<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NovaCare, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
[NOVACARE LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held November 5, 1998
King of Prussia, Pennsylvania
October 2, 1998
To the Holders of Common Stock of
NovaCare, Inc.:
The Annual Meeting of the Stockholders of NovaCare, Inc. (the "Company")
will be held at the Crystal Tea Room (Wannamaker Building), 100 Penn Square
East, Ninth Floor, Philadelphia, Pennsylvania 19107, on Thursday, November 5,
1998 at 10:00 A.M., local time, to consider and act upon the following matters:
1. Election of directors for the ensuing year.
2. To consider and act upon a proposal to approve the NovaCare 1998
Stock Option Plan.
3. To consider and act upon a proposal to approve a grant of options
to purchase Common Stock to an executive officer.
4. Ratification of selection of independent accountants.
5. Such other business as may properly come before the meeting or any
adjournments thereof.
Only stockholders of record at the close of business on September 7, 1998
are entitled to notice of and to vote at the meeting. A list of the stockholders
entitled to vote at the meeting may be examined at the Company's executive
offices in King of Prussia, Pennsylvania during the ten-day period preceding the
meeting.
By order of the Board of Directors,
Richard S. Binstein,
Secretary
Stockholders are cordially invited to attend the meeting in person. Whether
or not you plan to attend, please mark, sign and date the enclosed proxy and
mail it promptly in the enclosed return envelope so that your vote can be
recorded. The envelope does not require any postage if mailed in the United
States.
<PAGE> 3
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors of NovaCare, Inc. (the
"Company") for use at the 1998 Annual Meeting of Stockholders (the "Meeting") to
be held on November 5, 1998, and at any adjournments thereof. If properly signed
and returned to the Company and not revoked, the proxy will be voted in
accordance with the instructions it contains. The persons named in the
accompanying proxy will vote the proxy for the Board of Directors' slate of
directors and as recommended by the Board of Directors unless contrary
instructions are given. This Proxy Statement and the enclosed proxy are first
being sent to stockholders on or about October 2, 1998. The Company's principal
executive offices are located at 1016 West Ninth Avenue, King of Prussia,
Pennsylvania 19406.
Any proxy may be revoked at any time before it is exercised. The casting of
a ballot at the Meeting by a stockholder who may theretofore have given a proxy
will not have the effect of revoking that proxy.
Only stockholders of record at the close of business on September 7, 1998
are entitled to vote at the Meeting or any adjournments thereof. As of September
7, 1998, the Company had 62,535,789 outstanding shares of common stock, $.01 par
value (the "Common Stock"), each holder of which is entitled to one vote per
share with respect to each matter to be voted on at the Meeting. The Company has
no class or series of stock outstanding other than the Common Stock.
Directors are elected by plurality vote. Approval of the proposals to
approve the NovaCare 1998 Stock Option Plan and to grant options to an executive
officer, and ratification of the selection of independent accountants for the
Company will require the affirmative vote of the holders of a majority of the
Common Stock entitled to vote on the proposals and present in person or
represented by proxy. With respect to such proposals, abstentions will be
included, but broker non-votes will not be included, in the calculation of the
number of holders who are present at the Meeting.
<PAGE> 4
I. ELECTION OF DIRECTORS
Nine directors will be elected at the Meeting. It is the intention of each
of the persons named in the accompanying proxy to vote the shares represented
thereby in favor of the nine nominees listed in the following table, unless
contrary instructions are given. All of such nominees are presently serving as
directors. In case any of the nominees is unable or declines to serve, such
persons reserve the right to vote the shares represented by such proxy for
another person duly nominated by the Board of Directors in his or her stead or,
if no other person is so nominated, to vote such shares only for the remaining
nominees. The Board of Directors has no reason to believe that any person named
will be unable or will decline to serve. The directors elected by the
stockholders will serve until the 1999 Annual Meeting of Stockholders and until
their respective successors are duly elected and shall have qualified. Certain
information concerning the nominees for election as directors is set forth
below. Such information was furnished by them to the Company.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION AUGUST 15, 1998(1) OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
PETER O. CRISP, age 66, has been a director of the Company
since October 1997. Mr. Crisp was an associate of
Rockefeller Family & Associates, a family investment group,
from 1960 to August 1997; He served as a General Partner in
Venrock Associates, a venture capital limited partnership,
and as Chairman of Venrock, Inc., a venture capital
investment firm. Currently, Mr. Crisp is a Vice Chairman of
Rockefeller Financial Services, a position he has held since
October 1997. He is also a director of the following
corporations: American Superconductor Corp.; Evans &
Sutherland Computer Corp.; Thermedics, Inc.; Thermo Electron
Corporation; Thermo Power Corporation; ThermoTrex Corp.; and
U.S. Trust Corporation. 41,808 *
JOHN H. FOSTER, age 56, has been Chairman of the Board of
the Company since December 1984. Between December 1984 and
May 1997, he was also Chief Executive Officer of the
Company. Mr. Foster is a director of Corning Incorporated,
an international corporation with business interests in
specialty materials and communications. Since March 1991,
Mr. Foster also has been Chairman of the Board and Chief
Executive Officer of Integra, Inc., a national mental health
services company incorporated in 1991. He is also a director
of NovaCare Employee Services, Inc., a professional employer
organization approximately 71% owned by the Company
("NCES"). Mr. Foster is founder and Chairman of Foster
Management Company, an investment advisor, and general
partner of various venture capital investment funds. 4,151,214(2) 6.5%
TIMOTHY E. FOSTER, age 46, has been Chief Executive Officer
of the Company since May 1997 and a director of the Company
since December 1984. He was President and Chief Operating
Officer of the Company from October 1994 to May 1997. He
served as Senior Vice President, Finance and Administration
and Chief Financial Officer of the Company from November
1988 to October 1994, Treasurer of the Company from March
1992 to October 1994 and Secretary of the Company from
September 1987 to May 1994. Since February 1995, he has also
been a director of Integra, Inc., a national mental health
services company. He is also a director of NCES. 910,001(3) 1.4%
E. MARTIN GIBSON, age 60, has been a director of the Company
since March 1992. Mr. Gibson, who is retired, served as
Chairman and Chief Executive Officer of Corning Lab
Services, Inc., a subsidiary of Corning Incorporated, from
1990 until December 1994. He currently serves as a director
of International Technology Corp., an environmental
management company, Hardinge Brothers, Inc., a manufacturer
of machine tools, Pharmerica Corp., an institutional
pharmacy company, and Sensus Corp., a private biotechnology
company, and as the Chairman of the Board of NCES. 39,333(4) *
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME OF NOMINEE AND BENEFICIALLY AS OF PERCENT
BIOGRAPHICAL INFORMATION AUGUST 15, 1998(1) OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
SIRI S. MARSHALL, age 50, has been a director of the Company
since May 1994. Ms. Marshall has been Senior Vice President
and General Counsel of General Mills, Inc., a food
manufacturing company, since October 1994. Ms. Marshall was
Senior Vice President, General Counsel and Secretary of Avon
Products, Inc., a manufacturer and marketer of beauty
products, fashion jewelry and fragrances, from 1992 to 1994.
She is a member of the Chief Legal Officers Roundtable and a
Trustee of the Minneapolis Institute of Arts. 28,533(5) *
JAMES W. McLANE, age 59, has been President and Chief
Operating Officer and a director of the Company since May
1997. From 1991 to 1997, Mr. McLane served as Chief
Executive Officer of Aetna Health Plans and as Executive
Vice President of Aetna Life and Casualty. Mr. McLane is
also a director of FemRx, Inc., a medical device
manufacturer, and Alignis, Inc., a complementary healthcare
services company. 250,000(6) *
STEPHEN E. O'NEIL, age 65, has been a director of the
Company since December 1984. Mr. O'Neil has been a Principal
of The O'Neil Group, a private investment firm, since 1981.
He is a director of Brown-Forman Corporation, Castle
Convertible Fund, Inc., Spectra Fund, Inc., Alger Fund,
Inc., Alger American Funds and NCES. 36,833(7) *
GEORGE W. SIGULER, age 51, has been a director of the
Company since September 1986. Since January 1996, he has
been a managing director of Siguler Guff & Company, LLC, an
investment management firm. From September 1991 to January
1996, Mr. Siguler was a managing director of Mitchell
Hutchins Institutional Investors Inc. Mr. Siguler is a
director of Business Mortgage Investors, Inc. and Venture
Lending and Leasing, Inc. 40,733(8) *
DANIEL C. TOSTESON, M.D., age 73, has been a director of the
Company since April 1991. He is Dean Emeritus of the Faculty
of Medicine and Caroline Shields Walker Distinguished
Professor of Cell Biology, Harvard University. From 1977 to
1997, Dr. Tosteson was Dean of the Faculty of Medicine,
Caroline Shields Walker Professor of Cell Biology, Harvard
University and President of Harvard Medical Center,
1977-1997. Dr. Tosteson was President of Massachusetts
Biomedical Research Corporation from 1989 to 1997 and was a
Member of the Board of Trustees of Duke University from 1987
until 1995. 42,733(9) *
</TABLE>
- ---------------
* Less than one percent.
(1) As of August 15, 1998, each director had sole voting and investment power
with respect to all shares shown in the table as beneficially owned by him
or her, except as indicated below.
(2) Includes 1,650,001 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. Foster beneficially owns 4,000
shares (less than one percent) of the common stock (the "NCES Common Stock")
of NCES, presently issuable upon exercise of options.
(3) Consists of 900,001 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. Foster owns 14,000 shares (less
than one percent) of NCES Common Stock, 4,000 of such shares presently
issuable upon exercise of options.
(4) Includes 36,733 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Mr. Gibson owns 13,334 shares (less than
one percent) of NCES Common Stock presently issuable upon exercise of
options.
(5) Includes 26,533 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Ms. Marshall owns 3,334 shares (less than
one percent) of NCES Common Stock presently issuable upon exercise of
options.
3
<PAGE> 6
(6) Consists of 250,000 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. McLane owns 11,000 shares (less
than one percent) of NCES Common Stock, of which 1,000 shares are presently
issuable upon exercise of options.
(7) Includes 36,733 shares of the Company's Common Stock presently issuable upon
exercise of options. In addition, Mr. O'Neil owns 6,667 shares (less than
one percent) of NCES Common Stock presently issuable upon exercise of
options.
(8) Consists of 36,733 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. Siguler owns 3,334 shares (less
than one percent) of NCES Common Stock presently issuable upon exercise of
options.
(9) Consists of 42,733 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Dr. Tosteson owns 3,334 shares (less
than one percent) of NCES Common Stock presently issuable upon exercise of
options.
No family relationship exists among any of the directors or executive
officers of the Company.
During the fiscal year ended June 30, 1998, the Board met nine times and
convened once by means of unanimous written consent. Each of the nominees listed
above presently serving as a director of the Company attended at least 75% of
the meetings of the Board and meetings of any committees of the Board on which
such person served which were held during the time that such person served,
except as follows: George W. Siguler attended 73% of such Board and committee
meetings.
The Board has a Compensation Committee, an Audit Committee and a Nominating
Committee. The members of the Compensation Committee are Robert G. Stone, Jr.,
who serves as Chairman, E. Martin Gibson, Siri S. Marshall and Stephen E.
O'Neil. The Compensation Committee determines the compensation of senior
management, administers the Company's 1986 Stock Option Plan and determines the
persons who are to receive options and the number of shares subject to each
option. The Compensation Committee met three times and convened once by
unanimous written consent during the fiscal year ended June 30, 1998.
The members of the Audit Committee are Stephen E. O'Neil, who serves as
Chairman, Peter O. Crisp, E. Martin Gibson, Siri S. Marshall and George W.
Siguler. The Audit Committee acts as a liaison between the Board and the
independent accountants and annually recommends to the Board the appointment of
the independent accountants. The Audit Committee reviews, with the independent
accountants, the planning and scope of the audits of the financial statements,
the results of those audits and the adequacy of internal accounting controls and
monitors the Company's compliance programs and other corporate and financial
policies. The Audit Committee met twice during the fiscal year ended June 30,
1998.
The members of the Nominating Committee are Robert G. Stone, Jr. who serves
as Chairman, John H. Foster, George W. Siguler and Daniel C. Tosteson. The
Nominating Committee is authorized to review, approve and recommend persons for
election as directors. The Nominating Committee did not meet during the fiscal
year ended June 30, 1998. It will consider nominations by stockholders, which
should be submitted in writing to the Chairman of the Committee addressed in
care of the Secretary, NovaCare, Inc., 1016 West Ninth Avenue, King of Prussia,
Pennsylvania 19406.
COMPENSATION OF DIRECTORS OF NOVACARE
The Company provides each director with an annual retainer of $10,000 and
an annual grant of options to purchase 10,000 shares of Common Stock. The
Company pays each director a fee of $1,000 per meeting attended, plus
out-of-pocket expenses. In addition, committee members receive a fee of $1,000,
plus out-of-pocket expenses, for each non-telephonic committee meeting attended
that is not scheduled in conjunction with a meeting of the full Board, and a fee
of $500, plus out-of-pocket expenses, for each non-telephonic committee meeting
attended in conjunction with a meeting of the full Board and for each telephonic
meeting of the Board or any committee of the Board.
4
<PAGE> 7
COMPENSATION OF EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information for the fiscal years ended June
30, 1998, 1997 and 1996 concerning the compensation paid or awarded to the Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company during each such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL OTHER
NAME AND ---------------------------------- OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER($)(1) (#) ($)(2)
- ---------------------------- ---- --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John H. Foster(3)........... 1998 $580,266 $487,670 $128,374 0 $100,584
Chairman of the Board 1997 553,899 389,100 66,627 0 36,303
1996 530,865 0 2,000,000 590,451
Timothy E. Foster(4)........ 1998 500,000 243,835 7,395 0 71,381
Chief Executive Officer 1997 495,482 194,550 0 31,091
1996 403,750 100,000 1,500,000 48,957
James W. McLane(5).......... 1998 457,500 195,068 0 217,213
President and Chief 1997 70,274 0 850,000 0
Operating Officer
Daryl A. Dixon.............. 1998 374,000 249,282 134,867 153,492
President and General 1997 364,628 219,776 0 120,152
Manager -- Long Term Care 1996 315,000 142,616 155,766 137,895
Services Division
Ronald G. Hiscock(6)........ 1998 295,174 164,576 155,011 45,424
President and General 1997 272,903 175,944 0 18,282
Manager -- Outpatient 1996 199,022 125,612 232,518 28,520
Division
</TABLE>
- ---------------
(1) This amount represents the Company's incremental cost of personal use of the
Company aircraft, after deducting payments received by the Company for such
use.
(2) Other than the forgiveness of a loan of $455,000 to John H. Foster during
fiscal year 1996, and $61,586 payable in connection therewith in fiscal year
1996 pursuant to the terms of his employment agreement; forgiveness of
$90,000 in loans in each of fiscal years 1998, 1997 and 1996 and $5,244,
$6,993 and $8,741 payable in connection therewith to Daryl A. Dixon in
fiscal years 1998, 1997 and 1996, respectively; and amounts paid in fiscal
year 1996 of $7,049 to Ronald Hiscock as reimbursement for relocation
expenses, these amounts represent contributions to the Company's 401(k) plan
and its supplemental deferred compensation plan, and payments for long-term
disability insurance.
(3) John H. Foster served as Chairman of the Board and Chief Executive Officer
of the Company until May 1997, when he relinquished the position of Chief
Executive Officer.
(4) Timothy E. Foster became Chief Executive Officer of the Company in May 1997.
From October 1994 to May 1997, he was President and Chief Operating Officer
of the Company. Prior to such time he served as Senior Vice
President -- Finance and Administration, Chief Financial Officer and
Treasurer of the Company.
(5) James W. McLane became President and Chief Operating Officer of the Company
in May 1997.
(6) Ronald G. Hiscock became President and General Manager -- Outpatient
Division in February 1996. He served as President and General
Manager -- Orthotics/Prosthetics Division from April 1995 until its
combination with the Outpatient Division in February 1996, and prior to that
time served as the Vice President of Operations for the same division.
5
<PAGE> 8
The following table sets forth the number and value of options exercised by
the executive officers of the Company named in the Summary Compensation Table
during the fiscal year ended June 30, 1998 and the number and value of options
held by such executive officers at June 30, 1998.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
JUNE 30, 1998(#) AT JUNE 30, 1998($)(1)
----------------- ----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME UPON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- ---------- ----------------- ----------------------
<S> <C> <C> <C> <C>
John H. Foster............... 0 $ 0 1,650,001/399,999 $8,143,755/$1,949,995
Timothy E. Foster............ 307,200 1,615,043 900,001/299,999 4,387,505/ 1,462,495
James W. McLane.............. 0 0 250,000/600,000 218,750/ 525,000
Daryl A. Dixon............... 47,010 241,994 63,606/162,217 322,079/ 137,794
Ronald G. Hiscock............ 74,815 420,680 81,223/219,018 421,007/ 355,309
</TABLE>
- ---------------
(1) In-the-money options are those for which the fair market value of the
underlying Common Stock exceeds the exercise price of the option. The value
of in-the-money options is determined in accordance with regulations of the
Securities and Exchange Commission by subtracting the aggregate exercise
price of the option from the aggregate year-end value of the underlying
Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert G. Stone, Jr., as Chairman, Stephen E. O'Neil, E. Martin Gibson and
Siri S. Marshall served on the Compensation Committee of the Board of Directors
for the entire 1998 fiscal year. No insider served on the Committee and there
were no interlocks.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors (the "Committee")
presently is composed of four independent non-employee directors. The Committee
is responsible for setting and monitoring the effectiveness of the compensation
provided to the Company's officers, directors and senior management employees.
In its decision-making, the Committee is guided by a compensation
philosophy designed to reward employees for the achievement of organizational
goals and for the maximization of stockholder return. Specific levels of pay and
incentive opportunity are determined by the competitive market for executive
talent and, where appropriate, the need to invest in the future growth of the
business.
To determine the appropriate levels of compensation for different executive
and management positions, the Committee uses survey data provided by independent
external consulting firms. The most recent survey data was provided by
Towers-Perrin, a leading national consulting firm, and was supplemented by
survey data provided by Watson Wyatt, William M. Mercer and Coopers and Lybrand.
These firms maintain databases of compensation information from surveying
hundreds of companies in a wide variety of industries. This information is
updated on an ongoing basis. For the Company, competitive market data was
extracted from these databases which included companies of similar size and
complexity which are drawn from health care and related industries. The survey
groups are consistent with the peer groups used in the performance graph found
in this Proxy Statement. The data provided by these surveys (the "Surveys") were
used during the year to evaluate the Company's executive and management
compensation status across all operating divisions and provided the basis for
fiscal year 1998 compensation planning.
6
<PAGE> 9
The compensation program, which provides incentives for executives to
achieve the short-term and long-term goals of the Company, comprises three
components: base salary, cash incentives and stock option awards.
During fiscal year 1998, the executive salary ranges which were implemented
during fiscal year 1994 for all management and executive positions (excluding
the Chairman and the Chief Executive Officer), after adjusting for market rate
changes based on the information from the Surveys, were used to administer all
three components of the compensation program. The structure provided by these
ranges allowed the Company to manage consistently and fairly the reward system,
to encourage inter-divisional transfers, to manage compensation expenses and to
control participation in supplemental benefits programs.
Base Salary
Consistent with all salary programs of the Company, executive base salaries
are targeted at the 50th percentile of the competitive market. Annual salary
adjustments, including that of the Chairman and Chief Executive Officer, are
based on individual performance.
Incentive Compensation
Based on organizational level and performance, incentive opportunities are
available to a wide range of Company employees. These programs are effective in
reenforcing both the overall values of the Company and the specific operating
goals of the various business units.
Executive incentive plans are designed to focus executive attention on the
key performance goals of the Company, to identify the expected levels of
performance and to reward individuals who meet or exceed such expectations. The
aggregate amounts available for incentive awards are determined by the overall
financial performance of the Company. The actual awards paid to individual
recipients under the plans are based on the achievement of weighted performance
goals.
For the Chairman, the Chief Executive Officer and the President/Chief
Operating Officer, the key measure of performance in fiscal year 1998 was
earnings per share (exclusive of nonrecurring items). The targeted amount of
incentive compensation opportunity for the Chairman and the Chief Executive
Officer was a fixed percentage of the Company's net income. Actual awards, which
cannot exceed this fixed percentage, were determined by a formula which compares
actual earnings per share performance to budgeted earnings per share. If actual
earnings per share were less than 90% of budgeted earnings per share, no awards
were available to the Chairman, the Chief Executive Officer or the
President/Chief Operating Officer.
For other executives and management employees, including the other
executives named in this Proxy Statement, incentive awards were also
performance-driven. A minimum of 25% of the incentive award was based on
financial performance, and the remainder was based on achievement of specific
business objectives. To earn incentive awards based on financial performance,
the Company's performance must at a minimum have reached 85% of the financial
performance targets established by the Board of Directors, at which level of
performance 45% of the targeted incentive opportunity would be earned. Earned
awards increased proportionally and reached 100% at achievement of 100% of the
performance goal. Performance awards over 100% increased on a formula basis up
to 200% of the targeted incentive opportunity at 130% of such performance goal;
awards were capped at 200% of the targeted amount.
Stock Option Awards
The Company's 1986 Stock Option Plan (the "Plan") was approved by the Board
of Directors and the stockholders of the Company to align executives' interests
with stockholders' interests, to provide incentives for key employees of the
Company and its subsidiaries by encouraging their ownership of Common Stock and
to aid the Company in attracting and retaining such key employees, upon whose
efforts the Company's success and future growth depends.
Options are granted at the discretion of the Committee. Individual grant
sizes are determined based on a variety of factors, which include practices for
similar positions in the market and organizational and individual performance.
At the discretion of the Committee, and based on the recommendation of
management, options
7
<PAGE> 10
may also be used as an incentive for candidates recruited to fill key positions,
or as special retention incentives for employees with significant future
potential.
All options under the Plan are granted at 100% of the fair market value on
date of grant. The term of the option is 10 years from the date of grant and
vested options can be exercised at any time during such period. Options
generally vest and become exercisable in cumulative annual installments of 20%
over five years commencing one year after the date of grant. If an employee
leaves the Company before options are vested, the unexercised options are
forfeited and may be reissued under the Plan. Most of the options currently
outstanding under the Plan were issued in May 1996 with an alternate price-based
vesting schedule. Under that vesting schedule options vest in 20% increments
either pursuant to the standard five-year schedule or when the market price of
the Company's Common Stock averages $8, $10, $12, $14 and $16 for 40 consecutive
trading days, whichever first occurs. In August 1997, the Compensation Committee
of the Board authorized a Replacement Stock Option Plan (the "Replacement
Program") for employees (excluding the Chairman, Chief Executive Officer and
President/Chief Operating Officer) who participated in the May 1996 option
grants. The Program was offered to stock option holders on a voluntary basis.
Option holders electing to participate in the Replacement Program received an
additional option grant equal to 25% of their option holdings as of May 1996 and
agreed (i) to exercise between 25% and 30% of their vested options in a block
sale conducted by the Company and (ii) to refrain from exercising their
remaining vested options for a period of two years, except for the exercise and
sale of option stock through block sales to be conducted by the Company in 1998
and 1999. Option holders who had already exercised 25% or more of their vested
options were not eligible to participate in the Replacement Program.
Compensation of Chief Executive Officer
For fiscal year 1998, Timothy E. Foster, who became Chief Executive Officer
of the Company in May 1997, received $743,835 in aggregate cash compensation
comprising $500,000 in base salary and $243,835 in incentive compensation. His
incentive compensation was targeted at a bonus of 0.5% of net income if the
Company's earnings per share performance for the 1998 fiscal year met 100% of
budgeted earnings per share, subject to adjustments for extraordinary items. Mr.
Foster did not receive a salary increase in fiscal year 1998.
The decisions of the Committee depend significantly on quantitative market
data and recommendations of impartial third party consultants. The Committee
believes its decisions are consistent with the Company's business objectives and
performance expectations and have been made in the best interests of the Company
and its stockholders.
THE COMPENSATION COMMITTEE
Robert G. Stone, Jr., Chairman
E. Martin Gibson
Siri S. Marshall
Stephen E. O'Neil
Notwithstanding anything set forth in any of the Company's previous filings
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which might
incorporate future filings, including this Proxy Statement, in whole or in part,
the preceding report and the performance graph that follows shall not be
incorporated by reference into any such filings.
8
<PAGE> 11
PERFORMANCE GRAPH
The following performance graph compares the cumulative total stockholder
return of the Company's Common Stock to the S&P 500 Composite Stock Index and
the S&P Healthcare Index for the period from June 30, 1993 through June 30,
1998. The graph assumes that $100 was invested in each of the Company's Common
Stock, the S&P 500 and the companies listed on the S&P Healthcare Index on June
30, 1993 and that any dividends were reinvested.
COMPARISON OF FIVE YEARS CUMULATIVE TOTAL RETURN
FOR THE YEAR ENDED JUNE 30, 1998
NOVACARE, INC. S & P 500 S & P HEALTH CARE
6/93 $100 $100 $100
6/94 81 114 88
6/95 96 115 88
6/96 49 145 128
6/97 46 183 178
6/98 84 247 262
EMPLOYMENT AGREEMENTS
In July 1994, the Company entered into an employment agreement with John H.
Foster, Chairman of the Board of the Company. The agreement was amended on
February 2, 1995 and was further amended as of July 1, 1998. The term of the
agreement expires on June 30, 2000 and the agreement provides for automatic
one-year extensions commencing one year prior to termination in June 2000 and
continuing on each subsequent anniversary until either party shall give the
other notice of non-extension. The agreement provides for Mr. Foster to receive
an annual base salary, currently $300,000, subject to increases in accordance
with the policies of the Company, and to be eligible for an annual cash bonus
opportunity equal to 100% of base salary. In the event of Mr. Foster's death,
disability or voluntary termination, he shall be entitled to pro-rated bonus
compensation for the fiscal year during which such event occurs. The agreement
also provides that if Mr. Foster is terminated by the Company without cause, or
if Mr. Foster resigns subsequent to a change in control of the Company, a
material diminution of his position, authority or compensation or his removal by
the Company as Chairman of the Board, then Mr. Foster shall be entitled to (i)
his base salary and certain other
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<PAGE> 12
benefits for a period of two years from the date of such event, and (ii) bonus
compensation in an amount equal to (a) his pro-rated bonus compensation for the
fiscal year of such resignation or termination, plus (b) a final bonus
calculated, depending on the date of such resignation or termination, to equal
his bonus payment for the previous fiscal year or the greater of his bonus
payment for the previous fiscal year or the entire then-current fiscal year, and
an additional payment equal to one-half of such final bonus. The agreement also
provides that Mr. Foster shall be entitled to the advance of certain expenses in
connection with legal proceedings arising in connection with his service as an
officer or director of the Company. The agreement further provides Mr. Foster
the use of the Company's private aircraft and certain other benefits.
In July 1996, the Company entered into an amended employment agreement with
Timothy E. Foster, Chief Executive Officer of the Company. On May 15, 1998, the
agreement was further amended. The agreement provides for a three-year term of
employment with automatic one-year extensions commencing July 1, 1999 and
continuing on each subsequent anniversary until either party shall give the
other notice of non-extension at least one year before any renewal date. The
agreement, as amended, provides for Mr. Foster to receive an annual base salary,
currently $500,000, subject to increases in accordance with the policies of the
Company, and to be eligible for an annual cash bonus opportunity equal to 100%
of base salary. In the event of Mr. Foster's death, disability or voluntary
termination, he shall be entitled to pro-rated bonus compensation for the fiscal
year during which such event occurs. The agreement further provides Mr. Foster
the use of the Company's private aircraft and certain other benefits. The
agreement also provides that if Mr. Foster is terminated by the Company without
cause, or if Mr. Foster resigns subsequent to a change in control of the
Company, a material diminution of his position, authority or compensation or the
Company's failure to cause Mr. Foster's election to the Board of Directors, then
Mr. Foster shall be entitled to his base salary and certain other benefits for a
period of two years from the date of such event and bonus compensation in an
amount equal to (a) his pro-rated bonus compensation for the fiscal year of such
resignation or termination plus (b) a final bonus calculated, depending on the
date of such resignation or termination, to equal his bonus payment for the
previous fiscal year or the greater of his bonus payment for the previous fiscal
year or the entire then-current fiscal year, and an additional payment equal to
one-half of such final bonus. The agreement also provides that Mr. Foster shall
be entitled to the advance of certain expenses in connection with legal
proceedings arising in connection with his service as an officer or director of
the Company.
In April 1997, the Company entered into an employment agreement with James
W. McLane, President and Chief Operating Officer of the Company. That agreement
was amended on May 12, 1998 and on July 1, 1998. The agreement provides for a
five-year term of employment, commencing May 1, 1997, with automatic one-year
extensions commencing April 30, 2001 and continuing on each subsequent
anniversary until either party shall give the other notice of non-extension at
least one year before any renewal date. The agreement provides for Mr. McLane to
receive an annual base salary, currently $465,000, subject to increases in
accordance with the policies of the Company, and to be eligible for an annual
cash bonus opportunity equal to 100% of base salary. In the event of Mr.
McLane's death, disability or voluntary termination, he shall be entitled to
pro-rated bonus compensation for the fiscal year during which such event occurs.
In fiscal year 1997, Mr. McLane received a grant of options to purchase 850,000
shares of Common Stock at an exercise price of $10.875 per share. The term of
the options is 10 years. The right to purchase 100,000 shares of the Company's
Common Stock under the options vested immediately. Rights to purchase the
remaining 750,000 shares of Common Stock vest in equal annual installments of
20% and become exercisable in full in the event of a change in control of the
Company. Mr. McLane's employment agreement further provides Mr. McLane the use
of the Company's private aircraft and certain other benefits. The agreement also
provides that if Mr. McLane is terminated by the Company without cause, or if
Mr. McLane resigns subsequent to a change in control of the Company, a material
diminution of his position, authority or compensation or the Company's failure
to cause Mr. McLane's election to the Board of Directors, then Mr. McLane shall
be entitled to his base salary and certain other benefits for a period of two
years from the date of such event and bonus compensation in an amount equal to
(a) his pro-rated bonus compensation for the fiscal year of such resignation or
termination plus (b) a final bonus calculated, depending on the date of such
resignation or termination, to equal his bonus payment for the previous fiscal
year or the greater of his bonus payment for the previous fiscal year or the
entire then-current fiscal year, and an additional payment equal to one-half of
such final bonus.
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<PAGE> 13
Effective as of July 1, 1998, Mr. McLane received an additional grant of
options, subject to the approval of the stockholders of the Company, to purchase
150,000 shares of Common Stock at an exercise price of $11.50 per share. Those
options have a 10 year term and are exercisable in cumulative annual
installments of 20%. All such options become exercisable in full in the event of
a change in control of the Company. See "III. Approval of the Grant to an
Executive Officer of Option to Purchase Common Stock".
In January 1995, the Company entered into an employment agreement with
Daryl A. Dixon, President and General Manager -- Long Term Care Services
Division of the Company. The agreement, which was amended in October 1997,
provides for a five-year term of employment and provides for automatic one-year
extensions commencing one year prior to termination and continuing on each
subsequent anniversary until either party shall give the other notice of
non-extension. The agreement provides for Mr. Dixon to receive an annual base
salary, currently $383,000, subject to increases in accordance with the policies
of the Company, and to be eligible for an annual cash bonus equal to 50% of his
base salary. In the event of Mr. Dixon's death, disability, voluntary
termination or termination by the Company without cause, he shall be entitled to
pro-rated bonus compensation for the fiscal year of such event. The agreement
also provides for the grant of options to purchase the Company's Common Stock.
All options granted to Mr. Dixon become fully vested upon a change in control of
the Company. The agreement also provides for a loan by the Company to Mr. Dixon
in the amount of $450,000, bearing no interest and payable in equal annual
installments of $90,000 over five years, with such loan to be forgiven in
$90,000 installments on each payment date provided that Mr. Dixon is employed by
the Company, or forgiven in its entirety in the event of Mr. Dixon's death or
disability; in addition, on such payment dates Mr. Dixon shall receive
additional payments over such five-year period aggregating $26,224. The
agreement also provides that if Mr. Dixon is terminated by the Company without
cause, he shall be entitled to his base salary and certain other benefits for a
period of two years, and the unpaid balance of such loan shall be forgiven by
the Company in installments without regard to the requirement that Mr. Dixon be
employed by the Company. Mr. Dixon has a separate agreement relating to
relocation under which he has received a loan of $33,556.63, at an interest rate
of prime plus 1%, which was forgiven in four equal annual installments beginning
on August 1, 1994.
Effective January 1, 1996, the Company entered into an employment agreement
with Ronald G. Hiscock, President and General Manager of the Outpatient Division
of the Company. The agreement, which was amended on March 18, 1998, provides for
an annual base salary, currently $320,000, subject to increases in accordance
with the policies of the Company, and an annual cash bonus opportunity equal to
50% of base salary. The agreement also provides for the grant to Mr. Hiscock of
options to purchase 50,000 shares of the Company's Common Stock at an exercise
price of $5.75 per share. Those options vest in cumulative annual increments of
20% beginning in December 1996, have a 10 year term and become fully vested upon
a change in control of the Company. The agreement provides that Mr. Hiscock
shall be eligible for additional option grants based on performance. The
agreement also provides that if Mr. Hiscock is terminated by the Company without
cause or if Mr. Hiscock resigns subsequent to a change in control of the
Company, or a material diminution of his position, authority or compensation
immediately prior to a change in control of the Company, then Mr. Hiscock shall
be entitled to his base salary and certain other benefits for a period of one
year from the date of such event and bonus compensation in an amount equal to
his pro-rated bonus compensation for the fiscal year of such resignation or
termination. In addition, the agreement provides that Mr. Hiscock shall be
entitled to these same benefits if Mr. Hiscock's principal employment site is
relocated more than 50 miles after a change in control and Mr. Hiscock resigns
not less than one year after the change in control (but not more than two years
after the event giving rise to the change in control).
CERTAIN TRANSACTIONS
Since January 1993, the Company has subleased office space to certain
companies controlled by John H. Foster, Chairman of the Board of the Company, in
his capacity as chairman of the board, chief executive officer or general
partner of the principal stockholders of such companies. The Company paid base
rent at an annual rate of $14.00 per square foot through December 1997 and
$17.50 per square foot from January 1998 through December 2003. The companies
controlled by Mr. Foster will pay base rent at a rate equal to the Company's
cost, including reimbursement for leasehold improvements made by the Company,
through
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<PAGE> 14
December 2003 for their respective areas under sublease as follows: Foster
Management Company, 5,728 square feet; Integra, Inc., 11,324 square feet; and
Valley Forge Dental Associates, Inc., 4,007 square feet.
Timothy E. Foster, Chief Executive Officer and a director of the Company,
serves as a director of Integra, Inc. and Valley Forge Dental Associates, Inc.;
and Stephen E. O'Neil, a director and member of the Compensation and Audit
Committees of the Company, serves as a director of Valley Forge Dental
Associates, Inc. Each of the foregoing companies is controlled by John H.
Foster.
INFORMATION CONCERNING CERTAIN STOCKHOLDERS
The shareholdings as of August 15, 1998 of the only persons known to the
Company to own beneficially more than five percent (5%) of the outstanding
shares of the Common Stock other than John H. Foster, whose shareholdings are
set forth above under "I. Election of Directors" and whose address is 1016 W.
Ninth Avenue, King of Prussia, Pennsylvania 19406, and the shareholdings as of
August 15, 1998 of all directors and officers of the Company as of such date as
a group (according to information furnished by them to the Company) are set
forth in the following table. The shareholdings of the five named executive
officers of the Company (except for Daryl A. Dixon and Ronald G. Hiscock, whose
shareholdings are set forth in the table below) are set forth above under "I.
Election of Directors." Except as indicated in the footnotes to the table, all
of such shares are owned with sole voting and investment power.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME OWNED BENEFICIALLY PERCENT OF CLASS
---- ---------------------- ----------------
<S> <C> <C>
GeoCapital Corporation
767 Fifth Avenue
New York, New York..................... 4,279,133(1) 6.8%
Warburg Pincus Asset Management,
Inc.................................. 3,187,800 5.1%
All Directors and Officers as a Group
(20 persons)......................... 6,302,747(2)(3) 9.6%
Daryl A. Dixon......................... 96,770(4) *
Ronald G. Hiscock...................... 114,726(5) *
</TABLE>
- ---------------
* Less than one percent.
(1) GeoCapital Corporation does not have voting power with respect to these
shares.
(2) See footnotes 2 through 10 on pages 4 and 5.
(3) Includes 3,404,506 shares of the Company's Common Stock presently issuable
upon exercise of options and 4,137 shares issuable on conversion of
convertible debt securities. In addition, all directors and officers of the
Company as a group beneficially own 78,387 shares of NCES Common Stock,
55,837 of such shares presently issuable upon exercise of options.
(4) Includes 90,520 shares of the Company's Common Stock presently issuable upon
exercise of options and 25 shares owned by Mr. Dixon's spouse. In addition,
Mr. Dixon owns 2,000 shares of NCES Common Stock presently issuable upon
exercise of options.
(5) Includes 112,226 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, Mr. Hiscock owns 2,000 shares of NCES
Common Stock presently issuable upon exercise of options.
II. APPROVAL OF NOVACARE 1998 STOCK OPTION PLAN
Subject to the approval of the stockholders of the Company, the Board of
Directors has adopted the Company's 1998 Stock Option Plan (the "Plan"). The
Plan will provide for option grants to management-level employees based on such
employees' job level and scope of responsibilities. The affirmative vote of a
majority of the Common Stock present or represented and entitled to vote at the
Meeting is required for approval of the Plan. The text of the Plan is set forth
in Exhibit A hereto and the following discussion of the material features of the
Plan is qualified by reference to the text of the Plan attached hereto as
Exhibit A.
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<PAGE> 15
The purpose of the Plan is to provide for the continued availability of
options as a method to compensate senior managers, including new hires, and to
align incentives for such managers with the interests of stockholders to
increase stockholder value. There will be 2,800,000 shares available for grant
of options under the Plan. The closing price of the Common Stock on the New York
Stock Exchange on September 29, 1998 was $3.00.
SUMMARY OF PLAN
The following is a summary of significant features of the Plan and a
description of the principal tax and accounting implications that will be in
effect if the Plan is adopted. This summary is not a complete description of the
provisions of the Plan and is qualified in its entirety by reference to the full
text of the Plan, a copy of which is attached to this Proxy Statement as Exhibit
A and incorporated herein by reference.
The Plan provides for the issuance of options to purchase up to 2,800,000
shares of the Company's Common Stock. The Compensation Committee of the Board of
Directors administers the Plan. The Compensation Committee is made up of four
members of the Board of Directors. No current member of the Compensation
Committee is or has been an employee or officer of the Company.
Options granted under the Plan may be either incentive stock options
designed to meet the requirements of Section 422 of the Internal Revenue Code
(the "Code") or non-statutory options not intended to comply with such
requirements. There are no tax consequences upon issuance of a non-statutory
option. Upon exercise of a non-statutory option, the holder will realize taxable
income to the extent of the difference between the exercise price and the market
price of the Common Stock on the date of exercise, and the Company will have a
deductible expense equal to the option holder's realized taxable income. Upon
the sale of shares purchased upon such exercise, the optionee will realize
capital gain or loss measured by the difference between the amount realized on
the sale and the fair market value of the shares at the time of exercise of the
option. In the case of options granted to executive officers and other principal
officers, directors and greater than ten percent stockholders of the Company,
income will be recognized upon exercise of a non-qualified option only if the
option has been held for at least six months prior to exercise. If such option
is exercised within six months after the date of grant, an officer, director or
greater than ten percent stockholder will recognize income on the date six
months after the date of grant, unless he or she files an election under Section
83(b) of the Code to be taxed on the date of exercise.
In contrast, an optionee will not be taxed upon exercise of an incentive
stock option and the Company will not be entitled to a deduction from income in
respect thereof. If the optionee retains the shares transferred to him or her
upon exercise of an incentive stock option for more than one year after the date
of issuance of the stock and two years after the date of grant of the option,
any gain or loss realized on a subsequent sale of the shares by the optionee
will be treated as long-term capital gain or loss. If, on the other hand, the
optionee sells the shares within one year after the date of transfer or two
years after the date of grant of the option, the optionee will realize ordinary
income, and the Company will be entitled to a deduction from income, to the
extent of the excess of the value of the shares on the date of exercise or the
amount realized on the sale (whichever is less) over the exercise price. Any
excess of the sale price over the value of the shares on the date of exercise
will be treated as capital gain. The spread between the fair market value of the
shares on the date of exercise and the exercise price constitutes an item of tax
preference for purposes of the alternative minimum tax which, under certain
circumstances, could cause tax liability as a result of the exercise.
The term of options granted under the Plan is determined by the
Compensation Committee, but may not exceed ten years. The vesting schedule for
options is determined by the Compensation Committee. Options may be transferable
by will and the laws of descent and distribution, or in certain circumstances to
individuals related to the optionee.
Options under the Plan may be granted to key employees, including officers
or directors, of the Company or any subsidiary or parent of the Company. The
exercise price of options granted under the Plan is determined by the
Compensation Committee, but cannot be less than the market value of the
underlying stock on the date of grant. In addition, absent stockholder approval,
the Board may not reprice outstanding options
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<PAGE> 16
issued under the Plan. The purchase price for an option may be paid in cash, in
Common Stock of the Company, or in a combination of both. The Company may lend
an employee the purchase price or may guarantee a loan by a third party to the
employee for the purchase price. It is not possible to determine in advance
which eligible individuals will receive options.
Options may not be exercised after termination of employment, except that
options exercisable on the date of termination may be exercised within three
months after termination, if termination is by the Company. All options become
fully vested and may be exercised for three months following termination, if
termination is caused by death. The maximum number of shares subject to options
that may be granted to any one person under the Plan is 500,000 per year.
In the event of a merger or consolidation in which the Company is not the
surviving corporation, or any other transaction resulting in a change of
control, all outstanding options become fully vested pursuant to the Plan.
Management of the Company has determined that the marketplace demands that
the Company maintain a stock option plan that provides for annual grants of
options to management-level employees based on such employees' job level and
scope of responsibility rather than on a measurement of Company performance.
The Board of Directors believes that the Plan is in the best interests of
the Company. THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS
VOTE FOR THE APPROVAL OF THE PLAN. It is the intention of the persons named in
the accompanying form of proxy to vote the shares represented thereby in favor
of the approval of the Plan, unless otherwise instructed therein. If the Plan is
not approved, the Board of Directors will consider the appropriateness of
alternative compensation for management level employees.
III. APPROVAL OF THE GRANT TO AN EXECUTIVE OFFICER OF
OPTIONS TO PURCHASE COMMON STOCK
As of July 1, 1998, subject to the approval of the stockholders of the
Company, in recognition of his contributions to the Company and its values, Mr.
James W. McLane was granted an option to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $11.50 per share, the market
price of the Common Stock on the effective date of the grant. The term of the
option is 10 years. Rights to purchase the shares of Common Stock will vest in
equal annual increments of 20% (i.e., 30,000 shares) during the first five years
of the option term. The option becomes exercisable in full in the event of a
change in control of the Company.
The Board of Directors believes that Mr. McLane has been and will continue
to be a valuable part of the Company's executive management team. His experience
with managed care, the payer side of health care and health care policy
development on the national level has benefited, and is expected to continue to
benefit, the Company greatly as the health care marketplace turns farther toward
managed care and the integrated delivery of health care services.
Upon issuance of such options, there are no federal income tax consequences
to the Company or Mr. McLane. Upon exercise of the options, Mr. McLane will
realize taxable income to the extent of the difference between the exercise
price and the market price for the Common Stock on the date of exercise, and the
Company will have a deductible expense equal to Mr. McLane's realized taxable
income.
The purpose of such grant of options is to induce Mr. McLane to continue in
the employ of the Company, to reward him for his performance, and to provide him
with an incentive to create significant appreciation in value for the
stockholders of the Company.
14
<PAGE> 17
The following table sets forth the benefits that may be received by Mr.
McLane if the grant of options to purchase Common Stock is approved. The closing
price of the Common Stock on September 29, 1998 was $3.00.
NEW PLAN BENEFITS
GRANT OF OPTIONS TO PURCHASE COMMON STOCK
TO JAMES W. MCLANE (1)
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE($) NUMBER OF UNITS
----------------- --------------- ---------------
<S> <C> <C>
James W. McLane........................................ -- 150,000
President and Chief Operating Officer
</TABLE>
- ---------------
(1) Under this grant of options to James W. McLane no options or other benefits
will accrue to any current directors, any executive officers, or any other
current employees of the Company other than Mr. McLane.
The Board of Directors believes that the grant is in the best interests of
the Company. THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS
VOTE FOR THE APPROVAL OF THE GRANT OF OPTIONS TO JAMES W. MCLANE. It is the
intention of the persons named in the accompanying form of proxy to vote the
shares represented thereby in favor of the approval of the grant of options
unless otherwise instructed therein. If the grant is not approved, the Board of
Directors will consider the appropriateness of alternative compensation for Mr.
McLane.
IV. RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected PricewaterhouseCoopers LLP to serve as independent
accountants for the Company for the fiscal year ending June 30, 1999.
PricewaterhouseCoopers LLP has served as independent accountants for the
Company since 1989 and, although it is not required to do so, the Board is
submitting its selection of the Company's independent accountants for
ratification at the Meeting, in order to ascertain the views of stockholders
regarding such selection. If the selection is not ratified, the Board will
reconsider its selection.
THE BOARD RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR RATIFICATION
OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP TO AUDIT THE FINANCIAL STATEMENTS
OF THE COMPANY FOR THE COMPANY'S FISCAL YEAR ENDING JUNE 30, 1999. It is the
intention of the persons named in the accompanying form of proxy to vote the
shares represented thereby in favor of such ratification unless otherwise
instructed therein.
A representative of PricewaterhouseCoopers LLP will be present at the
Meeting with the opportunity to make a statement if such representative desires
to do so and will be available to respond to appropriate questions.
V. OTHER MATTERS
The Board does not know of any other matters which may be brought before
the Meeting. However, if any such other matters are properly presented for
action, it is the intention of the persons named in the accompanying form of
proxy to vote the shares represented thereby in accordance with their judgment
on such matters.
VI. MISCELLANEOUS
All costs relating to the solicitation of proxies of holders of Common
Stock will be borne by the Company. Proxies may be solicited by officers,
directors and regular employees of the Company and its subsidiaries personally,
by mail or by telephone or otherwise. The Company may pay brokers and other
persons holding shares of stock in their names or those of their nominees for
their reasonable expenses in
15
<PAGE> 18
sending soliciting material to their principals. In addition, the Company has
retained Morrow & Company ("Morrow") to assist in its solicitation of proxies
from brokers, nominees, institutions and individuals. The Company's agreement
with Morrow provides for a one-time fee of $6,000, plus $5.00 per call to
individual stockholders, as well as reimbursement of expenses.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the Meeting in person are urged to mark, sign and date the
accompanying proxy and mail it in the enclosed return envelope, which requires
no postage if mailed in the United States, so that their votes can be recorded.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Exchange Act, directors and executive officers
of the Company are required to make certain filings on a timely basis with the
Securities and Exchange Commission. To date all required filings have been made
on a timely basis.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the next Annual Meeting
of Stockholders of the Company must be received by the Company at its principal
executive offices by June 4, 1999 in order to be considered for inclusion in the
Company's proxy statement relating to such meeting. In the event that a
stockholder fails to notify the Company by August 18, 1999 of an intent to be
present at the Company's 1999 Annual Meeting of Stockholders in order to present
a proposal for a vote, the Company will have the right to exercise its
discretionary authority to vote against the proposal, if presented, without
including any information about the proposal in its proxy materials.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998, which has been filed with the Securities and Exchange
Commission, is included in the Annual Report accompanying this Proxy Statement.
October 2, 1998
16
<PAGE> 19
EXHIBIT A
NOVACARE 1998 STOCK OPTION PLAN
ARTICLE I -- PURPOSE AND EFFECTIVE DATE
SEC.1.1. PURPOSE. The purpose of the Plan is to provide financial
incentives for selected members of management, certain key consultants and
advisors and members of the Board of the Company, thereby promoting the
long-term growth and financial success of the NovaCare Group by (i) attracting
and retaining individuals of outstanding ability, (ii) strengthening the
NovaCare Group's capability to develop, maintain, and direct a competent
management team, (iii) providing an effective means for participants to acquire
and maintain ownership of Company Stock, (iv) motivating participants to achieve
long-range Performance Goals and objectives and (v) providing incentive
compensation opportunities competitive with those of other major corporations.
SEC.1.2. EFFECTIVE DATE AND EXPIRATION OF PLAN. Subject to shareholder
approval, the Plan is effective September 28, 1998. Unless earlier terminated by
the Board, the Plan shall terminate on the tenth anniversary of its Effective
Date. No Option shall be granted pursuant to the Plan after its termination
date, but exercise and payment of Options granted prior to the termination date
may extend beyond that date.
ARTICLE II -- DEFINITIONS
The following words and phrases, as used in the Plan, shall have these
meanings:
SEC.2.1. "ACT" means the Securities Exchange Act of 1934, as amended.
SEC.2.2. "BOARD" means the Board of Directors of the Company.
SEC.2.3. "CHANGE IN CONTROL" means any of the following events:
(a) a "person" (meaning an individual, a partnership, or other group or
association as defined in Sections 13(d) and 14(d) of the Act), 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 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
(b) Continuing Directors shall for any reason cease to constitute a
majority of the Board; or
(c) all or substantially all of the business and/or assets of the Company
is disposed of by the Company to a party or parties other than a subsidiary or
other affiliate of the Company, pursuant to a partial or complete liquidation of
the Company, sale of assets (including stock of a subsidiary of the Company) or
otherwise; or
(d) one or more of the Company's operating businesses are distributed to
shareholders by means of a spin-off, split-off, split-up, stock split, stock
dividend or other similar transaction, as determined by the Board of Directors.
SEC.2.4. "CODE" means the Internal Revenue Code of 1986, as amended.
SEC.2.5. "COMMITTEE" means the Compensation Committee of the Board. All
members of the Committee shall be "Outside Directors," as defined or interpreted
for purposes of Section 162(m) of the Code, and "Disinterested Persons," within
the meaning of Rule 16b-3 under the Act.
SEC.2.6. "COMPANY" means NovaCare, Inc. and any successor corporation.
SEC.2.7. "COMPANY STOCK" means common stock of the Company, or such other
class or kind of shares or other securities resulting from the application of
Section 6.2.
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SEC.2.8. "CONTINUING DIRECTOR" means a member of the Board who either was
a member of the Board on the Effective Date or who subsequently became a member
and whose election, or nomination of election, was approved by a vote of at
least two-thirds of the Continuing Directors then in office.
SEC.2.9. "EFFECTIVE DATE" means September 28, 1998.
SEC.2.10. "FAIR MARKET VALUE" means, as of any specified date, an amount
equal to the mean between the reported high and low prices of actual sales of
Company Stock on the New York Stock Exchange or, if no sale was made on such
date, on the last preceding day on which the Company Stock was traded.
SEC.2.11. "GRANT DATE" means the date that an Option is granted to a
Participant, which shall be specified by the Committee in the applicable Option
Letter.
SEC.2.12. "INCENTIVE STOCK OPTION" means an Option which meets the
requirements of Section 422 of the Code and which is designated as such in the
applicable Option Letter.
SEC.2.13. "NONQUALIFIED STOCK OPTION" means an Option not intended to be
an Incentive Stock Option and designated as a Nonqualified Stock Option in the
applicable Option Letter.
SEC.2.14. "NOVACARE GROUP" means the Company and any Subsidiary or Parent.
SEC.2.15. "OPTION" means the right, granted from time to time under the
Plan, to purchase Company Stock for a specified period of time at a stated
price. An Option may be either a Nonqualified Stock Option or an Incentive Stock
Option.
SEC.2.16. "OPTION LETTER" means a written confirmation of an Option under
the Plan furnished to the Participant.
SEC.2.17. "OPTION PRICE" means the price at which Company Stock may be
purchased under an Option.
SEC.2.18. "PARENT" means a parent corporation of the Company within the
meaning of Section 425(e) of the Code.
SEC.2.19. "PARTICIPANT" means (i) a member of the NovaCare Group's
management team who is an employee of any member of the NovaCare Group, (ii) an
advisor or consultant providing services to a member of the NovaCare Group,
(iii) a member of the Board or (iv) a non-continuing director of an acquired
company or a company with which the NovaCare Group combines and who does not
become an employee or director of the NovaCare Group, in each case, who is
designated by the Committee as eligible to participate in the Plan and who is
awarded an Option under the Plan. Unless otherwise determined by the Board, no
member of the Board who serves on the Committee shall be eligible to participate
in the Plan.
SEC.2.20. "PERFORMANCE GOALS" means goals established by the Committee
pursuant to Article IV.
SEC.2.21. "PERSONAL REPRESENTATIVE" means the person or persons who, upon
the death, disability, or incompetency of a Participant, shall have acquired, by
will or by the laws of descent and distribution or by other legal proceedings,
the right to exercise an Option theretofore granted to such Participant.
SEC.2.22. "PLAN" means the NovaCare, Inc. 1998 Stock Option Plan.
SEC.2.23. "SUBSIDIARY" means a corporation, domestic or foreign, the
majority of the voting stock of which is owned directly or indirectly by the
Company or a subsidiary corporation within the meaning of Section 425(f) of the
Code.
ARTICLE III -- ADMINISTRATION
SEC.3.1. COMMITTEE TO ADMINISTER. The Plan shall be administered by the
Committee. The Committee shall have full power and authority to interpret and
administer the Plan and to establish and amend rules and regulations for its
administration. The Committee's decisions shall be final and conclusive with
respect to the interpretation of the Plan and any Option granted under it.
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<PAGE> 21
The Board shall designate one of the members of the Committee as its
Chairman. The Committee shall hold its meetings at such times and places as it
may determine which may include a meeting by conference telephone call held in
accordance with applicable law. Action may be taken without a meeting if written
consent thereto is given in accordance with applicable law. A majority of its
members shall constitute a quorum. All determinations of the Committee shall be
made by a majority of its members. Any decision or determination reduced to
writing and signed by all members shall be as effective as if it had been made
by a majority vote at a meeting duly called and held. The Committee may appoint
a secretary (who need not be a member of the Committee). No member of the
Committee shall be liable for any act or omission with respect to his service on
the Committee, if he acts in good faith and in a manner he reasonably believes
to be in or not opposed to the best interests of the Company. Service on the
Committee shall constitute service as a director of the Company for all
purposes.
SEC.3.2. POWERS OF COMMITTEE.
(a) Subject to the provisions of the Plan, the Committee shall have
authority, in its discretion, to determine those individuals who shall receive
an Option, the time or times when such Option shall be granted, the vesting
schedule, if any, for the Option and the type of Option to be granted and the
number of shares to be subject to each Option.
(b) The Committee shall determine and set forth in an Option Letter the
terms of each Option (which terms shall not be inconsistent with the terms of
the Plan), including such terms, restrictions, and provisions as shall be
necessary to cause certain options to qualify as Incentive Stock Options. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Option Letter relating to an Option, in such
manner and to the extent the Committee shall determine in order to carry out the
purposes of the Plan. The Committee may, in its discretion, accelerate the date
on which any Option may be exercised, if the Committee determines that to do so
will be in the best interests of the Company and the Participants in the Plan.
ARTICLE IV -- AWARDS
SEC.4.1. SHARES AVAILABLE UNDER THE PLAN. The Company Stock to be offered
under the Plan will be authorized but unissued Company Stock or Company Stock
previously issued and outstanding and reacquired by the Company. Subject to
adjustment under Section 6.2, the total number of shares of Company Stock
available for Options under the Plan shall be 2,800,000. Any shares of Company
Stock tendered in exercise of an Option or subject to an Option that for any
reason is canceled or terminated without having been exercised shall again be
available for grants of Options under the Plan.
SEC.4.2. LIMITATION ON AWARDS. The maximum number of shares for which
Options may be granted to any Participant in any one Fiscal Year shall not
exceed 500,000 shares.
SEC.4.3. PERFORMANCE GOALS.
(a) Establishment of Goals. The Committee may establish, in writing,
Performance Goals, which shall be set forth in the applicable Option Letter.
(b) Criteria for Goals. Performance Goals will be comprised of specified
annual levels of one or more performance criteria as the Committee may deem
appropriate. Such goals may include, but shall not be limited to, earnings per
share, net earnings, operating earnings, unit volume, net sales, market share,
balance sheet measurements, revenue, cash flow, cash return on assets,
shareholder return, return on equity, return on capital or other value-based
performance measures. The Committee may disregard or offset the effect of any
special charges or gains, the cumulative effect of a change in accounting, or
the effect of other expenses or losses that are unusual in nature or infrequent
in occurrence, in determining the attainment of Performance Goals.
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ARTICLE V -- STOCK OPTIONS
SEC.5.1. AWARD OF STOCK OPTIONS. The Committee may, from time to time,
subject to the limitations and provisions of the Plan and such terms and
conditions as the Committee may prescribe, grant Options to any Participant.
Each Option Letter shall state whether the Option is an Incentive Stock Option
or Nonqualified Stock Option.
SEC.5.2. VESTING. Options granted under the Plan may be subject to a
vesting schedule set forth in the applicable Option Letter. Any restrictions and
conditions with respect to the time and method of vesting of Options shall be
prescribed by the Committee.
SEC.5.3. OPTION PRICE. The Option Price of Company Stock under each
Option shall be determined by the Committee, but in the case of an Incentive
Stock Option shall be a price not less than 100 percent of the Fair Market Value
of Company Stock at the date such Option is granted. With respect to Incentive
Stock Options granted to a Participant who at the time such Option is granted
owns Company Stock possessing more than ten percent (10%) of the total combined
voting power of all classes of Company Stock, the Option Price of Company Stock
under such Option shall be a price not less than 110 percent of the Fair Market
Value of Company Stock at the date such Option is granted.
SEC.5.4. OPTION PERIOD. Each Option granted shall expire ten (10) years
from its Grant Date, and shall be subject to earlier termination under the terms
of the Plan; provided, however, that if an Incentive Stock Option is granted to
a Participant who at the time such Option is granted owns Company Stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of Company Stock, such Option shall not be exercisable in full or in
part after the expiration of five (5) years from the Grant Date.
SEC.5.5. OPTION LETTER. Each Option shall be evidenced by a Option
Letter.
SEC.5.6. OPTION EXERCISE AND PAYMENT. Options may be exercised from time
to time by giving notice to the Company, or the agent of the Company, specifying
the number of shares to be purchased. The notice of exercise shall be
accompanied by payment in full of the Option Price in cash or a check payable to
the order of the Company or, at the Committee's discretion, the Option Price may
be paid in whole or in part through the transfer to the Company of shares of
Company Stock which has a Fair Market Value on the date of surrender equal to
the aggregate exercise price of the Company Stock as to which such Option shall
be exercised. For the purpose of assisting a Participant to exercise an Option,
the Company may make loans to the Participant or guarantee loans made by third
parties to the Participant, on such terms and conditions as the Board may
authorize. The Company shall not issue or transfer Company Stock upon exercise
of an Option until the Option Price is fully paid
SEC.5.7. PAYMENT OF TAXES. The Company shall have the power to withhold,
or require a Participant to remit to the Company, any federal, state, local or
foreign taxes required to be paid in connection with any Option, the exercise
thereof and the transfer of Company Stock pursuant to this Plan.
SEC.5.8. TERMINATION OF EMPLOYMENT. Unless otherwise specifically
provided in the terms of a Option Letter, an Option granted to a Participant who
is a employee of the NovaCare Group or a member of the Board may not be
exercised after the Participant has ceased to be in the full-time employ of the
Company or a member of the Board, except in the following circumstances:
(a) If the Participant's employment or service is terminated by action of
the Company, or by reason of disability or retirement under any retirement plan
maintained by the Company, the Option may be exercised by the Participant within
three months after such termination, but only as to any shares exercisable on
the date the Participant's employment so terminates;
(b) In the event of the death of the Participant during the three month
period after termination of employment or service covered by Section 5.8(a), the
Participant's Personal Representative shall have the remainder of such three
month period to exercise any Options which were exercisable by the Participant
at the time of his death;
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(c) In the event of the death of the Participant while employed or while a
member of the Board, the Option shall thereupon become exercisable in full, and
the Participant's Personal Representative shall have a period of one year from
the date of the Participant's death to exercise such Option. The provisions of
the foregoing sentence shall apply to any outstanding Options which are
Incentive Stock Options to the extent permitted by Section 422A(b)(7) of the
Code and such outstanding Options in excess thereof shall, immediately upon the
occurrence of the event described in the foregoing sentence, be treated for all
purposes of the plan as Nonqualified Stock Options and shall be immediately
exercisable as such as provided in the foregoing sentence.
(d) If the Participant is not an employee or member of the Board and is a
non-continuing director of a company acquired by the Company or with which the
Company has combined and the Company has become obligated to grant Options to
such Participant as a result of such acquisition or combination.
SEC.5.9. SHAREHOLDER RIGHTS AND PRIVILEGES. A Participant shall have no
rights as a shareholder with respect to any shares of Company Stock covered by
an Option until the issuance of shares to the Participant.
SEC.5.10. REPRICING. Unless otherwise approved by a majority of the
shareholders of the Company, the Committee shall not adjust or amend the
exercise price of Options previously granted under the Plan, whether through
amendment, cancellation or replacement Options or any other means.
ARTICLE VI -- GENERAL PROVISIONS
SEC.6.1. TRANSFERABILITY. Except as provided below, Options may not be
pledged, assigned or transferred for any reason during the Participant's
lifetime and any attempt to do so shall be void and the relevant Option shall be
forfeited. With the prior written approval of the Committee, a Nonqualified
Stock Option may, at the election of the Participant, be transferred to the
spouse or a descendant of the Participant, or a trust for the benefit of the
spouse or descendants. With the prior written approval of the Committee, an
Option that has been transferred to a spouse or a descendant of a Participant
may be subsequently transferred. The transferee of the Participant shall, in all
cases, be subject to the provisions of the applicable Option Letter. The rights
of the transferee shall in no event be greater than the rights of the
Participant.
SEC.6.2. ADJUSTMENTS UPON CHANGES IN STOCK. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, rights offering, or any other change in the
corporate structure or shares of the Company, the Committee shall make such
adjustments, if any, as it deems appropriate in the number and kind of shares
subject to the Plan, in the number and kind of shares covered by outstanding
Options, and in the Option price per share. The determinations and adjustments
made by the Committee pursuant to this Section 6.2 shall be conclusive.
SEC.6.3. AMENDMENT, SUSPENSION, AND TERMINATION OF PLAN.
(a) The Board may suspend or terminate the Plan or any portion thereof at
any time.
(b) The Committee may amend the Plan from time to time in such respects as
the Committee may deem advisable in order that any Options thereunder shall
conform to any change in applicable laws or regulations or in any other respect
the Committee may deem to be in the best interests of the Company. No such
amendment, suspension, or termination shall alter or impair any outstanding
Options without the consent of the Participant adversely affected thereby.
(c) With the consent of the Participant adversely affected thereby, the
Committee may amend or modify any outstanding Options in any manner to the
extent that the Committee would have had the authority under the Plan initially
to grant such Options as so modified or amended, including without limitation,
to change the date or dates as of which such Options may be exercised.
SEC.6.4. NONUNIFORM DETERMINATIONS. The Committee's determinations under
the Plan, including without limitation, (i) the determination of the
Participants eligible to receive Options, (ii) the form, amount, and timing of
such Options, (iii) the terms and provisions of such Options and (iv) the Option
Letters evidencing
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<PAGE> 24
the same, need not be uniform and may be made by it selectively among
Participants who receive, or who are eligible to receive, Options under the
Plan, whether or not such Participants are similarly situated.
SEC.6.5. GENERAL RESTRICTION. Each Option under the Plan shall be subject
to the condition that, if at any time the Committee shall determine that (i) the
listing, registration, or qualification of the shares of Company Stock subject
or related thereto upon any securities exchange or under any state or federal
law, (ii) the consent or approval of any government or regulatory body or (iii)
an agreement by the Participant with respect thereto, is necessary or desirable,
then such Option shall not become exercisable in whole or in part unless such
listing, registration, qualification, consent, approval, or agreement shall have
been effected or obtained free of any conditions not acceptable to the
Committee.
SEC.6.6. NO RIGHT TO EMPLOYMENT. Neither the action of the Company in
establishing the Plan, nor any action taken by it or by the Board or the
Committee under the Plan, nor any provision of the Plan, shall be construed as
giving to any person the right to be retained in the employment or service of
the Company or service as a member of the Board.
SEC.6.7. EFFECTIVENESS OF PLAN. The Plan will not be made effective
unless approved by a majority of the votes cast by the stockholders of the
Company at a meeting of stockholders duly called and held for such purpose, and
no Option granted hereunder shall be exercisable prior to such approval.
SEC.6.8. GOVERNING LAW. To the extent that Federal laws do not otherwise
control, the Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware without reference to any
conflict of laws principles.
VII -- CHANGE IN CONTROL
SEC.7.1. EFFECT OF CHANGE ON OPTIONS. Subject to the Board's ability to
amend this Plan but notwithstanding any provision of this Plan to the contrary,
all outstanding Options shall become fully vested and exercisable in full upon a
Change of Control.
* * * * * *
To record the adoption of the Plan, NovaCare, Inc. has caused its
authorized officers to affix its corporate name and seal as of this 28th day of
September, 1998
[CORPORATE SEAL] NOVACARE, INC.
Attest:
- ------------------------------------------------
- ------------------------------------------
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<PAGE> 25
October 2, 1998
To the Participants in the NovaCare, Inc.
401(k) Retirement Savings Plan:
In connection with the Annual Meeting of Stockholders of NovaCare, Inc. to
be held on November 5, 1998, participants in the NovaCare, Inc. 401(k)
Retirement Savings Plan who have elected to purchase NovaCare stock are invited
to review the enclosed Proxy Statement.
Participants who desire to instruct the Plan trustee as to how they wish to
vote shares of stock in which participants have an ownership interest through
the Plan are invited to complete and return the enclosed instruction card.
Shares of stock held through the Plan will be voted by the trustee as indicated
on all returned instruction cards. Instruction cards must be received by October
30, 1998, in order for the Plan trustee to act upon participants' instructions.
Please note the Plan trustee is required to hold participants' instructions in
confidence and is not permitted to disclose the contents of these directions to
NovaCare, Inc., or any employee or officer thereof. In accordance with the
trust, shares held through the Plan for which no instruction cards are returned
in a timely manner will not be voted.
Sincerely,
Trustee
<PAGE> 26
[NOVACARE LOGO]
King of Prussia, Pennsylvania
October 2, 1998
To the Participants in the NovaCare, Inc.
1986 Stock Option Plan and Related Plans:
Enclosed herewith are copies of (i) the NovaCare, Inc. Annual Report for
the fiscal year ended June 30, 1998 (including NovaCare's Annual Report on Form
10-K for such fiscal year) and (ii) the Proxy Statement delivered to holders of
NovaCare common stock in connection with the Annual Meeting (the "Meeting") of
Stockholders of NovaCare, Inc. to be held on November 5, 1998.
Although holders of options to purchase NovaCare common stock under the
NovaCare 1986 Stock Option Plan and related plans are not entitled to vote at
the Meeting with respect to such options, pursuant to the rules of the
Securities and Exchange Commission, NovaCare is required to deliver to such
holders the enclosed materials, which are provided herewith for your review and
information.
<PAGE> 27
[NOVACARE LOGO]
King of Prussia, Pennsylvania
October 2, 1998
Holders of NovaCare, Inc. 5 1/2% Convertible
Subordinated Debentures Due 2000:
Enclosed herewith are copies of (i) the NovaCare, Inc. Annual Report for
the fiscal year ended June 30, 1998 (including NovaCare's Annual Report on Form
10-K for such fiscal year) and (ii) the Proxy Statement delivered to holders of
NovaCare common stock in connection with the Annual Meeting (the "Meeting") of
Stockholders of NovaCare, Inc. to be held on November 5, 1998.
Although participants in the NovaCare, Inc. 5 1/2% Convertible Subordinated
Debentures Due 2000 are not entitled to vote at the Meeting with respect to
such Debentures, pursuant to the rules of the Securities and Exchange
Commission, NovaCare is required to deliver to such holders the enclosed
materials, which are provided herewith for your review and information.
<PAGE> 28
[NovaCare Logo]
King of Prussia, Pennsylvania
October 2, 1998
Participants in NovaCare, Inc. Supplemental Benefits Plan
Holding Interests Represented by NovaCare, Inc. Common Stock
Enclosed herewith are copies of (i) the NovaCare, Inc. Annual Report for
the fiscal year ended June 30, 1998 (including NovaCare's Annual Report on Form
10-K for such fiscal year) and (ii) the Proxy Statement delivered to holders of
NovaCare common stock in connection with the Annual Meeting (the "Meeting") of
Stockholders of NovaCare, Inc. to be held on November 5, 1998.
Although participants in the NovaCare, Inc. Supplemental Benefits Plan
holding interests represented by NovaCare, Inc. common stock are not entitled
to vote at the Meeting with respect to such interests, pursuant to the rules of
the Securities and Exchange Commission, NovaCare is required to deliver to such
holders the enclosed materials, which are provided herewith for your review and
information.
<PAGE> 29
NOVACARE, INC.
PROXY -- ANNUAL MEETING OF STOCKHOLDERS -- NOVEMBER 5, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a stockholder of NOVACARE, INC., does hereby appoint JOHN
H. FOSTER and TIMOTHY E. FOSTER, or either of them, his or her proxies, with
full power of substitution or resubstitution, to appear and vote all shares of
Common Stock of the Company which the undersigned is entitled to vote at the
Annual Meeting of Stockholders to be held on Thursday, November 5, 1998 at 10:00
A.M., local time, or at any adjournment thereof, upon such matters as may
properly come before the Meeting.
The undersigned hereby instructs said proxies or their substitutes to vote
as specified below on each of the following matters and in accordance with their
judgement on any other matters which may properly come before the Meeting.
(Continued and to be Completed on the Reverse Side)
SEE REVERSE SIDE
<PAGE> 30
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE
FOR ALL NOMINEES LISTED WITHHOLD AUTHORITY
BELOW (EXCEPT AS MARKED TO VOTE FOR ALL NOMINEES
TO THE CONTRARY BELOW) LISTED BELOW
1. Election of [ ] [ ]
Directors
NOMINEES: Peter O. Crisp, John H. Foster, Timothy E. Foster, E. Martin Gibson,
Siri S. Marshall, James W. McLane, Stephen E. O'Neil, George W.
Siguler and Daniel C. Tosteson, M.D.
(INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name in the space provided below.)
____________________________________
FOR AGAINST ABSTAIN
2. Approval of Adoption of Long-Term [ ] [ ] [ ]
Compensation Plan
3. Approval of grants of options to an [ ] [ ] [ ]
executive officer
4. Ratification of PricewaterhouseCoopers [ ] [ ] [ ]
LLP as independent accountants
The Board of Directors favors a vote "FOR" each item.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS INDICATED THEY WILL BE VOTED IN FAVOR OF THE ITEM(S) FOR WHICH NO DIRECTION
IS INDICATED.
IMPORTANT: Before returning this Proxy, please sign your name or names on the
line(s) below exactly as shown thereon. Executors, administrators, trustees,
guardians or corporate officers should indicate their full titles when signing.
Where shares are registered in the name of joint tenants or trustees, each joint
tenant or trustee should sign.
Dated: ________, 1998 Signature(s)_____________________________________ (L.S.)
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
