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, 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 January 31, 1997, NovaCare, Inc. had 60,585,180 shares of
common stock, $.01 par value, outstanding.
NOVACARE, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED DECEMBER 31, 1996
INDEX
______________
Part No. Item No. Description Page No.
________ ___________ ____________________ ________
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance Sheets as of
December 31, 1996 and June 30, 1996 1
- Condensed Consolidated Statements of
Operations for the Three Months Ended
December 31, 1996 and 1995 2
- Condensed Consolidated Statements of
Operations for the Six Months Ended
December 31, 1996 and 1995 3
- Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
December 31, 1996 and 1995 4
- Notes to Condensed Consolidated Financial
Statements 5-8
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
II OTHER INFORMATION
4 Submission of Matters to a Vote of Security-
Holders 13
6 Exhibits and Reports on Form 8-K 13
Signatures 14
i
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and June 30, 1996
(In thousands)
December 31, June 30,
1996 1996
____________ ____________
ASSETS (Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents........ $ 20,040 $95,724
Accounts receivable, net of
allowances at December 31, 1996
and at June 30, 1996 of $22,073
and $18,995, respectively........ 222,037 192,636
Other current assets............. 48,574 43,799
____________ ____________
Total current assets............ 290,651 332,159
Property and equipment, net........ 64,593 63,319
Excess cost of net assets acquired,
net................................ 435,882 354,117
Investments in joint ventures...... 11,839 11,984
Other assets....................... 30,797 28,152
____________ ____________
$833,762 $789,731
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of financing
arrangements.................... $ 11,052 $ 8,173
Accounts payable and accrued
expenses........................ 112,877 93,854
Income taxes payable............ 7,259 6,420
____________ ____________
Total current liabilities...... 131,188 108,447
Financing arrangements, net of
current portion................... 209,288 184,042
Other............................. 12,380 12,848
____________ ____________
Total liabilities.............. 352,856 305,337
____________ ____________
Commitments and contingencies..... ___ ___
Stockholders' equity:
Common stock, $.01 par value;
authorized 200,000 shares,
issued 66,388 shares at
December 31, 1996
and 66,091 shares at
June 30, 1996.................... 663 661
Additional paid-in capital....... 256,457 253,918
Retained earnings................ 270,190 253,430
____________ ____________
527,310 508,009
Less: Common stock in treasury
(at cost),5,844 shares at
December 31, 1996 and
3,190 shares at June 30, 1996..... (46,378) (23,465)
Deferred compensation.......... (26) (150)
____________ ____________
Total stockholders' equity..... 480,906 484,394
____________ ____________
$833,762 $789,731
============ ============
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
1
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
______________________
1996 1995
_________ _________
Net revenues........................... $235,012 $200,957
Cost of services....................... 174,101 145,748
_________ _________
Gross profit........................ 60,911 55,209
Selling, general and administrative
expenses............................... 33,982 33,762
Provision for uncollectible accounts... 5,207 3,826
Amortization of excess cost of
net assets acquired.................... 2,927 2,498
_________ _________
Income from operations........... 18,795 15,123
Investment income...................... 286 1,192
Interest expense....................... (3,280) (3,225)
Minority interest...................... (48) (25)
_________ _________
Income before income taxes....... 15,753 13,065
Income taxes........................... 6,537 5,618
_________ _________
Net income....................... $ 9,216 $ 7,447
========= =========
Net income per share............. $ .15 $ .12
========= =========
Weighted average number of
shares outstanding............... 62,725 64,273
========= =========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
2
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Six Months Ended
December 31,
________________________
1996 1995
__________ ___________
Net revenues.......................... $444,442 $399,094
Cost of services...................... 327,752 289,002
_________ _________
Gross profit....................... 116,690 110,092
Selling, general and administrative
expenses.............................. 66,790 66,452
Provision for uncollectible accounts.. 10,466 8,068
Amortization of excess cost of
net assets acquired................... 5,621 4,952
_________ _________
Income from operations.......... 33,813 30,620
Investment income..................... 1,376 3,096
Interest expense...................... (6,448) (6,565)
Minority interest..................... (92) (45)
_________ _________
Income before income taxes...... 28,649 27,106
Income taxes.......................... 11,889 11,656
_________ _________
Net income...................... $16,760 $15,450
========= ==========
Net income per share............ $ .27 $ .24
========= ==========
Weighted average number of
shares outstanding.............. 62,975 64,933
========= ==========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
3
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
December 31,
_____________________
1996 1995
________ ________
Cash flows from operating activities:
Net income................................... $16,760 $15,450
Adjustments to reconcile net income to
net cash flows provided by
operating activities:
Depreciation and amortization.............. 17,279 15,541
Minority interest.......................... 92 45
Provision for uncollectible accounts....... 10,466 8,068
Deferred income taxes...................... 1,100 2,163
Changes in assets and liabilities,
net of effects from acquisitions:
Accounts and notes receivable, net...... (28,861) (17,747)
Other current assets.................... 828 (2,201)
Accounts payable and accrued expenses 11,306 (9,847)
Income taxes payable.................... 540 3,637
Other, net.............................. (903) 187
________ ________
Net cash flows provided by
operating activities.................... 28,607 15,296
________ ________
Cash flows from investing activities:
Payments for businesses acquired,
net of cash acquired......................... (74,949) (13,833)
Net additions to property, equipment and
capitalized software......................... (9,647) (14,454)
Net payment in connection with the sale of ___
hospital operations.......................... (13,208)
Other, net................................... (1,318) (1,248)
________ ________
Net cash flows used in
investing activities.................... (85,914) (42,743)
________ ________
Cash flows from financing activities:
Proceeds from financing arrangements......... 12,000 133
Payment of financing arrangements............ (8,973) (24,580)
Proceeds from common stock issued............ 1,847 1,534
Payment for purchase of treasury stock....... (23,251) (24,211)
_________ ________
Net cash flows used in
financing activities.................... (18,377) (47,124)
________ ________
Net decrease in cash and cash equivalents.... (75,684) (74,571)
Cash and cash equivalents, beginning of
period....................................... 95,724 158,636
_________ ________
Cash and cash equivalents, end of period..... $20,040 $84,065
========= ========
Supplemental disclosures of cash flow
information:
Interest paid................................ $ 5,760 $ 6,094
========= ========
Income taxes paid, including
$29,200 related to the sale of hospital
operations for the six months ended
December 31, 1995............................. $14,080 $36,338
========= ========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
4
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 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, 1996 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, 1996. 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. Certain
amounts in the fiscal 1996 consolidated financial statements
have been reclassified to conform with fiscal 1997
presentation.
Operating results for the three and six-month periods
ended December 31, 1996 are not necessarily indicative of the
results that may be expected for a full year or any portion
thereof.
2. Provision for Restructure
During the first six months of fiscal 1997, the Company
continued to implement the consolidation and reorganization
programs outlined in the provisions for restructure incurred
in the third quarter of fiscal 1996 and fourth quarter of
fiscal 1995. These programs, which consist of exiting and
combining facilities and the consolidation of certain finance
and administrative functions, are substantially complete as to
the notification of personnel, the write off of assets, and
the consolidation of administrative functions. At December
31, 1996, approximately $5,680 remained accrued for facility,
branch and clinic closure and other costs. Thise remaining
amount relates to remaining lease obligations on facilities
which have been closed and the costs associated with the
closure of certain facilities.
3. Merger, Acquisition and Joint Venture Transactions
During the six months ended December 31, 1996, the Company
acquired 21 outpatient businesses, including 14 which provide
orthotic and prosthetic rehabilitation services and seven
which provide outpatient rehabilitation services, and also one
business which provides occupational health services and one
professional employer organization ("PEO"). During the six
months ended December 31, 1995, the Company acquired seven
outpatient businesses, including four which provide outpatient
rehabilitation services and three which provide orthotic and
prosthetic rehabilitation services. All acquisitions were
accounted for as purchases and, accordingly, the aggregate
purchase price was allocated to assets and liabilities based
on their fair values at the date of acquisition.
5
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1996
(In thousands)
(Unaudited)
The following unaudited pro forma consolidated results of
operations of the Company give effect to each of the
acquisitions as if they occurred on July 1, 1995:
For the six months
ended
December 31,
_____________________
1996 1995
_________ ________
Net revenues.......................... $468,217 $457,118
Net income............................ 17,493 17,745
Net income per share.................. $ .28 $ .27
The above pro forma information is not necessarily
indicative of the results of operations that would have
occurred had the acquisitions been made as of July 1, 1995, or
the results which may occur in the future.
Information with respect to businesses acquired in
purchase transactions for the six months ended
December 31, 1996 was as follows:
Cash paid (net of cash acquired)......... $63,557
Notes issued............................. 16,663
_________
80,220
Liabilities assumed...................... 10,280
_________
90,500
Fair value of assets acquired,
principally accounts receivable
and property and equipment............. 12,519
_________
Cost in excess of fair value
of net assets acquired................... $77,981
=========
The results of operations of businesses acquired have been
included in the consolidated results of the Company from the
effective date of each acquisition.
4. Financing Arrangements
Financing arrangements consisted of the following:
December 31, June 30,
1996 1996
_________ _________
Convertible subordinated
debentures (5.5%), due January 2000.. $175,000 $175,000
Subordinated promissory notes
(5% to 9%),payable through 2002...... 32,162 15,516
$150,000 revolving credit
facility (Euro-Rate plus 1/2
to 1-1/8%) due November 28, 1999..... 12,000 ___
Notes (5% to 9%), payable
through November 2000................. 88 172
Capitalized lease obligations,
payable through 2000.................. 1,090 1,527
________ _________
220,340 192,215
Less: current portion................. 11,052 8,173
__________ __________
$209,288 $184,042
========== ==========
6
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1996
(In thousands)
(Unaudited)
5. 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, 1996 of approximately $33,168 in
cash and 351 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, 1996 and December 31, 1995, the Company paid $11,392 and
$11,809 in cash, respectively, and issued 129 and 334 shares,
respectively, of common stock in connection with businesses
acquired in prior years.
6. Financial Data by Business Segment
As of the second quarter of fiscal 1997, the Company
operates in two industries, rehabilitation services and PEO
services. 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.
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.
Operating results and other financial data are presented
for the principal business segments of the Company as follows:
Rehabilitation PEO
Services Services Consolidated
____________ ________ ____________
Three Months Ended
December 31, 1996:
Net Revenues....... $224,677 $10,335 $235,012
Income from
Operations......... 18,661 134 18,795
Depreciation
Expense............ 5,718 6 5,724
Capital
Expenditures....... 6,095 ___ 6,095
Six Months Ended
December 31, 1996:
Net Revenues....... $434,107 $10,335 $444,442
Income from
Operations......... 33,679 134 33,813
Depreciation
Expense............ 11,652 6 11,658
Capital
Expenditures....... 9,647 ___ 9,647
As of December 31, 1996:
Assets.................. $826,705 $ 7,057 $833,762
7
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1996
(In thousands)
(Unaudited)
6. Financial Data by Business Segment (Continued)
Income from operations by business segment is total net
revenue less operating expenses. In computing operating
profit by business segment, none of the following items has
been added or deducted: other income, interest expense, income taxes or
unusual items. Identifiable assets by segment are those assets
that are used in the Company's operations in each industry.
8
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company has experienced significant growth in the recent
year through strategic acquisitions and growth in its existing
businesses. Since June 30, 1996, the Company purchased 21
outpatient companies, including 14 which provide orthotic &
prosthetic ("O&P") rehabilitation services and seven which
provide outpatient rehabilitation services, and also one business
which provides occupational medicine services. During the second
quarter of fiscal 1997, the Company entered into the professional
employer organization ("PEO") industry through the acquisition of
one PEO business. The following is the results of operations for
the three- and six-month periods ending December 31, 1996:
Three Months Six Months
Ended Ended
December 31, December 31,
____________ _____________
1996 1995 1996 1995
__________ _________ __________ _________
Net Revenues
Rehabilitation
services......... $224,677 $200,957 $434,107 $399,094
PEO.............. 10,335 ___ 10,335 ___
Gross profit
Rehabilitation
services......... 60,453 55,209 116,232 110,092
PEO.............. 458 ___ 458 ___
__________ _________ ___________ _________
Total gross
profit........... 60,911 55,209 116,690 110,092
Other operating
expenses(1)....... 42,116 40,086 82,877 79,472
__________ _________ __________ _________
Income from
operations........ $ 18,795 $ 15,123 $ 33,813 $ 30,620
=========== ========= =========== =========
(1) Other operating expenses includes selling, general &
administrative expenses, provision for uncollectible accounts, and
amortization of excess cost of net assets acquired.
Results of Operations for the Three Months Ended December 31, 1996
Net revenues for the three months ended December 31, 1996
increased from the prior year by $34.1 million or 16.9% to $235.0
million and gross profit increased $5.7 million or 10.3% to $60.9
million, respectively, primarily as a result of acquisitions and
internal growth as discussed further under "Operating Results by
Business".
Other operating expenses increased $2.0 million from $40.1
million in the second quarter of fiscal 1996 to $42.1 million in
the second quarter of fiscal 1997. The increased costs are
primarily associated with businesses acquired in fiscal 1997. As
a percentage of net revenues, other operating expenses decreased
from 19.9% to 17.9% for the same periods, respectively, as a
result of employee cost and lease savings resulting from the
productivity and cost reduction programs initiated in fiscal 1995
and 1996.
9
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - Continued
AND RESULTS OF OPERATIONS
Depreciation expense increased to $5.7 million for the three
months ended December 31, 1996 from $5.4 million for the three
months ended December 31, 1995 primarily due to the full year
effect of assets acquired in fiscal 1996 and certain internally
developed software placed in service during fiscal 1997.
Amortization expense increased $0.4 million from $2.5 million to
$2.9 million for the same periods, respectively, as a result of
businesses acquired subsequent to December 31, 1995.
Interest expense, net of interest income, increased $1.0
million compared with the prior period principally as a result of
decreased interest income due to lower invested cash in the
second quarter of fiscal 1997 compared with the first quarter of
fiscal 1996 as discussed in "Liquidity and Capital Resources" in
the Company's Form 10-K for the year ended June 30, 1996 and
later under "Liquidity and Capital Resources".
Income tax expense as a percentage of pretax income
decreased to 41.5% for the second quarter of fiscal 1997 from
43.0% in the previous year. The principal reason for the
decrease was lower effective state income tax rates.
Results of Operations for the Six Months Ended December 31, 1996
Net revenues for the six months ended December 31, 1996
increased from the prior year by $45.3 million or 11.4% to $444.4
million and gross profit increased $6.6 million or 6.0% to $116.7
million, respectively, primarily as a result of acquisitions and
internal growth as discussed further under "Operating Results by
Business".
Other operating expenses increased $3.4 million from $79.5
million for the six months ended December 31, 1995 to $82.9
million for the six months ended December 31, 1996. The increased
costs are primarily associated with businesses acquired in fiscal
1997. As a percentage of net revenues, other operating expenses
decreased from 19.9% to 18.6% for the same periods,
respectively, as a result of employee cost and lease savings
resulting from the productivity and cost reduction programs
initiated in fiscal 1995 and 1996.
Depreciation expense increased to $11.7 million for the six
months ended December 31, 1996 from $10.6 million for the six
months ended December 31, 1995 primarily due to the full year
effect of assets acquired in fiscal 1996 and certain internally
developed software placed in service during fiscal 1997.
Amortization expense increased $0.6 million to $5.6 million from
$5.0 million for the same periods, respectively, as a result of
businesses acquired subsequent to December 31, 1995.
Interest expense, net of interest income, increased $1.6
million compared with the prior period principally as a result of
decreased interest income due to lower invested cash in the first
six months of fiscal 1997 compared with the first six months of
fiscal 1996 as discussed in "Liquidity and Capital Resources" in
the Company's Form 10-K for the year ended June 30, 1996 and
later under "Liquidity and Capital Resources".
10
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - Continued
AND RESULTS OF OPERATIONS
Income tax expense as a percentage of pretax income
decreased to 41.5% for the six months ended December 31, 1996
from 43.0% in the previous year. The principal reason for the
decrease was lower effective state income tax rates.
Operating Results by Business
Rehabilitation Services
Results of Operations for the Three Months Ended December 31, 1996
Net revenues for the three months ended December 31, 1996
increased from the prior year by $23.7 million or 11.8% to $224.7
million. Gross profit for the three months ended December 31,
1996 increased from the prior year by $5.3 million or 9.6% to
$60.5 million. Gross profit as a percentage of net revenues
("gross profit margin") fell from 27.5% in the second quarter of
fiscal 1996 to 26.9% in the second quarter of fiscal 1997.
The $23.7 million increase in net revenues resulted
principally from: (i) an increase of $20.2 million from
businesses acquired since December 31, 1995, and (ii) a $7.4
million increase in contract rehabilitation revenues resulting
principally from a 2.0% increase in productivity, a 1.1% average
increase in pricing, and a 1.2% increase in the average number of
full time equivalents therapists ("FTE"). These increases were
offset somewhat by $4.5 million in revenues attributable to
outpatient facilities closed, sold or contributed to joint
ventures since September 30, 1995.
The $5.3 million increase in gross profit was primarily due
to the acquisitions and the increase in productivity, pricing and
FTE in contract rehabilitation offset somewhat by increased costs
of compensation and benefits. The decrease of 0.6% in the gross
profit margin results primarily from the acquisition of lower
margin businesses prior to integration cost reductions and
increased labor costs in excess of productivity and pricing
increases in contract rehabilitation services.
Results of Operations for the Six Months Ended December 31, 1996
Net revenues for the six months ended December 31, 1996
increased from the prior year by $35.0 million or 8.8% to $434.1
million. Gross profit for the six months ended December 31, 1996
increased from the prior year by $6.1 million or 5.6% to $116.2
million. Gross profit as a percentage of net revenues ("gross
profit margin") fell from 27.6% for the six months ended December
31, 1995 to 26.8% for the six months ended December 31, 1996.
The $35.0 million increase in net revenues resulted
principally from: (i) an increase of $26.8 million from
businesses acquired since December 31, 1995, (ii) an $11.6
million increase in contract rehabilitation net revenues
resulting principally from a 1.2% average increase in pricing and
a 1.7% increase in productivity, offset somewhat by a 1.1%
decrease in the average number of FTE, and (iii) a $4.6 million
increase in outpatient net revenues attributable to an
approximate 3% internal growth rate. These increases were offset
somewhat by $9.0 million in revenues attributable to outpatient
facilities closed, sold or contributed to joint ventures since
June 30, 1995.
The $6.1 million increase in gross profit was primarily due
to the acquisitions and the increase in productivity and pricing
in contract rehabilitation offset somewhat by increased costs of
compensation and benefits. The decrease of 0.8% in the gross
profit margin results primarily from the acquisition of lower
margin businesses prior to integration cost reductions and
increased labor costs in excess of productivity and pricing
increases in contract rehabilitation services.
11
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - Continued
AND RESULTS OF OPERATIONS
PEO
Results of Operations for the Three and Six Months Ended
December 31, 1996.
The financial results of the PEO represent the revenue and
costs associated with the acquisition of one business which
provides professional employer services. As of December 31,
1996, the Company provided services for approximately 2,000
worksite employees.
Liquidity and Capital Resources
During the six months ended December 31, 1996, the Company's
cash and cash equivalents decreased by $75.7 million from $95.7
million to $20.0 million. The decrease in cash and cash
equivalents principally resulted from (i) $74.9 million in
payments for the purchase of businesses acquired since June 30,
1996 and contingent payments in connection with businesses
acquired in previous years, (ii) the purchase of approximately
2.7 million shares of the Company's stock for $23.3 million, and
(iii) $9.6 million in payments for additions to property,
equipment and capitalized software. These decreases were offset
somewhat by cash provided by operations of $28.6 million and a
net increase in the Company's financing arrangements of $3.0
million.
Cash provided by operations increased to $28.6 million for
the six months ended December 31, 1996 from $15.3 million for the
six months ended December 31, 1995, respectively. This increase
is due to changes in working capital as a result of timing of
receipts and disbursements and the increase in operating income
before depreciation and amortization expense.
The Company used $9.6 million of cash for capital
expenditures during the first six months of fiscal 1997 compared
with $14.5 million in the first six months of fiscal 1996.
Capital expenditures generally relate to the costs incurred in
connection with internally developed software, leasehold
renovations and equipment replacement.
The Company amended its $150.0 million credit facility in
the first quarter of fiscal 1997 to extend the term of the
agreement from November 1997 to November 1999. As of December
31, 1996, $132.6 million of the credit facility was available
after reduction of borrowings and letters of credit of $5.4
million.
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 and long-term cash needs.
12
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security-Holders
____________________________________________________________
On October 31, 1996, the Company held its Annual Meeting of
Stockholders for the fiscal year ended June 30, 1996. 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, 1996, which information in such Item 4 is
incorporated in its entirety by reference herein.
Item 6 - Exhibits and Reports on Form 8-K
_________________________________________
(A) Exhibit
Number Exhibit Description Page Number
_________ _________________________ _____________
10(a) Employment agreement dated as of September 25, 1996
between the Company and William D. Fuchs
10(b) Employment agreement dated as of October 16, 1996
between the Company and Aven Kerr.
10(c) Employment agreement dated as of October 9, 1996
between the Company and Barry E. Smith.
27 Financial Data Schedule
(B) The Company filed no reports on Form 8-K during the quarter
ended December 31, 1996.
13
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 13, 1997 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
14
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS IN FORM
10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
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<NAME> NOVACARE, INC.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 20,040
<SECURITIES> 0
<RECEIVABLES> 244,110
<ALLOWANCES> 22,073
<INVENTORY> 16,757
<CURRENT-ASSETS> 290,651
<PP&E> 123,625
<DEPRECIATION> 59,032
<TOTAL-ASSETS> 833,762
<CURRENT-LIABILITIES> 131,188
<BONDS> 209,288
0
0
<COMMON> 663
<OTHER-SE> 480,243
<TOTAL-LIABILITY-AND-EQUITY> 833,762
<SALES> 0
<TOTAL-REVENUES> 444,442
<CGS> 327,752
<TOTAL-COSTS> 394,542<F1>
<OTHER-EXPENSES> 4,337<F2>
<LOSS-PROVISION> 10,466
<INTEREST-EXPENSE> 6,448
<INCOME-PRETAX> 28,649
<INCOME-TAX> 11,889
<INCOME-CONTINUING> 16,760
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<EXTRAORDINARY> 0
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<NET-INCOME> 16,760
<EPS-PRIMARY> .27
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<F1>"TOTAL COSTS" CONSIST OF COST OF SERVICES AND SELLING, GENERAL AND
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<F2>"OTHER EXPENSES" CONSIST OF AMORTIZATION OF GOODWILL AND MINORITY INTEREST
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</TABLE>
September 25, 1996
Mr. William D. Fuchs
1016 West Ninth Avenue
King of Prussia, PA 19406
Dear Bill:
It is indeed a pleasure to confirm NovaCare's offer of employment
and your acceptance to become President and General Manager,
Integrated Delivery Systems Division. The management team is
very pleased that someone of your stature and experience will be
helping shape NovaCare's future. Equally important, we believe
that you will contribute in a significant way to the building of
a culture based on values. Your experience and leadership was an
important part of our decision, and we look forward to your
contributions in this regard.
The offer of employment is as follows:
- - Base Salary - You will be paid $9,615.38 on a bi-weekly
basis as that is our method of payment. This annualizes to a
base salary of $250,000.
- - Incentive Opportunity - You will be eligible to participate
in the Nova Care Executive Incentive Compensation Plan as
approved by the Compensation Committee of the Board of Directors
(the "Compensation Committee"). Your opportunity will be 50% of
your base salary to a maximum of 100% of your base salary. This
incentive is based on performance against objectives which you
and Tim will negotiate. Bonuses are normally distributed after
the end of the 1997 fiscal year, provided you are still employed
by NovaCare at that time. An incentive plan document will be
forthcoming from Bud Locilento.
- - Equity - You will receive an initial stock option grant of
100,000 stock options priced at the end of business on your first
day of employment, subject to approval of the Compensation
Committee. It is anticipated that you will begin on Wednesday,
September 25, 1996. This grant will vest in five equal
installments of 20% each starting with the first anniversary of
your date of employment. Thereafter, you will be eligible to
participate in NovaCare's Stock Option Plan and receive an annual
grant based upon your performance against objectives and approved
by the Board of Directors.
- - Officer Status - You will be elected as an Officer of the
Corporation, subject to the approval of the Board of Directors at
its next scheduled meeting.
- - Supplemental Benefits Plan - You will be eligible to
participate in NovaCare's Supplemental Benefits Plan as a Level I
executive. You will receive a plan description under separate
cover. A representative of the Benefits Department will contact
you to explain this plan in detail.
William D. Fuchs
September 25, 1996
Page Two
- - Relocation - NovaCare will provide relocation benefits
including reasonable and customary closing costs for the sale of
your current residence and the purchase of a new residence in
Pennsylvania. A summary is enclosed for your review. In
addition, other relocation benefits will include:
- NovaCare will provide you with an equity loan equal to the
amount of equity in your current residence for a period of one
year. The loan will be collateralized by your current residence
and callable upon your termination, the sale of your house or the
expiration of the one-year loan period, whichever occurs first.
- To the extent that relocation reimbursements are taxable,
NovaCare will gross up these reimbursements to offset tax
liabilities during the year in which they occur.
- Understanding your need for extended temporary housing due
to your decision to allow your daughter to finish this school
year in Florida, you and I will arrive at a reasonable time
period during which this benefit will be provided. You will also
be provided a rental car under the same circumstances.
- - Benefits - You will be eligible to participate in any and
all of the group benefit plans that NovaCare offers. A benefits
brochure will be forwarded to you; and Debbie Kelly, Director of
Benefits, will contact you to explain our plans and enroll you
and your family.
- - Paid Time Off - You will receive four weeks of Paid Time Off
on an annual basis.
- - Non-Compete and Confidentiality Agreement - Restrictions
You acknowledge that the services to be rendered by you to
NovaCare are of a special and unique character. You have been
asked to help us develop a new approach to market integration in
our key markets throughout the United States. You will
bedeveloping key customer contacts and relationships and a
knowledge of how our information and management systems are
structured to enable us to compete effectively in those markets.
Those contacts and that knowledge will give us a competitive
advantage and could be used to our significant detriment by our
competitors. Therefore, in order to induce NovaCare to enter
into this Agreement, and in consideration of your employment
hereunder and NovaCare's agreement to make salary continuation
payments as more fully described in the following paragraph (b)
below, you agree, for the benefit of NovaCare, that you will not,
during the period of your employment with NovaCare and for two
(2) years thereafter commencing on the date of termination of
your employment with NovaCare:
(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 NovaCare or any subsidiary of NovaCare for which you have
at the date of termination of your employment with NovaCare,
or have had at any time during the two-year period prior to
such termination, supervisory or managerial responsibility;
(b) solicit or entice or endeavor to solicit or entice away
from NovaCare or employ, directly or indirectly, any person
who was an employee of NovaCare or of any subsidiary at any
time during the two-year period ending on the date of
termination of your employment with NovaCare either for your
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
NovaCare except that this restriction shall not apply in the
case of any person whose employment shall have been terminated
by NovaCare; or(c) solicit or entice or endeavor to solicit or
entice away any of the clients or customers of NovaCare,
either on your own account or on behalf of any other person.
William D. Fuchs
September 25, 1996
Page Three
You agree that if, in any proceeding, the court or other
authority refuses to enforce the confidentiality and non-
compete covenants set forth herein because such covenants
cover too extensive a geographic area or too long a period of
time, any such covenant will be deemed appropriately amended
and modified in keeping with the intention of the parties, to
the maximum extent permitted by law.
You acknowledge and agree that the confidentiality and non-
compete covenants and agreements set forth herein are
reasonable in all respects, and necessary in order to protect,
maintain and preserve the value and goodwill of the business
and other legitimate business interests of NovaCare. You
acknowledge and agree that the covenants and agreements set
forth in this Agreement are a material reason for the payment
of the compensation and benefits provided for in this
Agreement.
In the event of a breach or threatened breach by you of any of
the confidentiality and non-compete provisions of this
Agreement, you hereby consent and agree that NovaCare will be
entitled to pre-judgment injunctive relief or similar
equitable relief, designed to maintain the status quo ante
pending arbitration under this Agreement, as described below,
by restraining you from committing or continuing any such
breach or threatened breach or granting specific performance
of any act required to be performed by you under this
Agreement, without the necessity of showing any actual damage
or that only damages would not afford an adequate remedy and
without the necessity of posting any bond or other security.
You hereby consent to the jurisdiction of the federal courts
located in the Eastern District of Pennsylvania and the state
courts operating within the geographical area included in such
District for any proceedings hereunder.
Arbitration - We will attempt amicably to resolve
disagreements and disputes hereunder by negotiation. If the
matter is not amicably resolved through negotiation, within
thirty (30) days after written notice from either party, and
controversy, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, will be
subject to exclusive, final and binding arbitration, which
will be conducted in Philadelphia, PA, in accordance with the
National Health Lawyers Association ("NHLA") Alternative
Dispute Resolution Services Rules of Procedure for
Arbitration. Either party may bring a court action to compel
arbitration under this Agreement or to enforce an arbitration
award.
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
twelve months or until you find employment, whichever comes
first. In the event that you accept an offer of comparable
employment at a base salary lower than your base salary with
NovaCare at the time of your termination, NovaCare will pay
you an amount equal to the difference between the two salaries
on a monthly basis until the expiration of the one year salary
continuation period. 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.
Your employment relationship with NovaCare is at will. Either
you or NovaCare may terminate that relationship for any lawful
reasons 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 an authorized officer on
behalf of NovaCare. Your employment is also contingent upon
the completion of appropriate references.
William D. Fuchs
September 25, 1996
Page Four
These issues represent the substantive parts of the employment
offer, Bill. Should you want to discuss them, please feel
free to call me or Bud Locilento at 610-992-7435. We have a
dynamic organization and a bright future. We are all
delighted that you will be joining the team. You will be very
instrumental in "Helping Make Life a Little Better." Please
acknowledge your acceptance of this Agreement by signing the
enclosed copy of this letter and returning it to me.
Welcome to NovaCare.
Sincerely,
/s/ Timothy E. Foster
_________________________
Timothy E. Foster
cc: A. T. Locilento, Jr.
Agreed and Accepted:
/s/ William Fuchs October 4, 1996
__________________________ __________________
William Fuchs Date
October 16, 1996
Ms. Aven Kerr
1016 West Ninth Avenue
King of Prussia, PA 19406
Dear Aven:
It is indeed a pleasure to confirm NovaCare's offer of employment
and your acceptance to become Senior Vice President of Human
Resources. The management team is very pleased that someone of
your stature and experience will be helping shape NovaCare's
future. Equally important, we believe that you will contribute
in a significant way to the building of a culture based on
values. Your experience and leadership was an important part of
our decision, and we look forward to your contributions in this
regard.
The offer of employment is as follows:
- - Base Salary - You will be paid $7,692.30 on a bi-weekly basis
as that is our method of payment. This annualizes to a base
salary of $200,000.
- - Incentive Opportunity - You will be eligible to participate in
the Nova Care Executive Incentive Compensation Plan as approved
by the Compensation Committee of the Board of Directors (the
"Compensation Committee"). Your opportunity will be 50% of your
base salary to a maximum of 100% of your base salary and be pro-
rated based upon your time with NovaCare. This incentive is
based on performance against objectives which you and Tim will
negotiate. Bonuses are normally distributed after the end of the
1997 fiscal year, provided you are still employed by NovaCare at
that time. An incentive plan document will be forthcoming from
Bud Locilento.
- - Equity - You will receive an initial stock option grant of
90,000 stock options priced at the end of business on your first
day of employment, subject to approval of the Compensation
Committee. This grant will vest in five equal installments of
20% each starting with the first anniversary of your date of
employment. Thereafter, you will be eligible to participate in
NovaCare's Stock Option Plan and receive an annual grant based
upon your performance against objectives and approved by the
Board of Directors.
- - Officer Status - You will be elected an Officer of the
Corporation, subject to the approval of the Board of Directors at
its next scheduled meeting.
- - Supplemental Benefits Plan - You will be eligible to
participate in NovaCare's Supplemental Benefits Plan as a Level I
executive. A plan description is enclosed for your information.
A representative of the Benefits Department will contact you to
explain this plan in detail.
- - Benefits - You will be eligible to participate in any and all
of the group benefit plans that NovaCare offers. A benefits
packet is enclosed for your review. Debbie Kelly, Director of
Benefits, will contact you to explain our plans and assist you in
the enrollment process.
Aven Kerr
October 16, 1996
Page Two
- Non-Compete and Confidentiality Agreement - Restrictions
You acknowledge that the services to be rendered by you to
NovaCare are of a special and unique character. That
knowledge will give us a competitive advantage and could be
used to our significant detriment by our competitors.
Therefore, in order to induce NovaCare to enter into this
Agreement, and in consideration of your employment hereunder
and NovaCare's agreement to make salary continuation payments
as more fully described in the following paragraph (b) below,
you agree, for the benefit of NovaCare, that you will not,
during the period of your employment with NovaCare and for one
(1) year thereafter commencing on the date of termination of
your employment with NovaCare:
(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 NovaCare or any subsidiary of NovaCare
for which you have at the date of termination of your
employment with NovaCare, or have had at any time during the
one-year period prior to such termination, supervisory or
managerial responsibility;
(b) solicit or entice or endeavor to solicit or entice away
from NovaCare or employ, directly or indirectly, any person
who was an employee of NovaCare or of any subsidiary at any
time during the one-year period ending on the date of
termination of your employment with NovaCare either for your
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
NovaCare except that this restriction shall not apply in the
case of any person whose employment shall have been
terminated by NovaCare; or(c) solicit or entice or endeavor
to solicit or entice away any of the clients or customers of
NovaCare, either on your own account or on behalf of any
other person.
You agree that if, in any proceeding, the court or other
authority refuses to enforce the confidentiality and non-
compete covenants set forth herein because such
covenants cover too extensive a geographic area or too
long a period of time, any such covenant will be deemed
appropriately amended and modified in keeping with the
intention of the parties, to the maximum extent
permitted by law.
You acknowledge and agree that the confidentiality and
non-compete covenants and agreements set forth herein
are reasonable in all respects, and necessary in order
to protect, maintain and preserve the value and goodwill
of the business and other legitimate business interests
of NovaCare. You acknowledge and agree that the
covenants and agreements set forth in this Agreement are
a material reason for the payment of the compensation
and benefits provided for in this Agreement.
In the event of a breach or threatened breach by you of
any of the confidentiality and non-compete provisions of
this Agreement, you hereby consent and agree that
NovaCare will be entitled to pre-judgment injunctive
relief or similar equitable relief, designed to maintain
the status quo ante pending arbitration under this
Agreement, as described below, by restraining you from
committing or continuing any such breach or threatened
breach or granting specific performance of any act
required to be performed by you under this Agreement,
without the necessity of showing any actual damage or
that only damages would not afford an adequate remedy
and without the necessity of posting any bond or other
security. You hereby consent to the jurisdiction of the
federal courts located in the Eastern District of
Pennsylvania and the state courts operating within the
geographical area included in such District for any
proceedings hereunder.
Aven Kerr
October 16, 1996
Page three
Arbitration - We will attempt amicably to resolve
disagreements and disputes hereunder by negotiation. If the
matter is not amicably resolved through negotiation, within
thirty (30) days after written notice from either party, and
controversy, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, will be
subject to exclusive, final and binding arbitration, which
will be conducted in Philadelphia, PA, in accordance with the
National Health Lawyers Association ("NHLA") Alternative
Dispute Resolution Services Rules of Procedure for
Arbitration. Either party may bring a court action to compel
arbitration under this Agreement or to enforce an arbitration
award
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 six
months regardless of your employment status. In the event
that you remain unemployed beyond this six-month period,
NovaCare will extend the severance period for an additional
six months or until you accept an offer of comparable
employment, whichever comes first. In the event that you
accept an offer of comparable employment at a base salary
lower than your base salary with NovaCare at the time of your
termination, NovaCare will pay you an amount equal to the
difference between the two salaries on a monthly basis for a
period not to exceed the six-month extension. 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.
Your employment relationship with NovaCare is at will. Either
you or NovaCare may terminate that relationship for any lawful
reasons 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 an authorized officer on
behalf of NovaCare. Your employment is also contingent upon
the completion of appropriate references.
These issues represent the substantive parts of the employment
offer, Aven. Should you want to discuss them, please feel
free to call me. We have a dynamic organization and a bright
future. We are all delighted that you will be joining the
team. You will be very instrumental in "Helping Make Life a
Little Better." Please acknowledge your acceptance of this
Agreement by signing the enclosed copy of this letter and
returning it to me.
Welcome to NovaCare.
Sincerely,
/s/ Timothy E. Foster
______________________
Timothy E. Foster
cc: A. T. Locilento, Jr.
Agreed and Accepted:
/s/ Aven Kerr October 19, 1996
_______________________ ___________________
Aven Kerr Date
October 9, 1996
Barry E. Smith
1016 West Ninth Avenue
King of Prussia, PA 19406
Dear Barry:
This letter will confirm the terms under which you, in your
capacity as Vice-President, Controller and Chief Accounting
Officer of NovaCare, Inc. ("NovaCare" or the "Company"),
have accepted responsibility and authority in connection
with the Company's finance operations nationally. You will
be performing a unique function as we attempt to become the
first fully integrated national provider of rehabilitation
services by developing financial, accounting and information
systems to allow real time control of our business. I am
delighted to have you filling this important role. You have
demonstrated alignment with NovaCare's values and have
proven your operating skills. I am confident that your
expertise will help maximize operating and administrative
efficiencies to realize the full potential of the business.
The terms of our agreement are as follows, and are effective
August 1, 1996:
Title - You will continue to function as Vice-
President, Controller and Chief Accounting Officer
of the Company.
Base Salary - Effective August 1, 1996, you will
receive an increase to a bi-weekly salary of
$5,937.50. This annualizes to a base salary of
$154,375. You will be eligible for a performance
and salary review on an annual basis.
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 35%
of your base salary per fiscal year.
Supplemental Benefits - You will continue to
participate in NovaCare's Supplemental Benefits
Plan.
Confidentiality Agreement - You will, during your
employment with the Company and at all times
thereafter, treat all confidential material (as
hereinafter defined) of the Company or any other
member of the Company Group (as hereinafter
defined) confidentially. You will not, without
the prior written consent of the President of the
Company, disclose such confidential material,
directly or indirectly, to any party who at the
time of such disclosure is not an employee or
agent of any member of the Company Group, or
remove from the premises of the Company or any
other member of the Company Group any notes or
records relating thereto, copies thereof, or any
other property of any member of the Company Group.
You will not in any manner use any confidential
material of the Company Group, or any other
property of any member of the Company Group,
outside of the scope of your duties and
responsibilities under this Agreement or in any
way that is detrimental to any member of the
Company Group.
For purposes hereof, "confidential material" means
all information in any way concerning the
activities, business or affairs of any member of
the Company Group or any of the customers or
clients of any member of the Company Group,
including, without limitation, information
concerning trade secrets, together with all sales
and financial information concerning any member of
the Company Group and any and all information
concerning projects in research and development or
marketing plans for any products or projects of
the Company Group, and all information in any way
concerning the activities, business or affairs of
any of such customers or clients, which is
furnished to you by any member of the Company
Group or any of its agents, customers or otherwise
acquired by you in the course of your employment
with the Company; provided, however, that the term
"confidential material" does not include
information which (i) becomes generally available
to the public other than as a result of a
disclosure by you, (ii) was available to you on a
non-confidential basis prior to your employment
with
any member of the Company Group or (iii) becomes
available to you on a non-confidential basis from
a source other than any member of the Company
Group or any of its agents, customers or clients,
provided that such source is not bound by a
confidentiality agreement with any member of the
Company Group or any of such agents, customers or
clients. For the purposes hereof, the "Company
Group" means, collectively, NovaCare and the
subsidiaries and affiliates of NovaCare.
Non-Compete Agreement - You acknowledge that the
services to be rendered by you 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 the Company's agreement to
increase your base salary and to make the salary
continuation payments described in "Termination of
Employment" below, you agree for the benefit of
the Company that you will not, during the period
of your employment with the Company and for one
(1) year thereafter commencing on the date of
termination of your 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 other member of the Company Group
for which you have at the date of termination of
your employment with NovaCare, or had at any time
during the two (2) year period prior to such
termination, finance responsibility; or
(b) solicit or entice or endeavor to solicit or
entice away from the Company, or any other member
of the Company Group, or employ, directly or
indirectly, any person who was an employee
of the Company or any member of the Company Group at
any time during the one (1) year period ending on
the date of termination of your 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 has
terminated by the Company.
You agree that if, in any proceeding, the court or
other authority refuses to enforce the
confidentiality and non-compete covenants set
forth herein because such covenants cover too
extensive a geographic area or too long a period
of time, any such covenant will be deemed
appropriately amended and modified in keeping with
the intention of the parties, to the maximum
extent permitted by law.
You acknowledge and agree that the confidentiality
and non-compete covenants and agreements set forth
herein are reasonable in all respects, and
necessary in order to protect, maintain and
preserve the value and goodwill of the business of
the Company Group, as well as the proprietary and
other legitimate business interests of the members
of the Company Group. You acknowledge and agree
that the covenants and agreements set forth in
this Agreement are a material reason for the
payment of the compensation and benefits provided
for in this Agreement.
In the event of a breach or threatened breach by
you of any of the confidentiality and non-compete
provisions of this Agreement, you hereby consent
and agree that the Company will be entitled to pre-
judgment injunctive relief or similar equitable
relief, designed to maintain the status quo ante
pending arbitration under this Agreement, as
described below, by restraining you from
committing or continuing any such breach or
threatened breach or granting specific performance
of any act required to be performed by you under
this Agreement, without the necessity of showing
any actual damage or that only damages would not
afford an adequate remedy and without the
necessity of posting any bond or other security.
You hereby consent to the jurisdiction of the
federal courts located in the Eastern District of
Pennsylvania and the state courts operating within
the geographical area included in such District
for any proceedings hereunder.
Termination of Employment - The term of this
Agreement shall be three (3) years from the date
hereof, and shall be automatically renewed for
additional terms of one year unless either party
shall give notice of non-renewal at least ninety
(90) days prior to the end of the initial or any
renewal term. If, during the term of this
Agreement, the Company terminates your employment
for any reason other than due cause, the Company
will continue to pay your base salary bi-weekly,
until the first to occur of (1) the expiration of
a period of six (6) months, or (2) the date on
which you find alternative employment. All other
provisions of the Company's 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) a material breach of any of your
obligations hereunder, (b) any willful failure to
discharge your duties, (c) gross negligence in the
performance of your duties, (d) conduct
detrimental to the Company, or (e) 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 the Company's choice
should you be terminated for any reason other than
due cause.
Governing Law - This Agreement will be deemed a
contract made under, and for all purposes will be
construed in accordance with, the laws of the
Commonwealth of Pennsylvania applicable to
contracts to be performed entirely within such
Commonwealth.
Arbitration - We will attempt amicably to resolve
disagreements and disputes hereunder by
negotiation. If the matter is not amicably
resolved through negotiation, within thirty (30)
days after written notice from either party, and
controversy, dispute or disagreement arising out
of or relating to this Agreement, or the breach
thereof, will be subject to exclusive, final and
binding
arbitration, which will be conducted in Philadelphia,
PA, in accordance with the National Health Lawyers
Association ("NHLA") Alternative Dispute
Resolution Services Rules of Procedure for
Arbitration. Either party may bring a court
action to compel arbitration under this Agreement
or to enforce an arbitration award.
Your employment relationship with NovaCare is at will.
Either you or NovaCare may terminate that relationship for
any lawful reasons at any time, with or without notice. You
and NovaCare 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 NovaCare.
Please acknowledge your acceptance of this Agreement by
signing three (3) copies of this letter and returning them
to me.
NovaCare is facing challenging and exciting times, Barry. I
hope and expect that you will continue to make significant
contributions. I am looking forward to your continuing to
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
continuing to have 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/ Robert E. Healy, Jr.
__________________________
Robert E. Healy, Jr.
Senior Vice President,
Finance and Administration
and Chief Financial Officer
ACCEPTED AND AGREED:
/s/ Barry E. Smith December 18, 1996
____________________ ____________________
Barry E. Smith Date
