giving effect
to the Acquisition, any new Revolving Credit Loans to be requested or debt to
be assumed in connection therewith, the representations and warranties
contained in Article VI of the Credit Agreement shall be true on and as of the
Purchase Date with the same effect as though such representations and
warranties had been made on and as of the Purchase Date (except representations
and warranties which expressly relate solely to an earlier date or time, which
representations and warranties shall have been true and correct on and as of
the specific dates or times referred to therein) and the Loan Parties shall
have performed and complied with all covenants and conditions of the Credit
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate this _____ day of ___________, 19__.
NOVACARE, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 83
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 10
NovaCare is enclosing the following with this Certificate:
<TABLE>
<CAPTION>
NovaCare to
Check if
Enclosed
--------
<S> <C> <C>
(10) Agreements governing assumed Indebtedness described in Paragraph 2(B)
--------
(11) Joinder documentation described in Paragraph 5
--------
(12) Financial Statements of the Seller and its Subsidiaries described in
Paragraph 8(i)
--------
(13) Financial projections of the Seller and its Subsidiaries described in
Paragraph 8(ii)
--------
(14) Budget, forecasts and projections described in Paragraph 8(iii)
--------
</TABLE>
<PAGE> 84
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 11
ACKNOWLEDGMENT BY BANKS:
NovaCare to initial either (a) or (b) below as applicable:
<TABLE>
<CAPTION>
Initial
Applicable
Line
----------
<S> <C> <C>
(15) Each Bank shall be deemed to approve of this
proposed Acquisition unless it notifies NovaCare in
writing within ten (10) Business Days after it receives
a copy of this certification that it disapproves of this
certification because both of the following
are true:
(A) the Purchase Price listed in Paragraph 2(A) of
this certificate is less than or equal to $30,000,000
and
(B) the amount of the Assumed Indebtedness set forth
in Paragraph 2(B) of this certificate is less than
or equal to $15,000,000
----------
(16) Each Bank shall be deemed to approve of this
proposed Acquisition only by notifying NovaCare in
writing of its approval because either of the following is true:
(A) the Purchase Price set forth in Paragraph 2(A)
of this certificate is greater than $30,000,000
or
(B) the amount of Assumed Indebtedness set forth in
Paragraph 2(B) of this certificate is greater
than $15,000,000
----------
</TABLE>
<PAGE> 85
PNC BANK, NATIONAL ASSOCIATION
______________, 199__
Page 12
Banks to Sign and Initial Approval or Disapproval of proposed Acquisition:
<TABLE>
<CAPTION>
Approve Disapprove
------- ----------
<S> <C> <C>
PNC BANK, NATIONAL ASSOCIATION
By:
---------------------------------------- ----------------- -----------------
Name:
--------------------------------------
Title:
-------------------------------------
CORESTATES BANK, N.A.
By:
---------------------------------------- ----------------- -----------------
Name:
--------------------------------------
Title:
-------------------------------------
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:
---------------------------------------- ----------------- -----------------
Name:
--------------------------------------
Title:
-------------------------------------
MELLON BANK, N.A.
By:
---------------------------------------- ----------------- -----------------
Name:
--------------------------------------
Title:
-------------------------------------
NATIONSBANK N.A.
By:
---------------------------------------- ----------------- -----------------
Name:
--------------------------------------
Title:
-------------------------------------
FLEET BANK OF MASSACHUSETTS, N.A.
By:
---------------------------------------- ----------------- -----------------
Name:
--------------------------------------
Title:
-------------------------------------
</TABLE>
<PAGE> 86
EXHIBIT 8.01(m)(iii)
COMPLIANCE CERTIFICATE
, 19
-------------------- --
PNC BANK, NATIONAL ASSOCIATION
as Agent for the Banks party
to the Credit Agreement Referred to Below
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of May 27, 1994 (as
amended, supplemented or modified from time to time, the "Credit Agreement")
among NOVACARE, INC., a Delaware corporation ("NovaCare"), and the other
Borrowers and the Guarantors under such Credit Agreement (collectively, the
"Loan Parties"), the Banks party thereto and PNC BANK, NATIONAL ASSOCIATION, as
Agent for such Banks. Unless otherwise defined herein, terms defined in the
Credit Agreement are used herein with the same meanings.
I, ______________________________, [President/Chief Executive
Officer/Chief Financial Officer] of NovaCare, do hereby certify pursuant to
Section 8.01(m)(iii) of the Credit Agreement on behalf of NovaCare as of the
[fiscal quarter/year ended _______________, 19___] the "Report Date"), as
follows:
(1) Minimum Current Ratio. (Section 8.02(k)). The ratio
of (i) consolidated current assets of NovaCare and
its Subsidiaries to (ii) consolidated current
liabilities of NovaCare and its Subsidiaries
calculated as of the Report Date is __________ to 1.0
which is not less than the following ratios for the
following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
6/30/1997 2.0 to 1.0
7/1/1997 and
thereafter 1.75 to 1.0
</TABLE>
(2) Minimum Net Worth. (Section 8.02(l)). As of the
Report Date, the Consolidated Net Worth is
$__________ which is not less than the Minimum Net
Worth Requirement which is $__________. Such amounts
are computed as follows:
<PAGE> 87
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 2
<TABLE>
<S> <C> <C>
(A) Consolidated Net Worth as of the Report Date:
Total stockholders' equity of NovaCare and
its Subsidiaries $
------------
(B-1) Minimum Net Worth Requirement as of the
Report Date for any Report Date occurring
between the Closing Date through, but not
including, the Sixth Amendment Effective
Date:
(i) $375,250,000
(ii) Seventy-five percent (75%) of
Consolidated Net Income of NovaCare
and its Subsidiaries for each fiscal
quarter in which net income was
earned (as opposed to a net loss)
from March 31, 1994 through (and
including) the Report Date computed
as follows:
(a) consolidated net income $
-------
(b) Less: increases in net income
resulting from changes in
GAAP after Closing Date ($ )
------
(c) Plus: decreases in net
income resulting from
changes in GAAP after
Closing Date $
-------
(d) Subtotal sum of (a), (b)
and (c) $
-------
(e) Line (d) times 75% $
-------------
(iii) One hundred percent (100%) of all
proceeds received by NovaCare in
connection with the sale of shares
of its capital stock after deducting
any expenses associated with such
sale (including proceeds from
conversion of the Subordinated
Debentures) during the
</TABLE>
<PAGE> 88
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 3
<TABLE>
<S> <C> <C>
period from March 31, 1994 through
(and including) the Report Date $
-------
(iv) Sum of (i), (ii) and (iii) equals
Minimum Net Worth Requirement $
-------
(B-2) Minimum Net Worth Requirement as of the
Report Date. For any Report Date occurring
on and after the Sixth Amendment Effective
Date through and including June 30, 1996:
(i) $487,635,000
(ii) Ninety-five percent (95%) of
Consolidated Net Income of NovaCare
and its Subsidiaries for each fiscal
quarter after the fiscal quarter
ended June 30, 1995 in which net
income was earned (as opposed to a
net loss) from July 1, 1995 through
(and including) the Report Date
computed as follows:
(a) consolidated net income $
-------
(b) Less: increases in net income
resulting from changes in GAAP
after Closing Date ($ )
------
(c) Plus: decreases in net income
resulting from changes in GAAP
after Closing Date $
-------
(d) Subtotal sum of (a), (b)
and (c) $
-------
(e) Line (d) times 95% $
-------
(iii) One hundred percent (100%) of all
proceeds received by NovaCare in
connection with the sale of shares
of its capital stock after deducting
any expenses associated with such
sale (including proceeds from
conversion of the Subordinated
Debentures) during the
</TABLE>
<PAGE> 89
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 4
<TABLE>
<S> <C>
period from July 1, 1995 through (and
including) the Report Date $
-------
(iv) One hundred percent (100%) of the cash
purchase price of common stock of
NovaCare repurchased by NovaCare,
up to an aggregate maximum
amount of $55,000,000 during the
period from July 1, 1995 through (and
including) the Report Date $
-------
(v) Aggregate deductions from Consolidated
Net Income for non-cash extraordinary
items, up to an aggregate maximum
amount of $83,000,000 during the period
from July 1, 1995 through (and
including) the Report Date $
-------
(vi) Sum of amounts under clauses (i),
(ii) and (iii) reduced by amounts
under clauses (iv) and (v) equals
Minimum Net Worth Requirement $
-------
(B-3) Minimum Net Worth Requirement as of the Report
Date for any Report Date occurring on or after
July 1, 1996:
(i) Amount determined under item (vi) of
clause (B-2) above as of June 30, 1996 $
-------
(ii) Seventy-five percent (75%) of
Consolidated Net Income of NovaCare
and its Subsidiaries for each fiscal
quarter in which net income was earned
(as opposed to a net loss) from July
1, 1996 through (and including) the
Report Date computed as follows:
(a) consolidated net income $
-------
</TABLE>
<PAGE> 90
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 5
<TABLE>
<S> <C>
(b) Less: increases in net income
resulting from changes in
GAAP after Closing Date ($ )
------
(c) Plus: decreases in net
income resulting from
changes in GAAP after
Closing Date $
-------
(d) Subtotal sum of (a),
(b) and (c) $
-------
(e) Line (d) times 75% $
-------
(iii) One hundred percent (100%) of all
proceeds received by NovaCare in
connection with the sale of shares
of its capital stock after deducting
any expenses associated with such
sale (including proceeds from
conversion of the Subordinated
Debentures) during the period from
July 1, 1996 through (and including)
the Report Date $
-------
(iv) Sum of (i), (ii), and (iii) equals
Minimum Net Worth Requirement $
-------
</TABLE>
(3) Funded Debt to Capitalization. (Section 8.02(m)).
As of the Report Date, the ratio of (i) Consolidated
Funded Debt to (ii) Capitalization is __________ to
1.0. Such ratio must not be more than the following
ratios for the following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
June 30, 1996 .50 to 1.0
July 1, 1996 and
thereafter .45 to 1.0
</TABLE>
(A) Consolidated Funded Debt, the numerator of
the foregoing ratio, is determined as follows:
<PAGE> 91
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 6
<TABLE>
<S> <C> <C>
Indebtedness of NovaCare and its Subsidiaries
on the Report Date to persons other than
NovaCare and its Subsidiaries in respect of,
without duplication:
(i) Borrowed money $
-------
(ii) Amounts raised under or liabilities
in respect of any note purchase or
acceptance credit facility $
-------
(iii) Reimbursement obligations under any
letter of credit, currency swap
agreement, interest rate swap, cap,
collar or floor agreement or other
interest rate management device $
-------
(iv) Other transactions (including
without limitation forward sale or
purchase agreements, capitalized
leases and conditional sales
agreements) having the commercial
effect of a borrowing of money
entered into to finance operations
or capital requirements (but not
including trade payables and accrued
expenses incurred in the ordinary
course of business which are not
represented by a promissory note) $
-------
(v) any guaranty of indebtedness for
borrowed money $
-------
(vi) Sum of (i) through (v) equals Consolidated
Funded Debt $
-------
(B) Capitalization, the denominator of the foregoing
ratio, is determined as follows:
(i) Consolidated Funded Debt (amount
from clause (vi) of Paragraph (A)
above) $
-------
</TABLE>
<PAGE> 92
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 7
<TABLE>
<S> <C>
(ii) Consolidated Net Worth, which is
total stockholders' equity of
NovaCare and its Subsidiaries as of
the Report Date $
-------
(iii) Sum of (i) and (ii) equals Capitalization $
-------
</TABLE>
(4) Funded Debt to Cash Flow From Operations. (Section
8.02(n)). The ratio of (i) Consolidated Funded Debt
on the Report Date to (ii) Consolidated Cash Flow
from Operations for the four fiscal quarters ending
on the Report Date is __________ to 1.0. Such ratio
must not be more than the following ratios for the
following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1994 through
June 30, 1995 3.00 to 1.00
July 1, 1995 through
December 31, 1995 2.75 to 1.00
January 1, 1996 and
thereafter 2.50 to 1.00
(A) Consolidated Funded Debt, the numerator of
the foregoing ratio (amount from Paragraph
3(A) above) $
-------
(B) Consolidated Cash Flow from Operations(1), the
denominator of the foregoing ratio, for the
four fiscal quarters ending on the Report
Date is determined as follows:
(i) Net Income $
-------
(ii) Depreciation $
-------
(iii) Amortization $
-------
(iv) Other non-cash charges to net income $
-------
</TABLE>
- -------------------------------------
(1) To be adjusted in accordance with the definition of Consolidated Cash Flow
from Operations set forth in the Credit Agreement to give effect to Permitted
Acquisitions and Permitted Asset Transfers during the four fiscal quarters
ending on the Report Date.
<PAGE> 93
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 8
<TABLE>
<S> <C>
(v) Interest Expense $
-------
(vi) Income Tax Expense $
-------
(vii) Sum of (i), (ii), (iii), (iv), (v) and (vi) $
-------
(viii) Non-cash credits to net income $
-------
(ix) Item (vii) reduced by item (viii)
equals Consolidated Cash Flow from
Operations $
-------
</TABLE>
(5) Minimum Fixed Charge Coverage Ratio (2). (Section
8.02(o)). The ratio of (i) Consolidated Earnings
Available for Fixed Charges to (ii) Consolidated
Fixed Charges for the four fiscal quarters ending on
the Report Date is __________ to 1.0. Such ratio
must not be less than the following ratios for the
following periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through
June 30, 1996 1.5 to 1.0
July 1, 1996 and
thereafter 1.75 to 1.0
(A-1) For any Report Date occurring between the
Closing Date through, but not including the
Sixth Amendment Effective Date, Consolidated
Earnings Available for Fixed Charges, the
numerator of the foregoing ratio is
determined as follows:
(i) Net income $
-------
(ii) Interest expense $
-------
(iii) Income tax expense $
-------
</TABLE>
- ---------------------------------------
(2) To be adjusted in accordance with the definitions of Consolidated Earnings
Available for Fixed Charges and Consolidated Fixed Charges set forth in the
Credit Agreement to give effect to Permitted Acquisitions which occur during
the four fiscal quarters ending on the Report Date.
<PAGE> 94
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 9
<TABLE>
<S> <C>
(iv) Operating lease expense $
-------
(v) The sum of (i) through (iv) $
-------
(A-2) For any Report Date occurring between the
Closing Date through, but not including the
Sixth Amendment Effective Date, Consolidated
Fixed Charges, the denominator of the
foregoing ratio, for the four fiscal quarters
ending on the Report Date, is determined as
follows:
(vi) Interest expense $
-------
(vii) Operating lease expense $
-------
(viii) The sum of (i) and (ii) $
-------
(B-1) For any Report Date occurring on or after the
Sixth Amendment Effective Date, Consolidated
Earnings Available for Fixed Charges, the
numerator of the foregoing ratio is
determined as follows:
(i) Net Income $
-------
(ii) Interest Expense $
-------
(iii) Income Tax Expense $
-------
(iv) Depreciation $
-------
(v) Amortization $
-------
(vi) Other non-cash charges to net income $
-------
(vii) Expenses under operating leases $
-------
(viii) Sum of (i), (ii), (iii), (iv), (v) and (vi) $
-------
(ix) Non-cash credits to net income $
-------
(x) Item (viii) reduced by item (ix) equals
Consolidated Earnings Available for
Fixed Charges $
-------
</TABLE>
<PAGE> 95
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 10
<TABLE>
<S> <C>
(B-2) For any Report Date occurring on or after the
Sixth Amendment Effective Date, Consolidated
Fixed Charges, the denominator of the
foregoing ratio is determined as follows:
(i) Interest Expense $
-------
(ii) Expenses under operating leases $
-------
(iii) Income Tax Expense $
-------
(iv) Current maturities of long-term Indebtedness $
-------
(v) Current principal payments under
capitalized leases (for the twelve
(12) month period following the
Report Date) $
-------
(vi) The sum of (i) through (v) $
-------
</TABLE>
(6) [INTENTIONALLY OMITTED]
(7) Indebtedness Assumed in Permitted Acquisitions;
Purchase Money Security Interests (Sections
8.02(a)(v) and (vi)).
(a) Permitted Purchases and Purchase Money
Security Interests (Section 8.02(a)(v)). The
amount of Indebtedness of the Loan Parties
described in Section 8.02(a)(v) of the Credit
Agreement is $__________ on the Report Date
which is less than $20,000,000, the maximum
permitted amount. The amount of such
Indebtedness is computed as follows:
<TABLE>
<S> <C>
(i) Purchase Money Security Interests
entered into in the ordinary course
of business $
-------
</TABLE>
(ii) Permitted Purchases - Indebtedness
(including extensions and renewals
thereof) either (1) assumed by Loan
Parties pursuant to acquisitions of
the assets of other persons (by
purchase, merger or otherwise) in
Permitted Purchases between the
Closing Date and the Report Date or
(2) of corporations, partnerships or
other entities whose stock,
partnership interests or other
ownership interests were acquired by
Loan Parties (by purchase, merger or
otherwise) in Permitted Purchases
between the Closing Date
<PAGE> 96
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 11
and the Report Date, which in the case
of either (1) or (2) above remains
outstanding on the Report Date:
<TABLE>
<CAPTION>
Loan Party Collateral
which is securing
now liable Date of the
on the Permitted Indebtedness Indebtedness
Indebtedness Purchase (if any) Outstanding
------------ -------- -------- -----------
<S> <C>
$
---------------- ------------ ------------- ---------------
$
---------------- ------------ ------------- ---------------
$
---------------- ------------ ------------- ---------------
Total $
---------------
(iii) Sum of Lines (i) and (ii) (may not
exceed $20,000,000) $
---------------
</TABLE>
(b) Permitted Poolings (Section 8.02(a)(vi)).
The amount of Indebtedness of the Loan
Parties described in Section 8.02(a)(vi) of
the Credit Agreement incurred during the
current fiscal year was $__________ which is
less than $100,000,000, the maximum amount
permitted to be incurred during the current
fiscal year. The amount of such Indebtedness
is computed as follows:
Indebtedness either (1) assumed by acquiring
Loan Parties in Permitted Poolings during the
current fiscal year, or (2) of Pooling
Partners and their Subsidiaries whose stock
or other ownership interests were acquired in
Permitted Poolings during the current fiscal
year, including in the case of both (1) and
(2) any Indebtedness which has been repaid
since the date of the pooling as well as
Indebtedness which remains outstanding on the
date of this certificate.
<PAGE> 97
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 12
<TABLE>
<CAPTION>
Loan Party which
assumed Indebtedness Collateral securing
or Pooling Partner whose Date of the Indebtedness Amount of
stock was acquired Permitted Pooling (if any) Indebtedness
------------------ ----------------- -------- ------------
<S> <C> <C> <C>
$
---------------- ---------- ------------- -------------
$
---------------- ---------- ------------- -------------
$
---------------- ---------- ------------- -------------
Total (may not exceed $100,000,000) $
-------------
</TABLE>
(8) Permitted Additional Institutional Indebtedness
(Section 8.02(a)(viii) and definition of "Permitted
Additional Institutional Indebtedness"). The
following is a list of Permitted Additional
Institutional Indebtedness outstanding on the Report
Date:
<TABLE>
<CAPTION>
Documentation governing
has been delivered
Loan to Agent**
Lender Party Amount (yes/no)
------ ----- ------ --------
<S> <C> <C> <C>
$
--------------- ------------ ------------- --------------
$
--------------- ------------ ------------- --------------
$
--------------- ------------ ------------- --------------
</TABLE>
** Documentation governing Indebtedness should be enclosed with
the certificate if it has not previously been delivered to
Agent
(9) Permitted Additional Subordinated Indebtedness in
Excess of $5,000,000 (Section 8.02(a)(ix) and
definition of "Permitted Additional Subordinated
Indebtedness"). The following is a list of all
Permitted Additional Subordinated Indebtedness
outstanding on the Report Date which individually
exceeds $5,000,000:
<PAGE> 98
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 13
<TABLE>
<CAPTION>
Documentation governing
debt has been delivered to
Loan Agent **
Lender Party Amount (yes/no)
------ ----- ------ --------
<S> <C> <C> <C>
$
--------------- ------------ ------------- ------------
$
--------------- ------------ ------------- ------------
$
--------------- ------------ ------------- ------------
</TABLE>
** Documentation governing Indebtedness should be enclosed with
the certificate if it has not previously been
delivered to Agent
(10) Permitted Acquisitions. (Section 8.02(d)) The Loan
Parties made the following Permitted Acquisitions
during the quarter ending on the Report Date:
<TABLE>
<CAPTION>
Type of
Transaction
(Permitted
Purchase/ Purchase Price/
Seller/ Permitted Date of Pooling
Pooling Partner Pooling) Closing Consideration
--------------- -------- ------- -------------
<S> <C> <C> <C>
______________ ___________ _______ ____________
______________ ___________ _______ ____________
______________ ___________ _______ ____________
</TABLE>
(11) Permitted Investment in Excluded Entities; (Sections
8.02(f) and (i)). The Loan Parties' Restricted
Investments: (a) of the type described in clause (i)
of the definition of Permitted Investment in Excluded
Entities collectively are $_______; (b) of the type
described in clause (ii) of the definition of
Permitted Investment in Excluded Entities
collectively are $_______; and (c) of the type
described in clause (iii) of the definition of
Permitted Investment in Excluded Entities
collectively are $________. In the aggregate, the
Permitted Investment in Excluded Entities described
in the preceding clauses (a), (b), and (c) is
$________ which is less than $30,000,000. The
foregoing is computed below. The table below lists
as of the Report Date each Subsidiary and Minority
Subsidiary which is not a Borrower or Guarantor
(whether or not the Loan Parties have made a
Restricted Investment therein), each Unaffiliated
Managed Company in
<PAGE> 99
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 14
which the Loan Parties have made a Restricted
Investment and each other entity in which the Loan
Parties have made a Permitted Investment in Excluded
Entities.
<TABLE>
<CAPTION>
(iv)
(i) Other Total
Investments(3) (iii) obligations Restricted
in or (ii) Guaranties to or for Investments
contributions Loans to on behalf of the benefit (Sum of
Excluded to Excluded Excluded Excluded of Excluded columns (i)
Entity Entity Entity Entity Entity thru (iv))
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C>
$
-------- --------- ------- --------- ----------- ----------
$
-------- --------- ------- --------- ----------- ----------
Total (must be less than $30,000,000) $
----------
</TABLE>
(12) Events of Default or Potential Default. No event has
occurred and is continuing which constitutes an Event
of Default or Potential Default.
(13) Representations and Warranties. The representations
and warranties contained in Article VI of the Credit
Agreement are true on and as of the date hereof with
the same effect as though such representations and
warranties had been made on and as of the date hereof
(except representations and warranties which
expressly relate solely to an earlier date or time,
which representations and warranties shall have been
true and correct on and as of the specific dates or
times referred to therein) and the Loan Parties have
performed and complied with all covenants and
conditions hereof.
- ---------------------------------
(3) Indicate if nature of Restricted Investment is tangible property.
Restricted Investment in certain Excluded Entities is limited to the per entity
amount specified in the definition of Permitted Investment in Excluded Entities.
<PAGE> 100
PNC BANK, NATIONAL ASSOCIATION
_______________, 19___
Page 15
IN WITNESS WHEREOF, the undersigned has executed this
Certificate this _____ day of _____________, 19_____.
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
<PAGE> 1
NOVACARE 1996 ANNUAL REPORT
[PICTURE OF PERSON]
BOLD new strategies for
GROWTH:
<PAGE> 2
NOVACARE, INC.
NovaCare is a national provider of specialty health care services whose 14,500
employees provide and manage physical rehabilitation, orthotics and prosthetics,
subacute and occupational health services at 2,300 sites of care in 43 states
serving 30,000 patients per day. As a large and leading Professional Employer
Organization, NovaCare will expertly administer human resources functions for
small businesses, handling payroll distribution, purchasing and administering
health care and other benefits, and managing workers' compensation, employment
regulatory compliance and a broad array of other employee-related services.
NOVACARE'S VALUES
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, customers and co-workers.
ABOUT THE COVER
NovaCare prosthetists made it possible for Daina Bradley to walk again. Daina is
the brave young woman who endured the amputation of her right leg while trapped
in the rubble of the 1995 Oklahoma City bombing. More than a year later, Daina's
as active as ever thanks to NovaCare's unique Sabolich socket prosthetic device.
She is an exceptional example of how technological leadership in orthotics and
prosthetics is making a difference in the lives of thousands of amputees every
year. This annual report is about how NovaCare is extending its leadership into
many other areas with the potential to make a difference.
<PAGE> 3
NOVACARE, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share data.)
For the Year Ended June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $793,038 $905,359 $789,745
Net income 15,281 61,924 58,214
Net income per common share $ .24 $ .95 $ .90
Weighted average number of common
shares outstanding 64,325 65,163 64,663
<CAPTION>
As of June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital $223,712 $225,126 $194,324
Total assets 789,731 852,557 850,541
Total liabilities 305,337 364,922 434,837
Shareholders' equity $484,394 $487,635 $415,704
</TABLE>
<TABLE>
<CAPTION>
NET REVENUES
($ in millions)
Adjusted for the sale of the medical rehabilation hospitals division in 1995 and
a $10.5 million charge for a change in estimate.
<S> <C>
94 653
95 795
96 804
</TABLE>
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATIONS
($ in millions)
<S> <C>
94 34
95 44
96 58
</TABLE>
NOVACARE 1996 ANNUAL REPORT 1
<PAGE> 4
EXTENDING our leadership
NOVACARE HAS EARNED NATIONAL RECOGNITION FOR ITS LEADERSHIP IN CLINICAL
OUTCOMES, PROSTHETICS TECHNOLOGY AND WORKER REHABILITATION; WE'VE BEEN CITED AS
WELL FOR OUR SUCCESSFUL APPROACH TO ORGANIZATIONAL STRUCTURE AND EMPLOYEE
RELATIONS. FISCAL 1997 IS THE YEAR THAT WE EXTEND OUR LEADERSHIP IN NEW
DIRECTIONS TO CREATE OPPORTUNITIES FOR GROWTH AND HIGHER SHAREHOLDER RETURNS.
[PICTURES OF MAGAZINES AND NEWSPAPERS]
Best-selling author Fred Wiersema's new book CUSTOMER INTIMACY showcases
companies with exceptional customer relationships, foremost among them NovaCare,
along with General Electric, IBM, Nike, and Microsoft.
Our breakthrough prosthetics technology has been hailed around the world, most
recently in FORTUNE magazine, featuring our myolectric arm, which enables the
patient to open and close the hand by flexing muscles in the residual arm.
NovaCare's strong values-based culture and inverted organization are featured in
the March-April 1996 HARVARD BUSINESS REVIEW article "Managing Professional
Intellect: Making the Most of the Best."
USA TODAY joined more than 500 publications around the world reporting
NovaCare's development of prosthetic technology that enables the patient to feel
hot and cold.
2 NOVACARE 1996 ANNUAL REPORT
<PAGE> 5
[photo]
NovaCare Prosthetist and 1996 Paralympic Bronze Medal Winner Kurt Collier, shown
here with John H. Foster, was honored at the White House by President Clinton.
Kurt took the Pentathlon Bronze at this international competition for physically
disabled athletes.
[television]
A CBS REPORTS documentary in August 1996 spotlighted NovaCare as the nation's
largest employer of rehabilitation professionals, drawing particular attention
to our highly successful recruiting programs.
[newspaper]
A March NEW YORK TIMES article on return-to-work rehabilitation drew national
attention to our on-site rehabilitation program at CIGNA's Philadelphia
headquarters. CIGNA is one of many major U.S. employers that use NovaCare for
physical therapy services.
[report cover]
NovaCare leads the rehabilitation industry in its commitment to assuring the
highest quality cost-effective care. In May, NovaCare co-sponsored a symposium
with Harvard School of Public Health assembling for the first time 60 national
experts from all areas of health care to discuss improving clinical outcomes for
senior Americans with disabilities.
NOVACARE 1996 ANNUAL REPORT 3
<PAGE> 6
[PICTURE]
<PAGE> 7
to our SHAREHOLDERS
Fiscal 1996 was a year of mapping a new strategic direction for NovaCare -- an
initiative made possible by our market leadership in rehabilitation and our
exceptionally strong balance sheet.
At the end of fiscal 1995, we looked to 1996 as a year to restructure
our organization -- to make it "right" to meet emerging opportunities in health
care. We enter the new year with our restructuring in place. It is time now for
growth and value creation.
This letter is about 1996 and the steps we took to address challenges
in our businesses. Most importantly, it is about our new strategic direction.
A YEAR OF ACTION AND RESOLUTION
In 1996 financial performance was not up to our standards. Earnings before a
charge for a change in estimate and nonrecurring items decreased to $.48 from
$.61 per share in 1995. Yet, 1996 marked a critical turning point for NovaCare.
It was a year of action leading to resolution of many challenges we faced a year
ago. We returned former levels of profitability to long-term care contract
services where we operate rehabilitation programs in nursing homes; we merged
our two outpatient businesses; and, we implemented a plan for strengthening and
growing our outpatient services.
LONG-TERM CARE SERVICES REPOSITIONED
We successfully repositioned our long-term care services business in fiscal
1996: We reduced our dependence on those large nursing home chains inclined to
provide rehabilitation services with in-house staff by replacing them with new,
mostly smaller, customers, thus diversifying our customer base and contributing
to a more stable workforce. We centralized administrative functions, resulting
in substantially reduced costs and a new organization with the flexibility to
succeed in a changing payor world. Although regulatory uncertainty continues,
our restructured organization makes us confident that we can weather proposed
Medicare reimbursement changes.
Going forward, we will maintain our number-one market position in
long-term care rehabilitation, investing only in projects that will improve
clinical outcomes or lower costs. The substantial cash flow generated by this
business will be used to fund growth in other areas.
OUTPATIENT SERVICES STRENGTHENED
We merged our orthotics and prosthetics (O&P) and physical therapy businesses in
December 1995. This merger, along with streamlining staff and closing less
profitable centers, is expected to generate $10-$15 million in annual savings,
with most of it realized by the end of fiscal 1997.
Future improvements in the merged outpatient business will come from
marketing and acquisitions, resulting in more centers with more patients per
center. Outpatient services remains one of the fastest growing segments of
health care and is our link with emerging payor and provider relationships in
health care.
BOLD NEW STRATEGIES FOR GROWTH
Our growth plan is based on our view of emerging payor and provider trends, and
what they imply for new opportunities in and outside health care. Our strategy
for growth is built on a four-part foundation:
- - expansion of outpatient physical therapy and O&P services
- - affiliation with integrated delivery systems
- - development of occupational health practices
- - entry into the professional employer organization industry.
Although each area is attractive in its own right, the combination of
these businesses with NovaCare's existing core competencies and leading market
positions is powerful.
OUTPATIENT SERVICES
The first part of our strategy is to substantially expand our outpatient
physical therapy and O&P services in target markets through acquisitions and
start-up centers. We are building from a position of strength: Our O&P business
is the leading practice in the world with respect to technology and patient
care, and we are one of the two major networks of outpatient physical therapy
centers.
INTEGRATED DELIVERY SYSTEMS
The second part of our growth strategy -- further building our outpatient
volumes -- is to affiliate our outpatient services with leading integrated
health care delivery systems.
One of the most dramatic shifts in U.S. health care is the emergence
4 NOVACARE 1996 ANNUAL REPORT
<PAGE> 8
[PICTURE OF JOHN H, FOSTER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND TIMOTHY E
FOSTER, PRESIDENT AND CHIEF OPERATING OFFICER]
of networks of hospitals, physician practices, and ancillary services in local
markets. Such alliances are a response by providers to pressure for seamless,
integrated care created by the shift to a managed care environment. NovaCare,
with 500 outpatient centers across the U.S., and, more importantly, its clusters
of centers in many markets, is best positioned to become the rehabilitation
provider in these networks.
OCCUPATIONAL HEALTH
The third part of our growth strategy is occupational health, a $30 billion
highly fragmented industry and the last major unconsolidated frontier in health
care. Occupational health is a relatively new concept of care combining the
medical care and rehabilitation for injured and ill workers covered by workers'
compensation insurance. The result is high quality care for the patient and
substantially lower costs for the employer.
PROFESSIONAL EMPLOYER ORGANIZATION
The fourth part of our growth strategy takes us into a new and emerging
industry, that of the Professional Employer Organization (PEO), in which health
care is a critical component. A PEO manages the human resources function for
other employers, principally small businesses. It distributes payroll; buys and
administers health insurance plans; deals with employment regulations; in some
cases, recruits and hires for the employer; and, it handles workers'
compensation arrangements --a particularly solid fit with NovaCare expertise.
The employer is able to reduce costs and offer employees a broader range of
services because of PEO scale economies.
We will establish or acquire PEOs in markets in which we are building
occupational health practices and affiliating with integrated delivery systems
- -- the same markets where we will focus acquisition and start-up activity in our
outpatient business.
As we conclude fiscal 1996, we look back on two difficult years in
terms of financial performance and return to shareholders. During this time,
we've been building in the right direction: We've addressed the challenges in
our existing businesses, put the infrastructure in place for a return to growth,
and fashioned a winning strategy for the future.
Eleven years ago, NovaCare defined the long-term care contract services
industry and set the industry standard for quality and professionalism. Five
years ago, it did the same in the orthotics and prosthetics industry. Now we
intend to do it yet again: in the emerging occupational health and PEO
industries.
On behalf of your Board and management, I offer my appreciation to you,
our shareholders, for your continuing confidence and support. I also extend
thanks and admiration to all NovaCare employees. It is through their efforts
that we are Helping Make Life a Little Better for nearly 30,000 patients each
day, and pursuing bold new strategies for growth.
/s/ John H. Foster
------------------------------------
John H. Foster
Chairman and Chief Executive Officer
NOVACARE 1996 ANNUAL REPORT 5
<PAGE> 9
LOOKING ahead
NovaCare is the largest combined outpatient physical therapy and orthotics and
prosthetics network in the U.S. and an emerging player in the occupational
health arena putting us in the best position to meet the needs of integrated
delivery systems. These emerging networks are looking for an expert partner to
manage and provide these specialized services: a partner with an excellent
clinical reputation and outcomes, sophisticated systems capable of tracking and
measuring patient progress through the plan of care, and a strong financial
position to support expansion of the network as it grows. NovaCare brings these
strengths to such partnerships. In turn, NovaCare's patient volumes will
increase due to its broadened exposure to the market's gatekeepers -- be they
hospitals, payors, or physicians. Our experience with integrated systems is
positive: We are currently in a highly
STRATEGY : EXPANSION OF OUTPATIENT SERVICES
PART 1 CHANGES IN U.S. HEALTH CARE HAVE DRAMATICALLY INCREASED UTILIZATION OF
OUTPATIENT CARE, FROM SURGI-CENTERS TO REHABILITATION SERVICES. TODAY'S
OUTPATIENT PHYSICAL THERAPY INDUSTRY IS ESTIMATED AT $11 BILLION
COMPARED TO JUST $7 BILLION FOUR YEARS AGO, AND ANALYSTS PROJECT AN
EIGHT TO TEN PERCENT GROWTH RATE OVER THE NEXT FIVE YEARS.
Growth in the outpatient services industry is being fueled by demand
from: an aging population; increased survival rates from catastrophic injuries
and illnesses; and increased awareness that rehabilitation helps reduce overall
health care expenditures. In addition, shorter hospital stays move patients to
outpatient settings earlier in their recovery, when higher level care is needed.
Most people requiring braces and artificial limbs also need rehabilitation, so
combining outpatient rehabilitation and orthotics and prosthetics services (a $1
billion industry in itself) makes sense in contracting with managed care and
integrated delivery systems. In addition to these factors, demand for O&P
services is sensitive to technological advances (such as those being made by
NovaCare), which result in growing numbers of patients seeking the latest,
lightest and most responsive prosthetics. Additionally, 40 percent of lower-limb
amputations in the U.S. are associated with diabetes: This becomes more
significant as the population ages.
<TABLE>
<CAPTION>
ESTIMATED OUTPATIENT
REHABILITATION INDUSTRY
($ in billions)
<S> <C>
94 7.0
95 7.6
96 8.4
97 9.4
98 10.5
</TABLE>
NovaCare plans to expand its O&P leadership into international markets in fiscal
1997.
6 NOVACARE 1996 ANNUAL REPORT
<PAGE> 10
successful joint venture in Atlanta with Columbia/HCA, the nation's largest
health care company, in which we manage rehabilitation care for the entire
system.
NovaCare also plans to play a major role in developing occupational
health practices in selected markets, bringing our expertise in case management,
outcomes measurements and rehabilitation to bear in this emerging speciality
field that treats illnesses and injuries covered by workers' compensation
programs. Only recently have managed care principles, long a fact-of-life for
health care insurance, been applied to workers' compensation. The vehicle for
this transition is occupational health, which brings together all health care
services necessary to return a worker to full functionality and back-to-work in
the quickest and most cost-effective man-
"Our experience with integrated systems is positive: We are currently in a
highly successful joint venture in Atlanta with Columbia/HCA, the nation's
largest health care company, in which we manage rehabilitation care for the
entire system."
STRATEGY : INTEGRATED DELIVERY SYSTEM
PART 2 MANAGED CARE IS EXPECTED TO GROW AT A 15 PERCENT ANNUAL RATE OVER THE
NEXT DECADE, DRIVING CONTINUED DEMAND FOR HIGH QUALITY HEALTH CARE
SERVICES AT REASONABLE COST. INTEGRATED DELIVERY SYSTEMS ARE ONE OF
THE NEW FORMS OF CONSOLIDATION ARISING TO MEET THOSE NEEDS.
Health care providers and payors -- hospitals, insurers, physicians, and
ancillaries, such as outpatient services -- are rushing to form and market these
coordinated networks of care to price-sensitive managed care referral sources.
The networks manage patient costs through participant incentive arrangements
that encourage efficient use of services, an integrated plan of care, and a
smooth, seamless transition from hospital to post-acute care. Analysts predict
that within the next ten years, many markets will be dominated by two to four of
these networks, which will act as "gatekeepers" -- that is, they will control
access -- to most health care services. Physicians are joining forces and
affiliating with integrated systems in order to be better able to negotiate
contracts with large insured plans. Insurers prefer to deal with integrated
delivery systems in order to avoid difficulties of myriad individual contract
negotiations, case management and performance monitoring.
HOSPITALS IN NETWORKS
55% IN NETWORK
11% PLAN TO JOIN NETWORK
34% NO NETWORK PLANS
Source: Cowen & Company
NOVACARE 1996 ANNUAL REPORT 7
<PAGE> 11
ner. Today, NovaCare manages work injury rehabilitation and prevention programs
for employers through on-site programs and outpatient care. We perform worksite
analysis to assess workplace risk and provide worksite safety programs that help
employers comply with work-related state and federal requirements. By acquiring
occupational medicine practices in strategic markets, NovaCare will expand its
linkages with workers needing rehabilitation and increase its attractiveness as
a partner in integrated delivery systems.
Potential NovaCare/PEO-industry synergies are powerful. The obvious
advantage to an employer of linkage with NovaCare is our ability to control the
cost of health care, including workers' compensation and rehabilitation. In
fact, the success of the PEO
"Although each area [of future growth] is attractive in its own right, the
combination of these businesses with NovaCare's existing core competencies and
leading market positions is powerful."
STRATEGY : Occupational Health
PART 3 OCCUPATIONAL HEALTH IS A BURGEONING $30 BILLION INDUSTRY, REPRESENTING
AN INTEGRATED APPROACH TO TREATING WORK-RELATED ILLNESSES AND INJURIES
COVERED UNDER WORKERS' COMPENSATION PROGRAMS. dEMAND FOR THESE SERVICES
IS EXPLODING AS A RESULT OF OUT-OF-CONTROL WORKERS' COMPENSATION
EXPENSES, WHICH CAN BE A SIGNIFICANT PORTION OF A BUSINESS' OPERATING
COSTS.
Workers' compensation costs climbed to $63 billion in 1993 -- up 200 percent
over ten years. Under workers' compensation, employers must pay not only the
medical cost of work-related claims but also replacement wages, legal and other
benefit expenses, most of which increase in direct proportion to the workers'
time away from the job. Understandably, employers are looking for solutions. In
response, occupational health practices are developing to provide the full
continuum of health care services, from initial evaluation through
rehabilitation, in order to control costs. Injured or ill workers and their
employers reap the benefits. Occupational health physicians and nurses arrange
appointments with specialists, if necessary, manage the worker's care, and focus
at the same time on the employer's concerns, providing progress reports and
working toward the employee's safe and quick return to work, even light duty
work. Occupational health centers also provide pre-employment physicals, drug
and alcohol testing, workplace safety and injury prevention programs.
<TABLE>
<CAPTION>
ESTIMATED WORKERS' COMPENSATION COSTS
($ in billions)
<S> <C>
85 29
86 34
87 38
88 43
89 48
90 56
91 62
92 70
00 E 140
</TABLE>
Source: Towers Perrin
8 NOVACARE 1996 ANNUAL REPORT
<PAGE> 12
arrangement depends heavily on control of health care costs. The new PEO
business is a natural outgrowth of NovaCare's strength and experience in
managing a dispersed workforce. Today, we employ 14,500 individuals across 43
states. Through PEO acquisitions this fiscal year, we expect to manage at least
as many other employees, making NovaCare's PEO one of the largest in the U.S. As
one of the largest employers in many markets, we will gain leverage in
negotiating better rates for health care and workers' compensation coverage for
our PEO employees. Further, since we will establish or acquire PEOs in the same
markets in which we are joining integrated delivery systems, those systems,
including our own centers, will be in a position to provide health care services
to employees of our PEO. Our PEO may also be an attractive solution for many of
the small- to medium-sized nursing homes in which we provide long-term care
contract services: Nursing homes have recently moved to the top of the list of
U.S. businesses with the most workers' compensation claims.
STRATEGY : Professional Employer Organization
PART 4 ANALYSTS SAY THAT PEOS -- AN OUTSOURCING SOLUTION TO THE COMPLEXITIES
AND COSTS OF EMPLOYMENT MANAGEMENT -- ARE POTENTIALLY A $1.3 TRILLION
INDUSTRY, WITH REVENUES GROWING AT A 30 PERCENT ANNUAL RATE AT LEAST
THROUGH THE YEAR 2005. PEO SERVICES, PRIMARILY PROVIDED TO SMALL- TO
MEDIUM-SIZED BUSINESSES, INCLUDE PAYROLL AND HUMAN RESOURCE
ADMINISTRATION, HEALTH CARE AND WORKERS' COMPENSATION COVERAGE AND
OTHER BENEFITS SUCH AS 401(K) PLANS AND CREDIT UNIONS.
Other service providers, such as payroll processing firms, benefits and safety
consultants and temporary services agencies also offer services to assist
businesses with certain tasks. However, they do not provide such a comprehensive
range of employment-related services. PEOs, on the other hand, offer a "one
stop shop" where employers can find solutions to all of their human resources
problems and save money in the process. By consolidating the employees of many
employers, PEOs achieve economies of scale (reducing benefit costs by five to 15
percent) and are able to offer employees services and insurance coverage at
levels typically available only to large corporations. An area of particular
savings for member employers is workers' compensation. With workers'
compensation costs predicted to grow at 10 percent annually, small- to
medium-sized companies with high workers' compensation claims stand to benefit
substantially by outsourcing to PEOs. Analysts project that virtually all
employers with 500 or fewer employees -- of which there are over five million in
the U.S. -- would benefit financially by outsourcing to PEOs. Currently, only
50,000 small businesses use PEOs.
[PIE CHART]
U.S. SMALL COMPANY EMPLOYMENT
/ / LESS THAN 500 EMPLOYEES
REPRESENTS 49 MILLION EMPLOYEES
/ / MORE THAN 500 EMPLOYEES
Source: Bureau of Labor Statistics,
Small Business Administration
NOVACARE 1996 ANNUAL REPORT 9
<PAGE> 13
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) As of June 30,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 95,724 $ 158,636
Accounts receivable, net of allowance in 1996 and 1995 of $18,995
and $19,718 respectively ........................................ 192,636 192,652
Inventories ....................................................... 13,948 11,213
Deferred income taxes ............................................. 14,875 16,748
Other current assets .............................................. 14,976 34,571
--------- ---------
Total current assets ......................................... 332,159 413,820
Property and equipment, net ........................................... 63,319 63,659
Excess cost of net assets acquired, net ............................... 354,117 352,115
Investment in joint ventures .......................................... 11,984 --
Deferred income taxes ................................................. 2,332 1,470
Other assets, net ..................................................... 25,820 21,493
--------- ---------
$ 789,731 $ 852,557
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements ......................... $ 8,173 $ 32,684
Accounts payable and accrued expenses ............................. 93,854 93,088
Income taxes payable .............................................. 6,420 32,922
--------- ---------
Total current liabilities .................................... 108,447 158,694
Financing arrangements, net of current portion ........................ 184,042 192,331
Deferred income taxes ................................................. 9,625 8,147
Other ................................................................. 3,223 5,750
--------- ---------
Total liabilities ............................................ 305,337 364,922
--------- ---------
Comments and contingencies ............................................ -- --
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares,
issued 66,091 shares in 1996 and issued 65,476 shares in 1995 .. 661 656
Additional paid-in capital ........................................ 253,918 250,857
Retained earnings ................................................. 253,430 238,149
--------- ---------
508,009 489,662
Less: Common stock in treasury (at cost), 3,190 shares in 1996
and 187 shares in 1995 .................................... (23,465) (1,614)
Deferred compensation ........................................ (150) (413)
--------- ---------
Total shareholders' equity ................................... 484,394 487,635
--------- ---------
$ 789,731 $ 852,557
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
10 NOVACARE 1996 ANNUAL REPORT
<PAGE> 14
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands except per share data) For the Years Ended June 30,
---------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net revenues .............................................. $ 793,038 $ 905,359 $ 789,745
Cost of services .......................................... 575,480 640,232 529,007
--------- --------- ---------
Gross profit ..................................... 217,558 265,127 260,738
Selling, general & administrative expenses ................ 140,456 151,759 125,098
Provision for uncollectible accounts ...................... 16,359 15,918 14,453
Amortization of excess cost of net assets acquired ........ 9,874 10,937 7,225
Provision for restructure and other nonrecurring items .... 13,370 (57,368) 5,754
--------- --------- ---------
Income from operations ........................... 37,499 143,881 108,208
Investment income ......................................... 4,999 5,405 5,304
Interest expense .......................................... (12,536) (23,298) (17,077)
Minority interest ......................................... (96) (404) (543)
--------- --------- ---------
Income before income taxes ....................... 29,866 125,584 95,892
Income taxes .............................................. 14,585 63,660 37,678
========= ========= =========
Net income ....................................... $ 15,281 $ 61,924 $ 58,214
========= ========= =========
Net income per common share ...................... $ .24 $ .95 $ .90
========= ========= =========
Weighted average number of common share
outstanding ................................... 64,325 65,163 64,663
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
NOVACARE 1996 ANNUAL REPORT 11
<PAGE> 15
12 NOVACARE 1996 ANNUAL REPORT
<PAGE> 16
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
GEORGE W. SIGULER
Founding Partner,
Siguler, Guff & Company, LLC
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
SENIOR MANAGEMENT
PETER D. BEWLEY
Senior Vice President,
General Counsel and Secretary
SUSAN J. CAMPBELL
Vice President, Communications
and Investor Relations
DARYL A. DIXON
President and General Manager,
Contract Services Division
JOHN H. FOSTER
Chairman of the Board and
Chief Executive Officer
TIMOTHY E. FOSTER
President and Chief Operating Officer
ROBERT E. HEALY, JR.
Senior Vice President,
Finance and Administration and
Chief Financial Officer
RONALD G. HISCOCK
President and General Manager,
Outpatient Division
LAURENCE F. LANE
Senior Vice President,
Regulatory Affairs
ARTHUR T. LOCILENTO, JR.
Senior Vice President,
Human Resources
STEVEN M. WISE
Vice President, Information Systems and
Chief Information Officer
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> 17
[PICTURE OF BISINESS CARD]
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company
ASK Colorado Health Care Services, P.C.
Advance Orthotics, Inc.
Affiliated Physical Therapists, Ltd.
Artificial Limb and Brace Center
Atlantic Rehabilitation Services, Inc.
Boca Rehab Agency, Inc.
Bowman-Shelton Orthopedic Service, Incorporated
Buendel Physical Therapy, Inc.
C.O.A.S.T. Institute Physical Therapy, Inc.
CR Services Corp.
Cannon & Associates, Inc.
Cenla Physical Therapy & Rehabilitation Agency, Inc.
Center for Physical Therapy & Sports Rehabilitation, Inc.
CenterTherapy, Inc.
Certified Orthopedic Appliance Co., Inc.
Coplin Physical Therapy Associates, Inc.
Crowley Physical Therapy Clinic, Inc.
Douglas Avery & Associates, Ltd.
Douglas C. Claussen, R.P.T., Physical Therapy, Inc.
Francis Naselli, Jr. & Stewart Rich Physical Therapists, Inc.
GP Therapy, L.L.C.
Galaxy Service Corporation
Gallery Physical Therapy Center, Inc.
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 Specialists, Inc.
Hand Therapy Associates, Inc.
Hand Therapy and Rehabilitation Associates, Inc.
Hawley Physical Therapy, Inc.
Heartland Rehabilitation, Inc.
Indianapolis Physical Therapy and Sports Medicine, Inc.
Jim All, Inc.
Kesinger Physical Therapy, Inc.
Lynn M. Carlson, Inc.
McFarlen & Associates, Inc.
MedStat, P.C.
<PAGE> 2
Michigan Therapy Centre, Inc.
Mill River Management, Inc.
Mitchell Tannebaum I, Inc.
Mitchell Tannebaum II, Inc.
Mitchell Tannenbaum III, Inc.
Monmouth Rehabilitation, Inc.
NACC, Inc.
NC (Wisconsin), S.C.
NC Cash Management, Inc.
NC Occupational Therapy, P.C.
NC Physical Therapy, P.C.
NC Resources, Inc.
National Rehab Services
New Mexico Physical Therapists, Inc.
Northside Physical Therapy, Inc.
NovaCare (Arizona), Inc.
NovaCare (Colorado), Inc.
NovaCare (Illinois), Inc.
NovaCare (Texas), Inc.
NovaCare Easton & Moran Physical Therapy, Inc.
NovaCare Management Company, Inc.
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 I, Inc.
NovaCare Outpatient Rehabilitation, 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, Inc.
NovaCare Rehab Agency of Ohio, Inc.
NovaCare Rehab Agency of Oklahoma, Inc.
NovaCare Rehab Agency of Oregon, Inc.
NovaCare Rehab Agency of Pennsylvania, Inc.
NovaCare Rehab Agency of South Carolina, Inc.
NovaCare Rehab Agency of Southern California, Inc.
NovaCare Rehab Agency of Tennessee, Inc.
NovaCare Rehab Agency of Virginia, Inc.
NovaCare Rehab Agency of Washington, Inc.
NovaCare Rehabilitation Agency of Wisconsin, Inc.
<PAGE> 3
NovaCare Rehabilitation, Inc.
NovaCare Service Corp.
NovaCare Speech Therapy & Audiology, Inc.
NovaCare, Inc.
NovaCare, Inc. (Delaware)
OSI Midwest, Inc.
Ortho Rehab Associates, Inc.
Orthomedics - Voner of Whittier
Orthomedics - Voner
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.
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 Managed Care of Arizona, Inc.
Rehab Provider Network - California, Inc.
Rehab Provider Network - Delaware, Inc.
Rehab Provider Network - Georgia, Inc.
Rehab Provider Network - Illinois, Inc.
Rehab Provider Network - Indiana, 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 Colorado, Inc.
Rehab Provider Network of Florida, Inc.
Rehab Provider Network of Nevada, Inc.
Rehab Provider Network of New Mexico, Inc.
Rehab Provider Network of Texas, Inc.
Rehab Provider Network of Wisconsin, Inc.
Rehab World, Inc.
Rehab/Work Hardening Management Associates, Ltd.
<PAGE> 4
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.
Robin-Aids Prosthetics, Inc.
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 Therapy, P.C.
Stephenson-Holtz, Inc.
T.J. Partnership I
TJ Corporation I, L.L.C.
The Center for Physical Therapy and Rehabilitation, Inc.
Theodore Dashnaw Physical Therapy, Inc.
Therex, P.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.
WorkCare, L.L.C.
Workers Rehabilitation Services, 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 July 31, 1996 appearing on page 40 of this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------------------
PRICE WATERHOUSE LLP
Philadelphia, PA
September 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS IN FORM 10-K, FOR THE
FISCAL PERIOD ENDED JUNE 30, 1996.
</LEGEND>
<CIK> 0000802843
<NAME> NOVACARE, INC
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 95,724
<SECURITIES> 0
<RECEIVABLES> 211,631
<ALLOWANCES> 18,995
<INVENTORY> 13,948
<CURRENT-ASSETS> 332,159
<PP&E> 115,613
<DEPRECIATION> (52,294)
<TOTAL-ASSETS> 789,731
<CURRENT-LIABILITIES> 108,447
<BONDS> 184,042
0
0
<COMMON> 661
<OTHER-SE> 483,733
<TOTAL-LIABILITY-AND-EQUITY> 789,731
<SALES> 0
<TOTAL-REVENUES> 793,038
<CGS> 0
<TOTAL-COSTS> 715,936<F1>
<OTHER-EXPENSES> 18,341<F2>
<LOSS-PROVISION> 16,359
<INTEREST-EXPENSE> 12,536
<INCOME-PRETAX> 29,866
<INCOME-TAX> 14,585
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,281
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<FN>
<F1>"TOTAL COSTS" consist of salaries, wages, and benefits, rent expense, supply
costs, depreciation and other.
<F2>"OTHER EXPENSES" consist of amortization, merger and other non recurring items,
minority interest and investment income.
</FN>
</TABLE>
