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[NOVACARE LOGO]
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
Commission file number 1-10875
NOVACARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3247827
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1016 WEST NINTH AVENUE, KING OF PRUSSIA, PA 19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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Registrant's telephone number, including area code: (610) 992-7200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE, INC.
5 1/2% CONVERTIBLE SUBORDINATED NEW YORK STOCK EXCHANGE, INC.
DEBENTURES DUE 2000
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
AS OF SEPTEMBER 5, 1997, 61,076,427 SHARES OF COMMON STOCK WERE
OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD
BY NON-AFFILIATES WAS APPROXIMATELY $806,909,547. (DETERMINATION OF STOCK
OWNERSHIP BY NON-AFFILIATES WAS MADE SOLELY FOR THE PURPOSE OF RESPONDING TO
THIS REQUIREMENT AND THE REGISTRANT IS NOT BOUND BY THIS DETERMINATION FOR ANY
OTHER PURPOSE.)
DOCUMENTS INCORPORATED BY REFERENCE
PART III INCORPORATES INFORMATION BY REFERENCE FROM PORTIONS OF THE
REGISTRANT'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS TO BE
HELD ON OCTOBER 30, 1997.
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NOVACARE, INC. AND SUBSIDIARIES
FORM 10-K -- FISCAL YEAR ENDED JUNE 30, 1997
CONTENTS AND CROSS REFERENCE SHEET
FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K
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FORM 10-K FORM 10-K FORM 10-K
PART NO. ITEM NO. DESCRIPTION PAGE NO.
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I 1 Business..................................................... 1
The Company........................................... 1
Industry Background................................... 1
Company Strategy...................................... 3
Plan for Growth and Operations........................ 5
Business Profile...................................... 8
Competition........................................... 14
Reimbursement/Government Relations.................... 15
Government Regulation................................. 17
Insurance............................................. 20
Employees............................................. 20
Executive Officers of the Registrant.................. 21
2 Properties................................................... 22
3 Legal Proceedings............................................ 23
4 Submission of Matters to a Vote of Security Holders.......... 23
II 5 Market for Registrant's Common Equity and Related Stockholder
Matters.................................................... 23
6 Selected Financial Data...................................... 24
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 25
8 Financial Statements and Supplementary Data.................. 32
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 51
III 10 Directors and Executive Officers of the Registrant........... 51
11 Executive Compensation....................................... 51
12 Security Ownership of Certain Beneficial Owners and
Management................................................. 51
13 Certain Relationships and Related Transactions............... 51
IV 14 Exhibits, Financial Statement Schedules and Reports of Form
8-K........................................................ 51
Signatures........................................................................... 52
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PART I
ITEM 1. BUSINESS
THE COMPANY
NovaCare, Inc. ("NovaCare" or the "Company") was organized and formed in
1985 and is a national leader in physical rehabilitation services and employee
services. As the clinical leader in rehabilitation services, the Company treats
37,000 patients per day in cost-effective outpatient and long-term care settings
and has achieved number one market shares in long-term care and orthotics and
prosthetics. In addition, NovaCare is the nation's second largest provider of
outpatient rehabilitation services and the second largest employee services, or
professional employer organization ("PEO"), administering the full array of
human resource functions, including the management of health care benefits and
workers' compensation, principally for small and medium-sized businesses.
Rehabilitation services are the processes that restore individuals disabled
by trauma or disease to their optimal level of functionality and
self-sufficiency. Over 80% of individuals receiving rehabilitation services
return to the community in productive endeavors or to active retirement.
NovaCare's comprehensive medical rehabilitation services include (i) providing
rehabilitation therapy 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. The Company operated
medical rehabilitation hospitals until April 1, 1995, the effective date of the
sale of such hospitals, discussed in Part II to this Form 10-K. For the fiscal
year ended June 30, 1995, the medical rehabilitation hospitals represented 12%
of the Company's consolidated net revenues.
Employee services are generally provided to small and medium-sized
businesses and are comprehensive, fully integrated outsourcing solutions to
human resource management, including payroll management, workers' compensation,
risk management, benefits administration, unemployment services and human
resource consulting services. The Company creates relationships with both its
clients and worksite employees by contractually assuming certain administrative
and financial employer responsibilities with respect to worksite employees in a
"co-employment" relationship. By focusing on employee services, the Company
helps create a more satisfying, more productive relationship between clients and
employees. The Company supports its clients by: (i) improving profitability
through lowering or controlling costs associated with workers' compensation,
health insurance, other benefit coverage and regulatory compliance; (ii)
improving productivity through reducing the time and effort required by business
owners and executives to deal with the complexities of employment management,
enabling them to focus on their business core competencies and growth; and (iii)
improving employee satisfaction and performance. The Company helps employers
improve job satisfaction and performance of their employees by: (i) providing
improved health care and related benefits; (ii) delivering training programs;
and (iii) delivering dependable payroll and benefits administration.
INDUSTRY BACKGROUND
REHABILITATION SERVICES
Depending on an individual's diagnostic and therapeutic needs,
rehabilitation services are delivered in a variety of settings, including
rehabilitation hospitals, rehabilitation units in acute care hospitals,
long-term care facilities, outpatient rehabilitation facilities, rehabilitation
agencies and clinics, industrial settings, schools and patients' homes. These
services are provided by a variety of health care professionals including
physiatrists and other qualified rehabilitation physicians, occupational,
physical and respiratory therapists, rehabilitation nurses, speech-language
pathologists, audiologists, psychologists, social workers, orthotists,
prosthetists, recreational therapists, rehabilitation counselors and others.
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Recent industry analysis suggests that medical rehabilitation is an
approximately $27 billion industry. The industry's growth has been fueled
primarily by the following three factors:
Increased demand for services. Advances in technology, the aging
population and high quality of life expectations among disabled people
continue to drive demand for rehabilitation services. Technological
advances in medical care have lengthened lifespans and improved the quality
of life for patients who have suffered severe injury or disease. The U.S.
Bureau of the Census statistics show that the fastest growing segment of
the population is the group over 65 years of age. This group, among the 33
million Americans who have a disability and cannot perform basic physical
activity or need assistance to do so, has the highest requirement for
rehabilitation services. Approximately 75% of strokes and 70% of
amputations occur in persons over the age of 65. Almost 50% of Americans
over 75 years of age currently require some form of rehabilitation.
Proven cost-effectiveness of services. Payers (insurance companies,
managed care plans, employers, government programs and individual patients)
now recognize the benefits of rehabilitation in reducing lifetime costs of
health care. Recent studies suggest that from $11.00 to $30.00 in medical
costs are saved for every dollar spent on rehabilitation. Efforts to reduce
workers' compensation expenses also have stimulated demand for
rehabilitation of injured workers and the installation of work-hardening
and injury-prevention programs in the work place.
Comprehensive reimbursement for services. Rehabilitation services are
covered for payment by Medicare and Medicaid and are typically covered by
commercial health insurance policies, workers' compensation and managed
care plans.
EMPLOYEE SERVICES
The National Association of Professional Employer Organizations ("NAPEO")
estimates the PEO or employee services industry is currently approximately $18
billion in revenues with an annual growth rate over the last five years of
approximately 30%. The U.S. Small Business Administration estimates there were
approximately 6 million businesses in the United States with fewer than 100
employees in 1996. These businesses employed approximately 52 million persons
and had an aggregate annual payroll of approximately $1.1 trillion. Management
believes approximately 49 million of these employees are currently unserved by
the PEO industry. The PEO industry is highly fragmented. NAPEO data suggest that
as many as 2,400 PEOs are currently in operation and that the ten largest PEOs
account for less than 10% of the existing market. The Company expects there will
continue to be significant industry consolidation as smaller PEOs face
increasing regulatory complexity and capital requirements associated with
developing larger service delivery infrastructures and management information
systems.
Increased demand for services. The PEO industry evolved in the early 1980's in
response to increasing employment and benefit costs, and the complexities of the
legal and regulatory environment for the rapidly expanding small to medium-sized
business sector. The Company believes demand for PEO services will continue to
increase as (i) employment-related governmental regulation grows more complex,
(ii) growth continues within the small to medium-sized business community, (iii)
the need to provide health and retirement benefits in a cost-effective
convenient manner increases, and (iv) the business and regulatory communities
accept and recognize the PEO industry. The Company believes PEO services will
continue to experience growing demand because of anticipated growth in the
number of small businesses in the United States and the growing trend among
small to medium-sized employers to: (i) outsource non-core competencies; (ii)
reduce employee benefit costs; (iii) avoid employee-related risks and regulatory
complexities, and (iv) attract better employees and retain them through improved
benefit plans.
Cost effectiveness of services. According to estimates by the U.S. Small
Business Administration, the management of an average small to medium-sized
business devotes from 7% to 25% of its time to employee-related matters, leaving
management with less time to focus on core competencies. A National Federation
of Independent Business survey of small businesses in 1996 showed that six of
the top 13 major problem areas for small business are issues that can be
addressed by PEOs. These include (with their rank in importance) cost of health
insurance (1), workers' compensation costs (3), federal paperwork (7), frequent
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changes in federal tax laws (9), finding qualified employees (11), and
state/local paperwork (13). Work-related injuries cost employers over $70
billion in medical expenses and employee productivity each year. Employees are
attracted to small and medium-sized businesses that provide employees with human
resources services characteristic of large employers. An industry analyst's
study indicated that 40% of the clients that outsourced services with a PEO were
able to upgrade their employee benefits offerings and one-fourth of those
clients were able to offer health care and other benefits for the first time.
COMPANY STRATEGY
VALUES-BASED BUSINESS
NovaCare believes that the most important and differentiating quality of
outstanding organizations is the set of values which inspires, unites and
sustains them. Values are constant and enduring, and precede and underlie
business plans, policies, procedures, practices, performance and outcomes. The
Company's values are:
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Credo Helping Make Life a Little Better
Beliefs Respect for the Individual
Service to the Customer
Pursuit of Excellence
Commitment to Personal Integrity
Purpose
Rehabilitation To effectively meet the rehabilitation needs of our patients
Services through clinical leadership
Employee Services To be the brand, service and performance leader in the PEO
industry by creating a more satisfying, more productive
relationship between employers and employees
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It is management's belief that the strong commitment to these values by all
employees enables the Company to provide a unique level of service to its
customers by enabling employees to build the business and enhance their careers.
STRATEGY STATEMENT
OVERALL
NovaCare's strategy is to achieve a leading market position in each of its
businesses. The Company selects industry sectors that are large, fragmented,
growing rapidly and would benefit from the Company's core competencies:
outsourcing, information technology and human resource management.
Outsourcing. NovaCare provides creative, cost-effective outsourced solutions to
business. Instrumental in the Company's success in outsourcing is an ability to
understand and anticipate the needs of customers, while smoothly integrating
into their operations, so they can focus on their business' core competencies.
NovaCare manages activities that its customers may not have the necessary scale,
expertise, time or staff to handle. The Company seeks to be a partner with its
customers, whether a small business or a health care organization, adding and
adapting services as customer needs change.
Information Technology. NovaCare strives to improve its customers' performance
by providing knowledge-based services and technology beyond the reach of their
internal systems. The same information technology capability that adds value for
customers is utilized to improve NovaCare's efficiency and profitability.
Human Resource Management. Due to the competitive environment for clinical
rehabilitation professionals in which demand exceeds supply, NovaCare has
developed strong capabilities to attract and retain employees. With
approximately 19,000 employees working in small groups in customer facilities
and NovaCare outpatient centers, the Company has experience in effectively
managing a highly dispersed workforce on a national level.
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NovaCare's market leadership starts with a consolidation and integration
program designed to achieve the scale required to create margin opportunity and
warrant the investment made in service differentiation. The Company focuses its
consolidation activities in target geographic markets to leverage the cost of
field management and concentrate its resources on the most critical
relationships in a community. NovaCare orients the employees of acquired
businesses to the Company's values, creating alignment with common goals which,
in turn, facilitates integration.
REHABILITATION SERVICES
NovaCare's rehabilitation services strategy is to leverage its core
competencies and expert rehabilitation and specialty health care services to
expand and integrate with physicians, hospitals, long-term care, post-acute care
and managed care delivery systems. The Company's strategy is to enhance
NovaCare's position as the largest provider of low-cost, clinically excellent
medical rehabilitation services outside the medical rehabilitation hospital
setting. The strategy is based on the belief that:
- Medical rehabilitation services will continue to experience steady or
growing demand because health care payer cost-containment efforts will
continue to drive patients toward the most cost-effective health care
solution to satisfy patients' needs and customers' requirements.
- Large integrated delivery systems comprising health care providers and
payers will be networked to facilitate integrated patient care, to ease
administration, and reduce costs for payers and providers and to ensure
high quality care at competitive cost in local and regional geographic
markets.
- The aging of the population will increase the demand for medical
rehabilitation services as the elderly consume a disproportionate amount
of rehabilitation care.
- Purchasers of medical rehabilitation services will increase their
emphasis on cost-effective, clinically proven outcomes in the selection
of rehabilitation providers.
- Costs can be lowered through clinical and information systems
innovations coupled with "flat" organizations having broad spans of
control.
- Effective data management capabilities can enhance quality health care.
- Medical rehabilitation services, outside the medical rehabilitation
hospital setting, are not capital intensive, allowing for responsiveness
to changes in reimbursement or market conditions, without the use of
substantial capital resources.
EMPLOYEE SERVICES
The Company's strategy is to be the brand, service and performance leader
in the PEO industry by leveraging its expertise in human resource management,
information systems and outsourcing, in focused geographic markets. The strategy
is based on management's beliefs that:
- PEO services will continue to experience growing demand because of the
trend among small to medium-sized employers to: (i) outsource non-core
competencies, (ii) reduce employee benefit costs, (iii) avoid
employee-related risks and regulatory complexities, and (iv) attract
better employees through improved benefit plans.
- The industry for PEO services, based on analyst reports, is more than
95% unserved with the served portion expected to grow at the rate of 30%
per year for the next five years.
- The PEO industry is highly fragmented with significant consolidation
opportunities for companies with access to capital, larger service
delivery infrastructures, and well-developed and sophisticated
management information systems.
- PEOs typically take a transaction processing approach to their services
and do not emphasize the improved workforce performance characteristic
of satisfied employees.
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- In selecting PEO providers, small to medium-sized businesses will
increase their emphasis on cost-effectiveness, service excellence and
the breadth of services provided.
- Employees are attracted to small and medium-sized businesses that
provide employees with human resources services characteristic of large
employers.
PLAN FOR GROWTH AND OPERATIONS
REHABILITATION SERVICES
The rehabilitation services growth plan has four principal components: (i)
expand outpatient services, (ii) develop occupational health services, (iii)
focus growth and integration efforts in select target markets, and (iv) meet the
needs of the long-term care industry.
Expand Outpatient Services. NovaCare plans to continue to expand the
Company's extensive network of outpatient rehabilitation and O&P sites in target
geographic markets through acquisitions and start-up centers. Management
believes that the size and density of NovaCare's outpatient services network in
many markets positions the Company favorably to affiliate with integrated
delivery systems and to compete for referrals from managed care organizations,
physician groups, hospitals and commercial customers. In fiscal 1997, the
Company acquired 52 outpatient businesses with aggregate annualized revenues of
$140 million, increasing its network of facilities by 34% to 644 locations.
Develop Occupational Health Services. Occupational health integrates
injury prevention, physician, rehabilitation, case management and other
ancillary services to return the work injured employee to the workplace as
safely and quickly as possible. NovaCare provides "workplace-to-workplace"
service which combines worksite evaluation, injury/illness diagnosis, physician
treatment, rehabilitation and back to work programs. The goal is to minimize
health care and disability costs to employers while providing the employee the
opportunity to recover, as fully as possible, from a work-place injury. The
system includes a network of physician practices specializing in occupational
health care which oversee the workers' initial evaluation, care planning, and
clinical progress through their return to work. Treatment of patients is
generally performed in health care centers equipped in a manner similar to
NovaCare's outpatient rehabilitation centers.
The Company plans to build on its existing foundation and to acquire
established occupational health services practices, clinics and services in
target geographic markets. The Company believes such acquisitions will
complement the Company's expansion of outpatient services, capitalize on patient
flow synergies and further position NovaCare for affiliation with hospital
systems, managed care payers and commercial customers.
Focus Growth and Integration Efforts in Select Target Markets. NovaCare
intends to build and maintain leading market positions in 17 target geographic
markets by affiliating its rehabilitation services with leading health care
systems in these target markets. The Company's goal is to enhance referral and
health care system relationships, increase brand awareness and leverage its
clinical resources and infrastructure investments in target markets. Management
believes that with the largest combined outpatient rehabilitation and O&P
services network as the largest provider of rehabilitation services to the
long-term care industry and with the development of an occupational health
services network, NovaCare is in a strong position to meet the needs of health
care systems in a local or regional market. NovaCare offers the attributes that
a health care system partner or payer looks for: (i) dispersed outpatient
services capabilities, (ii) excellent clinical reputation and outcomes, (iii)
sophisticated systems capabilities to track and measure patient progress through
their plan of care, and (iv) a strong financial position to support network
growth. In fiscal 1997, 87% of NovaCare's rehabilitation services acquisitions
and start-up facilities were in target markets.
Meet the Needs of the Long-Term Care Industry. NovaCare intends to
continue to enhance its industry leadership position in long-term care.
Management believes that NovaCare's clinical programs, information technology
and ability to recruit and manage therapists will enable the Company to continue
to grow at a disproportionately higher rate than the long-term care industry.
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The Company's operating plan for rehabilitation services encompasses cost
containment and clinical leadership.
Cost Containment. A central aspect of the Company's strategy is to
position itself as a low-cost provider of high quality rehabilitation services.
Clinical improvements and innovation are expected to lower the cost of
rehabilitation service delivery. Management believes its efforts to flatten and
increase the flexibility of the organization to respond to change and its
investment in common, efficiency-enhancing clinical and administrative systems
will allow the Company to operate successfully in an increasingly challenging
reimbursement environment.
Clinical Leadership and Outcomes. Management believes that payers will
ultimately demand that low cost be accompanied by proof of quality outcomes. The
Company has committed resources to develop information analysis and display
systems that capture outcomes in a useable format. Management believes that, as
payers become more sophisticated and require providers to prove the delivery of
quality service, the Company's commitment to outcomes measurement, coupled with
its emphasis on clinical performance, will enhance its competitive position.
EMPLOYEE SERVICES
Through its subsidiary, NovaCare Employee Services, Inc. ("NCES"), the
Company is the second largest PEO in the United States. NCES commenced
operations in October 1996, concurrent with the acquisition of Resource One,
Inc. in Florida. In February 1997, the Company acquired three additional PEOs --
Employee Services of America Inc. and Prostaff Human Resources, Inc. in Florida,
and The TPI Group Ltd. in New York. As of June 30, 1997, the Company served
approximately 1,700 client organizations with approximately 35,000 employees at
over 3,000 worksites primarily in ten industries and 45 states.
NCES was established by the Company because it recognized that NovaCare's
core competencies are highly correlated with success in the PEO industry.
NovaCare's rehabilitation services are delivered in over 2,000 facilities
nationwide, and include worksite evaluation, injury prevention and work injury
rehabilitation. The ability to deliver employment-related services to small,
widely dispersed groups of employees and to effectively manage workers'
compensation risk are central to a PEO. NovaCare's investments in human resource
management, information technology, relationship selling and management control
systems are directly applicable to and can be leveraged through the employee
services business.
The Company's employee services business intends to grow through: (i)
increased investment in sales and marketing, (ii) focused geographic expansion;
(iii) emphasis on specific industries; and (iv) acquisitions and strategic
alliances.
Increased Investment in Sales and Marketing. NCES intends to develop a
brand identity. A recognized brand name is a valuable market tool. By utilizing
the nationally advertised brand name of NovaCare, the Company believes it will
achieve a strong brand identity in the PEO industry, at lower cost. The Company
will utilize professional marketing tools and strategies to communicate its
brand promise and performance to target audiences. Brand loyalty is expected to
generate referrals and improve client retention. The Company plans to survey the
marketplace, its worksite employees and potential clients on a continuous basis
to measure satisfaction and the effectiveness of its marketing efforts.
Focused Geographic Expansion. The Company has identified key attractive
geographic target markets and has established a plan for entering those markets
in a disciplined manner. The target markets are those 17 markets in which the
rehabilitation services business is focusing its growth and integration efforts.
Rehabilitation services customers and other extensive business-to-business
relationships represent a significant opportunity to grow in these target
markets. By concentrating on markets where NovaCare's rehabilitation services
business has achieved density, NCES will immediately have scale because NCES
already co-employs the NovaCare rehabilitation services employees. The Company
believes its market development model will enable it to penetrate new markets
quickly. This market development model consists of a highly structured sales
management control system and efficient selling process.
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Emphasis on Specific Industries. Target industries will vary from market
to market depending on economic characteristics and business demographics of
each geographic location. NovaCare intends to focus on industries with high
gross profit per worksite employee and significant worker's compensation profit
opportunities. The sales force is expected to utilize the key industry strategy
and become expert in one or more select industries in the markets in which they
are operating. Rehabilitation services customers represent a large potential
client base of small to medium-sized long-term care providers and other health
care customers who are currently obtaining outsourced contract rehabilitation or
who are referring patients to the Company.
Acquisitions and Strategic Alliances. The opportunities for PEO
consolidation are substantial with approximately 2,400 PEOs operating in a
highly fragmented industry. The Company believes that this industry
consolidation will be driven by increasing industry and regulatory complexity,
increasing capital requirements and the significant economies of scale available
to PEOs. The Company intends to make opportunistic acquisitions where
appropriate to achieve greater density in target geographic markets.
The Company is creating strategic alliances with service providers to small
and medium-sized businesses. With the trend toward outsourcing non-core
competencies, small and medium-sized businesses typically have service
relationships with accountants, attorneys, banks, trade associations and other
business advisors. Alliances with these service providers offer a cross-selling
opportunity for NCES. The Company intends to develop such referral opportunities
as an extension of its sales and marketing capability.
The NCES operating strategy is designed to control costs while supporting
growth. The operating strategy encompasses leveraging NovaCare's core
competencies and implementing a sophisticated business model.
Leverage NovaCare's Existing Core Competencies. As a national provider of
medical rehabilitation services, NovaCare has developed core competencies in (i)
delivering employment-related services to a dispersed workforce in third-party
worksites; (ii) establishing and maintaining national information systems
networks connecting clients, worksite employees and service providers; (iii)
developing and implementing workplace safety and injury prevention programs; and
(iv) regulatory change management. Other synergies include (i) the ability to
leverage to negotiate advantageous health care, workers' compensation and other
benefit program costs given NovaCare's scale in many geographic markets and (ii)
the availability of health care services for worksite employees from NovaCare
and other health care providers in NovaCare's local and regional health care
system networks in target markets.
As a health care provider, NovaCare has been an industry leader in response
to regulatory and legislative change in a highly regulated market. The Company's
experience in and ability to effect change in the regulatory environment will be
valuable as states and the federal government seek to implement new approaches
to regulating the PEO industry.
Implement Business Model. NCES has implemented a portfolio management
system to control and improve its performance in the selection of new business,
meeting its brand promise with respect to existing customers, and analyzing
lapsed business in order to identify the reasons for and the corrective action
necessary in response to client cancellations. The new business criteria orient
marketing to potential clients in target industries with high gross profit per
worksite employee and acceptable underwriting risk. Potential clients meeting
preset criteria are the target audience for the sales effort. The current
business portfolio component of the control system enables management to monitor
new client start-ups, client-specific financial and risk performance and
employee and employer satisfaction. By focusing management attention on key
business variables, the system permits day-to-day management to direct actions
consistent with the Company's strategy and business plan. Lapsed business is
analyzed by reason to facilitate identification of service delivery system
issues and to improve future client retention.
NCES has established an operating model that delivers services from two
different locations. The Company's local service center places an emphasis on
servicing the customer through local front-line activities. The local service
center conducts enrollment and orientation of new employees and clients, and
worksite safety evaluation and monitoring. Sales activity and customer service
will also be performed locally. Local activities relative to risk management
promote safety, early intervention of workers' compensation
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reported claims and early return to work. Centralized activity includes
nationally directed telemarketing, standard development of marketing materials,
a national accounts sales force, payroll processing, benefits administration and
claims management. The major elements of finance, procurement and compliance
will also be centralized.
BUSINESS PROFILE
REHABILITATION SERVICES
OUTPATIENT SERVICES
During fiscal year 1996, NovaCare merged its outpatient services
businesses, comprising outpatient rehabilitation and O&P services, under a
common management team to take advantage of administrative and operational
economies of scale and the evolution of rehabilitation services toward
affiliation with health care providers and payers. For the fiscal years ended
June 30, 1997 and 1996, outpatient services represented 38% and 35%,
respectively, of the Company's rehabilitation services net revenues.
Outpatient Rehabilitation Services
Management believes that NovaCare is a leading provider of freestanding
outpatient rehabilitation services in the United States, with a national network
of 336 centers, comprising stand-alone clinics, hospital-based clinics and
employer on-site clinics. Through these settings, licensed physical and
occupational therapists develop individual treatment plans to rehabilitate
patients recovering from musculoskeletal injury and/or surgery.
Outpatient rehabilitation services include general rehabilitation, which is
designed to return injured and post-operative patients to their optimal
functional capacity; sports rehabilitation, which is designed to minimize the
"down-time" of injured sports participants and safely return them to sports
activities; industrial rehabilitation and work hardening, which are designed to
reduce work-related injuries and rehabilitate and strengthen injured patients to
allow a rapid, safe return to normal job activities; and hospital-based
services, which involve the provision of inpatient and outpatient rehabilitation
services on a contract basis to acute care hospitals.
Patients are generally referred by physicians (most commonly orthopedists,
physiatrists, primary care physicians, internists and neurologists), managed
care insurers, workers' compensation insurers, case managers, industrial
companies and rehabilitation nurses. In a number of states, patients can obtain
outpatient therapy services by "direct access," that is without a physician's
referral.
Analysts estimate that the outpatient rehabilitation industry approximates
$11 billion. NovaCare's share of the industry total, based on fiscal 1997
revenues, is approximately 2%.
Orthotic and Prosthetic Services
NovaCare is the largest custom O&P patient care services organization in
the U.S. with an approximate 11% market share of a $1.5 billion industry, based
on fiscal 1997 revenues. Services are provided by 663 orthotists and
prosthetists, referred to as practitioners, through 274 patient care centers.
Orthotic rehabilitation involves the fitting, design, fabrication and use
of custom-made braces and support devices for treatment of musculoskeletal
conditions resulting from illness, injury or congenital anomalies. Prosthetic
rehabilitation involves the fitting, fabrication and use of custom-made
artificial limbs typically required by people who have suffered the loss of a
limb from vascular diseases, diabetes, cancer or trauma. The Company, through
its Sabolich socket and myoelectric technology, is a nationally renowned leader
in prosthetic research, design and patient care. Its breakthrough technology and
research is believed by management to clinically differentiate NovaCare in O&P
services worldwide.
The principal referral source for O&P rehabilitation services is the
orthopedic surgeon. However, other specialized physicians, such as physiatrists
and vascular surgeons, and managed care payers have emerged as
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important referral sources. Secondary referral sources include physical
therapists, orthopedic nurses, orthopedic technicians and other rehabilitation
professionals.
OCCUPATIONAL HEALTH SERVICES
Occupational health services comprise treatment for work-related injuries
and illnesses, physical and occupational rehabilitation therapy, pre-placement
physical examinations and evaluations, case management, diagnostic testing and
other employer-requested or government-mandated work-related health care
services. The most common work related injuries are soft tissue injuries,
lacerations, moderate trauma injuries to the spine or extremities, and exposure
to hazardous materials. Treatments typically are provided by licensed
physicians, physicians assistants, x-ray technicians and physical therapists.
The physicians generally are trained and experienced in occupational and
industrial medicine or have other medical backgrounds compatible with
work-related injuries.
The occupational health services market is highly fragmented. Industry
analysts estimate that there are more than 2,000 occupational health care
locations in the United States, representing a $30 billion industry. The Company
believes that, due to increasing business and regulatory complexity, capital
requirements and the development of health care systems in local and regional
markets, an increasing number of physicians specializing in occupational health
services are seeking to affiliate with larger health care service organizations.
The dollar amount of workers' compensation claims has increased
significantly in recent years, resulting in escalating employer costs. The
increase is attributable to (i) an increase in work-related injuries and
illnesses, (ii) the rise in the cost of health care, and (iii) the requirement
that employers pay the majority of lost wages, replacement wages, legal and
other benefit expenses. In the aggregate, workers' compensation costs amounted
to $70 billion annually in the United States. Occupational health services is an
employer's solution to controlling workers' compensation costs attributable to
medical costs and lost time from work.
NovaCare currently manages work injury rehabilitation and prevention
programs for employers through on-site programs and outpatient care through the
Company's six freestanding occupational health centers and its 336 outpatient
rehabilitation clinics. NovaCare performs work-site analysis to assess workplace
risk, provides work-site safety programs and helps employers comply with
work-related state and federal requirements. By acquiring additional practices
and related occupational health services in target markets, NovaCare plans to
expand its linkage with workers needing occupational rehabilitation, enhance the
patient volume of outpatient rehabilitation and increase the attractiveness of
the Company to workers' compensation insurers, commercial customers and
potential health care system affiliates.
LONG-TERM CARE SERVICES
NovaCare's long-term care services portfolio consists of contract therapy
and management consulting delivered principally to long-term care providers. For
the fiscal years ended June 30, 1997 and 1996, long-term care services
represented 59% and 63%, respectively, of the Company's rehabilitation services
net revenues.
Contract Rehabilitation Services
NovaCare provides multi-disciplinary rehabilitation therapy services on a
contract basis, principally to long-term care facilities. The multi-disciplinary
team comprises physical therapists, occupational therapists, and speech-language
pathologists working together to improve the ability of patients to perform the
activities of daily living. Physical therapy enhances muscular and neurological
responses and is designed to improve the patients' physical strength and range
of motion. Occupational therapy is the evaluation and treatment of physical,
cognitive and psychosocial performance deficits in activities of daily living.
Speech-language pathology is the diagnosis and treatment of speech, language,
voice and swallowing disorders.
NovaCare is the largest contract rehabilitation provider to the long-term
care industry with a market share of approximately 12%, as measured by fiscal
1997 net revenues. As of June 30, 1997, NovaCare provided these services in
approximately 1,750 facilities located in 44 states.
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Analysts estimate that the market for therapy services delivered under
contract to long-term care facilities is approximately $4.5 billion. A 1995
management-sponsored survey indicated that 73% of long-term care facility
rehabilitation services are performed on a contract basis.
The long-term care industry has typically contracted for therapy services
for the following reasons:
Insufficient caseload. The average nursing facility of approximately
100 beds has insufficient and/or fluctuating caseload, which makes it
uneconomical to operate its own therapy program with full-time employment
of therapists and the associated costs of management and administration.
Supply of therapists. There is an inadequate supply of therapists and
the workforce is characterized by high turnover. Consistent staffing levels
are difficult to maintain, which jeopardizes service levels and quality.
Expertise. Therapy revenues represent a relatively small percentage
of a nursing facility's total revenues and operating activities.
Reimbursement and regulatory complexities concerning appropriate
utilization, documentation, denials management and quality oversight, if
inadequately administered, can seriously erode the profitability of therapy
programs staffed by and managed by employees of the long-term care
facility. As a result, nursing facilities frequently choose to contract for
specialized expertise.
NovaCare has been successful in hiring therapists due in part to its
"employer of choice" programs and clinical and systems support networks. The
number of full-time-equivalent therapists hired in the Company's contract
rehabilitation business during fiscal 1997 was 2,605.
Employer of Choice Programs. NovaCare's employer of choice
initiatives comprise defined career ladders for clinicians, clinical
training and competitive compensation and benefit programs, as well as
management and technological support designed to attract and retain
therapists. At June 30, 1997, NovaCare employed 68 recruiters, which
management believes is the largest therapist recruiting organization in the
U.S. Over the past two years, one-fifth of the therapists who joined
NovaCare's contract rehabilitation business chose NovaCare as a result of
employee referrals.
Clinical Support. A network of local and national clinical experts is
available to all clinicians as support resources in all aspects of the
clinical practice.
Systems Support. NovaCare's proprietary information system, NovaNet
PLUS, reduces therapist record-keeping burdens, streamlines administrative
activities and captures information of value to clinicians, management and
customers. Integrated outcomes measurement was incorporated into the system
in fiscal 1997. Management believes that this innovative system continues
to increase NovaCare's attractiveness as an employer of therapists.
Clinical Leadership. NovaCare and the Harvard School of Public Health
have jointly devised a standard system for measuring the effectiveness of
rehabilitation outcomes for geriatric patients. The outcomes measurement
system now serves as a vehicle to determine the treatment and payment for
rehabilitation services to the geriatric population. Management believes
that NovaCare's leadership in outcomes measurement has and will continue to
enhance the Company's visibility in the clinical community and its
attractiveness as an employer.
Nursing facility operators have from time to time provided therapy services
on an in-house basis, with varying degrees of success. A recent multi-year study
of the costs of in-house programs compared with the costs of contract therapy
indicated higher average therapy costs per patient care hour in long-term care
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facilities with in-house programs. The study surveyed over 15,000 long-term care
facilities and examined several years of Medicare cost reports for long-term
care facilities with in-house therapy programs. Nevertheless, a number of
national multi-facility long-term care companies have directly hired therapists
to staff and manage their therapy program in-house. These in-house decisions
appear to be based, at least in part, on a desire to gain greater management
control over therapy programs, overriding economic concerns. This trend has been
exacerbated by consolidation activity in the nursing home industry.
During fiscal years 1995 through 1997, NovaCare reduced its dependence on
national chains of long-term care facilities due primarily to the transition
from outsourcing with NovaCare to providing therapy services in-house. The
percentage of NovaCare's rehabilitation services revenue attributable to
national chains declined to 21% at June 30, 1997 from 27% in fiscal 1994.
Business lost due to the in-house transition was replaced with predominantly
regional and independent customers, diversifying the Company's customer base.
Management does not expect in-house transitions to have a significant impact on
future results due to the Company's reduced dependency on national
multi-facility long-term care companies and the economic opportunity outsourcing
provides.
The anticipated annualized revenue of new contracts has increased from
approximately $120 million in fiscal 1996 to approximately $180 million in
fiscal 1997. Contract turnover has also declined to 15% in fiscal 1997 from 26%
in fiscal 1996. The anticipated annualized net revenue impact of new contracts
sold less contracts canceled improved to $98 million in fiscal 1997. In fiscal
1996, the anticipated annualized net revenue impact of contracts canceled
exceeded new contracts sold by $7 million.
Employee turnover in the rehabilitation industry is high relative to other
industries because of the therapist supply/demand imbalance. Also affecting
turnover is the aggressive recruiting that occurs within the industry, and the
highly mobile therapist population. Therapist turnover rates in long-term care
facilities are traditionally higher than in other therapy settings.
NovaCare's therapist turnover in the contract rehabilitation business
decreased in fiscal 1997 to 35% from 44% in fiscal 1996. Therapist turnover
initiated by employees decreased from 41.7% in fiscal 1996 to 31.23% in fiscal
1997. The balance of therapist turnover was based on the Company's decision to
terminate employment.
NovaCare is compensated for its contract services on a fee-for-service
basis, and generally collects payment for services from the long-term care
facility, which in turn may receive reimbursement from Medicare, Medicaid,
private insurance or the patient. Payments from Medicare and Medicaid are
subject to complex regulations. Medicare regulations are subject to anticipated
changes that may have a material effect on the long-term care services business.
See "Reimbursement/Government Relations", discussed later. NovaCare generally
indemnifies its customers against medical denials of reimbursement by third
party payers, including Medicare. NovaCare has established internal utilization
and documentation standards and systems to minimize denials. During the past two
fiscal years, on average, less than 2% of NovaCare's services were ultimately
denied payment.
NovaCare contracts predominantly with regional and local long-term care
companies and independently-owned nursing facilities for the provision of
rehabilitation therapy to their patients. Contracts are generally written for a
period of two years and include automatic renewals for one year. Contracts are
typically terminable upon 30 to 90 days notice by either party.
In the current unsettled reimbursement environment (See
"Reimbursement/Government Relations", discussed later), NovaCare believes that
it is well-positioned to compete effectively with other contract therapy
companies and the "in house" alternative due to: (i) its highly centralized
administrative functions and flexible organization structure which can respond
to business growth and industry change; (ii) a nationwide recruiting
organization and substantial staffing capabilities; (iii) a multi-disciplinary
team approach to therapy that is designed to deliver a high level of quality and
efficient care, (iv) sophisticated management information systems to assist
clinicians and management in analyzing clinical outcomes, therapy utilization,
claim denials, staffing and educational activities; (v) a clinical support
network to provide timely expert clinical advice to care providers; (vi) a
nationwide sales organization to secure customer contracts in
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support of business growth; and (vii) reimbursement and regulatory expertise to
assist nursing facility operators in their dealings with third-party payers,
principally Medicare.
MANAGEMENT AND INFORMATION SERVICES
The Company focuses on the delivery of expert management, information and
specialty consulting services to health care and long-term care institutions.
Such services currently include long-term care facility rehabilitation program
management, consulting and subacute program development, and management and
information services.
Rehabilitation Program Management and Consulting. The Company provides
rehabilitation program consulting and management services to long-term care and
hospital facilities through Polaris Group, a NovaCare business unit, and a
40%-owned subsidiary, Gill/Balsano Consulting, L.L.C. Due to regulatory and
reimbursement complexities in the long-term care and hospital industries, these
services assist these providers with utilization, documentation, receivables and
denials management, cost reporting, quality oversight and strategic direction
setting. The Company had arrangements to provide such services to 797 long-term
care facilities at June 30, 1997 as compared with 624 at June 30, 1996.
Information Services. NovaCare delivers a range of services based on its
proprietary NovaNet PLUS information system to its two largest long-term care
customers. These customers utilize NovaNet PLUS throughout their organizations
to: (i) promote a common clinical approach to case management; (ii) gather and
analyze clinical outcomes information; (iii) increase therapist administrative
and clinical efficiency; and (iv) provide operating unit financial information.
EMPLOYEE SERVICES
As co-employer of worksite employees, NovaCare assumes responsibility for
and manages the risks associated with: (i) worksite employee payroll; (ii)
workers' compensation insurance coverage; and (iii) compliance with certain
employment-related governmental regulations that can be effectively managed away
from the client's business. The client retains the right and responsibility for
supervision and direction of worksite employees' services in its business and
remains responsible for compliance with other employmentrelated governmental
regulations that are more closely related to worksite employee supervision. The
service fee charged by the Company to its clients covers the cost of certain
employment-related taxes, workers' compensation insurance coverage,
administrative and field services, salaries and wages of the worksite employees
and the client's portion of health and retirement benefit plan cost. NovaCare
also provides other value-added services such as temporary staffing, training
and human resource consulting.
In keeping with its strategy to create a more satisfying and more
productive relationship between employers and employees, NovaCare provides six
primary categories of employee services: (i) workers' compensation cost
containment and safety management; (ii) unemployment insurance cost containment;
(iii) employee benefits administration; (iv) human resources and compliance
management; (v) payroll management and (vi) value-added services. By engaging
the Company to provide these services, clients can focus on their core
competencies and enhance their abilities to compete.
These services are provided under the Company's standard services agreement
which provides for an initial one-year term; thereafter, the agreement is
renewed periodically. The agreement is subject to termination by the Company or
the client at any time upon 30 days' prior written notice. Service revenues,
billed to clients along with each periodic payroll, are based on a pricing model
that takes into account the gross pay of each employee and a mark-up which
includes the estimated costs of employment-related taxes, providing insurance
coverage and benefit plans, performing human resources, payroll, benefits and
compliance management and other services and an administration fee. The specific
mark-up varies by client based principally on the workers' compensation
classification of the worksite employees, their eligibility for health care
benefits and the size of the client. Accordingly, the Company's average mark-up
percentage will fluctuate based on client mix, which cannot be predicted with
any degree of certainty.
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Workers' Compensation Cost Containment and Safety Management. Workers'
compensation is a state-mandated, comprehensive insurance program that requires
employers to fund medical expenses, lost wages and other costs that result from
work-related injuries and illnesses, regardless of fault and without any
copayment by the employee. Annual workers' compensation costs exceed $70 billion
in medical expenses and employee productivity each year (see "Government
Regulation" below). Pursuant to the Company's services agreement, the Company
assumes the obligations of its clients to pay workers' compensation claims. The
Company seeks to control its workers' compensation costs through comprehensive
risk evaluation of prospective clients, the prevention of workplace injuries,
timely intervention with each employee injury, aggressive management of the
medical costs related to such injuries and the prompt return of employees to
work. The Company seeks to prevent workplace injuries by implementing a wide
variety of training and safety programs. NovaCare's efforts to return employees
to work quickly involve both rehabilitation services and the placement of
employees in transitional, light duty positions until they are able to resume
their former positions.
Unemployment Insurance Cost Containment. Pursuant to the services
agreement, NovaCare assumes the obligation of its clients to pay unemployment
insurance costs. NovaCare manages its unemployment insurance costs by
establishing employee termination procedures, quickly responding to unemployment
claims, attending unemployment hearings and attempting to reassign employees to
other worksites when a reduction in force occurs at any one worksite location.
Employee Benefits Administration. In accordance with the services
agreement, NovaCare offers worksite employees a benefits package which includes
several health care options such as point-of-service ("POS"), HMOs and indemnity
plans. Supplemental benefit programs include dental care, prescription drugs,
and life and disability insurance options. The Company also offers 401(k)
retirement savings and cafeteria-style plans to its eligible employees. The
Company delivers participant benefits to worksite employees and monitors and
reviews claims for loss control purposes. NovaCare believes that its ability to
provide and administer a wide variety of employee benefits on behalf of its
clients tends to mitigate the competitive disadvantage small and medium-sized
businesses normally face in the areas of employee benefit cost control and
employee recruiting and retention.
Human Resources and Compliance Management. Pursuant to the services
agreement, the Company provides comprehensive human resources services to reduce
the employment-related administrative burdens faced by its clients, and provide
worksite employees with a wide array of benefits typically offered by large
employers. NovaCare develops and administers personnel policies and procedures
for each of its clients, relating to, among other things, recruiting, retention
programs, performance management, discipline and terminations. The Company also
provides orientation, training and development, counseling and substance abuse
awareness for worksite employees.
By contract, NovaCare generally assumes responsibility for complying with
many employment-related regulatory requirements. In addition, the Company
assists its clients in understanding and complying with other employment-related
requirements for which the Company does not assume responsibility. Laws and
regulations applicable to employers include state and federal tax laws, state
workers' compensation laws, state unemployment laws, occupational safety laws,
immigration laws, and discrimination, sexual harassment and other civil rights
laws.
Payroll Management and Reporting. As a co-employer, NovaCare is
responsible for payroll processing, check preparation, distribution and record
keeping, payroll tax deposits, payroll tax reporting, employee file maintenance,
unemployment claims, and monitoring and responding to changing regulatory
requirements. Payroll reports are prepared for clients for financial and other
record keeping purposes. By having the Company assume the responsibility for
this significant administrative function, clients have certain guarantees of
regulatory compliance, reduced employment liabilities and greater management
resources to focus on their core business.
Other Value-Added Services. NovaCare offers rehabilitation temporary
staffing in the long term care industry. The rehabilitation temporary staffing
service currently accesses an active clinician pool of over 6,000 to provide
staff to skilled nursing facility clients at which over 1,300 worksite employees
were performing
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services at June 30, 1997. This business is supported by state-of-the-art
technology, which provides precise recruitment and sales productivity
information for management purposes. It also generates billing and utilization
reports for clients.
The Company plans to offer additional value-added services to clients and
worksite employees. Such services may include employee recognition programs,
travel discount arrangements, vision care, credit union membership, smart cards,
warehouse club memberships and various financial services. Some of these
services may generate fee income or commissions for the Company.
COMPETITION
REHABILITATION SERVICES
The health care industry in general, and rehabilitation in particular, are
highly competitive and subject to continual changes in methods of service
delivery and provider selection. Rehabilitation is largely a local market
business and competition varies considerably among markets. NovaCare competes in
the geographic markets where it provides long-term care services and where its
outpatient services patient care centers are located. The primary competitive
factors in such local markets are (i) quality of patient care services, (ii)
charges for services, (iii) responsiveness to meeting the needs of patients,
customers, referral sources and payers, and (iv) increasingly, networked
integration with other health care providers and payers.
Key competitive factors in the long-term care services businesses include
the ability to provide therapy staff to meet the therapy needs at customer
facilities and the ability to provide management and clinical support to such
staff. NovaCare competes in local markets with other national, regional and
local contract therapy providers. NovaCare believes that its ability to recruit
therapists, manage geographically dispersed service professionals, provide
expert clinical support and develop new services allows it to compete
successfully with other contract therapy providers in the markets where NovaCare
provides services. The demographics of potential customers have changed and will
continue to change as some large long-term care facility chains choose to take
all or part of their therapy services in-house. This may increase the
competition for remaining customers. The Company has diversified its customer
base in the long-term care industry to replace business lost because of such
in-house programs (see "Contract Rehabilitation Services," previously
discussed).
In the outpatient services business, key competitive factors include the
ability to develop and maintain relationships with referral sources (physicians,
rehabilitation professionals, hospitals and payers) and to provide sufficient
geographic coverage to allow the Company, alone or with other providers, to
compete successfully for patients from managed care payers, workers'
compensation payers and employers. The Company competes in local markets with
other national, regional and local outpatient rehabilitation service providers,
as well as hospital-based outpatient clinics and physician-directed therapy
practices. Some of these competitors may have greater patient referral,
personnel and geographic resources in certain local markets. Competition in the
O&P industry is highly fragmented; however, there are several regional providers
with multiple facilities in certain local markets. Management believes that the
Company competes successfully within its local markets based on its reputation
for quality and service, an ability to provide geographic coverage and
competitive prices, affiliation with health care systems, and technologically
superior O&P product offerings.
In the occupational health services industry, the market is highly
fragmented and competitive. The largest competitor in the industry has less than
4% market share. Competitors include other occupational health services
companies, independent physicians, hospitals, insurance companies, HMO's,
managed care providers and networks of primary care physician specialists. The
ability to compete successfully is dependent upon (i) relationships with
employers, employees and payer sources, (ii) quality of rehabilitative care, and
(iii) returning employees to work quickly at the lowest cost for the care
provided.
National and local sponsorship and support of organizations for injured and
disabled individuals enhance NovaCare's visibility and competitive position. In
addition, NovaCare has developed affiliations with academic institutions and has
provided funding for the development of a university level physical therapy and
occupational therapy programs.
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EMPLOYEE SERVICES
The PEO industry consists of as many as 2,400 companies, most of which
serve a single market or region. The Company believes that it is the second
largest PEO in the United States. NovaCare considers its primary competition to
include: (i) traditional in-house human resources departments; (ii) other PEOs,
and (iii) providers of unbundled employment-related services such as payroll
processing firms, temporary employment firms, commercial insurance brokers,
human resource consultants, workers' compensation insurers, HMOs and other
specialty managed care providers.
Competition in the highly fragmented PEO industry is generally on a local
or regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, reputation and price.
The Company believes that brand recognition, regulatory expertise, financial
resources, risk management, information technology capability and economies of
scale can distinguish a large-scale PEO from the rest of the industry. The
Company believes that it competes favorably in these areas.
NovaCare believes that barriers to entry into the PEO industry are
increasing due to, among others, the following factors: (i) the complexity of
the PEO business and the need for expertise in multiple disciplines; (ii) the
three to five years of experience required to establish experience ratings in
key cost areas of workers' compensation, health insurance and unemployment; and
(iii) the need for sophisticated management information systems to track all
aspects of business in a high growth environment.
REIMBURSEMENT/GOVERNMENT RELATIONS
REHABILITATION SERVICES
Reimbursement for medical rehabilitation services is available through
Medicare, Medicaid, commercial insurance, managed care programs, workers'
compensation and other government programs. Medicare is a federally funded
health program which provides health insurance coverage for certain disabled
persons and persons age 65 or older. Medicaid is a health insurance program,
jointly funded by the federal and state governments, which provides health
insurance coverage for certain financially or medically needy persons regardless
of age. Medicaid benefits supplement Medicare benefits for financially needy
persons age 65 or older. Congress has provided, through the Medicare program,
for coverage of contract therapy services, outpatient rehabilitation services
and O&P devices and patient care services. Medicare reimbursement rules are
different for a number of these services. Moreover, in many states Medicaid
reimburses for rehabilitation services for eligible recipients. A substantial
portion of NovaCare's business, in effect, is reimbursed by Medicare, and a
small portion by Medicaid. As a result, regulations regarding Medicare and
Medicaid eligibility, certification and reimbursement are important to
NovaCare's activities and changes in these programs or regulations could
adversely affect NovaCare's business.
The Company's gross profit directly or indirectly attributable to Medicare
for fiscal 1997 and 1996 was 45% and 49%, respectively.
CONTRACT REHABILITATION SERVICES
Contract rehabilitation services are covered and reimbursed in one of two
ways. In most cases, NovaCare bills a facility, which, in turn, invoices a
third-party payer, such as Medicare. NovaCare also provides services through its
own certified rehabilitation agencies, which directly bill a third-party payer,
such as Medicare.
Medicare reimburses the long-term care facility for contract therapy
services on a cost basis, and reimbursement levels are determined based on a
reasonable-cost standard. Specific guidelines exist for evaluating the
reasonable cost of physical therapy and there are general guidelines for
evaluating the reasonable cost of occupational therapy and speech-language
pathology services. With respect to physical therapy, the specific guideline
system is called salary equivalency. The physical therapy salary equivalency
rates have been adjusted annually based on a 1983 standard but do not adequately
reflect salary inflation since 1983. As a result, the portion of contract
services that relate to physical therapy services are essentially a break-even
business for many contractors, including NovaCare.
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The Health Care Financing Administration ("HCFA"), the federal agency
responsible for the rules governing Medicare and Medicaid, has issued proposed
specific reimbursement guidelines for occupational therapy and speech-language
pathology services and revisions to the existing guidelines for physical therapy
services. The proposed rules specify that when occupational therapy and
speech-language pathology services guidelines become effective, physical therapy
salary equivalency guidelines will be increased in consideration of the
substantial increases in salary and services standards since these guidelines
were last revised. The proposed rules governing such guidelines have received
public comment. Final rules are expected in the fourth quarter of calendar year
1997.
Until such time as salary equivalency guidelines are finally promulgated,
contract occupational therapy and speech-language pathology services are
evaluated based upon the reasonableness of costs incurred by the provider under
a "prudent buyer" standard. During the past three years, HCFA has issued several
directives to its fiscal intermediaries instructing them on how to ensure
therapy costs are reasonable. Intermediaries have been instructed to consider
relevant facts and circumstances concerning a facility's contracting costs. The
attention being given by HCFA to these instructions has increased scrutiny of
contracting practices. NovaCare is working with its customers to resolve issues
raised by fiscal intermediaries in cost report audits.
The Balanced Budget Act of 1997 (the "Act") enacted in August 1997, made
several changes in the way Medicare will reimburse nursing homes and other
providers for their services. Those changes will take effect for nursing homes
at different times throughout calendar years 1998 and 1999, depending on the
starting date for each facility's cost reporting year. By the middle of 1999,
the Act mandates that each facility be reimbursed, in part, under a
comprehensive prospective payment system, which will include payment for therapy
services in a single all-inclusive per diem payment. Therapy services not
covered by the prospective payment system will be covered by a fee schedule with
total charges being subject to an annual cap.
NovaCare also receives direct reimbursement by Medicare for 5% of its
contract therapy services provided through certified rehabilitation agencies.
See "Government Regulation", discussed later. NovaCare's certified
rehabilitation agencies file annual cost reports under the Medicare program
which are used to determine cost settlements for the prior year and interim
payment rates for the upcoming year. Funds received under various state programs
and Medicare are subject to audit with respect to proper application of the
various payment formulas. These audits can result in retroactive adjustments of
payments received from the program by NovaCare. If, as a result of such audits,
it is determined that overpayments for services were made to NovaCare, the
excess amount must be repaid by NovaCare to the government. If, on the other
hand, it is determined that an underpayment was made, the government agency will
make an additional payment to NovaCare.
The Act also mandates changes to the payment structure for services
provided through certified rehabilitation agencies. Implementation of these
changes stretches over the next 18 months. As with nursing homes, rehabilitation
agencies will change from the current cost-based system to a system based on a
fee schedule with an annual cap.
NovaCare is actively involved in trade groups assisting HCFA in designing
the regulations and reimbursement schedules necessary to implement the Act. By
changing Medicare reimbursement to nursing homes from a cost basis to a fixed
fee, the Act will make a fundamental change in the economic assumptions
underlying patient care in nursing homes. It cannot be predicted at this time
what effect this change will have on the demand for therapy services. Management
is taking steps which it believes will help to mitigate any adverse economic
impact of the changes made by the Act. There can be no assurance, however, that
these changes will not have a material adverse effect on the future operations
of the Company.
OUTPATIENT AND OCCUPATIONAL HEALTH SERVICES
The principal sources of reimbursement for outpatient and occupational
health services are commercial and workers' compensation insurance, managed care
plans, motor vehicle insurance and individual patients.
Workers' Compensation. Workers' compensation is a state mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from
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work-related injuries and illnesses. (See "Government Regulation" below.)
Workers' compensation represented approximately 17% of fiscal 1997 outpatient
and occupational health revenues.
Managed Care. Managed care plans represented approximately 15% of fiscal
1997 outpatient and occupational health revenues. NovaCare receives revenues
under managed care plans either on a discounted fee-for-service basis or, in a
growing number of cases, on the basis of capitated fees per covered member per
month.
Medicare. NovaCare receives reimbursement by Medicare for outpatient and
occupational health care services primarily through NovaCare's certified
rehabilitation agencies and on a fee schedule basis for O&P services. See
"Government Regulation," discussed later. Medicare and other government health
insurance programs represent approximately 10% of revenues.
GOVERNMENT REGULATION
REHABILITATION SERVICES
The health care industry, including rehabilitation services, is subject to
extensive federal, state and local regulation. The various layers of regulation
affect NovaCare's business by requiring licensure or certification of its
employees and facilities and controlling reimbursement for services provided.
Government and other third-party payers' health care policies and programs have
been subject to changes in payment and methodologies for a number of years.
Efforts to reform the nation's health care system could induce additional
changes. See "Reimbursement/Government Relations," previously discussed.
NovaCare operates certified rehabilitation agencies to facilitate billing
for outpatient services and a portion of its long-term care services. In order
to receive Medicare reimbursement directly, outpatient centers must be certified
by Medicare as rehabilitation agencies or comprehensive outpatient
rehabilitation facilities. The certification criteria relate to the type of
facility and its equipment, record keeping, staffing and service as well as
compliance with all state and local laws. In addition, certain states require
facilities to obtain state licensure as a health facility as a requirement for
reimbursement. As of June 30, 1997, NovaCare operated 18 and 72 certified
rehabilitation agencies for contract therapy services and outpatient
rehabilitation services, respectively. Management believes its operations are
structured to comply with all applicable rules and regulations.
In order to participate in the Medicare program, NovaCare's O&P patient
care centers are required to secure and maintain a supplier number. This process
requires certain disclosures and procedural requirements, which change
periodically. All of NovaCare's O&P patient care centers presently maintain such
a supplier number.
In most states, the employment of therapists by business corporations is a
permissible practice. However, several states, including states in which
NovaCare operates, have enacted legislation or regulations or have interpreted
existing licensing laws to restrict business corporations, such as NovaCare,
from practicing therapy through the direct employment of therapists. Management
believes its operations are structured to comply with applicable laws and
regulations.
Various state and federal laws and regulations govern the relationships
between providers of health care services and physicians, including employment
or service contracts and investment relationships. These laws and regulations
include the fraud and abuse provisions of the Medicare and Medicaid statutes,
which prohibit the payment, receipt or offering of any direct or indirect
remuneration for the referral of or to induce a referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment and the self-referral provisions of federal and
state law which generally prohibit referrals by a physician to persons with whom
the physician has certain types of financial relationships. Violations of these
provisions may result in civil or criminal penalties for individuals or entities
and/or exclusion from participation in the Medicare and Medicaid programs.
Management believes it is in compliance with these laws and regulations and has
established a broad-based compliance program to ensure conformance with these
rules as well as to other laws and regulations.
17
<PAGE> 20
EMPLOYEE SERVICES
The Company is subject to local, state and federal regulations which
include operating, fiscal and licensing requirements. Adding complexity to the
Company's regulatory environment are (i) uncertainties resulting from the
non-traditional employment relationships created by PEOs; (ii) variations in
state regulatory schemes, and (iii) the ongoing evolution of regulations
regarding health care and workers' compensation.
Many of the federal and state laws and regulations relating to labor, tax
and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and, accordingly, do not
specifically address the obligations and responsibilities of PEOs or the
co-employment relationship. Moreover, the Company's PEO services are regulated
primarily at the state level. Regulatory requirements regarding the Company's
business therefore vary from state to state, and as NovaCare enters new states
it will be faced with new regulatory and licensing environments. There can be no
assurance that the Company will be able to satisfy the licensing requirements or
other applicable regulations of any particular state in which it is not
currently operating, that it will be able to provide the full range of services
currently offered, or that it will be able to operate profitably within the
regulatory environment in any state in which it does not obtain regulatory
approval. The absence of required licenses would require NovaCare to restrict
the services it offers. New legislation or new interpretations of current
licensing and regulatory requirements could impose operating or licensing
requirements on the Company which it may not be able to satisfy or which could
have a material adverse effect on NovaCare's business, financial condition,
results of operations and liquidity. Additionally, interpretation of such
legislation or regulation by regulatory agencies with broad discretionary powers
could require the Company to modify its existing operations materially in order
to comply with applicable regulations.
The application of many laws to NovaCare's services will depend on whether
the Company is considered an employer under the relevant statutes and
regulations. The Internal Revenue Service (the "IRS") is examining this issue.
See "Employee Benefit Plans" below. In addition, from time to time there have
been proposals to enact a statutory definition of employer for certain purposes
of the Internal Revenue Code of 1986, as amended (the "Code").
PEO Licensing Requirements. A critical aspect of the growth of the PEO
industry has been increasing recognition and acceptance of PEOs by state
authorities. While many states do not explicitly regulate PEOs, approximately
one-third of the states, including Florida, have passed laws that have licensing
or registration requirements for PEOs and several additional states, including
Pennsylvania, are considering such regulation. Such laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
State regulation assists in screening insufficiently capitalized PEO operations
and, in NovaCare's view, has the effect of legitimizing the PEO industry by
resolving issues concerning an employee's status for specific purposes under
applicable state law. However, because existing regulations are relatively new,
there is limited interpretive or enforcement guidance available. The development
of additional regulations and interpretation of existing regulations can be
expected to evolve over time.
Federal and State Employment Taxes. NovaCare assumes the sole
responsibility and liability for the payment of federal and state employment
taxes with respect to wages and salaries paid to its employees, including
worksite employees. To date, the IRS has relied extensively on the common law
test of employment in determining employer status and the resulting liability
for failure to withhold. However, the IRS has formed a Market Segment Study
Group for the stated purpose of examining whether PEOs, such as the Company, are
the employers of the worksite employees under the Code provisions applicable to
federal employment taxes and, consequently, whether they are exclusively
responsible for payment of employment taxes on wages and salaries paid to such
employees. Another stated purpose of the Market Segment Study Group is to
determine whether owners of client companies can be employees of PEOs under the
federal employment tax laws.
The interpretive uncertainties raised by the Market Segment Study Group may
affect the Company's ability to report employment taxes on its own account
rather than for the accounts of its clients and would increase administrative
burdens on NovaCare's payroll service function. In addition, while the Company
18
<PAGE> 21
believes that it can contractually assume the client company's withholding
obligations, in the event NovaCare fails to meet these obligations, the client
company may be held jointly and severally liable.
Employee Benefit Plans. NovaCare offers various employee benefit plans to
its worksite employees, including 401(k) plans, cafeteria plans, group health
plans, group life insurance plans, group disability insurance plans and employee
assistance programs. Generally, employee benefit plans are subject to provisions
of both the Code and the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). In order to qualify for favorable tax treatment under the
Code, the plans must be established and maintained by an employer for the
exclusive benefit of its employees. Most of these benefit plans are also offered
to the Company's corporate employees.
The Market Segment Study Group established by the IRS is also examining
whether PEOs, such as NovaCare, are the employers of worksite employees under
Code provisions applicable to employee benefit plans and consequently are able
to offer to worksite employees benefit plans that qualify for favorable tax
treatment. The Company is unable to predict the timing or nature of the findings
of the Market Segment Study Group or the ultimate outcome of such conclusions or
findings. If the IRS study were to conclude that a PEO is not an employer of its
worksite employees for plan purposes, worksite employees could not continue to
make contributions to the Company's 401(k) plans or cafeteria plans. The Company
believes that although unfavorable to the Company, a prospective application by
the IRS of an adverse conclusion would not have a material adverse effect on its
financial position and results of operations. If such conclusion were applied
retroactively, employees' vested account balances would become taxable
immediately, the Company would lose its tax deduction to the extent the
contributions were not vested, the plans' trusts would become taxable trusts and
penalties could be assessed. In such a case, the Company would face the risk of
client dissatisfaction as well as potential litigation. A retroactive
application by the IRS of an adverse conclusion could have an adverse effect on
the Company's business, financial condition, results of operations and
liquidity. While the Company believes that a retroactive disqualification is
unlikely, there can be no assurance as to the ultimate resolution of these
issues.
In addition to the employer/employee relationship requirement described
above, pension and profit-sharing plans, including the Company's 401(k) plans,
must satisfy certain other requirements under the Code. These other requirements
are generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered in,
qualified employee benefit plans. The Company applies the nondiscrimination
requirements of the Code at both a consolidated and client company level to
ensure that its 401(k) plans are in compliance with the requirements of the
Code.
Workers' Compensation. Workers' compensation is a state mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. In exchange for providing workers' compensation coverage for
employees, employers are not subject to litigation by employees for benefits in
excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical costs and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials. Workers' compensation laws also regulate
the methods and procedures which the Company may employ in its workers'
compensation managed care programs.
As a creation of state law, workers' compensation is subject to change by
each state's legislature and is influenced by the political processes in each
state. Several states have mandated that employers receive coverage only from
state-operated funds. Other states have adopted legislation requiring that all
workers' compensation injuries be treated through a managed care program. While
such legislation may increase the market for the Company's workers' compensation
services, it may also intensify the competition faced by 24-hour health
coverage, in which the coverage of traditional employer-sponsored health plans
is combined with workers' compensation coverage to provide a single insurance
plan for health problems, whether or not related to work. Incorporating workers'
compensation coverage into conventional health plans may adversely affect
19
<PAGE> 22
the market for the Company's services and may intensify the competition faced by
the Company from HMOs and other health care providers. Moreover, because
workers' compensation benefits are mandated by law and are subject to extensive
regulation, payers and employers do not have the same flexibility to alter
benefits as they have with other health benefit programs. Finally, because
workers' compensation programs vary from state to state, it is difficult for
payers and multi-state employers to adopt uniform policies to administer, manage
and control the cost of benefits.
Other Employer Related Requirements. As an employer, NovaCare is subject
to a wide variety of federal and state laws and regulations governing
employer-employee relationships, including the Immigration Reform and Control
Act, the Americans with Disabilities Act, the Family Medical Leave Act, the
Occupational Safety and Health Act, wage and hour regulations, and comprehensive
state and federal civil rights laws and regulations, including those prohibiting
discrimination and sexual harassment. The definition of employer may be broadly
interpreted under these laws.
Responsibility for complying with various state and federal laws and
regulations is allocated by agreement between the Company and its clients, or in
some cases is the joint responsibility of both. Because NovaCare acts as a
co-employer with the client company, it is possible that the Company could incur
liability for violations of laws even though the Company is not contractually or
otherwise responsible for the conduct giving rise to such liability. The
Company's standard client agreement generally provides that the client will
indemnify the Company for liability incurred as a result of an act of negligence
of a worksite employee under the direction and control of the client or to the
extent the liability is attributable to the client's failure to comply with any
law or regulation for which it has specified contractual responsibility.
However, there can be no assurance that NovaCare will be able to enforce such
indemnification and the Company may therefore be ultimately responsible for
satisfying the liability in question.
INSURANCE
The Company maintains professional liability insurance in amounts deemed
appropriate by management based upon historical claims and the nature and risks
of the business. The Company also maintains property and general liability
insurance for the customary risks inherent in the operation of businesses in
general. While NovaCare believes its insurance policies to be adequate in amount
and coverage for its current operations, there can be no assurance that any
future claims will not exceed the limits of those policies or that such
insurance will continue to be available.
EMPLOYEES
At June 30, 1997, the Company had approximately 39,800 employees. Of these,
approximately 19,300 are rehabilitation services personnel and 20,500 are
employee services personnel. Only six of the Company's employees are represented
by a labor union and the Company is not aware of any current activity to
organize any of its non-worksite employees. Management considers relations
between the Company and its employees to be good. For information with respect
to the Company's worksite employees, see "Business Profile -- Employee Services"
above.
20
<PAGE> 23
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of NovaCare who served during the fiscal year are as
follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------------------- ----------------------------------------------------------- ---
<S> <C> <C>
John H. Foster.............. Chairman of the Board and Director 55
Timothy E. Foster........... Chief Executive Officer and Director 45
James W. McLane............. President, Chief Operating Officer and Director 58
Daryl A. Dixon.............. President and General Manager, Contract Rehabilitation
Division 37
Ronald G. Hiscock........... President and General Manager, Outpatient Division 46
Peter D. Bewley............. Senior Vice President, General Counsel and Secretary 51
Robert E. Healy, Jr. ....... Senior Vice President, Finance and Administration and Chief
Financial Officer 44
Laurence F. Lane............ Senior Vice President, Regulatory Affairs 52
Aven Kerr................... Senior Vice President, Human Resources 51
Susan J. Campbell........... Vice President, Communications and Investor Relations 46
Richard A. McDonald......... Vice President, Treasurer 50
Barry E. Smith.............. Vice President, Controller and Chief Accounting Officer 44
James T. Walmsley........... Vice President, Reimbursement 47
Steven M. Wise.............. Vice President, Information Systems and Chief Information
Officer 41
</TABLE>
No family relationships exist among any of the directors or executive
officers of NovaCare. Executive officers serve at the discretion of the NovaCare
Board of Directors.
JOHN H. FOSTER has been Chairman of the Board of NovaCare since December
1984. From 1984 to May 1997 he was also Chief Executive Officer of the Company.
Mr. Foster is also Chairman of the Board and Chief Executive Officer of Apogee,
Inc., a national mental health services company and a director of Corning
Incorporated, an international corporation with business interests in specialty
materials, communications, laboratory services and consumer products. Mr. Foster
is founder and Chairman of the Board of Foster Management Company, an investment
advisor, and general partner of various venture capital investment funds. He was
also the founder, Chairman of the Board and Chief Executive Officer of
RehabClinics, Inc., which was acquired by NovaCare in February 1994.
TIMOTHY E. FOSTER has been Chief Executive Officer of the Company since May
1997. From October 1994 until May 1997 he was President and Chief Operating
Officer. He served as Senior Vice President, Finance and Administration and
Chief Financial Officer of NovaCare from November 1988 to October 1994,
Treasurer of NovaCare from March 1992 to October 1994, and has been a director
of NovaCare since December 1984. Mr. Foster currently serves as a Director of
Apogee, Inc., a national mental health services company, a position he has had
since February 1995.
JAMES W. MCLANE has been President and Chief Operating Officer and a
director of the Company since May 1997. From 1991 to 1997, Mr. McLane served as
Chief Executive Officer of Aetna Health Plans and as Executive Vice President of
Aetna Life and Casualty. He is also a director of FemRx, a medical device
manufacturer.
DARYL A. DIXON has been President and General Manager of NovaCare's
Contract Rehabilitation Division since January 1994. He joined NovaCare in
February 1992 as Regional Vice President in the Contract Rehabilitation Division
and was Vice President, Operations of the Contract Rehabilitation Division from
November 1992 until January 1994. From 1982 to 1992, he held various positions
at Manor HealthCare, Inc., a nursing home management company.
RONALD G. HISCOCK has been President and General Manager of NovaCare's
Outpatient Division since February 1996 and had been President and General
Manager of NovaCare's Orthotics and Prosthetics Division from April 1995 to
February 1996. He joined NovaCare in June 1992 as the East Region President
21
<PAGE> 24
for the Orthotics and Prosthetics Division and was the Division's Vice President
of Operations from July 1994 through March 1995.
PETER D. BEWLEY has been Senior Vice President, General Counsel and
Secretary of NovaCare since May 1994. Prior to joining NovaCare Mr. Bewley was
Associate General Counsel at Johnson & Johnson, where he had been employed since
1977.
ROBERT E. HEALY, JR. has been Senior Vice President, Finance and
Administration and Chief Financial Officer since December 1995. From January
1994 to December 1995, he was Vice President Chief Financial Officer of
NovaCare's Contract Rehabilitation Division. He served as Vice President Finance
and Chief Accounting Officer of the Company from March 1992 to January 1994.
LAURENCE F. LANE has been Senior Vice President, Regulatory Affairs of
NovaCare since October 1994. From November 1986 to October 1994 he was Vice
President Regulatory Affairs.
AVEN KERR has been Senior Vice President, Human Resources of NovaCare since
October 1996. From November 1995 to September 1996, she was Senior Vice
President Administration and Systems at United Healthcare. She was Senior Vice
President, Human Resources at MetraHealth from May 1995 to November 1995. Prior
to that, she was employed by Prudential Insurance Company for 27 years in
various positions, most recently as Senior Vice President, Central Atlantic
Operations.
SUSAN J. CAMPBELL has been Vice President, Communications and Investor
Relations of NovaCare since April 1995. She joined NovaCare in March 1993 as
Director of Investor Relations and was Vice President, Investor Relations from
April 1994 to April 1995. Ms. Campbell was Vice President, Investor Relations,
First Fidelity Bancorporation from 1982 to 1993.
RICHARD A. MCDONALD has been Vice President, Treasurer since August 1996
and was Director, Treasury Services from May 1995 until August 1996. Prior to
joining the Company, he was a financial consultant to Continental Medical
Systems, Inc. He served as an assistant treasurer with American Healthcare
Management from 1990 until 1994.
BARRY E. SMITH has been Vice President, Controller and Chief Accounting
Officer of the Company since December 1995 and has been Vice President of
Finance of the Contract Rehabilitation Division since March 1995. He was Vice
President of Finance of the Medical Rehabilitation Hospital Division from
February 1994 through the sale date of the division, April 1995. From May 1992
through February 1994 he served in various positions in NovaCare's Corporate
Finance Department.
JAMES T. WALMSLEY has been Vice President, Reimbursement of NovaCare since
January 1994 and Director of Reimbursement from April 1992 to January 1994.
STEVEN M. WISE has been Vice President Information Systems and Chief
Information Officer since December 1995. He joined NovaCare in 1993 as Director,
Systems and Programming, for the Contract Rehabilitation Division. Prior to
joining NovaCare, he was employed at Ortho-McNeil Pharmaceutical Company where
he held various management positions in business systems development.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 1016 West Ninth
Avenue, King of Prussia, Pennsylvania 19406 where NovaCare leases approximately
132,500 square feet. The lease for this office space expires in June 2005. In
addition, the Company leases other office space in various cities in the United
States for terms which typically are three years or less. See Note 8 of Notes to
the Company's Consolidated Financial Statements for information concerning the
Company's leases for its facilities. The Company does not anticipate that it
will experience any difficulty in renewing any such leases upon their expiration
or obtaining different space on comparable terms if such leases are not renewed.
The Company believes that these facilities are well maintained and are of
adequate size for present needs and planned expansion in the near future.
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<PAGE> 25
NovaCare also has sublease agreements for approximately 24,748 square feet
of office space, expiring February 2003 with companies in which NovaCare's
Chairman of the Board is a Director and/or an Executive Officer.
ITEM 3. LEGAL PROCEEDINGS
From time to time, NovaCare is party to certain claims, suits and
complaints which arise in the ordinary course of business. Currently, there are
no such claims, suits or complaints which, in the opinion of management, would
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NovaCare's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol NOV. On September 5, 1997, there were 1,817 holders of record
of common stock.
The following table sets forth the high and low sales prices per share of
common stock as reported on the NYSE Composite Tape for the relevant periods.
<TABLE>
<CAPTION>
COMMON STOCK
PRICES
-----------------
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED JUNE 30, 1997
First Quarter............................................ $ 9.63 $ 6.88
Second Quarter........................................... 11.25 8.13
Third Quarter............................................ 13.75 9.63
Fourth Quarter........................................... 14.13 10.88
YEAR ENDED JUNE 30, 1996
First Quarter............................................ $ 9.50 $ 6.25
Second Quarter........................................... 8.50 5.13
Third Quarter............................................ 8.25 5.25
Fourth Quarter........................................... 7.63 6.25
</TABLE>
With the exception of 2-for-1 stock splits of common stock effected in the
form of stock dividends in June 1987 and July 1991, no other dividends have been
paid or declared on common stock since NovaCare's initial public offering on
November 5, 1986. NovaCare does not expect to declare any cash dividends on
common stock in the foreseeable future.
23
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
NovaCare's consolidated financial statements and the accompanying notes
presented elsewhere herein.
NOVACARE, INC. AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Net revenues............................. $1,066,451 $793,038 $905,359 $789,745 $582,342
Gross profit............................. 260,086 208,082 256,240 255,511 186,265
Income from operations................... 80,541 37,499 143,881 108,208 78,819
Net interest (expense) income............ (13,504) (7,537) (17,893) (11,773) (2,841)
Income before income taxes............... 66,801 29,866 125,584 95,892 75,542
Income taxes............................. 27,891 14,585 63,660 37,678 27,906
Net income............................... 38,910 15,281 61,924 58,214 47,636
Net income applicable to common
stock(2).............................. 38,910 15,281 61,924 58,214 47,585
Net income per common share.............. .62 .24 .95 .90 .79
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 173,576 $223,712 $255,126 $194,324 $265,908
Total assets............................. 1,014,304 789,731 852,557 850,541 611,567
Total indebtedness....................... 342,678 192,215 225,015 344,602 206,415
Total liabilities(3)..................... 506,298 305,337 364,922 434,837 282,587
Shareholders' equity..................... 508,006 484,394 487,635 415,704 328,980
</TABLE>
- ---------------
(1) Certain amounts have been reclassified to conform with the fiscal 1997
presentation.
(2) Gives effect to dividends, whether or not declared, on 10% mandatorily
redeemable preferred stock issued by a consolidated subsidiary in fiscal
1991 which was redeemed in fiscal 1993.
(3) Includes minority interests in consolidated subsidiaries.
24
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has experienced significant growth in the recent year through
strategic acquisitions and growth in its existing businesses. During fiscal
1997, the Company purchased 52 outpatient businesses and 3 businesses which
provide occupational health services. Of the outpatient businesses acquired, 33
provide orthotic and prosthetic ("O&P") rehabilitation services and 19 provide
outpatient rehabilitation services. The Company entered into the professional
employer organization ("PEO") industry through the acquisition of one PEO
business in October 1996 and three in February 1997. PEOs, or employee service
companies, provide human resource and payroll management, workers compensation
risk management, benefits administration, unemployment service and human
resource consulting services principally to small to medium-sized businesses.
Effective January 25, 1997, employee services were also provided to the
rehabilitation services segment of the Company.
During fiscal 1996, the Company acquired seven businesses which provide
outpatient rehabilitation services and six businesses which provide O & P
rehabilitation services. Nonrecurring charges in fiscal 1996 included a $13.4
million pretax restructuring charge and a $10.5 million pretax charge for a
change in estimate. Nonrecurring items in fiscal 1995 consisted of an $88.2
million pretax gain on the sale of the medical rehabilitation hospitals, a $29.9
million pretax restructuring charge, and a $1.0 million pretax charge relating
to the settlement of certain shareholder litigation.
The following are the results of operations for fiscal years ended June 30,
1997, 1996 and 1995. The results of operations for fiscal 1996 and 1995 have
been reclassified to conform to the fiscal 1997 presentation. Other operating
expenses includes selling, general & administrative expenses, provision for
uncollectible accounts and amortization of excess cost of net assets acquired.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Net revenues
Rehabilitation services......................... $ 927,547 $793,038 $905,359
Employee services............................... 394,193 -- --
Elimination..................................... (255,289) -- --
---------- -------- --------
Total net revenues.............................. 1,066,451 793,038 905,359
Gross profit
Rehabilitation services......................... 253,549 208,082 256,240
Employee services............................... 12,238 -- --
Elimination..................................... (5,701) -- --
---------- -------- --------
Total gross profit.............................. 260,086 208,082 256,240
Other operating expenses.......................... 179,545 157,213 169,727
Provision for restructure and other nonrecurring
items........................................... -- 13,370 (57,368)
---------- -------- --------
Income from operations............................ $ 80,541 $ 37,499 $143,881
========== ======== ========
</TABLE>
Change in Estimate
In the third quarter of fiscal 1996, the Company recorded a $10.5 million
charge to revenues to fully reflect payer allowances that had not been
sufficiently recognized by certain billing systems during the first three
quarters of fiscal 1996 and prior years. The Company has implemented a new
methodology for estimating allowances and commenced the implementation of a
fully integrated billing and allowance system. Systems implementation is
scheduled to be substantially completed in fiscal 1998.
25
<PAGE> 28
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Restructuring Charge
The Company recorded provisions for restructure of $13.4 million and $29.9
million in fiscal 1996 and 1995, respectively. The 1996 and 1995 programs,
consisting of the consolidation and reorganization of the Company's outpatient
and O&P businesses, closing certain administrative offices, O&P branches and
outpatient rehabilitation centers in selected markets, and the consolidation of
certain finance and other administrative functions, are substantially complete.
The Company estimates that these plans would reduce or eliminate in the
aggregate approximately $30 million to $35 million of annual expenses.
Of the total restructuring charges, $19.6 million related to amounts to be
paid in cash. The noncash portion of the charge related to the write-off of
certain assets, principally excess cost of net assets acquired, related to
facilities closed or to be closed.
Sale of Medical Rehabilitation Hospitals
Effective April 1, 1995, the Company sold its medical rehabilitation
hospitals in a transaction valued at $242.9 million. The transaction resulted in
a pretax gain on the sale of $88.2 million. The medical rehabilitation hospitals
contributed $110.6 million in net revenues, $31.3 million in gross profit and
$15.1 million in income from operations in fiscal 1995.
Year Ended June 30, 1997 Compared With the Year Ended June 30, 1996
Net revenues for the year ended June 30, 1997 increased from the prior year
by $273.4 million, or 34.5%, to $1.1 billion and gross profit increased $52.0
million, or 25.0%, to $260.1 million, primarily as a result of acquisitions,
internal growth and a prior year $10.5 million charge to revenues for a change
in estimate, as discussed further under "Operating Results by Business".
Other operating expenses increased $22.3 million from $157.2 million for
the year ended June 30, 1996 to $179.5 million for the year ended June 30, 1997.
The increased costs are primarily associated with businesses acquired in fiscal
1997. As a percentage of net revenues, other operating expenses decreased from
19.8% to 16.8% for the same periods, respectively, principally as a result of
employee and facility cost savings from the productivity and cost reduction
programs initiated in fiscal 1996 and 1995.
Depreciation expense increased to $24.4 million for the year ended June 30,
1997 from $23.3 million for the year ended June 30, 1996 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 $3.6 million to $13.5 million from $9.9 million for the same periods,
respectively, as a result of businesses acquired in fiscal 1997 and the full
year effect of businesses acquired during fiscal 1996.
Interest expense, net of investment income, increased $6.0 million compared
with the prior period principally as a result of decreased interest income due
to lower invested cash, and higher interest expense due to increased borrowings
in the fiscal 1997 compared with the fiscal 1996 as discussed under "Liquidity
and Capital Resources".
Income tax expense as a percentage of pretax income decreased to 41.8% for
the year ended June 30, 1997 from 48.8% for the year ended June 30, 1996. The
decrease in the income tax rate resulted principally from the impact of
nondeductible amortization of excess cost of net assets acquired
("amortization") on lower income subject to income tax in fiscal 1996 as a
result of the provision for restructure and the charge to revenues. See Note 9
to the Consolidated Financial Statements for the reconciliation of expected tax
rate to actual tax expense.
26
<PAGE> 29
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Year Ended June 30, 1996 Compared to the Year Ended June 30, 1995
Net revenues for fiscal 1996 decreased $112.3 million from fiscal 1995. The
decrease resulted principally from the inclusion of $110.6 million of net
revenues in fiscal 1995 from the medical rehabilitation hospitals sold in fiscal
1995 and the $10.5 million charge for the change in estimate in fiscal 1996.
Gross profit decreased $48.2 million in fiscal 1996 compared to fiscal
1995. The decrease resulted principally from the inclusion of $31.3 million
gross profit in fiscal 1995 from the medical rehabilitation hospitals sold in
fiscal 1995 and the $10.5 million charge to revenues for the change in estimate
in fiscal 1996.
See "Operating Results by Business -- Rehabilitation Services" below for a
further explanation of the comparison of net revenues and gross profit.
Operating expenses in fiscal 1996 decreased $12.5 million compared to
fiscal 1995. The decrease resulted primarily from the inclusion of expenses of
$16.1 million from the medical rehabilitation hospitals sold in fiscal 1995,
coupled with expense savings from the cost reduction programs undertaken in
fiscal 1996 and 1995, which were offset, somewhat, by an increase in
depreciation.
Depreciation expense increased to $23.3 million from $19.3 million for the
fiscal years 1996 and 1995, respectively. The increase was due primarily to the
full year effect of assets acquired in fiscal 1995 and certain internally
developed software, and other assets placed in service in fiscal 1996.
Amortization of excess cost of net assets acquired decreased by $1.1 million.
This decrease resulted from a reduction in the related assets being amortized
which were written off in the restructure charge.
In fiscal 1996, the Company recorded a $13.4 million provision for
restructure pertaining to the consolidation and reorganization of its outpatient
businesses and certain administrative functions.
Interest expense, net of interest income, decreased $10.4 million compared
with the prior period principally due to reduced amounts borrowed under the
Company's credit facility and increased cash invested, both as a result of the
sale of the medical rehabilitation hospitals.
Income tax expense as a percentage of pretax income decreased to 48.8% for
the year ended June 30, 1996 from 50.7% for the previous year. The principal
reasons for the effective income tax rate being higher than the statutory
federal income tax rate were state income taxes, non-deductible nonrecurring
items and nondeductible amortization of excess cost of net assets acquired
("amortization"). See Note 9 to the Consolidated Financial Statements for the
reconciliation of expected tax expense to actual tax expense.
OPERATING RESULTS BY BUSINESS
REHABILITATION SERVICES
The following table displays the proforma results of operations,which have
been reclassified to conform to the fiscal 1997 presentation, for the Company's
rehabilitation services segment had the sale of the medical rehabilitation
hospitals occurred July 1, 1994 and excluding restructuring and other
nonrecurring charges:
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------
1997 1996(1) 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues........................................ $927,547 $793,038 $794,716
Gross profit........................................ 253,549 208,082 224,957
Gross profit %...................................... 27.3% 26.2% 28.4%
</TABLE>
- ---------------
(1) Includes the $10.5 million charge for a change in estimate.
27
<PAGE> 30
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Year Ended June 30, 1997 Compared with the Year Ended June 30, 1996
Net revenues for the year ended June 30, 1997 increased from the prior year
by $134.5 million, or 17.0%. Gross profit for the year ended June 30, 1997
increased from the prior year by $45.5 million, or 21.9%. Gross profit as a
percentage of net revenues increased from 26.2% for the year ended June 30, 1996
to 27.3% for the year ended June 30, 1997.
The $134.5 million increase in net revenues resulted principally from: (i)
net revenues from businesses acquired, (ii) an increase in contract
rehabilitation net revenues resulting principally from new contract sales, (iii)
the $10.5 million prior year charge discussed previously, and (iv) an increase
in outpatient net revenues attributable to internal growth. These increases were
offset somewhat by a decrease in revenues attributable to outpatient facilities
closed or sold in fiscal 1997 and the full year effect of facilities closed,
sold or contributed to joint ventures in the prior year.
The $45.5 million increase in gross profit was primarily due to: (i)
acquisitions in fiscal 1997 and the full year effect of acquisitions in fiscal
1996, (ii) new contracts, and (iii) an increase in productivity in the
outpatient and contract rehabilitation businesses. The increase of 1.1% in the
gross profit margin results principally from the increase in contract
rehabilitation and outpatient productivity, an increase in the outpatient gross
profit margin as a result of the consolidation and reorganization of certain
outpatient rehabilitation and orthotic and prosthetic operations commenced in
the third quarter of fiscal 1996 and the impact of the $10.5 million charge
discussed previously.
Year Ended June 30, 1996 Compared with the Year Ended June 30, 1995
Net revenues for the year ended June 30, 1996 decreased from the prior year
by $1.7 million to $793.0 million and gross profit decreased by $16.9 million,
or 7.5%, to $208.1 million. As previously described, net revenues and gross
profit were effected by a $10.5 million charge to net revenues for a change in
estimate. Excluding this charge, net revenues increased $8.8 million, or 1.1%,
gross profit decreased $6.4 million, or 2.8%, and gross profit margin decreased
to 27.6% from 28.4% in fiscal 1996 compared with fiscal 1995, respectively.
The $8.8 million increase in net revenues in fiscal 1996 resulted
principally from: (i) an increase in contract rehabilitation pricing; (ii) an
increase in O&P net revenue per patient due to an increased mix of higher
revenue prosthetics; (iii) an increase in long-term care management and
consulting services; and (iv) the full year impact of the acquisition of 25
businesses in fiscal 1995, offset by a decrease in outpatient rehabilitation net
revenue per visit due to higher managed care contract mix.
The $6.4 million decrease in gross profit and decrease in gross profit
margin in fiscal 1996 resulted principally from increased costs of competitive
compensation and benefits, and decreased productivity and pricing pressure in
outpatient rehabilitation services.
EMPLOYEE SERVICES
Year Ended June 30, 1997
The Company's employee services segment provides human resource management
services to third party clients and the Company's rehabilitation services
segment. Inter-company activity is eliminated in consolidation.
Net revenues from third party clients increased from $10.9 million in the
second quarter of fiscal year 1997 to $76.9 million in the fourth quarter of
fiscal year 1997. This increase is primarily attributable to an increase in the
weighted average number of worksite employees ("WSEs") from 1,757 to 16,656
during the same periods. The increases in WSEs is due principally to the
acquisition of three PEOs in the third quarter of
28
<PAGE> 31
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
fiscal 1997 with an aggregate 14,412 WSEs at the date of acquisition and an
approximate 16.7% internal growth in the number of WSEs since the acquisition
date (approximately a 40% annualized growth rate). Net revenues from employee
services provided to the Company's rehabilitation segment increased from $99.9
million in the third quarter of fiscal 1997 to $155.4 million in the fourth
quarter. The increase is due to a WSE increase from 15,546 to 16,061 and
approximately one month of additional service during the fourth quarter.
Gross profit from third party clients increased from $0.8 million in the
second quarter to $3.2 million in the fourth quarter of fiscal year 1997. The
increase is attributable primarily to acquisitions and internal growth. Gross
profit pertaining to the Company's rehabilitation segment increased from $2.2
million in the third quarter to $3.5 million in the fourth quarter of fiscal
1997 due to the increased WSEs and the additional month of service.
Overall, gross profit as a percentage of net revenues declined from 7.7%
during the second quarter of fiscal 1997 to 2.9% for the fourth quarter of
fiscal 1997. The primary reasons for the decrease in the gross profit percentage
are the increased salaries, wages and employment taxes per WSE, which increased
revenues but not gross profit dollars, and the relative impact of services
provided to the Company's rehabilitation segment, which has a lower gross profit
percentage (2.0%) due to a more highly compensated employee population.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 cash and cash equivalents totaled $22.7 million, a
decrease of $73.0 million from $95.7 million at June 30, 1996. Cash generated
from operations decreased to $47.2 million in 1997 from $57.7 million in fiscal
1996, which was an increase from the $43.6 million generated in fiscal 1995. The
$10.5 million decrease in cash flow from operating activities from fiscal 1996
to 1997 resulted principally from a decrease in cash flows from accounts and
notes receivable of $41.2 million offset, somewhat, by an increase in cash flows
from net income of $23.6 million and $8.2 million of non-cash charges consisting
of depreciation, amortization and provision for doubtful accounts.
The $14.1 million increase in cash flows from operating activities from
fiscal 1995 to 1996 resulted principally from the $9.0 million use of cash in
fiscal 1995 by the medical rehabilitation hospitals prior to their sale and the
following items (each before the effect on cash flows of the sale of the medical
rehabilitation hospitals and nonrecurring items): (i) an $11.6 million increase
in depreciation and amortization, non-cash charges, (ii) a $16.1 million
increase in income taxes due to the timing of payments for income taxes in
fiscal 1996 compared with fiscal 1995, (iii) an $11.4 million decrease in
accounts payable and accrued expenses due primarily to the timing of
compensation related expenses, and (iv) a $6.3 million decrease in net income.
Investing activities, net of the effects of the sale of the medical
rehabilitation operations and the proceeds from the sale of marketable
securities of $88.2 million in fiscal 1995, used $187.8 million of cash in
fiscal 1997 compared to $51.7 million and $106.8 million in fiscal 1996 and
1995, respectively. Cash paid for acquisitions increased to $164.4 in fiscal
1997 compared to $20.8 million in fiscal 1996 which was a decline from the $71.8
million paid in fiscal 1995. Capital expenditures remained relatively constant
during the three year period ended June 30, 1997 at $21.7 million, $26.6
million, and $29.5 million, respectively, as the Company continued to invest in
internally and externally developed software and equipment needed for
technological efficiency in clinical and administrative activities in support of
clinical programs and outcomes, cost reduction initiatives and future growth
plans.
The Company's major financing activities consisted of borrowing, net of
repayment, $87.0 million in fiscal 1997, whereas the Company repaid debt, net of
borrowings, of $33.6 million and $113.1 million in fiscal 1996 and 1995,
respectively. The net borrowing increase in fiscal 1997 was used principally to
fund acquisition activity. The proceeds from the sale of the medical
rehabilitation hospitals, cash generated from operations and excess cash, were
used to repay debt in fiscal 1996 and 1995.
29
<PAGE> 32
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The Company amended its bank credit facility in fiscal 1997 to extend the
term of the agreement from November 1997 to November 1999 and to increase the
amount available to $190.0 million. As of June 30, 1997, $72.7 million of the
credit facility was available after reduction of borrowings and letters of
credit of $7.7 million. The Company is presently renegotiating its credit
facility to further increase the amount available.
The Company's growth strategy contemplates expansion of the outpatient,
occupational health and employee services businesses, and affiliation with
health care systems of providers and payers in target markets principally
through acquisitions and start-ups. Given the Company's cash position of $22.7
million at June 30, 1997 and debt capacity as suggested by its favorable debt to
total capital ratio of 40.3%, it is anticipated that the Company will take
advantage of its underleveraged position and ability to borrow. Cash payments
for acquired businesses under this strategy are expected to be approximately
$160 million in fiscal 1998. Capital expenditures are expected to be
approximately $35 million in fiscal 1998 as the Company acquires property and
equipment for the establishment of start-up outpatient and orthotic and
prosthetic facilities in selected markets and continues to invest in systems to
enhance clinical productivity, outcomes measurement and administrative
efficiencies.
The Company believes that the cash flows generated by the Company's
operations together with its existing cash and availability of credit will be
sufficient to meet the Company's cash needs during fiscal 1998.
Inflation
A significant portion of the Company's operating expenses are subject to
inflationary increases, particularly therapist salary increases, which
historically have exceeded other medical industry salary rate increases due to
the existing supply shortage of therapists. The Company has historically been
unable to partially offset inflationary increases through charge increases, but
has somewhat mitigated the effect by expanding services and increasing operating
efficiencies. In the existing regulatory environment and to the extent that
inflation occurs in the future, it is uncertain whether the Company will be able
to pass on the increased costs associated with providing health care services to
customers insured by government or managed care payers. However, management
believes that the Company will be able to somewhat offset this potential impact
through business expansion and increasing operating efficiencies.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125") as amended
by the December 1996 issuance of Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125"
("SFAS 127"). SFAS 125, as amended, provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Management does not believe the adoption of SFAS 125, as amended,
will have a material effect on the Company's financial position or results of
operations.
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128") which the Company is required to adopt no later than the second
quarter of fiscal year 1998. SFAS 128 established accounting standards for
computing and presenting earnings per share by replacing the presentation of
weighted shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic earnings per share which excludes dilution and diluted
earnings per share which includes the dilutive effect of all potentially
exercisable or convertible stock. Once adopted, SFAS 128 requires restatement of
all prior period earnings per share data. See Note 1 to the Consolidated
Financial Statements for the effect of adopting SFAS 128.
30
<PAGE> 33
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 integrating acquired businesses and in developing and introducing new
products and lines of business, adverse Internal Revenue Service rulings with
respect to the employer status of PEOs, state legislative and regulatory efforts
to control PEOs, adverse uninsured health or workers' compensation expenses in
the PEO, and unanticipated market changes.
31
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 22,716 $ 95,724
Accounts receivable, net of allowance in 1997 and 1996 of $33,263
and $18,995, respectively....................................... 256,477 192,636
Inventories........................................................ 18,450 13,948
Deferred income taxes.............................................. 13,939 14,875
Other current assets............................................... 18,313 14,976
---------- --------
Total current assets....................................... 329,895 332,159
Property and equipment, net.......................................... 69,740 63,319
Excess cost of net assets acquired, net.............................. 568,027 354,117
Investment in joint ventures......................................... 12,719 11,984
Deferred income taxes................................................ 2,570 2,332
Other assets, net.................................................... 31,353 25,820
---------- --------
$1,014,304 $789,731
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements.......................... $ 15,978 $ 8,173
Accounts payable and accrued expenses.............................. 135,272 93,854
Income taxes payable............................................... 5,069 6,420
---------- --------
Total current liabilities.................................. 156,319 108,447
Financing arrangements, net of current portion....................... 326,700 184,042
Deferred income taxes................................................ 14,779 9,625
Other................................................................ 4,851 2,451
---------- --------
Total liabilities.......................................... 502,649 304,565
---------- --------
Minority interests in consolidated subsidiaries...................... 3,649 772
Commitments and contingencies........................................ -- --
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares,
issued 66,630 shares in 1997 and 66,091 shares in 1996.......... 666 661
Additional paid-in capital......................................... 259,915 253,918
Retained earnings.................................................. 292,340 253,430
---------- --------
552,921 508,009
Less: Common stock in treasury (at cost), 5,590 shares in 1997
and 3,190 shares in 1996................................. (44,915) (23,465)
Deferred compensation...................................... -- (150)
---------- --------
Total shareholders' equity................................. 508,006 484,394
---------- --------
$1,014,304 $789,731
========== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
32
<PAGE> 35
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Net revenues.............................................. $1,066,451 $793,038 $905,359
Cost of services.......................................... 806,365 584,956 649,119
---------- -------- --------
Gross profit......................................... 260,086 208,082 256,240
Selling, general and administrative expenses.............. 146,289 130,980 142,872
Provision for uncollectible accounts...................... 19,708 16,359 15,918
Amortization of excess cost of net assets acquired........ 13,548 9,874 10,937
Provision for restructure and other nonrecurring items.... -- 13,370 (57,368)
---------- -------- --------
Income from operations............................... 80,541 37,499 143,881
Investment income......................................... 1,740 4,999 5,405
Interest expense.......................................... (15,244) (12,536) (23,298)
Minority interest......................................... (236) (96) (404)
---------- -------- --------
Income before income taxes........................... 66,801 29,866 125,584
Income taxes.............................................. 27,891 14,585 63,660
---------- -------- --------
Net income........................................... $ 38,910 $ 15,281 $ 61,924
========== ======== ========
Net income per common share.......................... $ .62 $ .24 $ .95
========== ======== ========
Weighted average number of common shares
outstanding........................................ 63,081 64,325 65,163
========== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
33
<PAGE> 36
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
SHARES ISSUED STOCK ADDITIONAL DEFERRED
----------------- ($.01 TREASURY PAID-IN RETAINED COMPEN- VALUATION
COMMON TREASURY PAR VALUE) STOCK CAPITAL EARNINGS SATION ALLOWANCE
------ -------- ---------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994.............. 64,228 (17) $643 $ (305) $240,619 $176,225 $ (662) $(816)
Issued in connection with employee
benefit plans....................... 302 52 4 453 3,497 -- -- --
Issued in connection with
acquisitions........................ 946 29 9 250 6,741 -- -- --
Reversal of valuation allowance....... -- -- -- -- -- -- -- 816
Repurchase of common stock............ -- (251) -- (2,012) -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 249 --
Net income............................ -- -- -- -- -- 61,924 -- --
------ ------ ---- -------- -------- -------- ----- -----
Balance at June 30, 1995.............. 65,476 (187) 656 (1,614) 250,857 238,149 (413) --
Issued in connection with employee
benefit plans....................... 199 198 1 1,624 1,336 -- -- --
Issued in connection with
acquisitions........................ 416 203 4 1,478 1,725 -- -- --
Repurchase of common stock............ -- (3,404) -- (24,953) -- -- -- --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 263 --
Net income............................ -- -- -- -- -- 15,281 -- --
------ ------ ---- -------- -------- -------- ----- -----
Balance at June 30, 1996.............. 66,091 (3,190) 661 (23,465) 253,918 253,430 (150) --
ISSUED IN CONNECTION WITH EMPLOYEE
BENEFIT PLANS....................... 539 17 5 11 4,284 -- -- --
ISSUED IN CONNECTION WITH
ACQUISITIONS........................ -- 344 -- 2,474 1,713 -- -- --
REPURCHASE OF COMMON STOCK............ -- (2,761) -- (23,935) -- -- -- --
AMORTIZATION OF DEFERRED
COMPENSATION........................ -- -- -- -- -- -- 150 --
NET INCOME............................ -- -- -- -- -- 38,910 -- --
------ ------ ---- -------- -------- -------- ----- -----
BALANCE AT JUNE 30, 1997.............. 66,630 (5,590) $666 $(44,915) $259,915 $292,340 -- --
====== ====== ==== ======== ======== ======== ===== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
34
<PAGE> 37
NOVACARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 38,910 $ 15,281 $ 61,924
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization.................................... 37,978 33,159 30,190
Minority interest................................................ 236 96 404
Provision for uncollectible accounts............................. 19,708 16,359 15,918
Deferred income taxes............................................ 6,017 3,631 (1,525)
Noncash portion of nonrecurring items............................ -- 8,256 15,415
Gain on sale of medical rehabilitation hospitals................. -- -- (88,243)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts and notes receivable.................................. (53,844) (12,676) (31,164)
Inventories.................................................... 2,502 (2,039) (2,875)
Other current assets........................................... (1,434) 10 1,388
Accounts payable and accrued expenses.......................... (725) (6,152) 10,279
Income taxes payable........................................... 110 1,553 28,982
Other, net..................................................... (2,217) 220 2,925
-------- --------- ---------
Net cash flows provided by operating activities................ 47,241 57,698 43,618
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash acquired............. (164,370) (20,764) (71,759)
Net additions to property and equipment............................ (21,653) (26,621) (29,529)
Net (payment for) proceeds from sale of medical rehabilitation
hospitals........................................................ -- (13,208) 206,838
Proceeds from sales of investments................................. -- -- 88,151
Other, net......................................................... (1,752) (4,326) (5,513)
-------- --------- ---------
Net cash flows (used in) provided by investing activities...... (187,775) (64,919) 188,188
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and credit arrangements............... 263,200 133 74,077
Payment of long-term debt and credit arrangements.................. (176,174) (33,769) (187,206)
Proceeds from common stock issued.................................. 3,750 2,898 3,947
Payment for purchase of treasury stock............................. (23,250) (24,953) (2,012)
-------- --------- ---------
Net cash flows provided by (used in) financing activities...... 67,526 (55,691) (111,194)
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents............... (73,008) (62,912) 120,612
Cash and cash equivalents, beginning of year....................... 95,724 158,636 38,024
-------- --------- ---------
Cash and cash equivalents, end of year............................. $ 22,716 $ 95,724 $ 158,636
======== ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
35
<PAGE> 38
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: NovaCare, Inc. is a national leader of physical
rehabilitation services and employee services. NovaCare's comprehensive medical
rehabilitation services include (i) providing rehabilitation therapy, subacute
and rehabilitation program consulting and management services on a contract
basis to health care institutions, primarily long-term care facilities, and (ii)
providing outpatient, orthotic and prosthetic ("O&P") and occupational health
rehabilitation services through a national network of patient care centers and
integrated delivery systems. The Company operated medical rehabilitation
hospitals until April 1, 1995, the effective date of the sale of such hospitals.
For the fiscal year ended June 30, 1995, the medical rehabilitation hospitals
represented 12% of the Company's consolidated net revenues.
Employee services are generally provided to small and medium-sized
businesses and are comprehensive, fully integrated outsourcing solutions to
human resource management, including payroll management, workers' compensation,
risk management, benefits administration, unemployment services and human
resource consulting services.
Principles of Consolidation: The Consolidated Financial Statements include
the accounts of NovaCare, Inc., its majority-owned subsidiaries and companies
effectively controlled through management agreements (collectively, "NovaCare"
or the "Company"). Investments in 20% or more of the voting stock of an
affiliate are accounted for under the equity method. All significant
intercompany accounts and transactions have been eliminated.
Reclassifications: Certain amounts in the fiscal 1996 and 1995
consolidated financial statements have been reclassified to conform with the
fiscal 1997 presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In 1996, the Company recorded a $10.5 million charge to net revenues to reflect
payer allowances that had not been sufficiently recognized by certain billing
systems.
Cash and Cash Equivalents: The Company considers its holdings of highly
liquid debt and money-market instruments to be cash equivalents if the
securities mature within 90 days from the date of acquisition. These investments
are carried at cost, which approximates fair value.
Net Revenues: Rehabilitation services net revenues are reported at the net
realizable amounts from customers and third party payers. Net revenues generated
directly from Medicare and Medicaid reimbursement programs represented 12%, 12%
and 18% of the Company's consolidated net revenues for fiscal 1997, 1996, and
1995, respectively. Settlement amounts due to or receivable from Medicare and
Medicaid programs are determined by fiscal intermediaries. Management believes
that adequate provision has been made in the consolidated financial statements
for potential adjustments resulting from such determinations.
Employee services revenues and related costs of wages, salaries, and
employment taxes pertaining to worksite employees are recognized in the period
in which the employee performs the service. Because the Company is at risk for
all of its direct costs, independently of whether payment is received from its
clients, and consistent with industry practice, all amounts billed to clients
for gross salaries and wages, related employment taxes, and health care and
workers' compensation coverage are recognized as revenue by the Company. The
Company establishes an allowance for doubtful accounts for both related and
third party accounts receivable based on prior experience.
36
<PAGE> 39
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Inventories: Inventories consist of customized orthotic and prosthetic
merchandise held for sale, work in process and raw materials and are carried at
the lower of cost or market. Cost of inventories is determined by the first-in,
first-out method.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, which principally range from three to seven years for
property and equipment and 30 to 40 years for buildings. Assets under capital
leases and leasehold improvements are amortized over the lesser of the lease
term or the asset's estimated useful life. Property and equipment also include
external and incremental internal costs incurred to develop major business
systems. Capitalized software costs are amortized on a straight-line basis over
three to five years.
Excess Cost of Net Assets Acquired: Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred taxes have been recorded
to the extent of the difference between the fair value and the tax basis of the
assets acquired and liabilities assumed. The excess of the purchase price over
the fair value of net assets acquired, including the recognition of applicable
deferred taxes, consists of non-compete agreements, customers lists, assembled
workforce and goodwill and is amortized on a straight-line basis over the
estimated useful lives of the assets which range from five to 40 years. The
Company performs a periodic assessment of the recoverability of goodwill based
on estimated future cash flows.
Other Assets: Other assets consist principally of investments in
affordable income housing partnerships, executive savings plan assets and
miscellaneous receivables. Investments in affordable income housing partnerships
are recorded at cost and are subject to an annual assessment as to carrying
value. The executive savings plan is a qualified savings plan offered to Company
executives. Contributions made to the fund by eligible employees are partially
matched by the Company. Withdrawals from the fund by employees are limited to
events specified by the plan document.
Workers' Compensation: The Company is contractually obligated to provide
workers' compensation coverage for its employees and co-employees. The Company
accomplishes this through a combination of various commercial insurance policies
and self insurance programs. The Company records estimated accruals for workers
compensation and health care claims, including estimates for incurred but not
reported claims, based upon review of the claims activity and past experience.
Management believes any differences which may arise between actual settlement of
claims and reserves at June 30, 1997 would not have a material impact on the
Company's financial position.
On July 1, 1997, the Company entered into a three-year contract with a
commercial insurance company for workers' compensation coverage. Under this
program, the Company's rehabilitation segment worksite employees will continue
to be covered under a self insurance program. Third party worksite employees
will be covered under a fixed cost insurance program, which is subject to
certain per incident and aggregate deductibles.
Income Taxes: The Company records deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.
Net Income Per Common Share: Net income per common share has been computed
by dividing net income applicable to common stock by the weighted average number
of common shares outstanding during the year, giving effect to dilutive stock
options.
Recently Issued Accounting Standards: In June, 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No.125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") as amended by the December 1996
37
<PAGE> 40
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
issuance of Statement of Financial Accounting Standards No. 127, "Deferral of
the Effective Date of Certain Provisions of SFAS No. 125" ("SFAS 127"). SFAS
125, as amended, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Management
does not believe the adoption of SFAS 125, as amended, will have a material
effect on the Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128") which the Company is required to adopt no later than the second
quarter of fiscal year 1998. SFAS 128 establishes accounting standards for
computing and presenting earnings per share by replacing the presentation of
weighted shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic earnings per share which excludes dilution ("earnings per
share") and diluted earnings per share which includes the dilutive effect of all
potentially exercisable or convertible stock ("earnings per share assuming
dilution"). Once adopted, SFAS 128 requires restatement of all prior period
earnings per share data.
The following represents the pro forma earnings per share which would be
required with the adoption of SFAS 128 for the three years ended June 30:
<TABLE>
<CAPTION>
PRO FORMA
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per share............................................. $.64 $.24 $.96
Earnings per share assuming dilution........................... .62 .23 .93
</TABLE>
While the effect of adopting SFAS 128 for fiscal years ended June 30, 1997,
1996 and 1995 is not material, Management believes that the effect to the first
quarter of fiscal 1998, once restated, may be material depending upon changes in
the Company's stock price.
2. PROVISION FOR RESTRUCTURE AND OTHER NONRECURRING ITEMS
The following table sets forth the Company's provision for restructure and
other nonrecurring items for the two years in the period ended June 30, 1996.
There were no nonrecurring items in fiscal 1997.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Productivity and cost reduction programs:
Employee severance costs..................................... $ 2,931 $ 7,042
Lease terminations........................................... 4,032 6,847
Asset write-offs, net of estimated sale proceeds............. 5,965 15,415
Other........................................................ 442 571
Gain on sale of medical rehabilitation hospitals............... -- (88,243)
Settlement of shareholder litigation........................... -- 1,000
-------- --------
$ 13,370 $(57,368)
======== ========
</TABLE>
At June 30, 1997, approximately $5,286 remained accrued for the
productivity and cost reduction programs initiated in fiscal 1996 and 1995. The
1996 productivity and cost reduction programs pertained to the consolidation and
reorganization of the Company's outpatient and O&P operations and certain
administrative functions. The 1995 program consisted of closing certain contract
rehabilitation offices, O&P branches, and outpatient centers in selected markets
and the consolidation of certain finance and other administrative
38
<PAGE> 41
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
functions. These programs are substantially complete. Of the amount accrued,
approximately $4,232 relates to the fiscal 1996 provision for restructure. The
remainder relates to the fiscal 1995 provision for restructure. The amounts
accrued at June 30, 1997, for both programs combined, relate primarily to lease
obligations on facilities which have been closed and the costs associated with
the closure of certain facilities which were sold in conjunction with the
restructure.
Effective April 1, 1995, the Company sold its medical rehabilitation
hospitals for $242,888 which consisted of cash of $232,394, debt of $19,156, and
cash assumed by the purchaser of $8,662, respectively. Of the cash portion of
the purchase price, $16,894 was unpaid at June 30, 1995 and was included as a
component of other current assets. Substantially all of this amount was received
in July 1995. Had the sale of the medical rehabilitation hospitals taken place
on July 1, 1994, pro forma unaudited net revenues for the fiscal year ended June
30, 1995 would have been $794,716 and pro forma unaudited income from operations
would have been $40,504.
3. ACQUISITION AND JOINT VENTURE TRANSACTIONS
During the year ended June 30, 1997, the Company acquired 52 outpatient
businesses, including 33 which provide O&P rehabilitation services, and 19 which
provide outpatient rehabilitation services. The Company also acquired three
businesses, which provide occupational health services, and four professional
employer organizations ("PEO"). During fiscal year 1996, the Company acquired
seven businesses which provide outpatient rehabilitation services and six
businesses which provide orthotic and prosthetic rehabilitation services.
The Company entered into two joint ventures in fiscal 1996. The carrying
value of these investments is $12,719 and $11,984 at June 30, 1997 and 1996,
respectively. The Company accounts for investments in joint ventures by the
equity method.
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:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net revenues................................................ $1,276,251 $1,217,419
Net income.................................................. 43,057 27,833
Net income per common share................................. $ .68 $ .43
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisition 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
was as follows (the allocation for fiscal 1997 acquisitions is preliminary):
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Excess cost of net assets acquired............................. $618,781 $391,324
Less: accumulated amortization................................. (50,754) (37,207)
-------- --------
$568,027 $354,117
======== ========
</TABLE>
39
<PAGE> 42
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Cash paid (net of cash acquired)............................. $149,147 $ 5,850
Deferred purchase price obligations.......................... 19,294 --
Notes issued................................................. 44,275 990
Other consideration.......................................... 4,781 19
-------- --------
217,497 6,859
Liabilities assumed.......................................... 11,685 617
-------- --------
229,182 7,476
Fair value of assets acquired, principally accounts
receivable and property and equipment...................... 19,501 1,430
-------- --------
Cost in excess of fair value of net assets acquired........ $209,681 $ 6,046
======== ========
</TABLE>
Certain purchase agreements require additional payments if specific
financial targets and non-financial conditions are met. Aggregate contingent
payments in connection with these acquisitions at June 30, 1997 of approximately
$42,112 in cash and 162 shares of common stock have not been included in the
initial determination of cost of the businesses acquired since the amount of
such contingent consideration, if any, is not presently determinable. During the
fiscal years ended June 30, 1997, 1996 and 1995, the Company paid $15,223,
$14,914 and $10,830, respectively, in cash and issued 344, 619 and 975 shares of
common stock, respectively, in connection with businesses acquired in prior
years.
Deferred purchase price obligations represent guaranteed purchase price
amounts due to former owners of four businesses acquired. Obligations of $19,233
remained accrued at June 30, 1997, and are included in accounts payable and
accrued expenses. Approximately $17,500 of the total amount, is due upon the
earlier of the initial public offering of a NovaCare, Inc. subsidiary's,
NovaCare Employee Services, Inc., common stock or December 31, 1997.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Materials and supplies....................................... $ 12,569 $ 9,730
Work in process.............................................. 4,509 3,355
Finished goods............................................... 1,372 863
-------- --------
$ 18,450 $ 13,948
======== ========
</TABLE>
40
<PAGE> 43
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------
1997 1996
-------- -------
<S> <C> <C>
Land and buildings.............................................. $ 3,983 $ 3,573
Property, equipment and furniture............................... 84,733 65,401
Capitalized software............................................ 31,792 31,515
Leasehold improvements.......................................... 20,559 15,124
------- -------
141,067 115,613
Less: accumulated depreciation and amortization................. (71,327) (52,294)
------- -------
$ 69,740 $63,319
======= =======
</TABLE>
Depreciation expense, including depreciation of property under capital
lease, for fiscal 1997, 1996, 1995 was $24,430, $23,285, and $19,253,
respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------
1997 1996
-------- -------
<S> <C> <C>
Accounts payable................................................ $ 13,647 $ 8,026
Accrued compensation and benefits............................... 65,564 44,610
Deferred and contingent purchase price obligations (Note 3)..... 25,624 --
Accrued workers' compensation and health claims................. 8,471 6,862
Accrued costs of productivity and cost improvement programs
(Note 2)...................................................... 5,286 8,241
Accrued interest................................................ 1,002 4,868
Other........................................................... 15,678 21,247
-------- -------
$135,272 $93,854
======== =======
</TABLE>
The Company is self-insured for certain health benefits up to $150 per
individual per year. The Company expensed amounts for estimated losses occurring
from both asserted and unasserted claims. The estimate of the liability for
unasserted claims arising from unreported incidents is based on an analysis of
historical claims rates.
41
<PAGE> 44
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Convertible subordinated debentures (5.5%), due January 2000... $175,000 $175,000
$190,000 revolving credit facility (EuroDollar rate plus 0.5%
to 1.125%), due November 28, 1999............................ 109,600 --
Subordinated promissory notes (5% to 10%), payable through
2007......................................................... 56,859 15,516
Notes (7.0% to 7.5%), payable through November 2000............ 456 172
Capitalized lease obligations, payable through 2016............ 763 1,527
-------- --------
342,678 192,215
Less: current portion.......................................... 15,978 8,173
-------- --------
$326,700 $184,042
======== ========
</TABLE>
The Company established a revolving credit facility with a syndicate of
lenders in fiscal 1996, which is collateralized by substantially all of the
Company's subsidiaries' common stock. During fiscal 1997, the credit agreement
was amended to extend the term of the agreement from November 1997 to November
1999 and to increase the available line of credit from $150,000 to $190,000. As
of June 30, 1997, $72,737 of the line of credit was available after reduction
for borrowings and letters of credit totaling $7,663. The revolving credit
facility arrangement requires the maintenance of minimum working capital and net
worth amounts as well as certain financial ratios. At June 30, 1997, the Company
was in compliance with these requirements. The Company is charged a commitment
fee of .25% per annum on the average daily available balance. The weighted
average borrowing rate for fiscal 1997 was 6.94%.
The Company has issued $175,000 of convertible subordinated debentures due
January 15, 2000, priced at par to yield 5.5%. The debentures are convertible,
at the option of the holder, into shares of the Company's common stock at a
conversion price of $26.65 per share. The debentures are redeemable, in whole or
in part, at the option of the Company. There is no sinking fund applicable to
the debentures.
The fair value of the Company's convertible subordinated debentures based
on quoted market prices at June 30, 1997 and 1996 was $164,500 and $154,875,
respectively. The estimated fair value of all other debt and financing
arrangements approximates carrying value.
At June 30, 1997, aggregate annual maturities of financing arrangements
were as follows for the next five fiscal years and thereafter:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998.............................................................. $ 15,978
1999.............................................................. 13,820
2000.............................................................. 295,875
2001.............................................................. 8,314
2002.............................................................. 5,609
Thereafter........................................................ 3,082
--------
$342,678
========
</TABLE>
Interest paid on debt during fiscal 1997, 1996 and 1995 amounted to
$18,120, $11,730 and $20,377, respectively.
42
<PAGE> 45
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LEASES
The Company is obligated under capital leases for office space and office,
transportation and therapy equipment. All other capital leases expire over the
next five years.
Included in property and equipment in the accompanying Consolidated Balance
Sheets are the following assets held under capital leases:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Property and equipment................................... $ 3,316 $ 3,196
Less: accumulated amortization........................... (2,497) (1,605)
------- -------
$ 819 $ 1,591
======= =======
</TABLE>
The Company also rents office space and office, transportation and therapy
equipment under non-cancelable operating leases. In an effort to leverage its
purchasing power with lessors, the Company has leased and concurrently subleased
certain office space to companies which are controlled by the Company's
Chairman. The Company is fully reimbursed for its lease costs for the
aforementioned office space under non-cancelable sublease agreements.
Future minimum lease commitments for all non-cancelable leases as of June
30, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUB-LEASE
FISCAL YEAR LEASES LEASES RECEIVABLES
--------------------------------------------------------- ------- --------- -----------
<S> <C> <C> <C>
1998..................................................... $ 518 $27,965 $ 1,135
1999..................................................... 172 23,725 731
2000..................................................... 34 18,202 395
2001..................................................... 17 12,856 175
2002..................................................... 9 8,173 142
Thereafter............................................... 123 7,393 83
------- ------- --------
Total minimum lease payments............................. 873 $98,314 $ 2,661
======= ========
Less: amount representing interest....................... (110)
-------
Present value of minimum payments under capital lease
obligations............................................ $ 763
=======
</TABLE>
43
<PAGE> 46
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $17,757 $ 8,048 $53,258
State................................................... 4,117 2,906 11,927
------- ------- -------
21,874 10,954 65,185
------- ------- -------
Deferred:
Federal................................................. 5,470 3,301 (1,182)
State................................................... 547 330 (343)
------- ------- -------
6,017 3,631 (1,525)
------- ------- -------
$27,891 $14,585 $63,660
======= ======= =======
</TABLE>
The components of net deferred tax assets as of June 30, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Accruals and reserves not currently deductible for tax purposes... $ 12,557 $10,484
Restructuring reserve............................................. 3,232 6,043
Other............................................................. 720 680
--------- --------
Gross deferred tax assets....................................... 16,509 17,207
--------- --------
Expenses capitalized for financial statement purposes............. (9,828) (6,274)
Depreciation and capital leases................................... (3,586) (2,589)
Other, net........................................................ (1,365) (762)
--------- --------
Gross deferred tax liabilities.................................. (14,779) (9,625)
--------- --------
Net deferred tax asset.......................................... $ 1,730 $ 7,582
========= ========
</TABLE>
The reconciliation of the expected tax expense (computed by applying the
federal statutory tax rate to income before income taxes) to actual tax expense
was as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected federal income tax expense....................... $23,380 $10,453 $43,954
State income taxes, less federal benefit.................. 3,244 2,108 7,530
Non-deductible nonrecurring items......................... 549 1,027 9,178
Non-deductible amortization of excess cost of net assets
acquired................................................ 2,974 2,011 2,370
Dividend exclusion and non-taxable interest income........ 59 (395) (401)
Other, net................................................ (2,315) (619) 1,029
------- ------- -------
$27,891 $14,585 $63,660
======= ======= =======
</TABLE>
Income taxes paid during fiscal 1997, 1996 and 1995 amounted to $21,981,
$38,699 and $37,604, respectively.
44
<PAGE> 47
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. MINORITY INTEREST
Minority interest resulted from investments in the following entities:
<TABLE>
<CAPTION>
AS OF JUNE
30,
-------------
1997 1996
------ ----
<S> <C> <C>
NovaCare Employee Services, Inc..................................... $3,334 --
All other entities.................................................. 315 772
------ -----
$3,649 $772
====== =====
</TABLE>
During fiscal 1997, one of the Company's consolidated subsidiaries,
NovaCare Employee Services, Inc., issued equity instruments on its own behalf.
The Company recognizes a minority interest liability for NovaCare Employee
Services, Inc. equity issued to third party investors plus the portion of
NovaCare Employee Services, Inc.'s net income attributable to those investors.
11. BENEFIT PLANS
Stock Option Plan:
The Company's stock option plan, as amended, provides for issuance of
options to purchase up to 5,800 shares of common stock to employees, officers
and directors. Under the plan, substantially all options are granted for a term
of up to 10 years at prices equal to the fair market value at the date of grant.
In May 1996, the Board approved an option exchange whereby option holders
were allowed to acquire new options to purchase shares of common stock in
exchange for the surrender by such option holders of certain existing options
under the plan. The exchange formula took into account the vesting schedule and
exercise price of the surrendered options. Under the exchange program, 1,157
options were surrendered and 888 new options were granted. The options granted
as a result of the exchange vest over 5 years, although vesting can be
accelerated if the Company's stock price achieves certain levels.
The following summarizes the activity of the stock option plan:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year....... 3,188 2,649 2,771
Granted................................ 551 2,592 1,162
Exercised.............................. (364) (71) (77)
Canceled............................... (475) (1,982) (1,207)
----------- ----------- -----------
Outstanding at end of year............. 2,900 3,188 2,649
=========== =========== ===========
Option price per share ranges:
Outstanding at beginning of year....... $ .09-$20.58 $ .09-$21.00 $ .09-$23.50
Granted................................ 7.38- 13.38 5.75- 7.50 7.25- 13.00
Exercised.............................. .09- 10.63 .09- 9.13 .09- 14.38
Canceled............................... 2.00- 16.50 .12- 20.58 .12- 20.58
Outstanding at end of year............. $ .09-$20.58 $ .12-$20.58 $ .09-$21.00
Options exercisable at end of year....... 1,464 363 1,109
Exercisable option price ranges.......... $ .09-$20.58 $ .09-$20.58 $ .09-$21.00
Options available for grant at end of
year under stock option plan........... 1,034 982 1,601
</TABLE>
45
<PAGE> 48
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Other Stock Option Awards:
During 1997, the Board decided, subject to shareholder approval, to grant
to the President of the Company 850 options to purchase the Company's common
stock at an exercise price equal to the fair market value on the grant date.
During May 1996, the Board also decided, subject to shareholder approval,
to offer certain officers of the Company a modified exchange. Under the modified
exchange, the Chairman received fewer options than would have been warranted
under the Black-Scholes formula while the Chief Executive Officer was offered an
exchange and additional options, resulting in a net reduction of outstanding
options of 909. The new options were at the same price and with the same vesting
term as the options issued pursuant to the exchange described above, except that
3,317 options of the 3,500 total options issued have a seven year term.
The following summarizes the other stock option award activity:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year...... 3,554 4,704 4,708
Granted............................... 850 3,500 --
Exercised............................. -- -- (4)
Canceled.............................. -- (4,650) --
------------ ------------- ------------
Outstanding at end of year............ 4,404 3,554 4,704
============ ============= ============
Option price per share:
Outstanding at beginning of year...... $ 2.25-$6.88 $ 2.25-$19.50 $2.25-$19.50
Granted............................... 10.88 6.88 --
Exercised............................. -- -- 2.25
Canceled.............................. -- 10.44-19.50 --
Outstanding at end of year............ $2.25-$10.88 $ 2.25-$6.88 $2.25-$19.50
Options exercisable at end of year...... 2,254 54 1,914
Exercisable option price ranges......... $2.25-$10.88 $ 2.25-$4.88 $2.25-$19.50
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the plans. The table below sets forth the proforma information as if the Company
had adopted the compensation recognition provisions of SFAS 123:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C> <C>
Decrease to:
Net income............................ $5,268 $1,585
Net income per common share........... $ .08 $ .02
Assumptions:
Expected life (years)................. 1.6 1.6
Risk-free interest rate............... 4.2%-7.8% 4.2%-7.8%
Volatility............................ 43.93% 59.01%
Dividend yield........................ N/A N/A
</TABLE>
46
<PAGE> 49
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The weighted average fair value per share of the stock options, calculated
using the Black-Scholes option pricing model, granted during the fiscal year
ended June 30, 1997 and 1996 is $10.59 and $6.76, respectively. The remaining
contractual life of all options granted as of June 30, 1997 is 7.29 years.
Deferred Compensation:
Deferred compensation represents common stock issued to certain key
employees wherein the recipient becomes fully vested at the end of a five-year
period. Compensation expense is charged to income over the vesting period.
Retirement Plans:
The Company has defined contribution 401(k) plans covering substantially
all of its employees. Company contributions for fiscal 1997, 1996 and 1995 were
$3,916, $3,634, and $3,878, respectively. The Company established a
non-qualified supplemental benefit plan covering certain key employees. The
Company's matching contribution was $224, $582 and $302 for fiscal 1997, 1996
and 1995, respectively.
12. FINANCIAL DATA BY BUSINESS SEGMENT
Beginning in the second quarter of fiscal 1997, the Company operates in two
service industries, rehabilitation services and employee services as described
in Note 1 -- Nature of Operations.
Income from operations by business segment is total net revenues less
operating expenses. In computing operating profit by business segment, none of
the following items has been added or deducted: other income, interest expense
or income taxes. Identifiable assets by segment are those assets that are used
in the Company's operations in each industry.
Employee services revenues and the related costs of wages, salaries, and
employment taxes pertaining to worksite employees are recognized in the period
in which the employee performs the services. Because the Company is at risk for
all of its direct costs, independently of whether payment is received from its
clients, and consistent with industry practice, all amounts billed to clients
for gross salaries and wages, related employment taxes, and health care and
workers' compensation coverage are recognized as revenue by the Company.
The Company's rehabilitation services segment is a client of the employee
services segment, resulting in the net revenues and asset eliminations.
47
<PAGE> 50
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating results and other financial data are presented for the principal
business segments of the Company as follows:
<TABLE>
<CAPTION>
REHABILITATION EMPLOYEE
SERVICES SERVICES ELIMINATION CONSOLIDATED
-------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Net revenues............................. $927,547 $394,193 $ (255,289) $ 1,066,451
Income from operations................... 77,610 2,931 -- 80,541
Depreciation expense..................... 24,265 165 -- 24,430
Net capital expenditures................. 21,324 329 -- 21,653
AS OF JUNE 30, 1997
Assets................................... $945,653 $ 95,998 $ (27,347) $ 1,014,304
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of Management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the financial position or results of operations of
the Company.
14. SHAREHOLDER RIGHTS PLAN
Under the terms of a Shareholder Rights Plan adopted in 1995, the Company's
Board of Directors declared a dividend distribution of one right for each
outstanding common share. The rights may not be exercised or traded apart from
the common shares to which they are attached until 10 days after a person or
group has acquired, obtained the right to acquire, or commenced a tender offer
for, at least 20% of the Company's outstanding common shares. In such event,
each right will become exercisable for one common share at a price of $27. If a
person or group acquires, or obtains the right to acquire, 20% or more of the
Company's outstanding common shares, each right will become exercisable for
common shares worth $54 and the rights held by the acquiror will become null and
void. If the Company is involved in a merger and its common shares are changed
or exchanged, or if more than 50% of its assets or earnings power is sold or
transferred, each right will become exercisable for common stock of the acquiror
worth $54. The rights will expire on March 20, 2000 unless earlier redeemed by
the Company for $.001 per right. Subject to its right to extend the redemption
period, the Company may redeem the rights at any time until any person or group
has acquired, or obtained the right to acquire, at least 20% of the Company's
outstanding common shares.
15. SUBSEQUENT EVENTS
One of the Company's subsidiaries, NovaCare Employee Services, Inc.
("NCES") plans to file a registration statement with the Securities and Exchange
Commission to register for the sale of up to 4,500 shares of its common stock.
NCES intends to use the net proceeds of the offering to satisfy $17,500 of
deferred purchase price obligations incurred in connection with NCES
acquisitions. The remaining net proceeds will be used for expansion of the NCES
operations, including further penetration of existing markets, and as
opportunities arise, to expand the NCES's client base in new or existing markets
through acquisitions, and to pay down debt under the Company's credit facility.
48
<PAGE> 51
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Net revenues................................ $331,555 $290,454 $235,012 $209,430
Gross profit................................ 73,957 69,439 60,911 55,779
Income from operations...................... 25,506 21,222 18,795 15,018
Net income.................................. 12,057 10,093 9,216 7,544
Net income per common share................. $ .19 $ .16 $ .15 $ .12
YEAR ENDED JUNE 30, 1996:
Net revenues................................ $202,551 $191,393 $200,957 $198,137
Gross profit................................ 55,018 42,972 55,209 54,883
Income from operations...................... 16,428 (9,549) 15,123 15,497
Net income (loss)........................... 8,411 (8,580) 7,447 8,003
Net income (loss) per common share.......... $ .13 $ (.13) $ .12 $ .12
</TABLE>
Results from the third quarter of fiscal 1996 included a $13,370 provision
for restructure and a $10,462 charge to fully reflect payer allowances that had
not been sufficiently recognized by certain billing systems.
49
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NovaCare, Inc.
In our opinion, the consolidated financial statements listed under Item
14(a)(1) and (2) on page 51 present fairly, in all material respects, the
financial position of NovaCare, Inc. and its subsidiaries at June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
July 31, 1997
50
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Registrant has had no changes in or disagreements with accountants on
accounting and financial disclosure of the type referred to in Item 304 of
Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1 -- Business -- Executive
Officers of the Registrant" and the table and text under the caption "Name of
Nominee and Biographical Information" and "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Proxy Statement to be filed with respect to the
1997 annual meeting of shareholders to be held on October 30, 1997 (the "Proxy
Statement"), which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the table and text under the
captions "Compensation of Executive Officers of the Company", "Compensation of
Directors of NovaCare", "Compensation Committee Interlocks and Insider
Participation" and "Employment Agreements" of the Proxy Statement, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, see the table and text under the
captions "Shares of Common Stock Owned Beneficially as of August 31, 1997" and
"Information Concerning Certain Stockholders" of the Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the text under the caption
"Certain Transactions" of the Proxy Statement, which information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
(1) FINANCIAL STATEMENTS:
Consolidated Balance Sheets at June 30, 1997 and 1996................ 32
Consolidated Statements of Operations for the three years ended June
30, 1997............................................................. 33
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended June 30, 1997...................................... 34
Consolidated Statements of Cash Flows for the three years ended June
30, 1997............................................................. 35
Notes to Consolidated Financial Statements........................... 36
Report of Independent Accountants.................................... 50
(2) FINANCIAL STATEMENT SCHEDULES:
II -- Valuation and Qualifying Accounts for each of the three years
in the period ended June 30, 1997.................................... 53
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K):
The exhibits required to be filed are listed in the index to
exhibits............................................................. 54
</TABLE>
(b) Current Reports on Form 8-K: (None)
51
<PAGE> 54
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoint
John H. Foster and Timothy E. Foster as attorneys-in-fact with full power of
substitution, severally, to execute in the name and on behalf of the Registrant
and each such person, individually and in each capacity stated below, one or
more amendments to the annual report which amendments may make such changes in
the report as the attorney-in-fact acting in the premises deems appropriate and
to file any such amendment to the report with the Securities and Exchange
Commission.
------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NOVACARE, INC.
By: /s/ ROBERT E. HEALY, JR.
------------------------------------
(ROBERT E. HEALY, JR.,
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION
AND CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------------ -------------------
<C> <S> <C>
/s/ JOHN H. FOSTER Chairman of the Board and Director September 19, 1997
- -----------------------------------------------
(JOHN H. FOSTER)
/s/ TIMOTHY E. FOSTER Chief Executive Officer and Director September 19, 1997
- -----------------------------------------------
(TIMOTHY E. FOSTER)
/s/ JAMES W. MCLANE President, Chief Operating Officer September 19, 1997
- ----------------------------------------------- and Director
(JAMES W. MCLANE)
/s/ ROBERT E. HEALY, JR. Senior Vice President, Finance and September 19, 1997
- ----------------------------------------------- Administration and Chief Financial
(ROBERT E. HEALY, JR.) Officer
/s/ BARRY E. SMITH Vice President, Controller and Chief September 19, 1997
- ----------------------------------------------- Accounting Officer
(BARRY E. SMITH)
/s/ E. MARTIN GIBSON Director September 19, 1997
- -----------------------------------------------
(E. MARTIN GIBSON)
/s/ SIRI S. MARSHALL Director September 19, 1997
- -----------------------------------------------
(SIRI S. MARSHALL)
/s/ STEPHEN E. O'NEIL Director September 19, 1997
- -----------------------------------------------
(STEPHEN E. O'NEIL)
/s/ GEORGE W. SIGULER Director September 19, 1997
- -----------------------------------------------
(GEORGE W. SIGULER)
/s/ ROBERT G. STONE, JR. Director September 19, 1997
- -----------------------------------------------
(ROBERT G. STONE, JR.)
/s/ DANIEL C. TOSTESON, M.D. Director September 19, 1997
- -----------------------------------------------
(DANIEL C. TOSTESON, M.D.)
</TABLE>
52
<PAGE> 55
SCHEDULE II
NOVACARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
- ----------------------------------------- ---------- ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for uncollectible accounts... $ 12,751 19,708 11,295(1) (13,207) $ 30,547
Allowance for Medicare denials and
other allowances.................... $ 6,244 -- 8,270(2) (11,798) $ 2,716
Year ended June 30, 1996:
Allowance for uncollectible accounts... $ 16,023 16,359 1,187(1) (20,818) $ 12,751
Allowance for Medicare denials and
other allowances.................... $ 3,695 -- 9,018(2) (6,469) $ 6,244
Year ended June 30, 1995:
Allowance for uncollectible accounts... $ 17,692 15,918 643(1) (18,230) $ 16,023
Allowance for Medicare denials and
other allowances.................... $ 15,039 -- 5,887(2) (17,231) $ 3,695
</TABLE>
- ---------------
(1) Allowances for doubtful accounts related to acquired receivables.
(2) Charged against net revenues.
53
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
3(a)* Certificate of Incorporation of the Company, as amended to date --
(incorporated by reference to Exhibit 3(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1992).
3(b) By-laws of the Company, as amended to date (incorporated by reference --
to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
4(a) Stock Option Plan, as amended to date.
4(b)* Form of Indenture dated as of January 15, 1993 between the Company and --
Pittsburgh National Bank relating to 5 1/2% Convertible Subordinated
Debentures Due 2000 (incorporated by reference to Exhibit 4 to
Registration Statement on Form S-3 No. 33-55710).
4(c) Rights Agreement dated as of March 9, 1995 by and between NovaCare, --
Inc. and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 99(a) to the Company's current
report on Form 8-K dated March 14, 1995).
10(a) (i) Employment Agreement dated as of July 1, 1994 between the Company --
and John H. Foster (incorporated by reference to Exhibit 10(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995).
(ii) Amendment dated February 2, 1995 to the employment agreement dated --
as of July 1, 1994 between the Company and John H. Foster (incorporated
by reference to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995).
10(b) Employment Agreement dated as of January 6, 1995 between the Company --
and Daryl A. Dixon and Promissory Note of Daryl A. Dixon in favor of
the Company dated January 6, 1995 (incorporated by reference to Exhibit
10(i) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1995).
10(c) Employment agreement dated as of January 24, 1996 between the Company --
and Ronald G. Hiscock (incorporated by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10(d) Employment agreement dated as of March 17, 1995 between the Company and --
Robert E. Healy, Jr. (incorporated by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended June 30, 1996).
10(e) Employment Agreement dated as of July 1, 1996 between the Company and
Timothy E. Foster.
10(f) Employment agreement dated as of October 9, 1996 between the Company --
and Barry E. Smith (incorporated by reference to Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1997).
10(g) Employment agreement dated as of October 16, 1996 between the Company --
and Aven Kerr (incorporated by reference to Exhibit 10(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996).
10(h) Employment Agreement dated as of April 14, 1997 between the Company and --
James W. McLane (incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
10(i) Stock Purchase Agreement dated as of May 1, 1997 between NovaCare
Employee Services, Inc. and James W. McLane.
</TABLE>
54
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
10(j) (i) Revolving Credit Facility Agreement dated as of May 27, 1994 by and --
among NovaCare and certain of its subsidiaries and PNC Bank, First
Union National Bank of North Carolina, Mellon Bank, N.A., Nations Bank
of North Carolina, N.A., CoreStates Bank, N.A., and National
Westminster Bank, N.A. (incorporated by reference to Exhibit 10(g) to
the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994).
(ii) Revolving Credit Facility Credit Agreement First Amendment dated --
as of September 20, 1994 by and among NovaCare and certain of its
subsidiaries and PNC Bank, N.A., First Union National Bank of North
Carolina, Mellon Bank, N.A., Nations Bank of North Carolina, N.A.,
CoreStates Bank, N.A., and National Westminster Bank, N.A.
(incorporated by reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994).
(iii) Revolving Credit Facility Agreement Second Amendment dated as of --
November 28, 1994 by and among NovaCare and certain of its subsidiaries
and PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nations Bank of North Carolina, N.A., CoreStates Bank,
N.A., National Westminster Bank, N.A., and Fleet Bank of Massachusetts,
N.A. (incorporated by reference to Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994).
(iv) Revolving Credit Facility Agreement Third Amendment dated as of --
May 15, 1995 by and among NovaCare and certain of its subsidiaries and
PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A. (Carolina), CoreStates Bank, N.A.,
NatWest Bank, N.A., and Fleet Bank of Massachusetts, N.A. (incorporated
by reference to Exhibit 10 (a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
(v) Revolving Credit Facility Agreement Fourth Amendment dated as of --
May 19, 1995 by and among NovaCare and certain of its subsidiaries and
PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A. (Carolina), CoreStates Bank, N.A.,
NatWest Bank, N.A., and Fleet Bank of Massachusetts (incorporated by
reference to Exhibit 10 (a) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
(vi) Revolving Credit Facility Agreement Fifth Amendment dated as of --
June 30, 1996 by and among NovaCare and certain of its subsidiaries and
PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A. (Carolina), CoreStates Bank, N.A., and
Fleet Bank of Massachusetts. (incorporated by reference to Exhibit
10(j)(vi) to the Company's Annual Report on Form 10-K for the year
ended June 30, 1996).
(vii) Revolving Credit Facility Agreement Sixth Amendment dated as of --
June 30, 1996 by and among NovaCare and certain of its subsidiaries and
PNC Bank, N.A., CoreStates Bank, N.A., First Union National Bank of
North Carolina, Fleet Bank of Massachusetts, N.A., Mellon Bank, N.A.
and Nationsbank, N.A. (incorporated by reference to Exhibit 10(j)(vii)
to the Company's Annual Report on Form 10-K for the year ended June 30,
1996).
(viii) Revolving Credit Facility Agreement Seventh Amendment dated as --
of November 4, 1996 by and among NovaCare and certain of its
subsidiaries and PNC Bank, N.A., First Union National Bank of North
Carolina, Mellon Bank, N.A., Nationsbank, N.A. (Carolina), CoreStates
Bank, N.A., and Fleet Bank of Massachusetts, N.A. (incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).
(ix) Revolving Credit Facility Agreement Eighth Amendment dated as of
January 30, 1997 by and among NovaCare and certain of its subsidiaries
and PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A., CoreStates Bank, N.A., Fleet Bank of
Massachusetts, N.A., The Bank of New York, and SunTrust Bank (Central
Florida), N.A.
</TABLE>
55
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
(x) Revolving Credit Facility Agreement Ninth Amendment dated as of
January 30, 1997 by and among NovaCare and certain of its subsidiaries
and PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A., CoreStates Bank, N.A., Fleet Bank of
Massachusetts, N.A., The Bank of New York, and SunTrust Bank (Central
Florida), N.A.
(xi) Revolving Credit Facility Agreement Tenth Amendment dated as of
March 31, 1997 by and among NovaCare and certain of its subsidiaries
and PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A., CoreStates Bank, N.A., Fleet National
Bank, The Bank of New York, and SunTrust Bank (Central Florida), N.A.
(xii) Revolving Credit Facility Agreement Eleventh Amendment dated as
of June 27, 1997 by and among NovaCare and certain of its subsidiaries
and PNC Bank, N.A., First Union National Bank of North Carolina, Mellon
Bank, N.A., Nationsbank, N.A., CoreStates Bank, N.A., Fleet National
Bank, The Bank of New York, SunTrust Bank (Central Florida), N.A., and
Bank One (Kentucky), N.A.
10(k) Supplemental Benefits Plan as amended to date.
13 Annual Report to Shareholders for the fiscal year ended June 30, 1997.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Power of Attorney (see "Power of Attorney" in Form 10-K). --
27 Financial Data Schedules.
</TABLE>
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for distribution
to shareholders of the Company. The Company will furnish a copy of any of such
exhibits to any stockholder requesting the same.
Exhibits denoted by an asterisk were filed prior to the Company's adoption
of filing via EDGAR.
56
<PAGE> 1
EXHIBIT 4(a)
NOVACARE, INC.
1986 Stock Option Plan
(as amended October 31, 1996)
1. Purposes of Plan. The purposes of this Plan, which
shall be known as the 1986 Stock Option Plan and is hereinafter referred to as
the "Plan", are (i) to provide incentives for key employees of NovaCare, Inc.
(the "Company") and its subsidiary or parent corporations (within the
respective meanings of Section 425(f) and 425(e) of the Internal Revenue Code
of 1986, as amended (the "Code"), and referred to herein as "Subsidiary" and
"Parent", respectively) by encouraging their ownership of the common stock,
$.01 par value, of the Company (the "Stock") and (ii) to aid the Company in
retaining such key employees, upon whose efforts the Company's success and
future growth depends, and attracting other such employees.
2. Administration. The Plan shall be administered by
the Stock Option Committee (the "Committee") of the Board of Directors, as
hereinafter provided. For purposes of administration, the Committee, subject
to the
<PAGE> 2
2
terms of the Plan, shall have plenary authority to establish such rules and
regulations, make such determinations and interpretations, and take such other
administrative actions as it deems necessary or advisable. All determinations
and interpretations made by the Committee shall be final, conclusive and
binding on all persons, including Optionees (as hereinafter defined) and their
legal representatives and beneficiaries.
The Committee shall be appointed from time to time by the
Board of Directors and shall consist of not fewer than three of its members.
Unless otherwise determined by the Board of Directors, no member of the Board
of Directors who serves on the Committee shall be eligible to participate in
the Plan. The Board of Directors shall designate one of the members of the
Committee as its Chairman. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and signed by all
members shall be as effective as if it had been made by a majority vote at a
<PAGE> 3
3
meeting duly called and held. The Committee may appoint a secretary (who need
not be a member of the Committee). No member of the Committee shall be liable
for any act or omission with respect to his service on the Committee, if he
acts in good faith and in a manner he reasonably believes to be in or not
opposed to the best interests of the Company. Service on the Committee shall
constitute service as a director of the Company for all purposes.
3. Stock Available for Options. There shall be
available for options under the Plan a total of 5,800,000 shares of Stock,
subject to any adjustments which may be made pursuant to Section 5(f). Shares
of Stock used for purposes of the Plan may be either authorized and unissued
shares, or previously issued shares held in the treasury of the Company, or
both. Shares of Stock covered by options which have terminated or expired
prior to exercise shall be available for further options hereunder.
4. Eligibility. Options under the Plan may be granted
to key employees of the Company or any Subsidiary or Parent, including officers
or directors of the Company or any Subsidiary or Parent. Options may be
granted to
<PAGE> 4
4
eligible employees whether or not they hold or have held options previously
granted under the Plan or otherwise granted or assumed by the Company. In
selecting employees for options, the Committee may take into consideration any
factors it may deem relevant, including its estimate of the employee's present
and potential contributions to the success of the Company and its Subsidiaries.
Service as a director or officer of the Company or any Parent or Subsidiary
shall be considered employment for purposes of the Plan. In the event the
Company becomes obligated to grant options, through the assumption of, or in
substitution for, outstanding awards previously granted by an acquired company
or a company with which the Company combines, options may be granted to a
non-continuing director of such acquired or combining company who does not
become an employee or director of the Company or any Subsidiary or Parent.
5. Terms and Conditions of Options. The Committee
shall, in its discretion, prescribe the terms and conditions of the options to
be granted hereunder, which
<PAGE> 5
5
terms and conditions need not be the same in each case, subject to the
following:
(a) Option Price. Except in the case of an
option granted in assumption of or substitution for an outstanding award of a
company acquired by the Company or with which the Company combines, the price
at which each share of Stock covered by an option granted under the Plan may be
purchased shall be determined by the Committee and shall not be less than the
market value per share of Stock on the date of grant of an option as determined
pursuant to Section 5(c). The date of the grant of an option shall be the date
specified by the Committee in its grant of the option.
(b) Option Period. The period for exercise of an
option shall in no event be more than ten years from the date of grant.
Options may, in the discretion of the Committee, be made exercisable in
installments during the option period. Any shares not purchased on any
applicable installment date may be purchased thereafter at any time before the
expiration of the option period.
<PAGE> 6
6
(c) Exercise of Options. In order to exercise an
option, the holder thereof (the "Optionee") shall deliver to the Company
written notice specifying the number of shares of Stock to be purchased,
together with cash or a certified or bank cashier's check payable to the order
of the Company in the full amount of the purchase price therefor; provided
that, for the purpose of assisting an Optionee to exercise an option, the
Company may make loans to the Optionee or guarantee loans made by third parties
to the Optionee, on such terms and conditions as the Board of Directors may
authorize; and provided further that such purchase price may be paid in shares
of Stock owned by the Optionee having a market value on the date of exercise
equal to the aggregate purchase price, or in a combination of cash and Stock.
For purposes of the Plan, the market value per share of Stock shall be the last
sale price regular way on the date of reference, or, in case no sale takes
place on such date, the average of the closing high bid and low asked prices
regular way, in either case on the principal national securities exchange on
which the Stock is listed or admitted to trading, or if the Stock is not listed
<PAGE> 7
7
or admitted to trading on any national securities exchange, the last sale price
reported on the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") on such date, or the
average of the closing high bid and low asked prices of the Stock in the
over-the-counter market reported on NASDAQ on such date, whichever is
applicable, or if there are no such prices reported on NASDAQ on such date, as
furnished to the Committee by any New York Stock Exchange member selected from
time to time by the Committee for such purpose. If there is no bid or asked
price reported on any such date, the market value shall be determined by the
Committee in accordance with the regulations promulgated under Section 2031 of
the Code, or by any other appropriate method selected by the Committee. If the
Optionee so requests, shares of Stock purchased upon exercise of an option may
be issued in the name of the Optionee or another person. An Optionee shall
have none of the rights of a stockholder until the shares of Stock are issued
to him. An option may not be exercised for less than ten shares of Stock, or
the
<PAGE> 8
8
number of shares of Stock remaining subject to such option, whichever is
smaller.
(d) Effect of Termination of Employment. An
option may not be exercised after the Optionee has ceased to be in the
full-time employ of the Company or any Subsidiary or Parent, except in the
following circumstances:
(i) If the Optionee's employment is terminated by action of
his employer, or by reason of disability or retirement under any
retirement plan maintained by the Company or any Subsidiary or Parent,
the option may be exercised by the Optionee within three months after
such termination, but only as to any shares exercisable on the date the
Optionee's employment so terminates;
(ii) In the event of the death of the Optionee during the
three month period after termination of employment covered by (i) above,
the person or persons to whom his rights are transferred by will or the
laws of descent and distribution shall have a period of one year from
<PAGE> 9
9
the date of his death to exercise any options which were exercisable by
the Optionee at the time of his death;
(iii) In the event of the death of the Optionee while
employed, the option shall thereupon become exercisable in full, and the
person or persons to whom the Optionee's rights are transferred by will
or the laws of descent and distribution shall have a period of one year
from the date of the Optionee's death to exercise such option. The
provisions of the foregoing sentence shall apply to any outstanding
options which are incentive stock options to the extent permitted by
Section 422A(b)(7) of the Code and such outstanding options in excess
thereof shall, immediately upon the occurrence of the event described in
the foregoing sentence, be treated for all purposes of the plan as
nonstatutory stock options and shall be immediately exercisable as such
as provided in the foregoing sentence.
<PAGE> 10
10
(iv) If the Optionee is not an employee or director of the
Company or any Subsidiary or Parent and is a non-continuing director of
a company acquired by the Company or with which the Company has combined
and the Company has become obligated to grant options to such Optionee
as a result of such acquisition or combination.
In no event shall any option be exercisable more than ten years
from the date of grant thereof. Nothing in the Plan or in any option granted
pursuant to the Plan (in the absence of an express provision to the contrary)
shall confer on any individual any right to continue in the employ of the
Company or any Subsidiary or Parent or interfere in any way with the right of
the Company to terminate his employment at any time.
(e) Nontransferability of Options. During the
lifetime of an Optionee, options held by such Optionee shall be exercisable
only by him. No option shall be transferable other than by will or the laws of
descent and distribution.
<PAGE> 11
11
(f) Adjustments for Change in Stock Subject to Plan
and Other Events. In the event of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger, consolidation, rights
offering, or any other change in the corporate structure or shares of the
Company, (i) except as provided in (ii) below, the Committee shall make such
adjustments, if any, as it deems appropriate in the number and kind of shares
subject to the Plan, in the number and kind of shares covered by outstanding
options, or in the option price per share, or both and (ii) the Board of
Directors of the Company shall make such adjustments, if any, as it deems
appropriate in the maximum number of shares which may be subject to options
granted to all directors of the Company and in the maximum number of shares
which may be subject to options granted to each director, in each case
pursuant to Section 5(i), in the number and kind of shares covered by
outstanding options, or in the option price per share, or both, with respect to
options held by directors of the Company.
In connection with any merger or consolidation in which the
Company is not the surviving corporation or any
<PAGE> 12
12
sale or transfer by the Company of all or substantially all of its assets or
any tender offer or exchange offer for or the acquisition, directly or
indirectly, by any person or group of all or a majority of the then outstanding
voting securities of the Company, all outstanding options granted to any
Optionee on or before December 31, 1989 or to a Director during the period of
his directorship at any time before or after December 31, 1989 shall become
exercisable in full, notwithstanding any other provision of the Plan or of any
such outstanding options granted thereunder, on and after (i) the fifteenth day
prior to the effective date of such merger, consolidation, sale, transfer,
acquisition or change in control or (ii) the date of commencement of such
tender offer or exchange offer, as the case may be. The Committee may, in its
sole discretion determine that certain other options granted after December 31,
1989 shall become exercisable in full under such circumstances determined by
the Committee. The provisions of this paragraph shall apply to any outstanding
options which are incentive stock options to the extent permitted by Section
422A(b)(7) of the Code and such outstanding options in excess thereof shall,
<PAGE> 13
13
immediately upon the occurrence of the event described in clause (i) or (ii) of
the foregoing sentence, be treated for all purposes of the Plan as nonstatutory
stock options and shall be immediately exercisable as such as provided in the
foregoing sentence. Notwithstanding the foregoing, in no event shall any
option be exercisable after the date of termination of the exercise period of
such option specified in Sections 5(b), 5(d) and 5(i)(2).
(g) Registration, Listing and Qualification of
Shares of Stock. Each option shall be subject to the requirement that if at
any time the Board of Directors shall determine that the registration, listing
or qualification of the shares of Stock covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of shares of Stock
thereunder, no such option may be exercised unless and until such registration,
listing, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors. The
<PAGE> 14
14
Company may require that any person exercising an option shall make such
representations and agreements and furnish such information as it deems
appropriate to assure compliance with the foregoing or any other applicable
legal requirement.
(h) Other Terms and Conditions. The Committee may
impose such other terms and conditions, not inconsistent with the terms hereof,
on the grant or exercise of options, as it deems advisable.
(i) Terms and Conditions of Options Granted to
Directors. Notwithstanding any provision contained in this Plan to the
contrary, in the event that the Board of Directors shall determine to authorize
grants of options to members of the Committee pursuant to Section 2, then, the
terms and conditions of options granted under the Plan to any director of the
Company shall be as follows:
(1) The price at which each share of Stock subject to an
option may be purchased shall, subject to any adjustments which may be made
pursuant to Section 5(f), in no event be less than the market value per share
of Stock on the date of grant, and provided further that in the event
<PAGE> 15
15
the option is intended to be an incentive stock option pursuant to Section 6
and the Optionee owns on the date of grant securities possessing more than 10%
of the total combined voting power of all classes of securities of the Company
or of any Parent or Subsidiary, the price per share shall not be less than 110%
of the market value per share of Stock on the date of grant.
(2) The option may be exercised to purchase shares of Stock covered
by the option:
A. in accordance with the following schedule:
<TABLE>
<CAPTION>
Cumulative Percentage of Aggregate Number of
Shares of Stock Covered by Option Which May
Exercise Period be Purchased
--------------- -------------------------------------------
<S> <C>
Within 1st year from date
of grant..................... 0%
Beginning one year from date
of grant..................... 33-1/3%
Beginning two years from date
of grant..................... 66-2/3%
Beginning three years from date
of grant..................... 100%
</TABLE>
<PAGE> 16
16
less, in the case of each exercise period, the number of shares of Stock, if
any, previously purchased under the option; or
B. in accordance with a price-triggered vesting schedule
that permits exercise of specific increments of options upon achievement of
identified target prices above the exercise price in accordance with the terms
of similar options approved within ninety days prior to the Directors' option
grant date by the Stock Option Committee for members of the Company's
management.
Any option granted under this subparagraph (i)(2) shall
terminate and no shares of Stock may be purchased thereunder more than ten
years after the date of grant, provided that if the option is intended to be an
incentive stock option pursuant to Section 6 and the Optionee owns on the date
of grant stock possessing more than 10% of the total combined voting power of
all classes of securities of the Company or of any Parent or Subsidiary, the
Option shall not be exercisable after the fifth anniversary of the date of
grant.
<PAGE> 17
17
(3) The maximum number of shares of Stock which may be
subject to options granted to all directors pursuant the Plan shall be
1,750,000 shares in the aggregate and the maximum number of shares of Stock
which may be subject to options granted to any director pursuant to the Plan
(including any options granted under the Plan to a director in his position as
an officer or employee of the Company) shall be 500,000 shares.
6. Provisions Applicable to Incentive Stock Options. The
Committee may, in its discretion, grant options under the Plan to eligible
employees which constitute "incentive stock options" (within the meaning of
Section 422A(b) of the Code), provided, however, that (a) no such incentive
stock options granted before January 1, 1987 shall (i) be exercisable while
there is "outstanding" (within the meaning of Section 422A(c)(7) of the
Internal Revenue Code of 1954) any incentive stock option previously granted to
the holder thereof to purchase Stock of the Company, or of any Parent or
Subsidiary, or of any predecessor of any such corporations, or (ii) cover a
number of shares in excess of the maximum number of shares
<PAGE> 18
18
permitted to be covered pursuant to the provisions of Section 422A(b)(8) of the
Internal Revenue Code of 1954, (b) the aggregate fair market value of the Stock
with respect to which incentive stock options granted after 1986 are
exercisable for the first time by the Optionee during any calendar year shall
not exceed the limitation set forth in Section 422A(b)(7) of the Code, and
provided further that Section 5(d)(ii) hereof shall not apply to any incentive
stock option.
7. Amendment and Termination. Unless the Plan shall
theretofore have been terminated as hereinafter provided, the Plan shall
terminate on, and no option shall be granted hereunder after, December 31,
1996; provided, however, that the Board of Directors may at any time prior to
that date terminate the Plan. The Board of Directors may at any time amend the
Plan; provided, however, that, except as contemplated in Section 5(f), the
Board of Directors shall not, without approval by a majority of the votes cast
by the stockholders of the Company at a meeting of stockholders at which a
proposal to amend the Plan is voted upon, (i) increase the maximum number of
shares of Stock for
<PAGE> 19
19
which options may be granted under the Plan, (ii) change the minimum option
prices, (iii) extend the period during which options may be granted or
exercised, or (iv) except as otherwise provided in the Plan, amend the
requirements as to the class of employees eligible to receive options. No
termination or amendment of the Plan may, without the consent of an Optionee,
adversely affect the rights of such Optionee under any option held by such
Optionee.
8. Effectiveness of Plan. The Plan will not be made
effective unless approved by a majority of the votes cast by the stockholders
of the Company at a meeting of stockholders duly called and held for such
purpose, and no option granted hereunder shall be exercisable prior to such
approval.
9. Other Actions. Nothing contained in the Plan shall be
construed to limit the authority of the Company to exercise its corporate
rights and powers, including but not by way of limitation, the right of the
Company to grant or assume options for proper corporate purposes other than
under the Plan with respect to any employee or other person, firm, corporation
or association.
<PAGE> 20
10. REPRICING. The Board of Directors shall not, without
approval by a majority of the votes cast by the stockholders of the Company at
a meeting of stockholders at which a proposal to reprice options is voted
upon, adjust or amend the exercise price of stock options previously awarded
under the Plan, whether through amendment, cancellation or replacement grants
or any other means.
<PAGE> 1
Exhibit 10(e)
EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of the first day of
July, 1996 by and between NOVACARE, INC., a Delaware corporation (the
"Company"), and TIMOTHY E. FOSTER (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive has served as President and Chief Operating
Officer of the Company since October 1994;
WHEREAS, the Company and the Executive entered into an Employment
Agreement dated as of December 2, 1994; and
WHEREAS, the Company and the Executive wish to amend and restate said
agreement to set forth the terms and conditions on which the Executive will
continue to serve in his current positions.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto hereby agree as follows:
1. EMPLOYMENT, TERM, AUTOMATIC EXTENSION.
1.1 Employment. The Company agrees to employ the Executive, and the
Executive agrees to serve in the employ of the Company, for the term set forth
in Section 1.2, in the positions and with the responsibilities, duties and
authority set forth in Section 2 and on the other terms and conditions set
forth in this Agreement.
1.2 Term. The term of the Executive's employment under this Agreement
shall commence on the date hereof and shall terminate on the third anniversary
of the date hereof, unless extended or sooner terminated in accordance with
this Agreement.
1.3 Automatic Extension. As of June 30, 1998, and as of each subsequent
June 30 (each, an "Automatic Renewal Date"), unless either party shall have
given a notice of non-extension prior to such Automatic Renewal Date, the term
of this Agreement shall be extended automatically for a period of one year to
the anniversary of the expiration date of the then-current term of this
Agreement. Once a notice of non-extension shall have been given by either party,
there shall be no further automatic extension of this Agreement.
<PAGE> 2
2
2. POSITION, DUTIES.
The Executive shall serve in the positions of President and Chief
Operating Officer of the Company. The Executive shall perform, faithfully and
diligently, such duties, and shall have such responsibilities, appropriate to
said positions, as shall be assigned to him from time to time by the Chief
Executive Officer and the Board of Directors of the Company. The Executive shall
report to the Chief Executive Officer of the Company. The Executive shall devote
such time and attention to the performance of his duties and responsibilities
hereunder as shall be necessary for the proper discharge thereof, as determined
by the Chief Executive Officer of the Company.
3. SALARY, INCENTIVE BONUS, STOCK OPTIONS.
3.1 Salary. During the term of this Agreement, in consideration of the
performance by the Executive of the services set forth in Section 2 and his
observance of the other covenants set forth herein, the Company shall pay to
the Executive, and the Executive shall accept, a base salary at the rate of
$500,000 per annum, payable in accordance with the standard payroll practices of
the Company. The Executive shall be entitled to such increases in base salary
during the term hereof as shall be determined by the Chief Executive Officer of
the Company and approved by the Compensation Committee of the Board of Directors
of the Company in their sole discretion, taking account of the performance of
the Company and the Executive, the size of the Company from time to time, and
other factors generally considered relevant to the salaries of officers holding
similar positions with enterprises comparable to the Company. In no event shall
the base salary of the Executive be decreased during the term of this Agreement.
3.2 Incentive Bonuses. (a) In addition to the base salary provided for
in Section 3.1, the Company shall pay to the Executive an incentive bonus with
respect to each fiscal year of the Company ending during the term of this
Agreement in accordance with this Section 3.2. The incentive bonus for each
fiscal year under this Section 3.2 shall be the greater of the amounts
determined under clause (X) or clause (Y):
(X) an amount equal to the product of the Net Income (as hereinafter
defined) of the Company multiplied by the Applicable Percentage (as hereinafter
defined); provided that no incentive bonus shall be payable under this Section
3.2 with
<PAGE> 3
3
respect to a fiscal year in which Net Income is less than ninety percent (90%)
of Budgeted Net Income (as hereinafter defined).
For purposes of this clause (X):
(i) the term "Net Income" shall mean, for any fiscal year of
the Company, the consolidated after-tax profit of the Company and its
wholly-owned subsidiaries for such year, without regard to extraordinary
non-operating profits and losses such as gain from sale of operating units, as
shown in the audited financial statements of the Company for such fiscal year.
In the event of any change in the fiscal year of the Company, appropriate
adjustments shall be made to the provisions of this Section 3.2 in order to
carry out the essential intent and principles of this Section 3.2;
(ii) the term "Applicable Percentage" shall mean one half of
one percent (0.5%) of Net Income for each fiscal year of the Company, beginning
with the fiscal year ending June 30, 1996; provided that in any Fiscal Year in
which Net Income is between 90% and 99% of Budgeted Net Income, the Applicable
Percentage shall be the Applicable Percentage for such Fiscal Year determined
without regard to this proviso multiplied by the "Adjustment Percentage" in the
table below opposite the percentage (rounded down to the nearest complete
percentage point) of Budgeted Net Income attained as Net Income in such Fiscal
Year:
<TABLE>
<CAPTION>
Percentage of Budgeted
Net Income Attained Adjustment Percentage
---------------------- ---------------------
<S> <C>
90% 45%
91% 51%
92% 56%
93% 62%
94% 67%
95% 73%
96% 78%
97% 84%
98% 89%
99% 95%
</TABLE>
(iii) the term "Budgeted Net Income" shall mean, for any fiscal
year of the Company, net income as set forth in the annual business plan of the
Company for such fiscal year
<PAGE> 4
4
as prepared by the Company's management and approved by the Board of Directors
of the Company; and
(iv) the term "extraordinary non-operating profits and losses
such as gain from sale of operating units" shall include capital transaction
outside the normal course of business but shall not include restructuring
charges, charges to increase accounts receivable reserves or similar charges
which relate to the operations of the Company or its business units.
(Y) an amount of up to $100,000 for the fiscal year of the Company
ending June 30, 1996, and an amount of up to $160,000 for the fiscal year of
the Company ending June 30, 1997, based on achievement of the applicable
performance measures set forth in Exhibit A to this Agreement.
(b) In the event of the termination of employment of the Executive
pursuant to Section 6.1 (Death), 6.2 (Disability), Section 6.4 (Without Cause),
6.5 (Voluntary Termination), 6.6 (Constructive Termination) or 6.7 (Change of
Control) of this Agreement, the Executive (or his estate or other legal
representative) shall be entitled to a bonus for the fiscal year in which such
termination takes place in an amount equal to the product of (i) the bonus for
such fiscal year determined pursuant to Section 3.2, multiplied by (ii) a
fraction, the numerator of which is the number of days from the beginning of
such fiscal year to the date of termination, and the denominator of which is
365. In the event of the termination of employment of the Executive pursuant to
Section 6.3 (Due Cause) of this Agreement, the Executive shall not be entitled
to a bonus for the fiscal year of the Company in which such termination takes
place. The Executive shall not be entitled to a bonus for any fiscal year of
the Company subsequent to the fiscal year in which the termination of his
employment pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due Cause)
or 6.5 (Voluntary Termination) takes place.
(c) The bonus payable to the Executive (or his estate or other legal
representative) for any fiscal year of the Company pursuant to this Section 3.2
shall be paid by the Company within ten (10) days of receipt by the Company of
the audited financial statements of the Company for such fiscal year.
3.3 Stock Options. (a) On May 3, 1996, the Company granted to the
Executive options (the "Options") to purchase 1,000,000 shares of the Company's
common stock, par value $.01
<PAGE> 5
5
per share ("Common Stock"), at an exercise price per share equal to the market
value of the Common Stock on the date of grant. The options were not granted
under the 1986 Stock Option Plan (the "1986 Plan"), and are subject to
stockholder approval. The Options:
(i) have a term of seven (7) years from the date of grant;
(ii) become exercisable as follows (but only after November 3,
1996):
(A) 20% on the first to occur of the first anniversary of the date of
grant or the average price (as defined in the Stock Option Certificate) of the
common stock of NovaCare achieving $8 per share;
(B) 40% on the first to occur of the second anniversary of the date of
grant or the average price of the common stock of NovaCare achieving $10 per
share;
(C) 60% on the first to occur of the third anniversary of the date of
grant or the average price of the common stock of NovaCare achieving $12 per
share;
(D) 80% on the first to occur of the fourth anniversary of the date of
grant or the average price of the common stock of NovaCare achieving $14 per
share;
(E) 100% on the first to occur of the fifth anniversary of the date of
grant or the average price of the common stock of NovaCare achieving $16 per
share;
(iii) except as provided in clause (iv) of this Section 3.3,
remain exercisable for a period of twelve (12) months commencing on the date of
termination of employment of the Executive, but only as to those shares as to
which the Options were exercisable at the date of termination; and
(iv) become exercisable in full upon a Change in Control of the
Company (as defined in Section 6.7), whether or not the employment of the
Executive shall be terminated, and upon the termination of the employment of
the Executive pursuant to Section 6.1 (Death), Section 6.2 (Disability) or
Section 6.4 (Without Due Cause) and, in any such case, shall remain exercisable
for the balance of the ten year term.
<PAGE> 6
6
The Options are or shall be evidenced by a Stock Option Certificate or
other appropriate documentation embodying the foregoing terms and other
standard terms and conditions not inconsistent with the foregoing terms.
(b) The Executive has heretofore been granted options to
purchase 500,000 shares of Common Stock pursuant to the Company's Option
Exchange Program, which grant was approved by the Compensation Committee of the
Board of Directors of the Company on May 2, 1996. The Executive has heretofore
also been granted options to purchase an aggregate of 7,200 shares of Common
Stock pursuant to the 1986 Plan.
4. EXPENSE REIMBURSEMENT.
During the term of this Agreement, the Company shall reimburse the
Executive for all reasonable and necessary out-of-pocket expenses incurred by
him in connection with the performance of his duties hereunder, upon the
presentation of proper accounts therefor in accordance with the Company's
policies.
5. BENEFITS, PERQUISITES.
5.1 Generally. During the term of this Agreement, the Executive will
be eligible to participate in all employee benefit plans and programs offered
by the Company from time to time to its employees of comparable seniority,
subject to the provisions of such plans and programs as in effect from time to
time.
5.2 Perquisites. (a) During the term of this Agreement, the Company
shall provide the Executive with the use of the Company's private corporate jet
for personal travel in connection with two vacations annually; provided that
the Company shall have no obligation to provide the Executive with the use of a
private corporate jet under this Section 5.2 during any period that the Company
does not own or lease a private corporate jet.
(b) During the term of this Agreement, the Company shall also provide
the Executive with the following: (i) a telephone in his automobile (for which
the Company shall pay for all installation, service and other charges), (ii)
first class airfare for travel in connection with the performance of his duties
hereunder, (iii) a corporate credit card of the
<PAGE> 7
7
Executive's choosing and (iv) a four-week paid vacation each year.
6. TERMINATION OF EMPLOYMENT.
6.1 Death. In the event of the death of the Executive, the Company
shall (i) pay to the estate or other legal representative of the Executive (a)
the base salary provided for in Section 3.1 (at the annual rate then in effect)
accrued to the date of the Executive's death and not theretofore paid to the
Executive and (b) any incentive bonus which shall be or become payable pursuant
to Section 3.2. Rights and benefits of the estate or other legal representative
or transferee of the Executive (a) with respect to the Options shall be
determined in accordance with Section 3.3 and (b) under the benefit plans and
programs of the Company shall be determined in accordance with the provisions
of such plans and programs. Neither the estate or other legal representative of
the Executive nor the Company shall have any further rights or obligations
under this Agreement, except as provided in Section 15.
6.2 Disability. If the Executive shall become incapacitated by reason
of sickness, accident or other physical or mental disability and shall be
unable to perform his normal duties hereunder for a period of six (6)
consecutive months, then, at any time following the conclusion of such six (6)
month period, the employment of the Executive hereunder may be terminated by
the Company or the Executive, upon thirty (30) days' notice to the other. In the
event of such termination, the Company shall (a) pay to the Executive the base
salary provided for in Section 3.1 (at the annual rate then in effect) accrued
to the date of such termination and not theretofore paid and (b) pay to the
Executive any incentive bonus which shall be or become payable under Section
3.2. Rights and benefits of the Executive or his transferee (a) with respect
to the Options shall be determined in accordance with Section 3.3 and (b) under
the other benefit plans and programs of the Company shall be determined in
accordance with the terms and provisions of such plans and programs. Neither
the Executive nor the Company shall have any further rights or obligations
under this Agreement, except as provided in Sections 7, 8, 9 and 15.
6.3 Due Cause. The employment of the Executive hereunder may be
terminated by the Company at any time for Due Cause (as hereinafter defined).
In the event of such termination, the Company shall pay to the Executive the
base
<PAGE> 8
8
salary provided for in Section 3.1 (at the annual rate then in effect) accrued
to the date of such termination and not theretofore paid to the Executive. The
Company shall also pay to the Executive any incentive bonus which shall be or
become payable to the Executive under Section 3.2 with respect to any fiscal
year of the Company ended prior to the date of such termination. Rights and
benefits of the Executive or his transferee (a) with respect to the Options
shall be determined in accordance with Section 3.3 and (b) under the benefit
plans and programs of the Company shall be determined in accordance with the
provisions of such plans and programs. For purposes hereof, "Due Cause" shall
mean (i) willful, gross neglect or willful, gross misconduct in the Executive's
discharge of his duties and responsibilities under this Agreement, or (ii) the
Executive's conviction of a felony; provided, however, that the Executive shall
be given written notice by the Chief Executive Officer of the Company that it
intends to terminate the Executive's employment for Due Cause, which written
notice shall specify the act or acts upon which the Chief Executive Officer of
the Company intends so to terminate the Executive's employment, and the
Executive shall then be given the opportunity, within fifteen (15) days of his
receipt of such notice, to have a meeting with the Chief Executive Officer of
the Company to discuss such act or acts. If the basis of such written notice is
other than an act or acts described in clause (ii), the Executive shall be given
seven (7) days after such meeting within which to cease or correct the
performance (or nonperformance) giving rise to such written notice and, upon
failure of the Executive within such seven (7) days to cease or correct such
performance (or nonperformance), the Executive's employment by the Company shall
automatically be terminated hereunder for Due Cause. Neither the Executive nor
the Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 7, 8, 9 and 15.
6.4 Termination by the Company Without Cause. (a) The Company may
terminate the Executive's employment at any time for whatever reason it deems
appropriate or without reason; provided, however, that in the event that such
termination is not pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due
Cause) or 6.5 (Voluntary Termination), the Company shall pay to the Executive:
(A) on the date of termination, the base salary provided for in
Section 3.1 (at the annual rate then in
<PAGE> 9
9
effect) accrued to the date of termination and not theretofore paid to the
Executive;
(B) severance pay, in the form of salary continuation for a period
("Severance Pay Period") of two (2) years commencing on the date of termination,
at a rate equal to the base salary provided for in Section 3.1 (at the annual
rate then in effect);
(C) any incentive bonus which shall be or become payable to the
Executive pursuant to Section 3.2;
(D) on a date (the "Payment Date") within ten (10) days of receipt
by the Company of the audited financial statements of the Company for the fiscal
year in which such termination shall have occurred, an amount equal to the
Final Bonus (as hereinafter defined) and, on the first anniversary of the
Payment Date, an amount equal to one-half of the Final Bonus. As used herein,
(X) if the date of termination of the Executive's employment shall occur during
the first six months of any fiscal year of the Company, the term "Final Bonus"
shall mean an amount equal to the bonus earned by the Executive for the last
completed fiscal year of the Company preceding the date of termination of his
employment and (Y) if the date of termination of the Executive's employment
shall occur during the last six months of any fiscal year of the Company, the
term "Final Bonus" shall mean an amount equal to the greater of (i) the bonus
earned by the Executive for the last completed fiscal year of the Company
preceding the date of termination of his employment or (ii) the bonus for the
fiscal year in which the termination of employment occurs, as determined
pursuant to Section 3.2(a) and before prorating pursuant to Section 3.2(b).
(b) During the Severance Pay Period, the Executive shall diligently seek
other full-time employment which is suitable and appropriate in light of his
background, experience, seniority and stature. Amounts payable to the Executive
pursuant to Section 6.4(a)(B) and 6.4(a)(D) shall be offset by amounts earned
from other employment (whether as an employee, a consultant or otherwise) during
the Severance Pay Period (provided that the Executive shall in no event be
required to refund any amounts which he has previously received from the Company
and provided, further, that there shall be no offset for the amounts earned by
the Executive during the Severance Period from positions held by the Executive
prior to commencement of the Severance Period).
<PAGE> 10
10
(c) Rights and benefits of the Executive or his transferee (a) with
respect to the Options shall be determined in accordance with Section 3.3 and
(b) under the other benefit plans and programs of the Company shall be
determined in accordance with the provisions of such plans and programs.
Neither the Executive nor the Company shall have any further rights or
obligations under this Agreement, except as provided in Sections 7, 8, 9 and 15.
6.5 Voluntary Termination. The Executive may terminate his employment
with the Company at any time upon thirty (30) days' prior written notice to the
Company. In the event of such termination (unless such termination is within
one year following a Change in Control of the Company, in which case the
provisions of Section 6.7 hereof shall be applicable), the Company shall pay
to the Executive the base salary provided for in Section 3.1 (at the annual
rate then in effect) accrued to the date of such termination and not therefore
paid to the Executive. The Company shall also pay to the Executive any
incentive bonus which shall be or become payable pursuant to Section 3.2.
Rights and benefits of the Executive or his transferee (a) with respect to the
Options shall be determined in accordance with Section 3.3 and (b) under the
benefit plans and programs of the Company shall be determined in accordance
with the provisions of such plans and programs. Neither the Executive nor the
Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 7, 8, 9 and 15.
6.6 Constructive Termination. Anything herein to the contrary
notwithstanding, if the Company:
(A) demotes the Executive to a lesser position than provided
in Section 2;
(B) causes a material change in the nature or scope of the
authorities, powers, functions, duties, or responsibilities attached to the
Executive's position as described in Section 2;
(C) decreases the Executive's base salary, changes the bonus
formula provided for in Section 3 or eliminates any of the benefits or
perquisites provided for in Section 5; or
<PAGE> 11
11
(D) fails to cause the election of the Executive to the Board
of Directors of the Company;
then, within thirty (30) days after learning of the action (or inaction), the
Executive may advise the Company in writing that the action (or inaction)
constitutes a termination of his employment by the Company pursuant to Section
4.4 (Without Cause), in which event the Company shall have thirty (30) days (the
"Correction Period") in which to correct such action (or inaction). If the
Company does not correct such action (or inaction) during the Correction
Period, such action (or inaction) shall (unless consented to in writing by the
Executive) constitute a termination of the Executive's employment by the
Company pursuant to Section 6.4 (Without Cause) effective on the first business
day following the end of the Correction Period.
6.7 Termination of Employment Following a Change in Control. Anything
herein to the contrary notwithstanding, the Executive may terminate his
employment with the Company during the one (1) year period following a Change
in Control, and such termination shall constitute a termination of the
Executive's employment by the Company pursuant to Section 6.4 (Without Cause);
provided, however, that the amounts referred to in paragraphs (A) and (B) of
Section 6.4 shall be paid to the Executive in a lump sum on the date of
termination and the amounts referred to in paragraph (D) of Section 6.4 shall
be paid to the Executive in a lump sum on the Payment Date; and further
provided that the Executive shall be under no obligation to seek other
employment and shall be under no obligation to offset any amounts earned from
such other employment (whether as an employee, a consultant or otherwise)
against such payments. For purposes of this Agreement, a Change in Control of
the Company shall be deemed to have occurred if:
(A) a "person" (meaning an individual, a partnership, or other
group or association as defined in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, other than the Executive or a group including the
Executive), either (i) acquires twenty percent (20%) or more of the combined
voting power of the outstanding securities of the Company having a right to
vote in elections of directors and such acquisition shall not have been
approved within sixty (60) days following such acquisition by a majority of the
Continuing Directors (as hereinafter defined) then in office or (ii) acquires
fifty percent (50%) or more of the combined voting power of the
<PAGE> 12
12
outstanding securities of the Company having a right to vote in elections of
directors; or
(B) Continuing Directors shall for any reason cease to
constitute a majority of the Board of Directors of the Company; or
(C) all or substantially all of the business and/or assets
of the Company is disposed of by the Company to a party or parties other than a
subsidiary or other affiliate of the Company, pursuant to a partial or complete
liquidation of the Company, sale of assets (including stock of a subsidiary of
the Company) or otherwise.
For purposes of this Agreement, the term "Continuing Director" shall
mean a member of the Board of Directors of the Company who either was a member
of the Board of Directors on the date hereof or who subsequently became a
Director and whose election, or nomination for election, was approved by a vote
of at least two-thirds of the Continuing Directors then in office.
6.8 Acceleration of Payments. In the event that the Company shall
fail to pay to the Executive any amount payable pursuant to this Section 6 at
the time such payment is due, all amounts to be paid to the Executive (or his
estate or legal representative) pursuant to this Section 6, Section 3 and any
other provision of this Agreement shall become immediately due and payable
without any further action by the Executive (or his estate or legal
representative).
7. CONFIDENTIAL INFORMATION.
7.1 Nondisclosure. The Executive shall, during the term of this
Agreement and at all times thereafter, treat as confidential and, except as
required in the performance of his duties and responsibilities under this
Agreement, not disclose, publish or otherwise make available to the public or to
any individual, firm or corporation any confidential information (as
hereinafter defined).
7.2 Confidential Information Defined. For the purposes hereof, the
term "confidential information" shall mean all information acquired by the
Executive in the course of the Executive's employment with the Company in any
way concerning the products, projects, activities, business or affairs of the
Company or the Company's customers, including, without
<PAGE> 13
13
limitation, all information concerning trade secrets and the products or
projects of the Company and/or any improvements therein, all sales and
financial information concerning the Company, all customer and supplier lists,
all information concerning projects in research and development or marketing
plans for any such products or projects, and all information in any way
concerning the products, projects, activities, business or affairs of customers
of the Company which is furnished to the Executive by the Company or any of its
agents or customers, as such; provided, however, that the term "confidential
information" shall not include information which (a) becomes generally
available to the public other than as a result of a disclosure by the
Executive, (b) was available to the Executive on a non-confidential basis prior
to his employment with the Company or (c) becomes available to the Executive on
a non-confidential basis from a source other than the Company or any of its
agents or customers provided that such source is not bound by a confidentiality
agreement with the Company or any of such agents or customers.
8. INTERFERENCE WITH THE COMPANY.
8.1 Restrictions. The Executive acknowledges that the services to be
rendered by him to the Company are of a special and unique character. In order
to induce the Company to enter into this Agreement, and in consideration of his
employment hereunder, the Executive agrees, for the benefit of the Company,
that he will not, during the period of his employment with the Company and
thereafter, for the Applicable Period (as hereinafter defined) commencing on
the date of termination of his employment with the Company:
(a) engage, directly or indirectly, whether as principal,
consultant, employee, partner, stockholder, limited partner or other investor
(other than a passive investment of (i) not more than five percent (5%) of the
stock or equity of any corporation the capital stock of which is publicly
traded or (ii) not more than five percent (5%) of the ownership interest of any
partnership or other entity) or otherwise, within the United States of America,
with any firm or person in any activity or business venture which is in
competition with any line or lines of business being conducted by the Company
or any subsidiary of the Company at the date of termination of the Executive's
employment with the Company, accounting for ten percent (10%) or more of the
Company's consolidated gross sales, revenues or
<PAGE> 14
14
earnings before taxes for the fiscal year ended immediately prior to the
conduct in question (the "Competition Restriction"); or
(b) solicit or entice or endeavor to solicit or entice away from
the Company any person who was an employee of the Company at job grade numbering
32 or higher, either for his own account or for any individual, firm or
corporation, whether or not such person would commit any breach of his contract
of employment by reason of leaving the service of the Company (the "Solicitation
Restriction"); or
(c) employ, directly or indirectly, any person who was an employee
of the Company at job grade numbering 32 or higher at any time during the one
year period ending on the date of termination of the Executive's employment with
the Company, except that this restriction shall not apply in the case of any
person whose employment shall have been terminated by the Company (the "Hiring
Restriction").
8.2 Time Periods. As used in this Section 8, the term "Applicable
Period" shall mean:
(a) twenty-four (24) months in the case of a termination of
employment pursuant to Section 6.3 (Due Cause), Section 6.4 (Without Due
Cause), Section 6.6 (Constructive Termination), or Section 6.7 (Change in
Control); and
<PAGE> 15
15
(b) twenty-four (24) months in the case of a termination
pursuant to Section 6.2 (Disability) or Section 6.5 (Voluntary Termination),
but only if the Company gives notice to the Executive within thirty (30) days
of the date of termination of employment of its intention to enforce such
restrictions against the Executive, and subject to the Company's continued
payment to the Executive during such twenty-four (24) month period of the base
salary provided for in Section 3.1 (at the annual rate in effect at the date of
termination).
9. EQUITABLE RELIEF.
In the event of a breach or threatened breach by the Executive of any
of the provisions of Sections 7 or 8 of this Agreement, the Executive hereby
consents and agrees that the Company shall be entitled to an injunction or
similar equitable relief from any court of competent jurisdiction restraining
the Executive from committing or continuing any such breach or threatened
breach or granting specific performance of any act required to be performed by
the Executive under any of such provisions, without the necessity of showing
any actual damage or that money damages would not afford an adequate remedy and
without the necessity of posting any bond or other security. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
at law or in equity which it may have.
10. SUCCESSORS AND ASSIGNS.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign this
Agreement or any part thereof without the prior written consent of a majority
of the Board of Directors of the Company; provided, however, that nothing
herein shall preclude
<PAGE> 16
16
one or more beneficiaries of the Executive from receiving any amount that may be
payable following the occurrence of his legal incompetency or his death and
shall not preclude the legal representative of his estate from receiving such
amount or from assigning any right hereunder to the person or persons entitled
thereto under his will or, in the case of intestacy, to the person or persons
entitled thereto under the laws of intestacy applicable to his estate. The term
"beneficiaries", as used in this Agreement, shall mean a beneficiary or
beneficiaries so designated to receive any such amount or, if no beneficiary has
been so designated, the legal representative of the Executive (in the event of
his incompetency) or the Executive's estate.
11. GOVERNING LAW.
This Agreement shall be deemed a contract made under, and for all purposes
shall be construed in accordance with, the laws of the Commonwealth of
Pennsylvania applicable to contracts to be performed entirely within such state.
In the event that a court of any jurisdiction shall hold any of the provisions
of this Agreement to be wholly or partially unenforceable for any reason, such
determination shall not bar or in any way affect the Company's right to relief
as provided for herein in the courts of any other jurisdiction. Such provisions,
as they relate to each jurisdiction, are, for this purpose, severable into
diverse and independent covenants. Service of process on the parties hereto at
the addresses set forth herein shall be deemed adequate service of such process.
12. ENTIRE AGREEMENT.
This Agreement contains all the understandings and representations between
the parties hereto pertaining to the subject matter hereof and supersedes all
undertakings and agreements, whether oral or in writing, if any there be,
previously entered into by them with respect thereto.
13. AMENDMENT, MODIFICATION, WAIVER.
No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing and signed by the Executive
and by a duly authorized representative of the Company other than the Executive.
Except as otherwise specifically provided in this Agreement, no waiver by either
party hereto of any breach by the other party hereto of any condition or
provision of this Agreement to be performed by
<PAGE> 17
17
such other party shall be deemed a waiver of a similar or dissimilar provision
or condition at the same or any prior or subsequent time, nor shall the failure
of or delay by either party hereto in exercising any right, power or privilege
hereunder operate as a waiver thereof to preclude any other or further exercise
thereof or the exercise of any other such right, power or privilege.
14. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement,
or any breach thereof, shall, except as provided in Section 9, be settled by
arbitration in accordance with the rules of the American Arbitration Association
then in effect and judgment upon such award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. The arbitration shall be held
in the area where the Company then has its principal place of business. The
arbitration award shall include attorneys' fees and costs to the prevailing
party.
15. ADVANCE OF DEFENSE EXPENSES.
In the event of any action, proceeding or claim against the Executive
arising out of his serving or having served in his capacity as an officer
and/or director of the Company, which in the Executive's sole judgment requires
him to retain counsel (such choice of counsel to be made in his sole and
absolute discretion) or otherwise expend his personal funds for his defense in
connection therewith, the Company shall be obligated to advance to the
Executive (or pay directly to his counsel) counsel fees and other costs
associated with the Executive's defense of such action, proceeding or claim;
provided, however, that in such event the Executive shall first agree in
writing, without posting bond or collateral, to repay all sums paid or advanced
to him pursuant to this Section 15 in the event that the final disposition of
such action, proceeding or claim is one for which the Executive would not be
entitled to indemnification pursuant to the provisions of the laws of the
State of Delaware or the Certificate of Incorporation or By-laws of the Company.
16. NOTICES.
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt
requested, addressed to the party
<PAGE> 18
18
concerned at the address indicated below or at such other address as such party
may subsequently designate by like notice:
If to the Company:
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: Chief Executive Officer
If to the Executive:
17. SEVERABILITY.
Should any provision of this Agreement be held by a court or
arbitration panel of competent jurisdiction to be enforceable only if modified,
such holding shall not affect the validity of the remainder of this Agreement,
the balance of which shall continue to be binding upon the parties hereto with
any such modification to become a part hereof and treated as though originally
set forth in this Agreement. The parties further agree that any such court or
arbitration panel is expressly authorized to modify any such unenforceable
provision of this Agreement in lieu of severing such unenforceable provision
from this Agreement in its entirety, whether by rewriting the offending
provision, deleting any or all of the offending provision, adding additional
language to this Agreement, or by making such other modifications as it deems
warranted to carry out the intent and agreement of the parties as embodied
herein to the maximum extent permitted by law. The parties expressly agree that
this Agreement as so modified by the court or arbitration panel shall be
binding upon and enforceable against each of them. In any event, should one or
more of the provisions of this Agreement be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as provided above, this Agreement shall be
construed as if such invalid, illegal or unenforceable provisions had never
been set forth herein.
<PAGE> 19
19
18. WITHHOLDING.
Anything to the contrary notwithstanding, all payments required to be
made by the Company hereunder to the Executive or his beneficiaries, including
his estate, shall be subject to withholding of such amounts relating to taxes
as the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation. In lieu of withholding such amounts, in whole or
in part, the Company, may, in its sole discretion, accept other provision for
payment of taxes as permitted by law, provided it is satisfied in its sole
discretion that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.
19. SURVIVORSHIP.
The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.
20. TITLES.
Titles of the sections and paragraphs of this Agreement are intended
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any section or paragraph.
21. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and
the same instrument.
* * *
<PAGE> 20
20
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NOVACARE, INC.
By /s/ John H. Foster
--------------------------------
John H. Foster
Chairman of the Board
/s/ Timothy E. Foster
--------------------------------
Timothy E. Foster
The foregoing Agreement has been
Approved by the Compensation Committee
of the Board of Directors:
/s/ Robert G. Stone
- ----------------------------------
Robert G. Stone
Chairman of Compensation Committee
<PAGE> 1
EXHIBIT 10(i)
NOVACARE EMPLOYEE SERVICES, INC.
2621 Van Buren Avenue
Norristown, PA 19403
May 1, 1997
Mr. James W. McLane
20 Colony Road
West Hartford, CT 06117
Dear Jamie:
The undersigned, NovaCare Employee Services, Inc., a Delaware
Corporation (the "Company"), and James W. McLane (the "Purchaser"), hereby agree
as follows:
1. Authorization and Sale of the Shares. The Company has
authorized the issuance to the Purchaser of and proposes to sell to the
Purchaser, as an employee benefit and as an incentive to the Purchaser 10,000
shares (collectively the "Shares" and individually a "Share") of its common
stock, $.01 par value (the "Common Stock"), at a price of $2.80 per Share.
2. Purchase of the Shares by the Purchaser. Subject to the terms
and conditions hereof, the Purchaser hereby agrees to purchase the Shares from
the Company in reliance upon its representations and warranties herein
contained, and the Company hereby agrees to sell the Shares to the Purchaser in
reliance upon the Purchaser's representations and warranties herein contained,
at an aggregate purchase price (the "Purchase Price") of $28,000 in cash.
3. Representations, Warranties, and Agreements of the Company.
The Company represents and warrants to, and agrees with, the Purchaser as
follows:
(a) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware.
(b) The Company has duly authorized the execution and delivery
of this Agreement and the issuance and delivery of the Shares and this Agreement
constitutes a valid and legally binding agreement of the Company enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, or other laws affecting generally the enforceability of
creditors' rights and by limitations on the availability of equitable remedies.
The Shares, when issued and
<PAGE> 2
delivered in accordance with this Agreement, shall have been duly issued and
shall be validly outstanding, fully paid and nonassessable shares of the Common
Stock.
4. Representations, Warranties, and Agreements of the Purchaser.
The Purchaser hereby represents and warrants to, and agrees with, the Company as
follows:
(a) The Purchaser understands that by the terms of this
Agreement he is purchasing shares of Common Stock issued and delivered by the
Company without compliance with the registration requirements of the Securities
Act of 1933 (the "Securities Act") or the securities laws of any state, under
and in reliance on exemptions from the registration requirements of the
Securities Act and such laws, and without the approval, disapproval, or passing
on the merits by any regulatory authority; that for purposes of such exemptions,
the Company will rely upon the representations, warranties and agreements of the
Purchaser contained herein; and that such non-compliance with registration
requirements is not permissible unless such representations and warranties are
correct and such agreements performed. The Purchaser is an "accredited investor"
as such term is defined in Rule 501 under the Securities Act.
(b) The Purchaser understands that the Company is under no
obligation to effect a registration under the Securities Act of the Shares to be
purchased by him hereunder. The Purchaser understands that, under existing rules
of the Securities and Exchange Commission (the "Commission"), the Purchaser may
be unable to sell any of the Shares except to the extent that the Shares may be
sold (A) in a bona fide private placement to a purchaser who shall be subject to
the same restrictions on sale or (B) subject to the restrictions contained in
Rule 144 under the Securities Act.
(c) The Purchaser is acquiring the Shares pursuant to this
Agreement for the Purchaser's own account and not with a view to or for sale in
connection with the distribution thereof within the meaning of the Securities
Act. The Purchaser shall not effect a distribution of any Shares until either
(A) the Purchaser has received the opinion of counsel for the Company that
registration under the Securities Act is not required or (B) a registration
statement under the Securities Act covering such Shares and the disposition
thereof has become effective under the Securities Act, and the Purchaser agrees
that the certificates evidencing the Shares may bear a restrictive legend to the
foregoing effect.
(d) As President of the Company's parent NovaCare, Inc., the
Purchaser is fully familiar with the business, properties and financial
condition of the Company, and acknowledges that he has been afforded access to
such additional information concerning the Company as he considers necessary or
appropriate to make an informed investment decision, and to all additional
information which has considered necessary to verify the accuracy of the
information so received. The Purchaser has had the opportunity to ask questions
of and receive answers from the Company concerning the terms and conditions of
the transactions contemplated by this Agreement
2
<PAGE> 3
(e) The Purchaser is a sophisticated investor familiar with
the type of risks inherent in the acquisition of restricted securities such as
the Common Stock and his financial position is such that he can afford to retain
the Shares for an indefinite period of time without realizing any direct or
indirect cash return on his investment.
(f) The Purchaser is familiar with the provisions of Rule 144
and the limitations upon the availability and applicability of such rule.
5. Restrictions on Transferability of the Shares. The Purchaser
hereby agrees that the Purchaser shall not sell, assign, transfer, gift, devise,
bequeath, deliver, pledge, hypothecate or otherwise dispose of any of the
Shares, except as provided for in this Agreement. Any disposition or purported
disposition of Shares in violation of this Agreement shall be null and void and
shall not be recorded on the books of the Company. Notwithstanding the
foregoing:
(a) Disposition of Vested Shares and Shares Which Are Not
Vested Shares. Shares which are "vested" in accordance with the following
schedule (the "Vested Shares") may be disposed of in the manner set forth in
Subsection (b) or (d) of this Section 5.
<TABLE>
<CAPTION>
Cumulative Percentage of
Shares Which Are Vested Shares
------------------------------
<S> <C>
On or before April 30, 1998 ................ 0%
May 1, 1998 to
April 30, 1999.............................. 33-1/3%
May 1, 1999 to
April 30, 2000.............................. 66-2/3%
On or after May 1, 2000 .................... 100%
</TABLE>
Shares which are not Vested Shares (the "Unvested Shares") may be
disposed of only in the manner set forth in Subsection (c) or (d) of this
Section 5.
(b) Vested Shares.
(i) Vested Shares held by the Purchaser may be transferred
by the Purchaser provided that the Purchaser first complies with the right to
purchase set forth in this Subsection (b). The Company shall have a right to
purchase any Vested Shares proposed to be sold by the Purchaser on the terms set
forth in this Subsection (b).
3
<PAGE> 4
(ii) If the Purchaser wishes to dispose of Vested Shares,
the Purchaser shall first obtain a bona fide written offer (the "Offer") for the
purchase of the Vested Shares which he or she wishes to dispose of. Such Offer
shall be for cash or promissory notes only. Promptly upon receipt of the Offer,
the Purchaser shall give notice to the Company (the "Offer Notice") of the
Purchaser's intent to dispose of Vested Shares, which Offer Notice shall specify
the name of the proposed purchaser, the number of Vested Shares (the "Offered
Securities") the Purchaser desires to dispose of and the price and terms of
payment of such proposed disposition. Upon receipt of the Offer Notice, the
Company shall have the right to purchase all (but not less than all) of the
Offered Securities at the price and on the terms of the Offer. Such right must
be exercised by the Company by giving notice to that effect to the Purchaser
within a period of ten business days after the date of receipt of the Offer
Notice (any such notice of the exercise of such right being herein referred to
as an "Acceptance Notice").
(iii) In the event of the exercise by the Company of its
right to purchase pursuant to this Subsection (b), the Acceptance Notice shall
specify the time and date for purchase of the Offered Securities (the "Share
closing") which shall be not more than 30 days after the expiration of the ten
business day period set forth in clause (b)(ii). The Purchaser shall deliver to
the Company at the Share closing, which shall be held at the business
headquarters of the Company, the Offered Securities in due and proper form for
transfer, against payment of the purchase price of the Company.
(iv) If the Company shall fail or decline to agree to
purchase the Offered Securities within the ten business day period provided for
in clause (b)(ii), then the Purchaser shall have the right and privilege to sell
all (but not less than all) the Offered Securities, within 60 days after the
expiration of such ten business day period, to the bona fide purchaser named in
the Offer Notice, at the price and on terms of payment specified in the Offer.
If, for any reason, the Offered Securities are not sold within such 60-day
period, the Offered Securities shall again become subject to the terms and
conditions of this Agreement.
(v) The Company's right to purchase set forth in this
Subsection (b) shall terminate upon the occurrence of the closing of the initial
sale by the Company to the public of shares of the Common Stock pursuant to a
registration statement filed under the Securities Act (other than a registration
statement covering securities of the Company to be issued pursuant to an
employee benefit plan).
(c) Termination of the Purchaser's Employment.
(i) If the Purchaser shall cease to be employed by the
Company's parent or any other subsidiary or affiliate of the Company's parent
(collectively, the "Company Group"), for any reason whatsoever, the Company
shall have the right (but not the obligation) to purchase from the Purchaser all
or any portion of the Unvested Shares owned by the Purchaser at the time the
Purchaser ceases to be employed by the Company, provided that Shares that become
vested before or upon such
4
<PAGE> 5
termination of Purchaser's employment pursuant to any provision of the
Employment Agreement providing for acceleration of vesting upon the occurrence
of certain events shall be deemed vested for purposes of this Agreement. Such
right to purchase shall be exercisable by written notice to that effect given by
the Company to the Purchaser within 30 days after the Purchaser has ceased to be
employed by any member of the Company Group, as aforesaid. Upon the giving of
such written notice, the Purchaser shall for all purposes cease to be a
stockholder of the Company as to the Unvested Shares covered by such notice and
shall have no rights against the Company or any other person in respect of such
Unvested Shares except the right to receive payment for such Unvested Shares in
accordance herewith. Notwithstanding the provisions of Subsection (a) of this
Section 5, Unvested Shares not so purchased by the Company shall upon the
expiration of such 30-day period become Vested Shares.
(ii) At the time and date specified in the notice given by
the Company referred to in clause (c)(i), which date shall in no event be more
than 15 days after the expiration of the 30-day period for the exercise of the
right to purchase set forth therein, the Purchaser shall deliver to the Company,
at the business headquarters of the Company, the Unvested Shares to be sold by
the Purchaser in due and proper form for transfer, against payment by the
Company of the purchase price therefor, as determined in accordance with clause
(c)(iii).
(iii) The per Share purchase price for the Unvested Shares
payable by the Company pursuant to clause (c)(ii) shall be $2.80. The number of
Unvested Shares to be purchased and the per Share purchase price pursuant to
this clause (c)(iii) shall be appropriately adjusted by the Board of Directors
of the Company to reflect any split, reverse split, recapitalization,
reorganization, merger, stock dividend, consolidation or other change in the
corporate structure or the stock of the Company
(d) Disposition to Family Members. Shares held by the
Purchaser may be transferred by the Purchaser to or for the benefit of the
Purchaser or a member of the Purchaser's immediate family. For the purpose of
this Agreement, the term "immediate family" of the Purchaser shall mean the
Purchaser's spouse and children (and the direct lineal descendants of the
Purchaser's children). It shall be a condition to the validity of any transfer
of Shares permitted by the provisions of this Subsection (d) that the transferee
shall execute a copy of this Agreement, shall hold such Shares subject to the
provisions of this Agreement, and shall make no further transfer of such Shares,
except in compliance with the terms and conditions of this Agreement.
6. The Closing. Simultaneously with the execution and delivery of
this Agreement, the Purchaser shall cause to be delivered to the Company a check
or checks payable to the order of the Company in the amount of the Purchase
Price. Promptly after receipt of such check or checks, the Company shall deliver
to the Purchaser at the Purchaser's address set forth at the head of this
Agreement, a stock certificate registered in the name of the Purchaser and
representing the Shares.
5
<PAGE> 6
7. Notice. Any notice under this Agreement shall be in writing
and delivered personally or sent by certified mail, return receipt requested,
addressed, as the case may be, (i) to the Company at its address set forth at
the head of this Agreement or such other address as may hereafter be designated
by the Company by notice to the Purchaser in the manner provided herein; and
(ii) to the Purchaser at the Purchaser's address set forth at the head of this
Agreement or such other address as may hereafter be designated by the Purchaser
by notice to the Company in the manner provided herein. All notices personally
delivered shall be deemed to have been given when delivered and all notices sent
by mail shall be deemed to have been given three business days after mailing.
8. Successors. The terms, covenants and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective heirs, legal representatives, successors, permitted
transferees and assigns.
9. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed entirely within such
Commonwealth.
10. Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto, and no modifications of or amendments to
this Agreement shall be binding on the parties hereto unless in writing and
signed by them.
11. Integration. This Agreement supersedes all prior
understandings, negotiations, and agreements relating to the subject matter
hereof.
12. Severability. If any provision herein contained shall be held
to be illegal or unenforceable, such holding shall not affect the validity or
enforceability of the other provisions of this Agreement.
13. Reorganization, Etc. The provisions of this Agreement shall
apply mutatis mutandi to any shares or other securities resulting from any stock
split or reverse split, stock dividend, reclassification, subdivision,
consolidation or reorganization of any shares or other securities of the Company
and to any shares or other securities of the Company or of any successor company
which may be received by the Purchaser by virtue of his or her ownership of the
Shares.
14. Disputes.
(a) Arbitration. The parties shall attempt amicably to resolve
disagreements by negotiating with each other. In the event that the matter is
not amicably resolved through negotiation, any controversy, dispute or
disagreement arising out of or relating to this Agreement (a "Controversy")
shall be settled exclusively by binding arbitration, which shall be conducted by
a single arbitrator in Philadelphia, PA, in accordance with the
J-A-M-S/Endispute Streamlined Arbitration Rules and Procedures (the "Rules").
The parties agree that, notwithstanding anything to the contrary contained
6
<PAGE> 7
in the Rules, the arbitrator shall not award consequential, exemplary,
incidental, punitive or special damages.
(b) Procedure. It is agreed that if any party shall desire
relief of any nature whatsoever from the other party as a result of any
Controversy, such party will initiate such arbitration proceedings within a
reasonable time, but in no event more than one (1) year after the facts
underlying said Controversy first arise or become known to the party seeking
relief (whichever is later). The failure of such party to institute such
proceedings within said period shall be deemed a full waiver of any claim for
such relief. The parties shall bear equally all costs of said arbitration (other
than their own attorney's fees and costs). The parties agree that the decision
and award of the Arbitrator shall be final and conclusive upon the parties, in
lieu of all other legal, equitable or judicial proceedings between them, and
that no appeal or judicial review of the award or decision of the Arbitrator
shall be taken, but that such award or decision may be entered as a judgment and
enforced in any court having jurisdiction over the party against whom
enforcement is sought.
* * *
7
<PAGE> 8
If you are in agreement with the foregoing, please execute and
deliver to the undersigned the enclosed counterpart of this Agreement, whereupon
this Agreement shall become a binding agreement between us.
Very truly yours,
NOVACARE EMPLOYEE
SERVICES, INC.
By /s/ Loren Holber
___________________________
Accepted and agreed to as
aforesaid:
/s/ James W. McLane
_______________________________
James W. McLane
8
<PAGE> 1
EXHIBIT 10(j)(ix)
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
January 30, 1997
PNC Bank, National Association,
as Agent
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Attn: Marcie Knittel, Vice President
RE: Eighth Amendment to Credit Agreement (the "Eighth Amendment")
Dear Marcie:
We refer to that certain Credit Agreement, dated as of May 27, 1994,
as amended (the "Credit Agreement"), by and among NovaCare, Inc. ("NovaCare")
and certain of its Subsidiaries, the Banks party thereto and PNC Bank, National
Association, as agent for the Banks ("Agent"). Defined terms used herein, not
otherwise defined herein, shall have the meanings given to them under the Credit
Agreement as amended hereby.
The Borrowers and Guarantors, the Banks and the Agent hereby desire
to amend the Credit Agreement, as hereinafter provided.
The parties hereto in consideration of their mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby,
covenant and agree as follows:
AGREEMENT
1. Amendment of Credit Agreement
The parties hereto do hereby modify and amend the Credit Agreement
as follows:
(a) Cover page is hereby amended by deleting in line 1 the number
"$150,000,000" and inserting in lieu thereof the number "175,000,000".
(b) Recital paragraph 1, page 1, is hereby amended by deleting in
line 2 the number "$150,000,000" and inserting in lieu thereof the number
"$175,000,000".
<PAGE> 2
(c) Upon the effectiveness of this Eighth Amendment and for periods
subsequent to such effective date, SunTrust Bank, Central Florida, N.A. and The
Bank of New York shall each be a Bank party to the Credit Agreement.
2. Amendment to Schedules.
(a) Schedules. Schedule 1.01(B) [List of Banks, Commitments and
Closing Fees] to the Agreement is hereby amended and restated in its entirety in
the form of such Schedule attached hereto.
3. Conditions of Effectiveness.
The effectiveness of this Eighth Amendment is expressly conditioned upon
the occurrence and completion of all of the following: (i) the Agent's receipt
of counterparts of this Eighth Amendment duly executed by the Borrowers, the
Guarantors and the Banks; (ii) the Agent's receipt of a certificate signed by
the Secretary or Assistant Secretary of the Borrowers and Guarantors, certifying
as to all action taken by the Borrowers and Guarantors to authorize the
execution, delivery and performance of this Eighth Amendment; (iii) the Agent's
receipt of a Confirmation of Guaranty duly executed by the Guarantors in the
form of Exhibit II attached hereto; (iv) an opinion of Peter D. Bewley, General
Counsel of the Loan Parties reasonably satisfactory to the Agent regarding this
Eighth Amendment; and (v) each Borrower shall have delivered to the Agent on
behalf of each Bank a Note in the amount of each Bank's Commitment.
This Eighth Amendment shall be dated as of and shall be effective as
of the date and year first above written which shall be the date of satisfaction
of all conditions precedent to effectiveness as set forth in this Section 3.
4. Consent of All Banks.
Pursuant to Section 11.01(a) of the Credit Agreement, this Eighth
Amendment shall require the written consent of all of the Banks, all of the
Borrowers and all of the Guarantors.
5. Full Force and Effect.
Except as expressly modified and amended by this Eighth Amendment,
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed and shall remain in full force and effect.
-2-
<PAGE> 3
6. Costs, Expenses, Disbursements.
The Borrowers hereby agree to reimburse the Agent and the Banks on
demand for all costs, expenses and disbursements relating to this Eighth
Amendment which are payable by the Borrowers as provided in Section 10.05 of the
Credit Agreement.
7. Counterparts.
This Eighth Amendment may be executed by different parties hereto in
any number of separate counterparts, each of which, when so executed and
delivered, shall be an original, and all of such counterparts shall together
constitute one and the same instrument.
8. Governing Law.
This Eighth Amendment shall be deemed to be a contract under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed and enforced in accordance with the internal laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles.
-3-
<PAGE> 4
[Signature Page 1 of 7 to Eighth Amendment]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Eighth Amendment as of the day and year
first above written.
BORROWERS AND GUARANTORS:
ATTEST: NOVACARE, INC., a Delaware corporation, and
each of the other BORROWERS listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as Exhibit
I) and each of the GUARANTORS listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as Exhibit
I), other than those listed below
By: /s/ Richard A. McDonald By: /s/ Barry E. Smith
----------------------- ----------------------
[Seal] Barry E. Smith [Name],
----------------
the Vice President
----------------[Title]
of each Borrower and Guarantor listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as Exhibit
I), other than those listed below, which is a
corporation and of each general partner of
each Borrower and Guarantor which is a
partnership
Address for Notices for each of the
foregoing Borrowers and Guarantors:
1016 West Ninth Avenue
King of Prussia, PA 19406
Telecopier No. (610) 992-3328
Attention: Chief Financial Officer
Telephone No. (610) 992-7200
<PAGE> 5
[Signature Page 2 of 7 to Eighth Amendment]
[INTENTIONALLY BLANK]
<PAGE> 6
[Signature Page 3 of 7 to Eighth Amendment]
AGENT:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By:/s/ Marcie D. Knittel
--------------------------------
Title: Vice President
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
BANKS:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Marcie D. Knittel
------------------------------
Title: Vice President
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
<PAGE> 7
[Signature Page 4 of 7 to Eighth Amendment]
CORESTATES BANK, N.A.
By: /s/ Jennifer W. Leibowitz
------------------------------
Name: Jennifer W. Leibowitz
Title: Vice President
Address for Notices:
1339 Chestnut Street
P.O. Box 7618
FC 1-8-3-22
Philadelphia, PA 19101
Telecopier No. (215) 786-7721
Attention: Jennifer W. Leibowitz
Assistant Vice President
Telephone No. (215) 786-3972
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By: /s/ Joseph H. Towell
------------------------------
Name: Joseph H. Towell
Title: Sr. V.P.
Address for Notices:
One First Union Center
301 S. Giles Street
Charlotte, NC 28288-0735
Telecopier No. (704) 374-4092
Attention: James F. Young,
Assistant Vice President
Telephone No. (704) 383-0507
<PAGE> 8
[Signature Page 5 of 7 to Eighth Amendment]
FLEET BANK OF MASSACHUSETTS, N.A.
By: /s/ Amy E. Fredericks
----------------------------
Name: Amy E. Fredericks
Title: Vice President
Address for Notices:
Health Care and Non Profit Group
Fleet Center MA BOF 04A
75 State Street
Boston, MA 02109-1810
Telecopier No. (617) 346-1646
Attention: Amy Fredericks
Vice President
Telephone No. (617) 346-1629
MELLON BANK, N.A.
By: /s/ Carol Paige
----------------------------
Name: Carol Paige
Title: Vice President
Address for Notices:
Healthcare Banking
Plymouth Meeting/Exec. Campus
610 W. Germantown Pike
Suite 200/AIM #19E-0246
Plymouth Meeting, PA 19462
Telecopier No. (610) 941-4136
Attention: Carol Paige
Vice President
Telephone No. (610) 941-8409
<PAGE> 9
[Signature Page 6 of 7 to Eighth Amendment]
NATIONSBANK, N.A.
By: /s/ Kevin Wagley
-----------------------------
Name: Kevin Wagley
Title: Vice President
Address for Notices:
One NationsBank Plaza
Fifth Floor
Nashville, TN 37239-1697
Telecopier No. (615) 749-4646
Attention: S. Walker Choppin
Sr. Vice President
Telephone No. (615) 749-3607
THE BANK OF NEW YORK
By: /s/ Peter H. Abdill
-----------------------------
Name: Peter H. Abdill
Title: Vice President
Address for Notices:
Northeastern Division
One Wall Street
22nd Floor
New York, NY 10286
Telecopier No. (212) 635-6999
Attention: Peter Abdill
Vice President
Telephone No. (212) 635-6987
<PAGE> 10
[Signature Page 7 of 7 to Eighth Amendment]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By: /s/ Harold Bitler
-----------------------------
Name: Harold Bitler
Title: First VP
Address for Notices:
Healthcare Banking Group
0-1106, Tower 10
200 South Orange Avenue
Orlando, FL 32801
Telecopier No. (407) 237-2491
Attention: Jeffrey R. Dickson
First Vice President
Telephone No. (407) 237-4541
STATE OF GEORGIA
COUNTY OF FULTON
On the 29 day of January, 1997 personally appeared Harold Bitler,
as the First Vice President of SunTrust Bank, Central Florida, National
Association, and before me executed the attached Eighth Amendment dated as of
January 30, 1997 to the Credit Agreement between NovaCare, Inc., with SunTrust
Bank, Central Florida, National Association, as Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal,
in the state and county aforesaid.
/s/ Marian C.Maldonato
--------------------------------------------
Signature of Notary Public, State of Georgia
Notary Public, Fulton County, Georgia
My Commission Expires Sept. 10, 1999
Marian C. Maldonato
--------------------------------------------
(Print, Type or Stamp Commissioned Name of
Notary Public) Personally known X ;
--------
OR Produced Identification
----------------
Type of identification produced:
------------
<PAGE> 11
SCHEDULE 1.01(B)
COMMITMENTS OF BANKS
<TABLE>
<CAPTION>
Revolving
Participation Credit
Bank Percentage Commitment
---- ---------- ----------
<S> <C> <C>
PNC Bank, National Association 22.857142858 $ 40,000,000
Mellon Bank, N.A. 15.714285714 $ 27,500,000
NationsBank, N.A. 14.285714286 $ 25,000,000
CoreStates Bank, N.A. 11.428571429 $ 20,000,000
SunTrust 10.000000000 $ 17,500,000
Fleet Bank of Massachusetts, N.A. 8.571428571 $ 15,000,000
First Union National Bank of North Carolina 8.571428571 $ 15,000,000
The Bank of New York 8.571428571 $ 15,000,000
TOTAL 100.000000000% $175,000,000
============== ============
</TABLE>
<PAGE> 1
EXHIBIT 10(j)(x)
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
January 30, 1997
PNC Bank, National Association,
as Agent
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Attn: Marcie Knittel, Vice President
RE: Amendment No. 9 to Credit Agreement (the "Amendment")
Dear Marcie:
We refer to that certain Credit Agreement, dated as of May 27, 1994,
as amended (the "Credit Agreement"), by and among NovaCare, Inc. ("NovaCare")
and certain of its Subsidiaries, the Banks party thereto and PNC Bank, National
Association, as agent for the Banks ("Agent"). Defined terms used herein, not
otherwise defined herein, shall have the meanings given to them under the Credit
Agreement as amended hereby.
The Borrowers and Guarantors, the Banks and the Agent hereby desire
to amend the Credit Agreement, as hereinafter provided.
The parties hereto in consideration of their mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby,
covenant and agree as follows:
AGREEMENT
1. Amendment of Credit Agreement.
The parties hereto do hereby modify and amend the Credit Agreement
as follows:
(a) Section 8.02 (d) [Negative Covenants; Liquidations, Mergers,
Consolidations, Acquisitions.] is hereby amended by deleting subsection (ii) (g)
thereof and inserting in lieu thereof, the following:
<PAGE> 2
"(g) the Consideration paid by the Loan Parties for
each Permitted Acquisition shall not exceed Thirty Million Dollars
($30,000,000), and after giving effect to such Permitted Acquisition, the
Consideration paid by the Loan Parties for all Permitted Acquisitions made
during the current fiscal year of the Loan Parties shall not exceed One Hundred
Fifty Million Dollars ($150,000,000) (the "Annual Permitted Acquisition Amount")
provided that in no event shall the portion of the Annual Permitted Acquisition
Amount utilized to make Permitted Acquisitions of physician practices in the
specialty of occupational medicine exceed Forty Million Dollars ($40,000,000) in
any fiscal year and in no event shall the portion of the Annual Permitted
Acquisition Amount utilized to make Permitted Acquisitions of Professional
Employment Organizations exceed Forty Five Million Dollars ($45,000,000) during
the fiscal year ended June 30, 1997 or Forty Million Dollars ($40,000,000)
during any fiscal year thereafter."
(b) Section 8.02 (o) [Negative Covenants.; Minimum Fixed Charge
Coverage Ratio.] is hereby amended by deleting the words "Closing Date" in the
first line of the column entitled "Period" and inserting, in lieu thereof, the
words "9/30/1996".
2. Conditions of Effectiveness.
The effectiveness of this Amendment is expressly conditioned upon
the occurrence and completion of all of the following: (i) the Agent's receipt
of counterparts of this Amendment duly executed by the Borrowers, the Guarantors
and the Required Banks; (ii) the Agent's receipt of a certificate signed by the
Secretary or Assistant Secretary of the Borrowers and Guarantors, certifying as
to all action taken by the Borrowers and Guarantors to authorize the execution,
delivery and performance of this Amendment; and (iii) an opinion of Peter D.
Bewley, General Counsel of the Loan Parties reasonably satisfactory to the Agent
regarding this Amendment. Further, the representations and warranties of the
Loan Parties contained in Article VI of the Credit Agreement shall be true and
accurate on the date hereof with the same effect as though such representations
and warranties had been made on and as of such date (except representations and
warranties which relate solely to an earlier date or time, which representations
and warranties shall be true and correct on and as of the specific dates or
times referred to therein), the Loan Parties shall have performed and complied
with all covenants and conditions hereof; no Event of Default or Potential
Default under the Credit Agreement shall have occurred and be continuing or
shall exist and there shall be delivered to the Agent for the benefit of each
Bank a certificate of an Authorized Officer of the Loan Parties dated as of the
date hereof certifying as to each of the foregoing.
-2-
<PAGE> 3
This Amendment shall be dated as of and shall be effective as of the
date and year first above written which shall be the date of satisfaction of all
conditions precedent to effectiveness as set forth in this Section 2.
3. Full Force and Effect.
Except as expressly modified and amended by this Amendment, the
Credit Agreement and the other Loan Documents are hereby ratified and confirmed
and shall remain in full force and effect.
4. Costs, Expenses, Disbursements.
The Borrowers hereby agree to reimburse the Agent and the Banks on
demand for all costs, expenses and disbursements relating to this Amendment
which are payable by the Borrowers as provided in Section 10.05 of the Credit
Agreement.
5. Counterparts.
This Amendment may be executed by different parties hereto in any
number of separate counterparts, each of which, when so executed and delivered,
shall be an original, and all of such counterparts shall together constitute one
and the same instrument.
6. Governing Law.
This Amendment shall be deemed to be a contract under the laws of
the Commonwealth of Pennsylvania and for all purposes shall be governed by and
construed and enforced in accordance with the internal laws of the Commonwealth
of Pennsylvania without regard to its conflict of laws principles.
-3-
<PAGE> 4
[Signature Page 1 of 6 to Ninth Amendment]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Amendment as of the day and year first above
written.
BORROWERS AND GUARANTORS:
ATTEST: NOVACARE, INC., a Delaware corporation, and
each of the other BORROWERS listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as
Exhibit I) and each of the GUARANTORS
listed on Schedule 6.01(c) of the Credit
Agreement (which Schedule is attached
hereto as Exhibit I), other than those
listed below
By: /s/ Peter D. Bewley By: /s/ Robert E. Healy, Jr.
---------------------- -----------------------------
Robert E. Healy, Jr. [Name],
[Seal] the Senior Vice President [Title] of each
Borrower and Guarantor listed on Schedule
6.01(c) of the Credit Agreement (which
Schedule is attached hereto as Exhibit I),
other than those listed below, which is a
corporation and of each general partner of
each Borrower and Guarantor which is a
partnership
Address for Notices for each of the
foregoing Borrowers and Guarantors:
1016 West Ninth Avenue
King of Prussia, PA 19406
Telecopier No. (610) 992-3328
Attention: Chief Financial Officer
Telephone No. (610) 992-7200
<PAGE> 5
[Signature Page 2 of 6 to Ninth Amendment]
AGENT:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By: /s/ Marcie D. Knittel
-----------------------------
Title: Vice President
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
BANKS:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Marcie D. Knittel
-----------------------------
Title: Vice President
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
<PAGE> 6
[Signature Page 3 of 6 to Ninth Amendment]
CORESTATES BANK, N.A.
/s/ Jennifer W. Leibowitz
By:______________________________
Jennifer W. Leibowitz
Name:____________________________
Vice President
Title:___________________________
Address for Notices:
1339 Chestnut Street
P.O. Box 7618
FC 1-8-3-22
Philadelphia, PA 19101
Telecopier No. (215) 786-7721
Attention: Jennifer W. Leibowitz
Assistant Vice President
Telephone No. (215) 786-3972
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
/s/ Joseph H. Towell
By:______________________________
Joseph H. Towell
Name:____________________________
A.V.P.
Title:___________________________
Address for Notices:
One First Union Center
301 S. Giles Street
Charlotte, NC 28288-0735
Telecopier No. (704) 374-4092
Attention: James F. Young,
Assistant Vice President
Telephone No. (704) 383-0507
<PAGE> 7
[Signature Page 4 of 6 to Ninth Amendment]
FLEET BANK OF MASSACHUSETTS, N.A.
By: /s/ Amy E. Fredericks
-----------------------------
Name: Amy E. Fredericks
Title: Vice President
Address for Notices:
Health Care and Non Profit Group
Fleet Center MA BOF 04A
75 State Street
Boston, MA 02109-1810
Telecopier No. (617) 346-1646
Attention: Amy Fredericks
Vice President
Telephone No. (617) 346-1629
MELLON BANK, N.A.
By: /s/ Carol Paige
-----------------------------
Name: Carol Paige
Title: Vice President
Address for Notices:
Healthcare Banking
Plymouth Meeting/Exec. Campus
610 W. Germantown Pike
Suite 200/AIM #19E-0246
Plymouth Meeting, PA 19462
Telecopier No. (610) 941-4136
Attention: Carol Paige
Vice President
Telephone No. (610) 941-8409
<PAGE> 8
[Signature Page 5 of 6 to Ninth Amendment]
NATIONSBANK, N.A.
By: /s/ Kevin Wagley
-----------------------------------
Name: Kevin Wagley
Title: Vice President
Address for Notices:
One NationsBank Plaza
Fifth Floor
Nashville, TN 37239-1697
Telecopier No. (615) 749-4646
Attention: S. Walker Choppin
Sr. Vice President
Telephone No. (615) 749-3607
THE BANK OF NEW YORK
By: /s/ Walter C. Parelli
-----------------------------------
Name: Walter C. Parelli
Title: Assistant Vice President
Address for Notices:
Northeastern Division
One Wall Street
22nd Floor
New York, NY 10286
Telecopier No. (212) 635-6999
Attention: Peter Abdill
Vice President
Telephone No. (212) 635-6987
<PAGE> 9
[Signature Page 6 of 6 to Ninth Amendment]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By: /s/ Harold Bitler
-----------------------------
Name: Harold Bitler
Title: First V.P.
Address for Notices:
Healthcare Banking Group
0-1106, Tower 10
200 South Orange Avenue
Orlando, FL 32801
Telecopier No. (407) 237-2491
Attention: Jeffrey R. Dickson
First Vice President
Telephone No. (407) 237-4541
STATE OF GEORGIA
COUNTY OF FULTON
On the 29th day of January, 1997 personally appeared
Harold Bitler, as the First Vice President of SunTrust Bank, Central
Florida, National Association, and before me executed the attached Ninth
Amendment dated as of _____________, 1997 to the Credit Agreement between
NovaCare, Inc., with SunTrust Bank, Central Florida, National Association, as
Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal,
in the state and county aforesaid.
/s/ Marian C. Maldonads
------------------------------------------------
Signature of Notary Public, State of Georgia
Notary Public, Fulton County, Georgia
My commission expires Sept. 10, 1999
Marian C. Maldonads
------------------------------------------------
(Print, Type or Stamp Commissioned Name of
Notary Public) Personally known /x/;
----
OR Produced Identification
---------------------
Type of identification produced:
----------------
------------------------------------------------
<PAGE> 1
EXHIBIT 10 (j)(xi)
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
Dated as of March 31, 1997
PNC Bank, National Association,
as Agent
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Attn: Marcie Knittel, Vice President
RE: Amendment No. 10, Waiver and Consent to Credit Agreement (the
"Amendment")
Dear Marcie:
We refer to that certain Credit Agreement, dated as of May 27, 1994,
as amended (the "Credit Agreement"), by and among NovaCare, Inc. ("NovaCare")
and certain of its Subsidiaries, the Banks party thereto and PNC Bank, National
Association, as agent for the Banks ("Agent"). Defined terms used herein, not
otherwise defined herein, shall have the meanings given to them under the Credit
Agreement as amended hereby.
The Borrowers and Guarantors, the Banks and the Agent hereby desire
to amend the Credit Agreement, as hereinafter provided.
The parties hereto in consideration of their mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby,
covenant and agree as follows:
AGREEMENT
PART I: AMENDMENT AND WAIVER
1. Amendment to Credit Agreement.
The parties hereto hereby agree that subject to the prior
satisfaction of all conditions precedent to the effectiveness of this Amendment
set forth in Part I, Section 4, the Credit Agreement shall be automatically
amended, as follows:
<PAGE> 2
(a) Section 8.02 (d) [LIQUIDATIONS, MERGERS, CONSOLIDATIONS,
ACQUISITIONS.], shall be amended by adding the following sentence after the last
sentence thereof:
"Notwithstanding anything herein or in any other Loan Document
to the contrary, for periods on and after March 31, 1997 neither NovaCare nor
any other Loan Party nor any Subsidiary of any Loan Party shall at any time
become a party to any merger or consolidation, or acquire by purchase, lease or
otherwise all or substantially all of the assets or capital stock or other
ownership interests of any other entity or Person which engages in the business
of a Professional Employment Organization, other than the continued ownership of
NovaCare's equity interest of common stock of NovaCare Employee Services, Inc.,
a Delaware corporation, such equity interest to be in an amount which at no time
shall exceed the amount of such interest as of March 31, 1997."
(b) Section 8.02(i) [LOANS AND INVESTMENTS], clause (iv) shall be
deleted in its entirety, and the following clause (iv) shall be inserted in lieu
thereof:
"(iv) Permitted Intercompany Indebtedness, and Investments by
the Loan Parties in other Loan Parties; provided, however, that for periods on
and after March 31, 1997 the Investments by the Loan Parties in other Loan
Parties which are engaged in the business of a Professional Employment
Organization shall be limited solely to the Investment by NovaCare in NovaCare
Employee Services, Inc., a Delaware corporation, such Investment to be in an
amount which at no time shall exceed the amount of such Investment as of March
31, 1997; and"
(c) Section 8.02(n) [FUNDED DEBT TO CASH FLOW FROM OPERATIONS] is
hereby amended and restated in its entirety to read as follows:
"(n) Funded Debt to Cash Flow From Operations. The Loan
Parties shall not permit the ratio of Consolidated Funded Debt to Consolidated
Cash Flow from Operations, calculated as of the end of each fiscal quarter for
the four fiscal quarters then ended, to exceed the ratio set forth below during
the period specified below:
<TABLE>
<CAPTION>
RATIO OF CONSOLIDATED
FUNDED DEBT TO CONSOLIDATED
PERIOD CASH FLOW FROM OPERATIONS
------ -------------------------
<S> <C>
Closing Date through 6/30/1995 3.00 to 1.00
7/1/1995 through 12/31/1995 2.75 to 1.00
1/1/1996 through 6/30/1996 2.50 to 1.00
7/1/1996 through 12/31/1996 3.00 to 1.00
1/1/1997 through 6/30/1997 2.75 to 1.00
7/1/1997 and thereafter 2.50 to 1.00"
</TABLE>
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<PAGE> 3
2. Background; Certain Representations, Warranties and Covenants of
Loan Parties.
NovaCare advises the Banks that during the fiscal quarter ended
March 31, 1997, the Loan Parties entered into acquisition transactions and
during the fiscal quarter ended June 30, 1997, the Loan Parties anticipate
entering into acquisition transactions, in all such cases the aggregate
Consideration with respect to which exceeds the $150,000,000 limitation for
Consideration paid by the Loan Parties for Permitted Acquisitions in any fiscal
year, as set forth in Section 8.02(d)(ii)(g) of the Credit Agreement.
The Loan Parties represent and warrant that Part A of Exhibit 1
hereto sets forth a complete and accurate list of each acquisition completed
during the fiscal quarter ended March 31, 1997, providing adequate detail of the
following for each acquisition: (i) the name of the acquired entity; (ii)
whether such acquired entity has joined the Credit Agreement as a Borrower or a
Guarantor; (iii) the line of (i) business of the acquired entity; and (iv) the
Consideration paid by the Loan Parties for the Permitted Acquisition. The Loan
Parties represent that all of the equity interests of each acquired entity or of
the entity which acquired such assets have been pledged to the Agent for the
benefit of the Banks on a first priority perfected basis.
The Loan Parties represent and warrant that Part B of Exhibit 1
hereto sets forth a complete and accurate list of each acquisition expected to
be completed during the fiscal quarter ended June 30, 1997, providing adequate
detail of the following for each acquisition: (i) the name of the entity to be
acquired; (ii) whether such entity will join the Credit Agreement as a Borrower
or a Guarantor; (iii) the line of business of the entity to be acquired; and
(iv) a good faith estimate of the expected Consideration to be paid by the Loan
Parties for the entity or such assets. The Banks acknowledge that the
Consideration set forth on Part B of Exhibit 1, is subject to final negotiation
of the terms of each transaction and that, without prior approval of the Banks,
the Loan Parties may increase the aggregate Consideration for each transaction
by not more than 25% of the original estimated Consideration for such
transactions as set forth on Part B of Exhibit 1.
3. Waiver Relating to Liquidations, Mergers, Consolidations,
Acquisitions.
The Banks hereby waive the aggregate limitation of $150,000,000 of
Permitted Acquisitions set forth in Section 8.02(d), clause (ii)(g)
[Liquidations, Mergers, Consolidations, Acquisitions] made by the Loan Parties
in the fiscal year ended June 30, 1997, to permit the Loan Parties to consummate
certain acquisitions listed on Exhibit 1 hereto made during the fiscal quarter
ended March 31, 1997 or to be made during the fiscal quarter ending June 30,
1997, provided that such acquisitions are made during the time periods and for
the Consideration listed on Exhibit 1 and so long as each Permitted Acquisition
otherwise complies with Section 8.02(d) of the Credit Agreement (including
without limitation that all equity interests of the entity acquired or which is
acquiring assets have been pledged to the Agent for the benefit of the Banks on
a first priority, perfected basis). The foregoing waiver is applicable only to
the fiscal quarters ended March 31 and June 30, 1997, and to the extent that the
acquisitions specified on Exhibit 1 are not completed on or before June 30,
1997, such acquisitions must be permitted by the provisions of Section 8.02(d)
and the other provisions of the Credit Agreement. To the extent that the Loan
Parties desire to substitute a potential acquisition listed on Part B of Exhibit
I for a
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<PAGE> 4
different acquisition, or desire to amend Exhibit 1 in any other manner, the
prior consent of the Required Banks, which shall not be unreasonably withheld,
shall be required. Within five (5) Business Days following receipt by the Banks
from NovaCare of a request to amend Part B of Exhibit 1, any Bank objecting to
the proposed amendment shall promptly notify NovaCare and the Agent of such
objection. Any Bank not objecting to a proposed amendment within such time
period shall be deemed to have consented to such proposed amendment.
4. Conditions of Effectiveness.
The effectiveness of the Amendment and Waiver set forth in this Part
I, Sections 1, 2 and 3 is expressly conditioned upon the occurrence and
completion of all of the following to the satisfaction of the Agent, in its sole
discretion:
(i) the Agent's receipt of counterparts of this Amendment duly
executed by the Borrowers, the Guarantors and all of the Banks; and (ii) the
Agent's receipt of a certificate signed by the President, Chief Executive
Officer or Chief Financial Officer of the Borrowers and Guarantors, certifying
as to all action taken by the Borrowers and Guarantors to authorize the
execution, delivery and performance of this Amendment and that all conditions to
the effectiveness of this Amendment have been met. Further, the representations
and warranties of the Loan Parties contained in Article VI of the Credit
Agreement shall be true and accurate on the date hereof with the same effect as
though such representations and warranties had been made on and as of such date
(except representations and warranties which relate solely to an earlier date or
time, which representations and warranties shall be true and correct on and as
of the specific dates or times referred to therein), the Loan Parties shall have
performed and complied with all covenants and conditions contained herein and in
the Loan Documents; no Event of Default or Potential Default under the Credit
Agreement shall have occurred and be continuing or shall exist; the information
set forth on Parts A and B of Exhibit 1 hereto shall be true and correct; and
there shall be delivered to the Agent for the benefit of each Bank a certificate
of the President, Chief Executive Officer or Chief Financial Officer of the Loan
Parties dated as of the date hereof certifying as to each of the foregoing.
PART II: AMENDMENT AND CONSENT REGARDING SPIN-OFF
1. Background; Certain Representations, Warranties and Covenants of
Loan Parties.
NovaCare currently owns at least a 90% interest in a certain
Professional Employment Organization known as NovaCare Employee Services, Inc.,
a Delaware corporation (the "Spin-Off Entity"). NovaCare plans to spin-off a
percentage of its ownership interest in the Spin-Off Entity by either directly
selling a portion of its ownership interest in the Spin-Off Entity or by having
the Spin-Off Entity issue additional shares of capital stock through an initial
public offering of stock (the "Spin-Off"). The Spin-Off will require the consent
of the all of the Banks. NovaCare desires that after the Spin-Off, the Spin-Off
Entity be classified as an Excluded Entity. NovaCare covenants that it shall
consummate the Spin-Off only if: (i) the aggregate proceeds to NovaCare or the
Spin-Off Entity (in either case, net of all reasonable and customary transaction
fees and costs and net of federal, state and local income taxes in connection
with the Spin-Off) shall be in an amount at least equal to the amount necessary
to repay all indebtedness of the Spin-
-4-
<PAGE> 5
Off Entity to NovaCare, including all accrued interest thereon, as of the date
of consummation of the Spin-Off; (ii) a portion of the proceeds of the Spin-Off
shall be used, on the date of consummation of the Spin-Off, by the Spin-Off
Entity to repay all of the outstanding Indebtedness of the Spin-Off Entity to
NovaCare, together with accrued interest thereon, which Indebtedness as of March
31, 1997 had an outstanding principal balance of $26 million; (iii) the Spin-Off
shall occur on or before September 30, 1997, and after giving effect to the
Spin-Off, NovaCare shall own at least 70% of all of the issued and outstanding
equity interests of the Spin-Off Entity; and (iv) at least ten (10) days prior
to consummation of the Spin-Off, NovaCare shall have delivered to the Agent
copies of all documents in connection with the Spin-Off (the "Spin-Off
Documents") which shall be in form and substance satisfactory to the Agent. The
Loan Parties represent and warrant that after giving effect to the Spin-Off, no
Event of Default or Potential Default shall exist or be continuing.
2. Consent of All Banks; Release of Certain Collateral.
(a) The consent of the Banks, as hereinafter provided, is subject to
the terms and conditions of this Amendment, including without limitation the
accuracy of all representations and warranties of the Loan Parties with respect
to the Spin-Off and the prior satisfaction of all covenants and all conditions
precedent set forth in Part II, Section 4 hereof, and subject to the foregoing,
the Banks hereby consent solely to either: (i) the spin-off of a portion of
NovaCare's stock in the Spin-Off Entity as described above or (ii) the issuance
by the Spin-Off Entity of additional shares of capital stock through an initial
public offering of stock. For the limited purpose, solely of permitting the
transactions described in the preceding sentence, the Banks hereby waive the
limitations on sales set forth in Section 8.02(e)(iv) of the Credit Agreement.
(b) Effective upon the consummation of the Spin-Off and satisfaction
of all conditions precedent set forth in Part II, Section 4 hereof, the Banks
consent to the release of their Lien upon the Stock of the Spin-Off Entity owned
by NovaCare and authorize the Agent to take the actions required to so release
such Lien.
3. Amendment to Credit Agreement - Effective Upon Consummation of
Spin-Off.
The parties hereto hereby agree that subject to the prior
satisfaction of all conditions precedent as set forth in Part II, Section 4,
effective upon the consummation of the Spin-Off, the Credit Agreement shall be
automatically amended, as follows:
(a) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by deleting,
in its entirety the definition of "Consolidated Cash Flow from Operations" and
inserting in lieu thereof, the following:
"Consolidated Cash Flow from Operations for any period of
determination shall mean (i) the sum of net income, depreciation, amortization,
other non-cash charges, if any, deducted in the determination of net income,
interest expense and income tax expense, minus (ii) non-cash credits, if any,
included in the determination of net income, in each case of NovaCare and its
Subsidiaries for such period determined and consolidated in accordance with GAAP
but without regard to net income and the other items described in clauses (i)
and (ii) of this sentence
-5-
<PAGE> 6
attributable to NovaCare PEO (for periods on and after the Spin-Off
Consummation) and without regard to net income and the other items described in
clauses (i) and (ii) of this sentence attributable to Restricted Excluded
Entities and; provided that, if a Loan Party shall have made one or more
Permitted Acquisitions during such period, Consolidated Cash Flow from
Operations shall be adjusted on a pro forma basis to give effect to all
Permitted Acquisitions as if they had occurred at the beginning of such period;
and provided further that if any Loan Party shall have effected one or more
Permitted Asset Transfers during such period, Consolidated Cash Flow from
Operations shall be adjusted on a pro forma basis to give effect to all such
Permitted Asset Transfers as if they had occurred at the beginning of such
period. The pro forma adjustments described in the previous sentence shall be
made based upon historical financial statements for the four (4) fiscal quarters
prior to the date of such Permitted Acquisition or Permitted Asset Transfer, as
the case may be, which historical financial statements shall be reasonably
satisfactory to the Agent."
(b) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by deleting,
in its entirety the definition of "Consolidated Earnings Available for Fixed
Charges" and inserting in lieu thereof, the following:
"Consolidated Earnings Available for Fixed Charges shall mean:
(A) for any period of determination from the Closing Date
through, but not including, the Sixth Amendment Effective Date, the sum of net
income, interest expense, income tax expense and expenses under operating
leases, in each case of NovaCare and its Subsidiaries for such period determined
and consolidated in accordance with GAAP, but without regard to net income,
interest expense, income tax expense and expenses under operating leases
attributable to Restricted Excluded Entities; and
(B) for any period of determination from the Sixth
Amendment Effective Date and thereafter, the sum of net income (excluding
non-cash credits, if any, included in the determination of net income), interest
expense, income tax expense, depreciation, amortization, other non-cash charges,
if any, deducted in the determination of net income and expenses under operating
leases, in each case of NovaCare and its Subsidiaries for such period determined
and consolidated in accordance with GAAP, but without regard to net income,
interest expense, income tax expense, depreciation, amortization, other non-cash
charges and expenses under operating leases attributable to NovaCare PEO (for
periods on and after the Spin-Off Consummation) and without regard to such items
attributable to Restricted Excluded Entities.
If a Loan Party shall have made one or more Permitted
Acquisitions during any such period, Consolidated Earnings Available for Fixed
Charges shall be adjusted on a pro forma basis to give effect to all Permitted
Acquisitions as if they had occurred at the beginning of such period; and
provided further that if any Loan Party shall have effected one or more
Permitted Asset Transfers during such period, Consolidated Earnings Available
for Fixed Charges shall be adjusted on a pro forma basis to give effect to all
such Permitted Asset Transfers as if they had occurred at the beginning of such
period. The pro forma adjustments described in the previous sentence shall be
made based upon historical financial statements for the four (4)
-6-
<PAGE> 7
fiscal quarters prior to the date of such Permitted Acquisition or Permitted
Asset Transfer, as the case may be, which historical financial statements shall
be reasonably satisfactory to the Agent."
(c) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting, in its entirety the definition of "Consolidated Fixed Charges" and
inserting in lieu thereof, the following:
"Consolidated Fixed Charges shall mean:
(A) for any period of determination from the Closing Date
through, but not including, the Sixth Amendment Effective Date, the sum of
interest expense plus expenses under operating leases, in each case of NovaCare
and its Subsidiaries for such period determined and consolidated in accordance
with GAAP;
(B) for any period of determination from the Sixth
Amendment Effective Date through and including the Spin-Off Consummation, the
sum of interest expense, expenses under operating leases, income tax expense,
current maturities of long term Indebtedness, and current principal payments
under capitalized leases (for the twelve (12) month period following the date of
determination), in each case of NovaCare and its Subsidiaries for such period
determined and consolidated in accordance with GAAP; and
(C) for any period of determination after the Spin-Off
Consummation, the sum of interest expense, expenses under operating leases,
income tax expense, current maturities of long term Indebtedness, and current
principal payments under capitalized leases (for the twelve (12) month period
following the date of determination), in each case of NovaCare and its
Subsidiaries (other than NovaCare PEO) for such period determined and
consolidated in accordance with GAAP.
If a Loan Party shall have made one or more Permitted
Acquisitions during any such period, Consolidated Fixed Charges shall be
adjusted on a pro forma basis to give effect to all Permitted Acquisitions as if
they had occurred at the beginning of such period; and provided further that if
any Loan Party shall have effected one or more Permitted Asset Transfers during
such period, Consolidated Fixed Charges shall be adjusted on a pro forma basis
to give effect to all such Permitted Asset Transfers as if they had occurred at
the beginning of such period. The pro forma adjustments described in the
previous sentence shall be made based upon historical financial statements for
the four (4) fiscal quarters prior to the date of such Permitted Acquisition or
Permitted Asset Transfer, as the case may be, which historical financial
statements shall be reasonably satisfactory to the Agent."
(d) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting, in its entirety the definition of "Consolidated Funded Debt" and
inserting in lieu thereof, the following:
"Consolidated Funded Debt shall mean (i) as of any date of
determination through but not including the Spin-Off Consummation, any
Indebtedness of NovaCare and its Subsidiaries to persons other than NovaCare and
its Subsidiaries, determined and consolidated in accordance with GAAP, and (ii)
as of any date of determination on and after the Spin-Off Consummation, any
Indebtedness of NovaCare and its Subsidiaries (other than NovaCare PEO),
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<PAGE> 8
to persons other than NovaCare and its Subsidiaries determined and consolidated
in accordance with GAAP. Any items which are included in more than one clause of
the definition of Indebtedness shall not be counted more than one time in
computing the amount of Consolidated Funded Debt."
(e) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting, in its entirety the definition of "Consolidated Net Income" and
inserting in lieu thereof, the following:
"Consolidated Net Income shall mean (i) for any period of
determination for periods prior to the Spin-Off Consummation, the net income of
NovaCare and its Subsidiaries for such period determined and consolidated in
accordance with GAAP, and (ii) for any period of determination for periods on
and after the Spin-Off Consummation, the net income of NovaCare and its
Subsidiaries (other than NovaCare PEO) for such period determined and
consolidated in accordance with GAAP, except that in the case of amounts under
either the forgoing clause (i) or (ii), there shall be excluded from such net
income any increases or decreases in income or expenses resulting from changes
in GAAP on and after the Closing Date."
(f) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting, in its entirety the definition of "Consolidated Net Worth" and
inserting in lieu thereof, the following:
"Consolidated Net Worth shall mean (i) as of any date of
determination for periods prior to the Spin-Off Consummation, total
stockholders' equity of NovaCare and its Subsidiaries as of such date determined
and consolidated in accordance with GAAP, and (ii) as of any date of
determination for periods on and after the Spin-Off Consummation, total
stockholders' equity of NovaCare and its Subsidiaries (other than NovaCare PEO)
as of such date determined and consolidated in accordance with GAAP."
(g) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting, in its entirety the definition of "Excluded Entities" and inserting in
lieu thereof, the following:
"Excluded Entities shall mean collectively (i) any Minority
Subsidiary or Unaffiliated Managed Company in which a Loan Party has made a
Restricted Investment permitted by Section 8.02(i)(v); (ii) the Excluded
Qualifying Subsidiaries; and (iii) effective upon the Spin-Off Consummation,
NovaCare PEO; and Excluded Entity shall mean separately any of the Excluded
Entities."
(h) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting in its entirety the definition of "Intercompany Indebtedness" and
inserting in lieu thereof, the following:
"Intercompany Indebtedness shall mean, for periods prior to
the Spin-Off Consummation, all Indebtedness of NovaCare or any of its
Subsidiaries, as maker, to NovaCare or any other Subsidiary, as holder, and for
periods on or after the Spin-Off Consummation, all Indebtedness of NovaCare or
any of its Subsidiaries (other than NovaCare PEO), as maker, to NovaCare or any
other Subsidiary, as holder. It is expressly agreed that for periods on or after
the Spin-Off Consummation, neither NovaCare nor any Subsidiary of NovaCare shall
make any loans or advances to NovaCare PEO."
-8-
<PAGE> 9
(i) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting clause (C) of the definition of "Minimum Net Worth Requirement" and
inserting in lieu thereof, the following new clause (C):
"(C) for any period of determination from July 1, 1996 and
thereafter, the sum of the amounts under the following clauses (i), (ii), (iii)
and (iv) reduced by the amount under the following clause (v): (i) the amount
determined under the preceding clause (B) as of June 30, 1996, plus (ii)
seventy-five percent (75%) of Consolidated Net Income of NovaCare and its
Subsidiaries (other than, for periods on and after the Spin-Off Consummation,
the portion of Consolidated Net Income attributable to NovaCare PEO) for each
fiscal quarter in which net income was earned (as opposed to a net loss), plus
(iii) to the extent not included in Consolidated Net Income in the preceding
clause (ii), one hundred percent (100%) of federal and state income tax refunds
(collectively the "Tax Refunds") received by NovaCare or a Subsidiary of
NovaCare (other than, for periods on and after the Spin-Off Consummation,
federal and state tax refunds attributable to NovaCare PEO) during the period of
determination relating to the sale by them of their rehabilitation hospitals
during the fiscal year ended June 30, 1995, plus (iv) the proceeds received by
NovaCare in connection with the sale of shares of its capital stock after
deducting any expenses associated with any sale including proceeds from
conversion of the Subordinated Debentures, during the period from July 1, 1996
through (and including) the date of determination, minus (v) the cash purchase
price of common stock of NovaCare repurchased by NovaCare during the period of
determination, up to an aggregate maximum amount for the repurchase of such
common stock of $70,000,000 plus the portion of the Tax Refunds used to
repurchase such common stock, for all periods after July 1, 1995."
(j) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
inserting after the definition of Notes, the following new definition of
"NovaCare PEO":
"NovaCare PEO shall mean NovaCare Employee Services, Inc., a
corporation organized and existing under the laws of the State of Delaware."
(k) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting the definition of "Permitted Investment in Excluded Entities" in its
entirety and inserting, in lieu thereof, the following:
"Permitted Investment in Excluded Entities shall mean
Restricted Investments in Excluded Entities which do not exceed in the aggregate
$50,000,000 for all Excluded Entities or the following amount as to any
individual Excluded Entity: (i) $5,000,000, in the case of a Restricted
Investment in an Excluded Entity which is a Minority Subsidiary; (ii)
$10,000,000, in the case of a Restricted Investment in an Excluded Entity which
is a Subsidiary; (iii) $1,000,000, in the case of a Restricted Investment in
either an Unaffiliated Managed Company or an entity which is neither a
Subsidiary nor a Minority Subsidiary, and (iv) for periods on and after the
Spin-Off Consummation, $0, in the case of any Restricted Investment in NovaCare
PEO. In addition, the aggregate Restricted Investments in Excluded Entities of
the type described in clause (iii) of the preceding sentence shall not exceed
$5,000,000. Notwithstanding anything in this Agreement to the contrary, for
periods on and after the Spin-Off
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<PAGE> 10
Consummation, no Restricted Investments shall be made by NovaCare or any
Subsidiary of NovaCare in NovaCare PEO."
(l) Section 1.01 [CERTAIN DEFINITIONS] shall be amended by
deleting the definition of "Permitted Line of Business" in its entirety and
inserting, in lieu thereof, the following:
"Permitted Line of Business shall mean, for the period
commencing on the Closing Date through the Sixth Amendment Effective Date, the
Existing Lines of Business; for the period commencing on the Sixth Amendment
Effective Date through but not including the date of the Spin-Off Consummation,
the business substantially engaged in by NovaCare and its Subsidiaries on the
Sixth Amendment Effective Date, rehabilitation and subacute care management and
consulting businesses, the ownership and operation of physician practice groups
specializing in occupational medicine and the ownership and operation of
Professional Employment Organizations; and for periods from and after the
Spin-Off Consummation, the business substantially engaged in by NovaCare and its
Subsidiaries on the Sixth Amendment Effective Date, rehabilitation and subacute
care management and consulting businesses and the ownership and operation of
physician practice groups specializing in occupational medicine."
(m) Section 1.01 [CERTAIN DEFINITIONS] shall be amended to include
the following new definitions of "Spin-Off" and "Spin-Off Consummation," which
shall be inserted between the definition of "Solvent" and the definition of
"Subordinated Debentures," as follows:
"Spin-Off shall mean that certain transaction pursuant to
which the following shall have occurred: (i) NovaCare shall have either
completed a spin-off of a percentage of its ownership interests in, or, caused
the issuance, through an initial public offering of stock, of additional shares
of capital stock of NovaCare PEO and as a result of such transaction, NovaCare,
after giving effect thereto, owned at least 70% of all of the issued and
outstanding equity interests of NovaCare PEO, (ii) the aggregate proceeds to
NovaCare or NovaCare PEO (in either case, net of all reasonable and customary
transaction fees and costs and all federal, state and local income taxes in
connection therewith) were at least equal to the amount necessary to repay all
indebtedness of NovaCare PEO to NovaCare, including all accrued interest
thereon, as of the Spin-Off Consummation, and (iii) a portion of such proceeds
were used to repay all outstanding Indebtedness together with accrued interest
thereon, of NovaCare PEO to NovaCare.
Spin-Off Consummation shall mean the date of the consummation
of the Spin-Off in accordance with and subject to the satisfaction of all of the
terms and conditions to the effectiveness of the Tenth Amendment."
(n) Section 1.01 [CERTAIN DEFINITIONS] shall be amended to include
the following new definition of "Tenth Amendment" which shall be inserted
between the definition of "Subsidiary Shares" and the definition of "Termination
Date" as follows:
"Tenth Amendment shall mean that certain tenth amendment to
this Agreement which is dated as of March 31, 1997 and which is effective as
provided therein."
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<PAGE> 11
(o) Section 2.08 [USE OF PROCEEDS], shall be amended and restated
in its entirety to read as follows:
"2.08 Use of Proceeds. The proceeds of the Revolving Credit
Loans shall be used by the Borrowers only for: (i) Permitted Acquisitions and
the refinancing of Indebtedness assumed in connection therewith , (ii) the
development of health care related businesses and facilities and for periods
prior to the Spin-Off Consummation, Professional Employment Organizations, each
as permitted under this Agreement, and (iii) general corporate purposes,
provided, however, that no portion of the Revolving Credit Loans shall be used
directly or indirectly for the purpose of repaying or redeeming the Subordinated
Debentures."
(p)(i) Section 8.01 (m) [CERTIFICATE OF BORROWERS; OTHER REPORTS AND
INFORMATION] is hereby amended by adding the following sentence at the end of
clause (i) [QUARTERLY FINANCIAL STATEMENTS]:
"Notwithstanding anything contained herein to the contrary,
for periods on and after the Spin-Off Consummation, the quarterly financial
statements of NovaCare and its consolidated Subsidiaries required to be prepared
and delivered in accordance with this Section 8.01 (m)(i) shall be prepared on a
consolidated basis in accordance with GAAP but without regard to NovaCare PEO."
(p)(ii) Section 8.01(m) [CERTIFICATE OF BORROWERS; OTHER REPORTS AND
INFORMATION] shall also be amended by adding the following sentence at the end
of clause (ii) [ANNUAL FINANCIAL STATEMENTS]:
"Notwithstanding anything contained herein to the contrary,
for periods on and after the Spin-Off Consummation, the annual financial
statements of NovaCare and its consolidated Subsidiaries required to be prepared
and delivered in accordance with this Section 8.01 (m)(ii) shall be prepared on
a consolidated basis in accordance with GAAP but without regard to NovaCare
PEO."
(q) Section 8.02(a) [INDEBTEDNESS.] is hereby amended by deleting
clause (vii) in its entirety and inserting the following new clause (vii), in
lieu thereof:
"(vii) Permitted Intercompany Indebtedness, provided, however,
that for periods on or after the Spin-Off Consummation, neither NovaCare nor any
Subsidiary of NovaCare shall make any loans or advances to NovaCare PEO."
(r) Section 8.02 (d) [LIQUIDATIONS, MERGERS, CONSOLIDATIONS,
ACQUISITIONS.], shall be amended and restated in its entirety to read as
follows:
"(d) Liquidations, Mergers, Consolidations, Acquisitions. Each
of the Loan Parties shall not, and shall not permit any of its Subsidiaries
(other than NovaCare PEO for any period after the Spin-Off Consummation) to,
dissolve, liquidate or wind-up its affairs, or become a party to any merger or
consolidation, or acquire by purchase, lease or otherwise all or
-11-
<PAGE> 12
substantially all of the assets or capital stock or other ownership interests of
any other person, provided that
(i) any wholly-owned Subsidiary of NovaCare may
consolidate or merge into another Loan Party which is wholly-owned by one or
more of the other Loan Parties, and
(ii) any Loan Party may acquire, whether by purchase or by
merger, (A) all of the ownership interests of another Person or (B)
substantially all of the assets of another Person or of a business or division
of another Person (each a "Permitted Acquisition"), provided that each of the
following requirements is met:
(a) such Person shall be a corporation, limited
liability company or other entity with respect to applicable state law provided
that the owners of all stock or other ownership interests in such entity shall
not be liable for any obligations of such entity or for the claims of any
creditors thereof,
(b) if the Loan Parties are acquiring the ownership
interests in such Person, such Person shall join this Agreement as a Borrower or
a Guarantor pursuant to Section 11.18 hereof and the owners of such acquired
Person shall grant Liens in the stock or other ownership interests in such
Person and otherwise comply with Section 11.18 on or before the date of such
Permitted Acquisition,
(c) the board of directors or other equivalent
governing body of such Person shall have approved such Permitted Acquisition,
(d) the business acquired, or the business conducted
by the Person whose ownership interests are being acquired, as applicable, shall
be a Permitted Line of Business,
(e) no Potential Default or Event of Default shall
exist immediately prior to and after giving effect to such Permitted
Acquisition,
(f) after giving effect to such Permitted Acquisition
there shall be Available Revolving Credit Commitments of at least Five Million
Dollars ($5,000,000), and
(g) the Consideration paid by the Loan Parties for
each Permitted Acquisition shall not exceed Thirty Million Dollars
($30,000,000), and after giving effect to such Permitted Acquisition, the
Consideration paid by the Loan Parties for all Permitted Acquisitions made
during the current fiscal year of the Loan Parties shall not exceed One Hundred
Fifty Million Dollars ($150,000,000) (the "Annual Permitted Acquisition Amount")
provided that in no event shall the portion of the Annual Permitted Acquisition
Amount utilized to make Permitted Acquisitions of physician practices in the
specialty of occupational medicine exceed Forty Million Dollars ($40,000,000) in
any fiscal year and in no event shall the portion of the Annual Permitted
Acquisition Amount utilized to make Permitted Acquisitions of Professional
Employment Organizations in any fiscal year prior to the fiscal year during
which the Spin-Off
-12-
<PAGE> 13
Consummation occurs exceed Forty Five Million Dollars ($45,000,000).
Notwithstanding anything in this Agreement to the contrary, for periods on or
after the Spin-Off Consummation, no portion of the Annual Permitted Acquisition
Amount shall be utilized to make Permitted Acquisitions of Professional
Employment Organizations."
(s) Section 8.02 (e) [DISPOSITIONS OF ASSETS OR SUBSIDIARIES.],
shall be amended and restated in its entirety to read as follows:
"(e) Dispositions of Assets or Subsidiaries. Each Loan Party
shall not sell, convey, assign, lease, abandon or otherwise transfer or dispose
of, voluntarily or involuntarily, any of its properties or assets, tangible or
intangible (including but not limited to sale, assignment, discount or other
disposition of accounts, contract rights, chattel paper, equipment or general
intangibles with or without recourse or of capital stock, shares of beneficial
interest or partnership interests of a Subsidiary), except transactions
involving (i) any sale, abandonment, transfer or lease of assets in the ordinary
course of business which are no longer necessary or required in the conduct of
such Loan Party's business; (ii) any sale, transfer, abandonment or lease of
assets by any Loan Party which is a wholly owned Subsidiary of NovaCare to
NovaCare or any other Loan Party which is a wholly owned Subsidiary of NovaCare;
(iii) any sale, abandonment, transfer or lease of assets in the ordinary course
of business which are replaced by substitute assets; or (iv) a sale of assets
provided that the sum of the Sale Price received from such sale and from all
prior sales permitted under this clause (iv) (but without regard to the Sale
Price received in connection with the Spin-Off) does not exceed 5% of
Consolidated Net Worth as of the end of the fiscal quarter of NovaCare preceding
the date of such sale and provided that the Loan Parties deliver to the Banks
evidence of compliance with this clause (iv) before making such sale."
(t)(i) Section 8.02(i) [LOANS AND INVESTMENTS], clause (iv) shall be
deleted in its entirety, and the following clause (iv) shall be inserted in lieu
thereof:
"(iv) Permitted Intercompany Indebtedness, and Investments by
the Loan Parties in other Loan Parties; provided, however, that for periods on
or after the Spin-Off Consummation, neither NovaCare nor any Subsidiary of
NovaCare shall make any loans or advances to or investments in NovaCare PEO;
and"
(t)(ii) Section 8.02 (i) [LOANS AND INVESTMENTS], shall also be
amended by adding the following sentence after the last sentence of clause (v)
thereof:
"Notwithstanding anything contained in this Section 8.02(i) to
the contrary, neither NovaCare nor any other Loan Party shall at any time on or
after the Spin-Off Consummation make any loan or advance to, purchase, acquire
or own any stock, bonds, notes or securities of, or any other investment or
interest in, or make any capital contribution to, or agree, become or remain
liable to do any of the foregoing with respect to NovaCare PEO, other than the
continued ownership of NovaCare's equity interest of common stock of NovaCare
PEO as owned as of the Spin-Off Consummation."
-13-
<PAGE> 14
(u) Section 8.02(k) [MINIMUM CURRENT RATIO], shall be amended by
adding the following sentence after the table set forth in such Section:
"For periods on and after the Spin-Off Consummation, for
purposes solely of this Section 8.02(k), NovaCare PEO shall not be deemed to be
a Subsidiary of NovaCare for purposes of calculating the ratio set forth above,
and the current assets and current liabilities of NovaCare PEO shall be excluded
from calculation of such ratio."
(v) Section 11.18 [JOINDER OF LOAN PARTIES.], clause (i) shall be
amended by adding the following sentence after the last sentence thereof;
"Notwithstanding the provisions of this Section 11.18(i) to
the contrary, for periods after the Spin-Off Consummation, NovaCare PEO shall
not be required to join this Agreement as a Guarantor or Borrower, and further,
following the Spin-Off Consummation, any equity interests of NovaCare PEO owned
by NovaCare or any Subsidiary of NovaCare shall not be required to be pledged to
the Agent for the benefit of the Banks."
(w) Schedule 1.01(E) [EXCLUDED ENTITIES] to the Credit Agreement
shall be amended and restated in its entirety in the form of such Schedule
attached hereto, for the purpose of including the Spin-Off Entity as an Excluded
Entity.
(x) Exhibit 8.01(m)(iii) [COMPLIANCE CERTIFICATE] to the Credit
Agreement shall be amended and restated in its entirety in the form of such
Exhibit attached hereto.
4. Conditions of Effectiveness.
The effectiveness of the Amendment and Consent set forth in this
Part II, Sections 1, 2 and 3 is expressly conditioned upon the occurrence and
completion of all of the following to the satisfaction of the Agent, in its sole
discretion: (i) the Agent's receipt of counterparts of this Amendment duly
executed by the Borrowers, the Guarantors and all of the Banks; (ii) NovaCare's
and/or the Spin-Off Entity's receipt, in the aggregate, of proceeds as a result
of the Spin-Off, net of all reasonable and customary transaction fees and costs
and net of federal, state and local income taxes in connection with the Spin-Off
in an amount at least equal to the amount necessary to repay all indebtedness of
the Spin-Off Entity to NovaCare, including all accrued interest thereon, as of
the date of consummation of the Spin-Off; (iii) a portion of the proceeds of the
Spin-Off shall be used, on the date of the consummation of the Spin-Off, by the
Spin-Off Entity to repay all of the outstanding Indebtedness of the Spin-Off
Entity to NovaCare, together with accrued interest thereon; (iv) the Spin-Off
shall have occurred on or before September 30, 1997; (v) after giving effect to
the Spin-Off, NovaCare shall own at least 70% of all of the issued and
outstanding equity interests of the Spin-Off Entity; (vi) NovaCare shall have
delivered to the Agent copies of all Spin-Off Documents prior to the
consummation of the Spin-Off, which shall all be in form and substance
satisfactory to the Agent, the Spin-Off shall have been consummated in
accordance with the Spin-Off Documents and the President, Chief Executive
Officer or Chief Financial Officer of NovaCare shall have delivered to the Agent
a Certificate certifying the consummation of the Spin-Off in accordance with the
Spin-Off Documents and attaching a true and complete copy of the Spin-Off
Documents, as certified by such officer; (vii) the Agent's receipt of a
certificate signed by the President, Chief Executive Officer or Chief Financial
Officer
-14-
<PAGE> 15
of the Borrowers and Guarantors, certifying as to all action taken by the
Borrowers and Guarantors to authorize the execution, delivery and performance of
the Spin-Off and this Amendment and that all conditions to the effectiveness of
this Amendment have been met; and (viii) the Agent's receipt of an opinion of
Peter D. Bewley, General Counsel of the Loan Parties reasonably satisfactory to
the Agent [including without limitation customary opinions regarding with
respect to the Spin-Off the compliance with all securities laws, including
10b(5) and a Prior Security Interest of remaining stock by NovaCare after the
Spin-Off.] Further, the representations and warranties of the Loan Parties
contained in Article VI of the Credit Agreement shall be true and accurate on
the date hereof with the same effect as though such representations and
warranties had been made on and as of such date (except representations and
warranties which relate solely to an earlier date or time, which representations
and warranties shall be true and correct on and as of the specific dates or
times referred to therein), the Loan Parties shall have performed and complied
with all covenants and conditions contained herein and in the Loan Documents; no
Event of Default or Potential Default under the Credit Agreement shall have
occurred and be continuing or shall exist and there shall be delivered to the
Agent for the benefit of each Bank a certificate of the President, Chief
Executive Officer or Chief Financial Officer of the Loan Parties dated as of the
date hereof certifying as to each of the foregoing.
PART III: MISCELLANEOUS
1. Effective Date of Waiver.
This Amendment shall be dated as of the date and year first above
written, provided, however that the provisions of Part I hereof shall be
effective only upon the satisfaction of all Conditions of Effectiveness set
forth in Part I, Section 4 hereof and provided further that the provisions of
Part II hereof shall be effective only upon the satisfaction of all Conditions
of Effectiveness set forth in Part II, Section 4 hereof.
2. Full Force and Effect.
Except as expressly modified and amended by this Amendment, the
Credit Agreement and the other Loan Documents are hereby ratified and confirmed
and shall remain in full force and effect.
3. Costs, Expenses, Disbursements.
The Borrowers hereby agree to reimburse the Agent and the Banks on
demand for all costs, expenses and disbursements relating to this Amendment
which are payable by the Borrowers as provided in Section 10.05 of the Credit
Agreement.
4. Counterparts.
This Amendment may be executed by different parties hereto in any
number of separate counterparts, each of which, when so executed and delivered,
shall be an original, and all of such counterparts shall together constitute one
and the same instrument.
-15-
<PAGE> 16
5. Governing Law.
This Amendment shall be deemed to be a contract under the laws of
the Commonwealth of Pennsylvania and for all purposes shall be governed by and
construed and enforced in accordance with the internal laws of the Commonwealth
of Pennsylvania without regard to its conflict of laws principles.
-16-
<PAGE> 17
[Signature Page 1 of 6 to Tenth Amendment, Waiver and Consent]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Amendment as of the day and year first above
written.
BORROWERS AND GUARANTORS:
ATTEST: NOVACARE, INC., a Delaware corporation, and
each of the other BORROWERS listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as
Exhibit I) and each of the GUARANTORS
listed on Schedule 6.01(c) of the Credit
Agreement (which Schedule is attached
hereto as Exhibit I), other than those
listed below
By: /s/ Peter D. Bewley By: /s/ Richard A. McDonald
---------------------------- ---------------------------------
Richard A. McDonald
-------------------------------[Name],
[Seal] the Vice President
---------------------------[Title]
of each Borrower and Guarantor listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as
Exhibit I), other than those listed below,
which is a corporation and of each general
partner of each Borrower and Guarantor
which is a partnership
Address for Notices for each of the
foregoing Borrowers and Guarantors:
1016 West Ninth Avenue
King of Prussia, PA 19406
Telecopier No. (610) 992-3328
Attention: Chief Financial Officer
Telephone No. (610) 992-7200
<PAGE> 18
[Signature Page 2 of 6 to Tenth Amendment, Waiver and Consent]
AGENT:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By: /s/ Marcie D. Knittel
---------------------------------
Title: Vice President
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
BANKS:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Marcie D. Knittel
----------------------------
Title: Vice President
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
<PAGE> 19
[Signature Page 3 of 6 to Tenth Amendment, Waiver and Consent]
CORESTATES BANK, N.A.
By: /s/ Jennifer W. Leibowitz
_____________________________________
Name: Jennifer W. Leibowitz
Title: Vice President
Address for Notices:
1339 Chestnut Street
P.O. Box 7618
FC 1-8-3-22
Philadelphia, PA 19101
Telecopier No. (215) 973-2738
Attention: Jennifer W. Leibowitz
Assistant Vice President
Telephone No. (215) 786-3972
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By: /s/ Ann M. Dodd
_____________________________________
Name: Ann M. Dodd
Title: Senior Vice President
Address for Notices:
One First Union Center
301 S. Giles Street
Charlotte, NC 28288-0735
Telecopier No. (704) 383-9144
Attention: Terence Moore
Assistant Vice President
Telephone No. (704) 383-5212
<PAGE> 20
[Signature Page 4 of 6 to Tenth Amendment, Waiver and Consent]
FLEET NATIONAL BANK
By: /s/ Maryann S. Smith
--------------------------------
Name: Maryann S. Smith
Title: Vice President
Address for Notices:
Health Care and Non Profit Group
Fleet Center MA BOF 04A
75 State Street
Boston, MA 02109-1810
Telecopier No. (617) 346-0610
Attention: Maryann S. Smith
Vice President
Telephone No. (617) 346-1594
MELLON BANK, N.A.
By: /s/ Colleen M. Cunniffer
--------------------------------
Name: Colleen M. Cunniffer
Title:
Address for Notices:
Healthcare Banking
Plymouth Meeting/Exec. Campus
610 W. Germantown Pike
Suite 200/AIM #19E-0246
Plymouth Meeting, PA 19462
Telecopier No. (610) 941-4136
Attention: Colleen M. Cunniffer
Vice President
Telephone No. 610-941-8426
<PAGE> 21
[Signature Page 5 of 6 to Tenth Amendment, Waiver and Consent]
NATIONSBANK, N.A.
By: /s/ Kevin Wagley
------------------------------------
Name: Kevin Wagley
Title: Vice President
Address for Notices:
One NationsBank Plaza
Fifth Floor
Nashville, TN 37239-1697
Telecopier No. (615) 749-4646
Attention: S. Walker Choppin
Sr. Vice President
Telephone No. (615) 749-3607
THE BANK OF NEW YORK
By: /s/ Peter H. Abdill
-----------------------------------
Name: Peter H. Abdill
Title: Vice President
Address for Notices:
Northeastern Division
One Wall Street
22nd Floor
New York, NY 10286
Telecopier No. (212) 635-6999
Attention: Peter Abdill
Vice President
Telephone No. (212) 635-6987
<PAGE> 22
[Signature Page 6 of 6 to Tenth Amendment, Waiver and Consent]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By: /s/ Jorge Arrieta
------------------------------------
Name: Jorge Arrieta
Title: Vice President
Address for Notices:
Healthcare Banking Group
0-1106, Tower 10
200 South Orange Avenue
Orlando, FL 32801
Telecopier No. (407) 237-2491
Attention: Jeffrey R. Dickson
First Vice President
Telephone No. (407) 237-4541
<PAGE> 23
STATE OF GEORGIA
COUNTY OF FULTON
On the 25th day of April, 1997 personally appeared Jorge Arrieta,
as the Vice President of SunTrust Bank, Central Florida, National Association,
and before me executed the attached Tenth Amendment Waiver and Consent dated
as of _____________, 1997 to the Credit Agreement between NovaCare, Inc.,
with SunTrust Bank, Central Florida, National Association, as Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal,
in the state and county aforesaid.
/s/
_______________________________________________
Signature of Notary Public, State of Georgia
Notary Public, Clayton County, Georgia
My Commission Expires November 1, 1998
(Print, Type or Stamp Commissioned Name of
Notary Public) Personally known X ;
____
OR Produced Identification ____________________
Type of identification produced:_______________
_______________________________________________
<PAGE> 24
EXHIBIT 1
PART A - Acquisitions made during fiscal quarter ended March 31, 1997 (See
attached)
PART B - Acquisitions to be made during fiscal quarter ended June 30, 1997 (See
attached)
<PAGE> 1
EXHIBIT 10(j)(xii)
NOVACARE, INC.
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PA 19406
June 27, 1997
PNC Bank, National Association,
as Agent
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Attn: Marcie Knittel, Vice President
RE: Eleventh Amendment to Credit Agreement (the "Eleventh
Amendment")
Dear Marcie:
We refer to that certain Credit Agreement, dated as of May 27, 1994,
as amended (the "Credit Agreement"), by and among NovaCare, Inc. ("NovaCare")
and certain of its Subsidiaries, the Banks party thereto and PNC Bank, National
Association, as agent for the Banks ("Agent"). Defined terms used herein, not
otherwise defined herein, shall have the meanings given to them under the Credit
Agreement as amended hereby.
The Borrowers and Guarantors, the Banks and the Agent hereby desire
to amend the Credit Agreement, as hereinafter provided.
The parties hereto in consideration of their mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby,
covenant and agree as follows:
AGREEMENT
1. Amendment of Credit Agreement
The parties hereto do hereby modify and amend the Credit Agreement
as follows:
(a) Cover page is hereby amended by deleting in line 1 the number
"$175,000,000" and inserting in lieu thereof the number "190,000,000".
(b) Recital paragraph 1, page 1, is hereby amended by deleting in
line 3 the number "$175,000,000" and inserting in lieu thereof the number
"$190,000,000".
<PAGE> 2
(c) Upon the effectiveness of this Eleventh Amendment and for
periods subsequent to such effective date, Bank One, Kentucky, NA ("Bank One")
shall be a Bank party to the Credit Agreement.
2. Amendment to Schedules.
(a) Schedules. Schedule 1.01(B) [List of Banks, Commitments and
Closing Fees] and Schedule 6.01(c) [Subsidiaries] to the Agreement are hereby
amended and restated in their entirety in the form of such Schedules attached
hereto as Exhibit I and Exhibit II respectively.
3. Conditions of Effectiveness.
The effectiveness of this Eleventh Amendment is expressly
conditioned upon the occurrence and completion of all of the following: (i) the
Agent's receipt of counterparts of this Eleventh Amendment duly executed by the
Borrowers, the Guarantors and the Banks; (ii) the Agent's receipt of a
certificate signed by the Secretary or Assistant Secretary of the Borrowers and
Guarantors, certifying as to all action taken by the Borrowers and Guarantors to
authorize the execution, delivery and performance of this Eleventh Amendment;
(iii) the Agent's receipt of a Confirmation of Guaranty duly executed by the
Guarantors in the form of Exhibit III attached hereto; (iv) an opinion of Peter
D. Bewley, General Counsel of the Loan Parties reasonably satisfactory to the
Agent regarding this Eleventh Amendment; and (iv) each Borrower shall have
delivered to the Agent on behalf of Bank One a Note in the amount of Bank One's
Commitment.
This Eleventh Amendment shall be dated as of and shall be effective
as of the date and year first above written which shall be the date of
satisfaction of all conditions precedent to effectiveness as set forth in this
Section 3.
4. Consent of All Banks.
Pursuant to Section 11.01(b) of the Credit Agreement, this Eleventh
Amendment shall require the written consent of all of the Banks.
5. Full Force and Effect.
Except as expressly modified and amended by this Eleventh Amendment,
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed and shall remain in full force and effect.
-2-
<PAGE> 3
6. Costs, Expenses, Disbursements.
The Borrowers hereby agree to reimburse the Agent and the Banks on
demand for all costs, expenses and disbursements relating to this Eleventh
Amendment which are payable by the Borrowers as provided in Section 10.05 of the
Credit Agreement.
7. Counterparts.
This Eleventh Amendment may be executed by different parties hereto
in any number of separate counterparts, each of which, when so executed and
delivered, shall be an original, and all of such counterparts shall together
constitute one and the same instrument.
8. Governing Law.
This Eleventh Amendment shall be deemed to be a contract under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed and enforced in accordance with the internal laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles.
[INTENTIONALLY BLANK]
-3-
<PAGE> 4
[Signature Page 1 of 6 to Eleventh Amendment, Waiver and Consent]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Amendment as of the day and year first above
written.
BORROWERS AND GUARANTORS:
ATTEST:
NOVACARE, INC., a Delaware corporation, and
each of the other BORROWERS listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as
Exhibit II) and each of the GUARANTORS
listed on Schedule 6.01(c) of the Credit
Agreement (which Schedule is attached
hereto as Exhibit II), other than those
listed below
By: /s/ Peter D. Bewley By: /s/ Richard A. McDonald
--------------------------- ------------------------------
Richard A. McDonald [Name],
------------------------------
[Seal] the Vice President [Title]
------------------------------
of each Borrower and Guarantor listed on
Schedule 6.01(c) of the Credit Agreement
(which Schedule is attached hereto as
Exhibit II), other than those listed below,
which is a corporation and of each general
partner of each Borrower and Guarantor which
is a partnership
Address for Notices for each of the
foregoing Borrowers and Guarantors:
1016 West Ninth Avenue
King of Prussia, PA 19406
Telecopier No. (610) 992-3328
Attention: Chief Financial Officer
Telephone No. (610) 992-7200
<PAGE> 5
[Signature Page 2 of 6 to Eleventh Amendment, Waiver and Consent]
AGENT:
PNC BANK, NATIONAL ASSOCIATION, as Agent
By: /s/ Marcie D. Knittel
_____________________________________
Title: V.P.
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
BANKS:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Marcie D. Knittel
_____________________________________
Title: V.P.
Address for Notices:
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, PA 15265
Telecopier No. (412) 762-2784
Attention: Regional Healthcare Group
Telephone No. (412) 762-8343
<PAGE> 6
[Signature Page 3 of 6 to Eleventh Amendment, Waiver and Consent]
CORESTATES BANK, N.A.
By: /s/ Lisa S. Rothenberger
___________________________________
Name: Lisa S. Rothenberger
Title: Commercial Officer
Address for Notices:
1339 Chestnut Street
P.O. Box 7618
FC 1-8-3-22
Philadelphia, PA 19101
Telecopier No. (215) 973-2738
Attention: Jennifer W. Leibowitz
Assistant Vice President
Telephone No. (215) 786-3972
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By: /s/ Joseph H. Towell
_____________________________________
Name: Joseph H. Towell
Title: Senior Vice President
Address for Notices:
One First Union Center
301 S. Giles Street
Charlotte, NC 28288-0735
Telecopier No. (704) 383-9144
Attention: Terence Moore
Assistant Vice President
Telephone No. (704) 383-5212
<PAGE> 7
[Signature Page 4 of 6 to Eleventh Amendment, Waiver and Consent]
FLEET NATIONAL BANK
By: /s/ Maryann S. Smith
-------------------------------------
Name: Maryann S. Smith
Title: Vice President
Address for Notices:
Health Care and Non Profit Group
Fleet Center MA BOF 04A
75 State Street
Boston, MA 02109-1810
Telecopier No. (617) 346-0610
Attention: Maryann S. Smith
Vice President
Telephone No. (617) 346-1594
MELLON BANK, N.A.
By: /s/ Colleen Cunniffee
-------------------------------------
Name: Colleen Cunniffee
Title: Banking Officer
Address for Notices:
Healthcare Banking
Plymouth Meeting/Exec. Campus
610 W. Germantown Pike
Suite 200/AIM #19E-0246
Plymouth Meeting, PA 19462
Telecopier No. (610) 941-4136
Attention: Colleen Cunniffee
Banking Officer
Telephone No. (610) 941-8426
<PAGE> 8
[Signature Page 5 of 6 to Eleventh Amendment, Waiver and Consent]
NATIONSBANK, N.A.
By: /s/ Kevin Wagley
-------------------------------------
Name: Kevin Wagley
Title: Vice President
Address for Notices:
Healthcare Finance Group
One NationsBank Plaza
Fifth Floor
Nashville, TN 37239-1697
Telecopier No. (615) 749-4640
Attention: Kevin Wagley
Vice President
Telephone No. (615) 749-3802
THE BANK OF NEW YORK
By: /s/ Peter H. Abdill
-------------------------------------
Name: Peter H. Abdill
Title: Vice President
Address for Notices:
Northeastern Division
One Wall Street
22nd Floor
New York, NY 10286
Telecopier No. (212) 635-6999
Attention: Peter Abdill
Vice President
Telephone No. (212) 635-6987
<PAGE> 9
[Signature Page 6 of 6 to Eleventh Amendment, Waiver and Consent]
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By: /s/ Ronald K. Rueve
------------------------------------
Name: Ronald K. Rueve
Title: Vice President
Address for Notices:
Healthcare Banking Group
0-1106, Tower 10
200 South Orange Avenue
Orlando, FL 32801
Telecopier No. (407) 237-2491
Attention: Jeffrey R. Dickson
First Vice President
Telephone No. (407) 237-4541
BANK ONE, KENTUCKY, NA
By: /s/ Todd D. Munson
------------------------------------
Name: Todd D. Munson
Title: Sr. V.P.
Address for Notices:
Internal Zip KY1-2216
416 West Jefferson Street
Louisville, KY 40202
Telecopier No. (502) 566-2367
Attention: Todd Munson
Sr. Vice President
Telephone No. (502) 566-2640
<PAGE> 10
STATE OF GEORGIA
COUNTY OF FULTON
On the _____ day of ___________, 1997 personally appeared
___________________, as the __________ President of SunTrust Bank, Central
Florida, National Association, and before me executed the attached Eleventh
Amendment Waiver and Consent dated as of _____________, 1997 to the Credit
Agreement between NovaCare, Inc., with SunTrust Bank, Central Florida, National
Association, as Lender.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal,
in the state and county aforesaid.
/s/ Tonya Adams
Signature of Notary Public, State of
Notary Public, Coweta County, Georgia
My Commission Expires May 6, 2001
Tonya Adams
Personally known X;
---
OR Produced Identification
Type of identification produced:________________
________________________________________________
<PAGE> 11
[EXHIBIT I TO ELEVENTH AMENDMENT]
SCHEDULE 1.01(B)
COMMITMENTS OF BANKS
<TABLE>
<CAPTION>
Revolving
Participation Credit
Bank Percentage Commitment
---- ---------- ----------
<S> <C> <C>
PNC Bank, National Association 21.052631578 $ 40,000,000
Mellon Bank, N.A. 14.473684211 $ 27,500,000
NationsBank, N.A. 13.157894737 $ 25,000,000
CoreStates Bank, N.A. 10.526315790 $ 20,000,000
SunTrust Bank, Central Florida, N.A. 9.210526316 $ 17,500,000
Fleet National Bank 7.894736842 $ 15,000,000
First Union National Bank of North Carolina 7.894736842 $ 15,000,000
The Bank of New York 7.894736842 $ 15,000,000
Bank One, Kentucky, NA 7.894736842 $ 15,000,000
TOTAL 100.000000000% $190,000,000
============== ============
</TABLE>
<PAGE> 1
EXHIBIT 10(k)
NCES/NOVACARE, INC.
SUPPLEMENTAL BENEFITS PLAN
This is the NCES/NOVACARE, INC. SUPPLEMENTAL BENEFITS PLAN
(formerly known as the NovaCare, Inc. Supplemental Benefits Plan), as
amended and restated effective July 1, 1997, maintained by NovaCare
Employee Services, Inc. ("NCES"), NovaCare, Inc., a Delaware
corporation ("NovaCare"), and certain of their affiliates which have
adopted the Plan for their eligible senior executives constituting a
select group of management or highly compensated employees.
<PAGE> 2
TABLE OF CONTENTS
Section Page
SECTION 1 DEFINITIONS .................................................. 1
SECTION 2 PARTICIPATION IN THE PLAN .................................... 5
2.1 Commencement of Participation .............................. 5
2.2 Procedure For and Effect of Admission ...................... 6
2.3 Cessation of Participation ................................. 6
2.4 Transfer of Employee ....................................... 6
2.5 Cessation of Employer's Affiliate Status ................... 7
SECTION 3 PLAN CONTRIBUTIONS ........................................... 7
3.1 Deferral Contributions ..................................... 7
3.2 Rules Governing Deferral Contributions ..................... 8
3.3 Fixed Matching Contributions ............................... 8
3.4 Performance Matching Contributions ......................... 8
3.5 Vesting .................................................... 8
SECTION 4 PARTICIPANT ACCOUNTS ......................................... 10
4.1 Establishment of Accounts .................................. 10
4.2 Benefit Allocation ......................................... 10
4.3 Irrevocable Allocation ..................................... 10
4.4 Adjustment of Accounts ..................................... 10
4.5 Suballocation Within the Education Account ................. 11
4.6 Investment Obligation of the Employer ...................... 11
SECTION 5 BENEFITS ..................................................... 11
5.1 Employer Provided Insurance Benefits ....................... 11
5.2 Retirement Account ......................................... 12
5.3 Education Account .......................................... 14
5.4 Fixed Period Account ....................................... 15
5.5 Tax Withholding ............................................ 15
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SECTION 6 ADMINISTRATION ............................................... 15
6.1 Appointment of Administrator ............................... 15
6.2 Administrator's Responsibilities ........................... 15
6.3 Records and Accounts ....................................... 16
6.4 Administrator's Specific Powers and Duties ................. 16
6.5 Employer's Responsibility to Administrator ................. 16
6.6 Liability .................................................. 16
6.7 Payment of Expenses ........................................ 17
6.8 Indemnity of Administrator ................................. 17
SECTION 7 CLAIMS PROCEDURE ............................................. 17
7.1 Claim ...................................................... 17
7.2 Review Procedure ........................................... 17
7.3 Final Decision ............................................. 18
SECTION 8 AMENDMENT AND TERMINATION .................................... 18
8.1 Plan Amendment ............................................. 18
8.2 No Premature Distribution .................................. 18
8.3 Termination of the Plan .................................... 18
SECTION 9 MISCELLANEOUS ................................................ 18
9.1 Supplemental Benefits ...................................... 18
9.2 Governing Law; Jurisdiction ................................ 19
9.3 No Assignment Permitted .................................... 19
9.4 Binding Terms .............................................. 19
9.5 Spendthrift Provision ...................................... 19
9.6 Headings ................................................... 19
9.7 Rule of Interpretation ..................................... 19
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<PAGE> 4
SECTION 1
DEFINITIONS
1.1 Account means the recordkeeping source under which Plan benefits are
calculated. The specific Accounts under the Plan are listed in Section
4.1.
1.2 Administrator means the individual or committee appointed to administer
the Plan pursuant to Section 6.
1.3 Agreement means the trust agreement between the Employer and one or
more trustees establishing a grantor trust to assist the Employer in
fulfilling its obligations under the Plan.
1.4 Base Pay means an Eligible Employee's base salary, Deferral
Contributions and any pretax elective deferrals to any
Employer-sponsored plan that includes either a qualified cash or
deferred arrangement under section 401(k) of the Code or a cafeteria
plan under section 125 of the Code.
1.5 Beneficiary means the person, persons, trust or other entity that a
Participant designates by written revocable designation filed with the
Administrator to receive Plan benefits in the event of the
Participant's death before all amounts due him under the Plan have been
fully paid. A Participant may designate a different Beneficiary with
respect to each Account established for him.
1.6 Boards means the Boards of Directors of NovaCare and NCES, or any
person or persons designated by the Boards of Directors.
1.7 Bonus means any cash remuneration paid to an Eligible Employee as an
incentive award pursuant to the bonus plan applicable to the Eligible
Employee. Bonus may consist of Annual Bonus and/or Quarterly Bonus
components. Annual Bonus means an incentive award based on performance
criteria applicable to an entire fiscal year of the applicable
Employer. Quarterly Bonus means an incentive award based on performance
criteria applicable to the first, second, third or fourth quarter, on a
stand-alone basis, of the fiscal year of the applicable Employer.
1.8 Change in Control means (other than an initial public offering) the
occurrence of any of the following:
A. the acquisition by any party or parties of the beneficial
ownership of 20% or more of the outstanding voting shares of
the Company;
B. the occurrence of a transaction requiring shareholders'
approval for the acquisition of the Company through purchase
of stock or assets, or by merger or otherwise; or
<PAGE> 5
C. the election during any 24-month period of 20%, or more, of
the members of either of the Boards, without the approval of a
majority of the members of such Board as constituted at the
beginning of the period.
1.9 Code means the Internal Revenue Code of 1986, as amended.
1.10 Company means either NovaCare or NCES as the context requires.
1.11 Deferral Agreement means a written agreement between a Participant and
the Employer whereby a Participant agrees to defer a portion of his
Base Pay and/or Bonus and the Employer agrees to provide Plan benefits.
1.12 Deferral Contribution means a Participant's elective deferral
contribution described in Section 3.1
1.13 Determination Date means March 31 and September 30 of each calendar
year or such other date as the Administrator shall designate and, for
each Participant, the date of his death, Retirement, termination of
employment due to Disability or other termination of employment.
1.14 Disability means an illness or injury that meets the definition and
provisions described in the Individual Long Term Disability Contract
covering the Participants.
1.15 Effective Date means September 1, 1991. The effective date of this
amendment and restatement is July 1, 1997.
1.16 Eligibility Dates.
A. Eligibility Date, for making Elective Deferrals, means (i) the
first day of the first payroll period of any month that begins
at least 30 days, but no more than 120 days, after the date an
individual first becomes an Eligible Employee, provided that
the Eligible Employee must properly submit all necessary forms
at least 15 days before such Eligibility Date and (ii) any
other date following an Enrollment Period established by the
Administrator;
B. Eligibility Date, for receiving Fixed and, if any, Performance
Matching Contributions, means the January 1 or July 1
following the Eligibility Date upon which the Participant
begins to make Elective Deferrals; and
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<PAGE> 6
C. Eligibility Date, for coverage for insurance benefits, means
the January 1 or July 1 following the later of the initial
date of hire of an individual who is an Eligible Employee as
of that date, or the date an individual who is an employee of
the Employer becomes an Eligible Employee.
1.17 Eligible Dependent means an individual who is a child, stepchild,
grandchild, niece or nephew, or who otherwise qualifies as a dependent
of a Participant for purposes of the Code, who is living at any time
during the Enrollment Period, and who is either (i) younger than age 14
or (ii) younger than age 18 but for whom a subaccount was initially
established pursuant to Section 4.5 prior to his reaching age 14.
1.18 Eligible Employee means each employee of the Employer who (i) has a
Salary Grade of 33 or higher, (ii) is designated by the Administrator
as an employee who would have a Salary Grade of 33 or higher (an
"Equivalent Salary Grade") if the employee had a Salary Grade, (iii)
was demoted during the preceding 12-month period into a lower-graded
position from a position with a Salary Grade or Equivalent Salary Grade
of 33 or higher, or (iv) was a Participant on July 1, 1994; provided
that Eligible Employee shall not include any employee of NCES or any of
its affiliates who also maintains an employee-employer relationship
with a co-employer other than NovaCare or any of its affiliates.
1.19 Employer means NovaCare, NCES and each of their respective affiliates
which have adopted the Plan for their eligible senior executives and
joined in the Trust.
1.20 Enrollment Period means the election period established by the
Administrator which ends prior to the first day of a Plan Year.
1.21 EPS Budget means, for any Plan Year up to and including the Plan Year
beginning July 1, 1995 and ending June 30, 1996, the average of the
percentages of the EPS Budgets achieved by NovaCare for that year and
the four immediately preceding Plan Years. For the Plan Year beginning
July 1, 1996, EPS Budget means the EPS Budget achieved by NovaCare for
that year. For any Plan Year beginning on or after July 1, 1997, EPS
Budget means the EPS Budget achieved by the applicable Company for that
year.
1.22 Fixed Matching Contribution means the Employer contributions described
in Section 3.3.
1.23 Group I Eligible Employee means each Eligible Employee who has a Salary
Grade or Equivalent Salary Grade of 35 or higher, or who had such a
Salary Grade or Equivalent Salary Grade immediately prior to a demotion
which became effective during the previous 12-month period.
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<PAGE> 7
1.24 Group II Eligible Employee means each Eligible Employee who has a
Salary Grade or Equivalent Salary Grade of 33 or 34, or who had such a
Salary Grade or Equivalent Salary Grade immediately prior to a demotion
which became effective during the previous 12-month period.
1.25 Investment Fund or Fund means the investments referenced in Section 4.4
that serve as a means to measure value increases or decreases with
respect to a Participant's Accounts.
1.26 Involuntary Termination means, solely for purposes of the Plan and the
Agreement, the occurrence of any of the following:
A. a termination of the Participant's employment by the Employer
other than for serious, willful misconduct in respect of the
employee's obligations to the Employer, which misconduct shall
include but not be limited to conviction of a felony, or
perpetration of a common law fraud which has or is likely to
result in material economic damage to the Employer; or
B. a termination of the Participant's employment by the
Participant following:
(1) a change by the Employer of the Participant's
functions, duties or responsibilities which causes
the Participant's position with the Employer to
become of less dignity, responsibility, importance,
scope or Salary Grade;
(2) a reassignment by the Employer of the Participant to
another geographic location more than 50 miles from
the Participant's current place of residence; or
(3) a reduction in the Participant's Total Compensation
other than one occurring through reduction of the
Participant's Bonus based on actual financial
performance of the Employer.
1.27 NCES means NovaCare Employee Services, Inc., a Delaware corporation.
1.28 NovaCare means NovaCare, Inc., a Delaware Corporation.
1.29 Participant means any Eligible Employee who has elected to participate
in the Plan and has reached an Eligibility Date.
1.30 Performance Matching Contribution means the Employer contributions
described in Section 3.4.
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<PAGE> 8
1.31 Plan means the NCES/NovaCare, Inc. Supplemental Benefits Plan as
described in this instrument, as amended.
1.32 Plan Year means the 12 consecutive month period beginning on each July
1 and ending on the following June 30.
1.33 Retirement means a severance from service by a Participant for any
reason (other than death or termination of employment due to
Disability) after reaching age 65 or after reaching age 55 and
completing 10 years of service with the Employer. A year of service
shall mean a Year of Service as defined in the NCES/NovaCare, Inc.
401(k) Retirement Savings Plan; provided, however, that years of
service shall include service with a prior employer if so provided in
the applicable acquisition agreement or in any agreement executed by
the Participant and the Employer.
1.34 Total Compensation for a Plan Year means the Eligible Employee's Base
Pay for the current Plan Year plus any Bonus paid for services rendered
in the Plan Year; provided that, in determining compensation for
coverage for insurance benefits for any policy period, the Eligible
Employee's Base Pay shall be determined as of January 15 (or, if later,
the date an employee becomes an Eligible Employee) and, if actual Bonus
is unknown as of such date, anticipated bonus, as determined under the
applicable bonus plan, shall be substituted for actual Bonus.
1.35 Trust means any grantor trust established by the Employer under the
Agreement.
1.36 Trustee means the trustee or trustees of the Trust appointed by the
Boards.
1.37 Trust Fund means the fund established under the Agreement, consisting
of all contributions, together with the income and realized and
unrealized appreciation and depreciation thereon.
SECTION 2
PARTICIPATION IN THE PLAN
2.1 Commencement of Participation. Each Eligible Employee may elect to
become a Participant and to make Elective Deferrals beginning as of a
date described in Section 1.16A. He then shall be eligible to receive
Fixed and, if any, Performance Matching Contributions beginning as of
the date described in Section 1.16B. Each Eligible Employee shall
receive coverage for insurance benefits beginning as of the date
described in Section 1.16C.
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<PAGE> 9
Notwithstanding the foregoing or any provision in this Plan to the
contrary:
A. An Eligible Employee who does not meet the definition of
Eligible Employee set forth in Section 1.18(i), (ii) or (iii)
shall not be eligible to make Elective Deferrals or to receive
Fixed and Performance Matching Contributions, but shall be
considered a Group II Eligible Employee for purposes of
Section 5.1; and
B. An Eligible Employee who is hired or promoted into a position
with a Salary Grade or Equivalent Salary Grade of 33 or higher
after June 1, 1997 shall not be eligible to make Elective
Deferrals or to receive Fixed and Performance Matching
Contributions unless he executes a Confidentiality and
Non-Competition Agreement in a form approved by the
Administrator, but shall be considered a Group I or Group II
Eligible Employee (depending upon his Salary Grade or
Equivalent Salary Grade) for purposes of Section 5.1.
2.2 Procedure For and Effect of Admission. Each Eligible Employee who
desires to participate in the Plan shall complete such forms and
provide such data as are required by the Administrator.
2.3 Cessation of Participation. A Participant shall cease to be an active
Participant on the earlier of:
A. the date on which an Employer terminates the Plan as to
employees of such Employer;
B. the date on which the Participant ceases to be an Eligible
Employee; or
C. the date on which the Participant's Employer ceases to be an
affiliate of the Company.
As long as an Account is maintained for a former active Participant, he
shall be deemed a Participant for all purposes except that he shall not
be permitted to make contributions to the Plan, receive Fixed or
Performance Matching Contributions, or be entitled to Employer-provided
insurance benefits under Section 5.1; provided, however, that a
Participant may elect to continue insurance coverage at his own expense
(or, at the sole discretion of the Administrator, at the Employer's
expense) when he ceases to be an active Participant.
2.4 Transfer of Employee. If a Participant transfers his employment from
one Employer to another Employer, the Participant shall not be deemed
to have ceased being an active
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<PAGE> 10
Participant under Section 2.3. Any obligations of a former Employer to
the Participant under the Plan shall become the obligations of the
Participant's new Employer.
2.5 Cessation of Employer's Affiliate Status. If a Participant ceases to be
an active Participant pursuant to Section 2.3C, the Administrator shall
determine in its absolute and unfettered discretion either to: (i)
fully vest the Participant in all Employer contributions made on his
behalf, transfer the vested portion of the Participant's Education
Account and Fixed Period Account, if any, to the Participant's
Retirement Account and distribute the vested value of the Retirement
Account to the Participant pursuant to Section 5.2D or (ii) transfer
the Participant's Accounts to a new trust to be maintained by the
employer for the benefit of the Participant.
SECTION 3
PLAN CONTRIBUTIONS
3.1 Deferral Contributions. Each Participant who is an employee may
authorize the Employer to reduce his (i) Base Pay and/or (ii) Bonus for
a Plan Year, and to have a corresponding amount credited to his
Accounts, in accordance with Section 4.2, by executing and filing a
Deferral Agreement with the Administrator during his initial Enrollment
Period or any subsequent Enrollment Period designated by the
Administrator. A Deferral Agreement specifying deferrals to be made
from Base Pay and/or Quarterly Bonus (if any) shall be executed and
filed during the Enrollment Period preceding the Plan Year during which
such Base Pay or Quarterly Bonus (if any) will be earned. A Deferral
Agreement specifying deferrals to be made from Annual Bonus shall be
executed and filed during the Enrollment Period preceding the Plan Year
during which such Bonus will be finally determined and paid. An
Eligible Employee who has previously executed and filed a Deferral
Agreement specifying deferrals to be made from the Bonus to be finally
determined and paid during the Plan Year beginning July 1, 1997 may
execute and file a new Deferral Agreement during the Enrollment Period
preceding the Plan Year beginning July 1, 1997, provided that the new
Deferral Agreement may increase, but may not decrease, the specified
Bonus deferrals.
Such Base Pay and Bonus deferrals shall be based on a fixed percentage.
Base Pay deferrals shall equal not less than 1% nor more than 25% of
Base Pay. Bonus deferrals shall equal not less than 1% nor more than
100% of Annual Bonus and/or Quarterly Bonus, respectively. The deferral
shall be made from Base Pay, Annual Bonus and/or Quarterly Bonus as the
Participant shall specify; however, to the extent the deferral is to be
made from Annual Bonus and/or Quarterly Bonus, but no Annual Bonus
and/or Quarterly Bonus is paid, the deferral shall be reduced.
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<PAGE> 11
Notwithstanding the foregoing, a Participant may not make contributions
to the Plan during any period for which contributions must be suspended
in accordance with Treas. Reg. Section 1.401(k)-1(d)(2)(iv)(B)(4), as a
condition of the Participant's receipt of a hardship withdrawal from
any retirement plan of the Employer that includes a qualified cash or
deferred arrangement under section 401(k) of the Code.
3.2 Rules Governing Deferral Contributions.
A. Each annual election to defer shall be irrevocable.
B. The amount that a Participant elects to defer shall be
credited to the Participant's Accounts as soon as practicable
after the date the amount would otherwise be paid to him as
cash compensation.
3.3 Fixed Matching Contributions. Each Employer shall make a fixed matching
contribution for each Group I Eligible Employee that shall equal 70% of
the first 5% of his Total Compensation that is contributed to the Plan
as a Deferral Contribution under Section 3.1. Each Employer shall make
a fixed matching contribution for each Group II Eligible Employee that
shall equal 30% of the first 5% of his Total Compensation that is
contributed to the Plan as a Deferral Contribution under Section 3.1.
Fixed Matching Contributions shall be credited to Participants'
Accounts when Deferral Contributions are so credited.
3.4 Performance Matching Contributions. Each Employer shall make a variable
matching contribution for each contributing Participant who is an
Eligible Employee as of the last day of the Plan Year for any Plan Year
in which the applicable Company attains between 90% and 110% of EPS
Budget. Unless otherwise determined by the Board for any Plan Year, if
the parameters set forth in the preceding sentence have been met, the
Performance Matching Contribution for each Group I Eligible Employee
shall equal the first 5% of his Total Compensation that is contributed
to the Plan as a Deferral Contribution under Section 3.1 multiplied by
the percentage of EPS Budget attained by the applicable Company, and
the Performance Matching Contribution for each Group II Eligible
Employee shall equal 40% of the first 5% of his Total Compensation that
is contributed to the Plan as a Deferral Contribution under Section 3.1
multiplied by the percentage of EPS Budget attained by the applicable
Company. Performance Matching Contributions shall be credited to
Participants' Accounts as soon as practicable following the annual
determination of whether EPS Budget has been attained by the applicable
Company.
3.5 Vesting. Benefits derived from Deferral Contributions are not subject
to forfeiture for any reason other than corporate insolvency. Benefits
derived from Fixed Matching Contributions and Performance Matching
Contributions shall vest according to a schedule
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<PAGE> 12
based on "Years of Participation" in the Plan. The term "A Year of
Participation" means a full Plan Year during which an employee of the
Employer is an Eligible Employee as defined in the Plan. For these
purposes, the first Plan Year, though less than 12 months, shall
qualify as a full Year of Participation.
For an Eligible Employee on or before June 1, 1997, benefits derived
from Fixed Matching Contributions and Performance Matching
Contributions shall vest at the rate of 20% per completed Year of
Participation beginning with the sixth (6th) completed Year of
Participation, unless the Eligible Employee executes a Confidentiality
and Non-Competition Agreement in a form approved by the Administrator
before September 1, 1997, or during such other time period as the
Administrator may thereafter designate. For an Eligible Employee on or
before June 1, 1997 who timely executes a Confidentiality and
Non-Competition Agreement in a form approved by the Administrator, or
for any employee who becomes an Eligible Employee after June 1, 1997,
benefits derived from Fixed Matching Contributions and Performance
Matching Contributions shall become 100% vested upon completion of the
fifth (5th) Year of Participation.
Notwithstanding the foregoing, benefits derived from Fixed Matching
Contributions and Performance Matching Contributions shall become 100%
vested (i) upon a Participant's Retirement; (ii) if a Participant dies
or suffers a Disability while employed by the Employer; or (iii) upon a
Participant's Involuntary Termination by the Employer, provided that
either (a) the Participant has completed at least one Year of
Participation in the Plan and the combination of the Participant's age
and Years of Participation at the time of his Involuntary Termination
totals at least 50, or (b) the Participant's Involuntary Termination
occurs within 12 months after the applicable Company undergoes a Change
in Control. In addition, the Administrator may, in the Administrator's
absolute and unfettered discretion, determine to vest Employer
contributions made on a Participant's behalf if the Participant's
termination of employment with the Employer was caused by events beyond
the Participant's control.
If a Participant terminates employment before becoming fully vested,
any nonvested Employer contributions shall be forfeited and shall be
used to reduce Employer contributions to the Plan. Notwithstanding the
foregoing, if the distribution of a Participant's Retirement Account is
deferred under Section 5.2B(5), the Participant shall not forfeit any
unvested Employer contributions until the Participant's Retirement
Account is actually distributed. For purposes of determining a
Participant's vested interest in Employer contributions at the time the
Participant's Retirement Account is distributed, any nonsuccessive
Years of Participation in the Plan shall be aggregated to determine his
vested percentage.
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<PAGE> 13
SECTION 4
PARTICIPANT ACCOUNTS
4.1 Establishment of Accounts. The following Accounts shall be established
with respect to each Participant:
A. Retirement Account,
B. Education Account, and
C. Fixed Period Account.
4.2 Benefit Allocation. Each Participant may submit to the Administrator
before the close of the Enrollment Period for each Plan Year a written
statement specifying the Participant's allocation of future
contributions as to his respective Accounts. If a Participant does not
submit such a statement, all contributions for the Plan Year following
the Enrollment Period shall be allocated to the Participant's
Retirement Account. Matching Contributions shall be allocated in the
same manner as Deferral Contributions.
4.3 Irrevocable Allocation. A Participant may not modify, alter, amend or
revoke his allocation for a Plan Year after such Plan Year begins.
4.4 Adjustment of Accounts. A Participant may request in a writing
delivered to the Administrator that his Accounts be valued as if they
were hypothetically invested in one or more of the Investment Funds
listed on the Benefit Account Allocations/Accumulation Options form
provided by the Administrator. A Participant may request one or more
Investment Fund(s) in multiples of 25% and may make a separate request
with respect to each Account. A request shall be effective as of the
Determination Date next following timely delivery to the Administrator,
and shall apply to new contributions and previous accumulations as the
Participant specifies.
Each Participant's Accounts established under Section 4.1 shall be
valued no less than monthly based upon the performance of the
Investment Fund(s) requested by the Participant as determined by the
Administrator. A Participant shall submit his investment measurement
request to the Administrator in writing.
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<PAGE> 14
If any Participant fails to file a request, he shall be deemed to have
requested the fund which, in the opinion of the Administrator, has the
least risk of loss of principal. The Administrator shall be under no
obligation to invest Deferral Contributions in the manner requested by
the Participant.
4.5 Suballocation Within the Education Account. If a Participant allocates
a portion of his anticipated contributions to his Education Account,
the Participant may further allocate among subaccounts on behalf of any
Eligible Dependent. In the absence of such suballocation, all
contributions to the Participant's Education Account shall be equally
allocated to the Participant's Eligible Dependents. A Participant's
directed adjustment request pursuant to Section 4.4 shall apply
uniformly to each subaccount.
4.6 Investment Obligation of the Employer. Benefits are payable as they
become due irrespective of any actual investments the Employer may make
to meet its obligations.
Notwithstanding, neither the Employer nor any trustee (in the event the
Employer elects to use a grantor trust to accumulate funds) shall be
obligated to purchase or maintain any asset, and any reference to
investments or Investment Funds is solely for the purpose of computing
the value of benefits. To the extent a Participant or any person
acquires a right to receive payments from the Employer under this Plan,
such right shall be no greater than the right of any unsecured creditor
of the Employer. Neither this Plan nor any action taken pursuant to the
terms of this Plan shall be considered to create a fiduciary
relationship between the Employer and the Participants or any other
persons, or to establish a trust in which the assets are beyond the
claims of any unsecured creditor of the Employer.
SECTION 5
BENEFITS
5.1 Employer Provided Insurance Benefits.
A. The Employer shall purchase or otherwise provide additional
life insurance for all Participants; provided that the
Administrator shall have first received all information and
executed documents from the Participants as the Administrator
has requested. Group I Eligible Employees shall be provided
additional life insurance coverage, subject to the terms of
available coverage, equal to two times their Total
Compensation for a Plan Year. Group II Eligible Employees
shall be provided additional life insurance coverage, subject
to the terms of available coverage, equal to their Total
Compensation for a Plan Year. Notwithstanding the foregoing,
the
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<PAGE> 15
Administrator may, in its sole discretion, set a maximum limit
on the amount of coverage to be provided to any class of
Participants and reduce the amount of benefits available to
Participants based on the cost thereof, consistent with
applicable law.
B. The Employer shall purchase or otherwise provide individual
Disability insurance coverage for all Participants at a rate
of 70% of Total Compensation, to a maximum of $15,000 per
month; provided that the Administrator shall have first
received all information and executed documents from the
Participants as the Administrator has requested.
Notwithstanding the foregoing, the Administrator may, in its
sole discretion, limit the amount or time period of Disability
insurance coverage consistent with applicable law.
5.2 Retirement Account.
A. If a Participant terminates employment for any reason,
including death, the Employer shall pay such Participant a
benefit in the form determined under Section 5.2B based on the
vested value of his Retirement Account. If the Participant is
deceased, the benefit shall be paid to his Beneficiary.
B. Form of Payment:
(1) If the Participant's termination of employment occurs
due to Retirement, payment of the benefit shall begin
within 120 days of Retirement.
A Participant shall elect one of the following
payment options at the time he establishes his
Retirement Account, and at such other times as shall
be determined by the Administrator, provided that any
such subsequent election by the Participant shall
apply only to amounts attributable to contributions
to the Retirement Account to be made in Plan Years
beginning after the Plan Year in which the election
is made:
(a) 100% joint and survivor annuity;
(b) an annual benefit to be paid for a fixed
period of 10 years, the amount to be paid in
any one year to equal the vested value of
the Retirement Account at the time of
payment multiplied by a fraction, the
numerator of which shall be one and the
denominator of which shall be ten minus the
number of benefit payments previously made
under this option; or
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<PAGE> 16
(c) a lump sum.
(2) If the Participant's termination of employment occurs
due to Disability, the benefit described in Section
5.2A shall be paid either as a lump sum or annually
over a fixed period of 10 years (as calculated in
(1)(b) above), as determined by the Administrator.
(3) If a Participant's termination of employment occurs
for any reason other than Retirement or Disability,
the benefit described in Section 5.2A shall be paid
in a lump-sum payment within 120 days from the date
of termination.
(4) Notwithstanding any provision to the contrary, if the
Participant's Retirement Account has a value less
than $20,000 at the time benefits are to commence,
then the Participant's benefit may, at the discretion
of the Administrator, be paid as a lump sum as soon
as administratively feasible following the
Participant's termination.
(5) Notwithstanding anything to the contrary, if the
Administrator determines at the time of a
Participant's termination of employment with the
Employer that a reasonable probability exists that
the Participant will return to employment with the
Employer, the Participant's Retirement Account shall
not be distributed to the Participant. The
Participant's Retirement Account shall instead be
held under the Plan until (i) the Administrator
determines that the Participant's return to
employment with the Employer is no longer reasonably
probable, or (ii) the Participant returns to
employment with the Employer, at which point the
Participant's Retirement Account shall be subject to
distribution in accordance with this Section 5.2.
Upon a Participant's reemployment by the Employer,
any funds transferred to the Participant's Retirement
Account from his Education Account or Fixed Period
Account shall be re-transferred to the respective
Account or Accounts.
C. If benefits are payable in a form of payment under Section
5.2B(1)(a), the amount of each payment shall be determined
based on the payments that would have been made if the
Employer applied the Participant's Retirement Account on the
date payments are to begin to purchase an annuity contract
providing such payments from an insurance carrier selected by
the Administrator.
D. Subject to Section 5.2B(5) hereof, if a Participant continues
to be employed by an entity that ceases to be an affiliate of
either Company and the Administrator
-13-
<PAGE> 17
determines to fully vest and distribute the Participant's
Account, the Employer shall, at the direction of the
Administrator, pay such Participant a benefit based on the
vested value of his Retirement Account. The benefit shall be
paid in a lump sum as soon as administratively feasible
following the later of the date the applicable entity ceases
to be an affiliate of either Company and the date that all
determinations have been made hereunder.
5.3 Education Account.
A. If a Participant remains continuously employed by the Employer
until January 1 of the calendar year in which an Eligible
Dependent reaches age 18, the Employer shall pay to the
Participant a benefit, as soon after such January 1st and each
of the next three anniversaries thereof as administratively
practicable, determined as follows:
Distribution
Percentage of Eligible
January 1st Dependent's Subaccount
1 25%
2 33-1/3%
3 50%
4 100%
B. A Participant may establish subaccounts under his Education
Account, with separate payments for each. A Participant may
have a maximum of five subaccounts at any time.
C. If a Participant terminates his employment for any reason with
a balance in his Education Account, the vested portion of the
balance shall be transferred to his Retirement Account and
distributed in accordance with Section 5.2.
D. Notwithstanding any provision to the contrary, if on the
January 1 of the calendar year in which an Eligible Dependent
of a Participant reaches age 18, the Eligible Dependent's
subaccount has a balance of less than $10,000, then the
Administrator, at its discretion, may direct that the balance
be paid to the Participant in one lump sum.
E. If any portion of an Education Account is not vested on the
date such portion is to be paid, distribution shall be
postponed until the January 1 following the date it is vested.
-14-
<PAGE> 18
5.4 Fixed Period Account.
A. A benefit equal to the lump sum value of the vested portion of
a Participant's Fixed Period Account shall be paid to him as
soon as administratively practicable after January 1 of the
payment year specified by the Participant. Nonvested amounts
will be paid as soon as administratively practicable after
January 1 following the year the Participant becomes vested.
B. A Participant may establish subaccounts under his Fixed Period
Account, with separate payment years for each. A Participant
may have a maximum of five subaccounts at any time.
C. If a Participant's employment terminates for any reason and
the Participant has a balance in his Fixed Period Account, the
vested portion of the balance shall be transferred to his
Retirement Account and be distributed in accordance with
Section 5.2.
5.5 Tax Withholding. To the extent required by law, the Employer shall
withhold or cause to be withheld taxes from payments made under the
Plan.
SECTION 6
ADMINISTRATION
6.1 Appointment of Administrator. The Boards shall appoint an individual or
a committee to serve as Administrator. The Administrator (or any member
of a committee) may be removed by the Boards at any time; and any
individual may resign at any time by submitting his resignation in
writing to the Boards. A new Administrator (or committee member) shall
be appointed as soon as practicable in the event of a removal or
resignation.
6.2 Administrator's Responsibilities. The Administrator is responsible for
the administration of the Plan. The Administrator may appoint other
persons or entities to perform any of its fiduciary functions. Such
appointment shall be made and accepted by the appointee in writing. The
Administrator and any such appointee may employ advisors and other
persons necessary or convenient to help him carry out his duties,
including his fiduciary duties. The Administrator shall have the right
to remove any such appointee from his position. Any person, group of
persons or entity may serve in more than one fiduciary capacity.
-15-
<PAGE> 19
6.3 Records and Accounts. The Administrator shall maintain or cause to be
maintained accurate and detailed records and accounts of Participants,
Employers and their respective rights under the Plan, and of all
investments, receipts, disbursements and other transactions. Such
accounts, books and records relating thereto shall be open at all
reasonable times to inspection and audit by the Employer and by persons
designated thereby.
6.4 Administrator's Specific Powers and Duties. In addition to any powers,
rights and duties set forth elsewhere in the Plan, the Administrator
shall have the following powers and duties:
A. to adopt such rules and regulations consistent with the
provisions of the Plan;
B. to enforce the Plan in accordance with its terms and any rules
and regulations it establishes;
C. to maintain records concerning the Plan sufficient to prepare
reports, returns and other information required by the Plan or
by law;
D. to construe and interpret the Plan and to resolve all
questions arising under the Plan;
E. to direct the Employer or the Trustee to pay benefits under
the Plan, and to give such other directions and instructions
as may be necessary for the proper administration of the Plan;
and
F. to be responsible for the preparation, filing and disclosure
on behalf of the Plan of such documents and reports as are
required by any applicable federal or state law.
6.5 Employer's Responsibility to Administrator. The Employer shall furnish
the Administrator such data and information as it may reasonably
require. The records of the Employer shall be determinative of each
Participant's period of employment, termination of employment and the
reason therefor, leave of absence, reemployment, years of service,
personal data, and compensation reductions. Participants and their
Beneficiaries shall furnish to the Administrator such evidence, data or
information, and execute such documents, as the Administrator requests.
6.6 Liability. Neither the Administrator nor the Employer shall be liable
to any person for any action taken or omitted in connection with the
administration of the Plan unless attributable to its own fraud or
willful misconduct; nor shall the Employer be liable to any person for
such action unless attributable to fraud or willful misconduct on the
part of a director, officer or employee of the Employer.
-16-
<PAGE> 20
6.7 Payment of Expenses. All expenses of the Administrator incurred in the
operation or administration of the Plan shall be paid by the Employer.
6.8 Indemnity of Administrator. The Employer shall indemnify the
Administrator (or any individual who is a delegate) against any and all
claims, loss, damage, expense or liability arising from any action or
failure to act, except when due to gross negligence, willful misconduct
or breach of fiduciary duty.
SECTION 7
CLAIMS PROCEDURE
7.1 Claim. If a Participant or Beneficiary is denied all or a portion of an
expected Plan benefit for any reason, he must file a written
notification of his claim with the Administrator. The Administrator
shall notify the Participant or Beneficiary within 60 days of allowance
or denial of the claim. If the Administrator fails to notify the
claimant of his decision to grant or deny the claim within 60 days,
such claim shall be deemed to have been denied; and the review
procedure described in Section 7.2 shall become available to the
claimant.
The notice provided by the Administrator under this Section shall be in
writing, sent by mail to the Participant's last known address and, if a
denial, must contain the following information:
A. the specific reasons for the denial;
B. the specific reference to the pertinent Plan provision on
which the denial is based;
C. if applicable, a description of any additional information or
material necessary to perfect the claim, and an explanation of
why such information or material is necessary; and
D. an explanation of the claims review procedure and the time
limitations of the review procedure applicable thereto.
7.2 Review Procedure. A Participant or Beneficiary is entitled to request a
review of any denial of his claim by the Administrator. The request for
review must be submitted in writing within 60 days of mailing of notice
of the denial. Absent a request for review within the 60-day period,
the claim will be deemed to be conclusively denied. The Participant or
Beneficiary or his representative shall be entitled to review all
pertinent documents and to
-17-
<PAGE> 21
submit issues and comments in writing. The Administrator shall provide
a full and fair review of the claim and render the final decision.
7.3 Final Decision. Within 60 days of mailing of a request for review, the
Administrator shall allow or deny the claim, unless special
circumstances require an extension (such as for a hearing); provided,
however, that in no event shall the decision be delayed beyond 120 days
after receipt of the request for review. The decision shall be
communicated in writing to the Participant or Beneficiary. The decision
shall recite the facts and reasons for denial, with specific reference
to the pertinent Plan provisions.
SECTION 8
AMENDMENT AND TERMINATION
8.1 Plan Amendment. The Plan may be amended in whole or in part by the
Boards at any time.
8.2 No Premature Distribution. Subject to Section 8.3, no amendment hereto
shall permit amounts accumulated prior to the amendment to be paid to a
Participant or Beneficiary prior to the time he would otherwise be
entitled thereto.
8.3 Termination of the Plan. The Employer reserves the right to terminate
the Plan and/or the Deferral Agreement pertaining to any Participant at
any time prior to the commencement of benefits. In the event of any
such termination, the Employer shall pay a benefit to the Participant
or the Beneficiary of any deceased Participant, in addition to other
insurance benefits hereunder, equal to the vested value of the
Participant's Accounts.
SECTION 9
MISCELLANEOUS
9.1 Supplemental Benefits. The benefits provided for the Participants under
the Plan are in addition to benefits provided by any other plan or
program of the Employer and, except as otherwise expressly provided
herein, the benefits of the Plan shall supplement and shall not
supersede any plan or agreement between the Employer and any
Participant or any provisions contained herein.
-18-
<PAGE> 22
9.2 Governing Law; Jurisdiction. The Plan shall be governed and construed
under the laws of the Commonwealth of Pennsylvania, and the courts of
the Commonwealth of Pennsylvania shall have exclusive jurisdiction in
any or all actions not superseded by federal law.
9.3 No Assignment Permitted. No Participant, Beneficiary or anyone claiming
through them shall have any right to commute, sell, transfer, assign or
otherwise convey the right to receive any payment under the terms of
the Plan. Any such attempted assignment shall be considered null and
void.
9.4 Binding Terms. The terms of the Plan shall be binding upon and inure to
the benefit of the parties hereto, their respective heirs, executors,
administrators and successors.
9.5 Spendthrift Provision. The interest of any Participant or any
Beneficiary receiving payments hereunder shall not be subject to
anticipation, nor to voluntary or involuntary alienation, until
distribution is actually made.
9.6 Headings. All headings preceding the text of the several Sections
hereof are inserted solely for reference and shall not constitute a
part of this Plan, nor affect its meaning, construction or effect.
9.7 Rule of Interpretation. Where appropriate, words in the masculine
gender shall include the feminine and neuter genders.
-19-
<PAGE> 23
IN WITNESS WHEREOF, to record the adoption of the amendment and
restatement of the Plan, NovaCare and NCES have caused their respective
authorized officers to affix their corporate names and seals as of the day and
year first written above.
[CORPORATE SEAL] NOVACARE, INC.
Attest: /s/ Peter D. Bewley By: /s/ Robert E. Healy, Jr.
---------------------------- ----------------------------------
Name: Robert E. Healy, Jr.
Title: Sr. VP and CFO
[CORPORATE SEAL] NOVACARE EMPLOYEE
SERVICES, INC.
Attest: /s/ Marie L. Martino By: /s/ Thomas D. Schubert
----------------------------- ----------------------------------
Name: Thomas D. Schubert
Title: Sr. V.P. and CFO
September 8, 1997
-20-
<PAGE> 1
EXHIBIT 13
NOVACARE 1997 ANNUAL REPORT
Front Cover
Photo of
Tony Volpentest, world record holder and gold medal winner in the 1996
Paralympic Games.
Photo of swallowing test
A new computer-based technology for treating swallowing disorders dramatically
improves patient outcomes.
Photo of employees from a shoe manufacturer
Small company employees receive big company benefits through NovaCare Employee
Services.
Photo of
NovaCare physical therapist, Ed Malloy, working with Rod Brind'Amour of the
Philadelphia Flyers.
HELPING MAKE LIFE A LITTLE BETTER
<PAGE> 2
Inside Front Cover
HELPING MAKE LIFE A LITTLE BETTER
RESPECT FOR THE INDIVIDUAL
SERVICE TO THE CUSTOMER
PURSUIT OF EXCELLENCE
COMMITMENT TO PERSONAL INTEGRITY
NOVACARE, INC. is a national leader in physical rehabilitation services and
employee services. As the clinical leader in rehabilitation, the company treats
37,000 patients per day in cost-effective outpatient and long-term care
settings, and has achieved number one market shares in long-term care and
orthotic and prosthetic rehabilitation. In addition, NovaCare is the nation's
second largest provider of outpatient rehabilitation services and the second
largest professional employer organization, administering the full array of
human resource functions, including the management of health care benefits and
workers' compensation, for small and medium-sized businesses.
NOVACARE'S VALUES unify our Company and mandate an open, participative,
empowered environment. Health care is changing at a remarkable pace and our
Company is expanding into new businesses. Our values-based culture enables us to
set aside the organizational anxiety and self-interest that often accompany
change. Instead, the pursuit of our values unlocks our inherent capacity to
drive change, creating immense opportunity. Without question, our greatest
strength and competitive advantage is our people, values-driven culture and
capacity for change.
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $1,066,451 $793,038 $905,359
Net income 38,910 15,281 61,924
Net income per common share $ .62 $ .24 $ .95
Weighted average number of common shares outstanding 63,081 64,325 65,163
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital $ 173,576 $223,712 $225,126
Total assets 1,014,304 789,731 852,557
Total liabilities 506,298 305,337 364,922
Shareholders' equity 508,006 484,394 487,635
</TABLE>
<PAGE> 3
1
LEADERSHIP PERFORMANCE GROWTH
NOVACARE HOLDS NUMBER ONE OR NUMBER TWO MARKET POSITIONS IN EACH OF ITS MAJOR
BUSINESSES AND LEADING SHARES IN ALMOST HALF OF ITS 17 TARGET MARKETS.
Outpatient Rehabilitation Centers Graph
(1995) 324
(1996) 466
(1997) 638
INVESTMENTS IN INFORMATION TECHNOLOGY CREATE SUPERIOR CUSTOMER SERVICE AND
IMPROVE ADMINISTRATIVE EFFICIENCY TO HELP NOVACARE MAINTAIN A LOW-COST POSITION.
Therapists per Manager Graph
(1995) 10.5
(1997) 17.1
NOVACARE PROVIDES CREATIVE OUTSOURCED SOLUTIONS TO THOUSANDS OF CUSTOMERS --
FROM LONG-TERM CARE FACILITIES TO PHYSICIANS, ATHLETIC TEAMS AND EMPLOYERS.
Long-term Care Contracts Graph ($ millions)
New Contract Sales
(1995) 116
(1996) 120
(1997) 127
Customer Cancellations
(1995) 86
(1996) 127
(1997) 82
WITH ITS ENTRY INTO THE EMPLOYEE SERVICES BUSINESS, NOVACARE LEVERAGES ITS
PROVEN EXPERTISE IN HUMAN RESOURCE MANAGEMENT.
Total Employees Graph
(1993) 9,550
(1994) 14,125
(1995) 15,440
(1996) 14,685
(1997) 39,291
<PAGE> 4
TO OUR SHAREHOLDERS
EXECUTIVE PHOTO
Timothy E. Foster
Chief Executive Officer
(left)
John H. Foster
Chairman of the Board
(center)
James W. McLane
President and Chief Operating Officer
(right)
Net Revenues($ millions)
Rehabilitation Services
(1992) 392
(1993) 582
(1994) 789
(1995) 905
(1996) 793
(1997) 927
Employee Services
(1997) 139
To Our Shareholders:
Fiscal 1997 was an excellent year: a year in which the restructure and
strategy development of 1995 and 1996 yielded strong returns. Spurred by
expanding market share and margins in each of our businesses, earnings per share
reached $.62 compared with $.24 per share in fiscal 1996. Adjusting fiscal 1996
for a restructure charge and a provision to increase accounts receivable
reserves, 1997 earnings per share increased 29% over the prior year.
Our dramatic return to growth was fueled by the successful implementation
of the strategy set forth in last year's annual report.
- Expand outpatient services
- Develop occupational health services
- Launch a professional employer organization, or employee services
business
- Focus growth and integration efforts in select target markets
This report will discuss the progress and impact of our strategy and
organizational development, while highlighting four themes that underpin our
current success and plans for the future.
GROWTH IN OUTPATIENT SERVICES
Revenues from rehabilitation services grew 15% in fiscal 1997, and
operating income increased 63%. The revenue enhancement stemmed principally from
growth in our outpatient services, comprising physical and occupational therapy,
artificial limbs (prosthetics) and custom braces (orthotics). An 88% increase in
the number of managed care contracts led to 2% growth in our base outpatient
clinics business despite an 8% decrease in pricing. We also acquired 52
outpatient businesses with aggregate annualized revenues of $140 million.
Disciplined cost controls and greater scale offset the price declines and our
outpatient base business gross profit margins increased from 26% in fiscal 1996
to 28% in fiscal 1997.
In addition to outpatient growth, our rehabilitation business benefited
from a significant increase in the number of long-term care facilities
outsourcing their rehabilitation programs to NovaCare. Propelled by our
outstanding clinical programs, information technology advances and unsurpassed
levels of therapist recruiting, new contract sales reached record levels and
cancellations dropped to a three-year low. As a result, contract rehabilitation
revenues increased 9%. While this business faces the prospect of changing
Medicare reimbursement, which will decrease margins, we are confident that our
preparation will enable us to better manage costs, while differentiating our
service and expanding our already overwhelming market leadership in this
business. The faster growth of our outpatient services relative to our long-term
care outsourcing business reduced our reliance on Medicare as a payer to 45% of
gross profits in fiscal 1997.
DEVELOPMENT OF OCCUPATIONAL HEALTH SERVICES
Leveraging the expertise gained from annually rehabilitating thousands of
patients with work-related injuries, we expanded our occupational health
business with acquisitions in Connecticut,
<PAGE> 5
3
Arizona and Northern California. NovaCare provides "workplace-to-workplace"
service, from worksite evaluation, to injury/illness diagnosis and physician
treatment, through rehabilitation and back to work, to minimize health care,
disability and lost productivity costs to employers. Occupational health remains
a highly fragmented $30 billion industry in which market leadership is far from
decided.
ENTERING THE EMPLOYEE SERVICES INDUSTRY
We entered the employee services industry and became an industry leader in
fiscal 1997. The acquisition of four professional employer organizations (PEOs)
and the outsourcing of NovaCare's 19,000 employees to the newly formed NovaCare
Employee Services, Inc., established that subsidiary as the second largest PEO
in the United States.
In return for an administrative fee and a share of reduced costs, PEOs
assume administrative activities and risks associated with employment, typically
for small and mid-sized businesses. It is a market opportunity that exceeds $1
trillion and leverages NovaCare's expertise in human resource management,
outsourcing, information technology, occupational health, and existing
relationships with innumerable smaller health care companies.
FOCUSED GROWTH IN TARGET MARKETS
To build and maintain leading market positions in our rehabilitation
services businesses, we focused on 17 selected markets. Our goals were to
enhance physician and health system relationships, increase brand awareness and
leverage our infrastructure investments in those communities. In 1997, nearly
90% of our rehabilitation acquisitions and start-up centers were in the target
markets -- the same markets in which we will expand our employee services
business. By year-end, we held leading market share positions in almost half of
these markets.
ORGANIZATIONAL DEVELOPMENT
It was very clear to us that our aggressive growth strategy coupled with
the rapidly changing health care environment would require expansion of the
leadership team. Accordingly, in late April, Timothy E. Foster was appointed
Chief Executive Officer. A founding Director of NovaCare, Tim served most
recently as President and Chief Operating Officer and, prior to that, as Senior
Vice President and Chief Financial Officer. His strategic contributions and
leadership in repositioning NovaCare have increased market share, improved
margins and return on equity, and enhanced shareholder value.
James W. McLane simultaneously was appointed President and Chief Operating
Officer. Jamie brings a wealth of health policy and managed care expertise and
relationships, as well as extensive executive leadership and business-building
experience. Prior to joining NovaCare, Jamie served as Chief Executive Officer
of Aetna Health Plans, a $7.5 billion managed care insurer, the nation's third
largest. Jamie already has made positive contributions to our operations and
service delivery. (See article on page 12.)
To bring new insight and marketing expertise to the PEO industry, Loren J.
Hulber was appointed President and Chief Executive Officer of NovaCare Employee
Services. Loren was formerly of American Brands where he served as President and
Chief Executive Officer of Day-Timers, Inc., the leader in personal time
management services. Loren also brings an exceptional background as a business
builder with specific expertise in brand development.
LOOKING AHEAD
Our plans for the future are aggressive. In outpatient rehabilitation, we
will focus on internal growth and acquisitions to strengthen market positions
and plan to accelerate the expansion of our occupational health business. The
contract rehabilitation business continues to show increases, and we are
confident about our ability to gain market share in this changing reimbursement
environment. Finally, we plan to forge ahead in the employee services business
by expanding into at least two new markets. This is perhaps NovaCare's greatest
growth opportunity, since less than 5% of potential customers currently utilize
PEO services.
NovaCare Employee Services intends to make an initial public offering in
fiscal 1998. Approximately 20% of the subsidiary's stock will be sold to the
public with a majority ownership position retained by NovaCare. The public
offering allows us to capitalize on the increasing interest of investors in this
high-growth industry, recoup NovaCare's initial investment, and create an
attractive security with which to acquire additional PEOs.
As we conclude 1997, we are firmly on the road to realizing our long-term
strategy of building a strong rehabilitation and employee services company. We
are number one in outsourced rehabilitation services in long-term care settings
and orthotics and prosthetics, and we hold the number two market position in
outpatient physical therapy and employee services, having entered the latter two
businesses more recently.
We have attained our leadership positions by investing in a unique set of
knowledge-based capabilities: our expertise in outsourced services, information
technology and human resource management, which differentiates our services. We
describe these capabilities in more detail later in this report.
Of course, behind the competencies that differentiate us, stand our
employees. We continue to invest in them, and they return that investment time
and again with substantial results -- all the while Helping Make Life a Little
Better for our patients, customers, and communities.
On behalf of your Board and management, we extend our thanks to all
NovaCare employees and offer our appreciation to you, our shareholders, for your
continuing confidence and support.
/s/ John H. Foster /s/ Timothy E. Foster
John H. Foster Timothy E. Foster
Chairman Chief Executive Officer
<PAGE> 6
ACHIEVING MARKET LEADERSHIP
Photo of
Tony Volpentest, world record holder and gold medal winner in the 1996
Paralympic Games.
Revenues From Sabolich Socket Technology
Graph($ millions)
(1995) .57
(1996) 7.95
(1997)15.18
HELPING MAKE LIFE A LITTLE BETTER
<PAGE> 7
5
Revenues From Upper Extremity Prosthetics
Graph ($ million)
(1995) 3.44
(1996) 5.65
(1997) 8.54
NOVACARE HAS ACHIEVED NUMBER ONE OR TWO MARKET POSITIONS IN EACH OF ITS MAJOR
BUSINESSES THROUGH CLINICAL LEADERSHIP, SUPERIOR OUTCOMES AND EXPERT SERVICES.
The race for leading market positions is hard won, but the rewards are
substantial -- higher margins, superior return on equity and enhanced
shareholder value.
Our process begins with the selection of industry sectors that are large,
fragmented, growing rapidly and that would benefit from our expertise in
outsourcing, information technology and human resource management.
We start with an aggressive consolidation and integration program. Rapid
consolidation is key to achieving the scale that creates margin opportunity and
warrants the investment made in service differentiation. We focus on target
geographic markets to leverage the cost of field management and concentrate our
resources on the most critical relationships in a community. We invest heavily
in the employees of acquired businesses, orienting them to our core values, and
creating alignment with common goals which, in turn, facilitates integration.
Consolidating industries to create scale is part of our history. Twelve
years ago, we entered the rehabilitation business as the nation's largest
provider of speech-language pathology services with $5 million in revenues.
Since then, we have completed 38 acquisitions and created a $550 million
business in outsourced rehabilitation services in the long-term care market.
Similarly, early in this decade, we entered the outpatient rehabilitation
and orthotic and prosthetic sectors by acquiring 197 businesses. Today, we have
an integrated network of 644 outpatient centers across 37 states, with net
revenues of approximately $360 million in fiscal 1997. Finally, last year, we
entered the employee services industry with four acquisitions.
Our scale has enabled us to make the investments necessary to differentiate
our services. In rehabilitation, we have invested in research and development to
distinguish our services clinically. Two recent innovations, the Vigor(SM)
rehabilitation and wellness program for seniors, developed in partnership with
Nautilus(R), and a computer-based technology for the treatment of swallowing
disorders, are enjoying strong demand from customers that wish to be clinically
differentiated in their local communities.
We have been a leader in the development of outcomes, which are so critical
to defining quality of care. We have the nation's largest database of
rehabilitation outcomes in long-term care -- data that has been utilized in
several high-profile research studies. Further, we have established a
professorship to advance rehabilitation outcomes research at the Harvard School
of Public Health.
NovaCare is recognized internationally for technological leadership in
prosthetics, including prosthetics that sense hot and cold, our unique Sabolich
socket that offers both comfort and a secure fit, and our use of myoelectrics to
enable amputees to open and close their hands at will.
In employee services, we are differentiated by our human resource
management expertise gained through 12 years of managing large numbers of
employees in dispersed locations. We help our customer, the small and mid-sized
business, attract and retain a quality workforce through employee benefits
historically available only to employees of much larger organizations. We are
unique in our ability to manage health care costs for employers, including
workers' compensation and rehabilitation.
At NovaCare, each of our major businesses ranks number one or two in its
sector. These leadership positions have been enhanced through the development of
outsourcing capabilities and investments in information technology and human
resource management, discussed on the following pages.
<PAGE> 8
PROVIDING CREATIVE OUTSOURCED SOLUTIONS
Photo of
NovaCare physical therapist, Ed Malloy, working with Rod Brind'Amour of the
Philadelphia Flyers.
Service Relationships by Customer Type Graph
(Total Customers 13,900)
(1997)
Temporary Staffing 1,700
Contract Rehabilitation 1,770
Employee Services 1,700
Athletic Teams 1,100
Managed Care 351
Management Consulting 797
Occupational Health 6,500
HELPING MAKE LIFE A LITTLE BETTER
<PAGE> 9
7
FROM NURSING HOMES TO MANUFACTURERS TO HOCKEY TEAMS, NOVACARE PROVIDES CREATIVE,
COST-EFFECTIVE OUTSOURCED SOLUTIONS FOR HEALTH CARE ORGANIZATIONS, EMPLOYERS AND
BUSINESSES.
Instrumental in our success in outsourcing is an ability to understand and
anticipate the needs of our customers, while smoothly integrating into their
operations, so they can focus on their businesses. We manage activities that our
customers may not have the necessary scale, expertise, time or staff to handle.
Our goal is to be a partner with our customers, whether a small business, an
orthopedic surgeon, a managed care organization or a facility administrator.
Our expertise in long-term care has led to considerable growth in our
outsourced rehabilitation services within that industry. Although rehabilitation
is a relatively small department in a long-term care facility, it is critical to
attracting patients. Yet, effectively managing a rehabilitation program,
including recruiting and retaining therapists, developing and implementing
clinically differentiated programs, and complying with frequently changing
regulations, calls for scale and specialized knowledge beyond that of most
facilities. This is why, with reimbursement rules becoming ever more complex, we
are signing a record number of new contracts and increasing our market share.
As partners with our customers, we add and adapt services as our customers'
needs change. Last year, through NovaPro(SM) Temporary Staffing, we established
relationships with approximately 1,700 health care institutions to provide
clinicians on a temporary basis. And, we expanded the services of Polaris Group,
our management consulting division, which provides expertise in program
development, reimbursement and regulatory compliance, and added 173 new clients.
Physicians, hospitals, managed care companies and employers turn to our
outpatient services for their patients, members and employees because we are
experts in rehabilitation. Our athletic trainers and physical therapists work
with 13 professional teams and more than 1,000 high school teams; our emerging
occupational health business serves 6,500 employers; and we operate 644
outpatient clinics nationwide.
We strive to integrate seamlessly into our customers' operations and to
improve their service to their customers. Our long-term care employees are part
of the facility team, participating with nursing in every patient care activity,
from admissions to daily care plan conferences to training programs for staff
members and families. We offer strength-building rehabilitation and wellness
programs for seniors, which our customers present as their Vigor(SM) programs.
Our athletic trainers are on the playing field in customer team jerseys. As a
co-employer with 1,700 employee services customers, we work directly with
employees, fielding questions that range from health care coverage to vacation
policy and other benefits.
<PAGE> 10
DRIVING RESULTS WITH INFORMATION TECHNOLOGY
Photo of swallowing test
A new computer-based technology for treating swallowing disorders dramatically
improves patient outcomes.
Facilities with NovaCare's Information System
Graph
(1995) 1,500
(1996) 1,600
(1997) 1,730
HELPING MAKE LIFE A LITTLE BETTER
<PAGE> 11
9
Patient Outcomes in NovaNet Plus Database
Graph
(1995) 5,100
(1996) 15,600
(1997) 36,000
FROM TECHNOLOGIES APPLIED TO PATIENT CARE TO INFORMATION MANAGEMENT, WE IMPROVE
OUR CUSTOMERS' PERFORMANCE BY PROVIDING KNOWLEDGE-BASED SERVICES AND TECHNOLOGY
BEYOND THE REACH OF THEIR INTERNAL SYSTEMS.
We create value for our customers by providing them information specific to
their needs - information which is generally unavailable from their internal
systems. In long-term care, we support our customers with information that
allows them to differentiate their services in the local community. This
information is provided through our proprietary system, NovaNet PLUS, introduced
in mid-1995. With NovaNet PLUS, customers can manage their clinical caseload,
track referral and discharge patterns, determine the cost of care per patient,
evaluate the effectiveness of various treatment methods, and compare their
clinical outcomes with a national database of comparable patients. This system
has proven so popular with customers that today we are in the process of
installing NovaNet PLUS throughout two large long-term care organizations,
including many locations where NovaCare is not currently the rehabilitation
services provider.
Occupational health and employee services customers want to return disabled
employees to work as quickly and safely as possible. We support the employer's
information needs by providing critical data on caseload, incidence of injury,
absence and costs. We also provide progress reports so that supervisors can make
informed decisions on staffing and production.
Through applied technologies, we provide health care customers with
clinical advances otherwise unavailable to them. Estimates are that swallowing
problems affect as many as 40% of the patient population in nursing homes. The
new NovaCare program for the diagnosis and treatment of swallowing dysfunction,
pictured here, incorporates computer-based technology that is noninvasive,
portable, and provides real-time information on swallowing functions.
Additionally, this program offers the opportunity to provide a cost-effective,
convenient alternative to patients who might otherwise need to travel to a
distant hospital for repeated diagnostic procedures.
The same information technology that adds value for our customers has
substantially improved NovaCare's efficiency and profitability. With the
implementation of NovaNet PLUS, our managers have access to daily information on
billing, payroll, productivity and clinical management to optimize caseload and
profitability. This support has allowed us to reduce the time formerly invested
by field management in information gathering and analysis by 90% and to increase
managers' spans of control by 62%, while at the same time improving customer and
employee retention rates. Developments like these contributed to an increase in
our operating profit margin for rehabilitation services from 6% in fiscal 1996
to 8% in fiscal 1997, at a time when most health care providers experienced
profit erosion.
<PAGE> 12
MANAGING HUMAN RESOURCES
Photo of employees from a shoe manufacturing company
Small company employees receive big company benefits through NovaCare Employee
Services.
"Employer of Choice" Results
Clinicians Recruited For Customer Facilities
Contract Rehabilitation
(1993) 2,297
(1994) 2,340
(1995) 2,447
(1996) 2,298
(1997) 2,605
Temporary Staffing
(1997) 1,783
HELPING MAKE LIFE A LITTLE BETTER
<PAGE> 13
11
NOVACARE HAS LEVERAGED ITS EXPERTISE AS THE "EMPLOYER OF CHOICE" IN
REHABILITATION SERVICES TO BECOME THE NATION'S SECOND LARGEST EMPLOYEE SERVICES
COMPANY.
NovaCare's most critical resources -- our 19,000 people -- are highly dispersed
and working in small groups in 2,400 locations nationwide -- in our customers'
health care facilities and our own outpatient centers. With NovaCare Employee
Services, we have added 20,000 employees -- located in the workplaces of our
employee services customers. To manage this number of employees effectively
requires a strong core competency in human resource management.
In rehabilitation, our ability to recruit and retain rehabilitation
professionals for our customers has been critical to our customers' success. In
fact, one of the reasons for outsourcing rehabilitation is the difficulty that
health care facilities experience in attracting and maintaining an adequate
number of therapists.
We support new customers and the growth of existing customers' programs
with the most effective recruiting organization for rehabilitation professionals
in the industry, with a proprietary information system that tracks every contact
with prospective clinical employees and today represents a database of 96,000
clinicians.
Demand for rehabilitation clinicians continues to exceed the supply, yet
NovaCare has been successful in recruiting a disproportionate share of
therapists and is, today, one of the leading employers of rehabilitation
therapists in the world. Over the past five years, we have hired an average of
2,400 therapists per year to work in our contract rehabilitation business and,
in fiscal 1997, we recruited an additional 1,800 clinicians for our temporary
staffing division.
Creating an organization of highly productive employees has required that
we develop "best practices" in recruiting, training and development, and
rewards, including pay, flexible benefits and recognition programs. Employee
surveys conducted by an outside firm consistently rank the satisfaction of
NovaCare's employees above average in comparison with that of employees of other
health care companies.
The employee services business is a natural outgrowth of our strength and
experience in managing a dispersed workforce. In addition, the advantage to our
customer is our ability to control the cost of health care, including
rehabilitation and workers' compensation, which for many employers represents
the highest cost after payroll expenses. At NovaCare, for example, effective
management of workers' compensation reduced our costs as a percentage of
salaries by 38% over the past three years.
Our human resources capabilities have provided attractive returns for
NovaCare shareholders. Through training, management and systems support, we have
improved the productivity of our therapists in both long-term care and
outpatient settings, helping to mitigate pricing pressures. For example, in 1990
our therapists in the long-term care business spent 65% of their time on direct
patient care; today that number is 73%. Further, last year, we were able to
transition most of our salaried clinicians to an hourly pay and flexible time
basis, to better align with the way our customers pay for services. With this
change, we reduced unit labor costs by 2% and, at the same time, realized the
highest employee retention rate in two years.
Our capabilities in human resource management have differentiated us in
rehabilitation services and will differentiate us in our employee services
business, where we are the outsourced human resources department for our
clients.
<PAGE> 14
12
NovaCare dove logo
JAMES W. McLANE JOINS NOVACARE EXECUTIVE TEAM
Jamie McLane joins NovaCare with 28 years' experience in senior management
positions in the Federal Government, Citicorp and Aetna. Just prior to joining
NovaCare as its new President and Chief Operating Officer, Jamie served as Chief
Executive Officer of Aetna Health Plans. Prior to 1991, he held various
positions at Citicorp, including Senior Vice President and Division Executive of
both the Global Insurance and Capital Investments Divisions. He has served as
co-chair of the task force on Medicare reform for the Executive Committee of the
Health Care Leadership Council, as a member of the Jackson Hole Group, and as
Chairman of Outward Bound USA.
"I look forward to melding my management and leadership experience, my knowledge
of the rapidly evolving and ever challenging health care system, and my
relationships with employers, providers and managed care organizations with the
proven abilities of NovaCare's management team," says McLane.
"Working together with all NovaCare employees, we will continue to create
shareholder value by HELPING MAKE LIFE A LITTLE BETTER for our customers and
patients. We will accomplish this through a disciplined focus on the four themes
that underlie NovaCare's recent success and our plans for the future:
o Attaining market leadership in each business and each target market;
o Providing creative outsourced solutions for an expanding array of
customers;
o Developing information technology capabilities to ensure superior customer
service and outcomes-oriented health care quality at a competitive cost;
and
o Managing human resource programs for employers so they can better care for
their patients, customers and employees."
<PAGE> 15
NovaCare, Inc.
Inside Back Cover
DIRECTORS
John H. Foster
Chairman of the Board
Timothy E. Foster
Chief Executive Officer
E. Martin Gibson
Retired Chairman and Chief Executive Officer, Corning Lab Services, Inc.
Siri S. Marshall, Esq.
Senior Vice President and General Counsel, General Mills, Inc.
James W. McLane
President and Chief Operating Officer
Stephen E. O'Neil
Private Investor
George W. Siguler
Founding Partner,
Siguler, Guff & Company, LLC
Robert G. Stone, Jr.
Retired Chairman of the Board,
The Kirby Corporation
Daniel C. Tosteson, M.D.
Caroline Shields Walker Distinguished
Professor of Cell Biology and
Dean Emeritus of the Medical Faculty,
Harvard University
SENIOR MANAGEMENT
Peter D. Bewley
Senior Vice President,
General Counsel and Secretary
Susan J. Campbell
Vice President,
Communications and Investor Relations
Daryl A. Dixon
President and General Manager,
Contract Rehabilitation Division
John H. Foster
Chairman of the Board
Timothy E. Foster
Chief Executive Officer
Robert E. Healy, Jr.
Senior Vice President,
Finance and Administration and
Chief Financial Officer
Ronald G. Hiscock
President and General Manager,
Outpatient Division
Loren J. Hulber
President and Chief Executive Officer,
NovaCare Employee Services, Inc.
Aven A. Kerr
Senior Vice President,
Human Resources
Laurence F. Lane
Senior Vice President,
Regulatory Affairs
James W. McLane
President and Chief Operating Officer
Steven M. Wise
Vice President, Information Systems and
Chief Information Officer
Note: No family relationships exist among any of the directors or officers.
SHAREHOLDER INFORMATION
Corporate Headquarters
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, PA 19406
(800) 331-8840
Online address: www.novacare.com
STOCK TRADING
NovaCare, Inc. common stock and 5.5% convertible subordinated debentures, due in
2000, are traded on the New York Stock Exchange under the symbols "NOV" and
"NOV/2000," respectively.
INFORMATION REQUESTS
Investors, analysts and others seeking information should contact:
NovaCare's Communications and Investor Relations Department
(610) 992-7495
SHAREHOLDER RECORDS
Shareholders desiring to change the name, address or ownership of stock or to
report lost certificates should contact:
American Stock Transfer Company
40 Wall Street, 46th Floor
New York, NY 10005
(718) 921-8200
<PAGE> 16
Back Cover
NovaCare Logo
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, PA 19406
800-331-8840
www.novacare.com
<PAGE> 1
EXHIBIT 21
09/10/97 Page 1
Subsidiary Name Only Listing
Corporation
A.D. Craig Company
ASK Colorado Health Care Services, P.C.
Advance Orthotics, Inc.
Advanced Orthopedic Technologies (Clayton), Inc.
Advanced Orthopedic Technologies (Lett), Inc.
Advanced Orthopedic Technologies (New Jersey), Inc.
Advanced Orthopedic Technologies (New Mexico), Inc.
Advanced Orthopedic Technologies (New York), Inc.
Advanced Orthopedic Technologies (OTI), Inc.
Advanced Orthopedic Technologies (Parmeco), Inc.
Advanced Orthopedic Technologies (SFV), Inc.
Advanced Orthopedic Technologies (Virginia), Inc.
Advanced Orthopedic Technologies (West Virginia),Inc.
Advanced Orthopedic Technologies Management Corp.
Advanced Orthopedic Technologies, Inc.
Advanced Orthopedic Technologies, Inc.
Affiliated Physical Therapists, Ltd.
Artificial Limb and Brace Center
Ather Sports Injury Clinic, Inc.
Atlantic Rehabilitation Services, Inc.
Boca Rehab Agency, Inc.
Bowman-Shelton Orthopedic Service, Incorporated
Buendel Physical Therapy, Inc.
C.O.A.S.T. Institute Physical Therapy, Inc.
CMC Center Corporation
CMC Medical Center, P.C.
Cannon & Associates, Inc.
Cenla Physical Therapy & Rehabilitation Agency, Inc.
Center for Physical Therapy & Sports Rehabilitation, Inc.
CenterTherapy, Inc.
Certified Orthopedic Appliance Co., Inc.
Champion Physical Therapy, Inc.
ConsulTemps, Inc.
Coplin Physical Therapy Associates, Inc.
Crowley Physical Therapy Clinic, Inc.
Dale Clark Prosthetics, Inc.
Douglas Avery & Associates, Ltd.
Douglas C. Claussen, R.P.T., Physical Therapy, Inc.
Elk County Physical Therapy, Inc.
Employee Benefits Management, Inc.
Employee Services, Inc. of North Carolina
Employers' Risk Management, Inc.
Fine, Bryant & Wah, Inc.
Francis Naselli, Jr. & Stewart Rich Physical Therapists, Inc.
Frank J. Malone & Son, Inc.
GP Therapy, L.L.C.
Gallery Physical Therapy Center, Inc.
<PAGE> 2
Georgia Physical Therapy of West Georgia, Inc.
Georgia Physical Therapy, Inc.
Greater Sacramento Physical Therapy Associates, Inc.
Grove City Physical Therapy and Sports Medicine, Inc.
Gulf Breeze Physical Therapy, Inc.
Gulf Coast Hand Specialists, Inc.
Hand Therapy Associates, Inc.
Hand Therapy and Rehabilitation Associates, Inc.
Hawley Physical Therapy, Inc.
09/10/97 Page 2
Subsidiary Name Only Listing
Heartland Rehabilitation, Inc.
Indianapolis Physical Therapy and Sports Medicine, Inc.
Industrial Health Care Company, Inc.
J. E. Hanger, Incorporated
Jim All, Inc.
Kesinger Physical Therapy, Inc.
Lynn M. Carlson, Inc.
Marilyn Hawker, Inc.
McFarlen & Associates, Inc.
McKinney Prosthetics/Orthotics, Inc.
MedStat, P.C.
Medical Arts O&P Services, Inc.
Metro Rehabilitation Services, Inc.
Mica Corporation, Inc.
Michigan Therapy Centre, Inc.
Mill River Management, Inc.
Mitchell Tannebaum I, Inc.
Mitchell Tannebaum II, Inc.
Mitchell Tannenbaum III, Inc.
Monmouth Rehabilitation, Inc.
NC (Wisconsin), S.C.
NC Cash Management, Inc.
NC Occupational Therapy, P.C.
NC Physical Therapy, P.C.
NC Resources, Inc.
New Mexico Physical Therapists, Inc.
Northland Regional Orthotic and Prosthetic Center, Inc.
Northside Physical Therapy, Inc.
NovaCare (Arizona), Inc.
NovaCare (Colorado), Inc.
NovaCare (Texas), Inc.
NovaCare Administrative Employee Services of New York, Inc.
NovaCare Administrative Employee Services, Inc.
NovaCare Easton & Moran Physical Therapy, Inc.
NovaCare Employee Services Club Staff, Inc.
NovaCare Employee Services Easy Staff, Inc.
NovaCare Employee Services Northeast, Inc.
NovaCare Employee Services Resource One, Inc.
NovaCare Employee Services TPI, Inc.
<PAGE> 3
NovaCare Employee Services of America, Inc.
NovaCare Employee Services of Boston, Inc.
NovaCare Employee Services of Bradenton, Inc.
NovaCare Employee Services of Florida, Inc.
NovaCare Employee Services of New York, Inc.
NovaCare Employee Services of Orlando, Inc.
NovaCare Employee Services, Inc.
NovaCare Management Company, Inc.
NovaCare Management Services, Inc.
NovaCare Northside Therapy, Inc.
NovaCare Orthotics & Prosthetics East, Inc.
NovaCare Orthotics & Prosthetics Holdings, Inc.
NovaCare Orthotics & Prosthetics West, Inc.
NovaCare Orthotics & Prosthetics, Inc.
NovaCare Outpatient Rehabilitation East, Inc.
NovaCare Outpatient Rehabilitation I, Inc.
NovaCare Outpatient Rehabilitation West, Inc.
NovaCare Outpatient Rehabilitation, Inc.
NovaCare Rehab Agency of Alabama, Inc.
09/10/97 Page 3
Subsidiary Name Only Listing
NovaCare Rehab Agency of Florida, Inc.
NovaCare Rehab Agency of Georgia, Inc.
NovaCare Rehab Agency of Illinois, Inc.
NovaCare Rehab Agency of Kansas, Inc.
NovaCare Rehab Agency of Missouri, Inc.
NovaCare Rehab Agency of New Jersey, Inc.
NovaCare Rehab Agency of North Carolina, Inc.
NovaCare Rehab Agency of Northern California, Inc.
NovaCare Rehab Agency of Ohio, Inc.
NovaCare Rehab Agency of Oklahoma, Inc.
NovaCare Rehab Agency of Oregon, Inc.
NovaCare Rehab Agency of Pennsylvania, Inc.
NovaCare Rehab Agency of South Carolina, Inc.
NovaCare Rehab Agency of Southern California, Inc.
NovaCare Rehab Agency of Tennessee, Inc.
NovaCare Rehab Agency of Virginia, Inc.
NovaCare Rehab Agency of Washington, Inc.
NovaCare Rehab Agency of Wyoming, Inc.
NovaCare Rehabilitation Agency of Wisconsin, Inc.
NovaCare Rehabilitation, Inc.
NovaCare Service Corp.
NovaCare Speech Therapy & Audiology, Inc.
NovaCare, Inc.
NovaCare, Inc. (Delaware)
NovaFunds, Inc.
NovaMark, Inc.
NovaMed, Inc.
NovaStock, Inc.
OSI Midwest, Inc.
<PAGE> 4
Opus Care, Inc.
Ortho East, Inc.
Ortho Rehab Associates, Inc.
Ortho-Fab Laboratories, Inc.
Orthopedic Rehabilitative Services, Ltd.
Orthopedic and Sports Physical Therapy of Cupertino, Inc.
Orthotic & Prosthetic Rehabilitation Technologies, Inc.
Orthotic and Prosthetic Associates, Inc.
Peters, Starkey & Todrank Physical Therapy Corporation
Physical Focus, Inc.
Physical Rehabilitation Partners, Inc.
Physical Therapy Institute, Inc.
Professional Insurance Planners of Florida, Inc.
Professional Orthotics and Prosthetics, Inc.
Professional Orthotics and Prosthetics, Inc. of Santa Fe
Progressive Orthopedic
Prosthetics-Orthotics Associates, Inc.
Quad City Management, Inc.
Quad City Regional Spine Institute, P.C.
RCI (Colorado), Inc.
RCI (Exertec), Inc.
RCI (Illinois), Inc.
RCI (Michigan), Inc.
RCI (S.P.O.R.T.), Inc.
RCI (WRS), Inc.
RCI Nevada, Inc.
Rebound Oklahoma, Inc.
Redwood Pacific Therapies, Inc.
Rehab Managed Care of Arizona, Inc.
09/10/97 Page 4
Subsidiary Name Only Listing
Rehab Provider Network - California, Inc.
Rehab Provider Network - Delaware, Inc.
Rehab Provider Network - Georgia, Inc.
Rehab Provider Network - Illinois, Inc.
Rehab Provider Network - Indiana, Inc.
Rehab Provider Network - Maryland, Inc.
Rehab Provider Network - Michigan, Inc.
Rehab Provider Network - New Jersey, Inc.
Rehab Provider Network - Ohio, Inc.
Rehab Provider Network - Oklahoma, Inc.
Rehab Provider Network - Pennsylvania, Inc.
Rehab Provider Network - Virginia, Inc.
Rehab Provider Network - Washington, D.C., Inc.
Rehab Provider Network of Colorado, Inc.
Rehab Provider Network of Florida, Inc.
Rehab Provider Network of Nevada, Inc.
Rehab Provider Network of New Mexico, Inc.
Rehab Provider Network of Texas, Inc.
Rehab Provider Network of Wisconsin, Inc.
<PAGE> 5
Rehab World, Inc.
Rehab/Work Hardening Management Associates, Ltd.
RehabClinics (Coast), Inc.
RehabClinics (Galaxy), Inc.
RehabClinics (New Jersey), Inc.
RehabClinics (PTA), Inc.
RehabClinics (SPT), Inc.
RehabClinics Abilene, Inc.
RehabClinics Dallas, Inc.
RehabClinics Pennsylvania, Inc.
RehabClinics, Inc.
Rehabilitation Fabrication, Inc.
Robert M. Bacci, R.P.T., Physical Therapy, Inc.
Robin-Aids Prosthetics, Inc.
Rx One, Inc.
S.T.A.R.T., Inc.
SG Rehabilitation Agency, Inc.
SG Speech Associates, Inc.
Salem Orthopedic & Prosthetic, Inc.
San Joaquin Orthopedic, Inc.
South Jersey Physical Therapy Associates, Inc.
Southpointe Fitness Center, Inc.
Southwest Medical Supply Company, Inc.
Southwest Physical Therapy, Inc.
Southwest Therapists, Inc.
Sporthopedics Sports and Physical Therapy Centers, Inc.
Sports Therapy and Arthritis Rehabilitation, Inc.
Sprint Physical Therapy, P.C.
Staffing Technologies, Inc.
Star Physical Therapy, Inc.
Start to Finish Therapy, P.C.
Stephenson-Holtz, Inc.
T.J. Partnership I
TJ Corporation I, L.L.C.
Texoma Health Care Center, Inc.
The Center for Physical Therapy and Rehabilitation, Inc.
The Orthopedic Sports and Industrial Rehabilitation Network, Inc.
Theodore Dashnaw Physical Therapy, Inc.
Therex, P.C.
09/10/97 Page 5
Subsidiary Name Only Listing
Treister, Inc.
Union Square Center for Rehabilitation & Sports Medicine, Inc.
Vanguard Rehabilitation, Inc.
Wayzata Physical Therapy Center, Inc.
West Side Physical Therapy, Inc.
West Suburban Health Partners, Inc.
Western Rehab Services, Inc.
WorkCare, L.L.C.
Workers Rehabilitation Services, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-88744; 33-88745; 33-88746) of NovaCare, Inc. of
our report dated July 31, 1997 appearing on page 50 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, PA
September 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS IN FORM 10-K FOR THE FISCAL PERIOD ENDED JUNE 30,
1997.
</LEGEND>
<CIK> 0000802843
<NAME> NOVA CARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 22,716
<SECURITIES> 0
<RECEIVABLES> 289,740
<ALLOWANCES> (33,263)
<INVENTORY> 18,450
<CURRENT-ASSETS> 329,895
<PP&E> 141,067
<DEPRECIATION> (71,327)
<TOTAL-ASSETS> 1,014,304
<CURRENT-LIABILITIES> 156,319
<BONDS> 326,700
0
0
<COMMON> 666
<OTHER-SE> 507,340
<TOTAL-LIABILITY-AND-EQUITY> 1,014,304
<SALES> 0
<TOTAL-REVENUES> 1,066,451
<CGS> 0
<TOTAL-COSTS> 952,654<F1>
<OTHER-EXPENSES> 12,044<F2>
<LOSS-PROVISION> 19,708
<INTEREST-EXPENSE> 15,244
<INCOME-PRETAX> 66,801
<INCOME-TAX> 27,891
<INCOME-CONTINUING> 38,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,910
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
<FN>
<F1>"Total Costs" consist of cost of services and selling and administrative
expenses.
<F2>"Other Expenses" consist of amortization of goodwill and minority interest
offset by interest income.
</FN>
</TABLE>
