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 March 31, 1996
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 May 8, 1996, NovaCare, Inc. had 66,017,404 shares of common
stock, $.01 par value, outstanding.
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED MARCH 31, 1996
INDEX
Part No. Item No. Description Page No.
- -------- -------- ----------- --------
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance Sheets as of
March 31, 1996 and 1995 1
- Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1996 and
1995 2
- Condensed Consolidated Statements of Operations
for the Nine Months Ended March 31, 1996 and
1995 3
- Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 1996 and
1995 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 March 31, 1996 and June 30, 1995
(In thousands)
March 31, June 30,
1996 1995
---------- ----------
(Unaudited) (See Note 1)
ASSETS
Current assets:
Cash and cash equivalents.................... $ 73,459 $ 158,636
Accounts receivable, net of allowance at
March 31, 1996 and at June 30, 1995 of
$29,297 and $19,718, respectively........... 194,350 192,652
Other current assets......................... 54,819 62,532
---------- ----------
Total current assets........................ 322,628 413,820
Property and equipment, net.................... 64,559 63,659
Excess cost of net assets acquired, net........ 362,158 352,115
Other assets................................... 23,865 22,963
---------- ----------
$ 773,210 $ 852,557
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements.... $ 9,427 $ 32,684
Accounts payable and accrued expenses........ 77,533 93,088
Income taxes payable......................... 9,859 32,922
---------- ----------
Total current liabilities................... 96,819 158,694
Financing arrangements, net of current portion. 186,583 192,331
Other.......................................... 14,427 13,897
---------- ----------
Total liabilities........................... 297,829 364,922
---------- ----------
Stockholders' equity:
Common stock, $.01 par value; authorized
200,000 shares, issued 66,015 shares at
March 31, 1996 and 65,476 shares at
June 30, 1995............................... 660 656
Additional paid-in capital................... 253,393 250,857
Retained earnings............................ 245,019 238,149
---------- ----------
499,072 489,662
Less: Common stock in treasury (at cost),
3,210 shares at March 31, 1996 and
187 shares at June 30, 1995........... (23,465) (1,614)
Deferred compensation.................. (226) (413)
---------- ----------
Total stockholders' equity.................. 475,381 487,635
---------- ----------
$ 773,210 $ 852,557
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
1
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NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
-------------------------
1996 1995
---------- ----------
Net revenues.................................. $ 191,393 $ 240,898
Operating costs:
Salaries, wages and benefits............... 135,901 152,412
Rental expense............................. 6,938 9,353
Supply costs............................... 6,190 5,862
Other...................................... 26,283 38,170
Provision for uncollectible accounts....... 4,520 4,812
Depreciation............................... 5,236 4,925
Amortization of excess cost of net
assets acquired.......................... 2,504 2,908
Provision for restructure and other
special charges.......................... 13,370 1,000
---------- ----------
Income from operations.................. (9,549) 21,456
Investment income............................. 816 660
Interest expense.............................. (2,986) (6,651)
Minority interest............................. (22) (109)
---------- ----------
Income before income taxes.............. (11,741) 15,356
Income taxes.................................. (3,161) 6,403
---------- ----------
Net (loss) income....................... $ (8,580) $ 8,953
========== ==========
Net (loss) income per share............. $ (.13) $ .14
========== ==========
Weighted average number of shares
outstanding........................... 63,813 64,953
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
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NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
March 31,
----------------------
1996 1995
-------- --------
Net revenues.................................. $ 590,487 $ 703,909
Operating costs:
Salaries, wages and benefits............... 396,220 441,263
Rental expense............................. 20,790 27,670
Supply costs............................... 18,500 17,005
Other...................................... 84,667 116,898
Provision for uncollectible accounts....... 12,588 11,725
Depreciation............................... 15,825 14,103
Amortization of excess cost of net
assets acquired.......................... 7,456 8,413
Provision for restructure and other
special charges.......................... 13,370 1,000
---------- ----------
Income from operations................. 21,071 65,832
Investment income............................. 3,912 1,969
Interest expense.............................. (9,551) (18,764)
Minority interest............................. (67) (379)
---------- ----------
Income before income taxes.............. 15,365 48,658
Income taxes.................................. 8,495 19,770
---------- ----------
Net income.............................. $ 6,870 $ 28,888
========== ==========
Net income per share.................... $ .11 $ .44
========== ==========
Weighted average number of shares
outstanding........................... 64,560 65,081
========== ==========
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)
Nine Months Ended
March 31,
-------------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net income.................................. $ 6,870 $ 28,888
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization............. 23,281 22,516
Minority interest......................... 67 379
Provision for uncollectible accounts...... 12,588 11,725
Deferred income taxes..................... (6,202) (988)
Non-cash portion of provision for
restructure............................. 6,978 -
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts and notes receivable, net..... (13,284) (29,558)
Other current assets................... (1,583) (1,772)
Accounts payable and accrued expenses.. (12,691) (15,412)
Income taxes payable................... 6,018 (4,355)
Other, net............................. (810) (469)
---------- ----------
Net cash flows provided by operating
activities........................... 21,232 10,954
---------- ----------
Cash flows from investing activities:
Proceeds from sales of available for sale
securities................................ - 40,757
Net payment in connection with the sale of
hospital operations....................... (13,208) -
Payments for businesses acquired, net of
cash acquired............................. (18,974) (68,056)
Additions to property, equipment and
capitalized software...................... (19,903) (21,157)
Other, net.................................. (2,204) (1,720)
---------- ----------
Net cash flows used in investing
activities........................... (54,289) (50,176)
---------- ----------
Cash flows from financing activities:
Proceeds from financing arrangements........ 133 73,503
Payment of financing arrangements........... (29,778) (42,462)
Net (payment for)/proceeds from common
stock purchases/issued.................... (22,475) 570
---------- ----------
Net cash flows (used in)/provided by
financing activities................. (52,120) 31,611
---------- ----------
Net decrease in cash and cash equivalents... (85,177) (7,611)
Cash and cash equivalents, beginning of
period.................................... 158,636 38,024
---------- ----------
Cash and cash equivalents, end of period.... $ 73,459 $ 30,413
========== ==========
Supplemental disclosures of cash flow
information:
Interest paid.............................. $ 11,241 $ 18,821
========== ==========
Income taxes paid, including $29,200
related to the sale of hospital operations
for the nine months ended March 31, 1996.. $ 39,594 $ 26,255
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
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NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(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 nine-month periods ended
March 31, 1996 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 hospital
operations taken place on July 1, 1994, pro forma unaudited net
revenues for the nine months ended March 31, 1995 would have been
$593,264 and pro forma unaudited income from operations would have
been $50,699.
2. Provision for Restructure
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 and prosthetic
operations and certain administrative functions. The provision
reflects the cost of exiting and combining facilities, along with
severance for work force reductions. The provision consists of the
following:
Asset write-offs, net of estimated
proceeds from sale....................... $ 5,965
Lease termination costs.................... 4,032
Employee severance costs................... 2,931
Other...................................... 442
--------
$ 13,370
========
Employee severance costs incurred in the provision represent
the accumulation of termination benefits set forth in the Company's
severance policy. The outpatient and orthotic and prosthetics
consolidation and reorganization will be completed by March 31, 1997.
Of the $13,370 charge, approximately $6,142 remained accrued at
March 31, 1996.
During the first nine 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.
5
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(In thousands)
(Unaudited)
During the first six months of fiscal 1996, the Company
completed the employee reduction portion of the restructure program
initiated in the fourth quarter of fiscal 1995 by terminating 660
employees. 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. As of March 31, 1996, reserves for restructuring activities
initiated in the fourth quarter of fiscal 1995 total $4,373.
3. Financing Arrangements
Financing arrangements consisted of the following:
March 31, June 30,
1996 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......................... 18,041 26,867
Notes (6% to 10.5%), payable through
January 1998................................. 123 720
Capitalized lease obligations, payable
through 2000................................. 2,846 4,428
---------- ----------
196,010 225,015
Less: current portion......................... 9,427 32,684
---------- ----------
$ 186,583 $ 192,331
========== ==========
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
anticipates finalization of the amendments to the revolving credit
facility by the end of the fourth 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 March 31, 1996 of approximately $26,334 in cash and 648 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 nine
months ended March 31, 1996 and March 31, 1995, the Company paid
$14,532 and $8,998 in cash, respectively, and issued 605 and 914
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
MARCH 31, 1996 AND 1995
Net revenues for the three months ended March 31, 1996 decreased from
the prior year by $49.5 million or 20.55% to $191.3 million and
earnings before interest, taxes, depreciation, amortization, provision
for restructure and other special charges, and minority interest
("Adjusted EBITDA") decreased by $18.7 million or 61.8% to $11.6
million.
The principal reason for the decrease in net revenues for the three
months ended March 31, 1996 compared with the same period in the prior
year was the inclusion in net revenues for the three months ended March
31, 1995 of $38.6 million from the medical rehabilitation hospital
operations, which were sold effective April 1, 1995. Net revenues for
the third quarter ended March 31, 1996 also included a $10.5 million
charge to fully reflect payor allowances that had not been sufficiently
recognized by certain billing systems. The Company has implemented a
new methodology for estimating allowances pending implementation of a
fully integrated system in the upcoming year.
The decrease in revenues associated with the sale of the medical
rehabilitation hospital operations and the adjustment to net revenues
was coupled with a decrease in outpatient rehabilitation net revenue
per visit. These factors were offset by a 1.6% increase in net revenue
per billable hour in the contract therapy services business and a 2.2%
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
remained relatively unchanged as a result of an increase in therapist
productivity offset by a 4.4% 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. This is a forward looking statement that, together with all
other forward looking statements contained below, is expressly
qualified by the cautionary statement on page 9, which identifies
significant factors that could cause results to differ materially.
The decrease in Adjusted EBITDA resulted principally from the sale of
the medical rehabilitation hospital operations ($7.2 million in the
third quarter of fiscal 1995) and the $10.5 million adjustment to net
revenues.
Depreciation and amortization for the three months ended March 31,
1996 decreased by $93,000 as compared with the prior year, primarily
due to the inclusion in the three months ended March 31, 1995 of
depreciation related to the medical rehabilitation hospital operations
offset by the full-year effect of depreciation of assets from
businesses acquired during fiscal 1995 and placing in service certain
internally-developed software during fiscal 1996.
Interest expense, net of investment income, decreased $3.8 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
invested as a result of the sale of the medical rehabilitation hospital
operations.
For the three months ended March 31, 1996, the income tax benefit as
a percentage of the pretax loss was 26.9% as a result of the benefit
associated with the provision for restructure and the adjustment to
net revenues offset by the cumulative effect of these charges on the
effective income tax rate. Had the provision for restructure and the
adjustment to net revenues not taken place, income tax expense as a
percentage of pretax income would have increased to 43.0% for the three
months ended March 31, 1996 from 41.7% for the previous year. The
increase in the rate resulted principally from the impact of non-
deductible goodwill on lower income subject to income tax and from a
higher level of income subject to state income taxes.
7
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
MARCH 31, 1996 AND 1995
Net revenues for the nine months ended March 31, 1996 decreased from
the prior year by $113.4 million or 16.1% to $590.5 million and
earnings before interest, taxes, depreciation, amortization, provision
for restructure and other special charges, and minority interest
("Adjusted EBITDA") decreased by $31.6 million or 35.4% to $57.7
million.
The principal reason for the decrease in net revenues for the nine
months ended March 31, 1996 compared with the same period in the prior
year was the inclusion in net revenues for the nine months ended March
31, 1995 of $110.6 million from the medical rehabilitation hospital
operations, which were sold effective April 1, 1995. Net revenues for
the nine months ended March 31, 1996 also included a $10.5 million
charge to fully reflect payor allowances that had not been sufficiently
recognized by certain billing systems. The Company has implemented a
new methodology for estimating allowances pending implementation of a
fully integrated system in the upcoming year.
The decrease in net revenues associated with the sale of the medical
rehabilitation hospital operations and the adjustment to net revenues
reserves was offset by (i) a 1.2% increase in net revenue per billable
hour combined with a .2% increase in contract therapy services billable
hours, (ii) a 5.4% increase in outpatient rehabilitation visits,
resulting primarily from the full effect of 25 acquisitions in fiscal
1995, offset by a 2.0% decrease in net revenue per visit, and (iii) a
4.7% 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 4.4% 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 Adjusted EBITDA principally resulted from the sale of
the medical rehabilitation hospital operations ($19.4 million in the
first nine months of fiscal 1995) and the $10.5 million adjustment to
net revenues.
Depreciation and amortization for the nine months ended March 31,
1996 increased by $765,000 as compared with the prior year, primarily
due to the full-year effect of depreciation of assets from businesses
acquired during fiscal 1995 and placing in service certain internally-
developed software during fiscal 1996 offset by the inclusion in the
nine months ended March 31, 1995 of depreciation related to the medical
rehabilitation hospital operations.
Interest expense, net of investment income, decreased $11.2 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
invested as a result of the sale of the medical rehabilitation hospital
operations.
Income tax expense as a percentage of pretax income increased to
55.3% for the nine months ended March 31, 1996 from 40.6% for the
previous year. The increase in the rate resulted principally from the
impact of non-deductible goodwill on lower income subject to income tax
as a result of the provision for restructure and the adjustment to net
revenues. The increase in rate also resulted from a higher level of
income subject to state income taxes.
8
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Continued
Liquidity and Capital Resources
At March 31, 1996, the Company's working capital decreased $29.3
million to $225.8 million compared with $255.1 million at June 30,
1995. The decrease in working capital resulted principally from i) the
purchase of approximately 3.4 million shares of the Company's stock for
$24.9 million, ii) the payment of $14.0 million for business
acquisitions, iii) capital expenditures of $19.9 million, and iv) the
$10.5 adjustment to net revenues. These decreases were offset by net
income and other non-cash charges of $38.0 million.
The Company used $19.9 million of cash for capital expenditures
during the first nine months of fiscal 1996 compared with $21.2 million
in the first nine months of fiscal 1995. Capital expenditures
generally relate to the costs incurred in connection with internally-
developed software, leasehold renovations and equipment replacement.
In the first nine months of fiscal 1996, the Company paid $5.0 million
for acquisitions of six outpatient rehabilitation companies, three
orthotic and prosthetic companies and one sub-acute management company.
The Company also paid $14.0 million for earnout arrangements relating
to previous acquisitions.
The Company is in the process of amending its credit facility, upon
which no amounts are currently drawn, to reflect the sale of the
medical rehabilitation hospital operations, to reduce the total
commitment from $175,000 to $150,000, and other matters. At March 31,
1996, 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.
Cautionary Statement
Except for historical information, matters discussed above 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
system 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.
9
<PAGE>
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security-Holders
None.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibit Page
Number Exhibit Description Number
------- ------------------- ------
10 Employment Agreement with Ronald G. Hiscock
27 Financial Data Schedule
(B) The Company filed no reports on Form 8-K during the quarter ended
March 31, 1996.
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)
May 15, 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
<PAGE>
/logo/
January 24, 1996
Mr. Ronald G. Hiscock
1016 West Ninth Avenue
King of Prussia, PA 19406
Dear Ron:
This letter will confirm the terms under which you have
accepted the expanded/responsibility at ORD as of 1/1/96
and anticipates the likelihood that you will assume the
leadership responsibilities for the combined Outpatient
Rehabilitation Division and Orthotics and Prosthetics
Division as of 4/1/96. I am looking forward to having
you assume this important role. You have demonstrated
alignment with NovaCare's values and have proven your
operating skills. I am confident that your expertise will
turn ORD around and maximize operating and administrative
efficiencies to realize the full potential of these
businesses.
The terms of our agreement are as follows, and are
subject to approval of the Compensation Committee of the
Board of Directors:
* Title - You will continue to function as President and
General Manager of the O&P Division. Concurrently, you
will function as Chief Operating Officer of the
Outpatient Rehabilitation Division through March 31,
1996. It is anticipated that on April 1, 1996, you will
become President and General Manager of the combined
O&P/ORD Division.
* Grade - Through March 31, 1996 you will continue to be
classified as a Grade 36 executive. According to the
plan, effective April 1, 1996, you will be promoted to a
Grade 37 executive and enjoy all the attendant benefits
of this promotion.
* Base Salary - Effective January 1, 1996, you will be
paid a bi-weekly salary of $7,692.31, as this is our
regular payroll schedule. This annualizes to a base
salary of $200,000. According to plan, effective April
1, 1996, you will receive a promotional increase to bring
your bi-weekly payment to $9,038.46. This annualizes to
a base salary of $235,000. You will be eligible for a
performance and salary review on January 1, 1997.
* Incentive Opportunity - You will participate in the
NovaCare Executive Incentive Compensation Plan as
approved by the Compensation Committee of the Board of
Directors. Your opportunity will be 45% of your base
salary through FY 1996. During this period of transition
and for the remainder of fiscal year 1996, your
incentive opportunity will be based exclusively on the
results of the Orthotics and Prosthetics Division.
For that portion of your incentive that is paid
quarterly, the Q3 and Q4 calculation will be based on
your O&P salary level of $200,000. For that portion
of your incentive that is paid annually, the
calculation will be based on your O&P salary as
follows - Q1 and Q2 at $170,000; Q3 and Q4 at
$200,000.
In addition, a supplemental incentive opportunity will
be available for Q4 for which the quarterly payment
and the applicable annual payment will be calculated
on the differential between the above mentioned
formula and your anticipated increased base salary to
$235,000 and incentive opportunity of 50% of base
salary. The criteria against which you will be
measured will be MBO's that you and John negotiate for
this period.
Beginning July 1, 1996 and through the fiscal year
1997, your incentive will increase to 50% of your base
salary and will be calculated on the performance of
the combined Divisions. Provided that you are still
employed by NovaCare on the date of payout, you will
be guaranteed a minimum incentive award of $50,000 for
fiscal year 1997, payment for which shall be made
after the conclusion of the fiscal year. In addition
to this baseline incentive opportunity, you and Bud
Locilento will present to me by April 1, 1996 a
recommendation for a Supplemental Incentive Plan that
will give you an opportunity to increase your
incentive compensation over a yet to be determined
period of time. That plan will be based on a
combination of revenue growth and margin percentage
targets.
* Equity - In recognition of your promotion, you will
receive a stock option grant of 50,000 shares priced at
the end of business December 11, 1995. You will also be
eligible to receive an annual grant based upon your
performance against objectives at the end of fiscal year
1996. That opportunity will recognize your performance
as President/General Manager of the O&P Division from
July, 1995 to March, 1996 and your anticipated expanded
responsibilities as President/General Manager of the
combined divisions from April, 1996 to June, 1996, and be
prorated to reflect the transition period.
* Supplemental Benefits - You will continue to
participate in NovaCare's Supplemental Benefits Plan as
a Level I executive.
* Non-Compete and Confidentiality Agreement -
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 and the Company's agreement to
make salary continuation payments as more fully
described following paragraph (b) below, the Executive
agrees, for the benefit of the Company, that he will
not, during the period of his employment with the
Company and for one (1) year thereafter commencing on
the date of termination of his employment with the
Company:
(a) engage, directly or indirectly, whether as
principal, consultant, employee, officer, director,
partner, agent, stockholder, limited partner or other
investor (other than an investment of (i) not more
than five percent (5%) of the stock or equity of any
corporation the capital stock of which is publicly
traded or (ii) not more than five percent (5%) of the
ownership interest of any partnership or other entity)
or otherwise, within the United States of America,
with any firm or person in any activity or business
venture which is in competition with any line or lines
of business being conducted by the Company or any
subsidiary of the Company for which the Executive has
at the date of termination of the Executive's
employment with the Company, or has had at any time
during the two-year period prior to such termination,
supervisory or managerial responsibility; or
(b) solicit or entice or endeavor to solicit or entice
away from the Company or employ, directly or
indirectly, any person who was an employee of the
Company or of any subsidiary at any time during the
one-year period ending on the date of termination of
the Executive's employment with the Company either for
his own account or for any individual, firm or
corporation, whether or not such person would commit
any breach of his contract of employment by reason of
leaving the service of the Company except that this
restriction shall not apply in the case of any person
whose employment shall have been terminated by the
Company.
* Termination of Employment - If NovaCare terminates
your employment for any reason other than due cause,
NovaCare will continue to pay your base salary
bi-weekly for a period of one (1) year or until you find
employment, whichever comes first. All other provisions
of NovaCare severance policies will apply in the event of
your termination, including the execution of an Agreement
and General Release as a precondition to any severance
payment. For purposes of this agreement, due cause means
(a) any willful and continuing failure to discharge your
duties, (b) gross negligence in the performance of your
duties, (c) conduct detrimental to the Company, or (d)
commission of a felony or any crime or offense involving
moral turpitude. You will also be extended Outplacement
Benefits appropriate for an executive of your level
through a vendor of NovaCare's choice should you be
terminated for any reason other than due cause.
* Change of Control - In the event that a person or a
"group" of persons as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, other than you or a
group that includes you, acquires ownership of securities
of the Company possessing fifty (50%) or more of the
combined voting power of the outstanding securities of
the Company having a right to vote in the elections of
directors and you are involuntarily terminated, the
initial stock option grant of 50,000 shares shall become
fully vested as of that date.
Your employment relationship with the Company is at will.
Either you or the Company may terminate that relationship
for any lawful reason at any time, with or without
notice. You and the Company hereby acknowledge that no
express or implied commitment or promise of employment
for any period of time has been made, and that the at-
will nature of this employment relationship may not be
altered hereafter, except through a written agreement
signed by you and an authorized officer on behalf of the
Company. Please acknowledge your acceptance by signing
one copy of this letter and returning to me.
NovaCare is facing challenging and exciting times, Ron.
I hope and expect that you will make significant and
immediate contributions. I am looking forward to having
you provide the necessary leadership and experience that
will realize the potential of what I am confident is an
outstanding business opportunity. I look forward to
having you on the team as we strive to fulfill our Credo
of Helping Make Life a Little Better for our constituents-
employees, customers, patients and shareholders.
Sincerely,
/s/John H. Foster
- -----------------
John H. Foster
Chairman
ACCEPTED AND AGREED:
/s/Ronald G. Hiscock 1-31-96
- -------------------- -------
Ronald G. Hiscock Date
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) STATEMENT IN FORM
10-Q, FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
</LEGEND>
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<PERIOD-END> MAR-31-1996
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<RECEIVABLES> 223,647
<ALLOWANCES> 29,297
<INVENTORY> 13,079
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<PP&E> 110,580
<DEPRECIATION> (46,021)
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<CURRENT-LIABILITIES> 96,819
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0
0
<COMMON> 660
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<TOTAL-REVENUES> 590,487
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