<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
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
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):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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:
________________________________________________________________________________
[X] 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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[NOVACARE LOGO]
1016 WEST NINTH AVENUE
KING OF PRUSSIA, PENNSYLVANIA 19406
August 13, 1999
Dear Stockholder:
You are invited to attend a Special Meeting of Stockholders of NovaCare,
Inc. (the "Company") to be held at the Sheraton Valley Forge Hotel, 1160 First
Avenue, King of Prussia, Pennsylvania 19406, on September 21, 1999 at 10:00
a.m., local time.
At the Special Meeting you will be asked to consider and vote upon a
proposal to approve: (i) the sale of the Company's outpatient physical therapy
and occupational health rehabilitation services business (the "PROH Sale"), (ii)
the sale of the Company's interest in NovaCare Employee Services, Inc. (the
"NCES Sale") and (iii) the adoption of the Plan of Restructuring of the Company
(the "Restructuring Proposal").
As described in the accompanying Proxy Statement, the Company is seeking
stockholder approval for the sale of its PROH business and its interest in NCES.
The Company is in the process of seeking buyers for its PROH business and its
interest in NCES. The Company anticipates that both the PROH Sale and the NCES
Sale will be structured as stock sales. While, to date, no definitive agreements
have been entered into with respect to the PROH Sale or the NCES Sale, the
Company is seeking stockholder approval to proceed with the sales when suitable
buyers are identified and definitive agreements are negotiated with such buyers.
The consummation of the sales would be subject to the receipt by the Company of
the minimum sales prices set forth in the accompanying Proxy Statement,
obtaining opinions of financial advisors in connection with the sales and
approval by the Board of Directors of the Company of the terms of any definitive
sale agreements. Except as requested in the accompanying Proxy Statement, no
further stockholder vote will be solicited by the Company for the PROH Sale or
the NCES Sale. Accordingly, stockholders will not have the opportunity to vote
on definitive sale agreements.
In addition, as described in the accompanying Proxy Statement, the Company
is seeking stockholder approval of a Plan of Restructuring. If the Plan of
Restructuring is approved, the Company intends to seek to reinvest the net
proceeds to the Company from the PROH Sale and the NCES Sale, after the payment
of liabilities, in a new business or businesses. Any such reinvestment would be
subject to the further vote and approval of the stockholders of the Company. If
the Company is unable, or chooses not, to reinvest any proceeds in a new
business or businesses, the Company will liquidate.
YOUR BOARD OF DIRECTORS HAS APPROVED THE PROH SALE, THE NCES SALE AND THE
RESTRUCTURING PROPOSAL AND HAS DETERMINED THAT THEY ARE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROH SALE, THE NCES SALE,
AND THE RESTRUCTURING PROPOSAL AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Proxy Statement relating to the actions to be
taken by stockholders of the Company at the Special Meeting and a proxy card.
The Proxy Statement more fully describes the proposed PROH Sale, NCES Sale and
Restructuring Proposal. Please read the Proxy Statement and Notice and consider
the information included therein carefully.
<PAGE> 3
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE SPECIAL
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED
AT THE SPECIAL MEETING.
Sincerely,
SIG
John H. Foster
Chairman of the Board of Directors
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[NOVACARE LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 21, 1999
King of Prussia, Pennsylvania
August 13, 1999
To the Holders of Common Stock of
NovaCare, Inc.
A Special Meeting of the Stockholders of NovaCare, Inc. ("NovaCare" or the
"Company") will be held at the Sheraton Valley Forge Hotel, 1160 First Avenue,
King of Prussia, Pennsylvania 19406, on Tuesday, September 21, 1999 at 10:00
a.m., local time, to consider and act upon the following matters:
1. To approve the sale of NovaCare's outpatient physical therapy and
occupational health rehabilitation services business.
2. To approve the sale of NovaCare's interest in NovaCare Employee
Services, Inc.
3. To adopt a Plan of Restructuring substantially in the form attached
as Appendix A to the Proxy Statement, dated August 13, 1999.
4. To consider and transact such other business as may properly be
brought before the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on July 30, 1999 as
the record date for determining the stockholders of the Company having the right
to notice of, and the right 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.
Please vote, date, sign and return the Proxy in the enclosed postage
prepaid envelope at your earliest convenience. If you return the Proxy, you may
nevertheless attend the meeting and vote your shares in person.
By order of the Board of Directors,
Richard S. Binstein,
Secretary
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WHETHER OR NOT
YOU ATTEND THE MEETING, PLEASE VOTE, DATE, SIGN AND RETURN THE PROXY IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE.
<PAGE> 5
PROXY STATEMENT
GENERAL
The Board of Directors of NovaCare, Inc. ("NovaCare" or the "Company"), a
Delaware corporation, whose principal executive offices are located at 1016 West
Ninth Avenue, King of Prussia, Pennsylvania 19406, is distributing this Proxy
Statement and soliciting the accompanying Proxy for use at the Special Meeting
of Stockholders of NovaCare (the "Meeting") to be held on September 21, 1999 at
10:00 a.m., local time, at the Sheraton Valley Forge Hotel, 1160 First Avenue,
King of Prussia, Pennsylvania 19406, and at any adjournments thereof.
The Board of Directors is proposing for approval by the stockholders at the
Meeting, (i) the sale (the "PROH Sale") of the Company's outpatient physical
therapy and occupational health rehabilitation services ("PROH") business, (ii)
the sale (the "NCES Sale") of the Company's interest in NovaCare Employee
Services, Inc. ("NCES") and (iii) the adoption of the Plan of Restructuring of
the Company (the "Plan"), substantially in the form attached as Appendix A to
this Proxy Statement (the "Restructuring Proposal").
As described in this Proxy Statement, the Company is seeking stockholder
approval for the sale of its PROH business and its interest in NCES. The Company
is in the process of seeking buyers for its PROH business and its interest in
NCES. The Company anticipates that both the PROH Sale and the NCES Sale will be
structured as stock sales. While, to date, no definitive agreements have been
entered into with respect to the PROH Sale or the NCES Sale, the Company is
seeking stockholder approval to proceed with the sales when suitable buyers are
identified and definitive agreements are negotiated with such buyers. The
consummation of the sales would be subject to the receipt by the Company of
certain minimum sales prices, obtaining opinions of financial advisors in
connection with the sales and approval by the Board of Directors of the Company
of the terms of any definitive sale agreements. Except as requested herein, no
further stockholder vote will be solicited by the Company for the PROH Sale or
the NCES Sale. Accordingly, stockholders will not have the opportunity to vote
on definitive sale agreements. See "Proposal 1. Approval of the PROH Sale" and
"Proposal 2. Approval of the NCES Sale," below.
In addition, as described in this Proxy Statement, the Company is seeking
stockholder approval of a Restructuring Proposal. If the Restructuring Proposal
is approved, the Company intends to seek to reinvest the net proceeds to the
Company from the PROH Sale and the NCES Sale, after the payment of liabilities,
in a new business or businesses. Any such reinvestment would be subject to the
further vote and approval of the stockholders of the Company. If the Company is
unable, or chooses not, to reinvest any proceeds in a new business or
businesses, the Company will liquidate. See "Proposal 3. Adoption of the
Restructuring Proposal," below.
Shares represented by duly executed Proxies in the enclosed form that are
received by the Company prior to the Meeting will be voted as instructed in the
Proxy on each matter submitted to the vote of stockholders. If any duly executed
Proxy is returned without voting instructions, the persons named as proxies
thereon intend to vote all shares represented by that Proxy (i) FOR approval of
the PROH Sale, (ii) FOR approval of the NCES Sale and (iii) FOR adoption of the
Restructuring Proposal.
The Board of Directors does not know of any other matters that may be
brought before the Meeting. In the event that any other matter should come
before the Meeting, the persons named on the Proxy will have discretionary
authority to vote all Proxies not marked to the contrary with respect to such
matters in accordance with their best judgment.
Each Proxy executed and returned by a stockholder may be revoked by (i)
delivering written notice of such revocation to the Secretary of NovaCare except
as to any matters upon which, prior to revocation, a vote shall have been cast
pursuant to authorization conferred by such Proxy, (ii) by executing and
delivering to the Secretary a Proxy bearing a later date, at any time at or
before the Meeting except as to any matters upon which, prior to such
revocation, a vote shall have been cast pursuant to the authorization conferred
by such Proxy, or (iii) by a vote cast in person at the Meeting. Presence at the
Meeting does not itself revoke a Proxy previously given.
This Proxy Statement is being mailed to stockholders on or about August 13,
1999.
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VOTING SECURITIES
The only outstanding class of voting securities of NovaCare is Common
Stock, $.01 par value per share (the "Common Stock"), each share of which
entitles the holder thereof to one vote. Only stockholders of record at the
close of business on July 30, 1999 (the "Record Date") are entitled to vote at
the Meeting and at any adjournment thereof. As of the close of business on the
Record Date, there were 63,252,337 shares of Common Stock outstanding. The
holders of a majority of the issued and outstanding stock entitled to vote,
present in person or by proxy, constitute a quorum for the transaction of
business. Any stockholders voting by proxy to abstain with respect to the
proposals will be counted as present for quorum purposes, while broker non-votes
will not be counted as present.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required for the approval of the PROH Sale, the approval of
the NCES Sale and the adoption of the Restructuring Proposal. Abstentions and
broker non-votes will have the same effect as a vote against any of the
proposals.
Information regarding directors and officers of the Company and all persons
known to be the beneficial owners of more than 5% of the outstanding Common
Stock appears below under the caption "Share Ownership of Certain Beneficial
Owners."
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information concerning the Company may be inspected and copies may be obtained
(at prescribed rates) at public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center, 500
W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition,
electronically filed documents, including reports, proxy and information
statements and other information regarding the Company, can be obtained from the
Commission's Web site at http://www.sec.gov. The Common Stock is listed on the
New York Stock Exchange, and reports, proxy statements and other information
concerning the Company can also be inspected at the offices of the New York
Stock Exchange located at 20 Broad Street, New York, New York 10005.
The following documents of NovaCare, which are on file with the Commission,
are incorporated in this Proxy Statement by reference and made a part hereof:
(a) NovaCare's Annual Report on Form 10-K for the year ended June 30, 1998.
(b) NovaCare's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1998, December 31, 1998 and March 31, 1999, as amended by
Form 10-Q/A dated August 13, 1999.
(c) NovaCare's Current Report on Form 8-K dated June 16, 1999, as amended
by Forms 8-K/A dated June 29, 1999 and August 13, 1999.
(d) NovaCare's Current Report on Form 8-K dated July 14, 1999, as amended
by Form 8-K/A dated August 13, 1999.
(e) The description of NovaCare's capital stock contained in its
Registration Statement on Form 8-A, filed November 12, 1986.
The Company will provide without charge to each person to whom a copy of
this Proxy Statement is delivered a copy of any or all of the foregoing
documents (other than exhibits). Requests for such documents should be directed
to NovaCare, Inc., 1016 West Ninth Avenue, King of Prussia, Pennsylvania 19406,
Attention: Richard S. Binstein, Secretary.
All documents filed pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Proxy Statement and prior to the
Meeting shall also be deemed to be incorporated by reference
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in this Proxy Statement and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR
This Proxy Statement and the documents referred to above contain certain
"forward-looking" statements, including among others the statements regarding
the possibility of finding a buyer or buyers for the Company's PROH business and
the Company's interest in NCES, the ability to consummate the sales of PROH and
NCES, the potential value of any other assets of the Company, the amount and
nature of liabilities of or that may be asserted against the Company, the timing
and amount of any distributions to stockholders pursuant to the Restructuring
Proposal, industry conditions and prospects and the Company's future operating
results. Without limiting the foregoing, words such as "anticipates",
"believes", "expects", "intends", "plans" and similar expressions are intended
to identify "forward-looking" statements.
All of these "forward-looking" statements are inherently uncertain, and
stockholders must recognize that actual events could cause actual results to
differ materially from management's expectations. Key risk factors that could,
in particular, have an adverse impact on the Company's ability to effect the
Restructuring Proposal on a timely basis and on the amount of any distributions
that may be made to stockholders pursuant to the Restructuring Proposal include
the Company's inability to find buyers for the Company's PROH business and the
Company's interest in NCES despite significant efforts to do so, and the ability
of the Company to consummate the sales of PROH and NCES.
As discussed below under "Proposal 3. Adoption of the Restructuring
Proposal -- Liquidation Analysis and Estimates," based on management's present
estimates, the Company expects that there will be net proceeds available from
the PROH Sale, the NCES Sale and the Restructuring Proposal which may be
distributed to the Company's stockholders. NONETHELESS, THERE CAN BE NO
ASSURANCE THAT THERE WILL BE ANY SUCH DISTRIBUTIONS, LET ALONE AS TO THEIR
AMOUNT OR WHEN IT OR THEY MIGHT OCCUR.
BACKGROUND AND REASONS FOR THE PROPOSALS
THE BOARD OF DIRECTORS IS SUBMITTING THE PROH SALE, THE NCES SALE AND THE
RESTRUCTURING PROPOSAL AS THREE SEPARATE MATTERS FOR A STOCKHOLDER VOTE.
HOWEVER, THE BOARD BELIEVES THAT THE THREE PROPOSALS ARE INTEGRAL PARTS OF AN
OVERALL PLAN FOR MAXIMIZING STOCKHOLDER VALUE IN THE COMPANY. THE BOARD OF
DIRECTORS AND MANAGEMENT BELIEVE THAT BY APPROVING ALL OF THE PROPOSALS, THE
COMPANY'S STOCKHOLDERS WILL RECEIVE GREATER VALUE THAN WOULD BE AVAILABLE TO
THEM THROUGH THEIR CONTINUED OWNERSHIP OF THE COMMON STOCK IF ALL OF THE
PROPOSALS WERE NOT APPROVED AND IMPLEMENTED.
BUSINESS OVERVIEW AND SEGMENTS
NovaCare was formed in 1985 and has been a national leader in physical
rehabilitation services and employee services. Physical rehabilitation services
are the processes that restore individuals disabled by trauma, injury or disease
to their optimal level of functionality and self-sufficiency. The Company's
physical rehabilitation services have been provided in two industry segments:
(i) outpatient services -- providing outpatient physical therapy and
rehabilitation, orthotic and prosthetic ("O&P") and occupational health
rehabilitation services through a national network of patient care centers, and
(ii) long-term care services -- providing rehabilitation therapy and health care
consulting services on a contract basis to health care institutions, primarily
long-term care facilities.
The Company's employee services segment consists of comprehensive, fully
integrated outsourcing solutions to human resource services, including payroll
management, workers' compensation, risk management, benefits administration,
unemployment services and human resource consulting services generally
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provided to small and medium-sized businesses through its 67% owned subsidiary,
NCES. The Company creates relationships with both its clients and worksite
employees by contractually assuming certain administrative, regulatory and
financial employer responsibilities with respect to worksite employees in a "co-
employment" relationship.
LONG-TERM CARE SERVICES -- REGULATORY CHANGES
Reimbursement for long-term care services provided by the Company has
primarily been through the Medicare program. Medicare is a federally funded
health program which provides health insurance coverage for certain disabled
persons and persons age 65 or older.
Prior to April 10, 1998, Medicare reimbursed long-term care facilities,
primarily skilled nursing facilities, for contract therapy services on a cost
basis. The fee paid to contract therapy service providers, such as NovaCare, was
a reimbursable cost for the long-term care facility. Reimbursement levels were
determined based on a reasonable-cost standard. Contract occupational therapy
and speech-language pathology services were evaluated based upon the
reasonableness of costs incurred by the provider under a "prudent buyer"
standard. Specific guidelines existed for evaluating the reasonable cost of
physical therapy. The specific guideline system for physical therapy was called
"salary equivalency," a method used to determine the prudent hourly cost for
physical therapy services in long-term care facilities.
Effective April 10, 1998, the Health Care Financing Administration
("HCFA"), the Federal agency responsible for the rules governing Medicare,
implemented salary equivalency reimbursement guidelines for occupational therapy
and speech-language pathology services and revised guidelines for physical
therapy services. With its enactment in June 1997, the Balanced Budget Act of
1997 (the "BBA") revised the manner in which Medicare reimburses long-term care
facilities by entirely eliminating cost-based reimbursement. Commencing on July
1, 1998, Medicare Part A services (in-patient services) became reimbursed under
a prospective payment system ("PPS") which includes payment for therapy services
in an all-inclusive per diem payment based on the acuity level of the patient's
illness. Medicare Part B services (outpatient and all other services not covered
by Part A) became covered by a fee schedule with total charges subject to an
annual cap effective January 1, 1999.
As a consequence of these regulatory changes, net revenues for the
Company's long-term care services segment decreased from $176.3 million in the
quarter ended March 31, 1998, the last quarter prior to the regulatory changes
discussed above, to $68.6 million in the quarter ended March 31, 1999, a 61%
decline. The decrease in net revenues was primarily due to the implementation of
the BBA (i) directly through lower reimbursement rates, and (ii) indirectly due
to decreased Medicare patient census in facilities served as a result of the
uncertainty of long-term care facilities with respect to the reimbursement
economics of Medicare patients under the BBA. NovaCare's long-term care services
segment incurred an EBITDA (earnings before interest, taxes, depreciation and
amortization) loss (excluding provision for restructure) of $9.6 million for the
quarter ended March 31, 1999, compared with positive EBITDA of $36.5 million for
the same quarter of the prior year, a $46.1 million decrease (approximately $184
million annualized).
In order to mitigate the effect of these trends in the long-term care
services segment, effective March 30, 1999, the Company implemented a
restructure plan involving a complete exit of selected markets with low customer
and therapist concentration. These markets, generally in the western United
States, were unprofitable (net revenues less cost of services, or gross profits,
resulted in a loss of approximately $0.2 million in March 1999, or approximately
$2 million annualized) and considered unlikely to return to a satisfactory level
of profitability in the foreseeable future.
In its remaining long-term care services markets, the Company continued to
implement a revised operating model during the third quarter ended March 31,
1999 and into the fiscal 1999 fourth quarter, however, the EBITDA loss for the
segment continued to be significant. Based on further analysis of the business
segment's remaining operations, management determined that in order for the
segment to become profitable by December 1999, the following business operating
model and cost structure changes had to take place: (i) reduce selling, general
and administrative expenses by approximately 50%, (ii) increase clinical
productivity by approximately 20%, (iii) increase revenue per customer facility
by approximately 15%,
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(iv) increase new contract sales levels, and (v) decrease customer contract
cancellations. Such dramatic changes were necessary due to the size of the
EBITDA loss ($7.5 million for the quarter ended March 31, 1999, or approximately
$30 million annualized). In management's opinion, the operating model and cost
structure changes that the Company would need to make to the business were so
extensive, that the remaining long-term care services segment business would not
likely be profitable in the foreseeable future. The Board of Directors and
management considered the relative economics of the only viable alternative
available to the Company, selling or exiting the remaining long-term care
services business, culminating with the Company's divestiture of its stock in
its long-term care services subsidiary on June 1, 1999 for a nominal amount. In
making this determination, management estimated the net cash flows of selling or
exiting the businesses. In essence, management's analysis indicated that the
costs of terminating the Company's contractual obligations to long-term care
services customers, employees and vendors, in the complete market exit, would
cost the Company approximately $12 million more than the terms of the
divestiture transaction. This divestiture transaction is further described in
the Company's Current Report on Form 8-K dated June 16, 1999, as amended by
Forms 8-K/A dated June 29, 1999 and August 13, 1999.
CAPITAL STRUCTURE -- HIGHLY LEVERAGED BALANCE SHEET
Due to the Company's lower EBITDA, caused by the impact of regulatory
changes in the long-term care services segment, the Company's cash flow from
operations is too low to satisfy its debt obligations. This situation
characterizes a capital structure that is highly leveraged. NovaCare's total
debt at March 31, 1999 was $596.0 million, of which $540.7 is due in less than
one year. EBITDA (excluding provision for restructure) for the quarter ended
March 31, 1999 was a loss of $2.3 million ($7.3 million positive EBITDA without
the long-term care services segment). In comparison, (i) at June 30, 1998, prior
to the phase-in of the BBA, the Company's total debt was $508.4 million ($32.1
million current portion) and EBITDA for the quarter ended June 30, 1998 was
$46.2 million, (ii) at September 30, 1998, total debt was $576.8 million ($35.2
million current portion) and EBITDA for the quarter was $33.6 million, and (iii)
at December 31, 1998, total debt was $581.4 million ($30.8 million current
portion) and EBITDA for the quarter was $25.8 million, excluding a $17.8 million
provision for restructure.
This highly leveraged condition led the Board of Directors and management
of the Company to undertake a strategic analysis of the Company's alternatives
to satisfy the indebtedness. To assist the Board of Directors and management in
assessing the Company's capital structure alternatives, the Company engaged
Warburg Dillon Read LLC ("WDR") and Wasserstein Perella & Co., Inc. ("WP").
SALE OF ORTHOTICS AND PROSTHETICS BUSINESS
To partially reduce the Company's debt leverage, on July 1, 1999, the
Company sold its O&P business to Hanger Orthopedic Group, Inc. ("Hanger") for
$445.0 million, including $407.7 million in cash and the assumption of seller
notes of $37.3 million. Of the purchase price, $15 million has been placed in
escrow in conjunction with a $94.0 million working capital guaranty to Hanger by
the Company. The proceeds from the transaction were used to satisfy the entire
balance of the Company's revolving credit facility, with approximately $37
million remaining after transaction related costs. These funds have been
temporarily invested to satisfy working capital requirements and future
maturities of other debt obligations. This transaction is further described in
the Company's Current Report on Form 8-K dated July 14, 1999, as amended by Form
8-K/A dated August 13, 1999.
CAPITAL STRUCTURE ALTERNATIVES
Subsequent to the sale of the O&P business, NovaCare remains highly
leveraged with indebtedness of approximately $248 million consisting of (i) $175
million of convertible subordinated debentures (the "Debentures") maturing on
January 15, 2000, (ii) $43 million comprising principally subordinated seller
notes (the "Seller Notes") related to acquisitions and maturing at various dates
through 2007 and (iii) a $30 million working capital guaranty in connection with
the long-term care services business divestiture.
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The only remaining asset of the Company which would provide sufficient
funds to satisfy the Debentures is the PROH business. The capital structure
alternatives considered by the Company were either filing for reorganization
under the Bankruptcy Code, obtaining medium-term (three to five year) financing
secured by the PROH assets, selling PROH or selling NovaCare. Filing for
bankruptcy protection was considered but rejected because, even if available,
such an action would have negative implications for the realizable value of the
Company's assets and a disruptive effect on the Company's employees, customers,
stockholders and other constituencies. Obtaining secured financing was also
rejected, because even if adequate secured financing could be obtained, the
Company would be too highly leveraged (approximately four times EBITDA) for it
to realize sustainable business growth. For example, PROH EBITDA for the latest
quarter ended June 30, 1999 annualized (multiplied by four) was $38.5 million.
Interest costs would be $18.5 million per year at an assumed 12% annual rate (a
typical high-yield interest rate for businesses with a risk profile similar to
that of PROH) on average debt of $154 million (four times EBITDA). Assuming a
40% effective tax rate (the combined federal and state income tax rate which
would be applicable for PROH on a stand-alone basis), income taxes would be $2.9
million. Further assuming that latest quarter annualized depreciation of $12.8
million is reinvested in capital expenditures to cover the normal replacement of
property and equipment, only $4.3 million ($38.5 million EBITDA less $12.8
million capital expenditures, $18.5 million interest and $2.9 million income
taxes) would be available to invest in the working capital and acquisitions to
sustain business growth.
The Board of Directors and management believe that a sale of PROH, as
opposed to a sale of NovaCare, will optimize the net proceeds to the Company
because (i) the tax loss expected on the PROH sale (approximately $282 million
and $183 million at the low and high ends, respectively, of the range of
estimated values of PROH set forth below under "Proposal 3. Adoption of the
Restructuring Proposal -- Liquidation Analysis and Estimates") would fully
offset the tax due on the gain from the O&P sale and the NCES Sale, a tax
advantage not available to the Company if NovaCare is sold, and (ii) the
NovaCare sales price would reflect a risk adjusted discount for the potential
and perceived risks to buyers with respect to contingent liabilities associated
with the Company's exit from a portion of the long-term care services business
and the sales of the remaining long-term care services business and O&P, a risk
not borne by a buyer who only buys the PROH business.
Assuming the PROH Sale is approved by the stockholders in order to satisfy
the Company's debt obligations, the only remaining operating business of the
Company would be its 67% owned subsidiary, NCES. The Board of Directors and
management of the Company determined that the Company should sell NCES because
(i) favorable market conditions exist for the sale of professional employer
organizations ("PEOs"), (ii) due to the sale of all the other operating
businesses of the Company, NCES would be better served being strategically
aligned with a business partner other than NovaCare, and (iii) at a 67%
ownership level, the tax structure between the Company and NCES is inefficient,
requiring the Company to attain 80% ownership or greater in NCES to avoid double
taxation of NCES earnings. Although the double taxation issue has been relevant
since NCES's initial public offering, prior to the sale of the other operating
businesses of NovaCare, it had been outweighed by the benefits of the strategic
alignment between NCES and the Company. With regard to strategic alignment,
NovaCare founded NCES to leverage the Company's investments in human resource
management, information systems, relationship selling, workers' compensation
risk management, outsourcing, and management of a dispersed work force. Access
to these capabilities in NovaCare's infrastructure on an incremental cost basis
was a key premise behind NovaCare's founding of NCES. With the sale of the
Company's other operating businesses and consequently the sale and dismantling
of its infrastructure, NCES no longer benefits from its affiliation with the
Company.
Based on due consideration of these alternatives and to optimize
stockholder value, the Board of Directors and management engaged WDR to approach
a number of potential strategic and financial buyers for the Company's PROH
business and WP to approach a number of potential strategic and financial buyers
for the Company's 67% ownership interest in NCES.
7
<PAGE> 11
PROPOSAL 1. APPROVAL OF THE PROH SALE
GENERAL
The Company has engaged WDR to conduct a competitive bidding process among
strategic and financial buyers of the stock of the Company's subsidiaries which
comprise PROH. No affiliates of the Company or any officers or directors of the
Company may participate in the bidding process. In July 1999, at the direction
of the Company, WDR contacted 32 potential acquirers of PROH, consisting of both
strategic buyers and financial buyers. Of the parties contacted, certain
prospective buyers requested and received a confidential information memorandum.
On July 30, 1999, letters were distributed to these potential buyers requesting
that preliminary, non-binding indications of interest be submitted by early
August 1999. The Company and WDR intend to evaluate any indications of interest
based on, among other factors, the price offered, the ability of potential
buyers to consummate a transaction and the material terms of acquisition
agreements proposed by potential buyers.
The Company currently anticipates that the minimum sale price for PROH will
be $200 million, including approximately $43 million of debt assumed and the
balance of the purchase price in cash. The proceeds of the sale would be
utilized to satisfy the Company's remaining debt obligations and the costs of
liquidating the Company and to pay stockholders as reflected in "Proposal 3.
Adoption of the Restructuring Proposal -- Liquidation Analysis and Estimates"
below.
In determining the anticipated sale price range for the PROH business, the
Board of Directors consulted with management of the Company. In making its
determination, the Board of Directors reviewed and analyzed the historical
financial results and future prospects of the PROH business, comparable
valuations of businesses similar to those of PROH to the extent that comparable
information was available from public and private transactions and other
relevant and appropriate information. The Board of Directors and management
determined that a transaction value (cash paid plus debt assumed) expressed as a
multiple of the latest quarter annualized ("LQA") EBITDA results was, among
other factors, an appropriate measure of comparability. The Board of Directors
believed that LQA EBITDA was an appropriate measure of comparability for a
transaction such as the PROH Sale, which involves a non-publicly traded
subsidiary, since potential strategic and financial buyers traditionally use LQA
EBITDA to determine the ability of an acquisition target to cover the capital
costs associated with financing acquisitions. Of the eight publicly disclosed
sales transactions involving comparable businesses sold since 1993 (the
acquisitions by HealthSouth Corp. of Horizon/CMS Healthcare Corp., Professional
Sports Care Management Inc., Advantage Health Corp., Caremark Orthopedic
Services Inc., the NovaCare Rehabilitation Hospital Division, ReLife Inc. and
the rehabilitation hospitals and outpatient centers of National Medical
Enterprises Inc. and the acquisition by NovaCare of RehabClinics, Inc.), the
lowest EBITDA multiple of LQA results was 6.3 times. The highest EBITDA multiple
of LQA results was 11.7 times, with the average multiple being 9.8 times. At a
minimum sales price of $200 million, the PROH transaction value would equate to
an LQA EBITDA multiple of 5.2 times. Although this LQA EBITDA multiple is below
the lowest LQA EBITDA multiple for the publicly disclosed comparable
transactions, the Board of Directors believed it was appropriate to use this
multiple as a minimum because the most recent publicly disclosed comparable
transaction was approximately two and one-half years old and, given the
Company's need to satisfy the Debentures by January 15, 2000, the Board of
Directors considered it essential to give management the flexibility to
consummate a sale of PROH in a timely manner. In connection with the execution
of a definitive purchase agreement with a buyer of the PROH business, the
Company will request an opinion from WDR as to the fairness, from a financial
point of view, to the Company of the consideration to be received by the Company
in the sale of the PROH business.
WDR has been paid an aggregate of $2.5 million for its strategic analysis
and in connection with the sales of the long-term care services business and the
O&P business. If the proposed PROH Sale is consummated, WDR will be paid an
aggregate of $1.5 million.
8
<PAGE> 12
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended March 31, 1999 and the fiscal year ended
June 30, 1998 and unaudited Pro Forma Consolidated Balance Sheet as of March 31,
1999 are based on the historical consolidated financial statements of the
Company adjusted to reflect the dispositions of the long-term care services
business ("LTC") and the O&P business and adjusted to give effect to the PROH
Sale. Since each of the Proposals presented herein can be adopted or rejected
individually, the Pro Forma Financial Information does not give effect to the
NCES Sale as set forth in Proposal 2 or the Restructuring Proposal as set forth
in Proposal 3. The Pro Forma Condensed Consolidated Statements of Operations
have been prepared assuming the above disposition occurred as of the beginning
of the respective periods presented and the Pro Forma Consolidated Balance Sheet
has been prepared assuming that the disposition occurred as of March 31, 1999.
The Pro Forma Financial Information does not purport to present what the
Company's results of operations or financial position would have been had the
disposition occurred as of the beginning of the respective periods or March 31,
1999, as the case may be, or to project the Company's results of operations or
financial position for any future period or date, nor does it give effect to any
matters other than those described in the notes thereto.
The Pro Forma Financial Information should be read in conjunction with the
Company's Consolidated Financial Statements.
9
<PAGE> 13
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR THE
NINE MONTHS PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ENDED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
MARCH 31, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR
1999 OF LTC OF O&P ADJUSTED OF PROH PROPOSAL 1
--------------- ------------ ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $1,398,830 $317,417(a) $209,442(a) $871,971 $254,128(c) $617,843
Cost of services...................... 1,183,863 257,824(a) 155,753(a) 770,286 179,704(c) 590,582
---------- -------- -------- -------- -------- --------
Gross profit...................... 214,967 59,593 53,689 101,685 74,424 27,261
Selling, general and administrative
expenses............................ 158,223 34,311(a) 8,915(a) 114,997 39,916(c) 75,081
Provision for uncollectible
accounts............................ 23,439 5,105(a) 4,177(a) 14,157 14,043(c) 114
Amortization of excess cost of net
assets acquired..................... 18,789 1,730(a) 5,538(a) 11,521 8,840(c) 2,681
Provision for restructure............. 129,747 98,647(a) -- 31,100 31,100(c) --
---------- -------- -------- -------- -------- --------
(Loss) from operations............ (115,231) (80,200) 35,059 (70,090) (19,475) (50,615)
Gain from issuance of subsidiary
stock............................... 1,506 -- -- 1,506 -- 1,506
Investment income..................... 423 94(a) -- 329 35(c) 294
Interest expense...................... (28,373) -- (2,209)(a) (26,164) (2,402)(c) (23,762)
Minority interest..................... (2,355) -- (137)(a) (2,218) (82)(c) (2,136)
---------- -------- -------- -------- -------- --------
(Loss) from continuing operations
before income taxes............. (144,030) (80,106) 32,713 (96,637) (21,924) (74,713)
Income taxes.......................... (19,163) (6,756)(b) 14,812(b) (27,219) (1,612)(d) (25,607)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations...................... $ (124,867) $(73,350) $ 17,901 $(69,418) $(20,312) $(49,106)
========== ======== ======== ======== ======== ========
(Loss) from continuing operations
per share:
Basic............................. $ (1.99) $ (1.11) $ (.78)
========== ======== ========
Assuming dilution................. $ (1.99) $ (1.11) $ (.78)
========== ======== ========
Weighted average number of shares
outstanding:
Basic............................. 62,738 62,738 62,738
========== ======== ========
Assuming dilution................. 62,738 62,738 62,738
========== ======== ========
</TABLE>
10
<PAGE> 14
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR THE PRO FORMA PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
JUNE 30, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR
1998 OF LTC OF O&P ADJUSTED OF PROH PROPOSAL 1
--------------- ------------ ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................... $1,671,925 $634,354(a) $251,732(a) $785,839 $283,550(c) $502,289
Cost of services................... 1,317,266 459,848(a) 186,171(a) 671,247 193,859(c) 477,388
---------- -------- -------- -------- -------- --------
Gross profit................... 354,659 174,506 65,561 114,592 89,691 24,901
Selling, general and administrative
expenses......................... 199,293 55,291(a) 13,468(a) 130,534 39,525(c) 91,009
Provision for uncollectible
accounts......................... 21,907 3,620(a) 4,840(a) 13,447 14,255(c) (808)
Amortization of excess cost of net
assets acquired.................. 20,269 2,304(a) 6,437(a) 11,528 8,727(c) 2,801
Provision for restructure.......... 23,500 23,500(a) -- -- -- --
---------- -------- -------- -------- -------- --------
(Loss) from operations......... 89,690 89,791 40,816 (40,917) 27,184 (68,101)
Gain from issuance of subsidiary
stock............................ 38,805 -- -- 38,805 -- 38,805
Investment income.................. 830 236(a) 29(a) 565 13(c) 552
Interest expense................... (28,285) -- (2,961)(a) (25,324) (1,499)(c) (23,825)
Minority interest.................. (1,494) -- (135)(a) (1,359) (69)(c) (1,290)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations before income
taxes........................ 99,546 90,027 37,749 (28,230) 25,629 (53,859)
Income taxes....................... 41,631 30,309(b) 15,067(b) (3,745) 9,477(d) (13,222)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations................... $ 57,915 $ 59,718 $ 22,682 $(24,485) $ 16,152 $(40,637)
========== ======== ======== ======== ======== ========
(Loss) from continuing operations
per share:
Basic.......................... $ .94 $ (.40) $ (.66)
========== ======== ========
Assuming dilution.............. $ .91 $ (.39) $ (.64)
========== ======== ========
Weighted average number of shares
outstanding:
Basic.......................... 61,742 61,742 61,742
========== ======== ========
Assuming dilution.............. 63,584 63,584 63,584
========== ======== ========
</TABLE>
11
<PAGE> 15
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) To eliminate results of operations of the Long-term Care Services and O&P
businesses for the entire period. With respect to the Long-term Care
Services business, the hospital contracting business, which is immaterial,
previously classified in the Company's Long-term Care Services segment
disclosure was not transferred as part of the sale.
(b) To reflect the adjustment to income tax expense based on Long-term Care
Services' and O&P's ratio of income before income taxes plus permanent
differences to the Company's consolidated income before income taxes plus
permanent differences multiplied by the Company's income tax expense.
(c) To eliminate results of operations of the PROH business for the entire
period.
(d) To reflect the adjustment to income tax expense based on PROH's ratio of
income before income taxes plus permanent differences to the Company's
consolidated income before income taxes plus permanent differences
multiplied by the Company's consolidated income tax expense.
12
<PAGE> 16
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
AS OF ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
MARCH 31, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR
1999 OF LTC OF O&P ADJUSTED OF PROH PROPOSAL 1
---------- ------------ ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 23,804 $ -- $ (1,150)(d) $ 74,977 $ (3,022)(f) $220,254
52,323(e) 148,299(g)
Accounts receivable.................... 301,369 (93,877)(b) (66,086)(d) 141,406 (113,997)(f) 27,409
Inventories............................ 45,135 -- (45,135)(d) -- -- --
Income tax receivable.................. 27,869 (60)(b) (67)(d) 16,192 11,550(g) 27,742
(11,550)(e)
Deferred income taxes.................. 14,580 -- (783)(d) 13,797 (487)(f) 13,310
Other current assets................... 27,771 (4,121)(b) (6,262)(d) 32,388 (10,112)(f) 32,276
15,000(e) 10,000(g)
Net assets of discontinued
operations........................... -- 82,944(c) -- 82,944 -- 82,944
---------- -------- --------- -------- --------- --------
Total current assets............ 440,528 (15,114) (63,710) 361,704 42,231 403,935
Property and equipment, net.............. 64,541 (1,572)(b) (13,869)(d) 49,100 (40,140)(f) 8,960
Excess cost of net assets acquired,
net.................................... 719,592 -- (258,033)(d) 461,559 (378,002)(f) 83,557
Investments in joint venture............. 15,203 -- -- 15,203 (15,203)(f) --
Other assets, net........................ 49,965 (17,720)(b) (1,752)(d) 27,568 (2,805)(f) 24,763
(2,925)(e)
---------- -------- --------- -------- --------- --------
Total assets............................. $1,289,829 $(34,406) $(340,289) $915,134 $(393,919) $521,215
========== ======== ========= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing
arrangements......................... $ 540,696 $ 30,000(a) $ (13,164)(d) $220,532 $ (14,929)(f) $205,603
(337,000)(e)
Accounts payable and accrued
expenses............................. 160,796 (28,653)(b) (22,373)(d) 116,045 (33,150)(f) 87,495
6,275(e) 4,600(g)
---------- -------- --------- -------- --------- --------
Total current liabilities....... 701,492 1,347 (366,262) 336,577 (43,479) 293,098
Financing arrangements, net of current
portion................................ 55,267 -- (27,513)(d) 27,754 (26,772)(f) 982
Deferred income taxes.................... 41,684 -- (3,478)(d) 38,206 (9,913)(f) 28,293
Other.................................... 6,200 -- (414)(d) 5,786 (1,521)(f) 4,265
---------- -------- --------- -------- --------- --------
Total liabilities............... 804,643 1,347 (397,667) 408,323 (81,685) 326,638
---------- -------- --------- -------- --------- --------
Minority interest........................ 27,501 -- (80)(d) 27,421 (114)(f) 27,307
Commitments and contingencies............ -- -- -- -- -- --
Shareholders' equity:
Common stock........................... 684 -- -- 684 -- 684
Additional paid-in capital............. 274,285 -- -- 274,285 -- 274,285
Retained earnings...................... 225,388 (30,000)(a) 57,458(e) 247,093 (312,120)(g) (65,027)
(5,753)(b)
---------- -------- --------- -------- --------- --------
500,357 (35,753) 57,458 522,062 (312,120) 209,942
Less: common stock in treasury....... (42,672) -- -- (42,672) -- (42,672)
---------- -------- --------- -------- --------- --------
Total shareholders' equity...... 457,685 (35,753) 57,458 479,390 (312,120) 167,270
---------- -------- --------- -------- --------- --------
$1,289,829 $(34,406) $(340,289) $915,134 $(393,919) $521,215
========== ======== ========= ======== ========= ========
</TABLE>
13
<PAGE> 17
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Adjustment to reflect the Company's liability and related loss as a result
of the $30,000 working capital guarantee provided to the purchaser of the
LTC business. This loss will be reported in discontinued operations in the
Company's June 30, 1999 financial statements and all prior periods will be
restated to reflect this presentation.
(b) Adjustments to reflect the elimination of the Long-term Care Services assets
and liabilities classified as Net Assets of Discontinued Operations. As a
result of the sale of the LTC business (the "LTC Transaction") and the exit
from Selected Long-term Care Services Markets (the "Selected Markets Exit"),
the Company classified all of the accounts receivable, net of allowance, to
which the Company was entitled, certain other assets retained by the Company
and current liabilities assumed by the Company as a result of the LTC
Transaction and accounts receivable, net of allowance, and liabilities
attributable to the Selected Markets Exit as Net Assets of Discontinued
Operations. Assets and liabilities transferred as a result of the LTC
Transaction have been eliminated and a loss of $5,753 recorded. The
aggregate loss of $35,753, $30,000 from the working capital guarantee and
$5,753 from the assets and liabilities transferred, will be reported as
discontinued operations in the Company's fiscal year 1999 financial
statements.
The hospital contracting business, which is immaterial, previously
classified in the Company's Long-term Care Services segment disclosure, was
not transferred as part of the LTC Transaction.
(c) Net Assets of Discontinued Operations consist of the following:
<TABLE>
<CAPTION>
SELECTED LTC
MARKETS EXIT TRANSACTION TOTAL
------------ ----------- --------
<S> <C> <C> <C>
Accounts receivable, net of allowances... $ 41,907 $ 51,970 $ 93,877
Other receivables, net of allowances..... 17,258 462 17,720
Accounts payable and accrued
liabilities............................ (17,027) (11,626) (28,653)
-------- -------- --------
Net Assets of Discontinued
Operations.......................... $ 42,138 $ 40,806 $ 82,944
======== ======== ========
</TABLE>
(d) Adjustments to reflect the elimination of the O&P assets and liabilities
that were transferred to the purchaser as a result of the sale of O&P (the
"O&P Transaction").
(e) Adjustments reflect: (i) the estimated gain of $57,458, net of estimated
taxes of $11,550 and estimated transaction costs of $9,200 and (ii)
estimated net proceeds from the O&P Transaction of $404,323, of which
$337,000 have been applied to the Company's outstanding line of credit,
$15,000 are assumed to be held in escrow and $52,323 have been included in
cash and cash equivalents.
The gain on the sale of O&P will be recognized as income from continuing
operations in the Company's fiscal year 2000 financial statements.
(f) Adjustments to reflect the elimination of the PROH assets and liabilities
assumed to be transferred to a purchaser as a result of the PROH Sale.
(g) Adjustments reflect: (i) the estimated loss of $312,120, including estimated
transaction costs of $4,600 and net of estimated tax benefits of $11,550,
and (ii) net proceeds from the PROH Sale. Net proceeds of $148,299 were
estimated as the $200,000 minimum purchase price for which shareholder
approval is being sought, reduced by $41,701 of PROH financing arrangements
to be transferred to a purchaser and $10,000 assumed to be held in escrow.
These amounts are estimates and may not reflect the terms of a definitive
agreement, if any. An increase to the estimated sale price would result in
an approximate 99% increase in the gain recognized and net proceeds before
an increase in escrowed funds, if any.
The loss on the sale of PROH will be recognized as a loss from continuing
operations in the Company's fiscal year 2000 financial statements.
14
<PAGE> 18
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of the Company are not entitled to
appraisal rights for their shares of the Company's capital stock in connection
with the transactions contemplated by the PROH Sale, or to any similar rights
under Delaware law.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has concluded that the PROH Sale is in the
best interests of the Company and its stockholders. Accordingly, subject to the
conditions that (i) the total sale price for PROH is a minimum of $200 million
and (ii) the Company's Board of Directors shall have obtained an opinion from a
financial advisor to the effect that, as of the date of such opinion, the
consideration to be received by the Company in the sale of the PROH business is
fair, from a financial point of view, to the Company, the Board of Directors
unanimously approved the PROH Sale at a meeting held on August 5, 1999. In
arriving at this conclusion, the Board considered a number of factors, including
the alternatives to the PROH Sale and the future prospects of the Company.
In addition to the conditions set forth above, prior to the execution of a
definitive sale agreement with any potential buyer of PROH, the Board of
Directors of the Company will be required to approve the terms of any such
definitive sale agreement. Except as requested herein, no further stockholder
vote will be solicited by the Company for the PROH Sale. Accordingly,
stockholders will not have the opportunity to vote on the definitive sale
agreement.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE PROH SALE.
If either the PROH Sale is not approved by the stockholders or the
conditions to the PROH Sale are not met, the Board of Directors will explore the
alternatives then available for the future of the Company. Such alternatives
include obtaining secured financing or, in the event the $200 million sale price
condition is not met, seeking to obtain stockholder approval of a sale at a
lower price. See "Background and Reasons for the Proposals -- Capital Structure
Alternatives" for a discussion of the secured financing alternative.
PROPOSAL 2. APPROVAL OF THE NCES SALE
GENERAL
The Company has engaged WP to conduct a competitive bidding process among
potential strategic and financial buyers of the Company's stock interest in
NCES. No affiliates of the Company or any officers or directors of the Company
may participate in the bidding process. WP is currently engaged in discussions
with a number of potential buyers and expects to receive final proposals from
these potential buyers in early August 1999. The Company and WP intend to
evaluate any offers received from potential buyers with respect to, among other
factors, price per share offered for the common stock of NCES, the ability of
potential buyers to consummate a transaction, and the material terms of
acquisition agreements proposed by potential buyers. It is anticipated that the
minimum sale price for the Company's interest in NCES will be $2.50 per share,
or an aggregate of $48.5 million. The proceeds of the sale would be utilized to
pay stockholders as reflected in "Proposal 3. Adoption of the Liquidation
Proposal -- Liquidation Analysis and Estimates" below.
The sale of NCES requires the approval of both the NCES and NovaCare
stockholders. NCES intends to solicit stockholder approval of any proposed
transaction in a separate proxy statement. NovaCare owns approximately 67% of
the outstanding common stock of NCES. In the event that the stockholders of
NovaCare vote in favor of "Proposal 2. Approval of the NCES Sale," NovaCare
intends to vote all of its shares of NCES in favor of a sale of NCES. As the
owner of 67% of the outstanding stock of NCES, NovaCare has the ability to
approve such a sale under Delaware law.
In determining the anticipated sale price range for the Company's interest
in NCES, the Board of Directors consulted with management of the Company. In
making its determination, the Board of Directors
15
<PAGE> 19
reviewed and analyzed the historical financial results and future prospects of
the NCES business, comparable valuations of businesses similar to those of NCES
to the extent that comparable information was available from public and private
transactions and other relevant and appropriate information. Since NCES is a
publicly traded company, the Board of Directors and management determined that,
among other factors, an appropriate measure of comparability was a per share
price to earnings ("PE") multiple because publicly traded companies are
generally valued on a PE multiple basis. Due to the significant changes in
NCES's earnings per share by virtue of the changes in NovaCare, NCES's largest
customer in the fiscal year ended June 30, 1999, the projections for the fiscal
year ending June 30, 2000 were considered to be the most relevant. Of the
comparable next twelve-month ("NTM") multiples for the four publicly traded
PEO's other than NCES (Administaff, Inc., Employee Solutions, Inc., Staff
Leasing, Inc. and TEAM America Corporation), the lowest NTM PE multiple was 11.1
times, and the high and average were 24.8 and 18.0 times, respectively. Of the
seven publicly disclosed sales transactions involving comparable businesses sold
since 1996 (the acquisition by Automatic Data Processing, Inc. of The Vincam
Group, Inc., the acquisition by Digital Solutions, Inc. of The Teamstaff
Companies, Inc., the acquisition by American Express of Administaff, Inc., the
acquisitions by The Vincam Group, Inc. of Staffing Network, Inc., Amstaff, Inc.
and Staff Administrators, Inc. and the acquisition by Paychex, Inc. of National
Business Solutions, Inc.), the lowest NTM PE multiple was 23.1 times. The
highest NTM PE multiple was 35.0 times, with the average multiple being 29.0
times. At a minimum sales price of $2.50 per share, the NCES transaction value
would equate to an NTM PE multiple of 24.5 times. The Board of Directors
believed that a minimum NTM PE multiple of 24.5 times was appropriate because it
was approximately mid-way between the low end of the sale transaction multiple
and the high end of the trading transaction multiple. In connection with the
execution of a definitive agreement with a buyer of the NCES business, the
Company will request an opinion from WP as to the fairness, from a financial
point of view, of the consideration to be received by the Company in the sale of
the Company's interest in NCES.
WP has been paid an aggregate of $1.8 million for its strategic analysis
and in connection with the sales of the long-term care services business and the
O&P business. If the proposed NCES Sale and PROH Sale are consummated, WP will
be paid an aggregate of $1.0 million.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended March 31, 1999 and the fiscal year ended
June 30, 1998 and unaudited Pro Forma Consolidated Balance Sheet as of March 31,
1999 are based on the historical consolidated financial statements of the
Company adjusted to reflect the dispositions of the LTC and the O&P businesses
and adjusted to give effect to the NCES Sale. Since each of the Proposals
presented herein can be adopted or rejected individually, the Pro Forma
Financial Information does not give effect to the PROH Sale as set forth in
Proposal 1 or the Restructuring Proposal as set forth in Proposal 3. The Pro
Forma Condensed Consolidated Statements of Operations have been prepared
assuming the above disposition occurred as of the beginning of the respective
periods presented and the Pro Forma Consolidated Balance Sheet has been prepared
assuming that the disposition occurred as of March 31, 1999.
The Pro Forma Financial Information does not purport to present what the
Company's results of operations or financial position would have been had the
disposition occurred as of the beginning of the respective periods or March 31,
1999, as the case may be, or to project the Company's results of operations or
financial position for any future period or date, nor does it give effect to any
matters other than those described in the notes thereto.
The Pro Forma Financial Information should be read in conjunction with the
Company's Consolidated Financial Statements.
16
<PAGE> 20
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR THE PRO FORMA
NINE MONTHS PRO FORMA PRO FORMA PRO FORMA AS
ENDED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
MARCH 31, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR
1999 OF LTC OF O&P ADJUSTED OF NCES PROPOSAL 2
--------------- --------------- --------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $1,398,830 $317,417(a) $209,442(a) $871,971 $617,843(c) $254,128
Cost of services................ 1,183,863 257,824(a) 155,753(a) 770,286 590,582(c) 179,704
---------- -------- -------- -------- -------- --------
Gross profit................ 214,967 59,593 53,689 101,685 27,261 74,424
Selling, general and
administrative expenses....... 158,223 34,311(a) 8,915(a) 114,997 27,718(c) 87,279
Provision for uncollectible
accounts...................... 23,439 5,105(a) 4,177(a) 14,157 114(c) 14,043
Amortization of excess cost of
net assets acquired........... 18,789 1,730(a) 5,538(a) 11,521 2,681(c) 8,840
Provision for restructure....... 129,747 98,647(a) -- 31,100 -- 31,100
---------- -------- -------- -------- -------- --------
(Loss) from operations...... (115,231) (80,200) 35,059 (70,090) (3,252) (66,838)
Gain from issuance of subsidiary
stock......................... 1,506 -- -- 1,506 1,506(c) --
Investment income............... 423 94(a) -- 329 85(c) 244
Interest expense................ (28,373) -- (2,209)(a) (26,164) (353)(c) (25,811)
Minority interest............... (2,355) -- (137)(a) (2,218) (2,136)(c) (82)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations before income
taxes..................... (144,030) (80,106) (32,713) (96,637) (4,150) (92,487)
Income taxes.................... (19,163) (6,756)(b) 14,812(b) (27,219) (524)(d) (26,695)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations................ $ (124,867) $(73,350) $ 17,901 $(69,418) $ (3,626) $(65,792)
========== ======== ======== ======== ======== ========
(Loss) from continuing
operations per share:
Basic....................... $ (1.99) $ (1.11) $ (1.05)
========== ======== ========
Assuming dilution........... $ (1.99) $ (1.11) $ (1.05)
========== ======== ========
Weighted average number of
shares outstanding:
Basic....................... 62,738 62,738 62,738
========== ======== ========
Assuming dilution........... 62,738 62,738 62,738
========== ======== ========
</TABLE>
17
<PAGE> 21
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR THE PRO FORMA PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
JUNE 30, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR
1998 OF LTC OF O&P ADJUSTED OF NCES PROPOSAL 2
--------------- ------------ ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $1,671,925 $634,354(a) $251,732(a) $785,839 $502,289(c) $283,550
Cost of services...................... 1,317,266 459,848(a) 186,171(a) 671,247 477,388(c) 193,859
---------- -------- -------- -------- -------- --------
Gross profit...................... 354,659 174,506 65,561 114,592 24,901 89,691
Selling, general and administrative
expenses............................ 199,293 55,291(a) 13,468(a) 130,534 23,880(c) 106,654
Provision for uncollectible
accounts............................ 21,907 3,620(a) 4,840(a) 13,447 292(c) 13,155
Amortization of excess cost of net
assets acquired..................... 20,269 2,304(a) 6,437(a) 11,528 2,801(c) 8,727
Provision for restructure............. 23,500 23,500(a) -- -- -- --
---------- -------- -------- -------- -------- --------
Income (loss) from operations..... 89,690 89,791 40,816 (40,917) (2,072) (38,845)
Gain from issuance of subsidiary
stock............................... 38,805 -- -- 38,805 38,805(c) --
Investment income..................... 830 236(a) 29(a) 565 220(c) 345
Interest expense...................... (28,285) -- (2,961)(a) (25,324) (308)(c) (25,016)
Minority interest..................... (1,494) -- (135)(a) (1,359) (1,290)(c) (69)
---------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes........................... 99,546 90,027 37,749 (28,230) 35,355 (63,585)
Income taxes.......................... 41,631 30,309(b) 15,067(b) (3,745) 14,126(d) (17,871)
---------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations...................... $ 57,915 $ 59,718 $ 22,682 $(24,485) $ 21,229 $(45,714)
========== ======== ======== ======== ======== ========
Income (loss) from continuing
operations per share:
Basic............................. $ .94 $ (.40) $ (.74)
========== ======== ========
Assuming dilution................. $ .91 $ (.39) $ (.72)
========== ======== ========
Weighted average number of shares
outstanding:
Basic............................. 61,742 61,742 61,742
========== ======== ========
Assuming dilution................. 63,584 63,584 63,584
========== ======== ========
</TABLE>
18
<PAGE> 22
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) To eliminate results of operations of the Long-term Care Services and O&P
businesses for the entire period. With respect to the Long-term Care
Services business, the hospital contracting business, which is immaterial,
previously classified in the Company's Long-term Care Services segment
disclosure was not transferred as part of the sale.
(b) To reflect the adjustment to income tax expense based on Long-term Care
Services' and O&P's ratio of income before income taxes plus permanent
differences to the Company's consolidated income before income taxes plus
permanent differences multiplied by the Company's income tax expense.
(c) To eliminate results of operations of the NCES business for the entire
period other than amounts associated with the provision of payroll and other
employee services to the Company. There are no pro forma adjustments related
to NCES associated with the provision of payroll and other employee services
to the Company because these expenses are eliminated upon consolidation of
the historical financial statements.
(d) To reflect the adjustment to income tax expense based on NCES's ratio of
income before income taxes plus permanent differences to the Company's
consolidated income before income taxes plus permanent differences
multiplied by the Company's consolidated income tax expense.
19
<PAGE> 23
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
AS OF ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
MARCH 31, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR
1999 OF LTC OF O&P ADJUSTED OF NCES PROPOSAL 2
---------- ------------ ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 23,804 $ -- $ (1,150)(d) $ 74,977 $ (4,509)(f) $118,968
52,323(e) 48,500(g)
Accounts receivable.................... 301,369 (93,877)(b) (66,086)(d) 141,406 (27,409)(f) 113,997
Inventories............................ 45,135 -- (45,135)(d) -- -- --
Income tax receivable.................. 27,869 (60)(b) (67)(d) 16,192 2,678(f) 3,540
(11,550)(e) (15,330)(g)
Deferred income taxes.................. 14,580 -- (783)(d) 13,797 (1,749)(f) 12,048
Other current assets................... 27,771 (4,121)(b) (6,262)(d) 32,388 (3,394)(f) 28,994
15,000(e)
Net assets of discontinued
operations........................... -- 82,944(c) -- 82,944 -- 82,944
---------- -------- --------- -------- -------- --------
Total current assets............ 440,528 (15,114) (63,710) 361,704 (1,213) 360,491
Property and equipment, net.............. 64,541 (1,572)(b) (13,869)(d) 49,100 (5,588)(f) 43,512
Excess cost of net assets acquired,
net.................................... 719,592 -- (258,033)(d) 461,559 (83,557)(f) 378,002
Investments in joint venture............. 15,203 -- -- 15,203 -- 15,203
Other assets, net........................ 49,965 (17,720)(b) (1,752)(d) 27,568 (734)(f) 26,834
(2,925)(e)
---------- -------- --------- -------- -------- --------
Total assets............................. $1,289,829 $(34,406) $(340,289) $915,134 $(91,092) $824,042
========== ======== ========= ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing
arrangements......................... $ 540,696 $ 30,000(a) $ (13,164)(d) $220,532 $ (231)(f) $220,301
(337,000)(e)
Accounts payable and accrued
expenses............................. 160,796 (28,653)(b) (22,373)(d) 116,045 (44,777)(f) 73,168
6,275(e) 1,900(g)
---------- -------- --------- -------- -------- --------
Total current liabilities....... 701,492 1,347 (366,262) 336,577 (43,108) 293,469
Financing arrangements, net of current
portion................................ 55,267 -- (27,513)(d) 27,754 (507)(f) 27,247
Deferred income taxes.................... 41,684 -- (3,478)(d) 38,206 (16,443)(f) 21,763
Other.................................... 6,200 -- (414)(d) 5,786 (4,244)(f) 1,542
---------- -------- --------- -------- -------- --------
Total liabilities............... 804,643 1,347 (397,667) 408,323 (64,302) 344,021
---------- -------- --------- -------- -------- --------
Minority interest........................ 27,501 -- (80)(d) 27,421 (27,307)(f) 114
Commitments and contingencies............ -- -- -- -- -- --
Shareholders' equity:
Common stock........................... 684 -- -- 684 -- 684
Additional paid-in capital............. 274,285 -- -- 274,285 -- 274,285
Retained earnings...................... 225,388 (30,000)(a) 57,458(e) 247,093 517(g) 247,610
(5,753)(b)
---------- -------- --------- -------- -------- --------
500,357 (35,753) 57,458 522,062 517 522,579
Less: common stock in treasury....... (42,672) -- -- (42,672) -- (42,672)
---------- -------- --------- -------- -------- --------
Total shareholders' equity...... 457,685 (35,753) 57,458 479,390 517 479,907
---------- -------- --------- -------- -------- --------
$1,289,829 $(34,406) $(340,289) $915,134 $(91,092) $824,042
========== ======== ========= ======== ======== ========
</TABLE>
20
<PAGE> 24
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Adjustment to reflect the Company's liability and related loss as a result
of the $30,000 working capital guarantee provided to the purchaser of the
LTC business. This loss will be reported in discontinued operations in the
Company's June 30, 1999 financial statements and all prior periods will be
restated to reflect this presentation.
(b) Adjustments to reflect the elimination of the Long-term Care Services assets
and liabilities classified as Net Assets of Discontinued Operations. As a
result of the LTC Transaction and the Selected Markets Exit, the Company
classified all of the accounts receivable, net of allowance, to which the
Company was entitled, certain other assets retained by the Company and
current liabilities assumed by the Company as a result of the LTC
Transaction and accounts receivable, net of allowance, and liabilities
attributable to the Selected Markets Exit as Net Assets of Discontinued
Operations. Assets and liabilities transferred as a result of the LTC
Transaction have been eliminated and a loss of $5,753 recorded. The
aggregate loss of $35,753, $30,000 from the working capital guarantee and
$5,753 from the assets and liabilities transferred will be reported as
discontinued operations in the Company's fiscal year 1999 financial
statements.
The hospital contracting business, which is immaterial, previously
classified in the Company's Long-term Care Services segment disclosure, was
not transferred as part of the LTC Transaction.
(c) Net Assets of Discontinued Operations consist of the following:
<TABLE>
<CAPTION>
SELECTED LTC
MARKETS EXIT TRANSACTION TOTAL
------------ ----------- --------
<S> <C> <C> <C>
Accounts receivable, net of allowances... $ 41,907 $ 51,970 $ 93,877
Other receivables, net of allowances..... 17,258 462 17,720
Accounts payable and accrued
liabilities............................ (17,027) (11,626) (28,653)
-------- -------- --------
Net Assets of Discontinued
Operations.......................... $ 42,138 $ 40,806 $ 82,944
======== ======== ========
</TABLE>
(d) Adjustments to reflect the elimination of the O&P assets and liabilities
that were transferred to the purchaser as a result of the O&P Transaction.
(e) Adjustments reflect: (i) the estimated gain of $57,458, net of estimated
taxes of $11,550 and estimated transaction costs of $9,200, and (ii)
estimated net proceeds from the O&P Transaction of $404,323, of which
$337,000 have been applied to the Company's outstanding line of credit,
$15,000 are assumed to be held in escrow and $52,323 have been included in
cash and cash equivalents.
The gain on the sale of O&P will be recognized as income from continuing
operations in the Company's fiscal year 2000 financial statements.
(f) Adjustments to reflect the elimination of the NCES assets and liabilities
assumed to be transferred to a purchaser as a result of the NCES Sale.
(g) Adjustments reflect: (i) the estimated gain of $517, net of estimated taxes
of $15,330 and transaction costs of $1,900, and (ii) proceeds from the NCES
Sale. Net proceeds of $48,500 were based on an assumed sale price of $2.50
per share multiplied by the 19,400 NCES shares owned by the Company. These
amounts are estimates and may not reflect the terms of a definitive purchase
and sale agreement, if any. An increase to the estimated sales price would
result in an approximate 99% increase in the gain recognized on net proceeds
before an increase in escrowed funds, if any.
21
<PAGE> 25
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of the Company are not entitled to
appraisal rights for their shares of the Company's capital stock in connection
with the transactions contemplated by the NCES Sale, or to any similar rights
under Delaware law.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has concluded that the NCES Sale is in the
best interests of the Company and its stockholders. Accordingly, subject to the
conditions that (i) the sale price for the Company's interest in NCES is a
minimum of $2.50 per share, or an aggregate of $48.5 million, and (ii) the
Company's Board of Directors shall have obtained an opinion from a financial
advisor to the effect that, as of the date of such opinion, the consideration to
be received by the Company for the sale of its interest in NCES is fair, from a
financial point of view, to the Company, the Board of Directors unanimously
approved the NCES Sale at a meeting held on August 5, 1999. In arriving at this
conclusion, the Board considered a number of factors, including the alternatives
to the NCES Sale and the future prospects of the Company.
In addition to the conditions set forth above, prior to the execution of a
definitive sale agreement with any potential buyer of NCES, the Board of
Directors of the Company will be required to approve the terms of any such
definitive sale agreement. Except as requested herein, no further stockholder
vote will be solicited by the Company for the NCES Sale. Accordingly,
stockholders will not have the opportunity to vote on the definitive sale
agreement.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE NCES SALE.
If the NCES Sale is not approved by the stockholders, the Board of
Directors will explore the alternatives then available for the future of the
Company.
22
<PAGE> 26
PROPOSAL 3. ADOPTION OF THE RESTRUCTURING PROPOSAL
GENERAL
The Board of Directors has adopted a Restructuring Proposal, which would
include the sale and possible distribution of any remaining assets of the
Company after consummation of the PROH Sale and the NCES Sale and adoption of a
Plan of Restructuring of the Company (the "Plan"). The Company's interest in
PROH and NCES represents substantially all of the assets (other than cash or
cash equivalents) of the Company. After the sales of PROH and NCES, the Company
will endeavor to sell or convert into cash any remaining assets of the Company.
In the event that the Company is unable for any reason to effect the NCES Sale,
the Company may either distribute the shares of NCES stock owned by it to
NovaCare stockholders pro rata as a dividend or pay existing indebtedness of the
Company with shares of NCES stock (provided such stock is valued at not less
than $2.50 per share).
As described below, if the Restructuring Proposal is approved, the Company
intends to seek to reinvest the net proceeds to the Company from the PROH Sale
and the NCES Sale, after the payment of liabilities, in a new business or
businesses. Approval of the Restructuring Proposal does not constitute approval
of the reinvestment in any new business or businesses and such reinvestment
would be subject to further vote and approval of the stockholders of the
Company. If the Company is unable, or chooses not, to reinvest any proceeds in a
new business or businesses, the Company will liquidate. Approval of the
Restructuring Proposal constitutes approval of such liquidation.
Under the terms of the Plan and pursuant to Delaware law, the Board of
Directors may amend or abandon the Plan prior to the dissolution of the Company
without stockholder approval. Furthermore, under the Plan, NovaCare will not
liquidate prior to December 31, 2000 (the "Liquidation Date"), unless the Board
of Directors determines to liquidate on an earlier date. The Board of Directors
does not currently intend to distribute the proceeds of the sales of PROH and
NCES to the Company's stockholders, if at all, until after the Liquidation Date.
The uses of the proceeds from the sales of PROH and NCES, if consummated, that
may be considered by the Board include the development, acquisition and/or
investment in or merger with new or existing businesses, distributions to the
Company's stockholders, repurchases of the Company's securities and general
business purposes. Such activities could include the acquisition of an entire
company or companies, or divisions thereof, either through a merger or a
purchase of assets, as well as an investment in the securities of a company or
companies or, alternatively, a combination with another business in which the
Company would not be the surviving corporation. The Company has not entered into
any substantive negotiations concerning such acquisitions or investments.
Consummation of any investments or business combinations will be subject to vote
and approval by the stockholders. If any investments or business combinations
are approved by the stockholders of the Company, the Plan will be terminated.
The Restructuring Proposal may eventually result in the complete
liquidation of all of the Company's assets. If the Restructuring Proposal is
approved, and if, prior to the Liquidation Date, no suitable investment or
business combination is identified, the Board of Directors will cause the
Company to file a certificate of dissolution with the Secretary of State of the
State of Delaware, wind up the Company's affairs, attempt to convert all Company
assets into cash or cash equivalents, pay or attempt to adequately provide for
the payment of all of the Company's known obligations and liabilities and
distribute pro rata in one or more liquidating distributions to or for the
benefit of the Company's stockholders, as of the applicable record date(s), all
of the Company's assets. If the Company is dissolved, pursuant to Delaware law,
the Company will continue to exist for three years (or such longer period of
time as the Court of Chancery of the State of Delaware shall direct) for the
purpose of prosecuting and defending suits against it or enabling the Company
gradually to close its business, to dispose of property, to discharge its
liabilities and to distribute the remaining assets to the stockholders of the
Company.
If assets of the Company remain undistributed to its stockholders by
December 31, 2001 (the "Final Distribution Date"), those assets would be
transferred to a liquidating trust (the "Liquidating Trust") for the pro rata
benefit of the stockholders of the Company of record on the Final Distribution
Date. Approval of the Restructuring Proposal will constitute stockholder
approval of the Plan and of the possible appointment by the
23
<PAGE> 27
Board of Directors of one or more trustees of the Liquidating Trust (the
"Liquidating Trustees") and the execution of a liquidating trust agreement with
the Liquidating Trustees on such terms and conditions as the Board of Directors
shall determine in its absolute discretion. In addition, approval of the
Restructuring Proposal will constitute stockholder approval of any and all sales
of assets of the Company approved by the Board of Directors or, if applicable,
the Liquidating Trustees.
The Restructuring Proposal, including the Plan, was approved by the Board
of Directors, subject to stockholder approval, on August 5, 1999. A copy of the
Plan is attached as Appendix A to this Proxy Statement. The material features of
the Restructuring Proposal, including the Plan, are summarized under "Principal
Provisions of the Plan" below. This summary does not claim to be complete and is
subject in all respects to the provisions of the Plan. Stockholders are urged to
read the Plan in its entirety.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended March 31, 1999 and the fiscal year ended
June 30, 1998 and unaudited Pro Forma Consolidated Balance Sheet as of March 31,
1999 are based on the historical consolidated financial statements of the
Company adjusted to reflect the disposition of the LTC and the O&P businesses
and adjusted to give effect to the PROH Sale and the NCES Sale. The Pro Forma
Condensed Consolidated Statements of Operations have been prepared assuming the
above dispositions occurred as of the beginning of the respective periods
presented and the Pro Forma Consolidated Balance Sheet has been prepared
assuming that the dispositions occurred as of March 31, 1999.
The Pro Forma Financial Information does not purport to present what the
Company's results of operations or financial position would have been had the
dispositions occurred as of the beginning of the respective periods or March 31,
1999, as the case may be, or to project the Company's results of operations or
financial position for any future period or date, nor does it give effect to any
matters other than those described in the notes thereto.
The Pro Forma Financial Information should be read in conjunction with the
Company's Consolidated Financial Statements.
24
<PAGE> 28
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR THE
NINE MONTHS PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ENDED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTMENTS
MARCH 31, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR THE SALE
1999 OF LTC OF O&P ADJUSTED OF PROH OF NCES
--------------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $1,398,830 $317,417(a) $209,442(a) $871,971 $254,128(c) $617,843(c)
Cost of services................. 1,183,863 257,824(a) 155,753(a) 770,286 179,704(c) 590,582(c)
---------- -------- -------- -------- -------- --------
Gross profit................. 214,967 59,593 53,689 101,685 74,424 27,261
Selling, general and
administrative expenses........ 158,223 34,311(a) 8,915(a) 114,997 39,916(c) 27,718(c)
Provision for uncollectible
accounts....................... 23,439 5,105(a) 4,177(a) 14,157 14,043(c) 114(c)
Amortization of excess cost of
net assets acquired............ 18,789 1,730(a) 5,538(a) 11,521 8,840(c) 2,681(c)
Provision for restructure........ 129,747 98,647(a) -- 31,100 31,100(c) --
---------- -------- -------- -------- -------- --------
(Loss) from operations....... (115,231) (80,200) 35,059 (70,090) (19,475) (3,252)
Gain from issuance of subsidiary
stock.......................... 1,506 -- -- 1,506 -- 1,506(c)
Investment income................ 423 94(a) -- 329 35(c) 85(c)
Interest expense................. (28,373) -- (2,209)(a) (26,164) (2,402)(c) (353)(c)
Minority interest................ (2,355) -- (137)(a) (2,218) (82)(c) (2,136)(c)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations before income
taxes...................... (144,030) (80,106) 32,713 (96,637) (21,924) (4,150)
Income taxes..................... (19,163) (6,756)(b) 14,812(b) (27,219) (1,612)(d) (524)(d)
---------- -------- -------- -------- -------- --------
(Loss) from continuing
operations................. $ (124,867) $(73,350) $ 17,901 $(69,418) $(20,312) $ (3,626)
========== ======== ======== ======== ======== ========
(Loss) from continuing
operations per share:
Basic........................ $ (1.99) $ (1.11)
========== ========
Assuming dilution............ $ (1.99) $ (1.11)
========== ========
Weighted average number of
shares outstanding:
Basic........................ 62,738 62,738
========== ========
Assuming dilution............ 62,738 62,738
========== ========
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR
PROPOSAL 3
-----------
<S> <C>
Net revenues..................... $ --
Cost of services................. --
--------
Gross profit................. --
Selling, general and
administrative expenses........ 47,363
Provision for uncollectible
accounts....................... --
Amortization of excess cost of
net assets acquired............ --
Provision for restructure........ --
--------
(Loss) from operations....... (47,363)
Gain from issuance of subsidiary
stock.......................... --
Investment income................ 209
Interest expense................. (23,409)
Minority interest................ --
--------
(Loss) from continuing
operations before income
taxes...................... (70,563)
Income taxes..................... (25,083)
--------
(Loss) from continuing
operations................. $(45,480)
========
(Loss) from continuing
operations per share:
Basic........................ $ (.72)
========
Assuming dilution............ $ (.72)
========
Weighted average number of
shares outstanding:
Basic........................ 62,738
========
Assuming dilution............ 62,738
========
</TABLE>
25
<PAGE> 29
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR THE PRO FORMA PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTMENTS
JUNE 30, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR THE SALE
1998 OF LTC OF O&P ADJUSTED OF PROH OF NCES
--------------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $1,671,925 $634,354(a) $251,732(a) $785,839 $283,550(c) $502,289(c)
Cost of services................. 1,317,266 459,848(a) 186,171(a) 671,247 193,859(c) 477,388(c)
---------- -------- -------- -------- -------- --------
Gross profit................. 354,659 174,506 65,561 114,592 89,691 24,901
Selling, general and
administrative expenses........ 199,293 55,291(a) 13,468(a) 130,534 39,525(c) 23,880(c)
Provision for uncollectible
accounts....................... 21,907 3,620(a) 4,840(a) 13,447 14,255(c) 292(c)
Amortization of excess cost of
net assets acquired............ 20,269 2,304(a) 6,437(a) 11,528 8,727(c) 2,801(c)
Provision for restructure........ 23,500 23,500(a) -- -- -- --
---------- -------- -------- -------- -------- --------
Income (loss) from
operations................. 89,690 89,791 40,816 (40,917) 27,184 (2,072)
Gain from issuance of subsidiary
stock.......................... 38,805 -- -- 38,805 -- 38,805(c)
Investment income................ 830 236(a) 29(a) 565 13(c) 220(c)
Interest expense................. (28,285) -- (2,961)(a) (25,324) (1,499)(c) (308)(c)
Minority interest................ (1,494) -- (135)(a) (1,359) (69)(c) (1,290)(c)
---------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... 99,546 90,027 37,749 (28,230) 25,629 35,355
Income taxes..................... 41,631 30,309(b) 15,067(b) (3,745) 9,477(d) 14,126(d)
---------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations................. $ 57,915 $ 59,718 $ 22,682 $(24,485) $ 16,152 $ 21,229
========== ======== ======== ======== ======== ========
Income (loss) from continuing
operations per share:
Basic........................ $ .94 $ (.40)
========== ========
Assuming dilution............ $ .91 $ (.39)
========== ========
Weighted average number of
shares outstanding:
Basic........................ 61,742 61,742
========== ========
Assuming dilution............ 63,584 63,584
========== ========
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR
PROPOSAL 3
-----------
<S> <C>
Net revenues..................... $ --
Cost of services................. --
--------
Gross profit................. --
Selling, general and
administrative expenses........ 67,129
Provision for uncollectible
accounts....................... (1,100)
Amortization of excess cost of
net assets acquired............ --
Provision for restructure........ --
--------
Income (loss) from
operations................. (66,029)
Gain from issuance of subsidiary
stock.......................... --
Investment income................ 332
Interest expense................. (23,517)
Minority interest................ --
--------
Income (loss) from continuing
operations before income
taxes...................... (89,214)
Income taxes..................... (27,348)
--------
Income (loss) from continuing
operations................. $(61,866)
========
Income (loss) from continuing
operations per share:
Basic........................ $ (1.00)
========
Assuming dilution............ $ (.97)
========
Weighted average number of
shares outstanding:
Basic........................ 61,742
========
Assuming dilution............ 63,584
========
</TABLE>
26
<PAGE> 30
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) To eliminate results of operations of the Long-term Care Services and O&P
businesses for the entire period. With respect to the Long-term Care
Services business, the hospital contracting business, which is immaterial,
previously classified in the Company's Long-term Care Services segment
disclosure was not transferred as part of the sale.
(b) To reflect the adjustment to income tax expense based on Long-term Care
Services' and O&P's ratio of income before income taxes plus permanent
differences to the Company's consolidated income before income taxes plus
permanent differences multiplied by the Company's income tax expense.
(c) To eliminate results of operations of the PROH business for the entire
period and the NCES business for the entire period, other than amounts
associated with the provision of payroll and other employee services to the
Company. There are no pro forma adjustments related to NCES associated with
the provision of payroll and other employee services to the Company because
these expenses are eliminated upon consolidation of the historical financial
statements.
(d) To reflect the adjustment to income tax expense based on pro forma income
before income taxes based on PROH's and NCES's ratio of income before income
taxes plus permanent differences to the Company's consolidated income before
income taxes plus permanent differences multiplied by the Company's
consolidated income tax expense.
27
<PAGE> 31
NOVACARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
AS OF ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTMENTS
MARCH 31, FOR THE SALE FOR THE SALE AS FOR THE SALE FOR THE SALE
1999 OF LTC OF O&P ADJUSTED OF PROH OF NCES
---------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 23,804 $ -- $ (1,150)(d) $ 74,977 $ (3,022)(f) $ (4,509)(f)
52,323(e) 148,299(g) 48,500(h)
Accounts receivable................ 301,369 (93,877)(b) (66,086)(d) 141,406 (113,997)(f) (27,409)(f)
Inventories........................ 45,135 -- (45,135)(d) -- -- --
Income tax receivable.............. 27,869 (60)(b) (67)(d) 16,192 11,550(g) 2,678(f)
(11,550)(e) (15,330)(h)
Deferred income taxes.............. 14,580 -- (783)(d) 13,797 (487)(f) (1,749)(f)
Other current assets............... 27,771 (4,121)(b) (6,262)(d) 32,388 (10,112)(f) (3,394)(f)
15,000(e) 10,000(g)
Net assets of discontinued
operations....................... -- 82,944(c) -- 82,944 -- --
---------- -------- --------- -------- --------- --------
Total current assets......... 440,528 (15,114) (63,710) 361,704 42,231 (1,213)
Property and equipment, net......... 64,541 (1,572)(b) (13,869)(d) 49,100 (40,140)(f) (5,588)(f)
Excess cost of net assets acquired,
net................................ 719,592 -- (258,033)(d) 461,559 (378,002)(f) (83,557)(f)
Investments in joint ventures....... 15,203 -- -- 15,203 (15,203)(f) --
Other assets, net................... 49,965 (17,720)(b) (1,752)(d) 27,568 (2,805)(f) (734)(f)
(2,925)(e)
---------- -------- --------- -------- --------- --------
Total assets........................ $1,289,829 $(34,406) $(340,289) $915,134 $(393,919) $(91,092)
========== ======== ========= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing
arrangements..................... $ 540,696 $ 30,000(a) $ (13,164)(d) $220,532 $ (14,929)(f) $ (231)(f)
(337,000)(e)
Accounts payable and accrued
expenses......................... 160,796 (28,653)(b) (22,373)(d) 116,045 (33,150)(f) (44,777)(f)
6,275(e) 4,600(g) 1,900(h)
---------- -------- --------- -------- --------- --------
Total current liabilities.... 701,492 1,347 (366,262) 336,577 (43,479) (43,108)
Financing arrangements, net of
current portion.................... 55,267 -- (27,513)(d) 27,754 (26,772)(f) (507)(f)
Deferred income taxes............... 41,684 -- (3,478)(d) 38,206 (9,913)(f) (16,443)(f)
Other............................... 6,200 -- (414)(d) 5,786 (1,521)(f) (4,244)(f)
---------- -------- --------- -------- --------- --------
Total liabilities............ 804,643 1,347 (397,667) 408,323 (81,685) (64,302)
---------- -------- --------- -------- --------- --------
Minority interest................... 27,501 -- (80)(d) 27,421 (114)(f) (27,307)(f)
Commitments and contingencies....... -- -- -- -- -- --
Shareholders' equity:
Common stock....................... 684 -- -- 684 -- --
Additional paid-in capital......... 274,285 -- -- 274,285 -- --
Retained earnings.................. 225,388 (30,000)(a) 57,458(e) 247,093 (312,120)(g) 517(h)
(5,753)(b)
---------- -------- --------- -------- --------- --------
500,357 (35,753) 57,458 522,062 (312,120) 517
Less: common stock in treasury... (42,672) -- -- (42,672) -- --
---------- -------- --------- -------- --------- --------
Total shareholders' equity... 457,685 (35,753) 57,458 479,390 (312,120) 517
---------- -------- --------- -------- --------- --------
$1,289,829 $(34,406) $(340,289) $915,134 $(393,919) $(91,092)
========== ======== ========= ======== ========= ========
<CAPTION>
PRO FORMA
AS ADJUSTED
FOR
OTHER PROPOSAL 3
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ -- $264,245
Accounts receivable................ -- --
Inventories........................ -- --
Income tax receivable.............. (1,595)(j) 28,825
15,330(l)
Deferred income taxes.............. (11,561)(i) --
Other current assets............... -- 28,882
Net assets of discontinued
operations....................... -- 82,944
-------- --------
Total current assets......... 2,174 404,896
Property and equipment, net......... 3,372
Excess cost of net assets acquired,
net................................ -- --
Investments in joint ventures....... -- --
Other assets, net................... (2,683)(i) 17,600
(3,746)(j)
-------- --------
Total assets........................ $ (4,255) $425,868
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing
arrangements..................... $ -- $205,372
Accounts payable and accrued
expenses......................... 23,092(k) 67,710
-------- --------
Total current liabilities.... 23,092 273,082
Financing arrangements, net of
current portion.................... -- 475
Deferred income taxes............... (11,850)(i) --
Other............................... -- 21
-------- --------
Total liabilities............ 11,242 273,578
-------- --------
Minority interest................... -- --
Commitments and contingencies....... -- --
Shareholders' equity:
Common stock....................... -- 684
Additional paid-in capital......... -- 274,285
Retained earnings.................. (2,394)(i) (80,007)
(5,341)(j)
(23,092)(k)
15,330(l)
-------- --------
(15,497) 194,962
Less: common stock in treasury... -- (42,672)
-------- --------
Total shareholders' equity... (15,497) 152,290
-------- --------
$ (4,255) $425,868
======== ========
</TABLE>
28
<PAGE> 32
NOVACARE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Adjustment to reflect the Company's liability and related loss as a result
of the $30,000 working capital guarantee provided to the purchaser of the
LTC business. This loss will be reported in discontinued operations in the
Company's June 30, 1999 financial statements and all prior periods will be
restated to reflect this presentation.
(b) Adjustments to reflect the elimination of the Long-term Care Services assets
and liabilities classified as Net Assets of Discontinued Operations. As a
result of the LTC Transaction and the Selected Markets Exit, the Company
classified all of the accounts receivable, net of allowance, to which the
Company was entitled, certain other assets retained by the Company and
current liabilities assumed by the Company as a result of the LTC
Transaction and accounts receivable, net of allowance, and liabilities
attributable to the Selected Markets Exit as Net Assets of Discontinued
Operations. Assets and liabilities transferred as a result of the LTC
Transaction have been eliminated and a loss of $5,753 recorded. The
aggregate loss of $35,753, $30,000 from the working capital guarantee and
$5,753 from the assets and liabilities transferred will be reported as
discontinued operations in the Company's fiscal year 1999 financial
statements.
The hospital contracting business, which is immaterial, previously
classified in the Company's Long-term Care Services segment disclosure, was
not transferred as part of the LTC Transaction.
(c) Net Assets of Discontinued Operations consist of the following:
<TABLE>
<CAPTION>
SELECTED LTC
MARKETS EXIT TRANSACTION TOTAL
------------ ----------- --------
<S> <C> <C> <C>
Accounts receivable, net of allowances... $ 41,907 $ 51,970 $ 93,877
Other receivables, net of allowances..... 17,258 462 17,720
Accounts payable and accrued
liabilities............................ (17,027) (11,626) (28,653)
-------- -------- --------
Net Assets of Discontinued
Operations.......................... $ 42,138 $ 40,806 $ 82,944
======== ======== ========
</TABLE>
(d) Adjustments to reflect the elimination of the O&P assets and liabilities
that were transferred to the purchaser as a result of the O&P Transaction.
(e) Adjustments to reflect: (i) the estimated gain of $57,458, net of estimated
taxes of $11,550 and estimated transaction costs of $9,200, and (ii)
estimated net proceeds from the O&P Transaction of $404,323, of which
$337,000 have been applied to the Company's outstanding line of credit,
$15,000 are assumed to be held in escrow and $52,323 have been included in
cash and cash equivalents.
The gain on the sale of O&P will be recognized as income from continuing
operations in the Company's fiscal year 2000 financial statements.
(f) Adjustments to reflect the elimination of the PROH and NCES assets and
liabilities assumed to be transferred to a purchaser as a result of the PROH
and NCES Sales.
(g) Adjustments reflect: (i) the estimated loss of $312,120, including estimated
transaction costs of $4,600 and net of estimated tax benefits of $11,550,
and (ii) net proceeds from the PROH Sale. Net proceeds of $148,299 were
estimated as the $200,000 minimum purchase price for which shareholder
approval is being sought, reduced by $41,701 of PROH financing arrangements
to be transferred to a purchaser and $10,000 assumed to be held in escrow.
The loss on the sale of PROH will be recognized as loss from continuing
operations in the Company's fiscal year 2000 financial statements.
(h) Adjustments reflect: (i) the gain of $517, net of estimated taxes of $15,330
and transaction costs of $1,900, and (ii) proceeds from the NCES Sale.
Proceeds of $48,500 were based on an assumed sale price
29
<PAGE> 33
of $2.50 per share multiplied by the 19,400 NCES shares owned by the
Company. These amounts are estimates and may not reflect the terms of a
definitive purchase and sale agreement, if any. An increase to the estimated
sales price would result in an approximate 99% increase in the gain
recognized on net proceeds before an increase in escrowed funds, if any.
(i) To eliminate deferred income taxes which relate to assets and liabilities
written off or disposed of in the preceding transactions.
(j) To write off certain assets, consisting principally of investments in low
income housing partnerships sold in the fourth quarter of fiscal 1999 of
$1,300 and deferred financing fees of $1,500. The effect of this pro forma
adjustment is recognized in the Pro Forma Condensed Consolidated Balance
Sheet only; there is no effect recognized in the Pro Forma Condensed
Consolidated Statement of Operations.
(k) To recognize principally severance and other employee contractual costs for
74 employees of $13,500, lease cost of $4,800 and long-term information
service agreement buyouts of $4,400. The effect of this pro forma adjustment
is recognized in the Pro Forma Condensed Consolidated Balance Sheet only;
there is no effect recognized in the Pro Forma Condensed Consolidated
Statement of Operations.
(l) To reverse income taxes provided on the sale of NCES resulting from the
application of the loss on the sale of PROH for income tax purposes.
LIQUIDATION ANALYSIS AND ESTIMATES
Management has estimated the following potential realizable values or range
of values for its assets, estimated liabilities and estimated cost of
liquidation after the Company sells PROH and NCES, assuming those businesses are
sold by September 30, 1999. The net proceeds from the sales of businesses were
estimated based on completed transactions with regard to long-term care services
and O&P and proposed transactions for PROH and NCES as described in Proposal 1
and Proposal 2, respectively, in this Proxy Statement. The basis for the minimum
or low end of the estimated realizable values from the sales of PROH and NCES is
discussed in Proposal 1 and Proposal 2, respectively. The maximum or high end of
the range of realizable values for the sales of PROH and NCES was determined on
the same basis, but utilizing the higher end of the range of comparable factors
(LQA EBITDA for PROH and PE NTM multiple for NCES). All business dispositions
have been or are assumed to be divestitures of the Company's ownership in the
stock of those businesses. Therefore, all assets and liabilities of those
subsidiaries are realized through the net proceeds from these sales, except for
the long-term care services sale, pursuant to which, upon satisfying a $30
million working capital guarantee, any accounts receivable of the subsidiary
sold which relate to periods prior to the date of the sale (June 1, 1999) are
transferred back to NovaCare. This transaction is further described in the
Company's Current Report on Form 8-K dated June 16, 1999, as amended by Forms
8-K/A dated June 29, 1999 and August 13, 1999. The remaining assets and
liabilities reflected in the table below are those assets and liabilities of
NovaCare, the parent company, and have been estimated to be fully realizable,
net of valuation allowances, as reflected in the Company's balance sheet as of
March 31, 1999. The following table also gives effect to other transactions
expected to occur as follows: (i) net proceeds from the exercise of stock
options were computed based on the assumption that all outstanding options to
purchase stock of the Company at or less than $3.94 per share (the high end of
the range of estimated net proceeds available for distribution per outstanding
common share, giving effect to such stock option exercises) were exercised, (ii)
other current assets include the escrows from the disposition of O&P and the
proposed disposition of PROH after March 31, 1999, and (iii) estimated
liabilities for severance and contractual costs, principally facility exit
costs, which result from the business dispositions and liquidation of the
Company.
The estimated operating losses from March 31, 1999 to September 30, 1999,
the date assumed as the beginning of the liquidation period, have been estimated
based on the Company's internal estimates for the quarter ended June 30, 1999
and its routine annual operating plan and budget process for the quarter ending
September 30, 1999. The estimated operating costs during liquidation were also
estimated based on the Company's internal routine annual operating plan and
budget process for the period October 1, 1999 through December 31, 2000, the
Liquidation Date.
30
<PAGE> 34
Except for historical transactions, there can be no assurance, however,
that the Company will be able to dispose of any of the assets below for or
within the indicated values or ranges (or at all).
<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
----------------------
<C> <S> <C>
(i) ESTIMATED REALIZABLE VALUES OF ASSETS OF THE COMPANY
$ 23.8
Cash and cash equivalents at March 31, 1999.................
380.1
Net proceeds from sale of O&P, excluding escrow.............
46.6 - 75.6
Net proceeds from sale of NCES..............................
143.7 - 243.4
Net proceeds from sale of PROH, excluding escrow............
52.9
Long-term care services ("LTCS") net current assets in
excess of working capital guarantee and market exit
costs.....................................................
28.8
Refundable income taxes.....................................
0.0 - 9.3
Net proceeds from exercise of stock options.................
28.9
Other current assets, including escrow from sales of O&P
and PROH..................................................
21.0
Other non-current assets....................................
---------------
725.8 - 863.8
Total estimated assets......................................
---------------
(ii) ESTIMATED LIABILITIES OF THE COMPANY
(337.0)
Revolving credit facility borrowing at March 31, 1999.......
(175.0)
Convertible subordinated debentures.........................
(44.6)
Accounts payable and accrued expenses.......................
(23.1)
Severance and facility exit costs...........................
---------------
(579.7)
Total estimated liabilities.................................
---------------
(iii) ESTIMATED OPERATING LOSSES FROM MARCH 31, 1999 TO SEPTEMBER (22.3) - (18.3)
30, 1999 (Assumed beginning of liquidation)...............
---------------
(iv) ESTIMATED OPERATING COSTS DURING LIQUIDATION
7.1 - 14.5
Investment income during liquidation........................
(2.8)
Interest on convertible subordinated debentures.............
(5.2) - (3.6)
Payroll and benefits for liquidation personnel..............
(3.0) - (2.0)
Legal, audit and other professional costs...................
(1.0) - (0.5)
Other costs.................................................
---------------
(4.9) - 5.6
Total estimated operating costs.............................
---------------
(v) ESTIMATED ACQUISITION RELATED CONTINGENT EARNOUT PAYMENTS (7.8)
PRIOR TO THE SALES OF O&P AND PROH, EARNED SUBSEQUENT TO
MARCH 31, 1999............................................
---------------
(vi) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION TO $ 111.0 - 263.6
STOCKHOLDERS..............................................
===============
(vii) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION PER $ 1.76 - 3.94
OUTSTANDING COMMON SHARE..................................
===============
</TABLE>
31
<PAGE> 35
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 Pro Forma
Consolidated Balance Sheet as of March 31, 1999:
<TABLE>
<CAPTION>
($ IN MILLIONS)
<S> <C>
Total stockholders' equity as of March 31, 1999............. $ 457.7
Loss on disposition of long-term care services subsidiary... (35.8)
Gain on disposition of O&P.................................. 57.5
Loss on proposed disposition of PROH........................ (312.1)
Gain on proposed disposition of NCES........................ 0.5
Additional tax benefit to be realized if both the sales of
PROH and NCES are completed............................... 15.3
Elimination of deferred income taxes which relate to assets
and liabilities written off or disposed of in the
preceding dispositions.................................... (2.4)
Write off of certain assets and recognition of severance and
other contractual costs incurred as a result of the
preceding dispositions and the liquidation of the
Company................................................... (28.4)
Estimated operating losses subsequent to March 31, 1999..... (22.3)
Estimated operating costs during liquidation................ (4.9)
Estimated acquisition related contingent earnout payments
prior to the sales of O&P and PROH, earned subsequent to
March 31, 1999............................................ (7.8)
Other....................................................... (6.3)
-------
ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS................................................ $ 111.0
=======
</TABLE>
THE METHODS USED BY THE BOARD OF DIRECTORS AND MANAGEMENT IN ESTIMATING THE
VALUES AND VALUE RANGES OF THE COMPANY'S ASSETS ARE INEXACT AND MAY NOT
APPROXIMATE VALUES ACTUALLY REALIZED. THE BOARD OF DIRECTORS' ASSESSMENT ASSUMES
THAT THE ESTIMATES OF THE COMPANY'S LIABILITIES AND OPERATING COSTS ARE
ACCURATE, BUT THOSE ESTIMATES ARE SUBJECT TO NUMEROUS UNCERTAINTIES BEYOND THE
COMPANY'S CONTROL AND ALSO DO NOT REFLECT ANY 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
SIGNIFICANTLY LESS THAN THE ESTIMATED AMOUNT 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.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has concluded that the Restructuring
Proposal is in the best interests of the Company and its stockholders.
Accordingly, the Board of Directors unanimously approved the Restructuring
Proposal at a meeting held on August 5, 1999. In arriving at this conclusion,
the Board considered a number of factors, including the alternatives to the
Restructuring Proposal and the future prospects of the Company.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE RESTRUCTURING PROPOSAL.
If the Restructuring Proposal is not approved by the stockholders, the
Board of Directors will explore the alternatives then available for the future
of the Company.
PRINCIPAL PROVISIONS OF THE PLAN
The liquidation provisions of the Plan will not be implemented until the
Liquidation Date, unless the Board of Directors determines to implement such
provisions on an earlier date. The Board of Directors does not currently intend
to implement the liquidation provisions of the Plan and distribute the proceeds
of the sales
32
<PAGE> 36
of PROH and NCES to the Company's stockholders, if at all, until after the
Liquidation Date. See "Conduct of the Company After the Closing of the PROH Sale
and the NCES Sale -- Use of Proceeds" below.
Distributions
The Company or the Liquidating Trust will make distributions of Available
Cash pro rata to stockholders at such time or times and in such amounts as
determined by the Board of Directors or the Liquidating Trustees. "Available
Cash" means the cash held by the Company or the Liquidating Trust after
deduction for the expenses of the operation of the Company or the Liquidating
Trust and a contingency reserve in an amount determined by the Board of
Directors or the Liquidating Trustees to be sufficient to satisfy any
liabilities, expenses and obligations of the Company or the Liquidating Trust
not otherwise paid or provided for and that could be recovered against the
stockholders to the extent of the amounts distributed to them by the Company or
the Liquidating Trust (the "Contingency Reserve").
The Company cannot predict the timing of the distributions from the
Liquidating Trust. It is the present intention of the Board of Directors,
however, that any Available Cash will be distributed to the stockholders
following the Final Record Date (as defined below). Nevertheless, no
distributions will be made until the Board of Directors or Liquidating Trustees
have determined the amount of the Contingency Reserve.
The Board of Directors believes that the Company and the Liquidating Trust
will have sufficient assets to pay the current and future obligations of the
Company and the Liquidating Trust and to make distributions to the stockholders,
but there can be no assurance to that effect. The amount of the distributions
will depend on the accounts payable and other liabilities of the Company
existing on the date of the approval of the Restructuring Proposal, the expenses
of operation of the Company and the Liquidating Trust that accrue following
approval of the Restructuring Proposal, and the amount of any claims that may be
asserted against the Company or the Liquidating Trust. The expenses of operation
of the Company and the Liquidating Trust will include professional fees and
other expenses of liquidation and could be substantial. The Company does not
anticipate that property, other than cash, will be distributed to the
stockholders by the Company or the Liquidating Trust.
Terms of the Liquidating Trust
The Board of Directors will determine whether and when to transfer assets
of the Company to the Liquidating Trust, but if all of the Company's assets are
not sold or distributed prior to the Final Distribution Date, the Company must
transfer all the remaining assets of the Company (including the Contingency
Reserve) to the Liquidating Trust. The purpose of the Liquidating Trust will be
to liquidate any non-cash assets held by the Liquidating Trust and distribute
the proceeds of all Available Cash to the stockholders of record on the Final
Record Date. The Liquidating Trust will be required to pay the expenses of its
operations and all unsatisfied expenses, liabilities and obligations of the
Company. Such expenses, liabilities and obligations will be paid initially out
of the Contingency Reserve, but if the Contingency Reserve is exhausted, such
expenses, liabilities and obligations will be paid out of the other assets held
by the Liquidating Trust.
If assets are transferred to the Liquidating Trust, each stockholder on the
Final Record Date will receive an interest (an "Interest") in the Liquidating
Trust pro rata to its interest in the outstanding Common Stock on that date. All
distributions from the Liquidating Trust will be made pro rata in accordance
with the Interests. The Interests will not be transferable except by operation
of law or upon death. Because the Interests will not be transferable, it is
anticipated that the Liquidating Trust will not be required to comply with the
periodic reporting and proxy statement requirements of the Exchange Act. The
Liquidating Trustees will, however, maintain books and records of the
Liquidating Trust, which will be available for inspection by holders of
Interests, to the extent permitted and in accordance with law.
The Plan authorizes the Board of Directors to appoint one or more
individuals or entities to act as Liquidating Trustees of the Liquidating Trust
and to cause the Company to enter into a liquidating trust agreement with such
Liquidating Trustees on such terms and conditions as may be approved by the
Board of Directors. It is anticipated that the Board of Directors will select
such Liquidating Trustees on the basis of the experience of each such individual
or entity in administering and disposing of assets and discharging liabilities
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of the kind to be held by the Liquidating Trust and the ability of each such
individual or entity to serve the best interests of the stockholders of the
Company. Approval of the Restructuring Proposal will constitute the approval by
the stockholders of any such appointment and the execution of a liquidating
trust agreement with the Liquidating Trustees.
As the stockholders of the Company will be deemed to have received a
liquidating distribution equal to their pro rata share of the value of the net
assets transferred to the Liquidating Trust (see "Certain Tax Consequences"
below), the transfer to the Liquidating Trust of assets could result in
immediate tax liability to the holders of Interests without their readily being
able to realize the value of such Interests to pay such taxes or otherwise.
Possible transfer of assets to the Liquidating Trust is only a contingency
plan to provide for the possibility that the Company may not be able to convert
all assets into cash or satisfy all liabilities before the Final Distribution
Date. Therefore, the Board of Directors has not finally determined the detailed
terms or structure for the Liquidating Trust, which would be determined by the
Board of Directors at a future date.
Contingency Reserve
Under Delaware law, the Company is required, in connection with its
dissolution, to pay or provide for payment of all of its expenses, liabilities
and obligations. These include known liabilities and obligations of the Company
accrued through the date of the approval of the Restructuring Proposal, expenses
to be incurred by the Company following approval of the Restructuring Proposal
in connection with the winding-up and dissolution of the Company, any expenses
to be incurred in connection with the operations of the Liquidating Trust,
claims that have been asserted against the Company but that have not been
settled or reduced to judgment and claims that have not yet been asserted but
may be asserted in the future. Known liabilities and obligations of the Company
include repayment of the Debentures, severance and other employee-related costs,
accounts payable and professional fees. See "Liquidation Analysis and Estimates"
above and "Certain Claims" below.
Following approval of the Restructuring Proposal by the stockholders and
prior to any distribution of Available Cash to stockholders, the Board of
Directors will set aside from all other assets of the Company a Contingency
Reserve to fund all then known liabilities and obligations of the Company and
the expenses expected to be incurred by the Company or the Liquidating Trust in
connection with its windup and dissolution, including the anticipated
operational expenses of the Company or the Liquidating Trust and other possible
claims against the Company or the Liquidating Trust. The Company is currently
unable to estimate with precision the amount of the Contingency Reserve, and the
estimated operating costs set forth above under "Liquidation Analysis and
Estimates" are for illustrative purposes only. The Contingency Reserve will
initially be based upon the assessment and estimates of the Board of Directors
of the Company's known liabilities and obligations, future operating expenses
and possible claims.
After the Contingency Reserve is established, the Board of Directors or the
Liquidating Trustees, as the case may be, may increase or decrease the
Contingency Reserve based on their then current estimate and assessment of the
operating expenses of the Company and/or the Liquidating Trust, the probable
value of any known claims against the Company or the Liquidating Trust and the
possibility of any then unknown claims being asserted against the Company or the
Liquidating Trust. Any increase in the amount of the Contingency Reserve will be
funded from the cash assets of the Company or the Liquidating Trust, as the case
may be, and will reduce the amount available for distribution to the
stockholders. The amount of any decrease in the Contingency Reserve would
increase the assets available for distribution to the stockholders. After all
expenses, liabilities and obligations of the Company and the Liquidating Trust
have been satisfied and the Board of Directors or the Liquidating Trustees, as
the case may be, determine that any future claims against the Company or the
Liquidating Trust are not probable of occurrence, any remaining funds in the
Contingency Reserve will be distributed pro rata to holders of Interests in the
Liquidating Trust.
In the event the Company fails to create an adequate Contingency Reserve
for payment of expenses, liabilities and obligations, or should the Contingency
Reserve and the assets held by the Liquidating Trust be exceeded by the amount
ultimately found payable in respect of the Company's expenses, liabilities and
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obligations, each stockholder could be held liable to the Company's creditors
for repayment of the stockholder's pro rata share of such excess, but limited to
the amounts received by the stockholder from the Company or the Liquidating
Trust. In addition, if a court holds at any time that the Company or the
Liquidating Trust has failed to make adequate provision for expenses,
liabilities and obligations, or if the amount ultimately required to be paid in
that respect exceeds the amount available from the Contingency Reserve and the
assets of the Liquidating Trust, a creditor of the Company could seek an
injunction against the making of distributions under the Plan on the grounds
that the amounts to be distributed are needed to provide for the payment of the
Company's expenses, liabilities and obligations. Any such action could delay or
substantially diminish the cash distributions to be made to the stockholders
under the Plan.
Disposition of Certain Assets
The Plan gives to the Board of Directors of the Company the power to sell
(or, in certain cases, otherwise dispose of) all the assets of the Company on
such terms and in such manner as determined by the Board of Directors and to
transfer remaining assets to the Liquidating Trust, to be sold by the
Liquidating Trustees. The prices at which the Company or the Liquidating Trust
may be able to sell those assets will depend on factors that may be beyond the
control of the Company or the Liquidating Trust and may not be as high as the
prices that could be obtained if the Company were not in liquidation. Approval
of the Restructuring Proposal will constitute approval of any such sales.
Certain Compensation Arrangements
Pursuant to the Plan, the Company may, in the absolute discretion of the
Board of Directors, pay to the Company's present or former officers, directors,
employees, agents and representatives, or any of them, compensation or
additional compensation above their regular compensation, in money or other
property, in recognition of any extraordinary efforts they, or any of them, may
undertake in connection with the implementation of the Plan. See also "Interests
of Certain Persons" below.
Closing of Transfer Books
The Company will close its transfer books on the earliest date (the "Final
Record Date") to occur of (i) the close of business on the record date fixed by
the Board of Directors for the final liquidating distribution to stockholders,
(ii) the close of business on the date of the transfer of the Company's
remaining assets to the Liquidating Trust, and (iii) the date on which the
Company files a Certificate of Dissolution with the Secretary of State of the
State of Delaware under Delaware law. After the Final Record Date, the Company
will not record any further transfers of Common Stock except pursuant to the
provisions of a deceased stockholder's will, intestate succession or operation
of law and the Company will not issue any new stock certificates, other than
replacement certificates. It is anticipated that no further trading of the
Common Stock will occur after the Final Record Date, and it is possible that
trading will effectively terminate before then. All liquidating distributions
from the Liquidating Trust or the Company on or after the Final Record Date will
be made to the stockholders pro rata according to their holdings of Common Stock
as of the Final Record Date. Subsequent to the Final Record Date, the Company
may, at its election, require stockholders to surrender certificates
representing their shares of Common Stock in order to receive distributions.
Stockholders should not forward their stock certificates before receiving
instructions to do so. If surrender of stock certificates is required, all
distributions otherwise payable by the Liquidating Trust or the Company, if any,
to stockholders who have not surrendered their stock certificates may be held in
trust for such stockholders, without interest, until the surrender of their
certificates (subject to escheat pursuant to the laws relating to unclaimed
property). If a stockholder's certificate evidencing the Common Stock has been
lost, stolen or destroyed, the stockholder may be required to furnish the
Company with satisfactory evidence of the loss, theft or destruction thereof,
together with surety bond or other indemnity, as a condition to the receipt of
any distribution. Any interim liquidating distribution from the Company prior to
the final distribution date will be made as of a record date prior to that
interim distribution that will be established by the Board of Directors.
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Indemnification
Pursuant to the Plan, the Company will indemnify its officers, directors,
employees, agents and representatives for actions taken in connection with the
Plan and the winding up of the affairs of the Company in accordance with the
Company's Certificate of Incorporation and By-Laws. The Company's obligation to
indemnify such persons may also be satisfied out of assets of the Liquidating
Trust. The Liquidating Trust will similarly be authorized to indemnify the
Liquidating Trustees and any employees, agents or representatives of the
Liquidating Trust for actions taken in connection with the operations of the
Liquidating Trust. Any claims arising in respect of such indemnification will be
satisfied out of the assets of the Liquidating Trust.
Dissolution of the Company
If the stockholders approve the Restructuring Proposal, and, if prior to
the Liquidation Date, the Board of Directors of the Company has not identified
any suitable investments or business combinations, the Company will file a
Certificate of Dissolution with the Secretary of State of the State of Delaware
dissolving the Company (the "Certificate of Dissolution"). The dissolution of
the Company will become effective, in accordance with Delaware law, upon the
filing of the Certificate of Dissolution with the Secretary of State of the
State of Delaware or upon such later date as may be specified in the Certificate
of Dissolution. Under Delaware law, the Company will continue to exist for three
years after the dissolution becomes effective or for such longer period as the
Delaware Court of Chancery shall direct, for the purposes of prosecuting and
defending suits, whether civil, criminal or administrative, by or against it,
and enabling the Company gradually to settle and close its business, to dispose
of and convey its property, to discharge its liabilities and to distribute to
the stockholders any remaining assets, but not for the purpose of continuing the
business for which the Company was organized.
Following the filing of the Certificate of Dissolution, the Board of
Directors will cause notices of dissolution to be sent to all known creditors of
the Company, and will publish notice of the Company's dissolution as required by
and otherwise in compliance with Delaware law. Except for the requirements of
Delaware law and the Exchange Act in connection with the Meeting of stockholders
to vote on the Restructuring Proposal, and except for the filing of the
Certificate of Dissolution and any required filings under federal or state tax
laws, no federal or state regulatory requirements must be complied with or
approvals obtained in connection with the dissolution.
UNDER DELAWARE LAW, IN THE EVENT THE COMPANY FAILS TO CREATE AN ADEQUATE
CONTINGENCY RESERVE FOR PAYMENT OF ITS EXPENSES AND LIABILITIES, OR SHOULD SUCH
CONTINGENCY RESERVE (AND THE ASSETS HELD BY ANY LIQUIDATING TRUST) BE EXCEEDED
BY THE AMOUNT ULTIMATELY FOUND TO BE PAYABLE IN RESPECT OF THE COMPANY'S
EXPENSES AND LIABILITIES, EACH STOCKHOLDER COULD BE HELD LIABLE FOR THE PAYMENT
TO THE COMPANY'S CREDITORS OF SUCH STOCKHOLDER'S PRO RATA SHARE OF SUCH EXCESS,
BUT LIMITED TO THE AMOUNTS RECEIVED BY SUCH STOCKHOLDER FROM THE COMPANY (AND
FROM ANY LIQUIDATING TRUST). ACCORDINGLY, IN THAT EVENT A STOCKHOLDER COULD BE
REQUIRED TO RETURN ALL DISTRIBUTIONS MADE AND THUS WOULD RECEIVE NOTHING FROM
THE COMPANY AS A RESULT OF THE RESTRUCTURING PROPOSAL. MOREOVER, IN THE EVENT A
STOCKHOLDER HAS PAID TAXES ON AMOUNTS RECEIVED, A REPAYMENT OF ALL OR A PORTION
OF SUCH AMOUNT COULD RESULT IN A SITUATION IN WHICH A STOCKHOLDER MAY INCUR A
NET TAX COST IF THE REPAYMENT OF THE AMOUNT DISTRIBUTED DOES NOT CAUSE A
REDUCTION IN TAXES PAYABLE IN AN AMOUNT EQUAL TO THE AMOUNT OF THE TAXES PAID ON
AMOUNTS PREVIOUSLY DISTRIBUTED.
THE ANTICIPATED TAX TREATMENT OF THE LIQUIDATION PROPOSAL IS SET FORTH
UNDER "CERTAIN TAX CONSEQUENCES" BELOW. NO RULING HAS BEEN REQUESTED FROM THE
INTERNAL REVENUE SERVICE (THE "IRS") WITH RESPECT TO THE ANTICIPATED TAX
TREATMENT OF THE RESTRUCTURING PROPOSAL, AND THE COMPANY WILL NOT SEEK AN
OPINION OF COUNSEL WITH RESPECT TO THE ANTICIPATED TAX TREATMENT. THE FAILURE TO
OBTAIN A RULING FROM THE IRS OR AN OPINION OF COUNSEL RESULTS IN LESS CERTAINTY
THAT THE ANTICIPATED TAX TREATMENT SUMMARIZED THEREIN WILL BE OBTAINED. IF ANY
OF THE CONCLUSIONS STATED UNDER "CERTAIN TAX CONSEQUENCES" PROVE TO BE
INCORRECT, THE RESULT COULD BE INCREASED TAXATION AT THE CORPORATE AND/OR
STOCKHOLDER LEVEL, THUS REDUCING THE BENEFIT TO THE STOCKHOLDERS AND THE COMPANY
FROM THE LIQUIDATION.
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AMENDMENT AND ABANDONMENT
Under the Plan, if the Board of Directors determines that liquidation and
dissolution are not in the best interests of the Company or its stockholders,
the Board of Directors may direct that the Plan be abandoned. The Company
nevertheless may cause the performance, without further stockholder approval, of
any contract for the sale of assets executed before then which the Board of
Directors considers to be in the best interests of the Company. The Board of
Directors also may amend or modify the Plan if it determines such action to be
in the best interests of the Company or its stockholders, to the extent
permitted by Delaware law, without the necessity of further stockholder
approval.
CONDUCT OF THE COMPANY AFTER THE CLOSING OF THE PROH SALE AND THE NCES SALE
Following the closing of the PROH Sale and the NCES Sale, if such sales
should occur, the Company intends to explore alternative investments or business
combinations as described below in "Use of Proceeds." If prior to the
Liquidation Date, no suitable investments or business combinations are
identified, the Company will begin winding-up its affairs, including the
attempted sale or liquidation of all of the Company's remaining non-cash assets,
payment of or provision for its obligations, liabilities and expenses and
compliance with law.
Use of Proceeds
NovaCare plans to use the cash proceeds from the sales of PROH and NCES to
repay the Debentures and other known liabilities (including transaction expenses
relating to the sales) estimated under "Liquidation Analysis and Estimates"
above.
The Board of Directors does not currently intend to distribute the
remaining proceeds of the sales of PROH and NCES to the Company's stockholders
until after the Liquidation Date, if at all. The uses of the proceeds from the
sales of PROH and NCES, if consummated, that may be considered by the Board
include the development, acquisition and/or investment in or merger with new or
existing businesses, distributions to the Company's stockholders, repurchases of
the Company's securities and general business purposes. Such activities could
include the acquisition of an entire company or companies, or divisions thereof,
either through a merger or a purchase of assets, as well as an investment in the
securities of a company or companies or, alternatively, a combination with
another business in which the Company would not be the surviving corporation.
The Company has not entered into any substantive negotiations concerning such
acquisitions or investments.
CONSUMMATION OF ANY INVESTMENTS OR BUSINESS COMBINATIONS WILL BE SUBJECT TO
VOTE AND APPROVAL BY THE STOCKHOLDERS. IF ANY INVESTMENTS OR BUSINESS
COMBINATIONS ARE APPROVED BY THE STOCKHOLDERS OF THE COMPANY, THE PLAN WILL BE
TERMINATED.
Pending use of the remaining net proceeds, the Company intends to invest
such funds in government securities and other investments that do not subject
the Company to regulation under the Investment Company Act of 1940 (the "1940
Act"). If NovaCare is deemed to be an investment company under the 1940 Act
because it invests in securities defined as "investment securities" under the
1940 Act, NovaCare must register as an investment company under the 1940 Act.
See "Risk Factors After the Closing of the PROH Sale and the NCES Sale" below.
Risk Factors After the Closing of the PROH Sale and the NCES Sale
Regulation. NovaCare will continue to be subject to regulation under the
Securities Act of 1933 and the Exchange Act. In addition, if NovaCare invests
the net proceeds of the PROH and NCES Sales in investment securities, NovaCare
may be subject to regulation under the 1940 Act. If NovaCare is deemed to be an
investment company under the 1940 Act because of its investment securities
holdings, NovaCare must register as an investment company under the 1940 Act. As
a registered investment company, NovaCare would be subject to the further
regulatory oversight of the Division of Investment Management of the Commission,
and its activities would be subject to substantial regulation under the 1940
Act. In addition, no more than 60% of NovaCare's Board of Directors could be
"interested persons" of the Company, within the meaning under
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the 1940 Act. The Company would seek to hire an investment adviser registered
under the Investment Advisers Act of 1940 to manage its assets, and such
investment adviser would be entitled to management fees. The Company would also
require the services of a custodian to maintain its securities, which custodian
would be entitled to custodial fees. In addition to registering with the
Commission, NovaCare would need to file annual and semi-annual reports with the
Commission, and to distribute these reports to its stockholders.
Although the Company does not intend to become an investment company and
intends to limit the investments of the Company's assets to government
securities and other investments that do not subject the Company to regulation
under the 1940 Act, if the Company were deemed to have invested in investment
securities and did not register under the 1940 Act, it would be in violation of
the 1940 Act and would be prohibited from engaging in business or selling its
securities and could be subject to civil and criminal actions for doing so. In
addition, the Company's contracts would be voidable and a court could appoint a
receiver to take control of the Company and liquidate it. Therefore, the
Company's classification as an investment company could materially adversely
affect the Company's business, results of operations and financial condition.
Potential Delisting of Securities. The New York Stock Exchange, Inc. (the
"NYSE") is likely to seek a delisting of the Company's securities from trading
in the event the Company is a "public shell" following the closing of the sales
of PROH and NCES. The term "public shell" generally includes a company whose
securities are publicly traded but which conducts no substantial operating
business. No assurance can be given that the NYSE will not determine that the
Company constitutes a "public shell" following the closing of the sales of PROH
and NCES. In the event the Company's securities are delisted and the Company
thereafter ceases to be a "public shell," the Company may reapply to have its
securities relisted for trading. However, it is the position of the NYSE that
the Company will have to meet the original listing requirements for trading, as
opposed to the continued listing requirements for trading, under which the
Company's securities currently trade. The original listing requirements are more
stringent than those for continued listing under current NYSE listing
requirements. No assurance can be given that the Company will cease to meet the
definition of a "public shell" following the closing of the sales of PROH and
NCES, that the Company will apply for the relisting of its securities for
trading on the NYSE or that, if the Company does so apply, that it will be able
to meet the original listing requirements.
CERTAIN CLAIMS
The Company has certain known liabilities and contingent liabilities, for
which it is or may be liable in the future. To the extent liabilities are known
and estimatable, the Company has included its current estimate in its summary of
estimated liabilities and operating costs included in "Liquidation Analysis and
Estimates" above. In addition, the Company is subject to legal proceedings and
claims that arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability, if any, with respect to any of
these actions will not be material.
TRADING OF THE COMMON STOCK
The Company will close its transfer books on the Final Record Date (as
described above) and at such time cease recording stock transfers and issuing
stock certificates (other than replacement certificates). Accordingly, it is
expected that trading in the shares will cease on or shortly after such date,
and trading may effectively terminate before then. To the extent the Company
makes interim liquidating distributions to stockholders prior to the Final
Record Date, the Common Stock will continue to trade, but the market price of
the Common Stock will likely decline as a result of such distributions.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of the Company are not entitled to
appraisal rights for their shares of the Company's capital stock in connection
with the transactions contemplated by the Restructuring Proposal, or to any
similar rights under Delaware law.
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CERTAIN TAX CONSEQUENCES
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal
income tax consequences of the PROH Sale, the NCES Sale and the Restructuring
Proposal, including the Plan, to the Company and its stockholders, but does not
purport to be a complete analysis of all the potential tax effects. The
discussion addresses neither the tax consequences that may be relevant to
particular categories of investors subject to special treatment under certain
federal income tax laws (such as dealers in securities, banks, insurance
companies, tax-exempt organizations, and foreign individuals and entities) nor
any tax consequences arising under the laws of any state, local or foreign
jurisdiction.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, administrative rulings and judicial
decisions now in effect, all of which are subject to change at any time, either
prospectively or retrospectively, by legislative, administrative or judicial
action. The following discussion has no binding effect on the IRS or the courts.
No ruling has been requested from the IRS with respect to the anticipated tax
treatment of the Restructuring Proposal and the Plan, and the Company will not
seek an opinion of counsel with respect to the anticipated tax treatment
summarized herein. There can be no assurance that the Liquidating Trust will be
treated as a liquidating trust for federal income tax purposes or that the
distributions made pursuant to the Plan, if any, will be treated as liquidating
distributions. If any of the conclusions stated herein proves to be incorrect,
the result could be increased taxation at the Company and/or the stockholder
level, thus reducing the benefit to the stockholders and the Company from the
liquidation.
Consequences to the Company. The Company recognized a tax loss on the sale
of the long-term care services business in fiscal 1999 and a gain on the sale of
O&P in fiscal 2000. The Company expects to recognize a gain on the sale or
distribution of the stock of NCES, a loss on the sale of the stock of PROH and
gains and losses on other assets sold pursuant to the Plan, generally on an
asset-by-asset basis. The Company expects that the gains with respect to the
sale or distribution of the stock of NCES, and the sale of O&P and other assets
will be fully absorbed by losses recognized on the sales of PROH, the long-term
care services business and other assets and by net operating loss ("NOL")
carryforwards and capital loss carryforwards available to the Company.
Accordingly, no current tax is expected to be due as a result of the sale or
distribution of the stock of NCES or the sale of the stock of PROH or the sales
of other assets pursuant to the Plan.
The Company expects that any NOL and capital loss carryforwards following
the sales of the Company's assets will remain available for use by the Company
in the event that the Company develops, acquires, invests in or merges with a
new business. In general, such NOL and capital loss carryforwards, if any, would
be available to offset future taxable income of the Company. However, capital
loss carryforwards can be used to offset only future capital gains. In addition,
there are a number of potential restrictions under various provisions of the
Code, including the time periods during which NOL carryforwards and capital loss
carryforwards may be used, that may apply to limit the Company's (or any Company
successor's) future utilization of the NOL carryforwards and capital loss
carryforwards, even absent a change in control of the Company. In addition,
under certain provisions of the Code, the Company's ability to offset future
income with its NOL or capital loss carryforwards would be restricted or
eliminated by a change in control of the Company.
If the Company liquidates, the Company will continue to be subject to tax
on its taxable income until the liquidation is complete. The Company will
recognize gain or loss upon any liquidating distribution of property to
stockholders or to the Liquidating Trust as if such property were sold to the
stockholders or Liquidating Trust. The amount of such gain or loss will equal
the difference between the Company's adjusted tax basis for each asset and the
asset's fair market value on the date of distribution.
Consequences to Stockholders. The stockholders will not recognize any gain
or loss as a result of the sale by the Company of its assets.
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If the Company liquidates, a stockholder will recognize gain or loss equal
to the difference between (i) the sum of the amount of money and the fair market
value of property (other than money) distributed to such stockholder directly or
to the Liquidating Trust on the stockholder's behalf, and (ii) such
stockholder's tax basis for his shares of Common Stock. A stockholder's tax
basis in his shares will generally equal the stockholder's cost for his shares
of Common Stock. The gain or loss will be a capital gain or loss, assuming the
Common Stock is held as a capital asset. Long-term capital gain realized by a
stockholder that is an individual, estate or trust may be eligible for reduced
tax rates. Long-term capital losses can generally be used to offset capital
gains and, for individuals, estates or trusts, up to $3,000 of ordinary income.
The tax basis of any property other than cash received by each stockholder upon
the complete liquidation of the Company will be the fair market value of the
property at the time of the distribution.
If the Company liquidates, stockholders may receive one or more liquidating
distributions, including a deemed distribution of cash and property transferred
to the Liquidating Trust. The amount of any distribution should be applied first
to reduce a stockholder's tax basis in his shares of Common Stock, but not below
zero. If a stockholder owns more than one block of shares of Common Stock, the
amount of any distribution must be allocated among the several blocks of shares
owned by the stockholder in the proportion that the number of shares in a
particular block bears to the total number of shares owned by the stockholder.
The amount of the distributions in excess of a stockholder's basis in his Common
Stock will be gain, and should be recognized in the year the distribution is
received (or transferred to the Liquidating Trust). If the amount of the
distributions is less than the stockholder's basis in his shares of Common
Stock, the stockholder will generally recognize a loss in the year the final
distribution is received.
If the Company liquidates, the Company will provide stockholders and the
IRS with a statement of the amount of cash and the fair market value of any
property distributed to the stockholders (or transferred to the Liquidating
Trust) during that year as determined by the Company, at such time and in such
manner as required by the Treasury Regulations.
The Liquidating Trust. The Company believes the Liquidating Trust will not
be treated as an association taxable as a corporation based upon the anticipated
activities of the Liquidating Trust and the advice of the Company's tax counsel.
Accordingly, the Liquidating Trust itself should not be subject to income tax.
If the Company transfers assets to the Liquidating Trust, stockholders will
be treated for tax purposes as having received a distribution at the time of
transfer of their pro rata share of money and the fair market value of property
other than money transferred to the Liquidating Trust, reduced by the amount of
known liabilities assumed by the Liquidating Trust or to which the property
transferred is subject. The distribution will be treated as a distribution in
liquidation of the stockholder's Common Stock. The effect of the distribution on
a stockholder's tax basis in his shares of Common Stock is discussed above in
"Consequences to Stockholders."
After formation of the Liquidating Trust, stockholders must take into
account for federal income tax purposes their pro rata portion of any income,
expense, gain or loss recognized by the Liquidating Trust. The income, expense,
gain or loss recognized by the Liquidating Trust will not effect the
stockholder's basis in his Common Stock.
As a result of the transfer of property to the Liquidating Trust and the
ongoing activities of the Liquidating Trust, stockholders should be aware that
they may be subject to tax whether or not they have received any actual
distributions from the Liquidating Trust with which to pay such tax.
As indicated above, the Company has not obtained any IRS ruling as to the
tax status of the Liquidating Trust, and there can be no assurance that the IRS
will agree with the Company's conclusion that the Liquidating Trust should be
treated as a liquidating trust for federal income tax purposes. If it were
determined that the Liquidating Trust should be classified for federal income
tax purposes as an association taxable as a corporation (as a result of a change
in law, changes in the IRS ruling guidelines or administrative positions, a
change in facts or otherwise), income and losses of the Liquidating Trust would
be reflected on its own tax return rather than being passed through to the
stockholders and the Liquidating Trust would be required to pay federal income
taxes at corporate tax rates. Furthermore, much of the above discussion would
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no longer be accurate. For instance, all or a portion of any distribution made
to the stockholders from the Liquidating Trust could be treated as a dividend
subject to tax at ordinary income tax rates.
Taxation of Non-United States Stockholders. Foreign corporations or
persons who are not citizens or residents of the United States should consult
their tax advisors with respect to the U.S. and non-U.S. tax consequences of the
Plan.
STATE AND LOCAL INCOME TAX CONSEQUENCES
The Company may be subject to liability for state and local taxes with
respect to the sale of assets. Stockholders may also be subject to liability for
state and local taxes with respect to the receipt of liquidating distributions
and their interests in the Liquidating Trust. State and local tax laws may
differ in various respects from federal income tax law. Stockholders should
consult their tax advisors with respect to the state and local tax consequences
of the Plan.
THE FOREGOING SUMMARY OF CERTAIN INCOME TAX CONSEQUENCES IS INCLUDED FOR
GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE TO ANY
STOCKHOLDER. THE TAX CONSEQUENCES OF THE PLAN MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF THE STOCKHOLDER. THE COMPANY RECOMMENDS THAT EACH
STOCKHOLDER CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF
THE PLAN.
INTERESTS OF CERTAIN PERSONS
John H. Foster, Chairman of the Board of Directors, is entitled to
terminate his employment with the Company and receive certain severance benefits
in the event of a "Change of Control" of the Company, as that term is defined in
the employment agreement, as amended, between the Company and Mr. John Foster.
The sale of the PROH business or the Company's interest in NCES would constitute
a "Change of Control" as defined in Mr. Foster's employment agreement, given the
Company's prior sale of its O&P business and its long-term care services
business. Thus, subsequent to stockholder approval of the NCES Sale and/or the
PROH Sale and the Company's completion of either transaction, Mr. John Foster
will have the right to terminate his employment with the Company and receive the
severance payments set forth in his employment agreement, which are equal to
approximately $2,200,000 in the aggregate.
Timothy E. Foster, a director and the Chief Executive Officer of the
Company, James W. McLane, a director and the President and Chief Operating
Officer of the Company, and Robert E. Healy, Jr., a Senior Vice President and
the Chief Financial Officer of the Company, each entered into an employment
agreement with the Company, dated May 30, 1999 (the "May 1999 Employment
Agreements"), superseding prior employment agreements between each such
executive and the Company (all of which previously were filed with the
Commission). Pursuant to certain "change of control" and constructive
termination provisions in such prior employment agreements, upon the completion
of the Company's sale of the LTC and O&P businesses (and resulting restructuring
and/or reorganization), each such executive contractually may have had the right
to terminate his employment with the Company and to receive substantial
severance payments. In order to induce these key senior executives to waive
their right to trigger such termination provisions and to satisfy the
requirements of the Company's senior lenders, all of the Company's outside
directors, upon the recommendation of the Compensation Committee of the Board of
Directors, unanimously approved the May 1999 Employment Agreements, which
contain certain transaction and retention bonus payments upon the sale of PROH
and/or NCES in accordance with the Restructuring Proposal, and upon the
implementation of a plan of liquidation (provided PROH has been sold). The
transaction and retention bonus payments contained in the May 1999 Employment
Agreements are in lieu of any severance.
The transaction and retention bonus payments to be paid to Mr. Timothy
Foster upon (i) the sale of NCES, (ii) the sale of PROH and (iii) the earlier of
the implementation of a plan of liquidation and June 30, 2000, are $475,000,
$400,000 and $500,000, respectively. The transaction and retention bonus
payments to be paid to Mr. McLane upon (i) the sale of NCES, (ii) the earlier of
the sale of PROH or refinancing of the
41
<PAGE> 45
Debentures and (iii) the earlier of the implementation of the sale of PROH and
June 30, 2000, are $362,500, $450,000 and $350,000, respectively. The
transaction and retention bonus payments to be paid to Mr. Healy upon (i) the
sale of NCES, (ii) the sale of PROH and (iii) the earlier of the implementation
of a plan of liquidation and June 30, 2000, are $317,500, $250,000 and $245,000,
respectively. The foregoing description of the May 1999 Employment Agreements is
only a summary of certain specific provisions in such agreements. A complete
copy of each such agreement was filed with the Commission as an exhibit to the
Company's Current Report on Form 8-K dated July 14, 1999.
Certain other individuals employed by the Company will receive payments in
connection with the completion of the transactions described in the Proxy
Statement. Richard S. Binstein, a Vice President and the Company's General
Counsel and Secretary, will receive payments upon the sale of NCES, the sale of
PROH and the earlier of the implementation of a plan of liquidation and June 30,
2000. In addition, the following individuals will receive payments upon the sale
of PROH: Jack D. Williams, Chief Operating Officer -- PROH Physical
Rehabilitation Division; Terrence P. Morrow, Chief Financial Officer -- PROH;
Nicholas J. Harsh, Chief Operating Officer -- PROH Occupational Health Division;
Dennis J. Fitzpatrick, Executive Vice President, Reimbursement and
Contracts -- PROH; and Jayne E. Fleck-Pool, Vice President, Clinical
Services -- PROH.
Officers and directors of the Company hold outstanding stock options under
the Company's stock option plans. The consummation of either the PROH Sale or
the NCES Sale will be deemed to be a "change in control" under such plans (given
the Company's prior sale of its O&P business and its long-term care services
business), and, accordingly, will result in the acceleration of the vesting of
such options.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the number of shares and percentage of the
Company's outstanding Common Stock deemed to be beneficially owned as of June 1,
1999, by (i) all persons known to the Company to be the beneficial owners of
more than 5% of its Common Stock, (ii) each director of the Company and (iii)
the directors and officers of the Company as a group. Unless otherwise
indicated, the beneficial owners have sole voting and investment power with
respect to all shares owned.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER (A) BENEFICIAL OWNERSHIP OUTSTANDING SHARES
- ---------------------------- -------------------- ------------------
<S> <C> <C>
John H. Foster.................................... 4,151,214(b) 5.9%
Timothy E. Foster................................. 900,001(c) 1.3%
E. Martin Gibson.................................. 50,000(d) *
Siri S. Marshall.................................. 39,200(e) *
James W. McLane................................... 437,504(f) *
Stephen E. O'Neil................................. 47,500(g) *
George W. Siguler................................. 51,400(h) *
Daniel C. Tosteson................................ 53,400(i) *
Directors and Officers as a group (16 persons).... 5,893,261(j) 8.2%
</TABLE>
- ---------------
* Less than one percent
(a) Information as to the interests of the directors and officers has been
furnished in part by them. The inclusion of information concerning shares
held by or for their spouses or children or by corporations in which they
have an interest does not constitute an admission by such persons of
beneficial ownership thereof. Unless otherwise indicated, all persons have
sole voting and dispositive power as to all shares they are shown as owning.
(b) Includes 1,650,001 shares of the Company's Common Stock presently issuable
upon the exercise of options. Mr. John Foster beneficially owns 8,000 shares
of NCES Common Stock presently issuable upon exercise of options.
42
<PAGE> 46
(c) Consists of 900,001 shares of the Company's Common Stock presently issuable
upon the exercise of options. In addition, Mr. Timothy Foster owns 18,000
shares of NCES Common Stock, 8,000 of such shares presently issuable upon
exercise of options.
(d) Includes 47,400 shares of the Company's Common Stock presently issuable upon
the exercise of options. In addition, Mr. Gibson owns 41,667 shares of NCES
Common Stock, 26,667 of such shares presently issuable upon exercise of
options.
(e) Includes 37,200 shares of the Company's Common Stock presently issuable upon
the exercise of options. In addition, Ms. Marshall owns 6,667 shares of NCES
Common Stock presently issuable upon exercise of options.
(f) Includes 430,000 shares of the Company's Common Stock presently issuable
upon the exercise of options, and 7,504 shares of the Company's Common Stock
issuable upon the conversion of the Debentures. In addition, Mr. McLane owns
12,000 shares of NCES Common Stock, 2,000 of such shares presently issuable
upon exercise of options.
(g) Includes 47,400 shares of the Company's Common Stock presently issuable upon
the exercise of options. In addition, Mr. O'Neil owns 13,334 shares of NCES
Common Stock presently issuable upon exercise of options.
(h) Includes 47,400 shares of the Company's Common Stock presently issuable upon
the exercise of options. In addition, Mr. Siguler owns 6,667 shares of NCES
Common Stock presently issuable upon exercise of options.
(i) Consists of 53,400 shares of the Company's Common Stock presently issuable
upon the exercise of options. In addition, Mr. Tosteson owns 6,667 shares of
NCES Common Stock presently issuable upon exercise of options.
(j) Includes 3,359,993 shares of the Company's Common Stock presently issuable
upon exercise of options. In addition, officers and directors own 130,552
shares of NCES Common Stock, 93,002 of such shares presently issuable upon
exercise of options.
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.
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 sending soliciting material to their principals. In
addition, the Company has retained Morrow & Co., Inc. ("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
$9,000, 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.
August 13, 1999
43
<PAGE> 47
APPENDIX A
PLAN OF RESTRUCTURING OF NOVACARE, INC.
This Plan of Restructuring (the "Plan") is intended to accomplish the
complete liquidation and dissolution of NovaCare, Inc., a Delaware corporation
(the "Company"), in accordance with the Delaware General Corporation Law and
Section 331 of the Internal Revenue Code of 1986, as amended (the "Code"), as
follows:
1. The Board of Directors of the Company (the "Board of Directors")
has adopted this Plan and called a meeting of the Company's stockholders
(the "Stockholders") to take action on the Plan. If, at said meeting of the
Stockholders, a majority of the outstanding common stock, $0.01 par value
per share (the "Common Stock"), votes for the adoption of this Plan, the
Plan shall constitute the adopted Plan of the Company as of the date on
which such Stockholder approval is obtained (the "Adoption Date"). No later
than thirty (30) days following the Adoption Date, the Company shall file
Form 966 with the Internal Revenue Service.
2. The Company will not implement the liquidation provisions of this
Plan prior to December 31, 2000 (the "Liquidation Date"), unless the Board
of Directors determines to implement such provisions on an earlier date.
The Board of Directors is not required to make any distribution to the
Company's Stockholders, if at all, until after the Liquidation Date. Prior
to the Liquidation Date, the uses of the assets of the Company that may be
considered by the Board of Directors include the development, acquisition
and/or investment in or merger with new or existing businesses,
distributions to the Company's Stockholders, repurchases of the Company's
securities and general business purposes. Such activities could include the
acquisition of an entire company or companies, or divisions thereof, either
through a merger or a purchase of assets, as well as an investment in the
securities of a company or companies or, alternatively, a combination with
another business in which the Company would not be the surviving
corporation. Consummation of any investments or business combinations will
be subject to vote and approval by the Stockholders. If any investments or
business combinations are approved by the Stockholders of the Company, this
Plan will be terminated.
3. After the Liquidation Date, the Company shall not engage in any
business activities except to the extent necessary to preserve the values
of its assets, wind up its business and affairs, and distribute its assets
in accordance with this Plan.
4. From and after the Liquidation Date, the Company shall complete the
following corporate actions:
(a) The Company shall determine whether and when to (i) transfer the
Company's property and assets (other than cash, cash equivalents and
accounts receivable) to a liquidating trust (established pursuant to
Section 7 hereof), or (ii) collect, sell, exchange or otherwise
dispose of all of its property and assets in one or more
transactions upon such terms and conditions as the Board of
Directors, in its absolute discretion, deems expedient and in the
best interests of the Company and the Stockholders. In connection
with such collection, sale, exchange and other disposition, the
Company shall collect or make provision for the collection of all
accounts receivable, debts and claims owing to the Company.
(b) The Company shall pay or, as determined by the Board of Directors,
make reasonable provision to pay, all claims and obligations of the
Company, including all contingent, conditional or unmatured claims
known to the Company and all claims which are known to the Company
but for which the identity of the claimant is unknown.
(c) The Company shall distribute pro rata to the Stockholders, all
available cash including the cash proceeds of any sale, exchange or
disposition, except such cash, property or assets as are required
for paying or making reasonable provision for the claims and
obligations of the Company. Such distribution may occur all at once
or in a series of distributions and shall be in
A-1
<PAGE> 48
cash, in such amounts, and at such time or times, as the Board of
Directors or the Trustees (as defined in Section 7 hereof), in their
absolute discretion, may determine. If and to the extent deemed
necessary, appropriate or desirable by the Board of Directors or the
Trustees, in their absolute discretion, the Company may establish
and set aside a reasonable amount (the "Contingency Reserve") to
satisfy claims against the Company, including, without limitation,
tax obligations, and all expenses of the sale of the Company's
property and assets, of the collection and defense of the Company's
property and assets, and of the liquidation and dissolution provided
for in this Plan. The Contingency Reserve may consist of cash and/or
property.
(d) Notwithstanding the foregoing, the Company may, if and when
determined by the Board of Directors or the Trustees, at any time
after the Adoption Date (including at any time prior to the
Liquidation Date), either (i) distribute the shares of NovaCare
Employee Services, Inc. (the "NCES Stock") owned by the Company to
the Stockholders pro rata as a dividend or (ii) use the NCES Stock
(provided such shares are valued at not less than $2.50 per share)
to repay existing indebtedness of the Company.
5. The distributions to the Stockholders pursuant to Sections 4, 7 and
8 hereof shall be in complete redemption and cancellation of all of the
outstanding Common Stock of the Company. As a condition to receipt of any
distribution to the Stockholders, the Board of Directors or the Trustees,
in their absolute discretion, may require the Stockholders to (i) surrender
their certificates evidencing the Common Stock to the Company or its agent
for recording of such distributions thereon or (ii) furnish the Company
with evidence satisfactory to the Board of Directors or the Trustees of the
loss, theft or destruction of their certificates evidencing the Common
Stock, together with such surety bond or other security or indemnity as may
be required by and satisfactory to the Board of Directors or the Trustees
("Satisfactory Evidence and Indemnity"). As a condition to receipt of any
final distribution to the Stockholders, the Board of Directors or the
Trustees, in their absolute discretion, may require the Stockholders to (i)
surrender their certificates evidencing the Common Stock to the Company or
its agent for cancellation or (ii) furnish the Company with Satisfactory
Evidence and Indemnity. The Company will finally close its stock transfer
books and discontinue recording transfers of Common Stock on the earliest
date (the "Final Record Date") to occur of (i) the close of business on the
record date fixed by the Board of Directors for the final liquidating
distribution, (ii) the close of business on the date on which the remaining
assets of the Company are transferred to the Trust or (iii) the date on
which the Company files a certificate of dissolution under the Delaware
General Corporation Law and thereafter certificates representing Common
Stock will not be assignable or transferable on the books of the Company
except by will, intestate succession, or operation of law.
6. If any distribution to a Stockholder cannot be made, whether
because the Stockholder cannot be located, has not surrendered its
certificates evidencing the Common Stock as required hereunder or for any
other reason, the distribution to which such Stockholder is entitled
(unless transferred to the Trust established pursuant to Section 7 hereof)
shall be transferred, at such time as the final liquidating distribution is
made by the Company, to the official of such state or other jurisdiction
authorized by applicable law to receive the proceeds of such distribution.
The proceeds of such distribution shall thereafter be held solely for the
benefit of and for ultimate distribution to such Stockholder as the sole
equitable owner thereof and shall be treated as abandoned property and
escheat to the applicable state or other jurisdiction in accordance with
applicable law. In no event shall the proceeds of any such distribution
revert to or become the property of the Company.
7. If deemed necessary, appropriate or desirable by the Board of
Directors, in its absolute discretion, in furtherance of the liquidation
and distribution of the Company's assets to the Stockholders, as a final
liquidating distribution or from time to time, the Company shall transfer
to one or more liquidating trustees, for the benefit of the Stockholders
(the "Trustees"), under a liquidating trust (the "Trust"), any assets of
the Company which are (i) not reasonably susceptible to distribution to the
Stockholders, including without limitation non-cash assets and assets held
on behalf of the Stockholders (a) who cannot be located or who do not
tender their certificates evidencing the Common Stock to the Company
A-2
<PAGE> 49
or its agent as herein above required or (b) to whom distributions may not
be made based upon restrictions under contract or law, including, without
limitation, restrictions of the federal securities laws and regulations
promulgated thereunder or (ii) held as the Contingency Reserve. If assets
are transferred to the Trust, each Stockholder on the Final Record Date
shall receive an interest (an "Interest") in the Trust pro rata to its
interest in the outstanding Common Stock on that date. All distributions
from the Trust will be made pro rata in accordance with the Interests. The
Interests shall not be transferable except by operation of law or upon
death of the recipient. The Board of Directors is hereby authorized to
appoint one or more individuals, corporations, partnerships or other
persons, or any combination thereof, including, without limitation, any one
or more officers, directors, employees, agents or representatives of the
Company, to act as the initial Trustee or Trustees for the benefit of the
Stockholders and to receive any assets of the Company. Any Trustees
appointed as provided in the preceding sentence shall succeed to all right,
title and interest of the Company of any kind and character with respect to
such transferred assets and, to the extent of the assets so transferred and
solely in their capacity as Trustees, shall assume all of the liabilities
and obligations of the Company, including, without limitation, any
unsatisfied claims and unascertained or contingent liabilities. Further,
any conveyance of assets to the Trustees shall be deemed to be a
distribution of property and assets by the Company to the Stockholders for
the purposes of Section 4 of this Plan. Any such conveyance to the Trustees
shall be in trust for the Stockholders of the Company. The Company, subject
to this Section 7 and as authorized by the Board of Directors, in its
absolute discretion, may enter into a liquidating trust agreement with the
Trustees, on such terms and conditions as the Board of Directors, in its
absolute discretion, may deem necessary, appropriate or desirable. Adoption
of this Plan by a majority of the outstanding Common Stock shall constitute
the approval of the Stockholders of any such appointment and any such
liquidating trust agreement as their act and as a part hereof as if herein
written.
8. Whether or not a Trust shall have been previously established
pursuant to Section 7, in the event it should not be feasible for the
Company to make the final distribution to the Stockholders of all assets
and properties of the Company prior to December 31, 2001 (the "Final
Distribution Date"), then, on or before such date, the Company shall be
required to establish a Trust and transfer any remaining assets and
properties (including, without limitation, any uncollected claims,
contingent assets and the Contingency Reserve) to the Trustees as set forth
in Section 7.
9. After the Liquidation Date, the officers of the Company shall, at
such time as the Board of Directors, in its absolute discretion, deems
necessary, appropriate or desirable, obtain any certificates required from
the Delaware tax authorities and, upon obtaining such certificates, the
Company shall file with the Secretary of State of the State of Delaware a
certificate of dissolution (the "Certificate of Dissolution") in accordance
with the Delaware General Corporation Law.
10. Adoption of this Plan by holders of a majority of the outstanding
Common Stock shall constitute the approval of the Stockholders of the sale,
exchange or other disposition in liquidation of all of the property and
assets of the Company, whether such sale, exchange or other disposition
occurs in one transaction or a series of transactions, and shall constitute
ratification of all contracts for sale, exchange or other disposition which
are conditioned on adoption of this Plan.
11. In connection with and for the purpose of implementing and
assuring completion of this Plan, the Company may, in the absolute
discretion of the Board of Directors, pay any brokerage, agency,
professional and other fees and expenses of persons rendering services to
the Company in connection with the collection, sale, exchange or other
disposition of the Company's property and assets and the implementation of
this Plan.
12. In connection with and for the purpose of implementing and
assuring completion of this Plan, the Company may, in the absolute
discretion of the Board of Directors, pay to the Company's officers,
directors, employees, agents and representatives, or any of them,
compensation or additional compensation above their regular compensation,
in money or other property, in recognition of the extraordinary efforts
they, or any of them, will be required to undertake, or actually undertake,
in connection with the
A-3
<PAGE> 50
implementation of this Plan. Adoption of this Plan by a majority of the
outstanding Common Stock shall constitute the approval of the Company's
Stockholders of the payment of any such compensation.
13. The Company shall indemnify its officers, directors, employees,
agents and representatives in accordance with its certificate of
incorporation, and by-laws and any contractual arrangements, for actions
taken in connection with this Plan and the winding up of the affairs of the
Company. The Company's obligation to indemnify such persons may also be
satisfied out of the assets of the Trust. The Trust will similarly be
authorized to indemnify the Trustees and any employees, agents or
representatives of the Trust for actions taken in connection with the
operations of the Trust. Any claims arising in respect of such
indemnification will be satisfied out of the assets of the Trust. The Board
of Directors and the Trustees, in their absolute discretion, are authorized
to obtain and maintain insurance as may be necessary or appropriate to
cover the Company's obligations hereunder.
14. Notwithstanding authorization or consent to this Plan and the
transactions contemplated hereby by the Stockholders, the Board of
Directors may modify, amend or abandon this Plan and the transactions
contemplated hereby without further action by the Stockholders to the
extent permitted by the Delaware General Corporation Law.
15. The Board of Directors of the Company is hereby authorized,
without further action by the Stockholders, to do and perform or cause the
officers of the Company, subject to approval of the Board of Directors, to
do and perform, any and all acts, and to make, execute, deliver or adopt
any and all agreements, resolutions, conveyances, certificates and other
documents of every kind which are deemed necessary, appropriate or
desirable, in the absolute discretion of the Board of Directors, to
implement this Plan and the transactions contemplated hereby, including,
without limiting the foregoing, all filings or acts required by any state
or federal law or regulation to wind up its affairs.
A-4
<PAGE> 51
[NOVACARE LOGO]
King of Prussia, Pennsylvania
August 13, 1999
To the Participants in the NovaCare
1986 Stock Option Plan, the NovaCare 1998 Stock Option Plan and Related Plans:
Enclosed herewith is a copy of the Proxy Statement delivered to holders of
NovaCare common stock in connection with the Special Meeting (the "Meeting") of
Stockholders of NovaCare, Inc. to be held on September 21, 1999.
Although holders of options to purchase NovaCare common stock under the
NovaCare 1986 Stock Option Plan, the NovaCare 1998 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> 52
[NOVACARE LOGO]
King of Prussia, Pennsylvania
August 13, 1999
To the Participants in the NovaCare, Inc.
401(k) Retirement Savings Plan:
In connection with the Special Meeting of Stockholders of NovaCare, Inc. to
be held on September 21, 1999, 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
September 13, 1999, 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.
<PAGE> 53
NOVACARE, INC.
PROXY -- SPECIAL MEETING OF STOCKHOLDERS -- SEPTEMBER 21, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, a stockholder of NOVACARE, INC., does hereby appoint JOHN H.
FOSTER, TIMOTHY E. FOSTER and JAMES W. McLANE, or any 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 Special Meeting of Stockholders to be held on Tuesday, September 21,
1999 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 the following matters and in accordance with their judgment
on any other matters which may properly come before the Meeting.
(Continued and to be Completed on the Reverse Side.)
-----------
SEE REVERSE
SIDE
-----------
<PAGE> 54
[X] PLEASE MARK YOUR
VOTE AS IN THIS
EXAMPLE
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. To approve the PROH Sale [ ] [ ] [ ]
FOR AGAINST ABSTAIN
2. To approve the NCES Sale [ ] [ ] [ ]
FOR AGAINST ABSTAIN
3. To adopt the Restructuring [ ] [ ] [ ]
Proposal
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR ITEMS 1, 2, AND 3. WHERE NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE ITEM FOR WHICH NO DIRECTION IS GIVEN.
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.
</TABLE>
Dated:________, 1999 Signature(s)_________________________________________(L.S.)
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
