U N I T E D S T A T E S
S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
W A S H I N G T O N, D C 2 0 5 4 9
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
Commission file number 1-10875
NovaCare, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3247827
(State of incorporation) (I.R.S. Employer Identification No.)
1016 W. Ninth Avenue, King of Prussia, PA 19406
(Address of principal executive office) (Zip code)
Registrant's telephone number: (610) 992-7200
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 / /
As of January 31, 1996, NovaCare, Inc. had 65,755,268 shares of common
stock, $.01 par value, outstanding.
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED DECEMBER 31, 1995
INDEX
Part No. Item No. Description Page No.
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance Sheets as
of December 31, 1995 and June 30, 1995 1
- Condensed Consolidated Statements
of Operations for the Three Months Ended
December 31, 1995 and 1994 2
- Condensed Consolidated Statements of
Operations for the Six Months Ended
December 31, 1995 and 1994 3
- Condensed Consolidated Statements of Cash
Flows for the Six Months Ended December 31,
1995 and 1994 4
- Notes to Condensed Consolidated Financial
Statements 5-6
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
II OTHER INFORMATION
4 Submission of Matters to a Vote of
Security-Holders 10
6 Exhibits and Reports on Form 8-K 10
Signatures 11
i
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and June 30, 1995
(In thousands)
December 31, June 30,
1995 1995
----------- -----------
ASSETS (Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents................... $ 84,065 $ 158,636
Accounts receivable, net of allowance at
December 31, 1995 and at June 30, 1995
of $23,782 and $19,718, respectively...... 203,129 192,652
Other current assets........................ 45,940 62,532
----------- -----------
Total current assets.................... 333,134 413,820
Property and equipment, net................... 67,726 63,659
Excess cost of net assets acquired, net....... 360,927 352,115
Other assets.................................. 24,971 22,963
----------- -----------
$ 786,758 $ 852,557
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements... $ 13,331 $ 32,684
Accounts payable and accrued expenses....... 82,157 93,088
Income taxes payable........................ 7,425 32,922
----------- -----------
Total current liabilities............... 102,913 158,694
Financing arrangements, net of current
portion..................................... 187,591 192,331
Other......................................... 14,185 13,897
----------- -----------
Total liabilities....................... 304,689 364,922
----------- -----------
Stockholders' equity:
Common stock, $.01 par value; authorized
200,000 shares, issued 65,711 shares at
December 31, 1995 and 65,476 shares at
June 30, 1995............................. 657 656
Additional paid-in capital.................. 251,678 250,857
Retained earnings........................... 253,599 238,149
----------- -----------
505,934 489,662
Less: Common stock in treasury (at cost),
3,198 shares at December 31, 1995
and 187 shares at June 30, 1995...... (23,590) (1,614)
Deferred compensation................. (275) (413)
----------- -----------
Total stockholders' equity............. 482,069 487,635
----------- -----------
$ 786,758 $ 852,557
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
1
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
-----------------------
1995 1994
----------- -----------
Net revenues.................................. $ 200,957 $ 232,201
Operating costs:
Salaries, wages and benefits............... 132,605 146,822
Rental expense............................. 7,034 9,385
Supply costs............................... 6,288 5,743
Other...................................... 28,200 38,889
Provision for uncollectible accounts....... 3,826 2,508
Depreciation............................... 5,383 4,778
Amortization of excess cost of net assets
acquired.................................. 2,498 2,766
----------- -----------
Income from operations.................. 15,123 21,310
Investment income............................. 1,192 458
Interest expense.............................. (3,225) (6,461)
Minority interest............................. (25) (116)
----------- -----------
Income before income taxes.............. 13,065 15,191
Income taxes.................................. 5,618 6,304
----------- -----------
Net income.............................. $ 7,447 $ 8,887
=========== ===========
Net income per share.................... $ .12 $ .14
=========== ===========
Weighted average number of shares
outstanding........................... 64,273 64,899
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Six Months Ended
December 31,
---------------------------
1995 1994
----------- -----------
Net revenues.................................. $ 399,094 $ 463,011
Operating costs:
Salaries, wages and benefits............... 260,319 288,851
Rental expense............................. 13,852 18,317
Supply costs............................... 12,310 11,143
Other...................................... 58,384 78,728
Provision for uncollectible accounts....... 8,068 6,913
Depreciation............................... 10,589 9,178
Amortization of excess cost of net assets
acquired.................................. 4,952 5,505
----------- -----------
Income from operations.................. 30,620 44,376
Investment income............................. 3,096 1,309
Interest expense.............................. (6,565) (12,113)
Minority interest............................. (45) (270)
----------- -----------
Income before income taxes.............. 27,106 33,302
Income taxes.................................. 11,656 13,367
----------- -----------
Net income.............................. $ 15,450 $ 19,935
=========== ===========
Net income per share.................... $ .24 $ .31
=========== ===========
Weighted average number of shares
outstanding........................... 64,933 65,144
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
December 31,
------------------------
1995 1994
----------- -----------
Cash flows from operating activities:
Net income.................................... $ 15,450 $ 19,935
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization............... 15,541 14,683
Minority interest........................... 45 270
Provision for uncollectible accounts........ 8,068 6,913
Deferred income taxes....................... 2,163 (895)
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts and notes receivable, net...... (17,747) (23,281)
Other current assets.................... (2,201) (3,826)
Accounts payable and accrued expenses... (9,847) (3,135)
Income taxes payable.................... 3,637 (10,195)
Other, net.............................. 187 (189)
----------- -----------
Net cash flows provided by operating
activities............................ 15,296 280
----------- -----------
Cash flows from investing activities:
Proceeds from sales of available for sale
securities.................................. - 41,755
Net payment in connection with the sale of
hospital operations......................... (13,208) -
Payments for businesses acquired, net of
cash acquired............................... (13,833) (64,393)
Additions to property, equipment and
capitalized software........................ (14,454) (11,721)
Other, net.................................... (1,248) (2,452)
----------- -----------
Net cash flows used in investing
activities............................. (42,743) (36,811)
----------- -----------
Cash flows from financing activities:
Proceeds from financing arrangements.......... 133 63,241
Payment of financing arrangements............. (24,580) (37,023)
Net (payment for)/proceeds from common stock
purchased/issued............................ (22,677) 2,570
----------- -----------
Net cash flows (used in)/provided by
financing activities................... (47,124) 28,788
----------- -----------
Net decrease in cash and cash equivalents..... (74,571) (7,743)
Cash and cash equivalents, beginning of
period...................................... 158,636 38,024
----------- -----------
Cash and cash equivalents, end of period...... $ 84,065 $ 30,281
=========== ===========
Supplemental disclosures of cash flow
information:
Interest paid................................ $ 6,094 $ 9,246
=========== ===========
Income taxes paid, including $29,200 related
to the sale of hospital operations for the
six months ended December 31, 1995......... $ 36,338 $ 23,913
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
(In thousands)
(Unaudited)
1.BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
NovaCare, Inc. (the "Company") are unaudited. The balance sheet as
of June 30, 1995 is condensed from the audited balance sheet of the
Company at that date. These statements have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission and should be read in conjunction with the
Company's consolidated financial statements and the notes thereto
for the year ended June 30, 1995. Certain information and footnote
disclosures normally in the financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the
opinion of Company management, the condensed consolidated financial
statements for the unaudited interim periods presented include all
adjustments (consisting of only normal recurring adjustments)
necessary to present a fair statement of the results for such
interim periods.
Operating results for the three and six-month periods ended
December 31, 1995 are not necessarily indicative of the results that
may be expected for a full year or any portion thereof. Effective
April 1, 1995, the Company sold its medical rehabilitation hospital
operations. Had the sale of the medical rehabilitation hosptial
operations taken place on July 1, 1994, pro forma unaudited net
revenues for the six months ended December 31, 1994 would have been
$390,948 and pro forma unaudited income from operations would have been
$34,946.
2.RESTRUCTURING LIABILITY
During the first six months of fiscal 1996, the Company continued
to implement the productivity and cost reduction program initiated in
fiscal 1995. This 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 in progress, and is expected to
be substantially complete by the end of the fiscal year.
As of December 31, 1995, the Company had completed the employee
reduction portion of the program by notifying 660 employees of their
termination. There are no further employee terminations expected
pursuant to this program. The Company anticipates that lease
termination costs will be in excess of those contemplated in the
charge taken in fiscal 1995 to close certain contract services offices.
These additional costs will be offset by lower than anticipated
severance costs. Reserves for restructuring activities at December 31,
1995 total $2,795 for employee severance costs and $5,593 for lease
termination and other costs.
5
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1995
(In thousands)
(Unaudited)
3.FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
December 31, June 30,
1995 1995
----------- -----------
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 2005........................ 22,303 26,867
Notes (6% to 12%), payable through June
1998........................................ 530 720
Capitalized lease obligations, payable
through 2000................................ 3,089 4,428
----------- -----------
200,922 225,015
Less: current portion........................ 13,331 32,684
----------- -----------
$ 187,591 $ 192,331
=========== ===========
The Company has in place a revolving credit facility with a syndicate of
lenders providing for a total commitment of up to $175,000, upon which no
amounts are currently drawn. The Company anticipates finalization of the
amendments to the revolving credit facility by the end of the third quarter
of fiscal 1996.
4.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 affect on the
financial position or results of operations of the Company.
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 December 31, 1995 of approximately $28,426 in cash and 742 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.
For the six months ended December 31, 1995 and December 31, 1994,
the Company paid $11,809 and $6,553 in cash, respectively, and
issued 334 and 284 shares, respectively, of common stock in
connection with businesses acquired in prior years.
6
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1995 AND 1994
Net revenues for the three months ended December 31, 1995 decreased
from the prior year by $31.2 million or 13.5% to $201.0 million and
earnings before interest, taxes, depreciation, amortization and
minority interest ("EBITDA") decreased by $5.9 million or 20.3% to
$23.0 million.
The principal reason for the decrease in net revenues for the three months
ended December 31, 1995 compared with the same period in the prior year was
the inclusion of net revenues in the three months ended December 31, 1994
of $36.2 million from the medical rehabilitation hospital operations, which
were sold effective April 1, 1995. This decrease coupled with a decrease
in net revenues per visit of 2.4% in outpatient rehabilitation was offset by
(i) a 1.0% increase in contract therapy services billable hours combined
with a 1.8% increase in net revenue per billable hour, and (ii) a 6.3%
increase in net revenue per patient in the orthotic and prosthetic business
resulting from increased sales of higher priced prosthetic devices. The
increase in contract therapy services billable hours results from an
increase in therapist productivity offset by a 2.6% decrease in the number
of therapists. The decrease in outpatient rehabilitation net revenues per
visit reflects increased pricing pressure, a trend that is expected to
continue.
The decrease in EBITDA principally resulted from the sale of the
medical rehabilitation hospital operations ($6.0 million in the second
quarter of fiscal 1995).
Depreciation and amortization for the three months ended December 31,
1995 increased by $337,000 as compared with the prior year, primarily
due to the full-year effect of acquisitions made during fiscal 1995 and
the placing in service of certain internally-developed software offset by
the inclusion in the three months ended December 31, 1994 of depreciation
related to the medical rehabilitation hospital operations.
Interest expense, net of investment income, decreased $4.0 million
compared with the prior period principally as a result of the payoff of
amounts borrowed under the Company's credit facility and increased cash
as a result of the medical rehabilitation hospital division sale.
Income tax expense as a percentage of pre-tax income increased to
43.0% for the three months ended December 31, 1995 from 41.5% for the
previous year. The increase in the rate principally resulted from the
impact of non-deductible goodwill on lower income subject to income tax
and from higher income subject to income taxes for state tax purposes.
7
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995 AND 1994
Net revenues for the six months ended December 31, 1995 decreased
from the prior year by $63.9 million or 13.8% to $399.1 million and
earnings before interest, taxes, depreciation, amortization and
minority interest ("EBITDA") decreased by $12.9 million or 21.8% to
$46.2 million.
The principal reason for the decrease in net revenues for the six months
ended December 31, 1995 compared with the same period in the prior year
was the inclusion of net revenues in the six months ended December 31, 1994
of $72.0 million from the medical rehabilitation hospital operations, which
were sold effective April 1, 1995. This decrease was offset by (i) a 1.6%
increase in contract therapy services billable hours combined with a 1.0%
increase in net revenue per billable hour, (ii) a 11.9% increase in
outpatient rehabilitation visits, resulting primarily from the full effect
of 25 acquisitions in fiscal 1995, offset by a 3.0% decrease in net
revenue per visit, and (iii) a 6.3% increase in orthotic and prosthetic
net revenue per patient resulting from increased sales of higher priced
prosthetic devices. The slight increase in contract therapy services
billable hours results from an increase in therapist productivity offset
somewhat by a decrease of approximately 1.0% in the number of therapists.
The decrease in outpatient rehabilitation net revenues per visit reflects
increased pricing pressure, a trend that is expected to continue.
The decrease in EBITDA principally resulted from the sale of the
medical rehabilitation hospital operations ($12.2 million in the first
six months of fiscal 1995).
Depreciation and amortization for the six months ended December 31,
1995 increased by $858,000 as compared with the prior year, primarily
due to the full-year effect of acquisitions made during fiscal 1995 and
the placing in service of certain internally-developed software offset by
the inclusion in the six months ended December 31, 1994 of depreciation
related to the medical rehabilitation hospital operations.
Interest expense, net of investment income, decreased $7.3 million
compared with the prior period principally as a result of the payoff of
amounts borrowed under the Company's credit facility and increased cash
as a result of the medical rehabilitation hospital division sale.
Income tax expense as a percentage of pre-tax income increased to 43.0%
for the six months ended December 31, 1995 from 40.1% for the previous
year. The increase in the rate principally resulted from the impact of
non-deductible goodwill on lower income subject to income tax and from
higher income subject to income taxes for state tax purposes.
8
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Continued
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company's working capital decreased $24.9
million to $230.2 million compared with $255.1 million at June 30,
1995. The decrease in working capital principally resulted from the
purchase of approximately 3.4 million shares of the Company's stock for
$24.9 million.
The Company used $14.5 million of cash for capital expenditures
during the first six months of fiscal 1996 compared with $11.7 million
in the first six months of fiscal 1995. Capital expenditures generally
relate to the costs incurred in connection with internally-developed
software and normal leasehold renovations and equipment replacement.
In the first six months of fiscal 1996, the Company paid $2.0 million
for acquisitions of four outpatient rehabilitation and three orthotic
and prosthetic companies. The Company also paid $11.8 million for
earnout arrangements relating to previous acquisitions.
In connection with the sale of the hospital division, the Company is
in the process of amending the credit facility, upon which no amounts
are currently drawn, to reflect the sale of the medical rehabilitation
hospital operations and other matters. At December 31, 1995, commitment
availability had been reduced by $560,000 for issued letters of credit.
The Company believes that the cash flows generated by the Company's
operations, together with its existing cash and availability of credit
under the credit facility, will be sufficient to meet the Company's
short and long-term cash needs.
9
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security-Holders
On October 26, 1995, the Company held its Annual Meeting of Stockholders
for the fiscal year ended June 30, 1995. A description of the results of
the election of Directors and each other matter voted upon at the meeting
is set forth in "Item 4 - Submission of Matters to a Vote of Security-
Holders" of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, which information is such Item 4 is incorporated
in its entirety by reference herein.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibit Exhibit Page
Number Description Number
------- ----------- ------
27 Financial Data Schedule
(B) The Company filed no reports on Form 8-K during the
quarter ended December 31, 1995.
10
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NOVACARE, INC.
--------------------------
(Registrant)
February 14, 1996 By /s/ Robert E. Healy, Jr.
----------------------------------
Robert E. Healy, Jr.
Senior Vice President,
Finance & Administration and
Chief Financial Officer
By /s/ Barry E. Smith
----------------------------------
Barry E. Smith,
Vice President,
Controller and
Chief Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) STATEMENTS IN FORM
10-Q, FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995.
</LEGEND>
<CIK> 0000802843
<NAME> NOVACARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 84,065
<SECURITIES> 0
<RECEIVABLES> 226,911
<ALLOWANCES> 23,782
<INVENTORY> 12,828
<CURRENT-ASSETS> 333,134
<PP&E> 111,878
<DEPRECIATION> 44,152
<TOTAL-ASSETS> 786,758
<CURRENT-LIABILITIES> 102,913
<BONDS> 187,591
0
0
<COMMON> 657
<OTHER-SE> 481,412
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<TOTAL-COSTS> 344,865<F1>
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<INCOME-PRETAX> 27,106
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<INCOME-CONTINUING> 15,450
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<EPS-PRIMARY> .24
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<FN>
<F1>"TOTAL COSTS" CONSIST OF SALARIES, WAGES AND BENEFITS, RENTAL EXPENSE, SUPPLY
COSTS AND OTHER.
<F2>"OTHER EXPENSES" CONSIST OF DEPRECIATION, AMORTIZATION OF EXCESS COST OF NET
ASSETS ACQUIRED AND MINORITY INTEREST NET OF INVESTMENT INCOME.
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</TABLE>
