<PAGE> 1
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 SEPTEMBER 30, 1998
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 October 31, 1998, NovaCare, Inc. had 62,660,502 shares of common stock,
$.01 par value, outstanding.
<PAGE> 2
NOVACARE, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PART NO. ITEM NO. DESCRIPTION PAGE NO.
- -------- -------- ----------- --------
<S> <C> <C> <C>
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998 1
- Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and 1997 2
- Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1997 3
- Notes to Condensed Consolidated Financial Statements 4-7
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
II OTHER INFORMATION
4 Submission of Matters to a Vote of Security Holders 14
6 Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
i
<PAGE> 3
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND JUNE 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1998 1998
----------- -----------
ASSETS (UNAUDITED) (See Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 11,448 $ 32,760
Accounts receivable, net of allowances at September
30, 1998 and at June 30, 1998 of $54,047 and $55,060,
respectively ............................................ 346,988 338,328
Inventories .............................................. 40,024 38,207
Deferred income taxes .................................... 14,580 14,580
Other current assets ..................................... 36,678 27,978
----------- -----------
Total current assets .................................. 449,718 451,853
Property and equipment, net ................................ 81,233 80,857
Excess cost of net assets acquired, net .................... 814,171 767,729
Investments in joint ventures .............................. 15,107 14,881
Other assets, net .......................................... 42,026 40,722
----------- -----------
$ 1,402,255 $ 1,356,042
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements ................ $ 35,155 $ 32,074
Accounts payable and accrued expenses .................... 158,495 193,025
Income taxes payable ..................................... 5,822 981
----------- -----------
Total current liabilities ............................. 199,472 226,080
Financing arrangements, net of current portion ............. 541,652 476,308
Deferred income taxes ...................................... 41,622 41,067
Other ...................................................... 11,720 13,608
----------- -----------
Total liabilities ..................................... 794,466 757,063
----------- -----------
Minority interest in consolidated subsidiaries ............. 20,684 18,306
Commitments and contingencies .............................. -- --
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares;
issued 67,961 shares at September 30, 1998 and issued
67,935 shares at June 30, 1998 .......................... 680 679
Additional paid-in capital ............................... 273,577 273,157
Retained earnings ........................................ 355,928 350,255
----------- -----------
630,185 624,091
Less: Common stock in treasury (at cost), 5,307 shares at
September 30, 1998 and 5,401 shares at June 30, 1998. (43,080) (43,418)
----------- -----------
Total shareholders' equity ............................ 587,105 580,673
----------- -----------
$ 1,402,255 $ 1,356,042
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
1
<PAGE> 4
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net revenues ...................................... $ 478,201 $ 356,698
Cost of services .................................. 393,618 278,301
--------- ---------
Gross profit ................................... 84,583 78,397
Selling, general and administrative expenses ...... 51,931 45,472
Provision for uncollectible accounts .............. 7,008 5,111
Amortization of excess cost of net assets acquired 6,132 4,466
--------- ---------
Income from operations ......................... 19,512 23,348
Gain from issuance of subsidiary stock ............ 1,355 --
Investment income ................................. 173 141
Interest expense .................................. (9,277) (5,794)
Minority interest ................................. (663) (75)
--------- ---------
Income before income taxes ..................... 11,100 17,620
Income taxes ...................................... 5,427 7,396
--------- ---------
Net income ..................................... $ 5,673 $ 10,224
========= =========
Net income per share - basic ................... $ .09 $ .17
========= =========
Net income per share - assuming dilution ....... $ .09 $ .16
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE> 5
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 5,673 $ 10,224
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Gain from issuance of subsidiary stock .................................... (1,355) --
Depreciation and amortization ............................................. 14,063 11,477
Provision for uncollectible accounts ...................................... 7,008 5,111
Minority interest ......................................................... 663 75
Deferred income taxes ..................................................... 555 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts and notes receivable .......................................... (15,961) (24,249)
Inventories ............................................................ (1,816) 994
Other current assets ................................................... (8,224) (2,109)
Accounts payable and accrued expenses .................................. (36,777) 747
Income taxes payable ................................................... 4,841 5,509
Other, net ............................................................. (481) (926)
--------- ---------
Net cash flows (used in) provided by operating activities.............. (31,811) 6,853
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash acquired ....................... (48,268) (22,939)
Net additions to property and equipment ...................................... (9,451) (6,138)
Other, net ................................................................... 354 (533)
--------- ---------
Net cash flows (used in) investing activities .......................... (57,365) (29,610)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing arrangements ......................................... 174,784 123,500
Payment of financing arrangements ............................................ (107,565) (91,415)
Proceeds from common stock issued ............................................ 712 540
Payment for purchase of subsidiary treasury stock ............................ (67) --
--------- ---------
Net cash flows provided by financing activities ........................ 67,864 32,625
--------- ---------
Net (decrease) increase in cash and cash equivalents ......................... (21,312) 9,868
Cash and cash equivalents, beginning of period ............................... 32,760 22,716
--------- ---------
Cash and cash equivalents, end of period ..................................... $ 11,448 $ 32,584
========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................................... $ 9,655 $ 2,785
========= =========
Income taxes paid ....................................................... $ 453 $ 1,862
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE> 6
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(In thousands, except per share data)
(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, 1998 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, 1998. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of Company management,
the condensed consolidated financial statements for the unaudited interim
periods presented include all adjustments (consisting of only normal
recurring adjustments) necessary to present a fair statement of the results
for such interim periods.
Operating results for the three-month period ended September 30, 1998 are
not necessarily indicative of the results that may be expected for a full
year or any portion thereof.
2. GAIN FROM ISSUANCE OF SUBSIDIARY STOCK
In the three-month period ended September 30, 1998, a subsidiary of the
Company, NovaCare Employee Services, Inc. ("NCES") issued 436 shares of its
common stock in connection with an acquisition. As a result of this common
stock transaction, the Company's percentage ownership of NCES decreased to
69.7% at September 30, 1998 from 70.9% at June 30, 1998.
The Company recorded a gain of $1,355 ($799 net of tax) for the difference
between the Company's historical cost of its investment in NCES and its
portion of NCES equity at September 30, 1998. The Company will continue to
record NCES investment adjustments through its statement of operations as
NCES's equity changes as a result of capital transactions.
3. NET INCOME PER SHARE
The following table sets forth the computation and reconciliation of net
income per share-basic and net income per share-assuming dilution:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
NET INCOME ........................................................... $ 5,673 $10,224
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC ........................ 62,566 61,124
Stock options ...................................................... 671 2,028
Contingently issuable shares - assuming dilution ................... 26 129
------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING - ASSUMING DILUTION ............ 63,263 63,281
======= =======
NET INCOME PER SHARE - BASIC ....................................... $ .09 $ .17
======= =======
NET INCOME PER SHARE - ASSUMING DILUTION ........................... $ .09 $ .16
======= =======
</TABLE>
4
<PAGE> 7
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(In thousands, except per share data)
(Unaudited)
The Company did not include convertible subordinated debentures,
equivalent to 6,567 shares of common stock, or options to purchase 2,397 and
41 shares of common stock for the three months ended September 30, 1998 and
1997, respectively, because their effects are antidilutive. There were no
transactions that occurred subsequent to September 30, 1998 that would have
materially changed the number of shares used in computing net income per
share-basic or net income per share-assuming dilution.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1998 1998
-------- --------
<S> <C> <C>
Accounts payable .......................................... $ 17,833 $ 19,679
Accrued compensation and benefits ......................... 65,695 87,985
Accrued costs of productivity and cost improvement programs 22,422 23,748
Accrued workers' compensation and health claims ........... 19,030 25,000
Deferred and contingent purchase price obligations ........ 6,417 8,756
Accrued interest .......................................... 6,332 7,080
Other ..................................................... 20,766 20,777
-------- --------
$158,495 $193,025
======== ========
</TABLE>
5. FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1998 1998
-------- --------
<S> <C> <C>
$400,000 revolving credit facility (EuroDollar rate plus
0.875% to 1.5%), due June 30, 2003 ..................... $300,000 227,500
Convertible subordinated debentures (5.5%), due January 2000 175,000 175,000
Subordinated promissory notes (5% to 10%), through 2007 .... 91,876 98,318
$25,000 revolving credit facility of subsidiary, due
November 17, 2000 ....................................... 2,000 --
Other ...................................................... 7,931 7,564
-------- --------
576,807 508,382
Less: current portion ..................................... 35,155 32,074
-------- --------
$541,652 $476,308
======== ========
</TABLE>
The Company has a revolving credit facility with a syndicate of lenders.
The facility is collateralized by substantially all the common stock of the
Company's subsidiaries. As of September 30, 1998, $99,078 of the line of credit
was available after reduction for letters of credit totaling $922 and
borrowings.
NCES has a revolving credit facility with a syndicate of lenders. The
credit facility provides for interest to be charged at a variable rate,
depending on certain financial ratios, equal to: (i) the EuroDollar rate plus a
range of 1.375% to 2.50%, or (ii) the lead lender's prime rate plus a range of
.125% to 1.25%. Loans made under the credit facility are collateralized by a
pledge of all of (i) the common stock of NCES's subsidiaries, (ii) the assets of
NCES and its subsidiaries, and (iii) the Company's interest in the common stock
of NCES. As of September 30, 1998, $21,859 of the NCES line of credit was
available after reduction for a letter of credit of $1,141 and borrowings.
5
<PAGE> 8
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(In thousands, except per share data)
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
Certain purchase agreements require additional payments if specific
financials targets and non-financial conditions are met. Aggregate contingent
payments in connection with these acquisitions at September 30, 1998 of
approximately $80,298 in cash and 26 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 three months ended September 30, 1998 and September 30,
1997, the Company paid $3,913 and $3,600 in cash, respectively, and issued 14
and 25 shares, respectively, of common stock in connection with businesses
acquired in prior years.
7. OPERATING SEGMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in fiscal 1998. Segment information is presented for outpatient
services, long-term care services and employee services, consistent with the
Company's reporting, organization and management structure.
Operating results and other financial data are presented for the principal
operating segments of the Company as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
NET REVENUES:
Outpatient services ........................ $ 151,361 $ 113,936
Long-term care services .................... 141,633 156,171
Employee services .......................... 389,162 266,757
--------- ---------
Total ................................... 682,156 536,864
Intrasegment elimination - employee services (203,955) (180,166)
--------- ---------
Consolidated revenues ................... $ 478,201 $ 356,698
========= =========
GROSS PROFIT:
Outpatient services ........................ $ 45,243 $ 34,777
Long-term care services .................... 34,037 41,903
Employee services .......................... 14,760 8,328
--------- ---------
Total ................................... 94,040 85,008
Intrasegment elimination - employee services (6,161) (3,968)
Depreciation ............................... (3,296) (2,643)
--------- ---------
Consolidated gross profit ............... $ 84,583 $ 78,397
========= =========
</TABLE>
6
<PAGE> 9
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
INCOME FROM OPERATIONS:
Outpatient services .......................................................... $ 18,345 $ 16,193
Long-term care services ...................................................... 17,977 24,568
Employee services ............................................................ 3,810 2,126
-------- --------
Total ..................................................................... 40,132 42,887
Unallocated selling, general and administrative expenses ..................... (20,620) (19,539)
-------- --------
Consolidated income from operations ....................................... $ 19,512 $ 23,348
======== ========
DEPRECIATION AND AMORTIZATION:
Outpatient services .......................................................... $ 7,516 $ 5,368
Long-term care services ...................................................... 3,211 2,819
Employee services ............................................................ 1,271 790
-------- --------
Total ..................................................................... 11,998 8,977
Unallocated selling, general and administrative expenses ..................... 2,065 2,500
-------- --------
Consolidated depreciation and amortization ................................ $ 14,063 $ 11,477
======== ========
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA"):
Outpatient services .......................................................... $ 25,861 $ 21,561
Long-term care services ...................................................... 21,188 27,387
Employee services ............................................................ 5,081 2,916
-------- --------
Total ..................................................................... 52,130 51,864
Unallocated selling, general and administrative expenses ..................... (18,555) (17,039)
-------- --------
Consolidated EBITDA ....................................................... $ 33,575 $ 34,825
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF As of
SEPTEMBER 30, June 30,
1998 1998
---------- ----------
<S> <C> <C>
SEGMENT ASSETS:
Outpatient services .......................................................... $ 939,646 $ 876,250
Long-term care services....................................................... 311,293 326,872
Employee services ............................................................ 116,867 112,583
Unallocated assets ........................................................... 34,449 40,337
---------- ----------
$1,402,255 $1,356,042
========== ==========
</TABLE>
7
<PAGE> 10
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Operating Segments
In fiscal 1998, NovaCare, Inc. (the "Company") adopted Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires companies to report
operating segments based upon the way a company manages its activities.
Consistent with the Company's reporting, organization and management structure,
the Company presents segment information for outpatient services, long-term care
services and employee services. Segment information for the first quarter of
fiscal 1998 has been restated to conform to the requirements of SFAS No. 131.
See Note 7 to the Condensed Consolidated Financial Statements for
financial data for each of the Company's operating segments.
In fiscal 1998, the Company's employee services subsidiary, NovaCare
Employee Services, Inc. ("NCES"), sold approximately 5.8 million shares in an
initial public offering. NCES issued additional shares in connection with
acquisitions completed in fiscal 1998 and 1999. As of September 30, 1998, the
Company owns 69.7% of NCES.
Regulatory Changes
In the first quarter of fiscal 1999 the Company experienced a decline in
earnings compared to the first quarter of fiscal 1998. Earnings for the three
months ended September 30, 1998, excluding a $0.8 million after-tax gain related
to the issuance of NCES stock, were $4.9 million, a 52% decline from $10.2
million in fiscal 1998. This decline resulted principally from reduced revenues
and earnings in the Company's long-term care services operating segment, which
recorded revenues and income from operations of $141.6 million and $18.0
million, respectively, in fiscal 1999 compared to $156.2 million and $24.6
million, respectively, in the first quarter of fiscal 1998.
This reduced operating performance by the long-term care services segment
resulted principally from (i) lower Medicare reimbursement rates due to salary
equivalency guidelines implemented by the Health Care Financing Administration
("HCFA") effective April 1998 and (ii) a 10% decline in the number of
rehabilitation patients per Company-served long-term care facility, resulting
from the regulatory uncertainty surrounding the level of reimbursement for
therapy services for Medicare patients under the Balanced Budget Act of 1997
("BBA").
In the fourth quarter of fiscal 1998, HCFA implemented salary equivalency
reimbursement guidelines for occupational therapy and speech language pathology
services and revised guidelines for physical therapy services. The net effect of
these guidelines was to reduce the long-term care segment's reimbursement rates
and gross profit percentage from previous levels. Additionally, BBA requires a
change from these salary equivalency guidelines for therapy services to a
prospective payment system for Medicare Part A services ("PPS") and a fee
schedule with annual maximum payments per patient for Medicare Part B services.
The Company believes that while these changes further reduce overall
reimbursement levels, they offer opportunities to therapy service providers who
can provide quality services at a lower cost.
In response to these changes in reimbursement methodology, the Company is
in the process of changing its long-term care service delivery model from one
characterized by a high concentration of one-on-one therapy, with licensed
professionals treating individual patients, to a model which: (i) relies more
heavily on well-trained therapy assistants and aides closely supervised by
licensed professionals and (ii) employs simultaneous therapy, wherein licensed
professionals, along with well-trained therapy assistants and aides, treat
multiple patients on a coordinated basis.
8
<PAGE> 11
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
By changing Medicare reimbursement to long-term care facilities from a
cost basis to a fixed fee, the BBA is a fundamental change in the economic
assumptions underlying patient care in long-term care facilities. Due to the
extensive nature of the reimbursement changes specified by the BBA, the effect
these changes may have on the demand for services and management's inability to
predict what portion of the PPS and fee schedule rates that the Company will be
able to receive based on negotiated terms of service contracts with its
customers, the Company is unable to determine the impact that the BBA will have
on its financial position or results of operations.
Corporate and Capital Structure Changes
The Company continues to evaluate its strategic alternatives for obtaining
additional capital to fund its growth. Such alternatives could include placing
additional debt through a high-yield offering or private placement, the offering
of equity securities in a private placement, the separation of the Company's
activities into two independent companies, one of which would operate its
outpatient services operating segment and the other of which would operate its
long-term care and employee services operating segments, and the subsequent
offering for sale of equity securities, or the sale of one or more of the
Company's businesses. The feasibility and timing of these alternatives will
depend on a variety of capital markets, tax, regulatory and operational issues.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Consolidated net revenues were $478.2 million, an increase of $121.5
million (34%) over fiscal 1998, as continued expansion in the Company's
outpatient services and employee services operating segments more than offset
the decline in long-term care services segment revenues. Growth in the
outpatient services segment resulted primarily from acquisitions. Employee
services growth was due primarily to internal growth. The revenue decline in
long-term care services was substantially due to regulatory changes. The
Company acquired six outpatient physical therapy and rehabilitation businesses
and one employee services business in the first quarter of fiscal 1999,
compared to eight outpatient physical therapy and rehabilitation business 10
orthotic and prosthetic ("O&P") businesses in the first quarter of last year.
Consolidated gross profit (excluding depreciation) was $87.9 million, an
increase of $6.8 million (8%) over fiscal 1998. The reasons for the gross
profit increase are the same as the net revenue increase, with acquisitions in
outpatient services and internal growth in employee services more than
offsetting the impact of regulatory changes in long-term care services. The
decline in gross profit as a percentage of net revenues ("gross profit margin")
to 18.4% compared to 22.7% last year, was due primarily to lower gross profit
margins in the long-term care services segment.
Other operating expenses, which include selling, general and
administrative expenses, depreciation (other than depreciation included in cost
of sales), amortization of excess cost of net assets acquired and provision for
uncollectible accounts, were $65.1 million, an increase of $10.0 million (18%)
over fiscal 1998. The increase relates principally to businesses acquired during
fiscal 1998 and the first quarter of fiscal 1999 as well as costs incurred to
support internal growth. As a percentage of net revenues, other operating
expenses decreased to 13.6% in the first quarter of fiscal 1999, compared to
15.4% in fiscal 1998. This decrease resulted principally from an increase in
employee services revenues, where these expenses are typically a smaller
percentage of net revenues compared to outpatient services or long-term care
services.
Depreciation expense, including depreciation included in cost of services
and selling, general and administrative expenses, was $7.9 million, an increase
of $0.9 million (13%) over fiscal 1998, due primarily to acquisitions and
capital expenditures in fiscal 1998 and fiscal 1999. Amortization of excess cost
of net assets acquired ("amortization") was $6.1 million in the first quarter of
fiscal 1999, an increase of $1.7 million (37%) over fiscal 1998 as a result of
businesses acquired subsequent to September 30, 1997.
9
<PAGE> 12
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense, net of investment income, was $9.1 million, an increase
of $3.5 million (61%) over fiscal 1998 as a result of increased borrowings
principally associated with the Company's acquisitions, as discussed under
"Liquidity and Capital Resources."
Income tax expense for the three months ended September 30, 1998 was 48.9%
of pre-tax income, an increase from 42.0% of pre-tax income in fiscal 1998. This
increase in tax rate resulted principally from the effect of nondeductible
amortization on reduced pre-tax income in fiscal 1999 compared to fiscal 1998.
OPERATING RESULTS BY SEGMENT
Outpatient Services
Net revenues for the outpatient services segment were $151.4 million, an
increase of $37.4 million (33%) over fiscal 1998. The increase in net revenues
was due principally to the effect of fiscal 1998 acquisitions, acquisitions
completed in the first quarter of fiscal 1999 and modest same-market growth in
O&P and occupational health, offset by a slight reduction in same-market growth
in outpatient physical therapy and rehabilitation.
Gross profit (excluding depreciation) was $45.2 million, an increase of
$10.5 million (30%) over the first quarter of fiscal 1998 resulting primarily
from the inclusion of businesses acquired in fiscal 1998 and fiscal 1999. Gross
profit margin declined to 29.9% from 30.5% in the first quarter of fiscal 1998,
principally as a result of pricing pressure in the outpatient physical therapy
and rehabilitation business.
Income from operations was $18.3 million, an increase of $2.2 million
(13%) over last year. The increase resulted from the higher gross profit noted
above, offset partially by higher selling, general and administrative expenses,
an increase in the provision for bad debts and higher depreciation and
amortization expense. The increase in these costs was principally the result of
expenses associated with acquired businesses.
Long-term Care Services
Net revenues for long-term care services were $141.6 million, a decrease
of $14.5 million (9%) from the first quarter of fiscal 1998. The decrease in net
revenues resulted from the factors previously noted in "Overview" above as an
overall pricing decrease of 16% was only partially offset by a volume increase
of 7%. The pricing decrease related to the impact of the salary equivalency
guidelines that were implemented in the fourth quarter of fiscal 1998 as well as
the overall lower reimbursement rates resulting from the implementation of the
BBA. The volume increases resulted from new contract sales net of cancellations
that occurred during fiscal 1998 and the first quarter of fiscal 1999. Partially
offsetting these net contract sales was a decline of approximately 10% in
average rehabilitation patients treated per Company-served customer facility
resulting from the uncertainty surrounding the reimbursement economics of
Medicare patients in long-term care facilities under the BBA.
Gross profit was $34.0 million, a decrease of $7.9 million (19%) from last
year. The gross profit margin was 24.0% compared to 26.8% last year. The decline
in gross profit and gross profit margin resulted from the lower pricing
experienced in fiscal 1999 as a result of regulatory changes (see "Overview"
above), which was only partially offset by lower salary and wage costs per
employee and improved productivity. The lower salary and wage costs per
employee essentially resulted from the Company's reduction of therapist
salaries and wages, which occurred in September 1998.
Income from operations was $18.0 million, a decrease of $6.6 million (27%)
from last year, as the decline in gross profit was partially offset by lower
selling, general and administrative expenses.
10
<PAGE> 13
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Employee Services
Employee services net revenues were $389.2 million (before an intercompany
elimination of $204.0 million related to services provided to the outpatient
services and long-term care services segments), an increase of $122.4 million
(46%) over last year's revenues of $266.8 million (before an intercompany
elimination of $180.2 million). This increase in net revenues is due to: (i) an
increase of $98.6 million in third-party net revenues and (ii) an increase in
net revenues of $23.8 million under the employee services segment's contract
with the outpatient services and long-term care services segments (the "NovaCare
Contract").
The increase in revenues from third parties resulted from acquisitions
completed in fiscal 1998 and 1999 and internal growth. Revenues under the
NovaCare Contract increased principally as a result of a 17.7% increase in the
average number of worksite employees.
Gross profit (excluding depreciation) was $14.8 million, an increase of
$6.4 million (77%) over the first quarter of fiscal 1998. The gross profit
margin was 3.8% compared to 3.1% in the first quarter of fiscal 1998. The
increase in gross profit and gross profit margin resulted from the increase in
net revenues and improved margins in the NovaCare Contract and in temporary
therapist staffing.
Income from operations was $3.8 million, an increase of $1.7 million (79%)
over last year. The increase resulted from the improvement in gross profit noted
above, partially offset by higher selling, general and administrative expenses
related to acquisitions and additional costs incurred to support internal
growth.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, cash and cash equivalents totaled $11.4 million, a
decrease of $21.3 million from June 30, 1998. During the three months ended
September 30, 1998, the Company used $31.8 million of cash in operating
activities. The unfavorable cash flow from operating activities in fiscal 1999
resulted principally from the timing of payments for accounts payable and
accrued expenses, particularly compensation-related payments, and higher
accounts receivable. The increase in accounts receivable resulted from higher
consolidated net revenues and an increase in days sales outstanding in the
long-term care services segment as customer payments slowed due to their cash
flow uncertainties pertaining to Medicare regulatory changes.
The Company also used $57.4 million of cash in investing activities in the
first quarter of fiscal 1999, of which $48.3 million related to acquisitions and
$9.5 million was for capital expenditures. Capital expenditures consisted
principally of information systems software and hardware costs in support of the
Company's business expansion and improved infrastructure as well as equipment
and leasehold improvements in startup operations in the outpatient services
segment.
To finance these cash requirements, the Company borrowed a net $72.5
million under its $400.0 million long-term credit facility and reduced its cash
balances by $21.3 million. At September 30, 1998, the Company had $99.1 million
available under its credit facility after reduction for a letter of credit of
$.9 million and borrowings of $300 million. NCES also borrowed a net $2.0
million under its $25.0 million credit facility principally to finance an
acquisition. At September 30, 1998, NCES had $21.9 million of its credit
facility available after reduction for a letter of credit of $1.1 million and
borrowings.
In order to improve its overall cash flow and reduce its outstanding
borrowings, the Company is in the process of implementing a program to improve
cash flow from operations and reduce acquisition and capital expenditures. The
Company has deferred all significant acquisitions in its outpatient services and
long-term care services operating segments and has reduced its budget for
capital expenditures from levels which were previously anticipated. In addition,
the Company has implemented a program to improve cash collections and reduce
days sales outstanding.
11
<PAGE> 14
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 READINESS
During the quarter ended September 30, 1998, NovaCare continued to address
issues associated with the "Year 2000" problem. The Year 2000 problem occurs
because, historically, certain computer programs have been written using two
digits, rather than four digits, to define the applicable year. The Company's
financial and management operating systems, microprocessors embedded in physical
therapy, office or other equipment ("embedded chips") or computer systems used
by third parties (such as financial institutions, customers or suppliers) could
malfunction when dates occurring after December 31, 1999 are recognized as
twentieth century dates (i.e. 1900) rather than twenty-first century dates (i.e.
2000).
NovaCare is currently in the process of implementing its comprehensive
response to the Year 2000 problem. During fiscal 1998, the Company completed an
inventory of its financial and management operating systems and made a
preliminary determination of which programs were or were not Year 2000 ready.
The Company also established a program to test each significant application
which was believed to be Year 2000 ready and to remediate all significant
programs which were not Year 2000 ready. In some cases, the Company intends to
address Year 2000 issues through the development of new programs, which enhance
or provide new functionality to these financial and management operating
systems.
The Company continues to survey its field locations to determine the
impact of embedded chips on physical therapy and office equipment as well as
owned and leased real estate. The Company expects this survey to be complete by
March 31, 1999.
The Company anticipates that the all of its significant computer
applications will be tested and remediated by June 30, 1999 and that embedded
chips which cannot accommodate Year 2000 issues and significantly affect field
operations will be identified and replaced by that date.
The Company estimates the total cost of its Year 2000 effort to be
approximately $6.5 million, including $2.5 million of capital costs for new
computers and related equipment. The estimate of capital costs has been reduced
by $2.5 million from the Company's original estimate at June 30, 1998. This
amount does not include costs for computer software developed in order to
provide or improve functionality. At September 30, 1998, the Company had already
spent approximately $1.7 million in this effort, of which $0.1 million
represented capital costs. The Company has increased its overall information
technology budget to accommodate Year 2000 issues and has not delayed other
projects critical to the Company's business.
The Company continues to interview customers, vendors and service bureaus
to determine their exposure to Year 2000 issues, their anticipated risks and
responses to those risks. Contingency planning is underway in the event that
third parties are unable to successfully remediate all Year 2000 issues. The
Company expects to complete this contingency planning by March 31, 1999.
However, there can be no assurance that this contingency planning will partially
or completely ameliorate the failure of one or more third parties to
successfully identify and resolve Year 2000 issues.
If the Company is unsuccessful in completing remediation of non-compliant
systems, correcting embedded chips and if customers or vendors cannot rectify
Year 2000 issues, the Company could incur additional costs, which may be
substantial, to develop alternative methods to managing its business and
replacing non-compliant equipment, and may experience delays in payments by
customers or to vendors.
12
<PAGE> 15
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAUTIONARY STATEMENT
Except for historical information, matters discussed above including, but
not limited to, statements concerning future growth, 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 reimbursement system changes,
including customer response to the establishment of salary equivalency
guidelines for certain therapies and the change from cost-based reimbursement to
fee schedules and per diem payments, the number and productivity of clinicians,
pricing of payer contracts, management retention and development, management's
success in integrating acquired businesses and in developing and introducing new
products and lines of business, the ability of the Company, its customers and
suppliers to complete assessment, testing and remediation of Year 2000 issues,
the ability of the Company to improve its cash flow from operations, adverse
Internal Revenue Service rulings with respect to the employer status of
employee services businesses and the Company's ability to implement the
employee services business model.
13
<PAGE> 16
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended September 30, 1998, the Company did not
submit any matters to a vote of security holders. On November 5, 1998, the
Company held its Annual Meeting of Stockholders for the fiscal year ended June
30, 1998. The following matters were submitted for vote:
1. The following individuals were nominated and elected to serve as the
directors of the Company:
<TABLE>
<S> <C>
Peter O. Crisp For: 47,331,590
Withhold Authority: 694,217
John H. Foster For: 47,329,964
Withhold Authority: 695,843
Timothy E. Foster For: 47,334,944
Withhold Authority: 690,863
E. Martin Gibson For: 47,336,244
Withhold Authority: 689,563
Siri S. Marshall For: 47,336,244
Withhold Authority: 689,563
James W. McLane For: 47,331,490
Withhold Authority: 694,317
Stephen E. O'Neil For: 47,321,344
Withhold Authority: 704,463
George W. Siguler For: 37,448,500
Withhold Authority: 10,577,307
Daniel C. Tosteson, M.D. For: 47,331,190
Withhold Authority: 674,617
</TABLE>
2. The holders of 43,288,765 shares voted for, the holders of 4,575,219
shares voted against and the holders of 161,823 shares abstained with
respect to the approval of the Company's 1998 Stock Option Plan.
3. The holders of 43,037,251 shares voted for, the holders of 4,819,204
shares voted against and the holders of 169,352 shares abstained with
respect to the approval of the grant to James W. McLane, President and
Chief Operating Officer of the Company, of certain options to purchase
shares of the common stock, $.01 par value of the Company.
4. The holders of 47,789,900 shares voted in favor of, the holders of
166,628 shares voted against, and the holders of 69,278 shares
abstained with respect to the ratification of the selection of
PricewaterhouseCoopers LLP, independent certified public accountants,
to serve as independent accountants for the Company.
14
<PAGE> 17
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) Exhibit
Number Exhibit Description Page Number
------ ------------------- -----------
<S> <C> <C>
10 (a) Amended and Restated Employment Agreement dated as of July 1,
1998 between the Company and John H. Foster.
10 (b) Amendment dated as of September 1, 1998 to the Amended and
Restated Employment Agreement dated as of July 1, 1998 between
the Company and John H. Foster.
10 (c) Amendment dated as of September 1, 1998 to the Employment
Agreement dated as of July 1, 1996, as amended, between the
Company and Timothy E. Foster.
10 (d) Amendment dated as of July 1, 1998 to the Employment
Agreement dated as of April 14, 1997, as amended, between the
Company and James W. McLane.
10 (e) Amendment dated as of September 1, 1998 to the Employment
Agreement dated as of April 14, 1997, as amended, between the
Company and James W. McLane.
10 (f) First Amendment dated as of October 8, 1998 to the Employment
Agreement dated as of March 18, 1998 between the Company
and Ronald G. Hiscock.
10 (g) Amendment dated as of October 14, 1998 to the Employment
Agreement dated as of June 13, 1997 between the Company
and Robert E. Healy.
10 (h) Amendment dated as of October 1, 1998 to the Employment
Agreement dated as of October 9, 1996 between the Company
and Barry E. Smith.
27 Financial Data Schedule
</TABLE>
15
<PAGE> 18
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)
NOVEMBER 13, 1998 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
16
<PAGE> 1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the "Agreement") made as
of the first day of July, 1998 by and between NovaCare, Inc., a Delaware
corporation (the "Company"), and John H. Foster (the "Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Employment Agreement,
dated as of July 1, 1994, as amended on February 2, 1995 (the "Employment
Agreement"); and
WHEREAS, Executive has heretofore relinquished his position as Chief
Executive Officer of the Company, but continues to serve the Company as the
Chairman of its Board of Directors;
WHEREAS, the parties now wish to amend and restate the Employment
Agreement, effective as of July 1, 1998, to modify the Executive's annual salary
and the manner in which Executive's annual bonus shall be determined for the
fiscal years ending June 30, 1999 and thereafter;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereby amend and restate the Employment
Agreement as follows:
1. EMPLOYMENT, TERM, AUTOMATIC EXTENSION.
1.1 Employment. The Company agrees to employ the Executive,
and the Executive agrees to serve in the employ of the Company, for the term set
forth in Section 1.2, in the positions and with the responsibilities, duties and
authority set forth in Section 2 and on the other terms and conditions set forth
in this Agreement.
1.2 Term. The term of the Executive's employment under this
Agreement shall commence as of July 1, 1994 and shall terminate on June 30,
2000, unless extended or sooner terminated in accordance with this Agreement.
1.3 Automatic Extension. As of June 30, 1999, and June 30 on
each subsequent year (each, an "Automatic Renewal Date"), unless either party
shall have given a notice of non-extension prior to such Automatic Renewal Date,
the term of this Agreement shall be extended automatically for a period of one
year to the anniversary of the expiration date of the then-current term of this
Agreement. Once a notice of non-extension shall have been given by either party,
there shall be no further automatic extension of this Agreement.
<PAGE> 2
2. POSITION, DUTIES.
The Executive shall serve in the position of Chairman of the Board
of Directors 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 Board of
Directors of the Company. The Executive shall report directly to the Board of
Directors of the Company. The Executive shall devote such time and attention to
the performance of his duties and responsibilities hereunder as shall be
necessary for the proper discharge thereof.
3. SALARY, INCENTIVE BONUS, STOCK OPTIONS.
3.1 Salary. During the term of this Agreement, in
consideration of the performance by the Executive of the services set forth in
Section 2 and his observance of the other covenants set forth herein, the
Company shall pay to the Executive, and the Executive shall accept, a base
salary at the rate of $300,000 per annum, payable in accordance with the
standard payroll practices of the Company. The Executive shall be entitled to
such increases in base salary during the term hereof as shall be determined by
the Compensation Committee of the Board of Directors of the Company in its sole
discretion, taking account of the performance of the Company and the Executive,
the size of the Company from time to time, and other factors generally
considered relevant to the salaries of chief executive officers of enterprises
comparable to the Company. In no event shall the base salary of the Executive be
decreased during the term of this Agreement.
3.2 Incentive Bonus
(a) In addition to the base salary provided for in
Section 3.1, the Executive shall be eligible for an incentive bonus target of
100% of base salary with respect to each fiscal year of the Company ending
during the term of this Agreement, payable in accordance with the terms of the
Company's Executive Incentive Compensation Plan based on attainment of stated
objectives, commencing with the fiscal year ending June 30, 1999.
The parties agree that, with respect to the fiscal
year ending June 30, 1998, Executive's incentive bonus shall be determined based
on the terms and conditions of the Employment Agreement, without regard to the
amendments contained in this Agreement.
(b) In the event of the termination of employment of the
Executive pursuant to Section 6.1 (Death), 6.2 (Disability), Section 6.4
(Without Cause), 6.5 (Voluntary Termination), 6.6 (Constructive Termination) or
6.7 (Change of Control) of this Agreement, the Executive (or his estate or other
legal representative) shall be entitled to a bonus for the fiscal year in which
such termination takes place in an amount equal to the product of (i) the
"Termination Bonus" (as defined herein) 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. As used herein,
the term "Termination Bonus" shall mean an amount equal to the greater of (i)
the amount determined pursuant to Section 3.2 (a), or (ii) $580,000. In the
event of the termination of employment of the Executive pursuant to Section 6.3
(Due Cause) of this Agreement, the Executive shall not be entitled to a bonus
for the fiscal
<PAGE> 3
year of the Company in which such termination takes place. The Executive shall
not be entitled to a bonus for any fiscal year of the Company subsequent to the
fiscal year in which the termination of his employment pursuant to Section 6.1
(Death), 6.2 (Disability), 6.3 (Due Cause) or 6.5 (Voluntary Termination) takes
place.
3.3 Stock Options. On November 3, 1993 (the "Grant Date"), the
Company granted to the Executive options (the "Options") to purchase 2,000,000
shares of the Company's common stock, par value $.01 per share ("Common Stock"),
at an exercise price per share equal to $19.50, which is 150% of the market
value of the Common Stock on the Grant Date. The Options:
(i) have a term of ten (10) years from the Grant Date;
(ii) become exercisable as to 20% of the shares covered
thereby on the first anniversary of the Grant Date and as to an additional 20%
of such shares on each of the next four anniversaries of the Grant Date;
(iii) except as provided in clause (iv) of this Section
3.3, remain exercisable for a period of twelve (12) months commencing on the
date of termination of employment of the Executive, but only as to those shares
as to which the Options were exercisable at the date of termination;
(iv) become exercisable in full upon a Change in Control
of the Company (as defined in Section 6.7), whether or not the employment of the
Executive shall be terminated, and upon the termination of the employment of the
Executive pursuant to Section 6.1 (Death), Section 6.2 (Disability) or Section
6.4 (Without Due Cause) and, in any such case, shall remain exercisable for the
balance of the ten year term; and
(v) are transferable at any time by the Executive to
members of his immediate family or to trusts for the benefit of the Executive or
members of his immediate family.
The Options are or shall be evidenced by a Stock Option Agreement or other
appropriate documentation embodying the foregoing terms and other standard terms
and conditions not inconsistent with the foregoing terms. No additional stock
options are to be issued for the next five fiscal years.
4. EXPENSE REIMBURSEMENT.
During the term of this Agreement, the Company shall reimburse the
Executive for all reasonable and necessary out-of-pocket expenses incurred by
him in connection with the performance of his duties hereunder, upon the
presentation of proper accounts therefor in accordance with the Company's
policies.
<PAGE> 4
5. BENEFITS, PERQUISITES.
5.1 Generally. During the term of this Agreement, the
Executive will be eligible to participate in all employee benefit plans and
programs offered by the Company from time to time to its employees of comparable
seniority, subject to the provisions of such plans and programs as in effect
from time to time.
5.2 Perquisites.
(a) [intentionally omitted]
(b) [intentionally omitted]
(c) During the term of this Agreement, the Company shall
provide the Executive with first priority use of a private corporate jet both
(i) for travel in connection with the performance of his duties hereunder and
(ii) for personal travel. The obligation of the Company to provide the Executive
with the use of a private corporate jet for personal travel shall be on the
terms heretofore approved by the Compensation Committee of the Board of
Directors and shall cease during any period that the Company does not own or
lease a private corporate jet.
(d) The Company will provide the Executive and/or
members of his family with life insurance through a split dollar arrangement on
terms to be agreed upon by the Company and the Executive. The Company's premium
costs shall be applied against the Executive's incentive bonuses hereunder.
6. TERMINATION OF EMPLOYMENT.
6.1 Death. In the event of the death of the Executive, the
Company shall (i) pay to the estate or other legal representative of the
Executive (a) the base salary provided for in Section 3.1 (at the annual rate
then in effect) accrued to the date of the Executive's death and not theretofore
paid to the Executive and (b) any incentive bonus which shall be or become
payable pursuant to Section 3.2. Rights and benefits of the estate or other
legal representative or transferee of the Executive (a) with respect to the
Options and other benefit plans 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 nor other legal representative of the Executive nor the Company shall
have any further rights or obligations under this Agreement.
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall be
unable to perform his normal duties hereunder for a period of six (6)
consecutive months, then, at any time following the conclusion of such six (6)
month period, the employment of the Executive hereunder may be terminated by the
Company or the Executive, upon thirty (30) days' notice to the other. In the
event of such termination, the Company shall (a) pay to the Executive the base
salary provided for in Section 3.1 (at the annual rate then in effect) accrued
to the date of such termination and
<PAGE> 5
not theretofore 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 other benefit plans and programs of the
Company shall be determined in accordance with the terms and provisions of such
plans and programs. Neither the Executive nor the Company shall have any further
rights or obligations under this Agreement, except as provided in Sections 7, 8,
9 and 15.
6.3 Due Cause. The employment of the Executive hereunder may
be terminated by the Company at any time for Due Cause (as hereinafter defined).
In the event of such termination, the Company shall pay to the Executive the
base 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 bonus which shall be
or become payable to the Executive under Section 3.2 with respect to any fiscal
year of the Company ended prior to the date of such termination. Rights and
benefits of the Executive or his transferee (a) with respect to the Options
shall be determined in accordance with Section 3.3 and (b) under the benefit
plans and programs of the Company shall be determined in accordance with the
provisions of such plans and programs. For purposes hereof, "Due Cause" shall
mean (i) willful, gross neglect or willful, gross misconduct in the Executive's
discharge of his duties and responsibilities under this Agreement, or (ii) the
Executive's conviction of a felony; provided, however, that the Executive shall
be given written notice by a majority of the Board of Directors of the Company
that it intends to terminate the Executive's employment for Due Cause, which
written notice shall specify the act or acts upon which the majority of the
Board of Directors of the Company intends so to terminate the Executive's
employment, and the Executive shall then be given the opportunity, within
fifteen (15) days of his receipt of such notice, to have a meeting with the
Board of Directors of the Company to discuss such act or acts. If the basis of
such written notice is other than an act or acts described in clause (ii), the
Executive shall be given seven (7) days after such meeting within which to cease
or correct the performance (or nonperformance) giving rise to such written
notice and, upon failure of the Executive within such seven (7) days to cease or
correct such performance (or nonperformance), the Executive's employment by the
Company shall automatically be terminated hereunder for Due Cause. Neither the
Executive nor the Company shall have any further rights or obligations under
this Agreement, except as provided in Sections 7, 8, 9 and 15.
6.4 Termination by the Company Without Cause. The Company may
terminate the Executive's employment at any time for whatever reason it deems
appropriate or without reason; provided, however, that in the event that such
termination is not pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due
Cause) or 6.5 (Voluntary Termination):
(i) 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 of two (2) years commencing on the date of
termination, at a rate equal to the greater of
<PAGE> 6
$580,000 per annum or the base salary provided for in Section 3.1 (at the annual
rate then in effect);
(C) any incentive bonus which shall be or become
payable to the Executive pursuant to Section 3.2 (b);
(D) on the date of termination, an amount equal to
the product derived by multiplying one and one-half (1.5) times the Final Bonus.
As used herein, the term "Final Bonus" shall mean an amount equal to the greater
of (i) $580,000 or (ii) the annual base salary provided for in Section 3.1 (at
the annual rate then in effect).
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. The
Company shall continue to pay any premiums payable on any split dollar life
insurance policies for a period of two (2) years commencing on the date of
termination. Rights and benefits of the Executive or his transferee (a) with
respect to the Options shall be determined in accordance with Section 3.3 and
(b) under the 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 bonus which
shall be or become payable pursuant to Section 3.2. Rights and benefits of the
Executive or his transferee (a) with respect to the Options shall be determined
in accordance with Section 3.3 and (b) under the benefit plans and programs of
the Company shall be determined in accordance with the provisions of such plans
and programs. Neither the Executive nor the Company shall have any further
rights or obligations under this Agreement, except as provided in Sections 7, 8,
9 and 15.
6.6 Constructive Termination. Anything herein to the
contrary notwithstanding, if the Company:
(A) demotes the Executive to a lesser position than
provided in Section 2;
(B) causes a material change in the nature or scope
of the authorities, powers, functions, duties, or responsibilities attached
to the Executive's position as described in Section 2;
<PAGE> 7
(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 and as Chairman of the Board of
Directors;
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 (other than for Due
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 under clause (i) of Section 6.4 shall be
paid to the Executive in a lump sum on the date of termination. For purposes of
this Agreement, a Change in Control of the Company shall be deemed to have
occurred if:
(A) a "person" (meaning an individual, a partnership, or
other group or association as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, other than the Executive or a group including
the Executive), either (i) acquires twenty percent (20%) or more of the combined
voting power of the outstanding securities of the Company having a right to vote
in elections of directors and such acquisition shall not have been approved
within sixty (60) days following such acquisition by a majority of the
Continuing Directors (as hereinafter defined) then in office or (ii) acquires
fifty percent (50%) or more of the combined voting power of the outstanding
securities of the Company having a right to vote in elections of directors; or
(B) Continuing Directors shall for any reason cease
to constitute a majority of the Board of Directors of the Company; or
(C) all or substantially all of the business and/or
assets of the Company is disposed of by the Company to a party or parties other
than a subsidiary or other affiliate of the Company, in which the Company owns
less than a majority of the equity, 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
<PAGE> 8
Directors on the date hereof or who subsequently became a Director and whose
election, or nomination for election, was approved by a vote of at least
two-thirds of the Continuing Directors then in office.
6.8 Acceleration of Payments. In the event that the Company
shall fail to pay to the Executive any amount payable pursuant to this Section 6
at the time such payment is due, all amounts to be paid to the Executive (or his
estate or legal representative) pursuant to this Section 6, Section 3 and any
other provision of this Agreement shall become immediately due and payable
without any further action by the Executive (or his estate or legal
representative).
7. CONFIDENTIAL INFORMATION.
7.1 Nondisclosure. The Executive shall, during the term of
this Agreement and at all times thereafter, treat as confidential and, except as
required in the performance of his duties and responsibilities under this
Agreement, not disclose, publish or otherwise make available to the public or to
any individual, firm or corporation any confidential information (as hereinafter
defined).
7.2 Confidential Information Defined. For the purposes hereof,
the term "confidential information" shall mean all information acquired by the
Executive in the course of the Executive's employment with the Company in any
way concerning the products, projects, activities, business or affairs of the
Company or the Company's customers, including, without limitation, all
information concerning trade secrets and the products or projects of the Company
and/or any improvements therein, all sales and financial information concerning
the Company, all customer and supplier lists, all information concerning
projects in research and development or marketing plans for any such products or
projects, and all information in any way concerning the products, projects,
activities, business or affairs of customers of the Company which is furnished
to the Executive by the Company or any of its agents or customers, as such;
provided, however, that the term "confidential information" shall not include
information which (a) becomes generally available to the public other than as a
result of a disclosure by the Executive, (b) was available to the Executive on a
non-confidential basis prior to his employment with the Company or (c) becomes
available to the Executive on a non-confidential basis from a source other than
the Company or any of its agents or customers provided that such source is not
bound by a confidentiality agreement with the Company or any of such agents or
customers.
8. INTERFERENCE WITH THE COMPANY.
8.1 Restrictions. The Executive acknowledges that the services
to be rendered by him to the Company are of a special and unique character. In
order to induce the Company to enter into this Agreement, and in consideration
of his employment hereunder, the Executive agrees, for the benefit of the
Company, that he will not, during the period of his employment with the Company
and thereafter, for the Applicable Period (as hereinafter defined) commencing on
the date of termination of his employment with the Company:
<PAGE> 9
(a) engage, directly or indirectly, whether as
principal, consultant, employee, partner, stockholder, limited partner or other
investor (other than an investment of (i) not more than five percent (5%) of the
stock or equity of any corporation the capital stock of which is publicly traded
or (ii) not more than five percent (5%) of the ownership interest of any
partnership or other entity) or otherwise, within the United States of America,
with any firm or person in any activity or business venture which is in
competition with any line or lines of business being conducted by the Company or
any subsidiary of the Company 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, provided that,
the Executive shall not be prohibited from continuing to conduct the existing
lines of business of Apogee, Inc. and Hearing Health Services Inc. (the
"Competition Restriction"); or
(b) solicit or entice or endeavor to solicit or entice
away from the Company any person who was an "officer" (as such term is used in
Rule 16a-1 under Section 16 of the Securities Exchange Act of 1934) of the
Company, either for his own account or for any individual, firm or corporation,
whether or not such person would commit any breach of his contract of employment
by reason of leaving the service of the Company (the "Solicitation
Restriction"); or
(c) employ, directly or indirectly, any person who was
an officer (as defined above) of the Company 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) twelve (12) months in the case of a termination of
employment pursuant to Section 6.3 (Due Cause);
(b) twenty-four (24) months as to the Competition and
Solicitation Restrictions and twelve (12) months as to the Hiring Restriction in
the case of a termination of employment pursuant to Section 6.4 (Without Due
Cause) or Section 6.6 (Constructive Termination);
(c) twenty-four (24) months as to the Competition
Restriction and twelve (12) months as to the Solicitation and Hiring
Restrictions in the case of a termination pursuant to Section 6.7 (Change in
Control); and
<PAGE> 10
(d) twenty-four (24) months as to the Competition and
Solicitation Restrictions and twelve (12) months as to the Hiring Restriction in
the case of a termination pursuant to Section 6.2 (Disability) or Section 6.5
(Voluntary Termination), but only if the Company gives notice to the Executive
within thirty (30) days of the date of termination of employment of its
intention to enforce such restrictions against the Executive, and subject to the
Company's continued payment to the Executive during such twenty-four (24) month
period of the base salary provided for in Section 3.1 (at the annual rate in
effect at the date of termination).
9. EQUITABLE RELIEF.
In the event of a breach or threatened breach by the Executive of
any of the provisions of Sections 7 or 8 of this Agreement, the Executive hereby
consents and agrees that the Company shall be entitled to an injunction or
similar equitable relief from any court of competent jurisdiction restraining
the Executive from committing or continuing any such breach or threatened breach
or granting specific performance of any act required to be performed by the
Executive under any of such provisions, without the necessity of showing any
actual damage or that money damages would not afford an adequate remedy and
without the necessity of posting any bond or other security. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
at law or in equity which it may have.
10. SUCCESSORS AND ASSIGNS.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign
this Agreement or any part thereof without the prior written consent of a
majority of the Board of Directors of the Company; provided, however, that
nothing herein shall preclude 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.
<PAGE> 11
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 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.
<PAGE> 12
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 Operating Officer
If to the Executive:
John H. Foster
c/o Foster Management Company
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
<PAGE> 13
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.
<PAGE> 14
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
as of the date first above written.
NOVACARE, INC.
By: /s/ Timothy E. Foster
--------------------------------
Timothy E. Foster
Chief Executive Officer
/s/ John H. Foster
--------------------------------
John H. Foster
<PAGE> 1
AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Amended and Restated Employment Agreement
(the "Amendment") made as of the 1st day of September, 1998, by and between
NovaCare, Inc., a Delaware corporation (the "Company"), and John H. Foster (the
"Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Amended and
Restated Employment Agreement dated as of July 1, 1998 (the "Employment
Agreement"); and
WHEREAS, the Board of Directors of the Company approved, at its meeting
held on August 5, 1998, a further amendment to the Employment Agreement to
modify the definition of Change in Control, as such term relates to the
immediate vesting of Company stock options held by the Executive:
WHEREAS, the parties now wish to amend the Employment Agreement to
provide that all stock options held by Executive immediately vest and become
fully exercisable upon a Change in Control of the Company, as defined in this
amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
1. For purposes of Section 3.3(iv) of the Agreement, the term "Change
in Control of the Company" as defined in Section 6.7 of the Agreement, shall be
modified to include, in addition to the items set forth in clauses (A), (B) and
(C) of Section 6.7, the following clause "(D)":
"(D) a spin-off, split-off, stock dividend or other similar
transaction involving the Company's outpatient services business, the
Company's orthotics and prosthetics business or the Company's long-term
care services business."
In addition, the provisions of Section 3.3(iv) of the Agreement (as
amended in this Amendment) shall be applicable to any and all options to acquire
the Company's common stock held be Executive.
2. In all other respects the Employment Agreement shall remain in full
force and effect without change.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
NOVACARE, INC.
By: /s/ Timothy E. Foster
------------------------------------
Timothy E. Foster
Chief Executive Officer
/s/ John H. Foster
------------------------------------
John H. Foster
<PAGE> 1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") made as of the
1st day of September, 1998, by and between NovaCare, Inc., a Delaware
corporation (the "Company"), and Timothy E. Foster (the "Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Employment
Agreement dated as of July 1, 1996, as amended by an amendment dated May 15,
1998 (the "Employment Agreement"); and
WHEREAS, the Board of Directors of the Company has approved, at its
meeting held on August 5, 1998, a further amendment to the Employment Agreement
to modify the definition of Change in Control, as such term relates to the
immediate vesting of Company stock options held by the Executive:
WHEREAS, the parties now wish to amend the Employment Agreement to
provide that all stock options held by Executive immediately vest and become
fully exercisable upon a Change in Control of the Company, as defined in this
amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
1. For purposes of Section 3.3(a)(iv) of the Agreement, the term
"Change in Control of the Company" as defined in Section 6.7 of the Agreement,
shall be modified to include, in addition to the items set forth in clauses (A),
(B) and (C) of Section 6.7, the following clause "(D)":
"(D) a spin-off, split-off, stock dividend or other similar
transaction involving the Company's outpatient services business, the
Company's orthotics and prosthetics business or the Company's long-term
care services business."
2. In all other respects the Employment Agreement shall remain in full
force and effect without change.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
NOVACARE, INC.
By: /s/ James W. McLane
-------------------------------------
James W. McLane
President and Chief Operating Officer
/s/ Timothy E. Foster
-------------------------------------
Timothy E. Foster
<PAGE> 1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Amendment") made
this 1st day of July, 1998, by and between NovaCare, Inc., a Delaware
corporation (the "Company"), and James W. McLane (the "Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Employment
Agreement dated as of April 14, 1997, amended as of May 12, 1998 (the
"Employment Agreement"); and
WHEREAS, the parties now wish to amend the Employment Agreement to
modify the benefits to which Executive is entitled in the event of a termination
of Executive's employment "without cause";
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
1. Section 6.4(a)(D) is hereby deleted and replaced with the following
new subsection (a)(D):
"(D) on the date of termination, an amount equal to the
product derived by multiplying one and one-half (1.5) times 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)."
2. Section 6.4 is hereby further amended by adding new subsections (d)
and (e) as follows:
"(d) During the Severance Pay Period, the Company shall
continue to provide life, disability, Supplemental Benefits Plan
(excluding Company match payable during the Severance Pay Period),
medical, and dental coverage for the Executive at the levels which were
being provided to the Executive immediately prior to the termination of
his employment (or such other benefits as shall be provided to senior
executives of the Company in lieu of such benefits from time to time
during such twelve (12) month period) on the same basis, including
Company payment of premiums and Company contributions, as such benefits
are provided to other senior executives of the Company.
<PAGE> 2
(e) Notwithstanding the foregoing, if the termination of
Executive's employment under this Section 6.4 occurs within two years
after a Change in Control (as defined in Section 6.7), the amounts
referred to in subsection 6.4 (a) shall be paid to Executive in a lump
sum on the date of termination; and 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."
3. Section 6.7 is hereby amended to provide that, in the event of a
termination of employment following a Change of Control as addressed in that
Section, the amount referred to in paragraph (D) of Section 6.4 shall be paid on
the date of termination (and references in Section 6.7 to the "Payment Date"
shall be disregarded).
4. In all other respects the Employment Agreement shall remain in full
force and effect without change.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
NOVACARE, INC.
By: /s/ Timothy E. Foster
------------------------------------
Timothy E. Foster
Chief Executive Officer
/s/ James W. McLane
------------------------------------
James W. McLane
<PAGE> 1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") made as of the
1st day of September, 1998, by and between NovaCare, Inc., a Delaware
corporation (the "Company"), and James W. McLane (the "Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Employment
Agreement dated as of April 14, 1997, as amended by amendments dated May 12,
1998 and July 1, 1998 (the "Employment Agreement"); and
WHEREAS, the Board of Directors of the Company has approved, at its
meeting held on August 5, 1998, a further amendment to the Employment Agreement
to modify the definition of Change in Control, as such term relates to the
immediate vesting of Company stock options held by the Executive:
WHEREAS, the parties now wish to amend the Employment Agreement to
provide that all stock options held by Executive immediately vest and become
fully exercisable upon a Change in Control of the Company, as defined in this
amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
1. For purposes of Section 3.3(iv) of the Agreement, the term "Change
in Control of the Company" as defined in Section 6.7 of the Agreement, shall be
modified to include, in addition to the items set forth in clauses (A), (B) and
(C) of Section 6.7, the following clause "(D)":
"(D) a spin-off, split-off, stock dividend or other similar
transaction involving the Company's outpatient services business, the
Company's orthotics and prosthetics business or the Company's long-term
care services business."
2. In all other respects the Employment Agreement shall remain in full
force and effect without change.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
NOVACARE, INC.
By: /s/ Timothy E. Foster
------------------------------------
Timothy E. Foster
Chief Executive Officer
/s/ James W. McLane
------------------------------------
James W. McLane
<PAGE> 1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "Amendment") made this
8th day of October, 1998, by and between NovaCare, Inc., a Delaware corporation
(the "Company"), and Ronald G. Hiscock (the "Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Employment Agreement
dated as of March 18, 1998 (the "Employment Agreement"); and
WHEREAS, the parties now wish to amend the Employment Agreement to modify
the benefits to which Executive is entitled in the event of a termination of
Executive's employment;
WHEREAS, the parties now wish to amend the Employment Agreement to
modify the definition of Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereby agree as follows:
1. Section 3.2(b) is hereby deleted and replaced with the following new
Section 3.2(b):
3.2 Bonus.
(b) In the event of the termination of employment of the
Executive pursuant to Section 6.1 (Death), Section 6.2 (Disability), Section 6.4
(Without Cause), Section 6.5 (Voluntary Termination), or Section 7 (Change of
Control) of this Agreement, and provided that all of the terms and conditions of
the Plan are satisfied including, but not limited to, the attainment of stated
objectives, the Executive (or his estate or other legal representative) shall be
entitled to a pro-rated 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 the
fiscal year of the Company in which such termination takes place. The Executive
shall not be entitled to a bonus for any fiscal year of the Company subsequent
to the fiscal year in which the termination of his employment takes place.
2. Section 3.3 (b) is hereby deleted and replaced with the following new
Section 3.3(b):
<PAGE> 2
3.3 Stock Options.
(b) For purposes of this Agreement, a Change in Control
shall be deemed to exist if:
(i) 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), either (A) 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
(B) 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
(ii) Continuing Directors shall for any reason cease to
constitute a majority of the Board of Directors of the Company; or
(iii) all or substantially all of the business and/or
assets of the Company are disposed of by the Company to a party or parties other
than a subsidiary or other affiliate of the Company, pursuant to a partial or
complete liquidation of the Company, sale of assets (including stock of a
subsidiary of the Company) or otherwise, or if the Company's outpatient services
business, the Company's orthotics and prosthetics business, and/or the Company's
long-term care services business, together or separately, are either sold to a
third party, spun-off to the Company's stockholders or otherwise transferred to
a third party (such third party being less than 50% owned by the Company).
3. Section 6.2 is hereby deleted and replaced with the following new
Section 6.2:
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall be
entitled to payment of benefits under the Company's Supplemental Benefits Plan
disability provision, the employment of the Executive hereunder may be
terminated by the Company or the Executive. In the event of such termination,
the Company shall pay to the Executive the difference between disability income
and the base salary then in effect for twenty-four (24) months following
termination. Rights and benefits of the Executive (a) with respect to stock
options shall be determined in accordance with the applicable option grant and
(b) under the other benefit plans and programs of the Company shall be
determined in accordance with the terms and provisions of such plans and
programs.
4. Section 6.4 is hereby deleted and replaced with the following new
Section 6.4:
6.4 Termination by the Company Without Cause. The Company may
terminate the Executive's employment at any time for whatever reason it deems
appropriate or
<PAGE> 3
without reason; provided, however, that in the event that such termination is
not pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due Cause) or 6.5
(Voluntary Termination), the Company shall pay to the Executive severance pay
representing twenty-four (24) months of salary, at a rate equal to the base
salary provided for in Section 3.1 (at the annual rate then in effect), payable,
at the election of the Executive, either in a lump sum within ninety (90) days
of termination, or in the same periodic installments as his base salary is paid
at the time of termination. 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 employee, a consultant, or otherwise)
against such payments. During the twenty-four (24) month severance pay period
referred to in this Section 6.4, the Company shall continue to provide life,
disability, medical, and dental coverage for the Executive at the levels which
were being provided to the Executive immediately prior to the termination of his
employment (or such other benefits as shall be provided to senior executives of
the Company in lieu of such benefits from time to time during such twenty-four
(24) month period) on the same basis, including Company payment of premiums and
Company contributions, as such benefits are provided to other senior executives
of the Company. In addition, the Executive will be provided with Outplacement
Benefits commensurate with those provided to other executives of the Company
through a vendor selected by the Company. Rights and benefits of the Executive
or his transferee (a) with respect to stock options shall be determined in
accordance with the applicable option grant 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.
4. Paragraph 7.2 is hereby deleted and replaced with the following new
Section 7.2:
7.2 Termination in connection with Relocation. If, after a
Change in Control, the Executive's principal site of employment is relocated to
a site 50 miles or more from the Executive's principal site of employment as of
the date immediately prior to the Change of Control, the Executive may resign
from employment with the Company by delivering a Notice of Termination to the
Company and, in the event that said Notice of Termination is delivered to the
Company during the period beginning with the first day of the nineteenth (19th)
month and ending on the last day of the twenty-fourth (24th) month following a
Change in Control, then the Executive shall be entitled to the severance
provisions of Section 6.4; provided, however, that under no circumstances (by
reason of relocation) shall the Executive be entitled to the severance
provisions of Section 6.4 if the Notice of Termination is delivered within the
first eighteen (18) months immediately following a Change in Control.
<PAGE> 4
5. In all other respects the Employment Agreement shall remain in full
force and effect without change.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date written above.
NOVACARE, INC.
By: /s/ James W. McLane 10/8/98
-------------------------------------
James W. McLane
President and Chief Operating Officer
/s/ Ronald G. Hiscock
-------------------------------------
Ronald G. Hiscock
<PAGE> 1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") made as of the
14th day of October, 1998, by and between NovaCare, Inc., a Delaware corporation
(the "Company"), and Robert E. Healy, Jr. (the "Executive"),
W I T N E S S E T H:
WHEREAS, the parties have heretofore entered into an Employment
Agreement dated as of June 13, 1997 (the "Employment Agreement"); and
WHEREAS, the parties wish to amend the Employment Agreement to modify
the benefits to which the Executive shall be entitled in the event of a
termination of Executive's employment "Without Cause"; and
WHEREAS, the parties also wish to add a Constructive Termination
provision to the Employment Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
1. Paragraph 6.4 (i) of the Employment Agreement is hereby deleted and
replaced with the following new paragraph 6.4(i):
(i) The Company shall continue to pay to the Executive (or his
estate or other legal representative in the case of the death of the Executive
subsequent to such termination), in the same periodic installments as his base
salary is paid at the time of termination, the base salary provided for in
Section 3.1 (at the annual rate then in effect), for a period of two (2) years
following such termination (the applicable period hereinafter being referred to
as the "Severance Period"). In addition, the Company shall pay to Executive, on
the date of termination, an amount equal to the product derived by multiplying
one and one-half (1.5) times the "Final Bonus". As used herein, (a) 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 (b)
if the date of termination of 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 (X) the bonus earned by the Executive for the
last completed fiscal year of the Company preceding the date of termination of
his employment or (Y) the bonus for the fiscal year in which the termination of
employment occurs, as determined pursuant to Section 3.2.
<PAGE> 2
2. A new Paragraph 6.7 is added to the Employment Agreement as follows:
6.7. 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; or
(C) decreases the Executive's base salary, or changes the
amount of the bonus for which the Executive is eligible;
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.
3. In all other respects the Employment Agreement shall remain in full
force and effect without change.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
NOVACARE, INC.
By: /s/ Timothy E. Foster
------------------------------------
Timothy E. Foster
Chief Executive Officer
/s/ Robert E. Healy, Jr.
------------------------------------
Robert E. Healy, Jr.
<PAGE> 1
TIMOTHY E. FOSTER
Chief Executive Officer
October 1, 1998
Mr. Barry Smith
1016 W. Ninth Ave.
King of Prussia, PA 19406
Dear Barry:
I am pleased to inform you of certain additional commitments and
agreements NovaCare, Inc. (the "Company") is making to you in connection with
your continued employment with the Company.
The Company agrees that, in the event you are terminated by the Company
(or its successor) without Due Cause (as defined herein) sixty (60) days in
advance of the public announcement of, or at any time during the one (1) year
period following, a Change in Control of the Company (as defined herein), you
will be paid, in a lump sum within thirty (30) days after the date of such
termination, severance pay representing a period of twelve (12) months of your
then existing annual base salary. Further, if you are terminated without Due
Cause during Fiscal Year 1999 sixty (60) days in advance of the public
announcement of, or following, a Change of Control of the Company, the Company
will pay to you in a lump sum within thirty (30) days of such termination, a
Fiscal Year 1999 bonus in an amount not less than 100% of the Fiscal Year 1998
bonus that was paid to you (annualized in the event you were not employed for
all of Fiscal Year 1998), in addition to the severance amount set forth in the
preceding sentence. The foregoing commitments shall supersede any other
agreement between you and the Company in connection with the payment of
severance in the event of a Change of Control of the Company including, without
limitation, the Company's Severance Policy, and shall constitute the entire
agreement between the parties with respect to the subject matters addressed
herein; provided, however, that nothing herein shall be interpreted to alter the
Company's standard policies and procedures with respect to unused paid time off.
Of course, all other terms and conditions of any severance agreement between you
and the Company shall remain in full force and effect to the extent of any
severance rights you may have in situations not involving a Change of Control of
the Company.
For purposes of this Agreement, Due Cause shall constitute (a) your
continuing failure to perform your duties and responsibilities to the Company,
if not remedied within sixty (60) days after a written demand for performance is
delivered
<PAGE> 2
to you; (b) any material act of dishonesty to the Company; (c) conviction of (i)
a felony or (ii) any crime or offense involving moral turpitude.
If, within the twelve (12) month period following a Change in Control,
there occurs:
(a) a 10% or more reduction in your annual base salary, or a 10% or more
reduction in the amount of the bonus for which you are eligible as of the date
immediately prior to the Change in Control; or
(b) your principal site of employment is relocated fifty (50) miles or
more from your principal site of employment as of the date immediately prior to
the Change of Control;
then, at your option, exercisable by you within thirty (30) days after the
occurrence of any of the foregoing events, you may resign from employment with
the Company by delivering a notice in writing (the "Notice of Termination") to
the Company, and, in such event, you shall be entitled to the severance
provisions discussed above. As in the case of an termination without Due Cause
following a Change in Control of the Company, if a Notice of Termination as
hereinbefore described is delivered in Fiscal Year 1999, your severance shall
include a Fiscal Year 1999 bonus as described above.
For purposes of this Agreement, a Change in Control of the Company shall
be deemed to have occurred if:
(i) a "person" (meaning an individual, a partnership, or other
group or association as defined in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, other than the Executive or a group including the
Executive), either (x) 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 (y) 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
(ii) Continuing Directors shall for any reason cease to
constitute a majority of the Board of Directors of the Company; or
<PAGE> 3
(iii) all or substantially all of the business and/or assets
of the Company are disposed of by the Company to a party or parties other than a
subsidiary or other affiliate of the Company, pursuant to a partial or complete
liquidation of the Company, sale of assets (including stock of a subsidiary of
the Company) or otherwise, or if the Company's outpatient services business, the
Company's orthotics and prosthetics business, and/or the Company's long-term
care services business, together or separately, are either sold to a third
party, spun-off to the Company's stockholders or otherwise transferred to a
third party (such third party being less than 50% owned by the Company).
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.
Lastly, if you receive any severance payment pursuant to this Agreement,
then any options to purchase the Company's Common Stock which you now hold or
are hereinafter granted to you by the Company shall become immediately fully
vested and exercisable; provided, however that you must exercise those options
within three months after the termination of your employment with the Company.
I am pleased that the Company is able to extend to you the severance
benefits discussed above. Please sign, date and return an original copy of this
letter to Kathryn Kehoe, Senior Vice President, Human Resources.
Sincerely,
/s/ Timothy E. Foster
Acknowledged:
/s/ Barry Smith 10/4/98
- --------------------------------
Signature and Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS IN FORM
10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<CIK> 0000802843
<NAME> NOVACARE, INC.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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<CASH> 11,448
<SECURITIES> 0
<RECEIVABLES> 401,034
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<INVENTORY> 40,024
<CURRENT-ASSETS> 449,718
<PP&E> 189,935
<DEPRECIATION> (108,702)
<TOTAL-ASSETS> 1,402,255
<CURRENT-LIABILITIES> 199,472
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0
0
<COMMON> 679
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<TOTAL-LIABILITY-AND-EQUITY> 1,402,255
<SALES> 0
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<CGS> 0
<TOTAL-COSTS> 445,549<F1>
<OTHER-EXPENSES> 5,267<F2>
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<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>
