<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-10875
NOVACARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3247827
(State of incorporation) (I.R.S. Employer Identification No.)
1016 W. NINTH AVENUE, KING OF PRUSSIA, PA 19406
(Address of principal executive office) (Zip code)
Registrant's telephone number: (610) 992-7200
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of October 31, 1999, NovaCare, Inc. had 63,304,289 shares of common stock,
$.01 par value, outstanding.
<PAGE> 2
NOVACARE, INC. AND SUBSIDIARIES
FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 1999
INDEX
-----
<TABLE>
<CAPTION>
Part No. Item No. Description Page No.
- - -------- -------- ----------- --------
<S> <C> <C> <C>
I FINANCIAL INFORMATION
1 Financial Statements
- Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1999 1
- Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 1999 and 1998 2
- Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 1999 and 1998 3
- Notes to Condensed Consolidated Financial Statements 4-10
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
II OTHER INFORMATION
4 Submission of Matters to a Vote of Security Holders 16
6 Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
i
<PAGE> 3
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND JUNE 30, 1999
(In thousands, except per share data)
(UNAUDITED)
(See Note 1)
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1999 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 27,330 $ 17,110
Income taxes receivable....................... 28,536 25,255
Deferred income taxes......................... 20,602 37,422
Net assets of discontinued operations......... 215,020 899,748
Other current assets.......................... 6,412 4,803
--------- --------
Total current assets...................... 297,900 984,338
Property and equipment, net..................... -- 3,372
Deferred income taxes........................... -- 1,669
Other assets, net............................... 1,605 5,216
--------- --------
$ 299,505 $994,595
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements..... $ 175,000 $522,543
Accounts payable and accrued expenses......... 30,824 39,366
--------- --------
Total current liabilities................. 205,824 561,909
Financing arrangements, net of current portion.. -- 336
Deferred income taxes........................... 20,602 39,091
--------- --------
Total liabilities......................... 226,426 601,336
--------- --------
Commitments and contingencies................... -- --
Shareholders' equity:
Common stock, $.01 par value; authorized
200,000 shares; issued 68,639 shares at
September 30, 1999 and issued 68,561 shares
at June 30, 1999............................ 686 686
Additional paid-in capital.................... 274,714 274,606
(Accumulated deficit) retained earnings....... (159,648) 160,640
--------- --------
115,752 435,932
Less: Common stock in treasury (at cost),
5,308 shares at September 30, 1999 and at
June 30, 1999............................... (42,673) (42,673)
--------- --------
Total shareholders' equity................ 73,079 393,259
--------- --------
$ 299,505 $994,595
========= ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
1
<PAGE> 4
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(See Note 1)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- --------
<S> <C> <C>
Net revenues .................................... $ -- $ --
Cost of services ................................ -- --
--------- --------
Gross profit ................................. -- --
Selling, general and administrative expenses .... 13,734 20,073
(Credit) provision for restructure .............. (1,987) --
--------- --------
(Loss) from operations ....................... (11,747) (20,073)
Investment and other income, net ................ 406 84
Gain on sale of property and equipment .......... 1,528 --
Interest expense ................................ (4,490) (6,847)
--------- --------
(Loss) before income taxes ................... (14,303) (26,836)
Income taxes .................................... -- 9,393
--------- --------
(Loss) from continuing operations ............ (14,303) (17,443)
Income from discontinued operations,
net of tax ................................... 11,448 23,116
Loss on disposal of discontinued operations,
net of tax ................................... (317,433) --
--------- --------
Net (loss) income ............................ $(320,288) $ 5,673
========= ========
(Loss) per share from continuing operations
- basic and assuming dilution ............. $ (0.23) $ (0.28)
========= ========
(Loss) earnings per share - basic and
assuming dilution ......................... $ (5.06) $ .09
========= ========
Weighted average number of shares outstanding
- basic and assuming dilution ............. 63,274 62,566
========= ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE> 5
NOVACARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
(See Note 1)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $(320,288) $ 5,673
Adjustments to reconcile net (loss) income to net cash flows
from operating activities of continuing operations:
(Income) from discontinued operations, net of tax............. (11,448) (23,116)
Loss on disposal of discontinued operations, net of tax....... 317,433 --
(Credit) provision for restructure............................ (1,987) --
(Gain) on sale of property and equipment...................... (1,528) --
Depreciation and amortization............................... 849 2,065
Deferred income taxes....................................... -- 555
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Other current assets....................................... (1,609) (6,394)
Accounts payable and accrued expenses...................... (6,638) (319)
Current income taxes....................................... (3,281) 3,182
Other, net................................................. 3,611 (354)
----------- ----------
Net cash flows (used in) continuing operations............. (24,886) (18,708)
Net cash flows (used in) discontinued
operations................................................ (1,837) (13,103)
----------- ----------
Net cash flows (used in) operating activities............ (26,723) (31,811)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Continuing operations - proceeds from sale of property
and equipment............................................. 4,934 --
Discontinued operations:
Net proceeds from sale of O&P business..................... 392,695 --
Payments for businesses acquired, net of cash acquired..... (5,321) (48,268)
Additions to property and equipment........................ (3,627) (9,451)
Other, net................................................. -- 354
----------- -----------
Net cash flows provided by (used in) investing
activities.............................................. 388,681 (57,365)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt and credit arrangements - continuing
operations................................................... -- 174,784
Payment of debt and credit arrangements- continuing
operations................................................... (347,879) (99,300)
Proceeds from debt and credit arrangements - discontinued
operations................................................... 1,528 --
Payments of debt and credit arrangements - discontinued
operations................................................... (5,487) (8,265)
Proceeds from common stock issued............................. 100 712
Other......................................................... -- (67)
----------- -----------
Net cash flows (used in) provided by financing
activities.............................................. (351,738) 67,864
----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 10,220 (21,312)
Cash and cash equivalents, beginning of period................ 17,110 32,760
----------- ------------
Cash and cash equivalents, end of period...................... $ 27,330 $ 11,448
=========== ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE> 6
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
On July 1, 1999, NovaCare, Inc. (The "Company") completed the sale of its
Orthotic and Prosthetic ("O&P") business to Hanger Orthopedic Group, Inc.
("Hanger").
On September 21, 1999, the stockholders of the Company approved three
proposals submitted as part of a Special Meeting of Stockholders of NovaCare,
Inc. The first proposal recommended the sale of the Company's Physical
Rehabilitation and Occupational Health ("PROH") division, the second proposal
recommended the sale of the Company's 64% interest in NovaCare Employee
Services, Inc. ("NCES") and the third proposal recommended the adoption of a
proposal to restructure the Company. Under the third proposal, if the Company
is unable to find suitable acquisition candidates to reinvest the proceeds from
the PROH and NCES sales, after the payment of its convertible subordinated
debentures (see Note 3) and other liabilities, it will liquidate.
On September 8, 1999, the Company entered into a definitive agreement with
a subsidiary of Plato Holdings, Inc. ("Plato") to sell its 64% interest in NCES
as part of a tender offer by Plato for all of NCES's outstanding shares at a
price of $2.50 per share. The tender offer and sale were completed on October
19, 1999.
On October 4, 1999, the Company announced that it had reached a definitive
agreement with Select Medical Corporation ("Select") for the sale of PROH for
$200,000. The sale of PROH was completed on November 19, 1999.
The Company's former long-term care operating services segment was
disposed in fiscal 1999 with the shutdown of certain of its operations in the
Western United States during the third fiscal quarter and the sale of the
remaining operations on June 1, 1999. The Company's former employee services
segment was disposed through the Company's sale of its interest in NCES. The
Company's former outpatient services segment was disposed through the sales of
O&P and PROH. As a result of these transactions, the Company has disposed of
all of its operating segments. The Company's remaining holding company
activities consist of the winding up of its affairs with respect to the
disposed segments, the search for potential acquisition candidates and the
preparation for potential liquidation.
Accordingly, the accompanying condensed consolidated financial statements
reflect all the Company's assets and liabilities, results of operations and
cash flows as discontinued operations except for its remaining holding company
activities, which are treated as continuing operations. Results of operations
and cash flows for the three months ended September 30, 1998 have been
reclassified to reflect the current period presentation. The accompanying
financial statements as of September 30, 1999 and for the three months ended
September 30, 1999 and 1998 are unaudited. The balance sheet as of June 30,
1999 is condensed from the audited balance sheet of the Company at that date,
and has been reclassified to present the assets and liabilities of the
outpatient and employee services segments as "net assets of discontinued
operations". Management believes readers of these financial statements should
focus their attention on the "Liquidation Analysis and Estimates" section of
management's discussion and analysis of financial condition and results of
operations as in the opinion of management, that presents the most relevant
financial information about the Company.
These statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto for the year ended June 30, 1999. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of Company management,
the condensed consolidated financial statements for the unaudited interim
periods include all adjustments necessary for a fair statement of the results
for such interim periods.
4
<PAGE> 7
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
2. DISCONTINUED OPERATIONS
On July 1, 1999, the Company sold its O&P business to Hanger for
$445,000. Of the purchase price, the Company placed $15,000 in escrow in
conjunction with a guarantee of a minimum $94,000 of working capital, as
defined in the agreement of sale. The final working capital amount is expected
to be settled by no later than March 31, 2000.
The gain on the sale of O&P consists of the following:
<TABLE>
<S> <C>
Cash received.......................................... $ 392,695
Debt assumed by the buyer.............................. 37,305
Less: transaction costs and related liabilities........ (17,175)
---------
Net transaction amount................................. 412,825
Book basis of net assets of O&P........................ (362,905)
---------
Gain on sale of O&P.................................... $ 49,920
=========
</TABLE>
The gain on the sale of O&P is included in net loss on disposal of
discontinued operations and is based on preliminary information and may require
adjustment. For income tax purposes any tax liability resulting from this
transaction will be offset by net operating losses and the loss on the NCES and
PROH sale.
In connection with the working capital guarantee, Hanger has presented the
Company with a calculation of working capital that indicates an adjustment of
approximately $29 million. In recognizing the gain on the sale of O&P,
management has considered the amount presented by Hanger and has made its best
estimate of the amount which may ultimately be required to settle the
guaranteed amount with Hanger. In the event the Company and Hanger cannot
agree on the settlement of the working capital guarantee, an independent
arbitrator will be engaged by both parties to resolve the matter by binding
arbitration. Management cannot presently determine the amount, if any, of
additional liability under the working capital guarantee as a result of these
future actions.
On October 18, 1999, the Company completed the sale of its interest in
NCES at the tender offer price of $2.50 per share. In connection with the
tender offer, the Company placed approximately $13,400 in escrow related to its
guarantee of a four-year agreement with NCES to provide employee services to
PROH. The Company has written down the net assets of NCES to their estimated net
realizable value at September 30, 1999, based on the sale. The charge for the
write-down to estimated net realizable value of NCES is as follows:
<TABLE>
<S> <C>
Cash received, October 1999............................ $ 48,500
Less: transaction costs and related liabilities........ (3,857)
--------
Net transaction amount................................. 44,643
Book basis of net assets of NCES....................... (47,791)
--------
Estimated loss on disposal of NCES..................... $ (3,148)
========
</TABLE>
The write-down to the estimated net realizable value of NCES is included
in the net loss on disposal of discontinued operations and is based on
preliminary information and may require adjustment.
5
<PAGE> 8
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
On November 19, 1999, the Company completed the sale of PROH. The sales
price for PROH was $200,000, of which the proceeds were reduced by the amount of
PROH debt assumed by Select. Of the remainder, $36,800 has been placed in escrow
in support of certain representations made by the Company, including minimum
working capital of approximately $86,000, collectibility of accounts
receivable, net of reserves, as of closing and certain contingent earnout
payments. The Company has written down the net assets of PROH to their
estimated net realizable value at September 30, 1999, based on the sale.
Included in transaction costs is a $12,800 accrual related to a guarantee of a
four year agreement with NCES to provide employee services to PROH as well as
$5,000 related to severance costs to be paid by the Company as a result of
terminations which may be made by the purchaser within the first twelve months
following closing. The charge for the write-down to the estimated net
realizable value of PROH is as follows:
<TABLE>
<S> <C>
Cash received, November 1999...................... $ 125,800
Amount placed in escrow........................... 36,800
Debt assumed by the buyer......................... 37,400
Less: transaction costs and related liabilities... (26,656)
---------
Net transaction amount............................ 173,344
Book basis of net assets of PROH.................. (521,451)
---------
Estimated loss on disposal of PROH................ $(348,107)
=========
</TABLE>
The write-down to estimated net realizable value of PROH is included in
the net loss on disposal of discontinued operations and is based on preliminary
information and may require adjustment.
Included in the net assets of discontinued operations below, are accounts
receivable of the long-term care services Western operations, which were closed
in fiscal 1999, and accounts receivable related to the operations sold in fiscal
1999 to Chance Murphy, Inc. ("Chance Murphy"). These receivables amounted to
$25,700 (including $21,400 related to the business sold to Chance Murphy) at
September 30, 1999. Pursuant to the agreement, the Company provided a working
capital guarantee of $30,000 and Chance Murphy agreed to pay to the Company the
amount, if any, of working capital as of June 1, 1999 in excess of $30,000 or,
as applicable, to transfer to the Company any remaining accounts receivable
relating to periods prior to June 1, 1999 once the working capital guarantee has
been satisfied. On November 11, 1999, the Company was released from the
commitment under the guarantee and the remaining accounts receivable ($18,700 as
of November 11, 1999) reverted back to the Company.
In the first quarter of fiscal 2000 as a result of the overall continued
deterioration of the financial condition of providers of long-term care services
as a consequence of the Balanced Budget Act of 1997, the Company recorded an
additional loss on the disposal of its long-term care services operating segment
of $13,098. This loss relates to a provision for uncollectible accounts for
certain accounts receivable remaining at September 30, 1999. Of this amount,
$4,300 relates to amounts due to the Company for its indemnification of
customers for disallowed Medicare charges, and the remainder relates to trade
accounts receivable.
In the first quarter of fiscal 2000 a lawsuit was filed against the Company
seeking payment of approximately $13,000 with respect to certain Medicare cost
report settlements related to its medical rehabilitation hospital division,
which was sold in fiscal 1995. The Company recorded an additional provision of
$3,000 for this matter and has included such amount in the loss on the disposal
of the long-term care services segment.
In connection with the sales of businesses, the purchasers have asserted
certain claims under indemnifications made by the Company in connection with
the sales. The amount of such claims in excess of amounts provided by the
Company in the accompanying financial statements totals $16,800. This
additional amount has not been provided because the ultimate amount of
liability, if any, is not presently determinable.
6
<PAGE> 9
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
Results of operations for all of the Company's discontinued operations
(consisting of the outpatient services, employee services and long-term care
services operating segments) were as follows for the three months ended
September 30, 1999 and 1998. In the three months ended September 30, 1999,
there were no operations of O&P or long-term care services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Net revenues ........................... $361,782 $478,201
Income before income taxes ............. 4,953 37,936
Income tax benefit (provision) ......... 6,495 (14,820)
Net income ............................. $ 11,448 $ 23,116
</TABLE>
The income tax benefit for the three months ended September 30, 1999
results from a reversal of accrued income tax liabilities in conjunction with
the sales of the Company's operating businesses.
Net assets of discontinued operations consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1999 1999
-------- ---------
<S> <C> <C>
Cash and cash equivalents ............. $ 2,079 $ 6,167
Accounts receivable, net .............. 157,167 249,769
Inventories ........................... -- 44,651
Property and equipment, net ........... 45,217 56,530
Excess cost of net assets acquired,
net .............................. 116,368 729,947
Investment in joint ventures .......... 14,345 15,120
Other receivables, net ................ 15,918 21,906
Other assets .......................... 20,177 22,037
Accounts payable and accrued
expenses ......................... (75,694) (101,445)
Working capital guarantee, long-term
care services .................... (904) (28,800)
Financing arrangements ................ (41,395) (82,678)
Minority interests .................... (31,642) (28,425)
Other liabilities ..................... (6,616) (5,031)
-------- ---------
Net assets of discontinued operations.. $215,020 $ 899,748
======== =========
</TABLE>
Net assets of discontinued operations by operating segment consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1999 1999
-------- ---------
<S> <C> <C>
Long-term care services .................. $ 34,433 $ 42,088
Employee services ........................ 44,643 47,904
Outpatient services ...................... 135,944 809,756
-------- --------
$215,020 $899,748
======== ========
</TABLE>
7
<PAGE> 10
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
3. FINANCING ARRANGEMENTS
Financing arrangements consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1999 1999
------------- ----------
<S> <C> <C>
Revolving credit facility, due
December 31, 1999.......................... $ -- $347,000
Convertible subordinated debentures
(5.5%), due January 2000................... 175,000 175,000
Other........................................ -- 879
-------- --------
175,000 522,879
Less: current portion........................ 175,000 522,543
-------- --------
$ -- $ 336
======== ========
</TABLE>
The Company has a revolving credit facility with a syndicate of lenders.
The facility is collateralized by substantially all the common stock of the
Company's subsidiaries. Amounts outstanding under the facility at June 30, 1999
were entirely repaid on July 1, 1999 from the proceeds of the sale of O&P. As of
July 1, 1999, the amount available under the revolving credit facility was
reduced to $35,000. On October 19, 1999, the amount available under the
revolving credit facility was further reduced to $15,621. The $15,621 exists
solely to collateralize standby letters of credit issued in support of certain
guarantees provided by the Company in conjunction with the sales of its
operating businesses.
4. PROVISION FOR RESTRUCTURE
In the fourth quarter of fiscal 1999, the Company recorded a provision for
restructure of $12,260 related to a program to reduce its selling, general and
administrative costs incurred at its corporate headquarters. The program
involved the termination of 74 employees of which 14 employees were terminated
as of September 30, 1999. This provision consisted of the following:
<TABLE>
<S> <C>
Employee severance and related costs..................... $ 3,060
Lease and technology agreement mitigation................ 8,515
Write-down of property and equipment..................... 685
-------
Total.................................................... $12,260
=======
</TABLE>
In the first quarter of fiscal 2000, the Company reversed $1,987 of this
provision based on the current costs expected to complete this program. The
reversal is the net amount of additional severance and related costs of $2,400
and reduction of lease and technology agreement mitigation of $4,387. The
Company expects that all of these costs will be expended by June 30, 2000.
Activity in the accrued liability for this provision consisted of the following:
<TABLE>
<S> <C>
Provision for restructure............................... $12,260
Less: non-cash write-down of property and equipment..... (685)
Reversal of provision................................... (1,987)
Payments and other reductions........................... (261)
-------
Balance, September 30, 1999............................. $ 9,327
=======
</TABLE>
8
<PAGE> 11
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
5. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation and reconciliation of net
(loss) income per share-basic and net income per share-assuming dilution:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
(LOSS) FROM CONTINUING OPERATIONS......................................... $ (14,303) $(17,443)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX........................... 11,448 23,116
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX................... (317,433) --
--------- --------
NET (LOSS) INCOME......................................................... $(320,288) $ 5,673
========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
WEIGHTED AVERAGE SHARES OUTSTANDING -- BASIC............................ 63,274 62,566
Stock options........................................................... -- --
Contingently issuable shares -- assuming dilution....................... -- --
--------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING -- ASSUMING DILUTION................ 63,274 62,566
========= ========
(LOSS) PER SHARE FROM CONTINUING OPERATIONS -- BASIC AND ASSUMING
DILUTION.............................................................. $ (0.23) $ (0.28)
========= ========
INCOME PER SHARE FROM DISCONTINUED OPERATIONS, NET OF TAX -- BASIC
AND ASSUMING DILUTION................................................. 0.18 0.37
========= ========
(LOSS) PER SHARE ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX --
BASIC AND ASSUMING DILUTION........................................... (5.01) --
========= ========
NET (LOSS) INCOME PER SHARE -- BASIC AND ASSUMING DILUTION.............. $ (5.06) $ .09
========= ========
</TABLE>
The Company did not include convertible subordinated debentures,
equivalent to 6,567 shares of common stock, options to purchase 4 and 3,068
shares, in the months ended September 30, 1999 and 1998, respectively, or
contingently issuable shares of 26 in the three months ended September 30, 1998
because their effects are antidilutive. There were no contingently issuable
shares as of September 30, 1999. There were no transactions subsequent to
September 30, 1999 that would have materially changed the number of shares used
in computing (loss) from continuing operations per share -- basic and assuming
dilution or net income per share -- basic and assuming dilution.
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the financial position or results of operations of
the Company.
The Company's professional employer organization ("PEO") operations are
subject to numerous Federal, state and local laws related to employment, taxes
and benefit plan matters. Generally, these regulations affect all companies
9
<PAGE> 12
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
in the United States. However, the regulatory environment for PEOs is an
evolving area due to uncertainties resulting from the non-traditional employment
relationship created by PEOs. Many Federal and state laws relating to tax and
employment matters were enacted prior to the development of PEO companies and
do not specifically address the obligations and responsibilities of these
co-employer relationships. The Internal Revenue Service ("IRS") has conducted a
market segment study of the PEO industry (the "Market Segment Study") focusing
on selected PEO's (not including the Company) for the purpose of examining the
relationship among PEOs, their clients, worksite employees, and the worksite
owners. IRS officials indicate that the Market Segment Study is near completion
and suggest that an announcement of the IRS' position with respect to PEOs has
been delayed pending the outcome of legislation that has been proposed by the
PEO industry. If the IRS concludes that PEOs are not "employers" of certain
worksite employees for purposes of the Internal Revenue Code, the Company's
benefit plans (including cafeteria, health and welfare, and retirement plans)
may lose their favorable tax status, and the Company may no longer be able to
assume its clients' Federal employment tax withholding obligations. The Company
believes that, although unfavorable to the Company, a prospective application
by the IRS of an adverse conclusion would not have a material adverse effect on
the Company's business, financial position, results of operations and
liquidity. While the Company believes that a retrospective disqualification is
unlikely, there can be no assurance as to the ultimate resolution of these
issues.
10
<PAGE> 13
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On July 1, 1999, NovaCare, Inc. (the "Company") completed the sale of its
orthotic and prosthetic ("O&P") business to Hanger Orthopedic Group, Inc.
("Hanger").
On September 21, 1999, the stockholders of the Company approved three
proposals submitted as part of a Special Meeting of Stockholders of NovaCare,
Inc. The first proposal recommended the sale of the Company's Physical
Rehabilitation and Occupational Health ("PROH") division, the second proposal
recommended the sale of the Company's 64% interest in NovaCare Employee
Services, Inc. ("NCES") and the third proposal recommended the adoption of a
proposal to restructure the Company. Under the third proposal, if the Company is
unable to find suitable acquisition candidates to reinvest the proceeds from the
PROH and NCES sales, after the payment of its convertible subordinated
debentures and other liabilities, it will liquidate.
On September 8, 1999, the Company entered into a definitive agreement with
a subsidiary of Plato Holdings, Inc. ("Plato") to sell its 64% interest in NCES
as part of a tender offer by Plato for all of NCES's outstanding shares at a
price of $2.50 per share. At September 30, 1999 the Company recorded a charge in
the amount of $3.1 million for the write-down of its investment in NCES to
estimated net realizable value. The tender offer and sale were completed on
October 19, 1999.
On October 4, 1999, the Company announced that it had reached a definitive
agreement with Select Medical Corporation ("Select") for the sale of PROH for
$200,000. At September 30, 1999, the Company recorded a charge in the amount of
$348.1 million for the write-down of its investment in PROH to estimated net
realizable value. The sale of PROH was completed on November 19, 1999.
The Company's former long-term care operating services segment was disposed
in fiscal 1999 with the shutdown of certain of its operations in the Western
United States during the third fiscal quarter and the sale of the remaining
operations on June 1, 1999. The Company's former employee services segment was
disposed through the Company's sale of its interest in NCES. The Company's
former outpatient services segment was disposed through the sale of O&P and
PROH. As a result of these transactions, the Company has disposed of all of its
operating segments. The Company's remaining holding company activities consist
of the winding up of its affairs with respect to the disposed segments, the
search for potential acquisition candidates and the preparation for potential
liquidation.
Accordingly, the Company has reflected substantially all of its assets and
liabilities, results of operations and cash flows, for the current and all prior
periods, as discontinued operations except for its remaining general and
administrative activities, which are treated as continuing operations.
CONTINUING OPERATIONS
Loss from continuing operations was $14.3 million for the first quarter of
fiscal 2000 compared to $17.4 million for the same period in fiscal 1999. The
decrease in loss resulted from a decrease in unallocated selling, general and
administrative expenses in support of decreased operating activities ($6.3
million), a reversal of previously recorded provision for restructure ($2.0
million), and a decrease in interest expense ($2.4 million). The decreases were
partially offset by a gain on the sale of property and equipment ($1.5 million).
DISCONTINUED OPERATIONS
Income from discontinued operations decreased to $11.4 million for the
three months ended September 30, 1999 compared to $23.1 million for the same
period last year. The decrease results principally from the inclusion of the
results of the O&P and long-term care services businesses for the three-month
period in the prior year offset partially by the reversal of accrued income tax
liabilities in conjunction with the sales of the Company's operating businesses.
11
<PAGE> 14
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Loss on disposal of discontinued operations reflects a charge for the
write-down of the carrying amounts for PROH and NCES to net realizable value at
September 30, 1999 ($351.2 million) and adjustments related to changes in
estimates of long-term care services discontinued operations stemming from
deteriorating industry conditions ($16.0 million), offset partially by the gain
on the sale of O&P ($49.9 million).
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
At September 30, 1999, cash and cash equivalents totaled $27.3 million
compared to $17.1 million at June 30, 1999. The net increase in cash from June
30, 1999 of $10.2 million resulted principally from proceeds from the sale of
O&P ($392.7 million) which was used to retire the outstanding balance on the
Company's line of credit ($347.0 million) and to fund continuing operations
($24.9 million) and discontinued operations ($1.8 million).
Liquidation Analysis and Estimates
Management has estimated the following potential realizable values or range
of values for its assets and estimated liabilities and estimated cost of
liquidation after the completion of the PROH and NCES sales. The maximum or high
end of the estimated realizable values of the assets and liabilities of the
Company, as reflected in the Company's September 30, 1999 condensed
consolidated balance sheet, are based on the assumption that these values are
fully realizable. The minimum or low end of the estimated realizable values are
estimated on the same basis as the maximum or high end except the estimated
realizable values for the sale of the Company's operating businesses have been
reduced by the amount of escrowed funds or potential maximum liability, if such
amount could be determined, in accordance with the respective purchase and sale
agreements.
The estimated operating losses from September 30, 1999 through the dates of
sale of NCES and PROH, the date assumed as the beginning of the liquidation
period, have been based on the Company's internal estimates. The estimated
operating costs during liquidation were also estimated based on the Company's
internal estimates for the period from September 30, 1999 through December 31,
2000, the assumed liquidation date.
Except for the historical transactions, some of which are based on
preliminary information, there can be no assurance, that the Company will
realize the value of the assets below, or liquidate the amounts of any of the
liabilities below, for or within the indicated values or ranges (or at all).
12
<PAGE> 15
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
----------------------
<S> <C>
(i) ESTIMATED REALIZABLE VALUES OF ASSETS OF THE COMPANY
Cash and cash equivalents at September 30, 1999.................... $ 27.3
Net proceeds from sale of NCES..................................... 44.7
Net proceeds from sale of PROH, excluding escrow................... 99.1
Long-term care services ("LTCS") net current assets in excess of
working capital guarantee and market exit costs.................. 34.4
Refundable income taxes............................................ 28.5
Other current assets, including escrow from sale of PROH........... 6.4-43.2
Other non-current assets........................................... 1.6
-------------------
Total estimated assets............................................. 242.0-278.8
-------------------
(ii) ESTIMATED LIABILITIES OF THE COMPANY
Convertible subordinated debentures................................ (175.0)
Accounts payable and accrued expenses.............................. (38.3)-(21.5)
Severance and facility exit costs.................................. (9.3)
-------------------
Total estimated liabilities........................................ (222.6)-(205.8)
-------------------
(iii) ESTIMATED OPERATING INCOME OF NCES AND PROH FROM
OCTOBER 1, 1999 THROUGH DATES OF SALE............................ 3.0
-------------------
(iv) ESTIMATED OPERATING COSTS DURING LIQUIDATION
Investment income during liquidation............................... 1.1-2.6
Interest on convertible subordinated debentures.................... (2.8)
Payroll and benefits for liquidation personnel..................... (6.3)-(6.0)
Legal, audit and other professional costs.......................... (5.1)-(4.1)
Other costs........................................................ (1.0)-(0.5)
-------------------
Total estimated operating costs.................................... (14.1)-(10.8)
(iii) ESTIMATED ACQUISITION RELATED CONTINGENT EARNOUT PAYMENTS PRIOR TO
THE SALES OF PROH, EARNED SUBSEQUENT TO SEPTEMBER 30, 1999....... (1.9)
-------------------
(iv) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS.. $ 6.4-63.3
===================
(v) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION PER
OUTSTANDING COMMON SHARE......................................... $ .10-1.00
===================
</TABLE>
In connection with its proxy statement dated August 13, 1999, the Company
estimated that funds available for distribution to stockholders could range from
$111.0 million to $234.6 million ($1.76 - $3.51 per share). As a result of
industry and financial market conditions, both the sales of PROH and NCES, the
largest factors in the proxy statement liquidation analysis, were at the minimum
anticipated values for those transactions. Further, a number of actual or
probable events, which were not known or anticipated at the time of the proxy
statement estimates or the Company's shareholder meeting on September 21, 1999,
resulted in an additional reduction in the potential realizable value to $63.3
million, the revised maximum estimated realizable value. These include: (i) an
$18.0 million reduction in proceeds from the sale of the O&P business arising
from the buyer's assertion of claims under the working capital guarantee, (ii) a
$13.1 million decline in the anticipated collections of long-term care
receivables stemming from deteriorating industry conditions, and (iii) a $12.8
million obligation guaranteed by NovaCare for NCES services to the PROH
business, which was not assumed by the purchaser of PROH. Possible contingencies
could further reduce the realizable value available for distribution to
stockholders to $6.4 million, the revised minimum realizable value. These
possible contingencies include primarily the potential for claims against the
$36.8 million escrow associated with the
13
<PAGE> 16
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
sale of PROH and claims asserted in connection with certain other divestitures.
The following table sets forth a reconciliation of the low end of the range
of the estimates set forth above under "Liquidation Analysis and Estimates" with
the Company's stockholders' equity, as set forth in its unaudited Consolidated
Balance Sheet as of September 30, 1999:
<TABLE>
<CAPTION>
($ IN MILLIONS)
---------------
<S> <C>
Total stockholders' equity as of September 30, 1999...... $ 73.1
Additional maximum amounts due in connection with
sales of businesses.................................... (53.6)
Estimated operating income subsequent to
September 30, 1999..................................... 3.0
Estimated operating costs during liquidation............. (14.2)
Estimated acquisition related contingent earnout
payments prior to the sale of PROH, earned
subsequent to September 30, 1999....................... (1.9)
-------
ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
TO STOCKHOLDERS........................................ $ 6.4
=======
</TABLE>
THE METHODS USED BY MANAGEMENT IN ESTIMATING THE VALUES AND VALUE RANGES
OF THE COMPANY'S ASSETS ARE INEXACT AND MAY NOT APPROXIMATE VALUES ACTUALLY
REALIZED. THESE ESTIMATES ARE SUBJECT TO NUMEROUS UNCERTAINTIES BEYOND THE
COMPANY'S CONTROL AND ALSO DO NOT REFLECT ALL CONTINGENT LIABILITIES THAT MAY
MATERIALIZE. FOR ALL THESE REASONS, THERE CAN BE NO ASSURANCE THAT THE ACTUAL
NET PROCEEDS DISTRIBUTED TO STOCKHOLDERS IN LIQUIDATION WILL NOT BE LESS THAN
THE ESTIMATED AMOUNTS SHOWN. MOREOVER, NO ASSURANCE CAN BE GIVEN THAT ANY
AMOUNTS TO BE RECEIVED BY THE COMPANY'S STOCKHOLDERS IN LIQUIDATION WILL EQUAL
OR EXCEED THE PRICE OR PRICES AT WHICH THE COMMON STOCK HAS RECENTLY TRADED OR
MAY TRADE IN THE FUTURE.
YEAR 2000 READINESS
Historically, certain computer programs have been written using two
digits, rather than four digits, to define the applicable year. This could
lead, in many cases, to a computer's recognizing a date using "00" as 1900
rather than the year 2000. This phenomenon could result in major computer
system failures or miscalculations, and is generally referred to as the "Year
2000" problem or issue.
The Company has assessed its exposure to the Year 2000 problem, and has
substantially completed its response to that exposure. Because of the sale of
substantially all of the Company's businesses, the Company believes that its
remaining exposure to Year 2000 issues is not significant. Generally, the
Company has exposure in three areas: (i) financial and management operating
computer systems used to manage the Company's business, (ii) microprocessors
and other electronic devices included as components of therapy and other
equipment used by the Company ("embedded chips") and (iii) computer systems
used by third parties, in particular financial institutions, customers and
suppliers of the Company. The Company estimates that the cost of its Year 2000
effort incurred subsequent to September 30, 1999 will be less than $0.3
million. As of September 30, 1999 the Company had spent approximately $4.0
million from the inception of its Year 2000 program in fiscal 1998.
The Company has substantially completed Year 2000 testing and remediation
on its financial and management operating systems and on embedded chips.
The Company has received written correspondence from its major vendors and
management is satisfied that the Company does not have significant exposure to
Year 2000 problems associated with vendors and major customer payers. The
Company is substantially complete with its business continuity plan, which
involves hard copy of
14
<PAGE> 17
NOVACARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
computer files and manual records to supplement computer records and data.
If the Company has not identified all potential significant Year 2000
issues or its business continuity plan is insufficient to deal with any Year
2000 problems that emerge, the Company could incur additional costs, which may
be substantial, to develop alternative methods of managing its business and
could experience delays in payments by customers or to vendors.
CAUTIONARY STATEMENT
Except for historical information, matters discussed above including, but
not limited to, statements concerning future operations and estimates of values
to be received in liquidation, are forward-looking statements that are based on
management's estimates, assumptions and projections. Important factors that
could cause results to differ materially from those expected by management
include potential claims related to businesses sold, the ability of the Company
to realize its remaining assets in cash, the cost to wind up the Company's
affairs in preparation for a potential liquidation, the ability of the Company
to identify potential acquisition targets and to successfully complete such
potential acquisitions, the Company's ability to retain management and
professional employees during its wind down period and the ability of the
Company, its customers and suppliers to complete the remediation of Year 2000
issues.
15
<PAGE> 18
NOVACARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 21, 1999, the Company held a Special Meeting of the
Stockholders of NovaCare, Inc. The following matters were submitted for vote:
1. The holders of 36,010,196 shares voted for, the holders of 1,480,035 shares
voted against and the holders of 331,193 shares abstained with respect to
the approval of the sale of the Company's physical rehabilitation and
occupational health business ("PROH").
2. The holders of 36,225,694 shares voted for, the holders of 1,381,462 shares
voted against and the holders of 214,272 shares abstained with respect to
the sale of the Company's interest in NovaCare Employee Services, Inc.
("NCES").
3. The holders of 33,285,442 shares voted in favor of, the holders of
3,865,696 shares voted against, and the holders of 670,282 shares abstained
with respect to the adoption of a Plan of Restructuring of the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit
Number Exhibit Description Page Number
------- ------------------- -----------
27 Financial Data Schedule
(B) Reports on Form 8-K
On July 14, 1999, the Company filed a Current Report on Form 8-K dated
July 1, 1999 with the Securities and Exchange Commission announcing the
sale of its orthotic and prosthetics business under Item 2, Acquisition or
Disposition of Assets.
On August 13, 1999, the Company filed Form 8-K/A Amendment No. 2 as an
amendment to the Current Report filed June 16, 1999 on Form 8-K.
On August 13, 1999, the Company filed Form 8-K/A as an amendment to
the Current Report filed July 14, 1999 on Form 8-K.
On October 14, 1999, the Company filed a Current Report on Form 8-K
dated September 21, 1999 with the Securities and Exchange Commission
reporting the approval of three proposals at its Special Meeting of
Stockholders on September 21, 1999, reporting a
definitive Agreement and Plan of Merger for NCES and a subsidiary of Plato
Holdings, Inc. dated September 8, 1999, and reporting a Stock Purchase
Agreement for the sale of the Company's PROH division to Select Medical
Corporation dated October 1, 1999 under item 5, Other Events.
On November 2, 1999, the Company filed a Current Report on Form 8-K
dated October 19, 1999 with the Securities and Exchange Commission
announcing the sale of NCES under Item 2, Acquisition of Disposition of
Assets.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVACARE, INC.
---------------------
(Registrant)
November 22, 1999 By /s/ Robert E. Healy, Jr.
--------------------------------
Robert E. Healy, Jr.,
Senior Vice President,
Finance & Administration and
Chief Financial Officer
By /s/ Barry E. Smith
--------------------------------
Barry E. Smith,
Vice President, Controller and
Chief Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE 3 MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENT IN FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<CIK> 0000802843
<NAME> NOVACARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 27,330
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 297,900
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 299,505
<CURRENT-LIABILITIES> 205,824
<BONDS> 0
0
0
<COMMON> 686
<OTHER-SE> 72,393
<TOTAL-LIABILITY-AND-EQUITY> 299,505
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 13,734<F1>
<OTHER-EXPENSES> (3,921)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,490
<INCOME-PRETAX> (14,303)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,303)
<DISCONTINUED> (305,985)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (320,288)
<EPS-BASIC> (5.06)<F3>
<EPS-DILUTED> (5.06)
<FN>
<F1>"TOTAL COSTS" CONSIST OF SELLING AND ADMINISTRATIVE EXPENSES.
<F2>"OTHER EXPENSES" CONSIST OF CREDIT FOR RESTRUCTURE, INVESTMENT AND OTHER
INCOME AND GAIN ON SALE OF PROPERTY AND EQUIPMENT.
<F3>"EPS" IS CALCULATED USING NET INCOME. EPS FROM CONTINUING OPERATIONS ONLY
IS $(0.23).
</FN>
</TABLE>
