<PAGE> 1
COMMISSION FILE NO 1-10875
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10875
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
(FULL TITLE OF THE PLAN AND ADDRESS OF THE PLAN, IF
DIFFERENT FROM THAT OF THE ISSUER NAMED BELOW)
NOVACARE, INC.
1016 WEST NINTH AVENUE,
KING OF PRUSSIA, PA 19406
(NAME OF ISSUER OF THE SECURITIES HELD PURSUANT TO THE
PLAN AND THE ADDRESS OF ITS PRINCIPAL EXECUTIVE OFFICE)
===============================================================================
<PAGE> 2
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-------------------- ----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 2
FINANCIAL STATEMENTS:
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS,
WITH FUND INFORMATION, AT DECEMBER 31, 1997 AND 1996 3 - 4
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN
BENEFITS, WITH FUND INFORMATION, FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996 5 - 7
NOTES TO FINANCIAL STATEMENTS 8 - 12
ADDITIONAL INFORMATION: *
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AT
DECEMBER 31, 1997 13
SCHEDULE OF REPORTABLE TRANSACTIONS:
SERIES OF TRANSACTIONS IN EXCESS OF 5% OF
NET ASSETS FOR THE YEAR ENDED DECEMBER
31, 1997 14
SIGNATURE PAGE 15
<CAPTION>
EXHIBIT EXHIBIT NUMBER
------- --------------
<S> <C>
CONSENT OF INDEPENDENT ACCOUNTANTS 23
</TABLE>
* OTHER SCHEDULES REQUIRED BY SECTION 2520.103-10 OF THE DEPARTMENT OF LABOR
RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE UNDER ERISA HAVE BEEN
OMITTED BECAUSE THEY ARE NOT APPLICABLE.
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTICIPANTS AND ADMINISTRATOR OF THE NOVACARE, INC. 401(k) RETIREMENT
SAVINGS PLAN.
IN OUR OPINION, THE ACCOMPANYING STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN
BENEFITS AND THE RELATED STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN
BENEFITS PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE NET ASSETS AVAILABLE FOR
PLAN BENEFITS OF THE NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN (THE "PLAN")
AT DECEMBER 31, 1997 AND 1996, AND THE CHANGES IN NET ASSETS AVAILABLE FOR PLAN
BENEFITS FOR THE YEARS THEN ENDED IN CONFORMITY WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. THESE FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE
PLAN'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.
OUR AUDITS WERE PERFORMED FOR THE PURPOSE OF FORMING AN OPINION ON THE
BASIC FINANCIAL STATEMENTS TAKEN AS A WHOLE. THE ADDITIONAL INFORMATION
INCLUDED IN THE SCHEDULES OF ASSETS HELD FOR INVESTMENT PURPOSES AND OF
REPORTABLE TRANSACTIONS IS PRESENTED FOR PURPOSE OF ADDITIONAL ANALYSIS AND IS
NOT A REQUIRED PART OF THE BASIC FINANCIAL STATEMENTS BUT IS ADDITIONAL
INFORMATION REQUIRED BY THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
("ERISA"). THE FUND INFORMATION IN THE STATEMENTS OF NET ASSETS AVAILABLE FOR
PLAN BENEFITS AND OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS IS
PRESENTED FOR PURPOSES OF ADDITIONAL ANALYSIS RATHER THAN TO PRESENT THE NET
ASSETS AVAILABLE FOR PLAN BENEFITS AND CHANGES IN NET ASSETS AVAILABLE FOR PLAN
BENEFITS OF EACH FUND. THE SCHEDULES OF ASSETS HELD FOR INVESTMENT PURPOSES AND
OF REPORTABLE TRANSACTIONS AND THE FUND INFORMATION HAVE BEEN SUBJECTED TO THE
AUDITING PROCEDURES APPLIED IN THE AUDITS OF THE BASIC FINANCIAL STATEMENTS
AND, IN OUR OPINION, ARE FAIRLY STATED IN ALL MATERIAL RESPECTS IN RELATION TO
THE BASIC FINANCIAL STATEMENTS TAKEN AS A WHOLE.
THE SCHEDULES OF ASSETS HELD FOR INVESTMENT PURPOSES AND OF REPORTABLE
TRANSACTIONS THAT ACCOMPANY THE PLAN'S FINANCIAL STATEMENTS DO NOT DISCLOSE THE
HISTORICAL COST OF CERTAIN ASSETS HELD BY THE PLAN TRUSTEE. DISCLOSURE OF THIS
INFORMATION IS REQUIRED BY THE DEPARTMENT OF LABOR'S RULES AND REGULATIONS FOR
REPORTING AND DISCLOSURE UNDER ERISA.
PRICE WATERHOUSE LLP
PHILADELPHIA, PENNSYLVANIA
JUNE 15, 1998
<PAGE> 4
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
FUND INFORMATION
--------------------------------------------------------------------------------------------------
FIDELITY FIDELITY FIDELITY NOVACARE
MANAGED INCOME PURITAN MAGELLAN STOCK FIDELITY U.S.
PORTFOLIO * FUND * FUND * FUND * BOND INDEX FUND
---------------- ---------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 20,223,523 $ 39,132,154 $ 57,839,697 $ 12,612,974 $ 517,872
RECEIVABLES/ PAYABLES:
EMPLOYEE CONTRIBUTIONS 148,276 293,767 411,080 95,984 15,209
EMPLOYER CONTRIBUTIONS 32,656 62,809 86,585 21,304 3,073
ADMINISTRATIVE FEES PAYABLE (16,517) (12,231) (4,422) (489) (683)
---------------- ---------------- ------------------- ----------------- -------------------
NET ASSETS AVAILABLE
FOR PLAN BENEFITS $ 20,387,938 $ 39,476,499 $ 58,332,940 $ 12,729,773 $ 535,471
================ ================ =================== ================= ===================
<CAPTION>
RETIREMENT FIDELITY
GOVERNMENT DIVERSIFIED FIDELITY
MONEY MARKET INTERNATIONAL EMERGING GROWTH NOVACARE LOAN
PORTFOLIO FUND FUND FUND TOTAL
---------------- ---------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 213,593 $ 2,289,177 $ 3,321,835 $ 56,694 $ 136,207,519
RECEIVABLES/ PAYABLES:
EMPLOYEE CONTRIBUTIONS 11,428 50,436 78,680 - 1,104,860
EMPLOYER CONTRIBUTIONS 2,121 9,626 15,275 - 233,449
ADMINISTRATIVE FEES PAYABLE (741) (64) (286) - (35,433)
---------------- ---------------- ------------------- ----------------- -------------------
NET ASSETS AVAILABLE
FOR PLAN BENEFITS $ 226,401 $ 2,349,175 $ 3,415,504 $ 56,694 $ 137,510,395
================ ================ =================== ================= ===================
</TABLE>
*Investment in this fund represents 5% or more of the Plan's net assets.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE> 5
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
FUND INFORMATION
-----------------------------------------------------------------------------------------------------
FIDELITY
MANAGED FIDELITY FIDELITY NOVACARE NOVACARE
INCOME PURITAN MAGELLAN STOCK LOAN
PORTFOLIO * FUND * FUND * FUND * FUND
----------------- ----------------- ------------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 19,090,269 $ 28,069,517 $ 41,165,975 $ 9,310,559 $ 121,880
RECEIVABLES/ PAYABLES:
EMPLOYEE CONTRIBUTIONS 126,817 219,089 314,562 58,732 -
EMPLOYER CONTRIBUTIONS 28,390 47,893 67,995 13,680 -
ADMINISTRATIVE FEES PAYABLE (753) (356) (180) (23) -
----------------- ----------------- ------------------- ----------------- ------------------
NET ASSETS AVAILABLE FOR
PLAN BENEFITS $ 19,244,723 $ 28,336,143 $ 41,548,352 $ 9,382,948 $ 121,880
================= ================= =================== ================= ==================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ----------------------------------------------------
TOTAL
------------------
<S> <C>
INVESTMENTS, AT FAIR VALUE $ 97,758,200
RECEIVABLES/ PAYABLES:
EMPLOYEE CONTRIBUTIONS 719,200
EMPLOYER CONTRIBUTIONS 157,958
ADMINISTRATIVE FEES PAYABLE (1,312)
------------------
NET ASSETS AVAILABLE FOR
PLAN BENEFITS $ 98,634,046
==================
</TABLE>
* Investment in this fund represents 5% or more of the Plan's net assets.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE> 6
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS,
WITH FUND INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
FUND INFORMATION
------------------------------------------------------------------------------------
FIDELITY MANAGED FIDELITY PURITAN FIDELITY NOVACARE STOCK
INCOME PORTFOLIO FUND MAGELLAN FUND FUND
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 1,147,482 $ 3,018,262 $ 3,597,316 $ -
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS - 3,627,655 7,618,719 1,753,334
------------------ ------------------ ----------------- -----------------
1,147,482 6,645,917 11,216,035 1,753,334
------------------ ------------------ ----------------- -----------------
CONTRIBUTIONS:
EMPLOYEE 3,544,190 6,536,257 8,844,680 2,006,008
EMPLOYER 283,185 1,178,432 1,560,398 360,876
PLAN MERGER (NOTE 5) - - - -
INVESTMENT TRANSFERS (1,866,079) (612,073) (925,902) 14,671
------------------ ------------------ ----------------- -----------------
1,961,296 7,102,616 9,479,176 2,381,555
------------------ ------------------ ----------------- -----------------
TOTAL ADDITIONS 3,108,778 13,748,533 20,695,211 4,134,889
------------------ ------------------ ----------------- -----------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 1,883,455 2,552,568 3,891,029 785,875
ADMINISTRATIVE FEES 82,108 55,609 19,594 2,189
------------------ ------------------ ----------------- -----------------
TOTAL DEDUCTIONS 1,965,563 2,608,177 3,910,623 788,064
------------------ ------------------ ----------------- -----------------
NET INCREASE (DECREASE) 1,143,215 11,140,356 16,784,588 3,346,825
NET ASSETS AT BEGINNING OF YEAR 19,244,723 28,336,143 41,548,352 9,382,948
------------------ ------------------ ----------------- -----------------
NET ASSETS AT END OF YEAR $ 20,387,938 $ 39,476,499 $ 58,332,940 $ 12,729,773
================== ================== ================= =================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
FUND INFORMATION
------------------------------
FIDELITY U.S.
BOND INDEX
FUND
---------------
<S> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 14,109
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS 8,461
---------------
22,570
---------------
CONTRIBUTIONS:
EMPLOYEE 199,915
EMPLOYER 25,868
PLAN MERGER (NOTE 5) -
INVESTMENT TRANSFERS 311,923
---------------
537,706
---------------
TOTAL ADDITIONS 560,276
---------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 23,330
ADMINISTRATIVE FEES 1,475
---------------
TOTAL DEDUCTIONS 24,805
---------------
NET INCREASE (DECREASE) 535,471
NET ASSETS AT BEGINNING OF YEAR -
---------------
NET ASSETS AT END OF YEAR $ 535,471
===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
<PAGE> 7
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
FUND INFORMATION
--------------------------------------------------------------------------------------
FIDELITY
RETIREMENT DIVERSIFIED FIDELITY
GOVERNMENT MONEY INTERNATIONAL EMERGING GROWTH NOVACARE LOAN
MARKET PORTFOLIO FUND FUND FUND
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 6,608 $ 79,897 $ 666,410 $ -
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS - 42,995 (388,300) -
------------------ ------------------ ----------------- -----------------
6,608 122,892 278,110 -
------------------ ------------------ ----------------- -----------------
CONTRIBUTIONS:
EMPLOYEE 152,198 802,350 1,211,264 -
EMPLOYER 15,006 127,307 196,427 -
PLAN MERGER (NOTE 5) 86,895 - - -
INVESTMENT TRANSFERS 43,316 1,322,337 1,776,993 (65,186)
------------------ ------------------ ----------------- -----------------
297,415 2,251,994 3,184,684 (65,186)
------------------ ------------------ ----------------- -----------------
TOTAL ADDITIONS 304,023 2,374,886 3,462,794 (65,186)
------------------ ------------------ ----------------- -----------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 76,318 25,546 46,291 -
ADMINISTRATIVE FEES 1,304 165 999 -
------------------ ------------------ ----------------- -----------------
TOTAL DEDUCTIONS 77,622 25,711 47,290 -
------------------ ------------------ ----------------- -----------------
NET INCREASE (DECREASE) 226,401 2,349,175 3,415,504 (65,186)
NET ASSETS AT BEGINNING OF YEAR - - - 121,880
------------------ ------------------ ----------------- -----------------
NET ASSETS AT END OF YEAR $ 226,401 $ 2,349,175 $ 3,415,504 $ 56,694
================== ================== ================= =================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------
TOTAL
---------------
<S> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 8,530,084
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS 12,662,864
---------------
21,192,948
---------------
CONTRIBUTIONS:
EMPLOYEE 23,296,862
EMPLOYER 3,747,499
PLAN MERGER (NOTE 5) 86,895
INVESTMENT TRANSFERS -
---------------
27,131,256
---------------
TOTAL ADDITIONS 48,324,204
---------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 9,284,412
ADMINISTRATIVE FEES 163,443
---------------
TOTAL DEDUCTIONS 9,447,855
---------------
NET INCREASE (DECREASE) 38,876,349
NET ASSETS AT BEGINNING OF YEAR 98,634,046
---------------
NET ASSETS AT END OF YEAR $ 137,510,395
===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
6
<PAGE> 8
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
FUND INFORMATION
------------------------------------------------------------------------------------
FIDELITY
MANAGED INCOME FIDELITY FIDELITY NOVACARE STOCK
PORTFOLIO PURITAN FUND MAGELLAN FUND FUND
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 957,248 $ 2,966,738 $ 5,440,492 $ -
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS - 398,436 (1,356,229) 4,444,638
----------------- ----------------- ----------------- ----------------
957,248 3,365,174 4,084,263 4,444,638
----------------- ----------------- ----------------- ----------------
CONTRIBUTIONS:
EMPLOYEE 3,448,831 5,369,404 8,143,788 1,413,012
EMPLOYER 1,104,284 1,000,040 1,442,989 278,277
PLAN MERGER (NOTE 5) 1,040,328 82,163 160,603 1,229
INVESTMENT TRANSFERS (595,961) 1,008,949 (444,207) 100,358
----------------- ----------------- ----------------- ----------------
4,997,482 7,460,556 9,303,173 1,792,876
----------------- ----------------- ----------------- ----------------
TOTAL ADDITIONS 5,954,730 10,825,730 13,387,436 6,237,514
----------------- ----------------- ----------------- ----------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 3,059,200 2,936,944 4,530,750 721,799
ADMINISTRATIVE FEES 21,773 33,507 9,727 19,347
----------------- ----------------- ----------------- ----------------
TOTAL DEDUCTIONS 3,080,973 2,970,451 4,540,477 741,146
----------------- ----------------- ----------------- ----------------
NET INCREASE (DECREASE) 2,873,757 7,855,279 8,846,959 5,496,368
NET ASSETS AT BEGINNING OF YEAR 16,370,966 20,480,864 32,701,393 3,886,580
----------------- ----------------- ----------------- ----------------
NET ASSETS AT END OF YEAR $ 19,244,723 $ 28,336,143 $ 41,548,352 $ 9,382,948
================= ================= ================= ================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------
FUND INFORMATION
-------------------
NOVACARE LOAN
FUND TOTAL
----------------- ---------------
<S> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ - $ 9,364,478
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS - 3,486,845
----------------- ---------------
- 12,851,323
----------------- ---------------
CONTRIBUTIONS:
EMPLOYEE - 18,375,035
EMPLOYER - 3,825,590
PLAN MERGER (NOTE 5) - 1,284,323
INVESTMENT TRANSFERS (69,139) -
----------------- ---------------
(69,139) 23,484,948
----------------- ---------------
TOTAL ADDITIONS (69,139) 36,336,271
----------------- ---------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS - 11,248,693
ADMINISTRATIVE FEES - 84,354
----------------- ---------------
TOTAL DEDUCTIONS - 11,333,047
----------------- ---------------
NET INCREASE (DECREASE) (69,139) 25,003,224
NET ASSETS AT BEGINNING OF YEAR 191,019 73,630,822
----------------- ---------------
NET ASSETS AT END OF YEAR $ 121,880 $ 98,634,046
================= ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
7
<PAGE> 9
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF PLAN
GENERAL. The NovaCare, Inc. (the "Company") 401(k) Retirement Savings Plan (the
"Plan"), which was formed effective July 1, 1990, is a defined contribution plan
subject to the Employee Retirement Income Security Act of 1974 ("ERISA") and the
Internal Revenue Code ("IRC"). All full and part-time employees of the Company
working a minimum of twenty hours per week on a regularly scheduled basis may
enroll beginning on the first day of the first payroll period of the month
following six months of consecutive service.
ENROLLMENT. An eligible employee participates in the Plan by authorizing the
Company to make tax-deferred contributions to the plan on the employee's behalf,
resulting in a reduction of the employee's taxable earnings. The employee may
direct the investment of these contributions (see "Investment Directions"
below).
CONTRIBUTIONS TO THE PLAN. Participants may authorize basic contributions
ranging from 1% to 15% of their compensation. Certain highly compensated
participants may have their basic contributions limited to 6% of their
compensation. In accordance with the IRC, such contributions may not exceed
$9,500 in 1996 and 1997. The Company makes matching contributions in the amount
of 30% of participant contributions up to the first 6% of compensation. No
matching contributions are made with respect to participant contributions
exceeding 6% of compensation.
Certain percentage tests (non-discrimination) ensure that contributions by or on
behalf of employees do not favor the highly compensated. If these tests are not
met, contributions and the earnings attributable thereto will be distributed to
the highly compensated employees in accordance with the Plan document. The Plan
met the 401(k) non-discrimination tests for the years ended December 31, 1997
and 1996.
PARTICIPANT ACCOUNT. Each account is credited with the participant's
contributions and an allocation of (a) the Company's matching contribution and
(b) Plan earnings. Company contributions are allocated based on the matching
percentage for participant contributions. Plan earnings are allocated to each
participant's account based on the respective account balances. The benefit to
which a participant is entitled is the amount that can be provided from their
account.
VESTING. Participants are fully vested in their elective deferrals plus actual
earnings thereon. Vesting in the remainder of the account is based on years of
continuous service. Participants become fully vested upon death or disability,
attainment of normal retirement age, or after five years of credited service.
INVESTMENT OPTIONS. Upon enrollment in the Plan, participants may direct
contributions among one or more of the following investment funds:
I. Fidelity Managed Income Portfolio - An open-end
commingled pool which invests in short- and
long-term investment contracts issued by
insurance companies (GICs), investment contracts
issued by commercial banks (BICs), synthetic
investment contracts designed to simulate
conventional GICs through the purchase of
securities and inclusion of a benefit responsive
feature (put feature), and cash equivalents.
II. Fidelity Puritan Fund - A mutual fund which
invests in common and preferred stocks and
bonds, including lower-quality, high-yielding
debt securities.
8
<PAGE> 10
NOVACARE, INC. 401(k) RETIREMENT SAVINGS
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
III. Fidelity Magellan Fund - A mutual fund which
invests in the stocks of companies with an
expected above-average growth potential and a
corresponding higher level of risk.
IV. Fidelity U.S. Bond Index Fund - A mutual fund
which invests in investment grade (medium to high
quality) or above with maturities of at least one
year, including U.S. Treasury or government
securities and corporate bonds, asset-backed and
mortgage-backed securities and U.S.
dollar-denominated foreign securities.
V. Retirement Government Money Market Portfolio - A
money market fund which invests in obligations
issued or guaranteed as to principal and interest
by the U.S. government, its agencies or
instrumentalities.
VI. Fidelity Diversified International Fund - An
international fund which invests primarily in
equity securities of companies located anywhere
outside the United States that are included in
the Morgan Stanley EAFE Index.
VII. Fidelity Emerging Growth Fund - A mutual fund
which invests primarily in stocks of small and
medium sized developing companies that the fund's
manager believes have potential to grow rapidly
in earnings or revenues.
VIII. NovaCare Stock Fund - Funds are invested in
NovaCare, Inc. common stock with a small portion
invested in short-term money market instruments
for liquidity.
The NovaCare Loan Fund represents loans which were outstanding as of the dates
of the RehabClinics, Inc. and the NovaCare Orthotics & Prosthetics Plan mergers
into the NovaCare Plan. The NovaCare Plan did not begin to offer employee loans
until January 1, 1998.
DISTRIBUTIONS AND WITHDRAWALS. Distributions are paid in the following manner:
I. Distributions from the Fidelity Managed Income
Portfolio, Fidelity Puritan Fund, Fidelity
Magellan Fund, Fidelity U.S. Bond Index Fund,
Retirement Government Money Market Portfolio,
Fidelity Diversified International Fund and
Fidelity Emerging Growth Fund are paid in cash.
II. Distributions from the NovaCare Stock Fund are
paid in cash or shares of NovaCare, Inc. common
stock at the participant's option. Fractional
shares are paid in cash.
Prior to termination of service, participants may, in the event of financial
hardship, withdraw amounts from the Plan twice in any 12-month period. In the
absence of financial hardship, a participant's contribution may not be withdrawn
prior to attainment of age 59 1/2.
Upon termination of service for reasons other than death, participants are
entitled to a lump-sum amount equal to the value of the vested balance of their
account. Participants with account balances exceeding $3,500 may defer receipt
of the lump-sum amount until reaching age 70 1/2. If a participant dies, the
entire amount in the participant's account is distributed in a lump sum to the
participant's beneficiaries. A terminating participant's unvested account
balance is forfeited. In the event of reemployment, the employee is eligible for
all previously forfeited amounts. At December 31, 1997, forfeited nonvested
accounts totaled $170,480. These accounts will
9
<PAGE> 11
NOVACARE, INC. 401(K) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
be used to reduce future employer contributions. Also, in 1997, employer
contributions were reduced by $433,592 from forfeited nonvested accounts.
ADMINISTRATIVE EXPENSES. The Company may elect to pay all Plan administrative
expenses. If the Company elects not to pay such expenses, the expenses will be
paid by the Plan. During 1997 and 1996, plan administrative expenses were shared
by both employer and participants.
PLAN TERMINATION. Although it has not expressed any intent to do so, the Company
has the right under the Plan to discontinue its contributions at any time and
terminate the Plan subject to the provisions of ERISA as described further in
the Plan document. In the event of Plan termination, participants will become
fully vested in their accounts.
2. SIGNIFICANT ACCOUNTING POLICIES
The Plan's financial statements are prepared on the accrual basis of accounting.
The Plan's investments are stated at fair value. Shares of registered investment
companies are valued at quoted market prices which represent the net asset value
of shares held by the Plan at year end. The Fidelity Managed Income Portfolio is
a common trust fund which is stated at its net asset value as determined by the
fund administrator as of the year-end valuation date. NovaCare common stock is
valued at its quoted market price at year end. Participant loans are valued at
cost which approximates fair value. Purchases and sales are recorded on a trade
date basis. Investment income is recorded when earned.
Basic and matching contributions are recorded in the period during which the
Company makes payroll deductions from participant earnings.
3. DISTRIBUTIONS PAYABLE
Distributions requested by withdrawing participants but not paid were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996
------------------------ -----------------------
<S> <C> <C>
FIDELITY MANAGED INCOME PORTFOLIO $ 1,452 $ 43,234
FIDELITY PURITAN FUND 23,461 5,868
FIDELITY MAGELLAN FUND 31,929 70,886
FIDELITY EMERGING GROWTH FUND 1,322 -
FIDELITY DIVERSIFIED INTERNATIONAL FUND 1,223 -
NOVACARE STOCK FUND 1,162 25,389
======================== =======================
TOTAL DISTRIBUTIONS PAYABLE $ 60,549 $ 145,377
======================== =======================
</TABLE>
Distributions are recorded as a reduction in Plan net assets when paid. For Form
5500 reporting purposes, such distributions are recorded as a reduction in Plan
assets when requested.
10
<PAGE> 12
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for benefits per the
financial statements to the Form 5500 at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------
<S> <C> <C>
Net assets available for benefits per the financial statements $ 137,510,395 $ 98,634,046
Less: Amounts allocated to withdrawing participants (60,549) (145,377)
--------------------- -----------------
Net assets available for benefits per the Form 5500 $ 137,449,846 $ 98,488,669
===================== =================
</TABLE>
The following is a reconciliation of benefits paid to participants according to
the financial statements to Form 5500:
<TABLE>
<CAPTION>
Year Ended
December 31,1997
--------------------
<S> <C>
Benefits paid to participants per the financial statements $ 9,284,412
Add: Amounts allocated to withdrawing participants at December 31, 1997 60,549
Less: Amounts allocated to withdrawing participants at December 31, 1996 (145,377)
--------------------
Benefits paid per Form 5500 $ 9,199,584
====================
</TABLE>
Amounts allocated to withdrawing participants are recorded on the Form 5500 for
benefit claims that have been processed and approved for payment prior to
December 31 but not yet paid as of that date.
5. PLAN MERGER
During 1997, the net assets available for plan benefits of the DC Claussen RPT
Physical Therapy, Inc. 401(k) Profit Sharing Plan totaling $86,895 were
transferred to the Plan.
During 1996, the net assets available for plan benefits of the Sabolich, Inc.
401(k) Profit Sharing Plan and the Coplin Physical Therapy 401(k) Profit Sharing
Plan totaling $983,488 and $300,835, respectively, were transferred to the Plan.
11
<PAGE> 13
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. INCOME TAXES
On February 2, 1996 the Internal Revenue Service determined by letter that the
Plan qualifies under Section 401 (a) of the IRC and is exempt from federal
income taxes under Section 501(a) of IRC. Once qualified, the Plan is required
to operate in conformity with the IRC to maintain its qualification. The Plan
has been amended since receiving the determination letter. However, the Plan
Administrator is not aware of any course of action or series of events that have
occurred that might adversely affect the Plan's qualified status.
7. RELATED PARTY TRANSACTIONS
Certain Plan investments represent shares of mutual funds managed by an
affiliate of Fidelity Management Trust Company ("FMTC"). FMTC is the trustee of
the Plan. Transactions in these mutual funds are party-in-interest transactions
which are exempt from the prohibited transaction rules of ERISA.
12
<PAGE> 14
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES/UNITS/
IDENTITY OF ISSUE INTEREST RATE COST (1) CURRENT VALUE
- ----------------------------------------------- --------------------- --------------------- -----------------------
<S> <C> <C> <C>
MUTUAL FUNDS:
FIDELITY MANAGED INCOME PORTFOLIO 20,223,523 $ 20,223,523 $ 20,223,523
FIDELITY PURITAN FUND 2,019,203 35,504,499 39,132,154
FIDELITY MAGELLAN FUND 607,113 50,220,978 57,839,697
FIDELITY U.S. BOND INDEX FUND 47,996 509,411 517,872
RETIREMENT GOVERNMENT MONEY MARKET
PORTFOLIO 213,593 213,593 213,593
FIDELITY DIVERSIFIED INTERNATIONAL FUND 141,920 2,246,182 2,289,177
FIDELITY EMERGING GROWTH FUND 139,867 3,710,135 3,321,835
--------------------- -----------------------
112,628,321 123,537,851
NOVACARE STOCK FUND 249,910 10,859,640 12,612,974
NOVACARE LOAN FUND: (MATURITY 1998-2003) 6% - 9% 56,694 56,694
--------------------- -----------------------
$ 123,544,655 $ 136,207,519
===================== =======================
</TABLE>
(1) CURRENT VALUE AT BEGINNING OF YEAR OR COST OF PURCHASE IF ACQUIRED DURING
THE YEAR.
13
<PAGE> 15
NOVACARE, INC. 401(K) RETIREMENT SAVINGS PLAN
SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
SERIES OF TRANSACTIONS IN THE SAME ISSUE AGGREGATING MORE THAN 5% OF THE
JANUARY 1, 1997 CURRENT VALUE OF PLAN ASSETS
<TABLE>
<CAPTION>
IDENTITY OF NUMBER OF PURCHASE SELLING EXPENSE
PARTY INVOLVED DESCRIPTION OF ASSET TRANSACTIONS PRICE PRICE INCURRED
- ------------------- -------------------------- --------------- --------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
FIDELITY
MANAGEMENT TRUST FIDELITY MANAGED INCOME
COMPANY PORTFOLIO 251 $ 5,771,050 $ - $ -
FIDELITY
MANAGEMENT TRUST FIDELITY MANAGED INCOME
COMPANY PORTFOLIO 245 - 4,637,798 -
FIDELITY
INVESTMENTS FIDELITY MAGELLAN FUND 246 16,221,768 - -
FIDELITY
INVESTMENTS FIDELITY MAGELLAN FUND 240 - 7,166,765 -
FIDELITY
INVESTMENTS FIDELITY PURITAN FUND 248 11,984,845 - -
FIDELITY
INVESTMENTS FIDELITY PURITAN FUND 241 - 4,549,862 -
FIDELITY
MANAGEMENT TRUST
COMPANY NOVACARE STOCK FUND 238 3,747,147 - -
FIDELITY
MANAGEMENT TRUST
COMPANY NOVACARE STOCK FUND 220 - 2,198,067 -
</TABLE>
<TABLE>
<CAPTION>
CURRENT VALUE
IDENTITY OF COST OF AT TRANSACTION REALIZED GAIN /
PARTY INVOLVED DESCRIPTION OF ASSET ASSET (1) DATE (LOSS)
- ------------------- ---------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
FIDELITY
MANAGEMENT TRUST FIDELITY MANAGED INCOME
COMPANY PORTFOLIO $ 5,771,050 $ 5,771,050 $ -
FIDELITY
MANAGEMENT TRUST FIDELITY MANAGED INCOME
COMPANY PORTFOLIO 4,637,798 4,637,798 -
FIDELITY
INVESTMENTS FIDELITY MAGELLAN FUND 16,221,768 16,221,768 -
FIDELITY
INVESTMENTS FIDELITY MAGELLAN FUND 6,743,438 7,166,765 423,327
FIDELITY
INVESTMENTS FIDELITY PURITAN FUND 11,984,845 11,984,845 -
FIDELITY
INVESTMENTS FIDELITY PURITAN FUND 4,184,003 4,549,862 365,859
FIDELITY
MANAGEMENT TRUST
COMPANY NOVACARE STOCK FUND 3,747,147 3,747,147 -
FIDELITY
MANAGEMENT TRUST
COMPANY NOVACARE STOCK FUND 1,714,789 2,198,067 483,278
</TABLE>
(1) CURRENT VALUE AT BEGINNING OF YEAR OR COST OF PURCHASE IF ACQUIRED DURING
THE YEAR.
14
<PAGE> 16
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
"NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN" HAS DULY CAUSED THIS ANNUAL
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
---------------------------------------------
DATE: June 23, 1998 BY:
------------------
AVEN A. KERR
PLAN ADMINISTRATOR
BY:
------------------
BARRY E. SMITH
VICE PRESIDENT, CONTROLLER, AND
CHIEF ACCOUNTING OFFICER,
NOVACARE, INC.
BY: -------------------
NOREEN B. BECCI
VICE PRESIDENT, BENEFITS
15
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
WE HEREBY CONSENT TO THE INCORPORATION BY REFERENCE IN THE REGISTRATION
STATEMENT ON FORM S-8 (NO. 33-36889 AND NO. 33-88746) OF NOVACARE, INC. OF OUR
REPORT DATED JUNE 15, 1998 APPEARING ON PAGE 2 OF THIS FORM 11-K.
PRICE WATERHOUSE LLP
PHILADELPHIA, PENNSYLVANIA
- ------------
