U N I T E D S T A T E S
S E C U R I T I E S A N D E X C H A N G E
C O M M I S S I O N
W A S H I N G T O N, D C 2 0 5 4 9
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number 1-10875
NovaCare, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3247827
(State of incorporation) (I.R.S. Employer Identification No.)
1016 W. Ninth Avenue, King of Prussia, PA 19406
(Address of principal executive office) (Zip code)
Registrant's telephone number: (610) 992-7200
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of May 1, 1997, NovaCare, Inc. had 60,898,872 shares of common
stock, $.01 par value, outstanding.
NOVACARE, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED MARCH 31, 1997
INDEX
-----------
Part No. Item No. Description Page No.
- -------- -------- -------------- ---------
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance
Sheets as of March 31, 1997 and
June 30, 1996 1
- Condensed Consolidated Statements
of Operations for the Three Months
Ended March 31, 1997 and 1996 2
- Condensed Consolidated Statements
of Operations for the Nine Months
Ended March 31, 1997 and 1996 3
- Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996 4
- Notes to Condensed Consolidated
Financial Statements 5-8
2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-13
II OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 14
Signatures 15
i
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and June 30, 1996
(In thousands)
March 31, June 30,
1997 1996
----------- -----------
ASSETS (Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents................. $ 14,699 $ 95,724
Accounts receivable, net of allowances at
March 31, 1997 and at June 30, 1996 of
$25,656 and $18,995, respectively......... 235,689 192,636
Other current assets...................... 51,987 43,799
----------- -----------
Total current assets..................... 302,375 332,159
Property and equipment, net................. 66,367 63,319
Excess cost of net assets acquired, net..... 536,922 354,117
Investments in joint ventures............... 12,045 11,984
Other assets................................ 32,715 28,152
----------- -----------
$ 950,424 $ 789,731
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of financing
arrangements.............................. $ 15,284 $ 8,173
Accounts payable and accrued expenses..... 127,946 93,854
Income taxes payable...................... 7,525 6,420
----------- -----------
Total current liabilities................ 150,755 108,447
Financing arrangements, net of
current portion............................. 288,556 184,042
Other....................................... 13,374 12,074
----------- -----------
Total liabilities........................ 452,685 304,563
----------- -----------
Minority interest........................... 3,353 774
Commitments and contingencies............... --- ---
Stockholders' equity:
Common stock, $.01 par value; authorized
200,000 shares, issued 66,504 shares at
March 31, 1997 and 66,091 shares at
June 30, 1996............................. 665 661
Additional paid-in capital................ 258,343 253,918
Retained earnings......................... 280,283 253,430
----------- -----------
539,291 508,009
Less: Common stock in treasury
(at cost), 5,619 shares at March 31, 1997
and 3,190 shares at June 30, 1996.......... (44,905) (23,465)
Deferred compensation................... --- (150)
----------- -----------
Total stockholders' equity.............. 494,386 484,394
----------- -----------
$ 950,424 $ 789,731
=========== ===========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
1
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------
1997 1996
----------- -----------
Net revenues............................. $ 290,454 $ 191,393
Cost of services......................... 221,015 148,421
----------- -----------
Gross profit.............. 69,439 42,972
Selling, general and administrative
expenses................................. 40,274 32,127
Provision for uncollectible accounts..... 4,291 4,520
Amortization of excess cost of
net assets acquired...................... 3,652 2,504
Provision for restructure and
other special charges..................... --- 13,370
----------- -----------
Income (loss) from
operations................ 21,222 (9,549)
Investment income......................... 167 816
Interest expense.......................... (3,776) (2,986)
Minority interest......................... (93) (22)
----------- -----------
Income (loss) before income taxes... 17,520 (11,741)
Income taxes.............................. 7,427 (3,161)
----------- -----------
Net income (loss)................... $ 10,093 $ (8,580)
=========== ===========
Net income (loss) per share......... $ .16 $ (.13)
=========== ===========
Weighted average number of
shares outstanding.................. 63,103 63,813
=========== ===========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
2
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
Net revenues.............................. $ 734,896 $ 590,487
Cost of services.......................... 548,767 437,423
----------- -----------
Gross profit................ 186,129 153,064
Selling, general and administrative
expenses.................................. 107,064 98,579
Provision for uncollectible accounts...... 14,757 12,588
Amortization of excess cost of
net assets acquired....................... 9,273 7,456
Provision for restructure and
other special charges..................... --- 13,370
----------- -----------
Income from operations............... 55,035 21,071
Investment income.......................... 1,543 3,912
Interest expense........................... (10,224) (9,551)
Minority interest.......................... (185) (67)
----------- -----------
Income before income taxes........... 46,169 15,365
Income taxes............................... 19,316 8,495
----------- -----------
Net income........................... $ 26,853 $ 6,870
=========== ===========
Net income per share................. $ .43 $ .11
=========== ===========
Weighted average number
of shares outstanding................ 63,017 64,560
=========== ===========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
3
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
March 31,
------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net income................................. $ 26,853 $ 6,870
Adjustments to reconcile net income to
net cash flows provided by
operating activities:
Depreciation and amortization............ 27,104 23,281
Minority interest........................ 185 67
Provision for uncollectible accounts..... 14,757 12,588
Deferred income taxes.................... 382 (6,202)
Non-cash portion of provision
for restructure........................ --- 6,978
Changes in assets and liabilities,
net of effects from acquisitions:
Accounts and notes receivable, net.... (35,095) (13,284)
Other current assets.................. (873) (1,583)
Accounts payable and accrued expenses. (539) (12,691)
Income taxes payable.................. 1,768 6,018
Other, net............................ (1,067) (810)
----------- -----------
Net cash flows provided by
operating activities.................. 33,475 21,232
----------- -----------
Cash flows from investing activities:
Payments for businesses acquired,
net of cash acquired....................... (142,718) (18,974)
Net additions to property, equipment and
capitalized software....................... (14,747) (19,903)
Net payment in connection with the sale of
hospital operations........................ --- (13,208)
Other, net................................. (1,409) (2,204)
----------- -----------
Net cash flows used in
investing activities.................. (158,874) (54,289)
----------- -----------
Cash flows from financing activities:
Proceeds from financing arrangements....... 119,700 133
Payment of financing arrangements.......... (54,766) (29,778)
Proceeds from common stock issued.......... 2,690 2,478
Payment for purchase of treasury stock..... (23,250) (24,953)
----------- -----------
Net cash flows provided
by/(used in) financing activities..... 44,374 (52,120)
----------- -----------
Net decrease in cash and cash equivalents.. (81,025) (85,177)
Cash and cash equivalents, beginning of
period..................................... 95,724 158,636
----------- -----------
Cash and cash equivalents, end of period... $ 14,699 $ 73,459
=========== ===========
Supplemental disclosures of cash flow
information:
Interest paid.......................... $ 11,314 $ 11,241
=========== ===========
Income taxes paid, including $29,200
related to the sale of hospital
operations for the nine months ended
March 31, 1996......................... $ 21,142 $ 39,594
=========== ===========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
4
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(In thousands)
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial
statements of NovaCare, Inc. (the "Company") are unaudited.
The balance sheet as of June 30, 1996 is condensed from the
audited balance sheet of the Company at that date. These
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and
should be read in conjunction with the Company's consolidated
financial statements and the notes thereto for the year ended
June 30, 1996. Certain information and footnote disclosures
normally in the financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of Company management, the condensed
consolidated financial statements for the unaudited interim
periods presented include all adjustments (consisting of only
normal recurring adjustments) necessary to present a fair
statement of the results for such interim periods. Certain
amounts in the fiscal 1996 consolidated financial statements
have been reclassified to conform with fiscal 1997
presentation.
Operating results for the three and nine-month periods
ended March 31, 1997 are not necessarily indicative of the
results that may be expected for a full year or any portion
thereof.
2. Provision for Restructure
During the first nine months of fiscal 1997, the Company
continued to implement the consolidation and reorganization
programs outlined in the provisions for restructure incurred
in the third quarter of fiscal 1996 and fourth quarter of
fiscal 1995. These programs, which consist of exiting and
combining facilities and the consolidation of certain finance
and administrative functions, are complete as to the
notification of personnel, the write off of assets, and the
consolidation of administrative functions. At March 31, 1997,
approximately $7,661 remained accrued for facility, branch and
clinic closure costs. This amount relates to
remaining lease obligations on facilities which have been
closed and the costs associated with the closure of certain
facilities.
3. Merger, Acquisition and Joint Venture Transactions
During the nine months ended March 31, 1997, the Company
acquired 41 outpatient businesses, including 25 which provide
orthotic and prosthetic rehabilitation services and 16 which
provide outpatient rehabilitation services. The Company also
acquired three businesses which provide occupational health
services and four professional employer organizations ("PEO").
During the nine months ended March 31, 1996, the Company
acquired nine outpatient businesses, including six which
provide outpatient rehabilitation services and three which
provide orthotic and prosthetic rehabilitation services. All
acquisitions were accounted for as purchases and, accordingly,
the aggregate purchase price was allocated to assets and
liabilities based on their fair values at the date of
acquisition.
5
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
March 31, 1997
(In thousands)
(Unaudited)
3. Merger, Acquisition and Joint Venture Transactions (Continued)
The following unaudited pro forma consolidated results of
operations of the Company give effect to each of the
acquisitions as if they occurred on July 1, 1995:
For the nine months
ended
March 31,
------------------------
1997 1996
----------- -----------
Net revenues......................... $ 916,173 $ 875,423
Net income........................... 29,031 11,862
Net income per share................. $ .46 $ .18
The above pro forma information is not necessarily
indicative of the results of operations that would have
occurred had the acquisitions been made as of July 1, 1995, or
the results which may occur in the future.
Information with respect to businesses acquired in
purchase transactions for the nine months ended
March 31, 1997 was as follows:
Cash paid (net of cash acquired)........ $ 128,747
Notes issued............................ 34,180
-----------
162,927
Liabilities assumed and other
consideration........................... 28,398
-----------
Fair value of assets acquired, 191,325
principally accounts receivable
and property and equipment....... 11,823
-----------
Cost in excess of fair value
of net assets acquired................ $ 179,502
===========
The results of operations of businesses acquired have been
included in the consolidated results of the Company from the
effective date of each acquisition.
4. Financing Arrangements
Financing arrangements consisted of the following:
March 31, June 30,
1997 1996
----------- -----------
Convertible subordinated
debentures (5.5%), due January 2000.... $ 175,000 $ 175,000
$175,000 revolving credit facility
(Euro-Rate plus 0.5 to 1.125%) due
November 28, 1999...................... 79,000 ---
Subordinated promissory notes (5% to
9.25%), payable through 2002........... 48,727 15,516
Notes (5% to 9.5%), payable through
November 2000.......................... 124 172
Capitalized lease obligations,
payable through 2000................... 989 1,527
----------- -----------
303,840 192,215
Less: current portion................... 15,284 8,173
----------- -----------
$ 288,556 $ 184,042
=========== ===========
6
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
March 31, 1997
(In thousands)
(Unaudited)
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are summarized as
follows:
March 31, June 30,
1997 1996
----------- -----------
Accounts payable....................... $ 17,100 $ 8,026
Accrued compensation and benefits...... 63,603 51,472
Deferred acquisition payments.......... 19,658 9,722
Accrued costs of productivity and cost
improvement programs................... 7,661 8,241
Accrued interest....................... 3,003 4,868
Other.................................. 16,921 11,525
----------- -----------
$ 127,946 $ 93,854
=========== ===========
Deferred acquisition payments consist of cash and stock
payable to former owners of acquired companies at future
dates specified by certain purchase agreements.
6. Contingencies
The Company is subject to legal proceedings and claims which
arise in the ordinary course of its business. In the opinion
of management, the amount of ultimate liability, if any, with
respect to these actions will not have a materially adverse
affect on the financial position or results of operations of
the Company.
Certain purchase agreements require additional payments if
specific financial targets and non-financial conditions are
met. Aggregate contingent payments in connection with these
acquisitions at March 31, 1997 of approximately $46,920 in
cash and 492 shares of common stock have not been included in
the initial determination of cost of the businesses acquired
since the amount of such contingent consideration, if any, is
not presently determinable. For the nine months ended March
31, 1997 and March 31, 1996, the Company paid $13,971 and
$14,532 in cash, respectively, and issued 338 and 605 shares,
respectively, of common stock in connection with businesses
acquired in prior years.
7. Financial Data by Business Segment
Beginning in the second quarter of fiscal 1997, the
Company has operated in two service industries, rehabilitation
services and Professional Employer Organization ("PEO")
services. Rehabilitation services include: (i) providing
rehabilitation therapy, subacute and rehabilitation program
consulting and management services on a contract basis to
health care institutions, primarily long-term care facilities,
and (ii) providing outpatient, orthotic and prosthetic ("O&P")
and occupational health rehabilitation services through a
national network of patient care centers and integrated
delivery systems comprised of health care providers and
payors. PEO services, which are hereafter referred to as
employee services, include human resource and payroll
administration, health care and workers' compensation coverage
and other benefits as an outsourcing solution to human resource
management, primarily to small- to medium-sized businesses.
7
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
March 31, 1997
(In thousands)
(Unaudited)
7. Financial Data by Business Segment (Continued)
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, income
taxes or unusual items. Identifiable assets by segment are
those assets that are used in the Company's operations in each
industry.
A significant component of net revenues within the
employee services segment include billings to clients wherein
the amounts billed and costs incurred for services provided
are the same, and the Company cannot impact the amount of such
costs. These costs include the salaries, wages,
bonuses and certain employment taxes of client worksite employees.
For the three and nine-month periods ended March 31, 1997,
employee services net revenues included $141,285 and $150,000,
respectively, which equaled such costs incurred.
Generally, for all other employee services revenues, the
amounts billed and related service costs may differ. These
services include workers' compensation, employee benefits,
state unemployment taxes, human resource and payroll administration.
The Company's rehabilitation services segment is a client
of the employee services segment, resulting in the net
revenues and asset eliminations.
Operating results and other financial data are presented
for the principal business segments of the Company as follows:
<TABLE>
Rehabilitation Employee
Services Services Elimination Consolidated
-------------- ------------ -------------- --------------
Three Months Ended
March 31, 1997:
<S> <C> <C> <C> <C>
Net revenues............. $ 238,715 $ 159,306 $ (107,567) $ 290,454
Income from operations... 20,235 987 --- 21,222
Depreciation expense..... 6,136 37 --- 6,173
Net capital expenditures. 4,955 145 --- 5,100
Nine Months Ended
March 31, 1997:
Net revenues............. $ 672,822 $ 169,641 $ (107,567) $ 734,896
Income from operations... 53,914 1,121 --- 55,035
Depreciation expense..... 17,788 43 --- 17,831
Net capital expenditures. 14,602 145 --- 14,747
As of March 31, 1997:
Assets................... $ 887,288 $ 77,940 $ (14,804) $ 950,424
</TABLE>
8
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company has experienced significant growth in the recent
year through strategic acquisitions and growth in its existing
businesses. Since June 30, 1996, the Company purchased 41
outpatient companies, including 25 which provide orthotic and
prosthetic ("O&P") rehabilitation services and 16 which provide
outpatient rehabilitation services, and also three businesses
which provide occupational health services. During the first
nine months of fiscal 1997, the Company entered into the
professional employer organization ("PEO") industry through the
acquisition of one PEO business in the second quarter and three
in the third quarter. PEO, or employee services, include human
resource and payroll administration, health care and workers'
compensation coverage and other benefits as an outsourcing
solution to human resource management, primarily
to small to medium-sized businesses. Effective January 24, 1997,
employee services were also provided to the rehabilitation
services segment of the Company. The following are the results
of operations for the three- and nine-month periods ending March
31, 1997 and March 31, 1996:
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1997 1996 (1) 1997 1996(1)
----------- ----------- ----------- -----------
<CAPTION>
Net revenues
<S> <C> <C> <C> <C>
Rehabilitation services..... $ 238,715 $ 191,393 $ 672,822 $ 590,487
Employee services........... 159,306 --- 169,641 ---
Elimination................. (107,567) --- (107,567) ---
----------- ----------- ----------- ----------
Total net revenues.......... 290,454 191,393 734,896 590,487
Gross profit
Rehabilitation services..... 66,070 42,972 182,302 153,064
Employee services........... 5,475 --- 5,933 ---
Elimination................. (2,106) --- (2,106) ---
----------- ----------- ----------- ----------
Total gross profit.......... 69,439 42,972 186,129 153,064
Other operating expenses (2). 48,217 39,151 131,094 118,623
Provision for restructure.... --- 13,370 --- 13,370
----------- ----------- ----------- -----------
Income from operations....... $ 21,222 $ (9,549) $ 55,035 $ 21,071
=========== =========== =========== ===========
</TABLE>
(1) Includes a $10.5 million charge for a change in estimate
(described further under "Operating Results by Business").
(2) Other operating expenses includes selling, general &
administrative expenses, provision for uncollectible
accounts, and amortization of excess cost of net assets
acquired.
Results of Operations for the Three Months Ended March 31, 1997
Net revenues for the three months ended March 31, 1997
increased from the prior year by $99.1 million or 51.8% to $290.5
million and gross profit increased $26.5 million or 61.6% to
$69.4 million, respectively, primarily as a result of
acquisitions, internal growth and a prior year $10.5 million
charge for a change in estimate as discussed further under
"Operating Results by Business".
9
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Other operating expenses increased $9.0 million from $39.2
million in the third quarter of fiscal 1996 to $48.2 million in
the third quarter of fiscal 1997. The increased costs are
primarily associated with businesses acquired in fiscal 1997. As
a percentage of net revenues, other operating expenses decreased
from 20.5% to 16.6% for the same periods, respectively, as a
result of employee cost and facility cost savings resulting
principally from the productivity and cost reduction programs
initiated in fiscal 1995 and 1996 and the impact of the $10.5 million
charge to net revenues.
As discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's
Form 10-K for the year ended June 30, 1996, during the third
quarter of fiscal 1996, the Company recorded a $13.4 million
provision for restructure pertaining to the consolidation and
reorganization of outpatient and O&P services and certain
administrative functions.
Depreciation expense increased to $6.2 million for the three
months ended March 31, 1997 from $5.2 million for the three
months ended March 31, 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 $1.2 million from $2.5 million to
$3.7 million for the same periods, respectively, as a result of
businesses acquired subsequent to March 31, 1996.
Interest expense, net of investment income, increased $1.4
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 third quarter
of fiscal 1997 compared with the third quarter of fiscal 1996 as
discussed in "Liquidity and Capital Resources" in the Company's
Form 10-K for the year ended June 30, 1996 and later under
"Liquidity and Capital Resources".
For the three months ended March 31, 1996, the income tax
benefit as a percentage of the pretax loss was 26.9% as a result
of the benefit associated with the provision for restructure and
the charge to net revenues offset by the cumulative effect of
these charges on the effective income tax rate. Had the
provision for restructure and the charge to net revenues not
taken place, income tax expense as a percentage of pretax income
would have been 43.0% compared with 42.4% for the third quarter
of fiscal 1997. The principal reason for the decrease was lower
effective state income tax rates.
Results of Operations for the Nine Months Ended March 31, 1997
Net revenues for the nine months ended March 31, 1997
increased from the prior year by $144.4 million or 24.5% to
$734.9 million and gross profit increased $33.1 million or 21.6%
to $186.1 million, respectively, primarily as a result of
acquisitions, internal growth and a prior year $10.5 million
charge for a change in estimate as discussed further under
"Operating Results by Business".
Other operating expenses increased $12.5 million from $118.6
million for the nine months ended March 31, 1996 to $131.1
million for the nine months ended March 31, 1997. The increased
costs are primarily associated with businesses acquired in fiscal
1997. As a percentage of net revenues, other operating expenses
decreased from 20.1% to 17.8% for the same periods,
respectively, as a result of employee cost and facility cost
savings resulting principally from the productivity and cost
reduction programs initiated in fiscal 1995 and 1996.
As discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's
Form 10-K for the year ended June 30, 1996, during the third
quarter of fiscal 1996, the Company recorded a $13.4 million
provision for restructure pertaining to the consolidation and
reorganization of outpatient and O&P services and certain
administrative functions.
10
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Depreciation expense increased to $17.8 million for the nine
months ended March 31, 1997 from $15.8 million for the nine
months ended March 31, 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 $1.8 million to $9.3 million from
$7.5 million for the same periods, respectively, as a result of
businesses acquired subsequent to March 31, 1996 and the full
year effect of businesses acquired from June 30, 1995 through
March 31, 1996.
Interest expense, net of investment income, increased $3.0
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 first nine
months of fiscal 1997 compared with the first nine months of
fiscal 1996 as discussed in "Liquidity and Capital Resources" in
the Company's Form 10-K for the year ended June 30, 1996 and
later under "Liquidity and Capital Resources".
Income tax expense as a percentage of pretax income
decreased to 41.8% for the nine months ended March 31, 1997 from
55.3% for the nine months ended March 31, 1996. The change in
the rate resulted principally from the impact of non-deductible
goodwill on lower income subject to income tax in the prior year
as a result of the provision for restructure and the charge to
net revenues.
Operating Results by Business
Rehabilitation Services
Results of Operations for the Three Months Ended
March 31, 1997
Net revenues for the three months ended March 31, 1997
increased from the prior year by $47.3 million or 24.7% to $238.7
million. Gross profit for the three months ended March 31, 1997
increased from the prior year by $23.1 million or 53.8% to $66.1
million. Gross profit as a percentage of net revenues ("gross
profit margin") increased from 22.5% in the third quarter of
fiscal 1996 to 27.7% in the third quarter of fiscal 1997.
The $47.3 million increase in net revenues resulted
principally from: (i) an increase of $25.8 million from
businesses acquired since March 31, 1996, (ii) a $10.5 million
prior year charge to fully reflect payor allowances that had not
been sufficiently recognized by certain billing systems, and
(iii) a $14.5 million increase in contract rehabilitation
revenues resulting principally from a 2.0% increase in
productivity, a 2.9% average increase in pricing, and a 6.7%
increase in the average number of full time equivalents
therapists ("FTE"). These increases were offset somewhat by $4.7
million in revenues attributable to outpatient facilities closed,
sold or contributed to joint ventures since March 31, 1996.
The $23.1 million increase in gross profit was primarily due
to the acquisitions and the increase in productivity, pricing and
FTE in contract rehabilitation offset somewhat by increased costs
of compensation and benefits. The increase of 5.2% in the gross
profit margin results primarily from the impact of the $10.5
million charge to net revenues combined with 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.
11
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Results of Operations for the Nine Months Ended
March 31, 1997
Net revenues for the nine months ended March 31, 1997
increased from the prior year by $82.3 million or 13.9% to $672.8
million. Gross profit for the nine months ended March 31, 1997
increased from the prior year by $29.2 million or 19.1% to $182.3
million. Gross profit as a percentage of net revenues increased
from 25.9% for the nine months ended March 31, 1996 to 27.1% for
the nine months ended March 31, 1997.
The $82.3 million increase in net revenues resulted
principally from: (i) an increase of $52.6 million from
businesses acquired since March 31, 1996, (ii) a $24.0 million
increase in contract rehabilitation net revenues resulting
principally from a 2.7% increase in productivity, a 1.8% average
increase in pricing and a 1.2% average increase in the number of
FTE, (iii) the $10.5 million prior year charge discussed
previously, and (iv) a $7.0 million increase in outpatient net
revenues attributable to internal growth. These increases were
offset somewhat by $13.7 million in revenues attributable to outpatient
facilities closed, sold or contributed to joint ventures since
March 31, 1996 and the full year effect of facilities closed,
sold or contributed between June 30, 1995 and March 31, 1996.
The $29.2 million increase in gross profit was primarily due
to the acquisitions and the increase in productivity, pricing,
and FTE in contract rehabilitation offset somewhat by increased
costs of compensation and benefits. The increase of 1.2% in the
gross profit margin results from 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.
Employee Services
Results of Operations for the Three and Nine Months Ended
March 31, 1997
The financial results of employee services include the
performance of four PEO businesses acquired in fiscal 1997 and a
contractual arrangement effective January 24, 1997, with the
Company's rehabilitation services segment to provide employee
services to approximately 17,500 worksite employees.
As of March 31, 1997, the Company provided services for a total
of approximately 35,000 worksite employees.
A significant component of employee services net revenues
consists of billings to clients wherein the amounts billed and
costs incurred for services provided are the same, and the
Company cannot impact the amount of such costs, "direct costs". These
costs include the salaries, wages, bonuses and certain employment
taxes of client worksite employees. For the three and nine-month
periods ended March 31, 1997, employee services net revenues
included $141.3 million and $150.0 million, respectively,
which equaled such costs incurred. Generally, for all other employee
services revenues, the amounts billed and related service costs may differ.
These services include workers' compensation, employee benefits, state
unemployment taxes, human resource and payroll administration.
The gross profit margins for the three and nine-
months ended March 31, 1997 were 3.4% and 3.5%, respectively.
The gross profit margin pertaining to the operations of the four
acquisitions was 6.5% and 6.2%, respectively, for the three and
nine-months ended March 31, 1997.
12
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources
During the nine months ended March 31, 1997, the Company's
cash and cash equivalents decreased by $81.0 million from $95.7
million to $14.7 million. The decrease in cash and cash
equivalents resulted principally from (i) $142.7 million in
payments for the purchase of businesses acquired since June 30,
1996 and contingent payments in connection with businesses
acquired in previous years, (ii) the purchase of approximately
2.7 million shares of the Company's stock for $23.3 million, and
(iii) $14.7 million in payments for additions to property,
equipment and capitalized software. These decreases were offset
somewhat by cash provided by operations of $33.5 million and a
net increase in the Company's financing arrangements of $64.9
million.
Cash provided by operations increased to $33.5 million for
the nine months ended March 31, 1997 from $21.2 million for the
nine months ended March 31, 1996, respectively. This increase is
due to the increase in operating income before depreciation and
amortization expense and changes in working capital as a result
of timing of receipts and disbursements.
The Company used $14.7 million of cash for capital
expenditures during the first nine months of fiscal 1997 compared
with $19.9 million in the first nine months of fiscal 1996.
Capital expenditures generally relate to the costs incurred in
connection with internally developed software, leasehold
renovations and equipment replacement.
The Company amended the credit facility in fiscal 1997 to
extend the term of the agreement from November 1997 to November
1999 and to increase the line of credit to $175.0 million. As of
March 31, 1997, $88.9 million of the credit facility was
available after reduction of borrowings and letters of credit of
$7.1 million.
The Company believes that the cash flows generated by the
Company's operations, together with its existing cash and
availability of credit under the credit facility, will be
sufficient to meet the Company's short- and long-term cash needs.
Cautionary Statement
Except for historical information, matters discussed above are
forward-looking statements that are based on management's
estimates, assumptions and projections. Important factors that
could cause results to differ materially from those expected by
management include the timing and nature of reimbursement changes
(including imposition of, and changes in, salary equivalency
rates for Medicare, changes in workers' compensation and other
governmental rate and reimbursement system changes), the number
and productivity of clinicians, decisions by chain customers as
to whether to take therapy and other services in-house, pricing
of managed care and other third party contracts, the direction
and success of competitors, management retention and development,
management's success 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.
13
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
Exhibit Page
(A) Number Exhibit Description Number
- --- ------- --------------------------------------- -------
10(a) Employment agreement dated as of April
1, 1997 between the Company and James W.
McLane
27 Financial Data Schedule
(B) The Company filed no reports on Form 8-K during
the quarter ended March 31, 1997.
14
NOVACARE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NOVACARE, INC.
---------------
(Registrant)
May 15, 1997 By/s/ Robert E. Healy, Jr.
-----------------------
Robert E. Healy, Jr.,
Senior Vice President,
Finance & Administration and
Chief Financial Officer
By/s/ Barry E. Smith
-----------------
Barry E. Smith,
Vice President,
Controller and
Chief Accounting Officer
15
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 14 day of April, 1997 by and between
NovaCare, Inc., a Delaware corporation (the "Company") and James
W. McLane (the "Executive").
RECITALS
--------
The Company wishes to retain the services of the Executive
in the capacity of President and Chief Operating Officer, and the
Executive wishes to serve in the employ of the Company in that
capacity, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth, the parties hereto,
intending to be legally bound, 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 position
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 be the period commencing on May 1,
1997 and ending on April 30, 2002, unless sooner terminated in
accordance with this Agreement.
1.3 Automatic Extension. As of April 30, 2001,
and as of each subsequent April 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 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.
2. Position, Duties.
-----------------
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 his full business time and attention to
the performance of his duties and responsibilities hereunder,
except that Executive may continue to serve as a director on any
Board of Directors on which he currently serves and on any other
Board that is authorized by the Company's Board of Directors.
Executive shall serve ex officio as a member of the Board of
Directors with a vote, and the Company shall cause the election
of the Executive to the Board of Directors of the Company.
3. Compensation.
-------------
3.1 Salary. In consideration of the performance by
the Executive of the services set forth in Section 2 and the
Executive's observance of the other covenants set forth herein,
the Company shall pay the Executive, and the Executive shall
accept, an annualized base salary of $450,000, payable on a bi-
weekly schedule in accordance with the Company's regular payroll
practices, beginning on May 1, 1997. The Executive shall be
entitled to an annual review of such salary and shall receive
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 into account 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 Bonus. (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, except the
fiscal year ending June 30, 1997, and including the fiscal year
ending sixty (60) days after the expiration of this Agreement
(including any extension thereof), in accordance with this
section 3.2. The 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
bonus shall be payable under this Section 3.2(X) with 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 the 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 to carry out the essential intent of this Section
3.2;
(ii) the term "Applicable Percentage" shall
mean four tenths of one percent (0.4%) of Net Income for each
fiscal year of the Company, beginning with the fiscal year ending
June 30, 1998; provided that in any fiscal year in which Net
Income is between ninety percent (90%) and ninety-nine percent
(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:
Percentage of
Budgeted Net Income Adjustment
Attained Percentage
------------------ ----------
90% 45%
91% 51%
92% 56%
93% 62%
94% 67%
95% 73%
96% 78%
97% 84%
98% 89%
99% 95%
(iii) the term "Budgeted Net Income"
shall mean, for any fiscal year of the Company, Net Income as set
forth in the annual business plan of the Company for such fiscal
year as prepared by the Company's management and approved by the
Board of directors of the company; and
(iv) the term "extraordinary non-operating
profits and losses such as gain from the sale of operating units"
shall include capital transactions 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 one hundred fifty thousand
dollars ($150,000) for the fiscal year of the Company ended June
30, 1998, provided that the Executive remains employed on the
payment date provided in Section 3.2(c) below.
(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(a), 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 any
fiscal year of the Company in which such termination takes place.
(c) The bonus payable to the Executive (or
his estate or 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. On the effective date of this
Agreement, the Company shall grant to the Executive options (the
"Options") to purchase eight hundred fifty thousand (850,000)
shares of the Company's common stock, par value $.01 per share
("Common Stock") at an exercise price per share equal to the
market value of the Common Stock on the date of grant. The
Options will be subject to shareholder approval. The Company will
take any and all actions required to secure approval of the
Options described herein. The Options:
(i) have a term of ten (10) years from the date
of grant;
(ii) become exercisable as follows:
(A) 100,000 Options on the date of grant;
(B) 150,000 Options on each of the first,
second, third, fourth and fifth anniversaries of the date of
grant of the Options;
(iii) except as provided in clause (iv) of
this Section 3.3, remain exercisable for a period of ninety (90)
days commencing on the date of termination of employment of the
Executive other than pursuant to Section 6.1 (Death) or Section
6.5 (Voluntary Termination), but only as to those Options that
are exercisable at the date of termination. If termination is
pursuant to Section 6.1 (Death) or if the Executive dies within
the 90-day period specified above, options exercisable at the
date of termination remain exercisable for twelve (12) months
after the date of termination, and if termination is pursuant to
Section 6.5 (Voluntary Termination) the Options cease to be
exercisable on the date of termination.
(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, in
such case, shall remain exercisable for the balance of the ten
(10) year term.
The Options 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.
The Chief Executive Officer and the Compensation
Committee of the Board of Directors will conduct an annual review
to determine an appropriate number of additional Options to be
awarded to the Executive, if any.
4. Expense Reimbursement.
----------------------
During the term of this Agreement, consistent with the
Company's policies and procedures as in effect from time to time,
the Company shall reimburse the Executive for all reasonable and
necessary out-of-pocket expenses incurred by the Executive in
connection with the performance of the Executive's duties and
responsibilities hereunder, upon the presentation of proper
accounts therefor in accordance with the Company's policies.
5. Other Benefits, Perquisites.
----------------------------
5.1 Generally. During the term of this Agreement, the
Executive shall be entitled to receive such benefits, including,
but not limited to, relocation benefits, life, disability and
health insurance, and participation in the Company's 401(k) plan
and Supplemental Deferred Compensation Plan, as are from time to
time made available to other similarly situated Executives of the
Company on the same terms as are available to such similarly
situated Executives in accordance with the provisions of the
Company's benefit plans in effect from time to time, it being
understood that the Executive shall be required to make the same
contributions and payments in order to receive any of such
benefits as may be required of such similarly situated
Executives.
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 such travel shall not conflict
with travel of the Chairman or the Chief Executive Officer and
further provided that the Company shall have no obligation to
provide Executive with the use of a private corporate jet under
this Section 5.2 during any period that the Company does not own
or lease a private corporate jet.
(b) During the term of this Agreement, the
Company shall also provide the Executive with the following: (i)
a telephone in his automobile (for which the Company shall pay
for all installation, service and other charges), (ii) first
class airfare for travel in connection with the performance of
his duties hereunder, (iii) a corporate credit card of the
Executive's choosing and (iv) four weeks paid vacation each
year.
6. Termination of Employment.
--------------------------
6.1 Death. In the event of the death of the Executive
during the term of this Agreement, the Company shall pay to the
estate or other legal representative of the Executive (a) the
base salary provided for in Section 3.1 accrued to the
Executive's date of death and not previously paid and (b) any
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 becomes
incapacitated by reason of sickness, accident or other physical
or mental disability and is for a period of six (6) consecutive
months unable to perform the essential functions of his position
hereunder, with or without reasonable accommodation, the
employment of the Executive may be terminated by the Company upon
thirty (30) days' prior written notice to the Executive provided,
however, that no termination shall be effected under this Section
unless the Executive is immediately eligible for full benefits
under the Company's disability plan immediately following such
termination to the extent that Executive has elected to
participate in the plan and make any required contributions.
Promptly after such termination, the Company shall (a) pay to the
Executive the base salary provided for in Section 3.1 accrued to
the date of such termination and not previously paid and (b) pay
to the Executive any 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 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.
6.3 Due Cause. The employment of the Executive may be
terminated by the Company at any time during the term of this
Agreement for Due Cause (defined below). In the event of such
termination, the Company shall pay to the Executive the base
salary provided for in Section 3.1 accrued to the date of such
termination and not previously paid to the Executive. The
Company shall also pay to the Executive any 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. For purposes hereof, "Due Cause" means (a) a
material and willful breach of any of the Executive's obligations
hereunder; (b) willful failure to carry out his duties hereunder,
or gross misconduct; or (c) that the Executive has been convicted
of any felony or of any lesser crime or offense involving moral
turpitude, or has been banned from participation in the
Medicare/Medicaid program. Before terminating Executive for Due
Cause, Company shall notify Executive in writing of the grounds
for such termination and, if such grounds are susceptible to
cure, shall provide Executive Thirty (30) days during which to
cure any such grounds. If Executive shall fail during such
period to cure the grounds, Executive's termination shall be
effective as of the expiration of the 30-day cure period. 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. After the satisfaction of any claim of the Company
against the Executive arising as a result of such 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 prior to the expiration of the term of this Agreement
for whatever reason it deems appropriate; provided, however, that
in the event that such termination is not pursuant to Sections
6.1, 6.2, 6.3 or 6.5, the company shall pay to the Executive:
(A) on the date of termination, the base salary
provided for in Section 3.1 (at the annual rate then in effect)
accrued to the date of termination and not theretofore paid to
the Executive;
(B) severance pay, in the form of salary continuation
for a period ("Severance Pay Period") of two (2) years commencing
on the date of termination, at a rate equal to the base salary
provided for in Section 3.1 (at the annual rate then in effect);
(C) any 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).
(c) Rights and benefits of the Executive or his
transferee (a) with respect to the Options shall be determined in
accordance with Section 3.3 and (b) under the other benefit plans
and programs of the Company shall be determined in accordance
with the provisions of such plans and programs. Neither the
Executive nor the Company shall have any further rights or
obligations under this Agreement, except as provided in Sections
7, 8, 9 and 15.
6.5 Voluntary Termination. The Executive may
terminate his employment with the Company at any time upon thirty
(30) days' prior written notice to the Company. In the event of
such termination (unless such termination is within one year
following a Change in Control of the Company, in which case the
provisions of Section 6.7 hereof shall be applicable), the
Company shall pay to the Executive the base salary provided for
in Section 3.1 (at the annual rate then in effect) accrued to the
date of such termination and not theretofore paid to the
Executive. The Company shall also pay to the Executive any
incentive bonus which shall be or become payable pursuant to
Section 3.2. Rights and benefits of the Executive or his
transferee (a) with respect to the Options shall be determined in
accordance with Section 3.3 and (b) under the benefit plans and
programs of the Company shall be determined in accordance with
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 diminution in the nature or
scope of the authorities, powers, functions, duties, or
responsibilities initially or subsequently assigned to the
Executive;
(C) decreases the Executive's base salary, changes the
bonus formula provided for in Section 3 or eliminates any of the
benefits or perquisites provided for in Section 5; or
(D) fails to cause the election of the Executive to
the Board of Directors of the Company;
then, within thirty (30) days after learning of the action (or
inaction), the Executive may advise the Company in writing that
the action (or inaction) constitutes a termination of his
employment by the Company pursuant to Section 6.4 (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 then the
Executive or a group including the Executive), either (i)
acquires twenty percent (20%) or more of the combined voting
power of the outstanding securities of the Company having a right
to vote in elections of directors and such acquisition shall not
have been approved within sixty (60) days following such
acquisition by a majority of the Continuing Directors (as
hereinafter defined) then in office or (ii) acquires fifty
percent (50%) or more of the combined voting power of the
outstanding securities of the Company having a right to vote in
elections of directors; or
(B) Continuing Directors shall for any reason cease to
constitute a majority of the Board of Directors of the Company;
or
(C) all or substantially all of the business and/or
assets of the Company is disposed of by the Company to a party or
parties other than 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 may be required by law or as may
occur 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). Prior to
making a disclosure that Executive considers to be required by
law, Executive shall provide to the Company a written notice of
intent to disclose at least five (5) days prior to the proposed
date of disclosure, including an opinion of Executive's counsel
setting forth the applicable legal requirement for disclosure.
7.2 Confidential Information Defined. For the
purposes hereof, the term "confidential information" shall mean
all information acquired by the Executive in the course of the
Executive's employment with the Company in any way concerning the
products, projects, activities, business or affairs of the
Company or the Company's customers, including, without
limitation, all information concerning trade secrets and the
products or projects of the Company and/or any improvements
therein, all sales and financial information concerning the
Company, all customer and supplier lists, all information
concerning projects in research and development or marketing
plans for any such products or projects, and all information in
any way concerning the products, projects, activities, business
or affairs of customers of the Company which is furnished to the
Executive by the Company or any of its agents or customers, as
such; provided, however, that the term "confidential information"
shall not include information which (a) becomes generally
available to the public other than as a result of a disclosure by
the Executive in breach of this Agreement, (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
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 is or, within the
preceding ninety (90) days, 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 Cause), Section 6.6 (Constructive
Termination), or Section 6.7 (Change in Control); and
(b) twenty-four (24) months in the case of a
termination pursuant to Section 6.2 (Disability) or Section 6.5
(Voluntary Termination), but only if the Company gives notice to
the Executive within thirty (30) days of the date of termination
of employment of its intention to enforce such restrictions
against the Executive, and subject to the Company's continued
payment to the Executive during such twenty-four (24) month
period of the base salary provided for in Section 3.1 (at the
annual rate in effect at the date of termination).
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
notify in writing and require any successors (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the Company
to assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to
perform if no such succession had taken place. As used in this
Section, the "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as
aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this
Agreement shall be binding upon, and inure to the benefit of, the
Company, as so defined.
10.2 Assignment by the Executive. The Executive may
not assign this Agreement or any part thereof without the prior
written consent of a majority of the Board of Directors of the
Company; provided, however, that nothing herein shall preclude
one or more beneficiaries of the Executive from receiving any
amount that may be payable following the occurrence of his legal
incompetency or his death and shall not preclude the legal
representative of his estate from receiving such amount or from
assigning any right hereunder to the person or persons entitled
thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy
applicable to his estate. The term "beneficiaries," as used in
this Agreement, shall mean a beneficiary or beneficiaries so
designated to receive any such amount or, if no beneficiary has
been so designated, the legal representative of the Executive (in
the event of his incompetency) or the Executive's estate.
11. Governing Law.
--------------
This Agreement shall be deemed a contract made under, and
for all purposes shall be construed in accordance with, the laws
of the Commonwealth of Pennsylvania applicable to contracts to be
performed entirely within such state. In the event that a court
of any jurisdiction shall hold any of the provisions of this
Agreement to be wholly or partially unenforceable for any reason,
such determination shall not bar or in any way affect the
Company's right to relief as provided for herein in the courts of
any other jurisdiction. Such provisions, as they relate to each
jurisdiction, are, for this purpose, severable into diverse and
independent covenants. Service of process on the parties hereto
at the addresses set forth herein shall be deemed adequate
service of such process.
12. Entire Agreement.
-----------------
This Agreement contains all the understandings and
representations between the parties hereto pertaining to the
subject matter hereof and supersedes all undertakings and
agreements, whether oral or in writing, if any there be,
previously entered into by them with respect thereto.
13. Amendment, Modification, Waiver.
--------------------------------
No provision of this Agreement may be amended or modified
unless such amendment or modification is agreed to in writing and
signed by the Executive and by a duly authorized representative
of the Company other than the Executive. Except as otherwise
specifically provided in this Agreement, no waiver by either
party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of a similar or dissimilar
provision or condition at the same or any prior or subsequent
time, nor shall the failure of or delay by either party hereto in
exercising any right, power or privilege hereunder operate as a
waiver thereof to preclude any other or further exercise thereof
or the exercise of any other such right, power or privilege.
14. Arbitration.
------------
Any controversy or claim arising out of or relating to this
Agreement, or any breach thereof, shall, except as provided in
Section 9, be settled by arbitration in accordance with the rules
of the American Arbitration Association then in effect, which
shall be binding on both parties, 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 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
With a Copy to:
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: General Counsel
If to the Executive:
James W. McLane
20 Colony Road
West Hartford, CT 06117
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.
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.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
NOVACARE, INC.
By: /s/ John H. Foster
---------------------
John H. Foster
/s/ James W. McLane
---------------------
James W. McLane
The foregoing Agreement has been
Approved by the Compensation Committee
of the Board of Directors:
/s/ Robert G. Stone
- --------------------------------------
Robert G. Stone
Chairman of the Compensation Committee
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) STATEMENTS IN FORM
10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
</LEGEND>
<RESTATED>
<CIK> 0000802843
<NAME> NOVACARE, INC.
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<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,699
<SECURITIES> 0
<RECEIVABLES> 261,345
<ALLOWANCES> 25,656
<INVENTORY> 0
<CURRENT-ASSETS> 302,375
<PP&E> 132,064
<DEPRECIATION> 65,697
<TOTAL-ASSETS> 950,424
<CURRENT-LIABILITIES> 150,755
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0
0
<COMMON> 665
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<TOTAL-LIABILITY-AND-EQUITY> 950,424
<SALES> 0
<TOTAL-REVENUES> 734,896
<CGS> 548,767
<TOTAL-COSTS> 655,831<F1>
<OTHER-EXPENSES> 7,915<F2>
<LOSS-PROVISION> 14,757
<INTEREST-EXPENSE> 10,224
<INCOME-PRETAX> 46,169
<INCOME-TAX> 19,316
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<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<FN>
<F1>"Total Costs" consist of cost of services and selling and administrative
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<F2>"Other Expenses" consist of amortization of goodwill and minority interest
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</FN>
</TABLE>
