<PAGE> 1
COMMISSION FILE NO 1-10875
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
OR
-- TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10875
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
(FULL TITLE OF THE PLAN AND ADDRESS OF THE PLAN, IF DIFFERENT FROM THAT
OF THE ISSUER NAMED BELOW)
NOVACARE, INC.
1016 WEST NINTH AVENUE, KING OF PRUSSIA, PA 19406
(NAME OF ISSUER OF THE SECURITIES HELD PURSUANT TO THE PLAN AND THE
ADDRESS OF ITS PRINCIPAL EXECUTIVE OFFICE)
<PAGE> 2
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS PAGE
- -------------------- ----
REPORT OF INDEPENDENT ACCOUNTANTS 2
FINANCIAL STATEMENTS:
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS,
WITH FUND INFORMATION, AT DECEMBER 31, 1998 AND 1997 3-4
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN
BENEFITS, WITH FUND INFORMATION, FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997 5-8
NOTES TO FINANCIAL STATEMENTS 9-13
SUPPLEMENTAL SCHEDULES: *
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AT
DECEMBER 31, 1998 14
SCHEDULE OF REPORTABLE TRANSACTIONS:
SERIES OF TRANSACTIONS IN EXCESS OF 5% OF
NET ASSETS FOR THE YEAR ENDED DECEMBER
31, 1998 15
SIGNATURE PAGE 16
EXHIBIT EXHIBIT NUMBER
CONSENT OF INDEPENDENT ACCOUNTANTS 23
* OTHER SCHEDULES REQUIRED BY SECTION 2520.103-10 OF THE DEPARTMENT OF LABOR
RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE UNDER ERISA HAVE BEEN
OMITTED BECAUSE THEY ARE NOT APPLICABLE.
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and Administrator of the NCES/NovaCare, Inc. 401(k)
Retirement Savings Plan,
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the NCES/NovaCare, Inc. 401(k) Retirement Savings Plan (the "Plan") at
December 31, 1998 and 1997, and the changes in net assets available for benefits
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Plan's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes and of reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974 ("ERISA"). The fund
information in the statements of net assets available for benefits and the
statement of changes in net assets available for benefits is presented for
purpose of additional analysis rather than to present the net assets available
for benefits and changes in net assets available for benefits of each fund.
These supplemental schedules and fund information are the responsibility of the
Plan's management. The supplemental schedules and fund information have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
The schedules of assets held for investment purposes and of reportable
transactions that accompany the Plan's financial statements do not disclose the
historical cost of certain assets held by the Plan trustee. Disclosure of this
information is required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under ERISA.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
June 22, 1999
<PAGE> 4
NCES/NOVACARE, INC. 401(K) RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
DECEMBER 31, 1998
FUND INFORMATION
<TABLE>
<CAPTION>
FIDELITY
MANAGED FIDELITY FIDELITY NOVACARE FIDELITY U.S.
INCOME PURITAN MAGELLAN STOCK BOND INDEX
PORTFOLIO * FUND * FUND * FUND FUND
----------- ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 22,263,439 $ 49,309,241 $ 85,766,228 $ 3,805,876 $ 2,032,326
RECEIVABLES/ (PAYABLES):
EMPLOYEE CONTRIBUTIONS 101,254 248,171 392,065 72,326 28,516
EMPLOYER CONTRIBUTIONS 20,821 51,656 79,691 15,679 6,114
ADMINISTRATIVE FEES (16,493) (17,102) (6,757) (1,839) (2,300)
PARTICIPANT LOANS 8,652 11,974 18,389 3,375 324
------------ ------------ ------------ ------------ ------------
NET ASSETS AVAILABLE FOR
PLAN BENEFITS $ 22,377,673 $ 49,603,940 $ 86,249,616 $ 3,895,417 $ 2,064,980
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
RETIREMENT FIDELITY FIDELITY
GOVERNMENT DIVERSIFIED AGGRESSIVE
MONEY MARKET INTERNATIONAL GROWTH NOVACARE LOAN
PORTFOLIO FUND FUND *(1) FUND TOTAL
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 1,981,573 $ 4,326,751 $ 9,842,337 $ 2,880,807 $ 182,208,578
RECEIVABLES/ (PAYABLES):
EMPLOYEE CONTRIBUTIONS 16,148 56,125 126,093 -- 1,040,698
EMPLOYER CONTRIBUTIONS 3,585 11,384 25,703 -- 214,633
ADMINISTRATIVE FEES (3,061) (56) (545) -- (48,153)
PARTICIPANT LOANS 848 937 1,924 (46,423) --
------------- ------------- ------------- ------------- -------------
NET ASSETS AVAILABLE FOR
PLAN BENEFITS $ 1,999,093 $ 4,395,141 $ 9,995,512 $ 2,834,384 $ 183,415,756
============= ============= ============= ============= =============
</TABLE>
*Investment in this fund represents 5% or more of the Plan's net assets.
(1) Formerly known as the Fidelity Emerging Growth Fund.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE> 5
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
DECEMBER 31, 1997
FUND INFORMATION
<TABLE>
<CAPTION>
FIDELITY
MANAGED FIDELITY FIDELITY NOVACARE FIDELITY U.S.
INCOME PURITAN MAGELLAN STOCK BOND INDEX
PORTFOLIO * FUND * FUND * FUND * FUND *
--------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 20,223,523 $ 39,132,154 $ 57,839,697 $ 12,612,974 $ 517,872
RECEIVABLES/ (PAYABLES):
EMPLOYEE CONTRIBUTIONS 148,276 293,767 411,080 95,984 15,209
EMPLOYER CONTRIBUTIONS 32,656 62,809 86,585 21,304 3,073
ADMINISTRATIVE FEES (16,517) (12,231) (4,422) (489) (683)
--------------- ---------------- ---------------- ---------------- ----------------
NET ASSETS AVAILABLE FOR
PLAN BENEFITS $ 20,387,938 $ 39,476,499 $ 58,332,940 $ 12,729,773 $ 535,471
=============== ================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
RETIREMENT FIDELITY
GOVERNMENT DIVERSIFIED FIDELITY
MONEY MARKET INTERNATIONAL EMERGING GROWTH NOVACARE LOAN
PORTFOLIO FUND FUND FUND TOTAL
--------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS, AT FAIR VALUE $ 213,593 $ 2,289,177 $ 3,321,835 $ 56,694 $ 136,207,519
RECEIVABLES/ (PAYABLES):
EMPLOYEE CONTRIBUTIONS 11,428 50,436 78,680 -- 1,104,860
EMPLOYER CONTRIBUTIONS 2,121 9,626 15,275 -- 233,449
ADMINISTRATIVE FEES (741) (64) (286) -- (35,433)
------------- ------------- ------------- ------------- -------------
NET ASSETS AVAILABLE
FOR BENEFITS $ 226,401 $ 2,349,175 $ 3,415,504 $ 56,694 $ 137,510,395
============= ============= ============= ============= =============
</TABLE>
* Investment in this fund represents 5% or more of the Plan's net assets.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE> 6
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1998
FUND INFORMATION
<TABLE>
<CAPTION>
FIDELITY FIDELITY
MANAGED INCOME FIDELITY FIDELITY NOVACARE U.S. BOND
PORTFOLIO PURITAN FUND MAGELLAN FUND STOCK FUND INDEX FUND
---------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 1,204,192 $ 4,879,031 $ 3,839,320 $ 707 $ 78,648
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS -- 1,850,164 16,658,036 (10,340,373) 29,349
------------ ------------ ------------ ------------ ------------
1,204,192 6,729,195 20,497,356 (10,339,666) 107,997
------------ ------------ ------------ ------------ ------------
CONTRIBUTIONS:
EMPLOYEE 2,946,605 7,332,245 11,247,055 2,255,967 803,926
EMPLOYER 968,458 1,328,636 1,989,692 429,402 123,240
PLAN MERGER (NOTE 5) 208,780 276,101 800,760 1,091 216,272
INTERFUND TRANSFERS (1,247,515) (1,891,803) (1,375,484) (504,515) 406,070
------------ ------------ ------------ ------------ ------------
2,876,328 7,045,179 12,662,023 2,181,945 1,549,508
------------ ------------ ------------ ------------ ------------
TOTAL ADDITIONS 4,080,520 13,774,374 33,159,379 (8,157,721) 1,657,505
------------ ------------ ------------ ------------ ------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 2,023,588 3,577,440 5,216,449 664,645 120,996
ADMINISTRATIVE FEES 67,197 69,493 26,254 11,990 7,000
------------ ------------ ------------ ------------ ------------
TOTAL DEDUCTIONS 2,090,785 3,646,933 5,242,703 676,635 127,996
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) 1,989,735 10,127,441 27,916,676 (8,834,356) 1,529,509
NET ASSETS AT BEGINNING OF YEAR 20,387,938 39,476,499 58,332,940 12,729,773 535,471
------------ ------------ ------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 22,377,673 $ 49,603,940 $ 86,249,616 $ 3,895,417 $ 2,064,980
============ ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE> 7
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1998
FUND INFORMATION
<TABLE>
<CAPTION>
FIDELITY
RETIREMENT FIDELITY FIDELITY
GOVERNMENT DIVERSIFIED AGGRESSIVE
MONEY MARKET INTERNATIONAL GROWTH NOVACARE LOAN
PORTFOLIO FUND FUND (1) FUND TOTAL
---------------- ---------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 47,999 $ 158,784 $ 585,257 $ 226,538 $ 11,020,476
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS - 202,331 1,737,875 - 10,137,382
---------------- ---------------- -------------- --------------- ------------
47,999 361,115 2,323,132 226,538 21,157,858
---------------- ---------------- -------------- --------------- ------------
CONTRIBUTIONS:
EMPLOYEE 665,161 1,653,705 3,199,368 - 30,104,032
EMPLOYER 71,204 278,205 532,600 - 5,721,437
PLAN MERGER (NOTE 5) 120,072 31,972 71,624 - 1,726,672
INTERFUND TRANSFERS 1,204,717 (11,314) 772,334 2,647,510 -
---------------- ---------------- -------------- --------------- ------------
2,061,154 1,952,568 4,575,926 2,647,510 37,552,141
---------------- ---------------- -------------- --------------- ------------
TOTAL ADDITIONS 2,109,153 2,313,683 6,899,058 2,874,048 58,709,999
---------------- ---------------- -------------- --------------- ------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 327,456 267,477 316,317 96,358 12,610,726
ADMINISTRATIVE FEES 9,005 240 2,733 - 193,912
---------------- ---------------- -------------- --------------- ------------
TOTAL DEDUCTIONS 336,461 267,717 319,050 96,358 12,804,638
---------------- ---------------- -------------- --------------- ------------
NET INCREASE (DECREASE) 1,772,692 2,045,966 6,580,008 2,777,690 45,905,361
NET ASSETS AT BEGINNING OF YEAR 226,401 2,349,175 3,415,504 56,694 137,510,395
---------------- ---------------- -------------- --------------- ------------
NET ASSETS AT END OF YEAR $ 1,999,093 4,395,141 $ 9,995,512 $ 2,834,384 $183,415,756
================ ================ ============== =============== ============
</TABLE>
(1) Formerly known as the Fidelity Emerging Growth Fund.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE> 8
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1997
FUND INFORMATION
<TABLE>
<CAPTION>
FIDELITY
MANAGED FIDELITY U.S.
INCOME FIDELITY FIDELITY NOVACARE BOND INDEX
PORTFOLIO PURITAN FUND MAGELLAN FUND STOCK FUND FUND
--------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 1,147,482 $ 3,018,262 $ 3,597,316 $ -- $ 14,109
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS -- 3,627,655 7,618,719 1,753,334 8,461
------------ ------------ ------------ ------------ ------------
1,147,482 6,645,917 11,216,035 1,753,334 22,570
------------ ------------ ------------ ------------ ------------
CONTRIBUTIONS:
EMPLOYEE 3,544,190 6,536,257 8,844,680 2,006,008 199,915
EMPLOYER 283,185 1,178,432 1,560,398 360,876 25,868
PLAN MERGER (NOTE 5) -- --
INTERFUND TRANSFERS (1,866,079) (612,073) (925,902) 14,671 311,923
------------ ------------ ------------ ------------ ------------
1,961,296 7,102,616 9,479,176 2,381,555 537,706
------------ ------------ ------------ ------------ ------------
TOTAL ADDITIONS 3,108,778 13,748,533 20,695,211 4,134,889 560,276
------------ ------------ ------------ ------------ ------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 1,883,455 2,552,568 3,891,029 785,875 23,330
ADMINISTRATIVE FEES 82,108 55,609 19,594 2,189 1,475
------------ ------------ ------------ ------------ ------------
TOTAL DEDUCTIONS 1,965,563 2,608,177 3,910,623 788,064 24,805
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) 1,143,215 11,140,356 16,784,588 3,346,825 535,471
NET ASSETS AT BEGINNING OF YEAR 19,244,723 28,336,143 41,548,352 9,382,948 --
------------ ------------ ------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 20,387,938 $ 39,476,499 $ 58,332,940 $ 12,729,773 $ 535,471
============ ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<PAGE> 9
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1997
FUND INFORMATION
<TABLE>
<CAPTION>
FIDELITY
RETIREMENT FIDELITY FIDELITY
GOVERNMENT DIVERSIFIED EMERGING
MONEY MARKET INTERNATIONAL GROWTH NOVACARE
PORTFOLIO FUND FUND LOAN FUND TOTAL
--------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
INVESTMENT INCOME:
DIVIDENDS AND INTEREST $ 6,608 $ 79,897 $ 666,410 $ -- $ 8,530,084
NET APPRECIATION (DEPRECIATION)
IN FAIR VALUE OF INVESTMENTS -- 42,995 (388,300) -- 12,662,864
------------ ------------ ------------ ------------ ------------
6,608 122,892 278,110 -- 21,192,948
------------ ------------ ------------ ------------ ------------
CONTRIBUTIONS:
EMPLOYEE 152,198 802,350 1,211,264 -- 23,296,862
EMPLOYER 15,006 127,307 196,427 -- 3,747,499
PLAN MERGER (NOTE 5) 86,895 -- -- -- 86,895
INTERFUND TRANSFERS 43,316 1,322,337 1,776,993 (65,186) --
------------ ------------ ------------ ------------ ------------
297,415 2,251,994 3,184,684 (65,186) 27,131,256
------------ ------------ ------------ ------------ ------------
TOTAL ADDITIONS 304,023 2,374,886 3,462,794 (65,186) 48,324,204
------------ ------------ ------------ ------------ ------------
DEDUCTIONS FROM NET ASSETS:
DISTRIBUTIONS TO PARTICIPANTS 76,318 25,546 46,291 -- 9,284,412
ADMINISTRATIVE FEES 1,304 165 999 -- 163,443
------------ ------------ ------------ ------------ ------------
TOTAL DEDUCTIONS 77,622 25,711 47,290 -- 9,447,855
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) 226,401 2,349,175 3,415,504 (65,186) 38,876,349
NET ASSETS AT BEGINNING OF YEAR -- -- -- 121,880 98,634,046
------------ ------------ ------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 226,401 $ 2,349,175 $ 3,415,504 $ 56,694 $137,510,395
============ ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE> 10
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF PLAN
GENERAL. The following description of the NCES/NovaCare, Inc. (the "Company")
401(k) Retirement Savings Plan (the "Plan"), formerly known as the NovaCare Inc.
Retirement Savings Plan, provides only general information. Participants should
refer to the Plan agreement for a more complete description of the Plan's
provisions. The Plan, which was formed effective July 1, 1990, is a defined
contribution plan subject to the Employee Retirement Income Security Act of 1974
("ERISA") and the Internal Revenue Code ("IRC"). All full and part-time
employees of the Company working a minimum of twenty hours per week on a
regularly scheduled basis may enroll beginning on the first day of the first
payroll period of the month following six months of consecutive service.
ENROLLMENT. An eligible employee participates in the Plan by authorizing the
Company to make tax-deferred contributions to the plan on the employee's behalf,
resulting in a reduction of the employee's taxable earnings. The employee may
direct the investment of these contributions (see "Investment Options" below).
CONTRIBUTIONS TO THE PLAN. Participants may authorize basic contributions
ranging from 1% to 15% of their compensation. Certain highly compensated
participants may have their basic contributions limited to 6% of their
compensation. In accordance with the IRC such contributions may not exceed
$10,000 and $9,500 in 1998 and 1997, respectively. The Company makes matching
contributions in the amount of 30% of participant contributions up to the first
6% of compensation.
PARTICIPANT ACCOUNT. Each account is credited with the participant's
contributions and an allocation of (a) the Company's matching contribution when
made and (b) Plan earnings when earned. Company contributions are allocated
based on the matching percentage for participant contributions. Plan earnings
are allocated to each participant's account based on the respective account
balances. The benefit to which a participant is entitled is the vested amount
that can be provided from their account.
VESTING. Participants are fully vested in their contributions plus actual
earnings on those contributions. Vesting in the remainder of the account is
based on years of continuous service according to a tiered vesting schedule.
Participants become fully vested upon death or disability, attainment of normal
retirement age, or after five years of credited service.
INVESTMENT OPTIONS. Upon enrollment in the Plan, participants may direct
contributions among one or more of the following investment funds:
I. Fidelity Managed Income Portfolio - An open-end commingled
pool which invests in short- and long-term investment
contracts issued by insurance companies (GICs), investment
contracts issued by commercial banks (BICs), synthetic
investment contracts designed to simulate conventional GICs
through the purchase of securities and inclusion of a benefit
responsive feature (put feature), and cash equivalents.
II. Fidelity Puritan Fund - A mutual fund which invests in
domestic and foreign common stocks and preferred stocks and
bonds, including lower-quality, high-yielding debt securities.
9
<PAGE> 11
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
III. Fidelity Magellan Fund - A mutual fund which invests in the
stocks of companies with an expected above-average growth
potential and a corresponding higher level of risk.
IV. Fidelity U.S. Bond Index Fund - A mutual fund which invests in
investment grade (medium to high quality) or above with
maturities of at least one year, including U.S. Treasury or
government securities, corporate bonds, asset-backed and
mortgage-backed securities and U.S. dollar-denominated foreign
securities.
V. Fidelity Retirement Government Money Market Portfolio - A
money market fund which invests in obligations issued or
guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities.
VI. Fidelity Diversified International Fund - An international
fund which invests primarily in equity securities of companies
located anywhere outside the United States that are included
in the Morgan Stanley EAFE Index.
VII. Fidelity Aggressive Growth Fund (formerly known as Fidelity
Emerging Growth Fund) - A mutual fund which invests primarily
in stocks of small and medium sized developing companies that
the fund's manager believes have potential to grow rapidly in
earnings or revenues.
VIII. NovaCare Stock Fund - Funds are invested in NovaCare, Inc.
common stock with a small portion invested in short-term money
market instruments for liquidity.
The NovaCare Loan Fund represents loans which were outstanding as of the dates
of the RehabClinics, Inc. and the NovaCare Orthotics & Prosthetics Plan mergers
into the NovaCare Plan as well as new loans issued under the Plan in 1998. The
NovaCare Plan did not begin to offer employee loans until January 1, 1998 as
described below.
PARTICIPANT LOANS. Effective January 1, 1998 participants may borrow from their
fund accounts a minimum of $1,000 up to a maximum equal to the lesser of 50
percent of their vested account balance or $50,000. Loan transactions are
treated as a transfer to (from) the investment funds from (to) the participant
loan fund. Loan terms range from six months to five years, are collateralized by
the vested balance in the participant's account and bear interest at a rate
commensurate with prevailing commercial lending institutions rates. Interest
rates ranged from 6% to 9.50% during 1998 and from 6% to 9% during 1997.
Principal and interest is paid ratably through bi-weekly payroll deductions.
DISTRIBUTIONS AND WITHDRAWALS. Distributions are paid in the following manner:
I. Distributions from all funds, except the NovaCare Stock Fund,
are paid in cash.
II. Distributions from the NovaCare Stock Fund are paid in cash or
shares of NovaCare, Inc. common stock at the participant's
option. Fractional shares are paid in cash.
10
<PAGE> 12
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Prior to termination of service, participants may, in the event of financial
hardship, withdraw amounts from the Plan twice in any 12-month period. In the
absence of financial hardship, a participant's contribution may not be withdrawn
prior to attainment of age 59 1/2.
Upon termination of service for reasons other than death, participants are
entitled to a lump-sum amount equal to the value of the vested balance of their
account. Participants with account balances exceeding $5,000 may defer receipt
of the lump-sum amount until reaching age 70 1/2. If a participant dies, the
entire amount in the participant's account is distributed in a lump sum to the
participant's beneficiaries. A terminating participant's unvested account
balance is forfeited. In the event of reemployment, the employee is eligible for
all previously forfeited amounts. At December 31, 1998 and 1997, forfeited
nonvested accounts totaled $599,652 and $170,480, respectively. These accounts
will be used to reduce future employer contributions. During 1998 and 1997,
employer contributions were reduced by $6,995 and $433,592, respectively, from
forfeited nonvested accounts.
ADMINISTRATIVE EXPENSES. The Company may elect to pay all Plan administrative
expenses. If the Company elects not to pay such expenses, the expenses will be
paid by the Plan. During 1998 and 1997, Plan administrative expenses were shared
by both the Company and the Plan participants.
PLAN TERMINATION. Although it has not expressed any intent to do so, the Company
has the right under the Plan to discontinue its contributions at any time and to
terminate the Plan subject to the provisions of ERISA. In the event of Plan
termination, participants will become fully vested in their accounts.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING. The Plan's financial statements are prepared on the accrual
basis of accounting.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
changes therein and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
INVESTMENT VALUATION AND INCOME RECOGNITION. The Plan's investments are stated
at fair value. Shares of registered investment companies are valued at quoted
market prices which represent the net asset value of shares held by the Plan at
year end. The Fidelity Managed Income Portfolio is a common trust fund, which is
stated at its net asset value as determined by the fund administrator as of the
year-end valuation date. The NovaCare Stock Fund is valued at its year end unit
value as determined by the trustee which is based upon the underlying value of
NovaCare common stock and short term money market instruments. Participant loans
are valued at cost, which approximates fair value. Purchases and sales are
recorded on a trade date basis. Investment income is recorded when earned.
PAYMENT OF BENEFITS. Benefits are recorded when paid.
11
<PAGE> 13
NCES\NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
3. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for benefits per the
plan financial statements to the Form 5500:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net assets available for benefits per the financial statements $ 183,415,756 $ 137,510,395
Less: Amounts allocated to withdrawing participants (280,712) (60,549)
------------- -------------
Net assets available for benefits per the Form 5500 $ 183,135,044 $ 137,449,846
============= =============
</TABLE>
The following is a reconciliation of benefits paid to participants per the plan
financial statements to the Form 5500:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------------
<S> <C>
Benefits paid to participants per the financial statements $ 12,610,726
Add: Amounts allocated to withdrawing participants at December 31, 1998 280,712
Less: Amounts allocated to withdrawing participants at December 31, 1997 (60,549)
-----------------------
Benefits paid to participants per the Form 5500 $ 12,830,889
=======================
</TABLE>
Amounts allocated to withdrawing participants are recorded on the Form 5500 for
benefit claims that have been processed and approved for payment prior to
December 31 but not yet paid as of that date.
4. PLAN MERGERS
During 1998 and 1997, the assets of the following plans were merged with and
into the Plan as follows:
<TABLE>
<CAPTION>
Effective Date 1998 1997
-------------- ---- ----
<S> <C> <C> <C>
Advanced Orthopedic Technologies, Inc.
401(k) Plan 07/01/98 $1,117,145 -
Fine, Bryant & Wah, P.T. Chartered
Profit Sharing Trust 10/06/98 131,035 -
Georgia Physical Therapy, Inc.
Profit Sharing Plan 10/27/98 478,492 -
DC Claussen RPT Physical Therapy, Inc.
Profit Sharing Plan 06/18/97 - $86,895
------------- ------------
$1,726,672 $86,895
============= ============
</TABLE>
12
<PAGE> 14
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
5. TAX STATUS
On February 2, 1996 the Internal Revenue Service determined by letter that the
Plan qualifies under Section 401 (a) of the IRC and is exempt from federal
income taxes under Section 501(a) of IRC. Once qualified, the Plan is required
to operate in conformity with the IRC to maintain its qualification. The Plan
has been amended since receiving the determination letter. However, the Plan
Administrator is not aware of any course of action or series of events that have
occurred that might adversely affect the Plan's qualified status.
6. RELATED PARTY TRANSACTIONS
Certain Plan investments represent shares of mutual funds and a collective trust
fund managed by an affiliate of Fidelity Management Trust Company ("FMTC"). FMTC
is the trustee of the Plan. Transactions in these mutual funds are
party-in-interest transactions which are exempt from the prohibited transaction
rules of ERISA.
7. SUBSEQUENT EVENTS
In January 1999, the assets of the Frank J. Malone and Son, Inc. Profit Sharing
401 (k) plan and the Dale Clark Division of O&P 1 401(k) plan, totaling $504,240
and $90,089, respectively, were merged with and into the plan.
13
<PAGE> 15
NCES\NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IDENTITY OF ISSUE/DESCRIPTION OF ASSET COST CURRENT VALUE
- ---------------------------------------------------- ------------------ -------------------
<S> <C> <C>
MUTUAL FUNDS:
FIDELITY MANAGED INCOME PORTFOLIO * $ 22,263,439(1) $ 22,263,439
FIDELITY PURITAN FUND * 47,459,077(1) 49,309,241
FIDELITY MAGELLAN FUND * 69,108,192(1) 85,766,228
FIDELITY U.S. BOND INDEX FUND* 2,001,008 2,032,326
FIDELITY RETIREMENT GOVERNMENT MONEY
MARKET PORTFOLIO * 1,981,573 1,981,573
FIDELITY DIVERSIFIED INTERNATIONAL FUND * 4,141,068 4,326,751
FIDELITY AGGRESSIVE GROWTH FUND * 8,515,701 9,842,337
------------ ------------
155,470,058 175,521,895
NOVACARE STOCK FUND * 14,146,249(1) 3,805,876
NOVACARE LOAN FUND 2,880,807 2,880,807
(MATURITY 1999-2004; INTEREST RATE 6% - 9.5%)
------------ ------------
$172,497,114 $182,208,578
============ ============
</TABLE>
(1) CURRENT VALUE AT BEGINNING OF YEAR OR COST OF PURCHASE IF ACQUIRED DURING
THE YEAR.
* PARTY - IN - INTEREST.
14
<PAGE> 16
NCES\NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
SCHEDULE OF REPORTABLE (5%) TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1998
SERIES OF TRANSACTIONS IN THE SAME ISSUE AGGREGATING MORE THAN 5% OF THE JANUARY
1, 1998 CURRENT VALUE OF PLAN ASSETS
<TABLE>
<CAPTION>
NUMBER OF PURCHASE SELLING EXPENSE
DESCRIPTION OF ASSET TRANSACTIONS PRICE PRICE INCURRED
- ------------------- -------------------- ------------ ----- ----- --------
<S> <C> <C> <C> <C> <C>
FIDELITY MANAGEMENT FIDELITY MANAGED 247 $ 7,359,945 $ -- $--
TRUST COMPANY INCOME PORTFOLIO
FIDELITY MANAGEMENT FIDELITY MANAGED 245 -- 5,320,029 --
TRUST COMPANY INCOME PORTFOLIO
FIDELITY INVESTMENTS FIDELITY MAGELLAN 251 22,188,343 -- --
FUND
FIDELITY INVESTMENTS FIDELITY MAGELLAN 248 -- 10,919,848 --
FUND
FIDELITY INVESTMENTS FIDELITY PURITAN FUND 250 15,510,150 -- --
FIDELITY INVESTMENTS FIDELITY PURITAN FUND 243 -- 7,183,227 --
FIDELITY MANAGEMENT NOVACARE STOCK FUND 248 5,864,148 --
TRUST COMPANY
FIDELITY MANAGEMENT NOVACARE STOCK FUND 246 -- 4,330,873 --
TRUST COMPANY
FIDELITY MANAGEMENT FIDELITY AGGRESSIVE 243 5,925,154 -- --
TRUST COMPANY GROWTH FUND
FIDELITY MANAGEMENT FIDELITY AGGRESSIVE 193 -- 1,142,528 --
TRUST COMPANY GROWTH FUND
</TABLE>
<TABLE>
<CAPTION>
CURRENT VALUE
COST OF AT TRANSACTION NET GAIN /
ASSET DATE (LOSS)
- ------------------- ----------- -------------- ------------
<S> <C> <C> <C>
FIDELITY MANAGEMENT $- $ 7,359,945 $ -
TRUST COMPANY
FIDELITY MANAGEMENT 5,320,029 (1) 5,320,029 -
TRUST COMPANY
FIDELITY INVESTMENTS - 22,188,343 -
FIDELITY INVESTMENTS 9,413,378 (1) 10,919,848 1,506,470
FIDELITY INVESTMENTS - 15,510,150 -
FIDELITY INVESTMENTS 6,512,274 (1) 7,183,227 670,953
FIDELITY MANAGEMENT - 5,864,148
TRUST COMPANY
FIDELITY MANAGEMENT 4,405,786 (1) 4,330,873 (74,913)
TRUST COMPANY
FIDELITY MANAGEMENT - 5,925,154
TRUST COMPANY
FIDELITY MANAGEMENT 1,127,915 1,142,528 14,613
TRUST COMPANY
</TABLE>
(1) CURRENT VALUE AT BEGINNING OF YEAR OR COST OF PURCHASE IF ACQUIRED DURING
THE YEAR.
15
<PAGE> 17
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE PLAN
ADMINISTRATORS OF THE "NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN" HAVE
DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED BY THE UNDERSIGNED HEREUNTO DULY
AUTHORIZED.
NCES/NOVACARE, INC. 401(k) RETIREMENT SAVINGS PLAN
DATE: June 29, 1999 BY: /S/KATHERINE P. KEHOE
--------------------------------
KATHERINE P. KEHOE
PLAN ADMINISTRATOR
BY: /S/BARRY E. SMITH
--------------------------------
BARRY E. SMITH
VICE PRESIDENT, CONTROLLER, AND
CHIEF ACCOUNTING OFFICER,
NOVACARE, INC.
16
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
WE HEREBY CONSENT TO THE INCORPORATION BY REFERENCE IN THE REGISTRATION
STATEMENT ON FORM S-8 (NO. 33-36889 AND NO. 33-88746) OF NOVACARE, INC. OF OUR
REPORT DATED JUNE 22, 1999 APPEARING ON PAGE 2 OF THIS FORM 11-K.
PricewaterhouseCoopers LLP
PHILADELPHIA, PENNSYLVANIA
June 28, 1999
