<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1997
REGISTRATION NO. 333-23599
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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RES-CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
KENTUCKY 61-0875371
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
10140 LINN STATION ROAD
LOUISVILLE, KENTUCKY 40223
(502) 394-2100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
RONALD G. GEARY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RES-CARE, INC.
10140 LINN STATION ROAD
LOUISVILLE, KENTUCKY 40223
(502) 394-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
HENRY D. KAHN F. MITCHELL WALKER, JR.
PIPER & MARBURY L.L.P. BASS, BERRY & SIMS PLC
36 SOUTH CHARLES STREET FIRST AMERICAN CENTER
BALTIMORE, MARYLAND 21201 NASHVILLE, TENNESSEE 37238
(410) 539-2530 (615) 742-6200
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 15, 1997
PROSPECTUS
2,591,000 SHARES
RES-CARE LOGO HERE
COMMON STOCK
Of the 2,591,000 shares of Common Stock offered hereby, 1,500,000 shares
are being sold by Res-Care, Inc. (the "Company"), and 1,091,000 shares are being
sold by certain shareholders of the Company (the "Selling Shareholders"). The
Company will not receive any of the proceeds from the sale of the shares of
Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Company's Common Stock is traded on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "RSCR." On April 14,
1997, the last reported sale price for the Company's Common Stock as quoted on
the Nasdaq National Market was $16.125 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $450,000 payable by the Company.
(3) The Company has granted to the Underwriters an over-allotment option to
purchase up to 388,650 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ , and the total Proceeds to Company
will be $ . See "Underwriting."
----------------------
The shares of Common Stock are offered, subject to receipt and acceptance
by the several Underwriters, to prior sale and to the Underwriters' right to
reject any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares will be
available for delivery on or about , 1997.
----------------------
Underwriters List
, 1997
<PAGE> 3
Facilities and programs in operation and under contract
Res-Care LOGO
RES-CARE MAP
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON
STOCK, INCLUDING STABILIZATION AND SHORT COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere or
incorporated by reference in this Prospectus. This summary is not intended to be
complete and is qualified in its entirety by reference to, and should be read in
conjunction with, the detailed information, including "Risk Factors," and
supplemental and historical consolidated financial statements and notes thereto
appearing elsewhere herein or incorporated by reference in this Prospectus.
Unless otherwise indicated, all information in this Prospectus gives effect to
the 3-for-2 stock split effected June 4, 1996 and the acquisition of the
partnership interests in Premier Rehabilitation Centers in January 1997 in a
transaction accounted for as a pooling-of-interests, and assumes that the
Underwriters' over-allotment option is not exercised. Unless the context
suggests otherwise, references in this Prospectus to "Res-Care" or the "Company"
include Res-Care, Inc. and its subsidiaries.
THE COMPANY
Res-Care is a leading provider of residential, training, educational and
support services to populations with special needs, including persons with
developmental and other disabilities and at-risk and troubled youths. The
services provided by the Company have historically been provided by state and
local government agencies and not-for-profit organizations. The Company's
programs include an array of services provided in both residential and
non-residential settings for adults and youths with mental retardation or other
developmental disabilities ("MR/DD") and disabilities caused by acquired brain
injury ("ABI"), and youths who have severe behavioral disorders, who are from
disadvantaged backgrounds or who have entered the juvenile justice system.
Since September 30, 1992, the Company has experienced significant growth in
the number of persons served, revenues and operating income. At February 28,
1997, Res-Care was providing services to approximately 7,600 persons with
special needs compared to approximately 3,300 persons at September 30, 1992,
representing a compound annual growth rate of approximately 21%. Res-Care
currently provides services to approximately 5,000 persons with disabilities in
larger facilities, group homes, personal residences or other community-based
programs in 17 states and to approximately 2,600 at-risk and troubled youths in
federally-funded Job Corps centers and juvenile treatment programs operated for
state and local agencies in seven states and Puerto Rico. The Company's revenues
and operating income have increased from $90.8 million and $4.9 million for the
year ended December 31, 1992 to $224.3 million and $15.9 million for the year
ended December 31, 1996, representing compound annual growth rates of
approximately 25% and 34%, respectively.
There is a growing trend throughout the United States toward privatization
of social services functions for special needs populations as governments of all
types face continuing pressure to control costs and improve the quality of
services. The markets for services for special needs populations in the United
States are large, growing and highly fragmented as evidenced by the following
industry estimates:
- Approximately 1.6% of the nation's population, or 4.2 million persons,
have some level of developmental disability to the extent that
professional services are required throughout their lives;
- Funding for MR/DD services totaled approximately $23.0 billion in 1996;
- Over 4,000 providers of MR/DD services operate over 10,000 facilities and
programs;
- In 1994, an estimated 2.7 million juvenile arrests accounted for 19% of
all arrests and 35% of all property crime arrests;
- The number of youths in the United States between the ages of 14 and 17
years, the highest risk juvenile group, is expected to increase 20% from
14 million in 1994 to 17 million in 2005;
- Reports of child abuse and neglect have grown 45% from 2.0 million in
1985 to 2.9 million in 1993; and
- Most of the estimated 6,000 residential youth services providers are
small and operate in limited geographic areas.
The Company believes it has significant opportunities to participate in the
growth and consolidation of these markets because of its quality programs and
operating systems, its financial strength, the economies of scale it can achieve
and its experience working with special needs populations and government
agencies.
3
<PAGE> 5
Res-Care strives to provide quality and caring services through the
operation of efficient and flexible programs. To achieve this goal, the
Company's business strategy is based upon the following key elements: (i)
continuing to expand upon the Company's leadership position as a provider of
disabilities services; (ii) leveraging the Company's 20 years of experience in
providing training and support services for disadvantaged youths and other
special needs populations to become a leading provider of services to at-risk
and troubled youths; (iii) focusing on quality management of existing programs
through models of ongoing program evaluation developed by the Company and (iv)
implementing and maintaining high quality, cost-effective alternatives to
programs operated directly by governmental entities and private agencies by
providing proven management systems and procedures that assure efficient
application of financial and human resources.
Res-Care's growth strategy is to (i) pursue acquisitions; (ii) add programs
and expand its existing programs in markets in which it currently operates; and
(iii) expand into additional geographic areas in the United States. The markets
for the Company's services are highly fragmented, and the Company believes that
there are significant opportunities to enhance its market positions through an
active acquisition program in the disabilities and at-risk and troubled youths
sectors that will enable the Company to expand its operations into new
geographic areas, add program offerings and establish new relationships with
governmental entities. The Company intends to build upon its established
relationships with governmental entities to expand its current programs and
obtain contracts for additional programs in existing markets, and to develop new
programs in response to societal trends and the needs of governmental agencies.
The Company also intends to expand its programs to additional geographic areas
which management identifies as having favorable reimbursement and operating
environments. Since September 1, 1996, the Company has obtained contracts for or
acquired operations of 36 facilities and programs serving approximately 800
persons with developmental and other disabilities and 20 facilities and programs
serving approximately 500 at-risk and troubled youths.
The Company was incorporated in Kentucky in 1974. Its principal executive
office is located at 10140 Linn Station Road, Louisville, Kentucky 40223, and
its telephone number is (502) 394-2100.
RECENT DEVELOPMENTS
The Company continues to expand its business largely through acquisitions
and new contracts for services. The following developments have occurred since
September 1, 1996:
Division for Persons with Disabilities ("DPD")
- In January 1997, the Company acquired the partnership interests in
Premier Rehabilitation Centers ("Premier"), a privately-owned provider of
services and support to approximately 77 persons with ABI and related
neurological disorders. Premier operates programs in St. Louis, Chicago and
Miami and generated annual revenues of approximately $5.9 million for the year
ended December 31, 1996.
- In Ohio, the Company acquired the stock of R.A.I.S.E., a privately-owned
corporation that provides an array of supported living and related services to
approximately 36 individuals with MR/DD.
- In New Jersey, approximately 50 individuals with MR/DD have selected the
Company to provide supported living services as part of a downsizing plan of a
state facility. The Company expects to begin providing these services by
mid-1997.
- In Kansas, the Company acquired a leasehold interest in an 81-bed
facility and the stock of Southwind Residential Services, a privately-owned
corporation that provides supported living services. The two operations serve a
total of approximately 100 individuals with MR/DD.
- In California, Res-Care assumed the operation of and entered into a
one-year lease agreement to provide for the orderly transition and downsizing of
Meadowview Park, a 59-bed facility in Orange County, and acquired Casa de Vida,
a 99-bed facility in San Luis Obispo. In addition, the Company has entered into
an agreement to acquire the operations of four six-bed group homes serving a
total of 24 individuals in the Los Angeles area, and was awarded grants for the
development of four six-bed group homes and a day program in the Sacramento
area.
- In Texas, the Company acquired the assets of Community Voices, an
operator of day programs serving approximately 80 individuals with MR/DD,
approximately 40 of whom reside in Res-Care group homes.
4
<PAGE> 6
- In Kentucky, the Company purchased the assets of a program serving 128
individuals with MR/DD previously owned by Agape Community Services, a
not-for-profit agency.
- In Florida, the Company entered into a transitional management agreement
on an emergency basis to manage the operations of Community Environments, a
not-for-profit provider of disabilities services and youth services, with
capacity to serve approximately 160 individuals with MR/DD and approximately 15
at-risk youths.
- In Louisiana, the Company acquired the assets of Gulf States Health, an
operator of 14 six-bed group homes in the New Orleans area.
Division for Youth Services ("DYS")
- In Colorado, the Company's 80%-owned subsidiary, Youthtrack, Inc.
("Youthtrack"), acquired the operating assets of Community Learning Centers, a
not-for-profit operator of community-based facilities and services for troubled
youths, serving approximately 400 youths at six residential treatment centers,
four medium secure detention centers, four tracker/mentor programs, two proctor
parent programs, two day treatment programs and a personalized apartment living
program.
- In Georgia, the Company's wholly-owned subsidiary, Alternative Youth
Services, Inc. ("AYS"), entered into a long-term management contract to operate
the Georgia Center for Youth, a program offering residential and educational
services to up to 60 at-risk youths in a 24-hour residential program on a
160-acre campus and at an alternative school the center operates off-site that
also serves additional students referred by the local school district.
- In Kentucky, AYS acquired the assets of a program previously owned by
Community Youth Services, offering residential and educational services to more
than 50 at-risk youths in community homes in Louisville, Elizabethtown and
Mayfield, Kentucky. In addition, the Company entered into an agreement with the
U.S. Department of Labor ("DOL") to perform certain support services at the
Great Onyx Job Corps Center, a 214-student center operated by the U.S.
Department of the Interior in Mammoth Cave, Kentucky, through October 31, 1997.
- In New York, the Company was awarded a new contract by the DOL to
continue to operate the 250-student South Bronx Job Corps Center, a contract
which includes the provision of certain support services at Gateway Job Corps
Center, a 224-student center operated by the U.S. Department of the Interior.
SUMMARY OF RECENT OPERATING RESULTS
On April 11, 1997, the Company announced financial results for the first
quarter of 1997. Net revenues increased to $64.9 million from $54.1 million for
the first quarter of 1996. Net income increased to $2.6 million, or $0.25 per
share, compared with $1.9 million, or $0.19 per share, for the prior-year
period. These figures give retroactive effect to the acquisition of Premier,
effective January 1, 1997, which has been accounted for as a
pooling-of-interests. First quarter 1997 results reflect nonrecurring
acquisition-related expenses of approximately $149,000 related primarily to the
Premier transaction. The results reflect acquisitions and increased
reimbursement rates in several states in the Company's Division for Persons with
Disabilities and acquisitions in the Company's Division for Youth Services.
THE OFFERING
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Common Stock offered by the Company..................... 1,500,000 shares
Common Stock offered by the Selling Shareholders........ 1,091,000 shares
Common Stock to be outstanding after the offering....... 11,783,703 shares(1)
Use of proceeds by the Company.......................... To repay amounts outstanding under its
revolving credit facility. See "Use of
Proceeds."
Nasdaq National Market symbol........................... RSCR
</TABLE>
- ---------------
(1) A Selling Shareholder will exercise options to purchase 225,000 shares and
sell a portion of such shares in the offering. Does not include 1,132,017
shares that may be issued upon the exercise of additional options
outstanding as of February 28, 1997.
5
<PAGE> 7
SUMMARY SUPPLEMENTAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Net revenues:
Disabilities services................. $65,754 $ 88,338 $114,358 $146,062 $181,280
Youth services........................ 25,065 27,534 28,600 31,366 42,985
------- -------- -------- -------- --------
Total net revenues............ 90,819 115,872 142,958 177,428 224,265
Facility and program expenses:
Disabilities services................. 57,717 77,309 101,446 129,218 156,657
Youth services........................ 22,220 24,507 25,544 27,529 38,221
------- -------- -------- -------- --------
Total facility and program
expenses.................... 79,937 101,816 126,990 156,747 194,878
------- -------- -------- -------- --------
Facility and program contribution....... 10,882 14,056 15,968 20,681 29,387
Operating expenses...................... 6,029 6,481 7,555 9,384 13,500
------- -------- -------- -------- --------
Operating income........................ 4,853 7,575 8,413 11,297 15,887
Income from continuing operations before
income taxes.......................... 4,725 7,870 8,987 12,010 14,961
Income from continuing operations....... 4,309 4,360 5,125 7,311 9,443
Net income(2)........................... 4,809 5,105 6,179 16,558 9,443
Income per share data:
Income from continuing operations per
share.............................. $ 0.58 $ 0.43 $ 0.51 $ 0.73 $ 0.91
Net income per share(2)............... $ 0.64 $ 0.51 $ 0.61 $ 1.64 $ 0.91
Pro forma net income per share(3)..... $ 0.42 $ 0.51 $ 0.61 $ 1.63 $ 0.88
Weighted average shares used in per
share calculations.................... 7,461 10,036 10,084 10,093 10,432
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Disabilities Services:
Number of facilities and programs..... 132 215 237 264 286
Contract capacity(4).................. 1,888 2,786 3,040 4,286 5,031
Persons served........................ 1,799 2,624 2,876 4,099 4,899
Capacity utilized..................... 95.3% 94.2% 94.6% 95.6% 97.4%
Youth Services:
Number of facilities and programs..... 7 7 7 8 28
Contract capacity(4).................. 1,880 1,880 1,970 2,500 2,670
Persons served........................ 1,874 1,824 2,000 2,562 2,605
Capacity utilized..................... 99.7% 97.0% 101.5% 102.5% 97.6%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 23,353 $ 23,353
Total assets............................ 115,312 115,312
Long-term debt, less current portion.... 30,672 8,229
Shareholders' equity.................... 58,095 80,538
</TABLE>
6
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(1) In January 1997, the Company acquired the partnership interests in Premier
in a transaction accounted for as a pooling-of-interests. Accordingly, the
Company's financial statements have been restated for all periods presented
to include the financial condition and results of operations of Premier;
however, operating data have not been restated to reflect the operations of
Premier. See "Management's Discussion and Analysis of Supplemental Financial
Condition and Results of Operations -- Overview" and Notes 1 and 13 of Notes
to Supplemental Consolidated Financial Statements.
(2) Net income includes income from operation of unconsolidated affiliate sold,
accounted for as a discontinued operation, of $500, $745, $1,054 and $428 in
1992, 1993, 1994 and 1995, respectively, and includes an $8,819 gain from
sale of this discontinued operation in 1995, net of applicable income taxes
of $6,270. The aggregate net income per share effect of the discontinued
operation was $0.06, $0.08, $0.10 and $0.91 in 1992, 1993, 1994 and 1995,
respectively.
(3) Pro forma net income reflects adjustments to provision for income taxes as
if: (i) the Company had been taxed as a C Corporation during 1992 rather
than as an S Corporation; and (ii) Premier's partnership operations had been
taxed as corporations for all periods presented.
(4) Contract capacity includes, in the case of licensed facilities, the number
of persons covered by the applicable license or permit and, in all other
cases, the number of persons covered by the applicable contract. Contract
capacity does not include capacity for day or respite programs.
(5) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common
Stock offered hereby at an assumed offering price of $16.125 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
7
<PAGE> 9
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock offered hereby.
SUBSTANTIAL DEPENDENCE ON GOVERNMENTAL REIMBURSEMENT
In the year ended December 31, 1996, approximately 81% of the Company's
revenues were attributable to Medicaid-funded disabilities services programs,
and the substantial majority of the remaining revenues were attributable to
federal Job Corps contracts. Governmental agencies have undertaken cost
containment measures designed to limit payments to health care and other service
providers, and these efforts are expected to continue. Various proposals are
currently under consideration to revamp the federally-funded Medicaid programs,
including efforts to introduce managed care and other arrangements in which
financial risks associated with service delivery are retained by the provider
rather than by the funding source. State regulatory agencies which administer
Medicaid programs have substantial discretion with regard to the implementation
of Medicaid reimbursement programs and with regard to the audit and inspection
of Medicaid programs. The Company is currently engaged in litigation with the
State of Indiana regarding reimbursement rates at certain large facilities in
Indiana which, if adversely determined, could adversely affect the Company's
business and results of operations. The Commonwealth of Kentucky has challenged
in an audit proceeding certain costs associated with programs managed by the
Company in Kentucky, which could also lead to retroactive rate adjustments to
the provider of record; the provider of record has recently filed a declaratory
action against Kentucky in an effort to resolve this matter. Various other
states have initiatives underway to change Medicaid reimbursement methodologies.
No assurance can be given that developments in one or more jurisdictions will
not adversely affect the Company's business, financial condition or results of
operations. See "Business -- Government Regulation and Reimbursement" and
"--Legal Proceedings."
GROWTH STRATEGY; RISKS ASSOCIATED WITH FUTURE ACQUISITIONS AND NEW CONTRACTS
Most of the Company's facilities and programs are operating at or near full
capacity. Moreover, in light of governmental budgetary pressures and competitive
forces, there has been downward pressure on reimbursement rates. Thus, the
Company's ability to expand its revenue base is dependent to a significant
extent on its ability to effect acquisitions and to obtain new contracts. The
Company regularly reviews acquisition opportunities and opportunities for new
contracts and periodically engages in discussions regarding possible
acquisitions and contracts. Although the Company currently has no agreement or
understanding with respect to any material acquisition, the Company continually
evaluates opportunities to expand its business through acquisitions of other
companies that provide services to various special needs populations and from
time to time enters into discussions and letters of intent which may lead to
acquisitions. There can be no assurance that the Company will be able to
identify acquisition or new contract prospects on terms favorable to the Company
or in a timely manner, enter into acceptable agreements or close any such
transactions. There can be no assurance that the Company will be able to achieve
its growth strategy, and any failure to do so could have a material adverse
effect on the Company's business, financial condition, results of operations and
ability to sustain growth. In addition, the Company believes that it will
compete for acquisition candidates and management contracts with a variety of
other prospective bidders, some of which have greater resources than the
Company. Increased competition for such acquisition candidates and management
contracts could have the effect of increasing the costs to the Company of
pursuing this growth strategy, could reduce the number of attractive candidates
to be acquired or could reduce the profitability of management contracts. Future
acquisitions and efforts to obtain management contracts could divert
management's attention from the daily operations of the Company and otherwise
require additional management, operational and financial resources. Moreover,
there can be no assurance that the Company will successfully integrate such new
operations into its business or operate such acquisitions profitably.
Acquisitions may also involve a number of special risks including adverse
short-term effects on the Company's business and results of operations;
dependence on retaining key personnel; amortization of acquired intangible
assets; and risks associated with unanticipated liabilities and contingencies.
8
<PAGE> 10
The Company may require additional debt or equity financing for future
acquisitions, which may not be available to the Company on terms favorable to
it, if at all. To the extent the Company uses its capital stock for all or a
portion of the consideration to be paid for future acquisitions, dilution may be
experienced by existing shareholders, including purchasers of Common Stock in
this offering. In the event that the Company's capital stock does not maintain
sufficient value or acquisition candidates are unwilling to accept the Company's
capital stock as consideration for the sale of their businesses, the Company may
be required to utilize more of its cash resources, if available, in order to
continue its acquisition program. If the Company does not have sufficient cash
resources or is not able to use its capital stock as consideration for
acquisitions, its growth through acquisitions could be limited.
UNCERTAIN ABILITY TO EXPAND YOUTH SERVICES OPERATIONS
Although Res-Care has operated Job Corps centers since 1976 and has
provided services for youths with developmental disabilities in its disabilities
services operations since 1978, the Company began intensive efforts to expand
its at-risk and troubled youth services operations in 1996 following the
formation of its Youthtrack and AYS subsidiaries. The Company has not yet
developed significant experience in operating such programs. No assurance can be
given that the Company will be able to generate sufficient revenues or
contribution margin to enable the Company to realize adequate returns on its
investment in this sector. The market for delivery of at-risk and troubled youth
services is highly competitive. Several of the Company's competitors have more
experience than does the Company in developing and implementing these services.
Due to the highly-fragmented nature of the youth services industry, the barriers
to entry remain low, and the Company may experience intensive competition as it
seeks to expand in this area, including competition from companies with
substantially greater resources than Res-Care. Moreover, the privatized
management of programs for at-risk and troubled youths has received varying
degrees of acceptance by state and local governmental authorities, and no
assurance can be given that the level of acceptance will rise or be maintained.
There can be no assurance that the Company will succeed in its goal to
significantly increase the revenues and operating income attributable to its
at-risk and troubled youth services operations.
DEPENDENCE ON GOVERNMENTAL AGENCIES AND GOVERNMENT CONTRACTS
The Company conducts its business primarily under contracts with federal,
state and local governments and governmental agencies, and virtually all of the
Company's revenues are attributable to such contracts. The Company's cash flow
is subject to the receipt of sufficient funding and timely payment by applicable
governmental entities. If the appropriate governmental agency does not receive
sufficient appropriations to cover its contractual obligations, a contract may
be terminated or the Company's compensation may be deferred or reduced. A number
of federal, state and local governments, including certain of those with which
the Company has contracts, have experienced fiscal difficulties. Any deferral or
reduction in payment could have a material adverse effect on the Company's cash
flow. In addition, the Company is dependent on governmental entities for
referral of a sufficient number of individuals to occupy the Company's
facilities and programs. The failure of the Company to receive a sufficient
number of such referrals may have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's contracts are typically subject to renewal (or in the case of
Job Corps contracts, extension) annually. The renewal and financial terms of
each contract are dependent upon many factors, including the quality and type of
services provided, governmental budget constraints, changes in government or
agency personnel and priorities or philosophies of governments or agencies with
respect to provision of services to various at-risk populations. Government and
agency contracts generally are subject to audits, reviews and investigations.
These audits, reviews and investigations typically involve a review of the
contractor's performance under the contract, its reported costs and its
compliance with applicable laws and regulations. In addition, some contracts are
subject to competitive bidding, and the Company's customers generally may
terminate their contracts with the Company for cause and upon certain other
specified conditions. The loss or renewal on less favorable terms of certain of
the Company's contracts could have a material adverse effect on the Company's
business, financial condition and results of operations.
9
<PAGE> 11
Approximately 18% of the Company's net revenues are attributable to Job
Corps contracts, awarded by the DOL. Performance at each Job Corps center is
ranked by the DOL using certain objective and subjective criteria, and contracts
for Job Corps centers with low performance rankings may not be extended or
successfully rebid. In 1996, the Company's contract to operate the Crystal
Springs, Mississippi Job Corps center was not extended for the full term of its
final contract year due to performance issues at that center. See "Management's
Discussion and Analysis of Supplemental Financial Condition and Results of
Operations." In addition, the DOL has recently made efforts to encourage new
participants in the program, including minority-owned businesses, and several
companies with government defense contracting experience have begun to bid for
Job Corps contracts. The five-year contract for the operation of the Company's
Gulfport, Mississippi Job Corps center expires in October 1997 and the contract
is up for rebid. There exists the risk that the contract to operate this center
will not be awarded to the Company, which would have an adverse effect on the
Company's revenues and net income. Although the Company has been able to retain
most of its Job Corps contracts in the past and was awarded a new Job Corps
contract in 1996 to operate the Edison Job Corps center, there can be no
assurance that the DOL will continue to extend the Company's Job Corps
contracts, or award the Company additional Job Corps contracts, in the future.
The Company has contracted with providers of record in various states to
manage and operate MR/DD facilities for them. In such cases, the Company is
dependent on the relationship between the state and local governments or
governmental agencies and the providers of record with which they contract. Each
state and local government or governmental agency may terminate or declare a
breach of contract with providers of record, may be denied federal matching
funds as partial reimbursement for certain program expenses or may reduce their
placement of individuals with, or the use of, such providers of record for
reasons that may be beyond the control of the Company. Such actions could
adversely affect the ability of the providers of record to pay the Company
pursuant to their subcontracts.
GOVERNMENT REGULATION
The Company is subject to extensive federal, state and local regulations
governing licensure, conduct of operations at existing facilities, construction
of new facilities, purchase or lease of existing facilities, addition of new
services, capital expenditures, cost containment and reimbursement for services
rendered. Failure by the Company to meet applicable standards could result in
the loss of a license, the delay or loss of reimbursement or the loss of an
ability to expand services. To date, loss of license has not been a significant
factor in the Company's operations. There can be no assurance that federal,
state or local governments will not impose additional restrictions on the
operations of the Company that might adversely affect its business, financial
condition and results of operations. See "Business -- Government Regulation and
Reimbursement."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly results of operations may fluctuate significantly
as a result of a variety of factors, including the timing of acquisitions or the
opening of new programs, the timing of rate adjustments and the cumulative
effect of rate adjustments differing from previously estimated amounts. Results
for any particular quarter may not be indicative of future quarterly or annual
results. See "Management's Discussion and Analysis of Supplemental Financial
Condition and Results of Operations."
VOLATILITY OF MARKET PRICE
From time to time after this offering, there may be significant volatility
in the market price of the Common Stock. The Company believes that the current
market price of the Common Stock reflects expectations that the Company will be
able to continue to operate its programs profitably and to develop additional
and new programs at a significant rate and operate them profitably. If the
Company is unable to operate its programs profitably or develop new programs at
a pace that reflects the expectations of the market, investors could sell shares
of Common Stock at or after the time that it becomes apparent that such
expectations may not be realized, resulting in a decrease in the market price of
the Common Stock. In addition to the operating results of the Company, changes
in earnings estimates by analysts, changes in general conditions in the economy
or the financial markets or other developments affecting the Company or
10
<PAGE> 12
comparable companies within the privatization services industries could cause
the market price of the Common Stock to fluctuate substantially. In recent
years, the stock market has experienced extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
See "Price Range of Common Stock and Dividend Policy."
OPPOSITION TO PROGRAM LOCATION AND ADVERSE PUBLICITY
The Company's success in obtaining new contracts may depend, in part, upon
its ability to locate facilities that can be leased or acquired on favorable
terms by the Company. Group homes are generally located in residential
communities. Larger facilities for persons with disabilities and at-risk and
troubled youths may be in or near populated areas and, therefore, may generate
legal action or other forms of opposition from residents in areas surrounding a
proposed site. The Company's business also is subject to public scrutiny and,
consequently, could be significantly affected by negative publicity, negative
public reaction or governmental investigations with respect to the Company's
policies or operations or the actions of consumers under its care. The Company's
reputation is very important to the retention and procurement of contracts.
Negative publicity or a governmental investigation with respect to the Company's
policies or operations or the actions of individuals under its care could have a
material adverse effect on the Company's business, financial condition and
results of operations.
POTENTIAL LEGAL LIABILITY
The Company's management of its residential, training, educational and
support programs exposes it to potential third-party claims or litigation by
participants or other persons for wrongful death, personal injury or other
damages resulting from contact with Company facilities, programs, personnel or
participants. In addition, the Company's contracts and the laws of certain
states generally require the Company to maintain adequate insurance for its
operations and to indemnify the governmental agency against any damages to which
the governmental agency may be subject in connection with such claims or
litigation. The Company has, on occasion, been sued by third parties and
maintains an insurance program that provides coverage for certain liability
risks faced by the Company, including wrongful death, personal injury, bodily
injury or property damage to a third party where the Company is found to be
negligent. There can be no assurance, however, that the Company's insurance will
be adequate to cover potential third-party claims. See "Business -- Legal
Proceedings."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The success of the Company is highly dependent upon the efforts and
abilities of Ronald G. Geary, its President and Chief Executive Officer, E.
Halsey Sandford, its Executive Vice President and Jeffrey M. Cross, its
Executive Vice President, Operations, Division for Persons with Disabilities. In
addition, although the Company's senior management team has been in place for a
number of years, the Company is currently engaged in nationwide searches for a
chief financial officer and a senior officer in charge of development
activities. The Company's at-risk and troubled youth services programs are
highly dependent upon the efforts of Donald B. Rice, President of Youthtrack and
Ralph G. Gronefeld, Jr., Vice President, AYS. The Company has entered into
separate employment agreements with each of the officers listed above containing
customary noncompetition, nondisclosure and nonsolicitation covenants. The loss
of the services of one or more senior executives could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management."
AVAILABILITY OF QUALIFIED PERSONNEL
The Company competes with many other providers of long-term care with
respect to attracting and retaining qualified and skilled personnel. A possible
shortage of professional personnel or direct service staff or other outside
pressures, including collective bargaining efforts, may require the Company to
enhance its wage and benefits package in order to compete in the hiring and
retention of such personnel. The Company will also be dependent upon the
available labor pool of semi-skilled and unskilled employees in each of the
markets in
11
<PAGE> 13
which it operates. The Company's labor costs are expected to increase, and there
can be no assurance that the Company can match an increase in such costs by
corresponding increases in reimbursement rates for services rendered by the
Company. Any significant failure to control its labor costs or to receive
increased reimbursement for such costs through rate increases would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
CONTROL BY PRINCIPAL SHAREHOLDERS
After completion of this offering, Mr. and Mrs. James Fornear and their
children will beneficially own approximately 26.5% of the outstanding shares of
Common Stock. As a result, these shareholders will be able to influence
significantly the outcome of matters requiring a shareholder vote, including the
election of members of the Board of Directors, and thereby exercise a
significant degree of control over the affairs and management of the Company.
See "Principal and Selling Shareholders."
COMPETITION
The provision of disabilities and youth services are subject to a number of
competitive factors, including quality of services provided, cost-effectiveness,
reporting and regulatory expertise, reputation in the community and the location
and appearance of facilities and programs. In addition to certain not-for-profit
organizations, including organizations affiliated with advocacy and sponsoring
groups, certain proprietary competitors operate in multiple jurisdictions and
may be well capitalized. The Company faces significant competition from
not-for-profit organizations and proprietary competitors in the states in which
it now operates and expects to face similar competition in any state that it may
enter in the future. Many of the Company's competitors have greater resources
than the Company. Such competition may adversely affect the Company's ability to
obtain new contracts and complete acquisitions on favorable terms. See
"Business -- Competition."
ENVIRONMENTAL AND EMPLOYEE SAFETY LAWS
The Company must comply with various federal and state laws and regulations
that govern the handling and disposal of medical and infectious waste in the
operation of its businesses. Failure to comply with these laws or regulations
could subject the Company to fines, criminal penalties and other enforcement
actions. The Company has developed and implemented policies with respect to the
handling and disposal of medical and infectious waste and believes it is in
compliance with such laws and regulations. Federal regulations promulgated by
the Occupational Safety and Health Administration impose additional requirements
on the Company with regard to protecting employees from exposure to bloodborne
pathogens. The Company believes that it has complied, and will continue to be
able to comply, with these regulations. However, there can be no assurance that
the regulations will not adversely affect the Company's business, financial
condition and results of operations.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue preferred stock
and to determine the price, rights, conversion ratios, preferences and
privileges of that stock without further vote or action by the holders of the
Common Stock. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights, including economic rights, of the
holders of any shares of preferred stock. Any such issuance may discourage third
parties from attempting to acquire control of the Company. Furthermore, the
Company is subject to the anti-takeover provisions of the Kentucky Business
Corporation Act prohibiting the Company from engaging in a "business
combination" with an "interested stockholder" for a period of five years after
the date of the transaction in which the person first becomes an "interested
stockholder," unless the business combination is approved in a prescribed
manner. The application of this statute and certain other provisions of the
Company's Amended and Restated Articles of Incorporation also could have the
effect of discouraging, delaying or preventing a change of control of the
Company not approved by the Board of Directors, which could adversely affect the
market price of the Company's Common Stock.
12
<PAGE> 14
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
11,783,703 shares of Common Stock, plus 1,132,017 shares of Common Stock
reserved for issuance upon exercise of options. Sales of a substantial number of
shares of Common Stock in the public market following this offering could
adversely affect the market price for the Company's Common Stock. Substantially
all of the shares of Common Stock to be outstanding after completion of this
offering will be either freely saleable or saleable subject to certain volume
and manner of sale restrictions under Rule 144 of the Securities Act.
The Company and its directors, executive officers and Selling Shareholders
who beneficially own in the aggregate 4,923,267 shares of Common Stock have
agreed not to publicly offer, sell or otherwise dispose of any of their shares
or options for a period of 90 days after the date of this Prospectus without the
prior written consent of J.C. Bradford & Co. However, J.C. Bradford & Co. may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to such lockup agreements. See "Underwriting."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including the following
cautionary statements that are intended to identify certain important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements concerning the Company made by or on
behalf of the Company, whether contained herein or elsewhere.
The Company's growth in revenues and earnings per share has been directly
related to a considerable increase in the number of individuals served in its
Division for Persons with Disabilities and its Division for Youth Services. This
growth is largely dependent upon development-driven activities, including the
acquisitions of other businesses or facilities or of management contract rights
to operate facilities, the award of contracts to open new facilities or start
new operations or to assume management of facilities previously operated by
governmental agencies or not-for-profit organizations and the extension or
renewal of contracts previously awarded to the Company. The Company often makes
forward-looking statements regarding its development activities.
Changes in the Company's future revenues depend significantly upon the
success of these development activities, and in particular on the Company's
ability to obtain additional contracts to provide services to the special needs
populations it serves, whether through acquisitions, awards in response to
requests for proposals for new facilities or programs or for facilities being
privatized by governmental agencies, or other development activities. Future
revenues also depend on the Company's ability to maintain and renew its existing
services contracts and its existing leases. The Company actively seeks
acquisitions of other companies, facilities and assets as a means of increasing
the number of consumers served, and changes in the market for such acquisition
prospects, including increasing competition for and increasing pricing of such
acquisition prospects, could also adversely affect the timing and/or viability
of future development activities.
Revenues of the Company's Division for Persons with Disabilities are highly
dependent on reimbursement under federal and state Medicaid programs. Generally,
each state has its own Medicaid reimbursement regulations and formula. The
Company's revenues and operating profitability are dependent upon the Company's
ability to maintain its existing reimbursement levels and to obtain periodic
increases in reimbursement rates. Changes in the manner in which Medicaid
reimbursement rates are established in one or more of the states in which the
Company conducts its operations, such as those recently encountered by the
Company, could adversely affect revenues and profitability. Other changes in the
manner in which federal and state reimbursement programs are operated, and in
the manner in which billings/costs are reviewed and audited, could also affect
revenues and operating profitability.
The Company's cost structure and ultimate operating profitability are
significantly dependent on its labor costs and the availability and utilization
of its labor force and thus may be affected by a variety of factors, including
local competitive forces, changes in minimum wages or other direct personnel
costs, the Company's
13
<PAGE> 15
effectiveness in managing its direct service staff, and changes in consumer
services models, such as the trends toward supported living and managed care.
Additionally, the Company's continued expansion of its existing operations,
and its ability to expand into providing services to other populations utilizing
the Company's core competencies are dependent upon continuation of trends toward
downsizing, privatization and consolidation, the Company's ability to tailor its
services to meet the specific needs of these different populations, and its
success in operating in a changing reimbursement environment. The continuation
of such trends and the nature of its operating environment are subject to a
variety of political, economic, social and legal pressures, including desires of
governmental agencies to reduce costs and increase levels of services, federal,
state and local budgetary constraints and actions brought by advocacy groups and
the courts to change existing service delivery systems. Material changes
resulting from these trends and pressures could adversely affect the demand for
and reimbursement of the Company's services and its operating flexibility, and
ultimately its revenues and profitability.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $22.4 million,
assuming an offering price of $16.125 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
($28.4 million if the Underwriters' over-allotment option is exercised in full).
The Company intends to use the entire net proceeds to repay amounts outstanding
under its revolving credit facility. The indebtedness was incurred under the
Company's $65 million revolving credit facility, including up to $10 million in
letters of credit (the "Revolving Credit Facility"). The Revolving Credit
Facility bears interest at the Company's option at either (i) LIBOR plus a range
of 0.75% to 1.75% depending upon certain financial ratios or (ii) the lead
lender's prime rate, and expires on December 31, 2001. The weighted average
interest rate on the Revolving Credit Facility on February 28, 1997 was 6.7%. As
of February 28, 1997, $40.0 million of direct borrowings were outstanding under
the Revolving Credit Facility and an additional $4.6 million in letters of
credit were outstanding. This indebtedness was incurred principally to fund the
Company's growth through acquisitions and internal development activities. Upon
application of the net proceeds of the offering to repay a portion of the
Revolving Credit Facility, the balance of the Revolving Credit Facility will
continue to be available pursuant to the terms thereof including for future
acquisitions. See Note 5 to Notes to Supplemental Consolidated Financial
Statements.
Although the Company currently has no agreement or understanding with
respect to any material acquisition, the Company continually evaluates
opportunities to expand its business through acquisition of other operations
that provide services to various special needs populations and from time to time
enters into discussions and letters of intent which may lead to potential
acquisitions. No assurance can be given that future acquisitions will be
consummated.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders. See "Principal and Selling Shareholders."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company as of December 31, 1996 and as adjusted to reflect the 1,500,000
shares of Common Stock offered by the Company hereby at an assumed offering
price of $16.125 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
AS
ACTUAL(1) ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 369 $ 369
======= =======
Long-term debt, less current portion........................ $30,672 $ 8,229
Shareholders' equity:
Preferred Stock, no par value, authorized 1,000,000
shares; no shares issued or outstanding................. -- --
Common Stock, no par value, authorized 20,000,000 shares;
issued 13,837,500 shares; issued 15,337,500 shares, as
adjusted(2)(3).......................................... 15,535 37,978
Additional paid-in capital................................ 4,035 4,035
Retained earnings......................................... 42,314 42,314
Less cost of common shares in treasury (3,803,822 shares
in 1996)................................................ (3,789) (3,789)
------- -------
Total shareholders' equity.............................. 58,095 80,538
------- -------
Total capitalization............................... $88,767 $88,767
======= =======
</TABLE>
- ---------------
(1) In January 1997, the Company acquired the partnership interests in Premier
in a transaction accounted for as a pooling-of-interests. Accordingly, the
Company's capitalization has been restated to include the capitalization of
Premier.
(2) The Board of Directors has recommended to the shareholders for approval at
the annual meeting of shareholders to be held on May 13, 1997 an increase in
the authorized shares of Common Stock to 40,000,000 shares.
(3) Does not include 983,197 shares of Common Stock reserved for issuance upon
the exercise of options outstanding as of December 31, 1996. A Selling
Shareholder will exercise options to purchase 225,000 shares and sell a
portion of such shares in the offering; the effect of such exercise has not
been reflected in the table above.
15
<PAGE> 17
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "RSCR." The following table sets forth, for the periods indicated,
the high and low sale prices of the Company's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter........................... $12.17 $10.50
Second Quarter.......................... 12.17 10.83
Third Quarter........................... 12.00 10.33
Fourth Quarter.......................... 11.67 10.33
1996
First Quarter........................... $14.50 $10.00
Second Quarter.......................... 26.50 12.67
Third Quarter........................... 25.00 15.75
Fourth Quarter.......................... 18.50 14.75
1997
First Quarter........................... $20.75 $16.50
Second Quarter (through April 14,
1997)................................. 16.63 14.75
</TABLE>
On April 14, 1997, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $16.125 per share. As of February 28,
1997, there were 298 holders of record of the Common Stock, and the Company
estimates that there were approximately 3,800 beneficial holders.
Since its initial public offering in December 1992, the Company has not
declared or paid a cash dividend on its Common Stock and is currently limited in
paying cash dividends under its Revolving Credit Facility. The Company currently
intends to retain earnings primarily for working capital and to finance
expansion and therefore does not anticipate paying any cash dividends in the
foreseeable future. See "Management's Discussion and Analysis of Supplemental
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
16
<PAGE> 18
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected supplemental consolidated financial data below should be read
in conjunction with "Management's Discussion and Analysis of Supplemental
Financial Condition and Results of Operations" and the Supplemental Consolidated
Financial Statements and related notes appearing elsewhere in this Prospectus as
well as Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Consolidated Financial Statements incorporated by
reference herein. The selected supplemental consolidated financial data
presented below under the captions "Statement of Income Data" and "Balance Sheet
Data" for, and as of the end of, each of the years in the three-year period
ended December 31, 1996, are derived from the supplemental consolidated
financial statements of the Company, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The selected supplemental
consolidated financial data presented for, and as of the years ended December
31, 1992 and 1993 are unaudited.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Net revenues:
Disabilities services................. $65,754 $ 88,338 $114,358 $146,062 $181,280
Youth services........................ 25,065 27,534 28,600 31,366 42,985
------- -------- -------- -------- --------
Total net revenues............ 90,819 115,872 142,958 177,428 224,265
Facility and program expenses:
Disabilities services................. 57,717 77,309 101,446 129,218 156,657
Youth services........................ 22,220 24,507 25,544 27,529 38,221
------- -------- -------- -------- --------
Total facility and program
expenses.................... 79,937 101,816 126,990 156,747 194,878
------- -------- -------- -------- --------
Facility and program contribution....... 10,882 14,056 15,968 20,681 29,387
------- -------- -------- -------- --------
Operating expenses:
Corporate general and
administrative..................... 4,960 5,428 6,112 7,188 9,817
Depreciation and amortization......... 1,069 1,053 1,443 2,196 3,683
------- -------- -------- -------- --------
Total operating expenses...... 6,029 6,481 7,555 9,384 13,500
------- -------- -------- -------- --------
Operating income........................ 4,853 7,575 8,413 11,297 15,887
------- -------- -------- -------- --------
Other (income) expense, net............. 128 (295) (574) (713) 926
Income from continuing operations before
income taxes.......................... 4,725 7,870 8,987 12,010 14,961
Income taxes............................ 416 3,510 3,862 4,699 5,518
------- -------- -------- -------- --------
Income from continuing operations....... 4,309 4,360 5,125 7,311 9,443
Net income(2)........................... 4,809 5,105 6,179 16,558 9,443
Income per share data:
Income from continuing operations
per share.......................... $ 0.58 $ 0.43 $ 0.51 $ 0.73 $ 0.91
Net income per share(2)............... $ 0.64 $ 0.51 $ 0.61 $ 1.64 $ 0.91
Pro forma net income per share(3)..... $ 0.42 $ 0.51 $ 0.61 $ 1.63 $ 0.88
Weighted average shares used in per
share calculations.................... 7,461 10,036 10,084 10,093 10,432
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Working capital......................... $12,127 $15,415 $16,790 $17,123 $ 23,353
Total assets............................ 32,296 44,343 50,368 87,440 115,312
Long-term debt, less current portion.... 1,102 4,748 5,742 18,644 30,672
Shareholders' equity.................... 18,935 23,939 30,279 47,069 58,095
</TABLE>
- ---------------
(1) In January 1997, the Company acquired the partnership interests in Premier
in a transaction accounted for as a pooling-of-interests. Accordingly, the
Company's financial statements have been restated for all periods presented
to include the financial condition and results of operations of Premier. See
"Management's Discussion and Analysis of Supplemental Financial Condition
and Results of Operations -- Overview" and Notes 1 and 13 of Notes to
Supplemental Consolidated Financial Statements.
(2) Net income includes income from operation of unconsolidated affiliate sold,
accounted for as a discontinued operation, of $500, $745, $1,054 and $428 in
1992, 1993, 1994 and 1995, respectively, and includes $8,819 gain from sale
of this discontinued operation in 1995, net of applicable income taxes of
$6,270. The aggregate net income per share effect of the discontinued
operation was $0.06, $0.08, $0.10 and $0.91 in 1992, 1993, 1994 and 1995,
respectively.
(3) Pro forma net income reflects adjustments to provision for income taxes as
if: (i) the Company had been taxed as a C Corporation during 1992 rather
than as an S Corporation; and (ii) Premier's partnership operations had been
taxed as corporations for all periods presented.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Res-Care receives revenues primarily from the delivery of residential,
training, educational and support services to populations with special needs,
including persons with developmental and other disabilities ("disabilities
services") and at-risk and troubled youths ("youth services"). Revenues for the
Company's disabilities services operations are derived primarily from state
government agencies under the Medicaid reimbursement system and from management
contracts with private operators, generally not-for-profit providers, who
contract with state government agencies and are also reimbursed under the
Medicaid system. Reimbursement methods vary by state and are typically based on
a flat rate or cost-based reimbursement system on a per person, per diem basis.
Generally, rates are adjusted annually based primarily upon historical costs
experienced by the Company and by other service providers, and inflation. At
facilities and programs where it is the provider of record, the Company is
directly reimbursed under state Medicaid programs for services it provides and
such reimbursement is affected by occupancy levels. At most facilities and
programs that the Company operates pursuant to management contracts, the
management fee is negotiated based upon the reimbursement amount expected to be
earned by the provider of record, which is affected by occupancy levels. Under
certain management contracts, the Company is paid a fixed fee regardless of
occupancy levels. See Note 1 of Notes to Supplemental Consolidated Financial
Statements for a further discussion of the Company's revenue recognition
policies with respect to Medicaid contracts.
The Company's youth services operations include seven vocational training
programs under the federal Job Corps program administered by the United States
Department of Labor ("DOL"). Under the Job Corps program, the Company is
reimbursed for direct costs related to Job Corps center operations and allowable
indirect costs for general and administrative expenses, plus a predetermined
management fee, normally a fixed percentage of facility and program expenses.
All of such amounts are reflected as revenue, and all such direct costs are
reflected as facility and program expenses. Final determination of amounts due
under Job Corps contracts is subject to audit and review by the DOL, and
renewals and extension of Job Corps contracts are based in part on performance
reviews. In July 1996, the Company began operating various programs for at-risk
and troubled youths through its Youthtrack subsidiary, 20% of which is owned by
Youthtrack's management, and the Company's wholly-owned Alternative Youth
Services subsidiary. Most of the youth services programs are funded directly by
federal, state and local government agencies. Under these contracts, the Company
is typically reimbursed based on fixed contract amounts, flat rates or
cost-based rates. The effect of Youthtrack management's ownership interest is
reflected in the Company's supplemental consolidated statement of income as a
minority interest.
Expenses incurred under federal, state and local government agency
contracts for disabilities services and youth services, as well as management
contracts with providers of record for such agencies, are subject to examination
by agencies administering the contracts and services. Any resulting adjustments
would be recorded as contractual adjustments to revenues in the period in which
the adjustment is made. See Note 1 of Notes to Supplemental Consolidated
Financial Statements.
The Company's revenues and net income fluctuate from quarter to quarter, in
part because annual Medicaid rate adjustments have been announced inconsistently
and are usually retroactive to the beginning of the particular state's fiscal
reporting period. The Company expects that future adjustments in reimbursement
rates in most states will consist primarily of cost-of-living adjustments.
However, in some cases states have revised their rate-setting methodologies
which has resulted in rate decreases as well as rate increases. Current
initiatives at the federal or state level may materially change the Medicaid
system as it now exists. Retroactively calculated contractual adjustments are
accrued on an estimated basis in the periods the related services are rendered
and recorded as adjustments to revenues in future periods as final settlements
are determined. Because the cumulative effect of rate adjustments may differ
from previously estimated amounts, net income as a percentage of net revenues
for a period in which an adjustment occurs may not be indicative of expected
results in succeeding periods. Revenues in the future may be affected by changes
in rate-setting structures, methodologies or interpretations that may be
proposed or are under consideration in states where
19
<PAGE> 21
the Company operates. Also, some states have considered initiating managed care
plans for persons currently in Medicaid programs. At this time, the Company
cannot determine the impact of such changes, or the effect of various federal
initiatives that have been proposed.
The Company is currently engaged in litigation or administrative
proceedings with several state Medicaid programs regarding rate-setting and
reimbursement methodologies which, if adversely determined, could adversely
affect the Company's business, financial condition or results of operations,
especially in any period in which such adjustments exceed amounts previously
estimated. See "Business -- Legal Proceedings."
The loss of one or more contracts to operate the Company's programs or
facilities could have a material adverse effect on the Company's current or
future results of operations. In 1996, the Company's contract to operate the
Crystal Springs, Mississippi Job Corps center was not renewed. The Company
estimates that the loss of this contract represents approximately $5.7 million
in annualized revenues.
In January 1997, the Company acquired the partnership interests in Premier
in a transaction accounted for as a pooling-of-interests. Premier provides
disabilities services to clients with acquired brain injuries. The Company's
financial statements and all financial and operating data derived therefrom have
been restated for all periods presented in this Prospectus to include the
financial condition and results of operations of Premier.
In May 1995, the Company sold to a third party all of its interest in an
unconsolidated affiliate engaged in providing home health care services and
reported a gain on this transaction of $8.8 million after applicable income
taxes. The effect of the sale has been recorded in the Company's financial
statements as a discontinued operation.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from
the Company's supplemental consolidated statements of income expressed as a
percentage of the Company's total net revenues and in the case of facility and
program expenses and facility and program contribution, as a percentage of
related net revenues, and the percentage change in the amounts of such items
from the prior year:
<TABLE>
<CAPTION>
YEAR TO YEAR
INCREASE
(DECREASE)
--------------
YEARS ENDED DECEMBER 31, 1994 1995
------------------------ TO TO
1994 1995 1996 1995 1996
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Net revenues:
Disabilities services................................ 80.0% 82.3% 80.8% 27.7% 24.1%
Youth services....................................... 20.0 17.7 19.2 9.7 37.0
----- ----- -----
Total net revenues........................... 100.0 100.0 100.0 24.1 26.4
Facility and program expenses:
Disabilities services................................ 88.7 88.5 86.4 27.4 21.2
Youth services....................................... 89.3 87.8 88.9 7.8 38.8
Total facility and program expenses.......... 88.8 88.3 86.9 23.4 24.3
Facility and program contribution:
Disabilities services................................ 11.3 11.5 13.6 30.5 46.2
Youth services....................................... 10.7 12.2 11.1 25.6 24.2
Total facility and program contribution...... 11.2 11.7 13.1 29.5 42.1
Operating expenses:
Corporate general and administrative................. 4.3 4.1 4.4 17.6 36.6
Depreciation and amortization........................ 1.0 1.2 1.6 52.2 67.7
----- ----- -----
Operating income....................................... 5.9 6.4 7.1 34.3 40.6
Other (income) expense, net............................ (0.4) (0.4) 0.4 24.2 NM
----- ----- -----
Income from continuing operations before income
taxes................................................ 6.3 6.8 6.7 33.6 24.6
Income taxes........................................... 2.7 2.7 2.5 21.7 17.4
----- ----- -----
Income from continuing operations...................... 3.6% 4.1% 4.2% 42.7% 29.2%
===== ===== =====
</TABLE>
20
<PAGE> 22
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total net revenues increased by 26.4%, or $46.8 million, to $224.3 million
in 1996 compared to 1995. Of this increase, 75.2% resulted from increased
disabilities services revenues. Disabilities services net revenues increased by
24.1%, or $35.2 million, to $181.3 million in 1996 compared to 1995. Revenues
increased primarily from the acquisition of 12 facilities and four supported
living operations in 1996, the opening of nine new facilities in 1996 and the
effect of a full year of operations of 21 new facilities and programs added in
1995. Revenues also increased due to certain cost-of-living and other rate
adjustments providing reimbursement for payroll and other expenses incurred in
prior periods. Average revenue per census day increased to $112.73 in 1996
compared to $111.68 in 1995. Average disabilities services facility and program
occupancy rates for 1996 increased 0.5% to 96.2% compared to 95.7% in 1995.
Youth services net revenues increased by 37.0%, or $11.6 million, to $43.0
million in 1996 compared to 1995, resulting primarily from the first full year
of operations of the Edison Job Corps Center and the Company's first year of
operations of Youthtrack. During 1996, the Company began providing services to
over 350 youths through an acquisition by and a new contract awarded to
Youthtrack. Revenues were also impacted by inflationary increases. In addition,
during 1996, the Company was awarded a contract by the DOL to continue operating
the South Bronx Job Corps Center. In December 1996, the Company was awarded a
10-month basic education contract to provide support services at the Great Onyx
Job Corps Center in Mammoth Cave, Kentucky.
Facility and Program Expenses
Facility and program expenses increased 24.3%, or $38.1 million, to $194.9
million in 1996 compared to 1995. Of this increase, $26.6 million, or 69.8%, was
due to payroll and payroll-related expenses. These expenses reflected additional
personnel, primarily for the facilities and programs added during the year, as
well as annual pay increases. Facility and program expenses decreased as a
percentage of total net revenues to 86.9% in 1996 from 88.3% in 1995 due to
improved operating efficiencies, higher occupancy levels and the effect of the
rate increases described above.
Disabilities services facility and program expenses increased 21.2%, or
$27.4 million, to $156.7 million in 1996 compared to 1995. Payroll and
payroll-related expenses represented 76.7% of this increase due primarily to the
additional facilities and programs that were operational during 1996 compared to
1995. As a percentage of disabilities services net revenues, disabilities
services facility and program expenses decreased to 86.4% in 1996 from 88.5% in
1995. This decrease was due to improved operating efficiencies, higher occupancy
levels and the effect of the rate increases described above.
Youth services facility and program expenses increased 38.8%, or $10.7
million, to $38.2 million in 1996 compared to 1995. The increase related
primarily to the first full year of the operation of the Edison Job Corps Center
and the initial costs of the Youthtrack operation. As a percentage of youth
services net revenues, youth services facility and program expenses increased to
88.9% in 1996 from 87.8% in 1995. The increase in facility and program expenses
as a percentage of net revenues was due primarily to the initial costs of the
Youthtrack operation incurred prior to the commencement of revenues.
Operating Expenses
Corporate general and administrative expenses increased 36.6%, or $2.6
million, to $9.8 million, in 1996 compared to 1995. The increase primarily
reflected additional personnel to support the growth of the Company's
operations, as well as increased use of professional services. As a percentage
of total net revenues, such expenses increased to 4.4% in 1996 compared to 4.1%
in 1995.
Depreciation and amortization expense increased 67.7%, or $1.5 million, to
$3.7 million in 1996 compared to 1995. The increase reflects primarily the
purchase of real property and intangible assets in disabilities services during
1995 and 1996. Amortization expense also includes amortization of deferred
start-up costs relating to the development of new facilities and programs.
Deferred start-up costs include
21
<PAGE> 23
administrative and staff salaries, rent, professional fees, insurance and other
costs incurred during the period prior to operation of the facilities and
programs. Such costs are amortized using the straight-line method over periods
ranging from five to seven years, consistent with applicable state reimbursement
regulations. At December 31, 1996, unamortized start-up costs totaled $3.5
million. See Notes 1 and 4 of Notes to Supplemental Consolidated Financial
Statements.
Other (Income) Expense, Net
Net interest expense increased $1.1 million, to $893,000, in 1996 compared
to net interest income of $221,000 in 1995. The difference resulted primarily
from increased borrowings for acquisitions and for working capital. In 1995,
funds held in escrow from a 1988 transaction for the sale of the assets of a
facility were returned, and the Company recognized a one-time credit of
$507,000, net of expenses. See Note 2 of Notes to Supplemental Consolidated
Financial Statements.
Income Taxes
Income taxes increased 17.4%, or $819,000, to $5.5 million in 1996 compared
to 1995, and reflect effective tax rates of 36.9% and 39.1% in 1996 and 1995,
respectively. The increase in income tax expense is attributable to the higher
level of operating income as discussed above.
Income From Continuing Operations and Net Income
Income from continuing operations increased 29.2%, or 2.1 million to $9.4
million in 1996 compared to 1995, resulting primarily from the revenue
contribution of acquired and new programs and facilities as well as improved
occupancy and per diem rates. Included in 1995 net income is $9.1 million, or
$0.91 per share, attributable to income from and gain on the sale of the
Company's discontinued home health care operations. This operation was sold
during 1995, resulting in an after tax gain of $8.8 million. Due to the effect
of the sale of the discontinued operation, net income was $9.4 million, or $0.91
per share, in 1996 versus $16.6 million or $1.64 per share in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Total net revenues increased 24.1%, or $34.5 million, to $177.4 million in
1995 compared to 1994. Of this increase, 92.0% resulted from increased
disabilities services revenues. Disabilities services net revenues increased by
27.7%, or $31.7 million, to $146.1 million in 1995 compared to 1994. Revenues
increased primarily from the acquisition of 21 facilities and programs in 1995
and ten facilities and programs in 1994. Disabilities services revenues also
increased due to reimbursement for general cost-of-living increases in staff and
other expenses in prior periods. Average disabilities services revenue per
census day decreased to $111.68 in 1995 compared to $112.80 in 1994 as a result
of lower reimbursement rates on certain acquired facilities. Average
disabilities services facility and program occupancy rates increased 1.1% to
95.7% in 1995 compared to 94.6% in 1994.
Youth services net revenues increased by 9.7%, or $2.8 million, to $31.4
million in 1995 compared to 1994, due principally to a new contract to operate
the Edison Job Corps Center in New Jersey and a one-year basic education
contract to provide support services at the Gateway Job Corps Center in
Brooklyn, New York. Revenues were also impacted by inflationary increases.
Facility and Program Expenses
Facility and program expenses increased 23.4%, or $29.8 million, to $156.7
million in 1995 compared to 1994. Of this increase, $21.9 million, or 73.5%, was
due to payroll and payroll-related expenses. These expenses reflected additional
personnel, primarily for the additional facilities and programs in disabilities
services, as well as annual pay increases. Facility and program expenses
decreased as a percentage of total net revenues to 88.3% in 1995 from 88.8% in
1994.
22
<PAGE> 24
Disabilities services facility and program expenses increased 27.4%, or
$27.8 million, to $129.2 million in 1995 compared to 1994. Payroll and
payroll-related expenses represented 73.4% of the increase due primarily to the
additional disabilities services facilities and programs that were operational
during 1995 compared to 1994. As a percentage of disabilities services net
revenues, disabilities services facility and program expenses decreased to 88.5%
in 1995 from 88.7% for 1994.
Youth services facility and program expenses increased 7.8%, or $2.0
million, to $27.5 million in 1995 compared to 1994. As a percentage of youth
services net revenues, youth services facility and program expenses decreased to
87.8% in 1995 from 89.3% in 1994. This decrease was due primarily to increased
recruitment and placement revenues in the Puerto Rico and South Bronx Job Corps
centers and to the new Job Corps contracts discussed above.
Operating Expenses
Corporate general and administrative expenses increased 17.6%, or $1.1
million, to $7.2 million in 1995 compared to 1994. The increase reflected
additional personnel to support the growth of the Company as well as normal pay
increases, increased travel and increased use of professional services. As a
percentage of total net revenues, such expenses decreased to 4.1% in 1995
compared to 4.3% in 1994.
Depreciation and amortization expenses increased 52.2%, or $753,000, to
$2.2 million in 1995 compared to 1994. The increase reflects primarily the
effect of the real property and intangible assets added in disabilities services
in 1995.
Other (Income) Expense, Net
Net interest income decreased 62.4%, or $367,000, to $221,000 in 1995
compared to 1994. The decrease resulted primarily from increased borrowings for
acquisitions.
In 1995, funds held in escrow from a 1988 transaction for the sale of the
assets of a facility were returned and the Company recognized a one-time credit
of $507,000, net of expenses. See Note 2 of Notes to Supplemental Consolidated
Financial Statements.
Income Taxes
Income taxes increased 21.7%, or $837,000, to $4.7 million in 1995 compared
to 1994, and reflect effective tax rates of 39.1% and 43.0% in 1995 and 1994,
respectively. The increase in income tax expense is attributable to the higher
level of operating income as discussed above.
Income From Continuing Operations and Net Income
For the reasons described above, income from continuing operations
increased 42.7%, or $2.2 million to $7.3 million in 1995 compared to 1994. Due
to the effect of the sale of the discontinued home health care operations,
described above, net income was $16.6 million or $1.64 per share in 1995
compared to $6.2 million or $0.61 per share in 1994.
23
<PAGE> 25
UNAUDITED QUARTERLY FINANCIAL INFORMATION
The Company's quarterly results may fluctuate significantly as a result of
a variety of factors, including the timing of acquisitions or the opening of new
programs, the timing of rate adjustments and the cumulative effect of rate
adjustments differing from previously estimated amounts. Rate adjustments have
tended to be more prevalent in the second and third quarters of the calendar
year. Income from continuing operations was favorably affected during the fourth
quarter of 1995 due to the release of funds held in escrow from a 1988
transaction for the sale of assets of a facility. Because of the potential
quarterly fluctuations in the Company's revenue and operating results, results
for any particular quarter may not be indicative of future quarterly or annual
results.
<TABLE>
<CAPTION>
1995 1996
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $37,162 $42,485 $47,504 $50,277 $54,066 $54,156 $56,388 $59,655
Facility and program contribution....... 4,232 4,975 5,685 5,789 6,390 6,788 7,715 8,494
Income from continuing operations....... 1,422 1,685 2,008 2,196 1,921 2,172 2,495 2,855
Income from continuing operations per
share................................. $ 0.14 $ 0.17 $ 0.20 $ 0.22 $ 0.19 $ 0.21 $ 0.24 $ 0.27
AS A PERCENTAGE OF NET REVENUES:
Facility and program contribution....... 11.4% 11.7% 12.0% 11.5% 11.8% 12.5% 13.7% 14.2%
Income from continuing operations....... 3.8% 4.0% 4.2% 4.4% 3.6% 4.0% 4.4% 4.8%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's needs for capital are attributable primarily to the Company's
plans to expand through acquisitions and the development of new facilities and
programs, and to have sufficient working capital for general corporate purposes.
Since most of the Company's facilities and programs are operating at or near
capacity, and budgetary pressures and other forces are expected to limit
increases in reimbursement rates received by the Company, the Company's ability
to continue to grow at its current rate is directly dependent upon such
acquisitions and development.
For 1996, net cash provided by operating activities was $8.1 million
compared to $4.1 million for 1995 and $4.2 million for 1994. The increase in
1996 was due primarily to an increase in income from continuing operations,
offset by an increase in accounts receivable.
For 1996, net cash used in investing activities was $20.7 million, related
primarily to acquisitions and the purchase of property and equipment. For 1995,
net cash used in investing activities was $17.3 million, related primarily to
acquisitions and the purchase of property and equipment, offset by dividends
from the unconsolidated affiliate sold and proceeds from the sale of the
unconsolidated affiliate net of income taxes. For 1994, net cash used in
investing activities was $4.2 million relating primarily to the purchase of
property and equipment.
Net cash provided by financing activities was $13.0 million for 1996 and
$10.3 million for 1995, both consisting primarily of borrowings against the
available line of credit. For 1994, net cash provided by financing activities
was $432,000, consisting primarily of borrowing against the line of credit
offset by repayment of notes payable.
On December 23, 1996, the Company entered into a new Revolving Credit
Facility, expiring December 31, 2001 which allows for maximum borrowings of $65
million, including up to $10 million in letters of credit. The Revolving Credit
Facility bears interest at the Company's option at either (i) LIBOR plus a range
of 0.75% to 1.75% depending upon certain financial ratios or (ii) the lead
lender's prime rate. The weighted average interest rate on the Revolving Credit
Facility on February 28, 1997 was 6.7%. At December 31, 1996, the Company had
approximately $31.0 million in outstanding indebtedness, consisting of a $26.2
million outstanding balance under its Revolving Credit Facility and $4.8 million
of notes payable. As of February 28, 1997, $40.0 million of direct borrowings
were outstanding under the Revolving Credit Facility and an additional $4.6
million in letters of credit were outstanding. The entire net proceeds of this
offering will be
24
<PAGE> 26
used to repay amounts outstanding under the line of credit, which thereafter
will be available for reborrowing. See "Use of Proceeds" and Note 5 of Notes to
Supplemental Consolidated Financial Statements.
Net days revenue in accounts receivable for disabilities services was 50
days at December 31, 1996, compared to 46 days at December 31, 1995, and 47 days
at December 31, 1994. Accounts receivable for disabilities services at December
31, 1996, increased to $31.2 million, compared to $22.8 million at December 31,
1995, and $15.0 million at December 31, 1994. In youth services, payment is
generally received within 15 to 45 days of billings.
The Company generally prefers to provide its services under management
contracts or in facilities that are leased, which minimizes the amount of
capital expenditures required. However, in states that utilize flat-rate
reimbursement structures, purchases may be made to maximize returns. Also,
acquisitions may involve significant capital expenditures. The Company has no
material commitments for capital expenditures for its current facilities,
although the Company maintains an ongoing capital improvements program.
The Company believes that borrowing under its Revolving Credit Facility
together with its cash and cash equivalents, the use of operating leases
whenever possible, the net cash generated from operations, and the net proceeds
of this offering will be able to satisfy its existing and expected commitments
for at least the next twelve months.
25
<PAGE> 27
BUSINESS
Res-Care is a leading provider of residential, training, educational and
support services to populations with special needs, including persons with
developmental and other disabilities and at-risk and troubled youths. The
services provided by the Company have historically been provided by state and
local government agencies and not-for-profit organizations. The Company's
programs include an array of services provided in both residential and
non-residential settings for adults and youths with MR/DD and disabilities
caused by ABI, and for youths who have severe behavioral disorders, who are from
disadvantaged backgrounds or who have entered the juvenile justice system.
Since September 30, 1992, the Company has experienced significant growth in
the numbers of persons served, revenues and operating income. At February 28,
1997, Res-Care was providing services to approximately 7,600 persons with
special needs compared to approximately 3,300 persons at September 30, 1992,
representing a compound annual growth rate of approximately 21%. Res-Care
currently provides services to approximately 5,000 persons with disabilities in
larger facilities, group homes, personal residences or other community-based
programs in 17 states and to approximately 2,600 at-risk and troubled youths in
federally-funded vocational training programs and juvenile treatment programs
operated for state and local agencies in seven states and Puerto Rico. The
Company's revenues and operating income have increased from $90.8 million and
$4.9 million for the year ended December 31, 1992 to $224.3 million and $15.9
million for the year ended December 31, 1996, representing compound annual
growth rates of approximately 25% and 34%, respectively.
Res-Care's growth strategy is to (i) pursue acquisitions, (ii) add programs
and expand its existing programs in markets in which it currently operates and
(iii) expand into additional geographic areas in the United States. The markets
for the Company's services are highly fragmented, and the Company believes that
there are significant opportunities to enhance its market positions through an
active acquisition program in the disabilities and at-risk and troubled youth
sectors that will enable the Company to expand its operations into new
geographic areas, add program offerings and establish new relationships with
governmental entities. The Company intends to build upon its established
relationships with governmental entities to expand its current programs and
obtain contracts for additional programs in existing markets, and to develop new
programs in response to societal trends and the needs of governmental agencies.
The Company also intends to expand its programs to additional geographic areas
which management identifies as having favorable reimbursement and operating
environments. Since September 1, 1996, the Company has obtained contracts for or
acquired operations of 36 facilities and programs serving approximately 800
persons with developmental and other disabilities and 20 facilities and programs
serving approximately 500 at-risk and troubled youths.
MARKETS FOR THE COMPANY'S SERVICES
There is a growing trend throughout the United States toward privatization
of social services functions for special needs populations historically provided
by governmental agencies as governments of all types face continuing pressure to
control costs and improve the quality of services. Although the number and scope
of privatized social services have increased dramatically in recent years, the
Company estimates that only a relatively small percentage of these services is
currently privately managed. Based on the combination of the current demographic
and societal factors affecting special needs populations, the Company believes
that the demand for privatized social services will continue to escalate.
Disabilities Services
Approximately 1.6% of the general population, or over 4.2 million
individuals, are estimated as being affected to some extent with MR/DD, often
with related medical or physical disabilities, to the extent that they require
some level of life-long supervision and support, including supervised housing
arrangements. While many of these persons are cared for by parents or other
family members, an estimated 390,000 live in supervised out-of-home residential
settings, of which approximately 54,000 live in supported living settings. It is
estimated that there are over 4,000 providers serving the MR/DD population,
including state and local governmental providers, not-for-profit organizations
and other proprietary providers, which operate over
26
<PAGE> 28
10,000 separate MR/DD facilities and programs. Funding for disabilities services
programs has increased consistently over the past two decades to its current
level of $22.9 billion annually, although only approximately 9% of persons with
MR/DD participate in these programs due to extensive waiting lists for community
living placements and day services in most states and to funding constraints.
The Company believes that demand for community-based programs will also
continue to increase as a result of a growing trend to deinstitutionalize
disabilities populations. Since 1970, 39 states have closed approximately 100
large state MR/DD facilities, representing one-third of such facilities that
existed in 1970. During this period, states have relocated individuals from
institutional facilities to less restrictive, alternative living arrangements,
such as community homes and supported living programs. Res-Care believes that
service patterns to populations with disabilities will continue to shift from a
highly-structured model to an individualized, service-as-needed model. This
shift is attributable to a number of factors, including state and local
governmental budgetary constraints, changes in public and professional attitudes
toward disabilities populations, the effect of litigation and other efforts of
public advocacy groups, and an aging population that has historically cared for
family members with disabilities in their own homes.
Youth Services
The Company's Division for Youth Services provides services to at-risk and
troubled youths primarily through secure and staff-secure residential treatment
programs and federally-funded Job Corps centers. At one end of the spectrum are
at-risk youths. These are youths who may not be functioning well in school or at
home and might exhibit such behaviors as aggressive noncompliance with parents
and authority figures, chronic truancy, fighting, running away and substance
abuse. At the other end of the spectrum are troubled youths. These are youths
who have committed serious and/or violent crimes, such as sex offenses,
robberies, assaults and drug trafficking. A significant number of at-risk and
troubled youths are believed to live in poverty and have been the object of
neglect or physical and/or emotional abuse.
The Company believes the market for residential, educational and vocational
programs for at-risk and troubled youths is a large and growing market.
Additionally, as juvenile crime and the demand for special educational and
residential services for these youths continue to grow and receive increasing
levels of attention from lawmakers and the general public, many industry
observers have predicted that government funding for programs addressing the
needs of at-risk and troubled youths, provided primarily through juvenile
justice, special education and child welfare agencies at the federal, state and
local levels, will continue to increase. A recent census projection stated that
the number of youths in the United States between the ages of 14 and 17 years,
the highest-risk juvenile group, is expected to increase by 20% from
approximately 14 million in 1994 to approximately 17 million in 2005. While the
youth population is expected to increase, the juvenile crime rate continues to
increase at an even greater rate. Violent crime arrests per 100,000 juveniles
ages 10-17 have increased approximately 72% from 1983 to 1995. In 1994, there
were 2.7 million arrests of juveniles under 18 years of age, accounting for 19%
of all arrests, and 35% of all property crime arrests. Contributing to this
growth is the fact that reported incidents of child abuse and neglect have grown
significantly in the last decade. Reports of child abuse and neglect of children
have grown 45% from 2.0 million in 1985 to 2.9 million in 1993.
The market for the provision of services to at-risk and troubled youths is
highly fragmented. A 1994 National Study for Residential Care for Children
survey reported that there were over 6,700 publicly and privately operated
residential care facilities for children, with over 117,000 youths in the 5,957
facilities that responded to the survey. In addition, at December 31, 1996,
there were 110 Job Corps centers in operation in the United States, operating at
or near their capacity of approximately 40,000 students. Of such centers,
approximately 70% were managed by private contractors and 30% by the federal
government. Funding for the Job Corps program has been maintained or increased
in each of the last ten years.
27
<PAGE> 29
BUSINESS STRATEGY
Res-Care strives to provide quality and caring residential, training,
educational and support services through the operation of efficient and flexible
programs to growing special needs populations, including persons with
developmental and other disabilities and at-risk and troubled youths. To achieve
this goal, the Company's business strategy is based upon the following key
elements:
Continue to Expand Leadership Position in Disabilities Services. Res-Care
is the leading provider of residential, training and support services to persons
with developmental disabilities, with more than 18 years operating experience in
this field. Over this period, Res-Care has developed a reputation for being an
operator of choice for governmental agencies and not-for-profit providers due to
its established operating procedures and management infrastructure that result
in efficient delivery of quality services at low cost. At the same time,
Res-Care has developed unique skills in dealing with special needs individuals
in difficult situations. The Company's disabilities and vocational training
services operations serve as a training ground for the management and direct
service personnel needed to develop, implement, transition and operate a rapidly
increasing number of facilities and programs for an expanding consumer base. As
Res-Care seeks to expand its disabilities services operations, it remains
committed to maintaining and enhancing its "best in class" management and
operating practices.
Leverage Experience to Become a Leading Provider of Services to At-Risk and
Troubled Youths. Res-Care's 20-year history of providing training and support
services to special needs populations, including disadvantaged youths, has
enabled it to develop a depth of management and direct services talent and
established operating procedures, service delivery protocols and financial
controls. As public concern and funding focus greater attention on addressing
the growing number of at-risk and troubled youths within the U.S. population,
the Company is well positioned to utilize its experience and core competencies
to implement a broad range of programs for at-risk and troubled youths. These
capabilities are enhanced by the recent addition of personnel in its Division
for Youth Services with extensive juvenile correctional services experience.
Focus on Quality Management of Existing Programs. The Company strives to
enhance the delivery of its programs, and the competency of its staff to attain
the positive outcomes desired for the special needs populations they serve. The
Company has developed and implemented models of ongoing program evaluation and
quality management which the Company believes provide critical feedback to
measure the performance of its various programs. The Company believes its
reputation for consistency and quality in its program offerings is an important
competitive advantage which enables it to renew existing contracts and to expand
services, as well as capitalize on privatization opportunities with additional
governmental agencies.
Provide Cost-Effective Solutions. The Company believes that it has a
demonstrated ability to design, implement and operate residential, training,
educational and support facilities and programs at a lower cost than
governmental agencies and not-for-profit entities that historically have
performed such services. The Company has developed proven management systems and
procedures that assure efficient application of financial and human resources in
order to continue to implement and maintain high quality, cost-effective
alternatives to programs operated directly by governmental entities and private
agencies. The Company also has developed the ability to transition effectively
the operations of an acquired program to Res-Care's proven operating philosophy
and system, and has been engaged on an emergency basis by government agencies
and courts to manage programs where the prior operator has experienced financial
or program-related difficulties.
GROWTH STRATEGY
The Company's growth strategy involves an active acquisition program, the
development of new programs in existing markets and the expansion into new
geographic and service markets.
Pursue Acquisitions. The markets for disabilities services and at-risk and
troubled youth services are highly fragmented. In 1996, there were over 4,000
providers serving the MR/DD population and over 6,000 providers serving the
at-risk and troubled youth population. The Company believes these fragmented
markets provide significant opportunities for the Company to enhance its
position through acquisitions of for-profit and
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not-for-profit operations and companies in these service fields. The Company
intends to pursue acquisitions that will help it further penetrate existing
geographic and service markets, expand its operations into new geographic areas,
add complementary program types to the Company's array of service offerings and
establish new relationships with state and local governmental entities and
not-for-profit providers. Although the Company currently has no agreement or
understanding with respect to any material acquisition, the Company continually
evaluates opportunities to expand its business through acquisitions of other
companies that provide services to various special needs populations and from
time to time enters into discussions and letters of intent which may lead to
acquisitions. No assurance can be given that future acquisitions will be
consummated.
Add New Programs and Expand Operations in Existing Markets. The Company
intends to build upon established relationships with governmental contracting
agencies and their administrative staffs to expand the Company's disabilities
and youth services programs and to obtain contracts for additional programs in
states where the Company currently operates. The Company has active and on-going
development efforts focused on winning new state contracts and working with
state agencies to develop new programs to be awarded on a competitive basis. In
addition to its current array of programs, the Company also is actively seeking
to develop new services in response to societal trends affecting the special
needs populations and the requirements of governmental agencies and
not-for-profit providers.
Expand Operations into New Geographic Markets. The Company is seeking to
expand the geographic scope of its disabilities and youth services offerings
into additional states. This expansion may occur through acquisitions or
development of new facilities and programs. In pursuing this expansion strategy,
the Company seeks to identify those states or programs which have favorable
reimbursement and operational environments and are receptive to privatized
governmental services. The Company currently operates programs in 20 states,
including expansions into California, Georgia, Illinois, Kansas, Missouri, Ohio
and Oklahoma since the beginning of 1995.
SERVICES
Disabilities Services
Since 1978, Res-Care has provided services to persons with developmental
disabilities primarily through the operation and management of group homes
(generally serving six to eight individuals) and larger facilities (generally
serving 40 or more individuals) that provide alternatives to placement in state
institutions or traditional nursing homes or other long-term care facilities not
capable of providing specialized active treatment required by these individuals.
Some of Res-Care's clients have ABI, and service patterns to these individuals
are similar to those for individuals with mental retardation or other
developmental disabilities. Since 1992, the Company has also operated supported
living programs, in which persons with disabilities reside in their own
residences or apartments with outside support provided as needed. Some
individuals require 24-hour staffing, while others need only drop-in services,
day programs, supported employment or transportation services. Community-based
settings enable persons with developmental or other disabilities to live and
develop in an environment that encourages each person to achieve maximum
independence and self-respect.
The Company's programs are based predominately on individual habilitation
plans designed to encourage greater independence and development of daily living
skills through individualized support and training. Management believes that the
breadth and quality of the Company's services and support and training programs
makes the Company attractive to state and local governmental agencies and
not-for-profit providers who may wish to contract with it. As of February 28,
1997, the Company was providing services to approximately 5,000 individuals in
facilities and programs in 17 states. The Company's programs are designed to
offer specialized support to these individuals not generally available in larger
state institutions and traditional long-term care facilities. In each of the
Company's programs, services are administered by Res-Care employees and
contractors, such as qualified mental retardation professionals ("QMRPs"),
physicians, psychologists, therapists, social workers and other direct service
staff. These services include social, functional and vocational skills training,
and emotional and psychological counseling and therapy as needed for each
individual.
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Social Skills Training. The Company's social skills training focuses
on problem solving, anger management and adaptive skills to allow
individuals with disabilities to interact with others in the residential
setting and in the community. Emphasis is placed on contact with the
community at large as appropriate for each individual. The desired outcome
is to enable each to participate in home, family and community life as
fully as possible.
Many individuals with developmental and other disabilities require
behavioral intervention services. The Company provides these services
through psychiatrists, psychologists and behavioral specialists, some of
whom serve as consultants on a contract basis. All operations utilize a
non-aversive approach to behavior management which has been pioneered by
the Company and which is designed to avoid consequences involving
punishment or extreme restrictions on individual rights. Behavior
management techniques are employed by the interdisciplinary team and direct
service staff rather than psychotropic medications to modify behavior, the
goal being to minimize the use of medications whenever possible. When
necessary, medications are handled in strict compliance with federal
regulations.
Functional Skills Training. The Company's functional skills training
program encourages mastery of personal skills and the achievement of
greater independence. As needed, individual habilitation plans may focus on
basic skills training in such areas as personal hygiene and dressing, as
well as more complex activities such as shopping and use of public
transportation. Individuals are encouraged to participate in daily
activities such as housekeeping and meal preparation as appropriate.
Vocational Skills Training and Day Programs. The Company provides
extensive vocational training or specialized day programs for all
individuals served. Some individuals are able to be placed in
community-based jobs, either independently or with job coaches, or may
participate as part of a work team contracted for a specific service such
as cleaning, sorting or maintenance. Clients not working in the community
may be served through vocational workshops or day programs appropriate for
their needs. The Company operates such programs and also contracts for this
service with outside providers. The Company's philosophy is to enable all
persons served to perform productive work in the community or otherwise
develop vocational skills based on their individual abilities. Clients
served by specialized day programs may be older or have physical or health
restrictions which prevent them from being employed or participating in
vocational programs. Specialized day programs may include further training
in daily living skills, community integration or specialized recreation
activities.
Counseling and Therapy Programs. The Company's counseling and therapy
programs address the physical, emotional and behavioral challenges of
individuals with MR/DD or ABI. Goals of the programs include the
development of enhanced physical agility and ambulation, acquisition of
adaptive skills for both personal care and work, as well as the development
of coping skills and the use of alternative, responsible, and socially
acceptable interpersonal behaviors. Individualized counseling programs may
include group and individual therapies. Occupational and physical therapies
and therapeutic recreation are provided based on the assessed needs of the
individual.
At each of its operations, the Company provides comprehensive
individualized support and training programs that encourage greater independence
and the development of personal and vocational skills commensurate with the
particular individual's capabilities. As the individual progresses, new programs
are created to encourage greater independence and self-respect, and the
development of additional personal or vocational skills.
Youth Services
Since 1976, the Company has been operating programs for disadvantaged
youths through the federal Job Corps program administered by the DOL, which
provides for the educational and vocational skills training, health care,
employment counseling and other support necessary to enable disadvantaged youths
to become responsible working adults. In December 1995, the Company began a
strategic initiative to expand its Division for Youth Services and develop
services that is designed to address the specific needs of at-risk and troubled
youths to enable each youth to be transitioned back into the community. The
youths targeted to be served through the strategic initiative range from
pre-adjudicated and adjudicated youths who have entered
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the juvenile justice system to youths who exhibit a variety of behavioral and
emotional disorders and in some instances have been diagnosed with mental
retardation or another developmental disability. Programs offered for troubled
youths include secure and staff-secure detention programs, boot camps, long-term
treatment programs, secure transportation, tracker/mentor programs, AWOL
apprehension, proctor parent programs, day treatment programs and monitoring,
transition and after-care programs. At-risk youth programs include therapeutic
residential programs, non-residential educational programs and the operation of
an alternative school. Over time, the Company expects to continue to expand the
services provided by the Company to these youths.
The Company's programs include a variety of educational and vocational
training programs and comprehensive programs for behavior change, including
individual, group and family counseling and training in social and independent
living skills. These programs emphasize self-esteem, academic enhancement,
empathy development, critical thinking and problem solving, anger management and
coping strategies, substance abuse treatment and relapse prevention. Programs
are designed to increase self-control and effective problem-solving; to teach
youths how to understand and consider other people's values, behaviors and
feelings; to show youths how to recognize how their behavior affects other
people and why others respond to them as they do; and to enable them to develop
alternative, responsible, interpersonal behaviors. Although certain youths in
the Company's programs require both drug therapy and treatment for use or abuse
of drugs, the Company's goal is to minimize or eliminate the use of medication
whenever possible. When appropriate, medication is prescribed by independent
physicians and may be administered by Company personnel. Management believes
that the breadth of the Company's services and its history of working with
youths make the Company attractive to local, state and federal governmental
agencies.
As an integral part of its youth services program, Res-Care operates seven
Job Corps centers with a contracted capacity of 2,095 persons. The Job Corps
program is designed to address the severe unemployment problem faced by
disadvantaged youths throughout the country. The typical Job Corps student is a
16- to 24-year old high school dropout who reads at the seventh grade level,
comes from a disadvantaged background, has not held a regular job, and was
living in an environment characterized by a troubled home life or other
disruptive conditions. Each center offers training in several vocational areas
depending upon the particular needs and job market opportunities in the region.
Students are required to participate in basic education classes to improve their
academic skills and to complement their vocational training. High school
equivalency classes are available to obtain GED certificates. Upon graduation or
other departure from the program, each student is referred to the nearest Job
Corps placement agency for assistance in finding a job or enrolling in a school
or training program. Approximately 70% of the students completing the program
have obtained jobs or continued their education elsewhere.
OPERATIONS
Disabilities Services
DPD operations are under the direct supervision of the Company's Executive
Vice President, Operations, Division for Persons with Disabilities, who is
responsible for six geographic regions, each headed by a Vice President, and two
Vice Presidents responsible for ABI operations nationally. Each Vice President
supervises the senior administrators and/or administrators responsible for the
various MR/DD or ABI facilities and programs under his or her control. In
general, each cluster of group homes, supported living program and larger
facility is overseen by an administrator. In addition, a program manager
supervises a comprehensive team of professionals and community-based consultants
who participate in the design and implementation of individualized programs for
each individual served. QMRPs work with direct service staff and professionals
involved in the programs to ensure that quality standards are met and that
progress towards each individual's goals and objectives is monitored and
outcomes are achieved. Individual habilitation plans are reviewed and modified
by the team as needed. The operations utilize community advisory boards and
consumer satisfaction surveys to solicit input from professionals, family
members and advocates, as well as from the neighboring community, on how to
continue to improve service delivery and increase involvement with the
neighborhood or community.
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The Company's direct service staff have the most frequent contact with, and
generally are recruited from, the community in which the facility or program is
located. These staff members are screened to meet certain qualification
requirements and receive orientation, training, and continuing education.
The provision of disabilities services is subject to complex and
substantial state and federal regulation and the Company strives to ensure that
its internal controls and reporting systems comply with Medicaid reimbursement
and other program requirements, policies and guidelines. The Company designs and
implements programs, often in coordination with appropriate state agencies, in
order to assist the state in meeting its objectives and to facilitate the
efficient delivery of quality services. Management and personnel resources are
devoted to keeping abreast of new laws, regulations and policy directives
affecting the quality of or reimbursement for such services. In addition, the
Company believes it has developed expertise in accurately predicting eligibility
for Medicaid and other benefits and in processing reimbursement claims. The
Company's billing system is centralized and able to take advantage of expedited
payment procedures, such as electronic billing, that may be available.
The Company has developed a model of ongoing program evaluation and quality
management which the Company believes provides critical feedback to measure the
quality of its various operations. Each operation conducts its own quality
assurance program, the Periodic Service Review ("PSR"), which is reviewed by the
responsible Vice President, Operations. Results from the PSRs are reviewed on a
quarterly basis with the Executive Vice President, Operations, Division for
Persons with Disabilities. Management and operational goals and objectives are
established for each facility and program, as part of an annual budget and
strategic planning process. A weekly statistical reporting system and quarterly
statement of progress provides management with relevant and timely information
on the operations of each facility. Survey results from government agencies for
each operation are recorded in a database and quarterly summary reports are
reviewed by senior management. The Company believes the PSR system is a vital
management tool to evaluate the quality of its programs, and has been useful as
a marketing tool to promote the Company's programs, since it provides more
meaningful and significant data than is usually provided by routine monitoring
by government agencies.
Youth Services
At-Risk and Troubled Youths. The Company's programs are designed to
provide consistent, high quality and cost-effective education and treatment to
address the needs of the various segments of the at-risk and troubled youths
population. The Company generally is responsible for the overall operation of
its facilities and programs, including management, general administration, staff
recruitment and security and supervision of the youth in their programs.
Youthtrack operations are under the direct supervision of its President, and AYS
operations are under the direct supervision of the Company's Vice President,
Alternative Youth Services.
The Company has assembled an experienced team of managers, counselors and
staff that blends program expertise with business and financial experience. The
Company believes that its recruitment, selection and training programs generate
sufficient personnel capable of implementing the Company's systems and
procedures as it expands this segment of its business. The Company's staff
includes teachers, counselors, mental health professionals, juvenile justice
administrators and licensed clinicians.
The Company's internal training policies require its teachers, counselors,
security and other direct service staff to complete extensive training. Core
training includes courses in the major Company program components such as
behavior change education, positive peer culture, nonviolent crisis
intervention, discipline and limit-setting, anger management and social skills
training. Continuing education also is required for all staff. The Company
demonstrates its commitment to its employees' professional development by
offering classes and training programs, as well as tuition reimbursement
benefits.
The Company has also implemented its PSR system at the majority of its
youth services programs and expects to complete implementation at the Company's
remaining programs during fiscal 1997.
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The Company recognizes that, in the operation of programs for at-risk and
troubled youths, a primary mission is to protect the safety of the community
within a facility, as well as the neighboring community. Thus, the Company's
programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
Job Corps Centers. The Company's Job Corps centers are operated under
contract with the DOL which provides the physical plant and equipment. The
Company is directly responsible for the management, staffing and administration
of Job Corps centers. Each center is managed by a center director, who reports
to the Vice President, Job Corps, who in turn reports to the Company's Chief
Executive Officer.
A typical Res-Care Job Corps operation consists of a three tier management
staff structure. The center director has the overall responsibility for
day-to-day management at each facility and is assisted by several senior staff
managers who typically are responsible for academics, vocational training,
social skills, safety and security, health services and behavior management.
Managers are assisted by front line supervisors who have specific
responsibilities for such areas as counseling, food services, maintenance,
finance, residential life, recreation, property, purchasing, human resources and
transportation.
A performance standards report for each center, issued by the DOL monthly,
measures and assigns ratings to three primary categories of performance: (i)
placement of graduates, (ii) education results, as measured by GED achievement
and reading and math gains and (iii) the number of students completing a
prescribed vocational curriculum to make a student job-ready. These are then
combined into an overall performance rating. The ratings are derived from a
comparison of the operator's performance results against predetermined standards
in each category. All 110 centers are ranked against each other in these
categories. Performance standards reports are reviewed by center directors and
the Vice President, Job Corps, and acted upon as appropriate to address areas
where improvement is needed. At February 28, 1997, the ratings of all of the
centers operated by the Company exceeded the national standard established by
the DOL for Job Corps centers and only one of the centers operated by the
Company was ranked in the bottom quartile in the ranking of all Job Corps
centers.
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FACILITIES AND PROGRAMS
The tables below set forth information as of February 28, 1997 regarding
the Company's disabilities services and youth services, respectively:
DIVISION FOR PERSONS WITH DISABILITIES
<TABLE>
<CAPTION>
INITIAL
CONTRACT OPERATING OPERATION
STATE TYPES OF PROGRAMS CAPACITY(1) ARRANGEMENTS IN STATE
----- ----------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
California...... Larger Facilities, Group 639 Provider of Record 1995
Homes, Day Programs
Colorado........ Larger Facility, Supported 164 Provider of Record 1992
Living
Florida......... Larger Facilities, Group 350 Provider of Record, 1983
Homes, ABI Management Contract
Illinois........ Larger Facilities, ABI 133 Provider of Record 1995
Indiana......... Larger Facilities, Group 840 Provider of Record 1983
Homes, Child Care Facility,
Supported Living
Kansas.......... Larger Facilities, Supported 274 Provider of Record 1995
Living
Kentucky........ Larger Facilities, Group 570 Provider of Record, 1978
Home, Supported Living, Day Management Contract
Program
Louisiana....... Group Homes 132 Provider of Record 1984
Missouri........ ABI 39 Provider of Record 1997
Nebraska........ Group Homes, Supported 348 Provider of Record 1992
Living, Day Program
New Mexico...... Supported Living 173 Provider of Record 1994
Ohio............ Larger Facility, Group Homes, 133 Provider of Record 1995
Supported Living, Respite
Program
Oklahoma........ Supported Living 145 Provider of Record 1995
Tennessee....... Group Homes, Supported Living 281 Provider of Record, 1993
Management Contract
Texas........... Larger Facilities, Group 708 Provider of Record 1993
Homes, Day Program
West Virginia... Larger Facility, Group Homes 303 Management Contract 1987
-----
Total...... 5,232
</TABLE>
- ---------------
(1) Contract capacity includes, in the case of licensed facilities, the number
of persons covered by the applicable license or permit, and in all other
cases, the number of persons covered by the applicable contract. Contract
capacity does not include capacity for day or respite programs.
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DIVISION FOR YOUTH SERVICES
<TABLE>
<CAPTION>
INITIAL
CONTRACT OPERATION
STATE TYPES OF PROGRAMS CAPACITY(1) IN STATE
----- ----------------- ----------- ---------
<S> <C> <C> <C>
Colorado................. Residential, Non-Residential, Secure, 467 1996
Medium Secure, Proctor Parent, Day
Treatment, Apartment Living
Florida.................. Job Corps 300 1983
Georgia.................. Residential, Alternative School 60 1997
Kentucky................. Residential 48 1997
Mississippi.............. Job Corps 280 1978
New Jersey............... Job Corps 530 1995
New York................. Job Corps 250 1986
Puerto Rico.............. Job Corps 735 1990
-----
Total............... 2,670
</TABLE>
- ---------------
(1) Contract capacity includes, in the case of licensed facilities, the number
of persons covered by the applicable license or permit, and in all other
cases, the number of persons covered by the applicable contract.
CONTRACTS
State Contracts. Contracts for participation as a provider of services in
the Medicaid programs are regulated by federal and state agencies. Although the
contracts have a stated term of one year and generally may be terminated without
cause on 60 days notice, the contracts are typically renewed annually if the
Company has complied with licensing, certification, program standards and other
regulatory requirements. Serious deficiencies can result in delicensure or
decertification actions by these agencies. As provider of record, the Company
contractually obligates itself to adhere to the applicable federal and state
regulations regarding the provision of services, the maintenance of records and
submission of claims for reimbursement under the Medicaid Assistance Program,
Title XIX of the Social Security Act and pertinent state medical assistance
programs. Pursuant to provider agreements, the Company agrees to accept the
payment received from the government entity as payment in full for the services
administered to the individuals and to provide the government entity with
information regarding the owners and managers of the Company, as well as comply
with requests and audits of information pertaining to the services rendered.
Provider agreements can be terminated at any time for non-compliance with the
federal, state or local regulations. Reimbursement methods vary by state and are
typically based on a flat-rate or cost-based reimbursement system on a per
person, per diem basis. See "Management's Discussion and Analysis of
Supplemental Financial Condition and Results of Operations."
Contracts for the Company's youth services programs, excluding Job Corps,
are regulated by state and local governmental entities. Contracts generally have
one year terms, subject to annual renewal, or cover individuals for specific
terms. The contract rate is also accepted as payment in full for services
rendered.
Management Contracts. Management contracts with states, local agencies or
other providers of record typically call for the Company to manage the
day-to-day operations of facilities or programs. Many of these contracts are
short-term (generally a year in duration) and are subject to renewal or
renegotiation provided that program standards and regulatory requirements are
met. Depending upon the state's reimbursement policies and practices, management
contracts provide fees to the Company computed on the basis of a fixed fee per
individual (which may include some form of incentive payment), a percentage of
operating expenses (so-called cost-plus contracts), a percentage of revenue or
an overall fixed fee paid regardless of occupancy. The provider of record is
generally paid a net operating income (facility gross revenues minus lease
payment, facility operating expenses and the Company's management fee), some
specified minimum amount or a fixed amount. Historically, the Company's Medicaid
provider contracts and management contracts have been renewed or satisfactorily
renegotiated. The Company believes its experience in this regard is consistent
with the overall experience of other operators in the disabilities services
business.
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Job Corps Contracts. Contracts for Job Corps centers are awarded pursuant
to a rigorous bid process. After successfully bidding, the Company operates the
Job Corps centers under comprehensive contracts negotiated with the DOL. Under
Job Corps contracts, the Company is reimbursed for all facility and program
costs related to Job Corps center operations and allowable indirect costs for
general and administrative expenses, plus a predetermined management fee,
normally a fixed percentage of facility and program expense.
The contracts cover a five-year period, consisting of an initial two-year
term with three one-year renewal terms exercisable at the option of the DOL. The
contracts specify that the decision to exercise an option is based on an
assessment of (i) the performance of the center as compared to its budget, (ii)
compliance with federal, state and local regulations, (iii) qualitative
assessments of center life, education, outreach efforts and placement record and
(iv) the overall rating received by the center. Shortly prior to the expiration
of the five-year contract period (or earlier if the DOL elects not to exercise a
renewal term), the contract is rebid, regardless of the operator's performance.
The current operator may participate in the rebid process. In situations where
the DOL elects not to exercise a renewal term, however, it is unlikely that the
current operator will be successful in the rebidding process. It is the
Company's experience that there is usually an inverse correlation between the
performance ratings of the current operator and the number of competitors who
will participate in the rebidding process, with relatively fewer competitors
expected where such performance ratings are high.
The Company is currently operating seven Job Corps Centers in Gulfport,
Mississippi; South Bronx, New York; Miami, Florida; Edison, New Jersey; and
Puerto Rico(3). The five-year period covered by the Company's Job Corps
contracts generally expire in 2000, although the Gulfport and the South Bronx
contracts expire in 1997 and 2001, respectively. The Company intends to
selectively pursue additional centers through the Request for Proposals ("RFP")
process.
MARKETING AND DEVELOPMENT
The primary focus of the Company's marketing activities is on identifying
other providers who may consider an acquisition or a management contract
arrangement, and on contacting state and local governments and governmental
agencies responsible for the provision of the types of disabilities services and
youth services offered by the Company.
The Executive Vice President, responsible for the Company's development
department, directs the Company's marketing efforts for disabilities services
and provides support as needed for the youth services marketing efforts.
Responsibility for marketing activities related to youth services are divided
among the following officers of the Company and its subsidiaries: the Vice
President, Job Corps; the Vice President, Alternative Youth Services; and the
President and Vice President, Development, of Youthtrack. Marketing activities
are reviewed on a regular basis by senior management.
In its pursuit of government contracts, the Company contacts governments
and governmental agencies in geographical areas in which it operates and in
others in which it has identified expansion potential. Contacts are made and
maintained by both regional operations personnel and corporate development
personnel, augmented as appropriate by other senior management. The Company
targets new areas based largely on its assessment of the needs for its services,
the system of reimbursement, the receptivity to out-of-state and proprietary
operators, expected changes in the service delivery system (i.e., privatization
or downsizing), the labor climate and existing competition.
The Company also seeks to identify service needs or possible changes in the
service delivery or reimbursement system of governmental entities that may be
driven by changes in administrative philosophy, budgetary considerations, or
pressure or legal actions brought by advocacy groups. As needs or possible
changes are identified, the Company attempts to work with and provide input to
the responsible governmental personnel and to work with provider associations
and consumer advocacy groups to this end. If an RFP results from this process,
the Company then determines whether and on what terms it will respond and
participate in the competitive process.
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With regard to identifying other providers who may be acquisition or
management contract candidates, the Company attempts to establish relationships
with providers through presentations at national and local conferences,
membership in national and local provider associations, direct contact via mail,
telephone or personal visit and follow up with information packets including
video presentation.
In some cases, the Company may be contacted directly and requested to
submit proposals or become a provider in order to provide services to address
specific problems. These may include an emergency takeover of a troubled
operation or the need to develop a large number of community placements within a
certain time period.
REFERRAL SOURCES
The Company receives substantially all of its new MR/DD clients from
referrals from third parties. Generally, family members of persons with MR/DD
are first made aware of available residential or alternative living arrangements
through a state or local case management system. Case management systems are
operated by governmental or private agencies. The Company's ABI services receive
referrals from doctors, hospitals, private and workers' compensation insurers
and attorneys. In either case, where it is determined that some form of MR/DD or
ABI service is appropriate, a referral of one or more providers of such services
is then made to family members or other interested persons. The Company
generally receives referrals or placements of individuals to its AYS and
Youthtrack programs through state or local agencies or entities responsible for
such services, and individuals are recruited to its Job Corps programs largely
through private contractors. The Company's reputation and prior experience with
agency staff, case workers and others in positions to make referrals to the
Company are important for building and maintaining census in the Company's
operations.
COMPETITION
The provision of disabilities services and youth services is subject to a
number of competitive factors, including range and quality of services provided,
cost-effectiveness, reporting and regulatory expertise, reputation in the
community, and the location and appearance of facilities and programs. These
markets are highly fragmented, with no single company or entity holding a
dominant market share. The Company competes with other for-profit companies,
not-for-profit entities and governmental agencies.
With regard to disabilities services, individual states remain a major
provider of MR/DD services, primarily through the operation of large
institutions, and not-for-profit organizations are active in all states and
range from small agencies serving a limited area with specific programs to
multi-state organizations. Many of these organizations are affiliated with
advocacy and sponsoring groups, such as community mental health and mental
retardation centers and religious organizations.
The youth services business in which the Company engages is one that other
entities may easily enter without substantial capital investment or experience
in management of education or treatment facilities. In addition, certain
not-for-profit entities may offer education and treatment programs at a lower
cost than the Company due in part to government subsidies, foundation grants,
tax deductible contributions or other financial resources not available to
for-profit companies.
Currently, only a limited number of companies actively seek Job Corps
contracts because the bidding process is highly specialized and technical and
requires a significant investment of personnel and other expenses over a period
of several months. Approximately one-half of the privately-operated centers are
operated by the three largest operators. Competition for Job Corps contracts has
increased as the DOL has made efforts to encourage new participants in the
program, particularly minority-owned businesses, and as several companies with
government defense contracting experience have entered the Job Corps market.
Certain proprietary competitors operate in multiple jurisdictions and may
be well capitalized. The Company also competes in some markets with smaller
local companies that may have a better understanding of the local conditions and
may be better able to gain political and public acceptance. Such competition may
adversely affect the Company's ability to obtain new contracts and complete
acquisitions on favorable terms.
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The Company faces significant competition from all of these providers in the
states in which it now operates and expects to face similar competition in any
state that it may enter in the future.
Professional staff retention and development is a critical factor in the
successful operation of the Company's business. The competition for talented
professional personnel, such as therapists and QMRPs, is intense. The Company
utilizes a standard professional service agreement for provison of services by
certain professional personnel, which is generally terminable on 30 or 60 day
notice. The demands of providing the requisite quality of service to persons
with special needs contribute to a high turnover rate of direct service staff.
Consequently, a high priority is placed on recruiting, training and retaining
competent and caring personnel.
GOVERNMENT REGULATION AND REIMBURSEMENT
The operations of the Company are subject to compliance with various
federal, state and local statutes and regulations. Compliance with state
licensing requirements is a prerequisite for participation in
government-sponsored health care assistance programs, such as Medicaid. The
following sets forth in greater detail certain regulatory considerations
applicable to the Company:
Funding Levels. Federal and state funding for the Company's disabilities
services business is subject to statutory and regulatory changes, administrative
rulings, interpretations of policy, intermediary determinations and governmental
funding restrictions, all of which may materially increase or decrease program
reimbursement. Congress has historically attempted to curb the growth of federal
funding of such programs, including limitations on payments to facilities under
the Medicaid program. These efforts have intensified recently. Federal law
requires Medicaid programs to pay rates that are reasonable and adequate to meet
the costs which must be incurred by an efficient provider in order to provide
services conforming with applicable laws, regulations and quality and safety
standards. Although states in general have historically increased rates to
compensate for inflationary factors, some have curtailed funding due to state
budget deficiencies or for other reasons. In several such instances providers,
acting through their state health care trade associations, have been able to
negotiate or employ legal action in order to reach a compromise settlement.
Revenues in the future may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed or under
consideration in states where the Company operates.
Reimbursement Requirements. To qualify for reimbursement under Medicaid
programs, facilities and programs are subject to various requirements of
participation and other requirements imposed by federal and state authorities.
In order to maintain a Medicaid or state contract, certain statutory and
regulatory requirements must be met. These participation requirements relate to
client rights, quality of services, physical plant and administration. Long-term
providers, like the Company, are subject to periodic unannounced inspection by
state authorities, often under contract with the appropriate federal agency, to
assure compliance with the requirements of participation in the Medicaid or
state program.
Licensure. In addition to the requirements to be met by the Company for
participation in the Medicaid program, the Company's facilities and programs are
usually subject to annual licensing and other regulatory requirements of state
and local authorities. These requirements relate to the condition of the
facilities, the quality and adequacy of personnel and the quality of services.
State licensing and other regulatory requirements vary from jurisdiction to
jurisdiction and are subject to change.
Regulatory Enforcement. From time to time, the Company receives notices
from regulatory inspectors that in their opinion there are deficiencies for
failure to comply with various regulatory requirements. The Company reviews such
notices and takes corrective action as appropriate. In most cases, the Company
and the reviewing agency agree upon the steps to be taken to bring the facility
or program into compliance with regulatory requirements. Serious deficiencies
can result in decertification or delicensure actions by the Health Care
Financing Administration or state regulatory agencies.
Restrictions on Acquisitions and Additions. All states in which the
Company currently operates have adopted laws or regulations which generally
require that a state agency approve the Company as a provider and many require a
determination that a need exists prior to the addition of beds or services.
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<PAGE> 40
Cross Disqualifications and Delicensure. In certain circumstances,
conviction of abusive or fraudulent behavior with respect to one facility or
program may subject other facilities and programs under common control or
ownership to disqualification from participation in the Medicaid program.
Executive Order 12549 prohibits any corporation or facility from participating
in federal contracts if it or its principals (including but not limited to
officers, directors, owners and key employees) have been debarred, suspended or
declared ineligible, or have been voluntarily excluded from participating in
federal contracts. In addition, some state regulations provide that all
facilities licensed with a state under common ownership or control are subject
to delicensure if any one or more of such facilities are delicensed.
Regulation of Certain Transactions. The Social Security Act, as amended by
the Health Insurance Portability and Accountability Act of 1996 (the "Health
Insurance Act"), provides for the mandatory exclusion of providers and related
persons from participation in the Medicaid program if the individual or entity
has been convicted of a criminal offense related to the delivery of an item or
service under the Medicaid program or relating to neglect or abuse of residents.
Further, individuals or entities may be, but are not required to be, excluded
from the Medicaid program under certain circumstances including, but not limited
to, the following: convictions relating to fraud; obstruction of an
investigation of a controlled substance; license revocation or suspension;
exclusion or suspension from a state or federal health care program; filing
claims for excessive charges or unnecessary services or failure to furnish
medically necessary services; or ownership or control by an individual who has
been excluded from the Medicaid program, against whom a civil monetary penalty
related to the Medicaid program has been assessed, or who has been convicted of
a crime described in this paragraph. The illegal remuneration provisions of the
Social Security Act make it a felony to solicit, receive, offer to pay or pay
any kickback, bribe or rebate in return for referring a resident for any item or
service, or in return for purchasing, leasing or ordering any good, service or
item, for which payment may be made under the Medicaid program. Other provisions
in the Health Insurance Act proscribe false statements in billing and in meeting
reporting requirements and in representations made with respect to the
conditions or operations of facilities. A violation of the illegal remuneration
statute is a felony and may result in the imposition of criminal penalties,
including imprisonment for up to five years and/or a fine of up to $25,000.
Further, a civil action to exclude a provider from the Medicaid program could
occur. There are also other civil and criminal statutes applicable to the
industry, such as those governing false billings and anti-supplementation
restrictions and the new health care offenses contained in the Health Insurance
Act, such as health care fraud, theft or embezzlement, false statements and
obstruction of criminal investigation of health care offenses. Criminal
sanctions for these new health care criminal offenses can be severe. Sanctions
for the newly-enacted health care fraud offense, for example, include
imprisonment for up to 20 years. The agencies administering the Medicaid program
have increased their criminal and civil enforcement activity in the prevention
of program fraud and abuse, including the payment of illegal remuneration.
Environmental Laws. Certain federal and state laws govern the handling and
disposal of medical, infectious and hazardous waste. Failure to comply with
those laws or the regulations promulgated thereunder could subject an entity
covered by these laws to fines, criminal penalties and other enforcement
actions.
OSHA. Federal regulations promulgated by the Occupational Safety and
Health Administration impose additional requirements on the Company including
those protecting employees from exposure to elements such as bloodborne
pathogens. The Company cannot predict the frequency of compliance, monitoring or
enforcement actions to which it may be subject as regulations are implemented
and there can be no assurance that such regulations will not adversely affect
the operations of the Company.
INSURANCE
The Company maintains professional malpractice and general liability
insurance on professionals and other staff employed in each of its locations in
addition to coverage for the customary risks inherent in the operation of
business in general. While the Company believes its insurance policies to be
adequate in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or at
a reasonable cost.
39
<PAGE> 41
EMPLOYEES
As of February 28, 1997, the Company employed 8,218 employees, including
7,308 in its Division for Persons with Disabilities, 762 in its Division for
Youth Services, and 148 in its corporate offices. As of that date, the Company
was not subject to collective bargaining agreements with any of its employees.
PROPERTIES
As of December 31, 1996, the Company owned 153 properties and operated
facilities and programs at 268 leased properties. All other facilities and
programs are operated under management contracts.
LEGAL PROCEEDINGS
The Company is a party to legal and/or administrative proceedings involving
state program administrators and others, that, in the event of unfavorable
outcomes, may affect revenues and period-to-period comparisons. In Indiana, in
July 1995, the Company and other providers were notified of reimbursement rates
issued retroactive to July 1, 1994 which were lower than the Company and certain
other providers projected based on a settlement that had been reached with the
State concerning the rate-setting methodology for larger facilities. The Company
and another provider filed a lawsuit and an agreement was reached with the State
under which the implementation of the new rate structure was delayed until March
1, 1996, at which time the State prospectively implemented the new rates. A
preliminary injunction was denied and testimony in the trial on the merits was
concluded in August 1996. There has been no decision in the case. If the State
is ultimately successful on all issues it could result in a reduction of net
revenues to the Company of approximately $1.3 million for the thirty months
ended December 31, 1996. Any reduction would be recorded against the Company's
allowance for contractual adjustments and/or net revenues, as appropriate, in
the period in which the issues are resolved. Based on the outcome of the
preliminary injunction proceedings, the Company is unable to predict whether it
will prevail on the merits of all issues in the litigation but the opinion of
its legal counsel in the case is that there is a significant likelihood that the
Company will ultimately prevail on the merits of the principal issues involved,
in which case the Company believes that the ultimate net effect on the results
of its operations, cash flow or financial condition will not be material.
In January 1995, the Company filed an action for declaratory judgment
against the landlord of four of the Company's large facilities in Indiana to
enforce a provision in the leases for such facilities to the effect that the
parties would renegotiate the terms of the leases if any change in the Medicaid
program becomes effective or is implemented such that reimbursement is reduced
to the extent that the economic feasibility of the lease is materially and
adversely affected. The parties have agreed to suspend the litigation pending
the outcome of the Indiana rate litigation, and the Company is unable at this
time to determine whether it will ultimately prevail in the matter. The Company
subleased three other large facilities in Indiana from the same landlord. The
sublease, which did not include a renegotiation provision, expired on July 31,
1996. The parties entered into a new nine-month lease expiring on April 30,
1997, on essentially the same terms and conditions as the previous sublease,
which has recently been extended until December 31, 1997. These three facilities
account for approximately $6.0 million in annual revenues. As a result of these
matters, the Company may be compelled or may elect ultimately to reduce certain
of its facility-based operations in Indiana.
The Kentucky Department of Medicaid Services ("Kentucky") has notified the
provider of record of a larger facility managed by the Company of certain
adjustments to the facility cost report for the 1991 fiscal year as a result of
the completion of its audit for that year. Kentucky has also audited the
facility for fiscal years 1992 through 1995, but has not yet issued its audit
report with respect to these years. The Company and the provider believe that
Kentucky does not have the legal and factual basis for these adjustments and
thus, since receipt of the notification in August 1995, have engaged in various
administrative and other efforts with Kentucky to have the proposed adjustments
withdrawn. To date, the parties have been unable to resolve the matter. The
provider has filed an action for declaratory judgment and injunctive relief
against Kentucky in which it seeks a judicial determination concerning the
adjustments. The provider and the Company, in the opinion of their respective
counsel for this matter, believe that there is a significant likelihood that the
provider will ultimately prevail on the merits of its argument that the improper
legal standards have been applied in the
40
<PAGE> 42
adjustments. The Company believes that upon application of the appropriate legal
standards, the ultimate net effect of the adjustments on the results of its
operations, cash flow or financial condition will not be material. However, if
Kentucky ultimately prevails in the litigation and requires similar adjustments
for the subsequent years under audit (fiscal years 1992 through 1995), up to
$3.4 million of the provider's costs in the aggregate could be disallowed. The
Company is unable at this time to determine the effect on the Company if
Kentucky should prevail.
In May 1996, legislation was passed in Florida that would significantly
reduce rates effective September 1, 1996 for the operations that the Company
manages in that state. Both individual consumers and a trade association filed
motions in pre-existing lawsuits to stop implementation of the new rates. A
preliminary injunction has been granted in one of the actions which requires the
State to continue full funding of certain intermediate care facilities and
services for persons with developmental disabilities pending approval of an
alternate plan by the Health Care Financing Administration. In Tennessee, new
regulations were scheduled to take effect October 1, 1996, which would reduce
certain allowable costs to providers which could affect the management fees of
the Company under its management contracts with not-for-profit providers for
group homes. These regulations have been withdrawn and regulations have been
proposed, but not yet enacted, that are acceptable to the providers and
managers. The Company is unable, at this time, to determine the extent of the
effect any such regulations will have on revenues and profit contributions.
In March 1997, certain small providers brought an action against the Texas
Department of Mental Health and Mental Retardation seeking to enjoin the
implementation of a provision (not applicable to the Company) of a new
reimbursement system implemented in Texas effective January 1, 1997. The new
reimbursement system was the result of a settlement of litigation brought by a
provider association challenging prior rate structures. The new reimbursement
system has favorably affected the Company's first quarter results, and Texas has
been paying under the new rates during the first quarter notwithstanding the
pendency of the litigation. The judge initially granted a temporary restraining
order, but such order did not take effect because the plaintiffs did not post
the necessary bond. The plaintiffs continue to seek a temporary injunction
restraining implementation of the challenged provision, and a further hearing on
the temporary injunction has been scheduled for April 30, 1997. While management
of the Company, after consultation with counsel participating in the litigation
on behalf of the provider association, believes that it is not likely that the
ultimate effect of the litigation (and any administrative actions that may
follow) will result in the new Texas reimbursement system being set aside, an
adverse ruling in the proceedings could affect period to period comparisons.
In addition, the Company is a party to various other legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such lawsuits are without merit. Further, such claims are generally covered
by insurance. The Company does not believe the results of such litigation will
have a material adverse effect on its consolidated financial condition or
results of operations.
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<PAGE> 43
MANAGEMENT
The following table sets forth the executive officers, key employees and
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
James R. Fornear............................. 66 Chairman of the Board of Directors
Ronald G. Geary.............................. 49 President, Chief Executive Officer and Director
E. Halsey Sandford........................... 64 Executive Vice President and Director
Spiro B. Mitsos.............................. 66 Secretary, Treasurer and Director
Jeffrey M. Cross............................. 43 Executive Vice President, Operations, Division
for Persons with Disabilities
Seymour L. Bryson............................ 59 Director
W. Bruce Lunsford............................ 49 Director
OTHER KEY EMPLOYEES
R. Dan Brice................................. 50 Acting Executive Vice President, Finance and
Administration
Donald B. Rice............................... 45 President, Youthtrack, Inc.
Stanley M. Goldstein......................... 44 President, Premier Rehabilitation Centers
Sergei N. Davidenkoff........................ 51 Vice President, Job Corps
Ralph G. Gronefeld........................... 38 Vice President, Alternative Youth Services
David S. Waskey.............................. 45 General Counsel
Diana L. Fornear............................. 45 Vice President, Human Resources
</TABLE>
James R. Fornear, the founder of the Company, has served as Chairman of the
Board of the Company since 1984. Mr. Fornear was the President of the Company
from 1974 to 1990 and was Chief Executive Officer of the Company from 1989 to
1993. Mr. Fornear is the father of Diana L. Fornear.
Ronald G. Geary, an attorney and certified public accountant, has served as
a director and President of the Company since February 1990 and as Chief
Executive Officer of the Company since 1993. Prior to being named Chief
Executive Officer, Mr. Geary was Chief Operating Officer of the Company from
1990 to 1993. From 1989 to 1990, he was Assistant Secretary of State of the
Commonwealth of Kentucky.
E. Halsey Sandford has been a director of the Company since 1984 and has
been Executive Vice President since 1992. From 1965 to 1992, Mr. Sandford was in
charge of corporate finance for J.J.B. Hilliard, W. L. Lyons, Inc., a New York
Stock Exchange member firm based in Louisville, Kentucky engaged in the
investments and stock brokerage business and from 1972 to 1992 served as a
Director and Senior Vice President.
Spiro B. Mitsos, Ph.D., a psychologist, has been Secretary and Treasurer of
the Company since 1984 and a director of the Company since 1974. Dr. Mitsos
provides psychological consultation services to facilities operated by the
Company. Dr. Mitsos has served as an adjunct faculty member at Southern Illinois
University, the University of Kentucky and the University of Evansville. Dr.
Mitsos is a past President of the Indiana Planning and Advisory Board for
Developmental Disabilities.
Jeffrey M. Cross has been employed by the Company since 1984, with the
exception of the period between 1987 and 1989. In 1991, he was named vice
president for operations in Kentucky and Indiana. Mr. Cross currently serves as
Executive Vice President, Operations for the Division for Persons with
Disabilities, a position he has held since 1994.
Seymour L. Bryson, Ph.D. has served as a director of the Company since
1989. Since 1984, Dr. Bryson has held several administrative positions with
Southern Illinois University at Carbondale, including professor in the
University's Rehabilitation Institute, Dean of the College of Human Resources,
Special Assistant to the Chancellor, Executive Assistant to the President and
Executive Assistant to the Chancellor.
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<PAGE> 44
W. Bruce Lunsford, an attorney and certified public accountant, has served
as a director of the Company since 1992. Since 1985, Mr. Lunsford has served as
Chairman of the Board, President and Chief Executive Officer of Vencor,
Incorporated, a diversified healthcare provider primarily focusing on the needs
of the elderly. Mr. Lunsford is a director of National City Corporation, a bank
holding company, and Churchill Downs, Incorporated.
R. Dan Brice, a certified public accountant, has been employed by the
Company since 1990 and has served as Controller of the Division for Persons with
Disabilities and as Director of Accounting Services. Since November 1996, he has
served as Acting Executive Vice President of Finance and Administration. In
February 1997, Mr. Brice was also named Vice President of Corporate Finance,
Administration and Division of Youth Services Accounting.
Donald B. Rice has served as President and Chief Executive Officer of
Youthtrack since 1995. From 1990 to 1995, Mr. Rice served as a management and
financial consultant to public and private sector clients, with particular
emphasis on clients serving persons with developmental disabilities. From 1977
to 1990, Mr. Rice served in various positions in the Colorado state government,
most recently as Associate Director of the Colorado Department of Institutions.
Stanley M. Goldstein founded Premier Rehabilitation Centers, a provider of
services to persons with ABI, in 1989 and joined the Company in January 1997
following the Company's acquisition of Premier. For more than 10 years prior to
1989, Mr. Goldstein held various management positions in the health care field.
Sergei N. Davidenkoff began working in the Company's Division for Youth
Services in 1984 and was promoted to his current position as Vice President, Job
Corps in 1991. Mr. Davidenkoff has over 25 years of experience in Job Corps
center operations.
Ralph G. Gronefeld, Jr., a certified public accountant, was named Vice
President, Alternative Youth Services in January 1997. From July 1995 through
March 1996, he served as interim senior administrator for the Company's west
region in its Division for Persons with Disabilities and, in December 1995, was
elected to the board of directors of Youthtrack. From November 1990 until June
1995, Mr. Gronefeld served as President of Total Color Corporation, a graphic
arts firm in Louisville.
David S. Waskey joined the Company as General Counsel in May 1992. Prior to
that time, he practiced law with the Louisville, Kentucky office of Alagia, Day,
Trautwein & Smith. Before beginning the practice of law in 1984, Mr. Waskey was
a certified public accountant in public practice.
Diana L. Fornear, Vice President of Human Resources of the Company since
January 1992, has served the Company in a number of capacities since 1979
including Director of Employee Benefits and Risk Management and Chief Personnel
Officer. Ms. Fornear is the daughter of James R. Fornear.
43
<PAGE> 45
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of March 15, 1997, and as adjusted to
reflect the sale of the shares of Common Stock in this offering, certain
information with respect to beneficial ownership of the Common Stock by (i) each
person or entity known by the Company to own beneficially more than 5% of the
Common Stock outstanding, (ii) each director of the Company, (iii) all executive
officers and directors of the Company as a group and (iv) the Selling
Shareholders. Except as indicated by footnote, the persons or entities named in
the table below have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
--------------------- ---------------------
NUMBER OF NUMBER OF SHARES NUMBER OF
NAME SHARES PERCENT BEING OFFERED SHARES PERCENT
---- ---------- -------- ---------------- ---------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS, AND
5% BENEFICIAL OWNERS
James R. Fornear(1)(2).................. 1,724,932 17.1% 225,000 1,499,932 12.7%
Margaret H. Fornear(1)(2)............... 1,354,106 13.5 225,000 1,129,106 9.6
Ronald G. Geary(2)(3)................... 868,329 8.4 65,000 803,329 6.6
E. Halsey Sandford(4)................... 272,050 2.6 100,092 171,958 1.5
Spiro B. Mitsos(5)...................... 388,170 3.8 50,000 338,170 2.8
Jeffrey M. Cross(6)..................... 22,150 * -- 22,150 *
Seymour L. Bryson(7).................... 12,375 * -- 12,375 *
W. Bruce Lunsford(8).................... 21,750 * -- 21,750 *
OTHER SELLING SHAREHOLDERS
Andrew Eckman(9)........................ 82,353 * 10,000 72,353 *
David H. Fornear........................ 111,715 1.1 19,250 92,465 *
Diana L. Fornear(10).................... 145,514 1.4 5,000 140,514 1.2
Stanley M. Goldstein(11)................ 268,036 2.7 227,722 40,314 *
Joseph Parris(12)....................... 262,500 2.6 30,000 232,500 2.0
Estella J. Wesley....................... 97,133 1.0 10,000 87,133 *
Walter A. Winshall(13).................. 141,214 1.4 123,936 17,278 *
All executive officers and directors as
a group (7 persons)(14)............... 3,309,756 32.5% 440,092 2,869,664 24.4%
</TABLE>
- ---------------
* Less than 1%.
(1) As husband and wife, James R. Fornear and Margaret H. Fornear each may be
deemed to be the beneficial owner of the shares of Common Stock owned by
the other pursuant to the applicable rules of the Commission. Such
beneficial ownership is disclaimed by each of Mr. Fornear and Mrs. Fornear.
Does not include 883,132 shares to be owned beneficially by the Fornears'
adult children after the offering.
(2) The address of such person is c/o Res-Care, Inc., 10140 Linn Station Road,
Louisville, Kentucky 40223.
(3) Includes 300,297 shares subject to options that are presently exercisable,
750 shares held by a family member and 1,232 shares held as of September
30, 1996 for the benefit of Mr. Geary by the Retirement Savings Plan over
which Mr. Geary has no voting power but does have investment power.
(4) Includes 226,350 shares subject to options that are presently exercisable.
Does not include 68,000 shares held in trust for the benefit of Mrs.
Sandford and their children for which Mrs. Sandford is trustee and over
which Mr. Sandford has no voting or investment power and as to which he
disclaims beneficial ownership.
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<PAGE> 46
(5) Represents shares owned jointly by Dr. Mitsos and Mrs. Mitsos with respect
to which each have shared voting and investment power.
(6) Represents shares owned jointly by Mr. Cross and Mrs. Cross with respect to
which each has shared voting and investment power. Includes 21,550 shares
subject to options that are presently exercisable.
(7) Includes 6,750 shares subject to options that are presently exercisable.
(8) Includes 6,750 shares subject to options that are presently exercisable.
(9) Includes 2,445 shares held in trust for minor children.
(10) Includes 51 shares held in the Company's employee stock purchase plan, 898
shares held for the benefit of Ms. Fornear by the Retirement Savings Plan
over which Ms. Fornear has no voting power but does have investment power,
and 15,720 shares subject to options that are presently exercisable.
(11) Includes 40,314 shares held in escrow on behalf of Mr. Goldstein and over
which he has investment and voting power.
(12) Includes 40,000 shares held jointly with spouse.
(13) Includes 17,278 shares held in escrow on behalf of Mr. Winshall and over
which he has investment and voting power.
(14) Includes 561,697 shares subject to options that are presently exercisable.
45
<PAGE> 47
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co., Montgomery Securities and Equitable Securities Corporation as
representatives of the several underwriters (the "Representatives") have agreed,
severally, to purchase from the Company and the Selling Shareholders, the number
of shares of Common Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ---------
<S> <C>
J.C. Bradford & Co. ........................................
Montgomery Securities.......................................
Equitable Securities Corporation............................
---------
Total............................................. 2,591,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all shares of Common Stock
offered hereby if any of such shares are purchased.
The Company and the Selling Shareholders have been advised that the
Underwriters propose initially to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow and such dealers may reallow a concession
not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed.
The offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
aggregate of 388,650 additional shares of Common Stock to cover over-allotments.
To the extent the Underwriters exercise this option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the above table bears to the total and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby. If
purchased, the Underwriters will sell such additional shares on the same terms
as those on which the 2,591,000 shares are being offered.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in the offering in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with the
Offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
46
<PAGE> 48
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with the Offering.
The Company, its executive officers and directors and the Selling
Shareholders have agreed that they will not, without the prior written consent
of J.C. Bradford & Co., issue, sell, transfer, assign or otherwise dispose of
any shares of the Common Stock or options, warrants, or rights to acquire Common
Stock owned by them prior to 90 days from the date of this Prospectus.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and controlling persons, if any,
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments which the Underwriters or any such
controlling persons may be required to make in respect thereof.
J.C. Bradford & Co. and Equitable Securities Corporation have, from time to
time, provided investment banking and financial advisory services for the
Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and Selling Shareholders by Reed Weitkamp Schell Cox &
Vice, Louisville, Kentucky. Certain legal matters in connection with this
offering will be passed upon for the Company by Piper & Marbury L.L.P.,
Baltimore, Maryland and the Underwriters by Bass, Berry & Sims PLC, Nashville,
Tennessee.
EXPERTS
The supplemental consolidated financial statements and schedule of
Res-Care, Inc. and its subsidiaries as of December 31, 1995 and 1996, and for
each of the years in the three-year period ended December 31, 1996, have been
included herein and in the registration statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements and schedule of Res-Care, Inc. and
its subsidiaries as of December 31, 1995 and 1996, and for each of the years in
the three-year period ended December 31, 1996, have been incorporated by
reference herein and in the registration statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission, including the reports and
other information incorporated by reference into this Prospectus, can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at rates prescribed by the Commission or from the Commission's Internet
web site at http://www.sec.gov. The Common Stock of the Company is quoted on the
Nasdaq National Market. Reports, proxy statements and other information
concerning the Company can be inspected at the offices of The Nasdaq Stock
Market, 1735 K Street, Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus constitutes a part of the Registration Statement and does not
contain all of the information set forth in the Registration Statement and the
exhibits
47
<PAGE> 49
and schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. Statements contained in this
Prospectus as to any contracts, agreements or other documents filed as an
exhibit to, or incorporated by reference in, the Registration Statement are
qualified in all respects to the copy of such contract, agreement or other
document filed as an exhibit or incorporated by reference in the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to the Registration Statement,
including the exhibits and schedules thereto. The Registration Statement,
together with exhibits and schedules thereto, may be inspected, without charge,
at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, and also at the regional offices of the Commission listed above or
through the Commission's Internet web site. Copies of such material may also be
obtained from the Commission upon the payment of prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-20372) pursuant to the 1934 Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
2. The Company's Current Report on Form 8-K dated March 19, 1997;
3. The Registration Statement on Form 8-A with respect to Res-Care Common
Stock dated June 25, 1992; and
4. All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the 1934 Act subsequent to the date of filing of the
Registration Statement of which this Prospectus is a part and prior to the
termination of the offering made hereby.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of any
or all of the documents which have been incorporated herein by reference, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be directed to Res-Care, Inc., 10140 Linn Station Road, Louisville,
Kentucky 40223, Attention: R. Dan Brice, telephone: (502) 394-2100.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus 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 Prospectus.
48
<PAGE> 50
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Supplemental Consolidated Balance Sheets at December 31,
1995 and 1996............................................. F-3
Supplemental Consolidated Statements of Income for the Years
Ended December 31, 1994, 1995 and 1996.................... F-4
Supplemental Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1994, 1995 and 1996...... F-5
Supplemental Consolidated Statements of Cash Flows for the
Years Ended December 31, 1994, 1995 and 1996.............. F-6
Notes to Supplemental Consolidated Financial Statements..... F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Res-Care, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Res-Care, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related supplemental consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Res-Care, Inc. and the partnership interests in Premier
Rehabilitation Centers effective January 1, 1997, which has been accounted for
as a pooling-of-interests as described in notes 1 and 13 to the supplemental
consolidated financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling-of-interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated financial
statements of the Company after annual financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Res-Care, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 28, 1997
F-2
<PAGE> 52
RES-CARE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1996
ASSETS ------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,461 $ 7,932
Accounts and notes receivable, less allowance for
contractual adjustments of $1,911 in 1995 and $1,945 in
1996 (note 5)........................................... 26,288 33,996
Inventories............................................... 468 656
Deferred income taxes (note 7)............................ 2,313 2,498
Prepaid expenses.......................................... 1,217 1,961
------- --------
Total current assets............................... 37,747 47,043
------- --------
Property and equipment, at cost (note 10):
Land and land improvements................................ 1,677 4,556
Leasehold improvements.................................... 2,444 2,932
Buildings................................................. 30,056 35,900
Furniture and equipment................................... 5,463 7,761
------- --------
39,640 51,149
Less accumulated depreciation and amortization............ (5,164) (7,568)
------- --------
Net property and equipment......................... 34,476 43,581
------- --------
Excess of acquisition cost over net assets acquired, less
accumulated amortization of $216 in 1995 and $633 in 1996
(note 10)................................................. 8,521 14,558
Other assets (note 4)....................................... 6,696 10,130
------- --------
$87,440 $115,312
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5)................ $ 458 $ 369
Trade accounts payable.................................... 4,556 5,241
Accrued expenses (note 6)................................. 13,578 16,059
Accrued income taxes (note 7)............................. 2,032 2,021
------- --------
Total current liabilities.......................... 20,624 23,690
------- --------
Long-term liabilities....................................... 429 1,421
Long-term debt (note 5)..................................... 18,644 30,672
Deferred income taxes (note 7).............................. 637 1,361
------- --------
Total liabilities.................................. 40,334 57,144
------- --------
Commitments and contingencies (note 11).....................
Minority interest in equity of consolidated subsidiary...... 37 73
Shareholders' equity (notes 1 and 9):
Preferred stock, no par value, authorized 1,000,000
shares, no shares issued or outstanding................. -- --
Common stock, no par value, authorized 20,000,000 shares,
issued 13,837,500 shares................................ 15,535 15,535
Additional paid-in capital................................ 2,297 4,035
Retained earnings......................................... 33,247 42,314
------- --------
51,079 61,884
Less cost of common shares in treasury (4,026,522 shares
in 1995 and 3,803,822 shares in 1996)................... (4,010) (3,789)
------- --------
Total shareholders' equity......................... 47,069 58,095
------- --------
$87,440 $115,312
======= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-3
<PAGE> 53
RES-CARE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues (note 8)....................................... $142,958 $177,428 $224,265
Facility and program expenses:
Wages, salaries and benefits.............................. 77,098 99,035 125,664
Purchased services........................................ 7,219 8,120 9,274
Supplies and other expenses............................... 42,673 49,592 59,940
-------- -------- --------
126,990 156,747 194,878
Operating expenses:
Corporate general and administrative...................... 6,085 7,161 9,813
Depreciation and amortization............................. 1,443 2,196 3,683
Compensation -- stock options (note 9).................... 27 27 4
-------- -------- --------
Total operating expenses.......................... 7,555 9,384 13,500
-------- -------- --------
Total facility, program and operating expenses.... 134,545 166,131 208,378
-------- -------- --------
Operating income.......................................... 8,413 11,297 15,887
Other expenses (income):
Interest expense (note 5)................................. 164 630 1,351
Interest income........................................... (752) (851) (458)
Loss (gain) from sale of assets (note 2).................. 14 (489) (4)
-------- -------- --------
Total other expenses (income), net................ (574) (710) 889
-------- -------- --------
Minority interest in (income) loss of consolidated
subsidiary................................................ -- 3 (37)
Income from continuing operations before income taxes....... 8,987 12,010 14,961
Income taxes (note 7)....................................... 3,862 4,699 5,518
-------- -------- --------
Income from continuing operations........................... 5,125 7,311 9,443
Discontinued operations (note 3):
Income from operation of unconsolidated affiliate sold,
net of applicable income taxes of $92 in 1994 and $37
in 1995................................................ 1,054 428 --
Gain from sale of unconsolidated affiliate, net of
applicable income taxes of $6,270...................... -- 8,819 --
-------- -------- --------
Net income.................................................. $ 6,179 $ 16,558 $ 9,443
======== ======== ========
Income per share data:
Income from continuing operations per share............... $ 0.51 $ 0.73 $ 0.91
Income from discontinued operations per share............. 0.10 0.04 --
Gain from sale of discontinued operations per share....... -- 0.87 --
-------- -------- --------
Net income per share........................................ $ 0.61 $ 1.64 $ 0.91
======== ======== ========
Pro forma income data (unaudited) (note 7):
Net income as reported.................................... $ 6,179 $ 16,558 $ 9,443
Pro forma adjustment to provision for income taxes........ (18) (56) (292)
-------- -------- --------
Pro forma net income...................................... $ 6,161 $ 16,502 $ 9,151
======== ======== ========
Pro forma net income per share............................ $ 0.61 $ 1.63 $ 0.88
======== ======== ========
Weighted average shares used in per share calculation..... 10,084 10,093 10,432
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE> 54
RES-CARE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
---------------------------------------------------------------------
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------- PAID-IN RETAINED ----------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------- ---------- -------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993....... 13,838 $15,535 $2,052 $ 9,873 4,469 $(4,450) $23,010
Constructive retirement of treasury
stock to be used in pooling
transaction...................... (409) (458) 51 -- (409) 407 --
Shares issued to effect Premier
pooling-of-interests (notes 1 and
13).............................. 409 458 (70) 541 -- -- 929
Net income......................... -- -- -- 6,179 -- -- 6,179
Exercise of stock options.......... -- -- 56 -- (4) 5 61
Contributions by Premier, net...... -- -- -- 100 -- -- 100
------ ------- ------ ------- ----- ------- -------
Balance at December 31, 1994....... 13,838 15,535 2,089 16,693 4,056 (4,038) 30,279
Net income......................... -- -- -- 16,558 -- -- 16,558
Exercise of stock options.......... -- -- 208 -- (29) 28 236
Distributions by Premier, net...... -- -- -- (4) -- -- (4)
------ ------- ------ ------- ----- ------- -------
Balance at December 31, 1995....... 13,838 15,535 2,297 33,247 4,027 (4,010) 47,069
Net income......................... -- -- -- 9,443 -- -- 9,443
Exercise of stock options.......... -- -- 1,738 -- (223) 221 1,959
Distributions by Premier, net...... -- -- -- (376) -- -- (376)
------ ------- ------ ------- ----- ------- -------
Balance at December 31, 1996....... 13,838 $15,535 $4,035 $42,314 3,804 $(3,789) $58,095
====== ======= ====== ======= ===== ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-5
<PAGE> 55
RES-CARE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,179 $ 16,558 $ 9,443
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,443 2,196 3,683
Provision for contractual adjustments................... 738 575 800
Deferred income taxes -- net............................ (814) (672) 539
Provision for compensation -- stock options............. 27 27 4
Income from operation of unconsolidated affiliate sold,
net of applicable income tax expense................... (1,054) (428) --
Gain from sale of unconsolidated affiliate, net of
applicable income tax expense of $6,270................ -- (8,819) --
Loss (gain) from sale of assets......................... 14 (489) (4)
Income (loss) applicable to minority interest of
consolidated subsidiary................................ -- (3) 37
Change in operating assets and liabilities:
Increase in accounts and notes receivable............... (1,453) (9,866) (8,419)
(Increase) decrease in inventories...................... (41) 5 (157)
(Increase) decrease in prepaid expenses................. 11 (341) (645)
Increase in other assets................................ (127) (537) (102)
Increase (decrease) in trade accounts payable........... (671) 887 660
Increase in accrued expenses............................ 32 3,343 2,110
Increase (decrease) in accrued income taxes............. (58) 1,736 488
Decrease in long-term liabilities....................... -- (87) (325)
------- -------- --------
Net cash provided by operating activities........... 4,226 4,085 8,112
------- -------- --------
Cash flows from investing activities:
Decrease in advances to unconsolidated affiliate sold..... 136 586 --
Dividend from unconsolidated affiliate sold............... -- 3,024 --
Proceeds from sale of unconsolidated affiliate, net of
costs................................................... -- 16,425 --
Payment of income taxes associated with the gain from sale
of unconsolidated affiliate............................. -- (6,270) --
Redemption of short-term investment....................... 1,545 -- --
Proceeds from sale of assets.............................. 770 541 7
Purchase of property and equipment........................ (3,671) (12,531) (5,721)
Acquisitions of businesses................................ (2,475) (17,773) (12,718)
Purchase of mortgages..................................... (340) -- --
Payments received on notes from sale of assets............ 39 39 39
Deferred start-up costs................................... (213) (1,291) (2,269)
------- -------- --------
Net cash used in investing activities............... (4,209) (17,250) (20,662)
------- -------- --------
Cash flows from financing activities:
Net borrowings under notes payable to bank................ 1,038 10,172 12,006
Repayment of notes payable................................ (740) (113) (66)
Proceeds received from exercise of stock options.......... 34 209 1,457
Partnership contributions (distributions)................. 100 (4) (376)
Contribution from minority interest of consolidated
subsidiary.............................................. -- 40 --
------- -------- --------
Net cash provided by financing activities........... 432 10,304 13,021
------- -------- --------
Increase (decrease) in cash and cash equivalents............ 449 (2,861) 471
Cash and cash equivalents at beginning of year.............. 9,873 10,322 7,461
------- -------- --------
Cash and cash equivalents at end of year.................... $10,322 $ 7,461 $ 7,932
======= ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-6
<PAGE> 56
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the acquisition of the partnership interests in
Premier Rehabilitation Centers (Premier) as described in Note 13. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements reflect the consolidated financial position of Res-Care, Inc. and its
wholly owned and majority-owned subsidiaries (the Company) prior to the date of
consummation; however, they will become the historical consolidated financial
statements of the Company after annual financial statements covering the date of
consummation of the business combination are issued. Intercompany transactions
and balances are eliminated in consolidation.
The Company receives revenues primarily from the delivery of residential,
training, educational and support services to various populations with special
needs, including persons with mental retardation and other developmental
disabilities and at-risk troubled youths that have typically been provided by
state and local government agencies and not-for-profit organizations.
Net Revenues
Disabilities Services: Client services are provided at rates established
at the time services are rendered. Payments for services rendered to clients
covered by Medicaid are generally less than the Company's established rates.
Contractual allowances and adjustments are recorded to reflect the difference
between established rates and expected reimbursement. Retroactively calculated
contractual adjustments are accrued on an estimated basis in the periods the
related services are rendered and recorded as adjustments to revenues in future
periods when final settlements are determined.
Revenues are derived primarily from state government agencies under the
Medicaid reimbursement system and from management contracts with private
operators, generally not-for-profit providers, who contract with state
government agencies and are also reimbursed under the Medicaid system.
Revenues in the future may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed in states
where the Company operates. Some states are considering initiating managed care
plans for persons served in the Medicaid programs. At this time, the Company
cannot determine the impact of such changes, or the effect of any possible
Congressional actions.
Youth Services: Revenues include amounts reimbursable under cost
reimbursement contracts with the U.S. Department of Labor for operating Job
Corps centers. The contracts provide for payments based on per diem rates or
cost reimbursement formulas. Under government regulations, the Company is
reimbursed its allowable indirect costs for general and administrative expenses,
plus a predetermined fee. Final determination of amounts due under the contracts
is subject to audit and review by the U.S. Department of Labor.
Juvenile treatment revenues are derived primarily from state awarded
contracts and from state agencies under various reimbursement systems.
Reimbursement from state or locally awarded contracts varies per facility or
program, and is typically paid via fixed contract amounts, flat rates, or
cost-based rates.
For both disabilities services and youth services, expenses are subject to
examination by agencies administering the contracts and services. Management
believes that adequate provisions have been made for potential adjustments
arising from such examinations. Revenues and accounts receivable are recorded
net of estimated allowances and adjustments. Provision for bad debt expense, if
any, is provided for in the period the expense is determined by management.
F-7
<PAGE> 57
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives
of the assets, principally by the straight-line method. Estimated useful lives
for buildings are 20-40 years. Leasehold improvements are generally amortized
over the life of the respective leases. The useful lives of furniture and
equipment vary from three to seven years. The Company acts as custodian of
assets where the Company has contracts to operate facilities or programs owned
or leased by the U.S. Department of Labor, various states and private providers.
The excess of acquisition cost over net assets acquired and the cost of
licenses are amortized over 20-30 years using the straight-line method. The
Company assesses the recoverability of goodwill and other intangibles as events
or circumstances indicate a possible inability to recover their carrying amount.
Such evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company businesses. The analyses necessarily involve significant
management judgment to evaluate the capacity of an acquired business to perform
within projections.
Inventories
Inventories consist principally of supplies, food and linens and are stated
at the lower of cost (first-in, first-out method) or market.
Deferred Start-Up Costs
Deferred start-up costs are reimbursable under applicable state regulations
and include administrative and staff salaries, rent, professional fees,
insurance and other costs incurred during the period prior to operation of the
various facilities. These costs are amortized on a straight-line method over
periods ranging from five to seven years, consistent with applicable state
reimbursement regulations.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under such method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
Pro forma summarized information has been presented as an addendum to the
supplemental consolidated statements of income to include the impact of income
taxes as if Premier's partnership operations had been taxed as a corporation.
Per Share Data
The Company's Board of Directors authorized a three-for-two stock split to
be distributed on June 4, 1996, to shareholders of record on May 24, 1996. All
share and per share data included in this annual report have been restated to
reflect the stock split. Per share data is based on the weighted average number
of common shares and common share equivalents outstanding during the period.
F-8
<PAGE> 58
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Per share amounts have also been restated to reflect the issuance of
409,250 shares of common stock in the Premier acquisition.
Insurance
The Company maintains insurance in the form of commercial general liability
and commercial umbrella liability policies, which include malpractice insurance.
Management intends to maintain such coverages in the future and is of the
opinion that insurance coverages are adequate to cover any potential losses on
asserted claims. Management is unaware of any incidents which would ultimately
result in a loss in excess of the Company's insurance coverages. In addition,
the Company self-insures group health insurance for its employees. Such
self-insurance costs are accrued based upon the aggregate of the liability for
reported claims and an estimated liability for claims incurred but not reported.
The Company has an annual stop-loss limit of $125,000 for each covered
individual.
Workers' compensation policies covering all operations except for New York,
West Virginia, Ohio and Puerto Rico are covered under large deductible or
retrospective policies. The Company is responsible for paying the first $250,000
of each claim until the total of all claims exceeds the aggregate stop loss. The
insurance company is responsible for the claim in excess of the deductible and
for all claims in excess of the aggregate stop loss. At this time, no claim is
likely to exceed the deductible and all claims are not likely to exceed the
aggregate stop loss. Estimated future payments have been expensed.
Financial Instruments
Various methods and assumptions were used by the Company in estimating its
fair value disclosures for significant financial instruments. Fair values of
cash and cash equivalents, short-term investments, accounts and notes receivable
and trade accounts payable approximate their carrying amount because of the
short maturity of those investments. The fair value of short-term debt
approximates its carrying amount. The fair value of long-term debt is based on
the present value of the underlying cash flows discounted at the current
estimated borrowing rates available to the Company, and approximates its
carrying value as interest rates are variable.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain amounts in 1994 and 1995 have been reclassified to conform with the
1996 presentation.
2. CASH HELD IN ESCROW
On May 31, 1988, the Company sold the assets of a facility. In conjunction
with the sale, $541,000 of the sale proceeds were deferred to provide for
certain contingencies relating to periods prior to sale. In the fourth quarter
of 1995, funds held in escrow were returned and the Company recognized a
one-time credit of $507,000, net of expenses.
3. DISCONTINUED OPERATIONS
On May 31, 1995, the Company sold all of its stock in its unconsolidated
affiliate, Home Care Affiliates, Inc. ("HCAI"), to Housecall Medical Resources,
Inc. of Atlanta, Georgia, for $17.5 million in cash before
F-9
<PAGE> 59
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting for other costs of $2.0 million. The Company owned 68% of the stock
of HCAI, a provider of home nursing and related home health services, a business
separate from that of the Company. Due to certain provisions of the shareholder
agreement, HCAI was accounted for as an unconsolidated affiliate. The effect of
the sale of the Company's interest in HCAI has been reported in the accompanying
financial statements as a discontinued operation.
The Company provided managerial and administrative services to a division
of HCAI under an administrative management agreement. Administrative expenses
include personnel, management, accounting, risk management, benefits management,
purchasing and various other services, and amounted to approximately $838,000
for the year ended December 31, 1994. For the five months ended May 31, 1995,
the approximate amount was $433,000. The Company will continue to provide these
services under a separate administrative services agreement that expires May 31,
1999.
4. OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Long-term receivables and advances to managed facilities.... $ 963 $ 1,102
Deferred start-up costs, net of accumulated amortization.... 1,605 3,456
Licenses, net of accumulated amortization................... 3,104 3,013
Other assets................................................ 1,024 2,559
------ -------
$6,696 $10,130
====== =======
</TABLE>
5. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility with banks........................ $10,563 $26,196
Variable rate term loan payable to a bank with interest set
at "prime rate" or "Euro-rate" as of December 31, 1995.
Interest payments are due monthly in arrears with unpaid
principal due April 30, 1999. The rate was 7.1% as of
December 31, 1995. The note was paid in full during
1996...................................................... 3,500 --
Notes payable to Beverly Health and Rehabilitation Services,
with interest rates of 9.0% on the original $600 and 7.5%
on the remaining $3,000. These notes are secured by a deed
of trust for real estate. The $600 note is payable in
annual installments of $100, with final payment due April
30, 2001. The remaining notes are due at maturity on April
30, 2001.................................................. 3,600 3,500
Variable rate term loan, 9.75% at December 31, 1995, secured
by Premier accounts receivable, payable in monthly
installments. This note was refinanced and paid in full
during 1996............................................... 263 --
</TABLE>
F-10
<PAGE> 60
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term loan, 8.75%, secured by the business assets of Premier,
payable in monthly installments. This note, originally due
in 1999, was paid in full in January 1997................. -- 198
Mortgage notes, 9.5%, secured by real estate. These notes,
originally due in 2000 and 2019, were paid in full in
January 1997.............................................. 1,064 1,050
Other....................................................... 112 97
------- -------
19,102 31,041
Less current portion........................................ 458 369
------- -------
$18,644 $30,672
======= =======
</TABLE>
On December 23, 1996, the Company entered into a new revolving credit
facility with its banks: PNC Bank, Kentucky, Inc.; National City Bank of
Kentucky; SunTrust Bank, Nashville, N.A.; and Bank One, Kentucky, N.A. The
facility provides for a maximum borrowing of $65 million, including up to $10
million in letters of credit. It expires and is due at maturity in December
2001, subject to extension. The credit facility is secured by all accounts
receivable and general intangibles of the Company. As of December 31, 1996,
letters of credit in the amount of $3.5 million were outstanding. Under the
facility, the Company is provided a cash management system in which accounts are
replenished daily for checks clearing the previous day. Account replenishments
are applied against the outstanding borrowing.
As of December 31, 1996, uncleared checks in the amount of $3.1 million
were outstanding and are reflected in long-term debt. The agreement contains
certain covenants pertaining to net worth, current ratio, debt service coverage
ratios and ratio of total indebtedness to cash flow from operations. The Company
was in compliance with all covenants as of December 31, 1996. The interest rate
was 6.9% and 6.4% as of December 31, 1995, and 1996, respectively.
Interest expense was $164, $630, and $1,351 in the years 1994, 1995 and
1996, respectively. During 1995, $136 of interest paid was capitalized as part
of the purchase and renovation of a corporate office building.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 369
1998........................................................ 107
1999........................................................ 108
2000........................................................ 101
2001........................................................ 30,356
-------
$31,041
=======
</TABLE>
F-11
<PAGE> 61
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued trade payables...................................... $ 1,628 $ 2,064
Accrued wages and payroll taxes............................. 4,599 5,620
Accrued vacation............................................ 1,357 1,710
Accrued workers' compensation............................... 1,591 1,395
Other....................................................... 4,403 5,270
------- -------
$13,578 $16,059
======= =======
</TABLE>
7. INCOME TAXES
Total income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1994 1995 1996
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations....................... $3,862 $ 4,699 $5,518
Discontinued operations................................. 92 6,307 --
Shareholders' equity, for tax benefits related to stock
options............................................... -- -- (498)
------ ------- ------
$3,954 $11,006 $5,020
====== ======= ======
</TABLE>
Income taxes expense (benefit) attributable to income from continuing
operations is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................ $3,495 $4,017 $3,937
Deferred............................................... (619) (492) 317
------ ------ ------
Total federal.................................. 2,876 3,525 4,254
------ ------ ------
State and local:
Current................................................ 1,164 1,317 1,042
Deferred............................................... (178) (143) 222
------ ------ ------
Total state and local.......................... 986 1,174 1,264
------ ------ ------
Total income taxes............................. $3,862 $4,699 $5,518
====== ====== ======
</TABLE>
F-12
<PAGE> 62
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income taxes in relation to the amounts computed by
application of the U.S. Federal income tax rate of 34% to pretax income follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at the statutory rate............... $3,056 $4,083 $5,087
Increase (decrease) in income taxes:
Additional federal income tax............................ 184 -- --
State taxes, net of federal benefit...................... 636 732 857
Income taxed directly to Premier partners................ (14) (48) (256)
Other.................................................... -- (68) (170)
------ ------ ------
$3,862 $4,699 $5,518
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996, are presented below:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
contractual adjustments................................ $ 765 $ 774
Workers' compensation costs, principally due to accrual
for financial reporting purposes....................... 636 558
Health insurance costs, principally due to accrual for
financial reporting purposes........................... 157 --
Compensated absences, due to accrual for financial
reporting purposes..................................... 249 371
Other liabilities and reserves, deductible in different
periods for financial reporting and tax purposes....... 503 911
Other.................................................. 96 40
------ ------
Total gross deferred tax assets................... 2,406 2,654
------ ------
Deferred tax liabilities:
Accounts receivable, principally due to experience rated
revenue recognition for income tax reporting
purposes............................................... 64 74
Property and equipment, due to differences in
depreciation........................................... 115 104
Deferred start-up costs, due to capitalization for
financial reporting purposes........................... 384 969
Amortization of goodwill and licenses..................... 167 337
Other..................................................... -- 33
------ ------
Total gross deferred tax liabilities.............. 730 1,517
------ ------
Net deferred tax asset.................................... $1,676 $1,137
====== ======
Classified as follows:
Deferred income tax asset................................. $2,313 $2,498
Deferred income tax liability............................. 637 1,361
------ ------
Net deferred tax asset.................................... $1,676 $1,137
====== ======
</TABLE>
F-13
<PAGE> 63
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No valuation allowance for deferred tax assets was required as of December
31, 1994, 1995 or 1996, nor was there any change in the total valuation
allowance for the years ended December 31, 1995 and 1996. The realization of
deferred tax assets is dependent upon the Company generating future taxable
income when temporary differences become deductible. Based upon the historical
and projected levels of taxable income, management believes it is more likely
than not the Company will realize the benefits of the deductible differences.
See the pro forma information included as an addendum to the supplemental
consolidated statements of income for a summary of the impact of income taxes as
if Premier's partnership operations had been taxed as a corporation.
8. SEGMENT INFORMATION
The Company's continuing operations, all of which are in the United States
and Puerto Rico, are broken into two business segments as described in note 1.
Operating income is defined as net revenues less facility, program and
operating expenses. Identifiable assets are those assets used in the operations
of each business segment. The following table shows net revenues, operating
income and other financial information by business segment.
<TABLE>
<CAPTION>
FACILITY
AND DEPRECIATION
AS OF AND FOR THE YEARS NET PROGRAM OPERATING AND IDENTIFIABLE CAPITAL
ENDED DECEMBER 31: REVENUES EXPENSES INCOME AMORTIZATION ASSETS EXPENDITURES
----------------------- -------- -------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1994
Disabilities services....... $114,358 $101,446 $ 6,890 $1,176 $ 27,299 $2,587
Youth services.............. 28,600 25,544 1,523 -- 4,004 --
Corporate and other......... -- -- -- 267 19,065 1,084
-------- -------- ------- ------ -------- ------
Total............. 142,958 126,990 8,413 1,443 50,368 3,671
======== ======== ======= ====== ======== ======
1995
Disabilities services....... 146,062 129,218 9,163 1,530 58,987 4,345
Youth services.............. 31,366 27,529 2,134 -- 5,250 --
Corporate and other......... -- -- -- 666 23,203 8,186
-------- -------- ------- ------ -------- ------
Total............. 177,428 156,747 11,297 2,196 87,440 12,531
======== ======== ======= ====== ======== ======
1996
Disabilities services....... 181,280 156,657 13,546 2,573 81,818 4,842
Youth services.............. 42,985 38,221 2,341 104 8,843 170
Corporate and other......... -- -- -- 1,006 24,651 709
-------- -------- ------- ------ -------- ------
Total............. $224,265 $194,878 $15,887 $3,683 $115,312 $5,721
======== ======== ======= ====== ======== ======
</TABLE>
The Company accounts for contractual adjustments by charging them against
revenues, as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Disabilities services............................... $575 $575 $800
Youth services...................................... 163 -- --
---- ---- ----
$738 $575 $800
==== ==== ====
</TABLE>
F-14
<PAGE> 64
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. BENEFIT PLANS
(In thousands, except share and per share data)
On January 1, 1995, the Company amended and restated its Money Purchase
Pension Plan in its entirety as the Res-Care, Inc. Retirement Savings Plan. In
connection with this plan, the Company contributed an amount equal to 3% of
eligible employee salary and an additional 3% of employee salary in excess of
$40. Total expenses relating to this plan for the years ended December 31, 1994,
1995 and 1996, were $1,360, $1,357 and $1,883, respectively.
On January 1, 1995, as part of the Retirement Savings Plan, the Company
established a 401(k) plan in which eligible employees may participate. In
connection with the plan, the Company matches one-half of the employee's
contribution up to a maximum of 2%. The total expense relating to this plan for
the years ended December 31, 1995 and 1996 was $344 and $354 respectively.
The Company has stock-based compensation plans, which are described below.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with Statement of Financial
Accounting Standards No. 123, the Company's net income and income per share
amounts would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
---------------------
1995 1996
------- ------
<S> <C> <C>
INCOME DATA:
As Reported
Income from continuing operations................... $ 7,311 $9,443
Income from operation of unconsolidated affiliate
sold............................................. 428 --
Gain from sale of unconsolidated affiliate.......... 8,819 --
------- ------
Net income.................................. $16,558 $9,443
======= ======
Pro Forma
Income from continuing operations................... $ 7,154 $9,032
Income from operation of unconsolidated affiliate
sold............................................. 428 --
Gain from sale of unconsolidated affiliate.......... 8,819 --
------- ------
Net income.................................. $16,401 $9,032
======= ======
INCOME PER SHARE DATA:
As Reported
Income from continuing operations per share......... $ 0.73 $ 0.91
Income from discontinued operations per share....... 0.04 --
Gain from sale of discontinued operations per
share............................................ 0.87 --
------- ------
Net income per share........................ $ 1.64 $ 0.91
======= ======
Pro Forma
Income from continuing operations per share......... $ 0.72 $ 0.87
Income from discontinued operations per share....... 0.04 --
Gain from sale of discontinued operations per
share............................................ 0.87 --
------- ------
Net income per share........................ $ 1.63 $ 0.87
======= ======
</TABLE>
F-15
<PAGE> 65
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's stock-based compensation plans are fixed stock option plans.
Under the 1991 Incentive Stock Option Plan, the Company may grant options to its
salaried officers and employees for up to 2,534,062 shares of common stock.
Under the plan, the exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is normally
five years. All options, except those granted to its president and chief
executive officer, vest 20 percent per year over five years. Options for 97,500
shares granted to the president and chief executive officer on October 26, 1995
vested immediately, and options for 112,797 shares granted to the president and
chief executive officer on November 5, 1996 vest 100% on March 15, 1997.
Under a stock option plan adopted October 28, 1993, 60,000 shares are
available for issuance to nonemployee members of the Board of Directors at an
exercise price which cannot be less than the fair market value on the date of
grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: no dividends paid, as it has been
the Company's policy not to declare or pay dividends since its initial public
offering in 1992 and the Company does not anticipate paying dividends in the
foreseeable future; expected volatility, 49%; risk-free interest rate, 6.368%;
and expected lives, five to six years.
Stock option activity is shown below:
<TABLE>
<CAPTION>
1995 1996
-------------------- ---------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE
------------- ------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................. 635,175 $ 6.06 849,210 $ 7.59
Granted.......................................... 295,050 11.44 397,647 11.82
Exercised........................................ (27,900) 7.50 (222,725) 6.54
Canceled......................................... (53,115) 10.89 (40,935) 11.24
------- --------
Outstanding at end of year....................... 849,210 7.59 983,197 9.39
======= ========
Exercisable at end of year....................... 400,814 $ 4.57 490,780 $ 6.79
======= ========
Weighted-average fair value of options granted
during the year................................ $3.93 $4.08
======= ========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------- ------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE OUTSTANDING AT WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- ----------------
<C> <C> <C> <C> <C> <C>
$ 1 to 8 256,050 0.4years $ 2.84 256,050 $ 2.84
10 to 12 608,350 4.0 10.90 233,230 11.02
15 to 19 112,797 5.8 15.25 -- --
20 to 25 6,000 4.4 24.50 1,500 24.50
------- -------
$ 1 to 25 983,197 3.3 $ 9.39 490,780 $ 6.79
======= =======
</TABLE>
10. ACQUISITIONS
During the three years ended December 31, 1996, the Company has made
various acquisitions as set forth below, all of which have been accounted for as
purchases (also see note 13). The supplemental consolidated financial statements
include the operating results of each business accounted for as a purchase
F-16
<PAGE> 66
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the date of its acquisition. Except for the acquisitions of the 12 Beverly
facilities and the 44 group homes in Texas, pro forma results of operations have
not been presented because the effects of these acquisitions were not
significant.
On August 31, 1993, the Company entered into an agreement with several
companies controlled by a single shareholder to acquire up to 59 group homes in
Texas under leasing arrangements with certain obligations and options to
purchase over a three-year period. In 1995, the Company completed the purchase
under the agreement acquiring 44 group homes. The purchase price of the 44 group
homes and other assets was $5.7 million, of which $3.5 million was paid in cash
and the balance by mortgages previously acquired and other accrued expenses. The
Company has been operating 57 of the group homes since September 1, 1993. The
allocation of the purchase price for the 44 group homes was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Buildings, land and equipment............................... $3,314
Licenses, at cost........................................... 1,572
Excess of acquisition cost over net assets acquired......... 845
------
$5,731
======
</TABLE>
On May 1, 1995, the Company acquired the assets of 12 intermediate care
facilities for persons with mental retardation from Beverly Enterprises. The
purchase price was $16.7 million. The purchase price was paid with $12.6 million
in cash and three promissory notes to Beverly in the amount of $3.6 million. The
purchase price also included $.5 million of other costs associated with the
acquisition. The allocation of the purchase price was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Buildings, land and equipment............................... $11,027
Excess of acquisition cost over net assets acquired......... 5,417
Inventory................................................... 199
Other....................................................... 11
-------
$16,654
=======
</TABLE>
The following summary of results of operations on a pro forma basis gives
effect to the acquisition of the 12 Beverly facilities and the acquisition of
the 44 group homes in Texas as though both acquisitions had taken place as of
January 1, 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
--------------------------
<S> <C> <C>
Net revenues........................................... $174,416 $187,841
Income from continuing operations...................... 6,201 7,754
Net income............................................. 7,255 17,001
Income from continuing operations per share............ 0.61 0.77
Net income per share................................... $ 0.72 $ 1.68
</TABLE>
During the year ended December 31, 1996, the Company made nine
acquisitions. Seven of the acquisitions were businesses providing disabilities
services. The other acquisition was a provider of youth services. The total
purchase price of these acquisitions was $12.7 million in cash, allocated as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Buildings, land and equipment............................... $ 6,002
Excess of acquisition cost over net assets acquired......... 6,449
Other....................................................... 267
-------
$12,718
=======
</TABLE>
F-17
<PAGE> 67
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain operating facilities, office space, vehicles and
equipment under operating leases which expire at various dates from 1997 through
2002. Total rent expense was approximately $7,740, $8,625 and $9,361 for the
years ended December 31, 1994, 1995 and 1996, respectively. Approximate future
minimum lease payments under all non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------
(IN THOUSANDS)
<S> <C>
1997........................................................ $7,944
1998........................................................ 6,366
1999........................................................ 4,539
2000........................................................ 1,758
2001........................................................ 1,281
Thereafter.................................................. $2,237
</TABLE>
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The Company is a party to litigation in Indiana in
which the state's methodology for calculating reimbursement is being contested.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial condition
or results of operations.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for:
Interest.................................................... $ 153 $ 581 $1,352
Income taxes................................................ 4,692 9,909 4,362
Supplemental schedule of noncash investing and financing
activities:
Notes payable resulting from purchase of property and
equipment................................................. $ 78 $3,600 --
</TABLE>
13. PREMIER ACQUISITION
Effective January 1, 1997, the Company acquired all of the partnership
interests in Premier in exchange for 409,250 shares of the Company's common
stock in a business combination accounted for as a pooling-of-interests. Premier
provides disability services to clients with acquired brain injuries and will be
included in the operations of the Division for Persons with Disabilities. As
discussed in note 1, the supplemental consolidated financial statements give
retroactive effect to the acquisition.
Premier's revenues and net income included in the Company's supplemental
consolidated statements of income for the three years ended December 31, 1996
are summared as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $5,104 $5,760 $5,919
Net income.................................................. 41 142 752
</TABLE>
F-18
<PAGE> 68
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $37,162 $42,485 $47,504 $50,277 $177,428
Facility and program contribution........... 4,232 4,975 5,685 5,789 20,681
Income from continuing operations........... 1,422 1,685 2,008 2,196 7,311
Net income.................................. 1,669 10,770 2,008 2,111 16,558
Income from continuing operations per
share..................................... 0.14 0.17 0.20 0.22 0.73
Discontinued operations:
Income from operation of unconsolidated
affiliate sold, net of applicable income
taxes, per share.......................... 0.02 0.02 -- -- 0.04
Gain from sale of unconsolidated affiliate,
net of applicable income taxes, per
share..................................... -- 0.88 -- (0.01) 0.87
Net income per share........................ 0.16 1.07 0.20 0.21 1.64
Pro forma net income per share.............. 0.16 1.07 0.20 0.20 1.63
<CAPTION>
1996
----
<S> <C> <C> <C> <C> <C>
Net revenues................................ $54,066 $54,156 $56,388 $59,655 $224,265
Facility and program contribution........... 6,390 6,788 7,715 8,494 29,387
Net income.................................. 1,921 2,172 2,495 2,855 9,443
Net income per share........................ 0.19 0.21 0.24 0.27 0.91
Pro forma net income per share.............. 0.19 0.20 0.23 0.26 0.88
</TABLE>
F-19
<PAGE> 69
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY THE SHARES OF COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH SOLICITATION OR OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 14
Capitalization........................ 15
Price Range of Common Stock and
Dividend Policy..................... 16
Selected Supplemental Consolidated
Financial Data...................... 17
Management's Discussion and Analysis
of Supplemental Financial Condition
and Results of Operations........... 19
Business.............................. 26
Management............................ 42
Principal and Selling Shareholders.... 44
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Available Information................. 47
Incorporation of Certain Documents by
Reference........................... 48
Index to Supplemental Consolidated
Financial Statements................ F-1
</TABLE>
======================================================
======================================================
2,591,000 SHARES
RES-CARE LOGO
COMMON STOCK
---------------------
PROSPECTUS
---------------------
J.C. Bradford & Co.
Montgomery Securities
Equitable Securities Corporation
, 1997
======================================================
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses in connection with the issuance
and distribution of the securities to be registered, other than underwriting
discounts and commissions. All such expenses are estimated, except for the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 19,247
NASD filing fee............................................. 6,852
Nasdaq listing fee.......................................... 17,500
Accounting fees and expenses................................ 125,000
Legal fees and expenses..................................... 150,000
Printing.................................................... 100,000
Transfer agent fees......................................... 5,000
Blue sky fees and expenses (including legal fees)........... 10,000
Miscellaneous............................................... 16,401
----------
TOTAL............................................. $ 450,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 271B.8-510 of the Kentucky Business Corporation Act (the "Act")
permits the indemnification by a corporation of any director who is made party
to a threatened, pending or completed action, suit or proceeding because he is
or was a director of such corporation. To be eligible for indemnification, such
person must have conducted himself in good faith and reasonably believed that
his conduct, if undertaken in his official capacity with the corporation, was in
the corporation's best interests, and, if not in his official capacity, was at
least not opposed to the corporation's best interests. In the case of a criminal
proceeding, the director must also not have had reasonable cause to believe his
conduct was unlawful. A director may not be indemnified under the
above-referenced section in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with any other proceeding charging improper personal benefit to
him, whether or not involving action in official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Indemnification permitted under Section 271B.8-510 of the Act in connection
with a proceeding by or in the right of the corporation shall be limited to
reasonable expenses incurred in connection with the proceeding. Section
271B.8-560 of the Act provides that a Kentucky corporation may indemnify its
officers, employees and agents to the same extent as directors. Mandatory
indemnification against reasonable expenses incurred in connection with a
proceeding is provided for by the Act, unless otherwise limited by the
corporation's articles of incorporation, where a director or officer has been
wholly successful on the merits or otherwise, in the defense of any proceeding
to which he was a party because he is or was a director or officer of the
corporation. A court of competent jurisdiction may also order indemnification if
the director is fairly and reasonably entitled thereto in view of all relevant
circumstances, whether or not he met the applicable standard of conduct or was
adjudged liable to the corporation, but if he was adjudged liable, his
indemnification shall be limited to reasonable expenses incurred.
The Act provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any bylaw, agreement, vote of shareholders or disinterested directors, or
otherwise. Additionally, the Act provides that a corporation may purchase and
maintain insurance on behalf of directors, officers, employees or agents of the
corporation against liability asserted against or incurred by such party in
their respective capacity with the corporation.
Article X of the Company's Amended and Restated Articles of Incorporation
and Article X of the Company's Bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent permitted
by law.
II-1
<PAGE> 71
The proposed form of Underwriting Agreement to be filed as Exhibit 1.1 to
this Registration Statement contains certain provisions relating to the
indemnification of the Company and its directors and officers by the
Underwriters, and certain provisions relating to the indemnification of the
Underwriters by the Company, its directors and officers, and the Selling
Shareholders for certain liabilities, including liabilities arising under the
Securities Act, and affords certain rights of contribution with respect thereto.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*1.1 -- Form of Underwriting Agreement.
2.1 -- Agreement by and among Res-Care, Inc., RSCR California,
Inc., Res-Care Illinois, Inc., Res-Care Kansas, Inc., and
RSCR Texas, Inc. and Beverly Health and Rehabilitation
Services, Inc., Beverly Enterprises -- California, Inc.,
Beverly Enterprises -- Illinois, Inc., Beverly
Enterprises -- Kansas, Inc. and Beverly
Enterprises -- Texas, Inc. dated April 5, 1995 (excluding
Exhibits and Schedules). Exhibit 2-1 to the Company's
Report on Form 8-K dated May 1, 1995 filed on May 12,
1995 is hereby incorporated by reference.
2.2 -- Stock Purchase Agreement by and among Housecall Medical
Resources Inc. and Res-Care, Inc., Blair S. Gordon and J.
Paul Gordon dated as of May 31, 1995 (excluding Exhibits
and Schedules). Exhibit 2-1 to the Company's Report on
Form 8-K dated May 31, 1995 filed on June 15, 1995 is
hereby incorporated by reference.
3.1 -- Amended and Restated Articles of Incorporation of the
Company as amended. Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
3.2 -- Bylaws of the Company. Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
4.1 -- Specimen Common Stock Certificate. Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-48749) is hereby incorporated by reference.
4.2 -- Article VI of the Amended and Restated Articles of
Incorporation of the Company included in Exhibit 3.1.
*5.1 -- Opinion of Reed Weitkamp Schell Cox & Vice
10.1 -- 1991 Incentive Stock Option Plan of the Company (adopted
April 24, 1991, amended and restated as of February 23,
1995). Exhibit 4 to the Company's Registration Statement
on Form S-8 (Reg. No. 33-80331) is hereby incorporated by
reference.
10.2 -- Amended and Restated Employment Agreement, dated April
27, 1992, between the Company and E. Halsey Sandford.
Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-48749) is hereby incorporated by
reference.
10.3 -- 1991 Compensation/Evaluation Bonus Plan. Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (Reg.
No. 33-48749) is hereby incorporated by reference.
10.4 -- 1993 Nonemployee Directors Stock Ownership Incentive Plan
of the Company (adopted October 28, (1993). Exhibit 4.1
to the Company's Registration Statement on Form S-8 (Reg.
No. 33-76612) is hereby incorporated by reference.
10.5 -- Amended and Restated Loan Agreement dated as of April 26,
1995 by and among Res-Care, Inc., and PNC Bank, Kentucky,
Inc. and National City Bank, Kentucky. Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year
ending December 31, 1995 is hereby incorporated by
reference.
</TABLE>
II-2
<PAGE> 72
<TABLE>
<C> <S>
10.6 -- 1994 Employee Stock Purchase Plan effective July 1, 1995. Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Reg. No. 33-85964) is hereby incorporated by
reference.
10.7 -- Employment Agreement dated October 26, 1995 between the Company and Ronald G. Geary.
Exhibit 10-1 to the Company's Report on Form 10-Q for the quarter ending September 30,
1995 is hereby incorporated by reference.
10.8 -- Res-Care, Inc. 401(K) Restoration Plan effective December 1, 1995. Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ending December 31, 1995 is hereby
incorporated by reference.
10.9 -- Second Amendment to Loan Instruments dated as of February 16, 1996 by and among
Res-Care, Inc., and PNC Bank, Kentucky, Inc. National City Bank, Kentucky and Sun Trust
Bank, Nashville, N.A. Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ending December 31, 1995 is hereby incorporated by reference.
10.10 -- Second Amended and Restated Employment Agreement dated March 17, 1996 between the
Company and E. Halsey Sandford. Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ending December 31, 1995 is hereby incorporated by reference.
10.11 -- Amended and Restated Employment Agreement dated as of October 26, 1995 and amended
November 5, 1996 between the Company and Ronald G. Geary. Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ending December 31, 1996 is hereby
incorporated by reference.
10.12 -- Loan Agreement dated as of December 23, 1996 by and among Res-Care, Inc. and all of its
subsidiaries and PNC Bank, Kentucky, Inc., National City Bank of Kentucky, SunTrust
Bank, Nashville, N.A., and Bank One, Kentucky, NA. Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1996 is hereby incorporated
by reference.
10.13 -- Employment Agreement dated January 1, 1997 between the Company and Jeffrey M. Cross.
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ending December
31, 1996 is hereby incorporated by reference.
*23.1 -- Consents of KPMG Peat Marwick LLP.
*23.2 -- Consent of Reed Weitkamp Schell Cox & Vice (included in opinion filed as Exhibit 5).
**24.1 -- Power of Attorney.
</TABLE>
- ---------------
* Filed herewith.
** Filed with initial filing of Registration Statement on March 19, 1997.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise,
II-3
<PAGE> 73
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement or Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Louisville, Commonwealth of Kentucky, on April
14, 1997.
RES-CARE, INC.
By: /s/ RONALD G. GEARY
------------------------------------
Ronald G. Geary
President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Principal Executive Officer:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ RONALD G. GEARY Chief Executive Officer and April 14, 1997
- ----------------------------------------------------- President
Ronald G. Geary
/s/ R. DAN BRICE Principal Financial and Accounting April 14, 1997
- ----------------------------------------------------- Officer
R. Dan Brice
</TABLE>
A Majority of the Board of Directors:
Seymour L. Bryson, James R. Fornear, Ronald G. Geary, W. Bruce Lunsford,
Spiro B. Mitsos and E. Halsey Sandford.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ RONALD G. GEARY For himself and as Attorney- April 14, 1997
------------------------------------------------- in-Fact
Ronald G. Geary
By: /s/ E. HALSEY SANDFORD For himself and as Attorney- April 14, 1997
------------------------------------------------- in-Fact
E. Halsey Sandford
</TABLE>
II-5
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Res-Care, Inc.:
Under date of February 28, 1997, we reported on the supplemental
consolidated balance sheets of Res-Care, Inc. and subsidiaries as of December
31, 1995 and 1996, and the related supplemental consolidated statements of
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. In connection with our audits of the
aforementioned supplemental consolidated financial statements, we also audited
the related financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic supplemental consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 28, 1997
S-1
<PAGE> 76
RES-CARE, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
------------------------- ---------- ---------------------------------- ---------------------------------
ADDITIONS
BALANCE CHARGED TO CHARGED TO
@ COST OTHER DEDUCTION
YEAR DESCRIPTION JANUARY 1 AND EXPENSES ACCOUNTS DEDUCTIONS DESCRIPTION
- ---- ------------------------- ---------- --------------- ---------------- ---------- --------------------
<C> <C> <C> <C> <C> <C> <C>
Allowance for Contractual Accounts Receivables
1994 Adjustments $1,733,218 $738,522** $488,891 Written-off
Allowance for Contractual Accounts Receivables
1995 Adjustments $1,982,849 $575,076** $646,600 Written-off
Allowance for Contractual Accounts Receivables
1996 Adjustments $1,911,325 $800,000** $765,893 Written-off
<CAPTION>
COL. E
-----------
BALANCE @
YEAR DECEMBER 31
- ---- -----------
<C> <C>
1994 $1,982,849
1995 $1,911,325
1996 $1,945,432
</TABLE>
** Charged to Revenue
S-2
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S> <C>
*1.1 -- Form of Underwriting Agreement.
2.1 -- Agreement by and among Res-Care, Inc., RSCR California,
Inc., Res-Care Illinois, Inc., Res-Care Kansas, Inc., and
RSCR Texas, Inc. and Beverly Health and Rehabilitation
Services, Inc., Beverly Enterprises -- California, Inc.,
Beverly Enterprises -- Illinois, Inc., Beverly
Enterprises -- Kansas, Inc. and Beverly
Enterprises -- Texas, Inc. dated April 5, 1995 (excluding
Exhibits and Schedules). Exhibit 2-1 to the Company's
Report on Form 8-K dated May 1, 1995 filed on May 12,
1995 is hereby incorporated by reference.
2.2 -- Stock Purchase Agreement by and among Housecall Medical
Resources Inc. and Res-Care, Inc., Blair S. Gordon and J.
Paul Gordon dated as of May 31, 1995 (excluding Exhibits
and Schedules). Exhibit 2-1 to the Company's Report on
Form 8-K dated May 31, 1995 filed on June 15, 1995 is
hereby incorporated by reference.
3.1 -- Amended and Restated Articles of Incorporation of the
Company as amended. Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
3.2 -- Bylaws of the Company. Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
4.1 -- Specimen Common Stock Certificate. Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-48749) is hereby incorporated by reference.
4.2 -- Article VI of the Amended and Restated Articles of
Incorporation of the Company included in Exhibit 3.1.
*5.1 -- Opinion of Reed Weitkamp Schell Cox & Vice
10.1 -- 1991 Incentive Stock Option Plan of the Company (adopted
April 24, 1991, amended and restated as of February 23,
1995). Exhibit 4 to the Company's Registration Statement
on Form S-8 (Reg. No. 33-80331) is hereby incorporated by
reference.
10.2 -- Amended and Restated Employment Agreement, dated April
27, 1992, between the Company and E. Halsey Sandford.
Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-48749) is hereby incorporated by
reference.
10.3 -- 1991 Compensation/Evaluation Bonus Plan. Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (Reg.
No. 33-48749) is hereby incorporated by reference.
10.4 -- 1993 Nonemployee Directors Stock Ownership Incentive Plan
of the Company (adopted October 28, (1993). Exhibit 4.1
to the Company's Registration Statement on Form S-8 (Reg.
No. 33-76612) is hereby incorporated by reference.
10.5 -- Amended and Restated Loan Agreement dated as of April 26,
1995 by and among Res-Care, Inc., and PNC Bank, Kentucky,
Inc. and National City Bank, Kentucky. Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year
ending December 31, 1995 is hereby incorporated by
reference.
10.6 -- 1994 Employee Stock Purchase Plan effective July 1, 1995.
Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (Reg. No. 33-85964) is hereby incorporated by
reference.
10.7 -- Employment Agreement dated October 26, 1995 between the
Company and Ronald G. Geary. Exhibit 10-1 to the
Company's Report on Form 10-Q for the quarter ending
September 30, 1995 is hereby incorporated by reference.
</TABLE>
<PAGE> 78
<TABLE>
<C> <S> <C>
10.8 -- Res-Care, Inc. 401(K) Restoration Plan effective December 1, 1995. Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ending December 31, 1995 is hereby
incorporated by reference.
10.9 -- Second Amendment to Loan Instruments dated as of February 16, 1996 by and among
Res-Care, Inc., and PNC Bank, Kentucky, Inc. National City Bank, Kentucky and Sun Trust
Bank, Nashville, N.A. Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ending December 31, 1995 is hereby incorporated by reference.
10.10 -- Second Amended and Restated Employment Agreement dated March 17, 1996 between the
Company and E. Halsey Sandford. Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ending December 31, 1995 is hereby incorporated by reference.
10.11 -- Amended and Restated Employment Agreement dated as of October 26, 1995 and amended
November 5, 1996 between the Company and Ronald G. Geary. Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ending December 31, 1996 is hereby
incorporated by reference.
10.12 -- Loan Agreement dated as of December 23, 1996 by and among Res-Care, Inc. and all of its
subsidiaries and PNC Bank, Kentucky, Inc., National City Bank of Kentucky, SunTrust
Bank, Nashville, N.A., and Bank One, Kentucky, NA. Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1996 is hereby incorporated
by reference.
10.13 -- Employment Agreement dated January 1, 1997 between the Company and Jeffrey M. Cross.
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ending December
31, 1996 is hereby incorporated by reference.
*23.1 -- Consents of KPMG Peat Marwick LLP.
*23.2 -- Consent of Reed Weitkamp Schell Cox & Vice (included in opinion filed as Exhibit 5).
**24.1 -- Power of Attorney.
</TABLE>
- ---------------
* Filed herewith.
** Filed with initial filing of Registration Statement on March 19, 1997.
<PAGE> 1
Exhibit 1.1
RES-CARE, INC.
2,591,000 SHARES
OF
COMMON STOCK
UNDERWRITING AGREEMENT
April 15, 1997
J. C. Bradford & Co., L.L.C.
Montgomery Securities
Equitable Securities Corporation
c/o J. C. Bradford & Co., L.L.C.
J. C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Dear Ladies and Gentlemen:
Res-Care, Inc., a Kentucky corporation (the "Company"), and certain
shareholders of the Company identified on Schedule I hereto (the "Selling
Shareholders") propose to sell to the underwriters named in Schedule II hereto
(the "Underwriters"), for whom you are acting as the representatives (the
"Representatives"), 1,500,000 shares and 1,091,000 shares, respectively, of
common stock, no par value, of the Company (the "Common Stock"). The 2,591,000
shares of Common Stock are referred to herein as the "Firm Shares." Such shares
of Common Stock are to be sold to the Underwriters, acting severally and not
jointly, in such amounts as are set forth in Schedule II hereto opposite the
name of such Underwriter.
The Company also proposes to grant to the Underwriters an option to
purchase up to 388,650 additional shares of Common Stock as provided for in
Section 4 of this Agreement for the purpose of covering over-allotments (the
"Option Shares"). The Firm Shares and the Option Shares purchased pursuant to
this Agreement are herein called the "Shares."
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the several Underwriters that:
(a) The Company meets the requirements for use of, and has filed with
the Securities and Exchange Commission (the "Commission") under the
Securities Act of
<PAGE> 2
1933, as amended (the "Securities Act"), a registration statement on Form
S-3 (No. 333-23599), including the related preliminary prospectus and may
have filed amendments thereto. Copies of such registration statement and
amendments, and all forms of the related prospectuses contained therein,
have been delivered to you. Such registration statement, including the
prospectus, Part II, the information incorporated by reference, and all
financial schedules and exhibits thereto, as amended at the time when it
shall become effective, together with any registration statement filed by
the Company pursuant to Rule 462(b) of the Securities Act, is herein
referred to as the "Registration Statement," and the prospectus included as
part of the Registration Statement on file with the Commission that
discloses all the information that was omitted from the prospectus on the
effective date pursuant to Rule 430A of the Rules and Regulations (as
defined below) is herein referred to as the "Final Prospectus." The
prospectus included as part of the Registration Statement on the date when
the Registration Statement became effective is referred to herein as the
"Effective Prospectus." Any prospectus included in the Registration
Statement and in any amendment thereto prior to the effective date of the
Registration Statement is referred to herein as a "Preliminary Prospectus."
For purposes of this Agreement, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Securities Act or
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
applicable.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus, at
the time of filing thereof, complied with the requirements of the
Securities Act and the Rules and Regulations, and did not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. When the Registration Statement becomes effective and at all
times subsequent thereto up to and including the First Closing Date (as
hereinafter defined), (i) the Registration Statement, the Effective
Prospectus and Final Prospectus and any amendments or supplements thereto
will contain all statements which are required to be stated therein in
accordance with the Securities Act and the Rules and Regulations and will
comply with the requirements of the Securities Act and the Rules and
Regulations, and (ii) neither the Registration Statement, the Effective
Prospectus nor the Final Prospectus nor any amendment or supplement thereto
will include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they are made,
not misleading; except that the foregoing does not apply to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter specifically for use therein
(it being understood that the only information so provided is the
information included in the last paragraph on the cover page, the
stabilization and market-making legends on the inside front cover and under
the caption "Underwriting" in the Effective Prospectus and the Final
Prospectus).
2
<PAGE> 3
(c) The documents that are incorporated by reference in any
Preliminary, Effective and Final Prospectus or from which information is so
incorporated by reference, when they become effective or were filed with
the Commission, as the case may be, complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as applicable,
and the Rules and Regulations, and any documents so filed prior to the
termination of this offering and incorporated by reference subsequent to
the effective date of the Registration Statement, shall, when they are
filed with the Commission, conform in all material respects with the
requirements of the Securities Act and the Exchange Act, as applicable, and
the Rules and Regulations.
(d) The Company and each subsidiary of the Company (as used herein,
the term "subsidiary" includes any corporation or other entity in which the
Company or any subsidiary of the Company has an ownership interest) is duly
organized and validly existing and in good standing under the laws of the
respective jurisdictions of their incorporation, with full corporate power
and authority to own their properties and conduct their businesses as now
conducted and are duly qualified or authorized to do business and are in
good standing in all jurisdictions where the failure to so qualify would
have a material adverse effect on the condition (financial or otherwise),
earnings or business affairs or business prospects of the Company and its
subsidiaries, taken as a whole ("Material Adverse Effect"). All of the
Company's subsidiaries are set forth on Exhibit 1(d) hereto.
(e) The outstanding stock of each of the Company's subsidiaries is
duly authorized, validly issued, fully paid and nonassessable. Except with
respect to Youthtrack, Inc. ("Youthtrack") all of the outstanding stock of
each of the Company's subsidiaries is owned by the Company, clear of any
lien, encumbrance, pledge, equity or claim of any kind, except for a pledge
of each subsidiary's capital stock pursuant to the Company's revolving
credit facility. Except as set forth on Exhibit 1(e) hereto, (i) the
Company has no other subsidiaries and is not a partner or joint venturer in
any partnership or joint venture, (ii) the Company's subsidiaries do not
have any outstanding options to purchase or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell any shares of capital stock or an
ownership interest of such subsidiary, and (iii) there are no preemptive
rights or other rights to subscribe for or purchase any shares of the
capital stock or an ownership interest of the Company's subsidiaries. Of
the 1,000 outstanding shares of capital stock of Youthtrack, 800 shares are
owned by the Company, clear of any lien, encumbrance, pledge, equity or
claim of any kind, except for a pledge of each subsidiary's capital stock
pursuant to the Company's revolving credit facility. The ownership of all
of the outstanding stock of each of the Company's subsidiaries is set forth
on Exhibit 1(e) hereto.
(f) After giving effect to the transaction described in footnote one
to the Selected Supplemental Consolidated Financial Data in the Final
Prospectus, the capitalization of the Company as of December 31, 1996, is
as set forth under the caption
3
<PAGE> 4
"Capitalization" in the Effective Prospectus and the Final Prospectus, and
the Common Stock conforms to the description thereof contained or
incorporated by reference in the Effective Prospectus and the Final
Prospectus. All the issued shares of capital stock of the Company have been
duly authorized and validly issued, are fully paid and non-assessable. None
of the issued shares of capital stock of the Company have been issued in
violation of any preemptive or similar rights. The Shares to be sold by the
Company, upon issuance and delivery and payment therefor in the manner
herein described, will be duly authorized, validly issued, fully paid and
nonassessable. There are no preemptive rights or other rights to subscribe
for or to purchase, or any restriction upon the transfer of, any shares of
Common Stock pursuant to the Company's Amended and Restated Articles of
Incorporation, bylaws or other governing documents or any agreement or
other instrument to which the Company is a party or by which it may be
bound except as described in the Effective Prospectus and the Final
Prospectus. Neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock or any other
securities of the Company. The Underwriters will receive good and
marketable title to the Shares to be issued and delivered hereunder, free
and clear of all liens, encumbrances, claims, security interests,
restrictions, stockholders' agreements and voting trusts whatsoever.
(g) All offers and sales by the Company of its Common Stock prior to
the date hereof were at all relevant times duly registered or the
subject of an available exemption from the registration requirements of
the Securities Act and were duly registered or the subject of an available
exemption from the registration requirements of the applicable state
securities or Blue Sky laws.
(h) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Shares to the several
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms (y) except as enforcement of rights to indemnity
and contribution hereunder may be limited by federal or state securities
laws or principles of public policy and (z) subject to the qualification
that the enforceability of the Company's obligations hereunder may be
limited by bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws relating to or affecting creditors' rights generally
and by general principles of equity regardless of whether considered in a
proceeding in equity or at law. No consent, approval, authorization or
order of any court or governmental agency or body is required for the
performance of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except such as have been
obtained and such as may be required by the National Association of
Securities Dealers, Inc. ("NASD") or under the Securities Act, or state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the several Underwriters. The issue and sale
of the Shares by the Company, the
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<PAGE> 5
Company's performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in a breach or violation
of any of the terms and provisions of, or constitute a default by the
Company or any of its subsidiaries under, any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or to which the Company or
any of its subsidiaries or any of their respective properties is subject,
the Amended and Restated Articles of Incorporation or bylaws of the Company
or any of its subsidiaries or any statute or any judgment, decree, order,
rule or regulation of any court or governmental agency or body applicable
to the Company, or any subsidiary or any of their respective properties
which breach, violation or default would have a Material Adverse Effect.
Neither the Company nor any subsidiary is in violation of its Articles of
Incorporation or by-laws or any law, administrative rule or regulation or
arbitrators' or administrative or court decree, judgment or order or in
violation or default (there being no existing state of facts which with
notice or lapse of time or both would constitute a default), in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, deed of trust, mortgage,
loan agreement, note, lease, agreement or other instrument or permit to
which it is a party or by which it or any of its properties is or may be
bound where the consequence of such violation or default would have a
Material Adverse Effect.
(i) The consolidated financial statements (and the related notes) and
the supplemental consolidated financial statements (and the related notes)
of the Company included or incorporated by reference in the Registration
Statement, the Effective Prospectus and the Final Prospectus present fairly
the financial position, results of operations and changes in financial
position and cash flow of the Company and its subsidiaries at the dates and
for the periods to which they relate and have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated. The other financial statements and
schedules and financial and statistical data included or incorporated by
reference in or as schedules to the Registration Statement conform to the
requirements of the Securities Act, the Exchange Act and the Rules and
Regulations and present fairly the information presented therein for the
periods shown. KPMG Peat Marwick LLP, whose reports appear in the Effective
Prospectus and the Final Prospectus, are independent accountants as
required by the Securities Act and the Rules and Regulations.
(j) Subsequent to December 31, 1996, neither the Company nor any
subsidiary has sustained any material loss or interference with its
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, which is not disclosed in
the Effective Prospectus and the Final Prospectus; and subsequent to the
respective dates as of which information is given in the Registration
Statement, the Effective Prospectus and the Final Prospectus, (x) neither
the Company nor any of its subsidiaries has incurred any material
liabilities or obligations, direct or contingent, or entered into any
5
<PAGE> 6
material transactions not in the ordinary course of business, and (y) there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock or any material change in the
capital stock, long-term liabilities, obligations under capital leases or
short-term borrowings of the Company and its subsidiaries or any issuance
of options, warrants or rights to purchase the capital stock of the
Company, or any material adverse change, or any development involving a
prospective material adverse change, which would have a Material Adverse
Effect, except in each case as described in or contemplated by the
Effective Prospectus and the Final Prospectus.
(k) Except as described in the Effective Prospectus and Final
Prospectus, there is not pending, or to the knowledge of the Company
threatened, any action, suit, proceeding, inquiry or investigation, to
which the Company, any of its subsidiaries or any of their officers or
directors is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or governmental
agency or body, wherein an unfavorable decision, ruling or finding could
prevent or materially hinder the consummation of this Agreement or which
would have a Material Adverse Effect.
(l) There are no contracts or other documents required to be described
in the Registration Statement, the Effective Prospectus and the Final
Prospectus or to be filed as exhibits to the Registration Statement by the
Securities Act or by the Rules and Regulations which have not been
described, incorporated by reference or filed as required. All such
contracts to which the Company or any of its subsidiaries is a party have
been duly authorized, executed and delivered by the Company or such
subsidiary, constitute valid and binding agreements of the Company or such
subsidiary and are enforceable against the Company or such subsidiary in
accordance with the terms thereof. The Company or such subsidiary has
performed all material obligations required to be performed by it, and is
neither in default in any material respect nor has it received notice of
any default or dispute under, any such contract or other material
instrument to which it is a party or by which its property is bound or
affected. To the best knowledge of the Company, no other party under any
such contract or other material instrument to which it is a party is in
default in any material respect thereunder.
(m) Except as described in the Effective Prospectus and the Final
Prospectus, the Company and each of its subsidiaries has good and
marketable title to all real and material personal property owned by them,
free and clear of all liens, charges, encumbrances or defects (collectively
"Liens"), other than liens that are reflected in the financial statements
included in the Effective Prospectus and the Final Prospectus or that do
not materially detract from the value or impair the use of the property
subject thereto; and, except as described in the Effective Prospectus and
the Final Prospectus, the real and personal property and buildings referred
to in the Effective Prospectus and the Final Prospectus which are leased
from others by the Company are held under valid, subsisting and, assuming
due execution and delivery by parties to such leases other than the Company
and its subsidiaries, enforceable leases except as enforceability may be
limited
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<PAGE> 7
by applicable equitable principles or by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect
affecting the enforcement of creditors' rights.
(n) The Company's system of internal accounting controls taken as a
whole is sufficient to meet the broad objectives of internal accounting
control insofar as those objectives pertain to the prevention or detection
of errors or irregularities in amounts that would be material in relation
to the Company's financial statements; and, to the best knowledge and
belief of the Company, neither the Company nor any of its subsidiaries nor
any employee or agent of the Company or any subsidiary has made any payment
of funds of the Company or received or retained any funds in violation of
any law, rule or regulation. Neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any subsidiary has
offered or paid any remuneration (including any kickback, bribe or rebate)
directly or indirectly, overtly or covertly, in cash or in kind to any
person to induce such person to refer an individual to any of the
facilities of the Company or any of its subsidiaries for the furnishing or
arranging for the furnishing of any item or service for which payment may
be made to the Company or any of its subsidiaries under any third party
reimbursement program.
(o) The Company and its subsidiaries have filed all federal, state and
local income and franchise tax returns required to be filed through the
date hereof and have paid all taxes shown as due therefrom except those
taxes being contested in good faith or where the failure to file such
return or to pay such tax would not have a material adverse effect on the
Company and its subsidiaries taken as a whole; and there is no tax
deficiency that has been, nor does the Company or any subsidiary have
knowledge of any tax deficiency which is likely to be, asserted against the
Company or its subsidiaries, which if determined adversely would have a
Material Adverse Effect.
(p) The Company and its subsidiaries operate their respective
businesses in conformity with all applicable statutes, common laws,
ordinances, decrees, orders, rules and regulations of any governmental body
except where the failure to so operate their respective businesses would
not have a Material Adverse Effect. Each of the facilities owned, leased,
operated or managed, directly or indirectly, by the Company and its
subsidiaries is being operated in compliance in all material respects with
all applicable laws, orders, rules or regulations. The Company and each of
its subsidiaries has such permits, licenses, franchises and authorizations
of governmental or regulatory authorities ("Permits") for each of the
facilities owned, leased, operated or managed, directly or indirectly, by
the Company or a subsidiary, as are necessary to own its respective
properties and to conduct its business in the manner described in the
Effective Prospectus and the Final Prospectus, subject to such
qualifications as may be set forth in the Effective Prospectus and the
Final Prospectus, except where the failure to obtain such a Permit or
Permits in the aggregate would not cause a Material Adverse Effect; the
Company and each of its subsidiaries has fulfilled and performed all of its
material obligations with
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<PAGE> 8
respect to the Permits, and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof or
result in any other material impairment to the rights of the holder of any
such Permit subject in each case to such qualification as may be set forth
in the Effective Prospectus and the Final Prospectus, except to the extent
that any such revocation, termination or impairment would not have a
Material Adverse Effect. The Company and its subsidiaries are not aware of
any existing or imminent matter which may materially adversely impact the
operations of these facilities other than as specifically disclosed in the
Effective Prospectus and the Final Prospectus.
(q) Neither the Company nor any of its subsidiaries is currently
engaging in any activity, whether alone or in concert with others, which
constitutes a violation of any federal or state laws (including, but not
limited to, federal antifraud and abuse or similar laws pertaining to the
Medicare, Medicaid or any other federal or state health or insurance
program, and federal or state laws pertaining to insurance fraud)
prohibiting fraudulent or abusive practices connected in any way with the
provision of healthcare services or the billing for such services provided
to a beneficiary of any federal or state health or insurance program,
except such violations which in the aggregate would not have a Material
Adverse Effect.
(r) Neither the Company nor any of its subsidiaries have failed to
file with the applicable regulatory authorities any statement, report,
information or form required by any applicable law, regulation or order
except where the failure to so file would not have a Material Adverse
Effect; all such filings or submissions were in compliance with applicable
laws when filed and no deficiencies have been asserted by any regulatory
commission, agency or authority with respect to such filings or
submissions. Neither the Company nor any of its subsidiaries have failed to
maintain in full force and effect any license or permit necessary for the
conduct of its business, or received any notification that any revocation
or limitation thereof is threatened or pending, and, except as disclosed in
the Effective Prospectus and the Final Prospectus, to the knowledge of the
Company, there is not any pending change under any law, regulation, license
or permit which could have a Material Adverse Effect. Neither the Company
nor any of its subsidiaries have received any notice of violation of or
been threatened with a charge of violating and, to the Company's knowledge,
is not under investigation with respect to a possible violation of any
provision of any law, regulation or order.
(s) No labor dispute exists with the Company's employees or with
employees of its subsidiaries which would have a Material Adverse Effect.
The Company is not aware of any existing or imminent labor disturbance by
its employees or by any employees of its subsidiaries which would have a
Material Adverse Effect.
(t) The Company and each of its subsidiaries is insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are
8
<PAGE> 9
prudent and customary in the businesses in which it is engaged; and neither
the Company nor any of its subsidiaries has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a reasonably comparable cost.
(u) Neither the Company nor any of its subsidiaries is in violation of
any federal, state, local or foreign law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials and the Company and each of
its subsidiaries has received all material permits, licenses or other
approvals required of it under applicable federal, state and foreign
occupational safety and health and environmental laws and regulations to
conduct its respective businesses, and the Company and each of its
subsidiaries is in compliance with all terms and conditions of any such
permit, license or approval, except any such violation of law or
regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not result in a Material Adverse
Effect.
(v) Except where such failures to comply or violations would not in
the aggregate have a material adverse effect on the Company or any of its
subsidiaries, the Company and each of its subsidiaries has complied with
the Immigration Reform and Control Act of 1986 and all regulations
promulgated thereunder ("IRCA") with respect to (i) the completion and
maintenance of Forms 1-9, Employment Eligibility Verification Forms, for
all of its current employees and reverification of the employment status of
any and all employees whose employment authorization documents indicated a
limited period of employment authorization; (ii) with respect to all former
employees who left the Company's or any of its subsidiaries' employment
within three years prior to the date hereof, the Company and each of its
subsidiaries has complied with IRCA with respect to the maintenance of
Forms 1-9 for at least three years or for one year beyond the date of
termination, whichever is later; (iii) the Company and each of its
subsidiaries has had no immigration violations and has employed only
individuals authorized to work in the United States and has never been the
subject of any inspection or investigation relating to its compliance with
or violation of IRCA; and (iv) it has not been warned, fined or otherwise
penalized by reason or any failure to comply with IRCA, and no such
proceeding is pending or threatened.
(w) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it or any of its subsidiaries to
become, an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940.
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<PAGE> 10
(x) Neither the Company nor any of its subsidiaries nor, to the
knowledge of the Company and of the directors officers, employees or agents
of the Company or its subsidiaries have taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might be expected to constitute, stabilization or
manipulation of the price of the Common Stock.
(y) The Shares have been approved for designation on the National
Association of Securities Dealers Automated Quotation National Market
System upon notice of issuance.
Any certificate signed by any officer of the Company and delivered to you
or to counsel for the Underwriters in connection with the Closing Date (as
hereinafter defined) shall be deemed a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
2. Representations and Warranties of the Selling Shareholders. Each of the
Selling Shareholders, severally and not jointly, represents and warrants to each
Underwriter and agrees as follows that:
(a) Such Selling Shareholder at the First Closing Date or at the
Option Closing Date (as such closing dates are defined herein), as the case
may be, will have valid and marketable title to the Shares set forth in
Schedule I to be sold by such Selling Shareholder, free and clear of any
liens, encumbrances, equities and claims (other than as imposed by the
Securities Act or this Agreement), and full right, power and authority to
effect the sale and delivery of such Shares; and upon the delivery of and
payment for the Shares to be sold by such Selling Shareholder pursuant to
this Agreement, valid and marketable title thereto, free and clear of any
liens, encumbrances, equities and claims, will be transferred to the
Underwriters.
(b) Such Selling Shareholder has duly executed and delivered the
Custodian Agreement and Power of Attorney in the form previously delivered
to the Representatives, appointing Ronald G. Geary, James R. Fornear and E.
Halsey Sandford, and any one of them, as each Selling Shareholder's
attorneys-in-fact (the "Attorneys-in-Fact") and appointing Piper & Marbury
L.L.P. as custodian (the "Custodian"). The Attorney-in-Fact is authorized
to execute, deliver and perform this Agreement on behalf of such Selling
Shareholder, to deliver the Shares to be sold by such Selling Shareholder
hereunder, to accept payment therefor and otherwise to act on behalf of
such Selling Shareholder in connection with this Agreement. Certificates,
in suitable form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank, representing the Shares to
be sold by such Selling Shareholder hereunder have been deposited with the
Custodian pursuant to the Custodian Agreement for the purpose of delivery
pursuant to this Agreement. Such Selling Shareholder agrees that the shares
of Common Stock represented by the certificates on deposit with the
Custodian are subject to the interest of the
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<PAGE> 11
Underwriters hereunder, that the arrangements made for such custody and the
appointment of the Attorney-in-Fact are to that extent irrevocable, and
that the obligations of such Selling Shareholder hereunder shall not be
terminated except as provided in this Agreement and the Custodian
Agreement. If such Selling Shareholder should die or become
incapacitated or if any other event should occur, before the delivery of
the Shares of such Selling Shareholder hereunder, the certificates for
such Shares deposited with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as
if such death, incapacity or other event had not occurred, regardless
whether the Custodian or the Attorney-in-Fact shall have received notice
thereof.
(c) Such Selling Shareholder, acting through his duly authorized
Attorney-in-Fact, has duly executed and delivered this Agreement and the
Custody Agreement and Power of Attorney; this Agreement constitutes a
legal, valid and binding obligation of such Selling Shareholder, all
authorizations and consents necessary for the execution and delivery of
this Agreement and the Custodian Agreement and Power of Attorney on
behalf of such Selling Shareholder and for the sale and delivery of the
Shares to be sold by such Selling Shareholder hereunder have been given,
except as may be required by the Securities Act or state securities laws;
and such Selling Shareholder has the legal capacity and full right, power
and authority to execute this Agreement and the Custodian Agreement and
Power of Attorney.
(d) The performance of this Agreement and the Custodian Agreement and
Power of Attorney and the consummation of the transactions contemplated
hereby and thereby by such Selling Shareholder will not result in a breach
or violation of, or conflict with, any of the terms of provisions of, or
constitute a default by such Selling Shareholder under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or instrument to which such
Selling Shareholder is bound.
(e) For a period of 90 days from the date of the Final Prospectus,
such Selling Shareholder will not, directly or indirectly, sell, offer to
sell, grant any option for the sale of, or otherwise dispose of any shares
of Common Stock, other than to the Underwriters pursuant to this Agreement,
without the prior written consent of J.C. Bradford & Co., L.L.C.
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<PAGE> 12
(f) Such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in Section 1 of
this Agreement are not true and correct; is familiar with the Registration
Statement, the receipt of a copy of which is hereby acknowledged, and has
no knowlege of any material fact, condition or information not disclosed
in the Effective Prospectus or Final Prospectus which has or may
adversely affect the business of the Company or any of its subsidiaries;
and the sale of the Shares by such Selling Shareholder is not prompted by
any information concerning the Company not set forth in the Effective
Prospectus or Final Prospectus.
(h) At the time the Registration Statement becomes effective (i) such
parts of the Registration Statement and any amendments and supplements
thereto as specifically refer to such Selling Shareholder will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) such parts of the Effective Prospectus and Final
Prospectus as specifically refer to such Selling Shareholder will not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(i) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement by such Selling Shareholder, and the
consummation by him of the transactions herein contemplated (other than as
required by the Securities Act, state securities laws and the NASD).
(j) Any certificates signed by or on behalf of such Selling
Shareholder as such and delivered to the Representatives or to counsel for
the Representatives shall be deemed a representation and warranty by such
Selling Shareholder to each Underwriter as to the matters covered thereby.
(k) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Shareholder agrees to deliver to you prior to or
at the First Closing Date (as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9 (or other applicable
form or statement specified by Treasury Department regulations in lieu
thereof).
(l) Such Selling Shareholder will not take, directly or indirectly,
any action designed to cause or result in, or which might constitute or be
expected to constitute, stabilization or manipulation of the price of the
Common Stock.
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3. Representations and Warranties of the Underwriters. The Representatives,
on behalf of the several Underwriters, represent and warrant to the Company that
the information set forth (a) on the cover page of the Effective Prospectus with
respect to the public offering price and underwriting discount and (b) under
"Underwriting" in the Effective Prospectus was furnished to the Company by and
on behalf of the Underwriters for use in connection with the preparation of the
Registration Statement and such information is accurate in all material
respects. The Representatives further represent and warrant to the Company that
such Representatives have the authority to act on behalf of the several
Underwriters in connection with this Agreement and the offering contemplated
hereby.
4. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, the Company agrees to sell 1,500,000 shares of Common Stock and
the Selling Shareholders agree to sell the number of shares of Common Stock
as set forth opposite each such Selling Shareholder's name on Schedule I
hereto to each of the Underwriters, and each of the Underwriters, severally
and not jointly, agrees to purchase at a purchase price of $______ per
share, the number of Firm Shares set forth opposite such Underwriter's name
in Schedule II hereto. The Underwriters agree to offer the Firm Shares to
the public as set forth in the Final Prospectus.
(b) The Company hereby grants to the Underwriters an option to
purchase, solely for the purpose of covering over-allotments in the sale of
Firm Shares, all or any portion of the Option Shares at the purchase price
per share set forth above. The option granted hereby may be exercised as to
all or any part of the Option Shares at any time (but only once) within 30
days after the date the Registration Statement becomes effective. The
Underwriters shall not be under any obligation to purchase any Option
Shares prior to the exercise of such option. The option granted hereby may
be exercised by the several Underwriters by the Representatives giving
written notice to the Company setting forth the number of Option Shares to
be purchased and the date and time for delivery of and payment for such
Option Shares and stating that the Option Shares referred to therein are to
be used for the purpose of covering over-allotments in connection with the
distribution and sale of the Firm Shares. If such notice is given prior to
the First Closing Date, the date set forth therein for such delivery and
payment shall not be earlier than two full business days thereafter or the
First Closing Date, whichever occurs later. If such notice is given on or
after the First Closing Date, the date set forth therein for such delivery
and payment shall not be earlier than three full business days thereafter.
In either event, the date so set forth shall not be more than 15 full
business days after the date of such notice. The date and time set forth in
such notice is herein called the "Option Closing Date." Upon exercise of
the option, the Company shall become obligated to sell to the Underwriters,
and, subject to the terms and conditions herein set forth, the Underwriters
shall become obligated to purchase, for the account of each Underwriter,
from the
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<PAGE> 14
Company the number of Option Shares specified in such notice. Option Shares
shall be purchased for the accounts of the several Underwriters in
proportion to the number of Firm Shares set forth opposite such
Underwriter's name in Schedule II hereto, except that the respective
purchase obligations of each Underwriter shall be adjusted so that no
Underwriter shall be obligated to purchase fractional Option Shares.
(c) Certificates in definitive form for the Firm Shares which each
Underwriter has agreed to purchase hereunder shall be delivered by or on
behalf of the Company and the Selling Shareholders to the Underwriters for
the account of such Underwriter against payment by such Underwriter or on
its behalf of the purchase price therefor by certified or official bank
check or checks in New York Clearing House (next day) funds to the order of
the Company and the Selling Shareholders, at the offices of J.C. Bradford &
Co., L.L.C., 330 Commerce Street, Nashville, Tennessee 37201, or at such
other place as may be agreed upon by the Underwriters, the Company and the
Selling Shareholders, at 10:00 A.M., Nashville time, on the third full
business day after this Agreement becomes effective, or, at the election of
the Representatives, on the fourth full business day after this Agreement
becomes effective, if it becomes effective after 4:30 p.m. Eastern time, or
at such other time not later than the seventh full business day thereafter
as the Underwriters and the Company may determine, such time of delivery
against payment being herein referred to as the "First Closing Date." The
First Closing Date and the Option Closing Date are herein individually
referred to as the "Closing Date" and collectively referred to as the
"Closing Dates." Certificates in definitive form for the Option Shares
which each Underwriter shall have agreed to purchase hereunder shall be
similarly delivered on the Option Closing Date. The certificates in
definitive form for the Shares so to be delivered will be in good delivery
form and in such denominations and registered in such names as the
Underwriters request not less than 48 hours prior to the First Closing Date
or the Option Closing Date, as the case may be. Such certificates will be
made available for checking and packaging at a location in New York, New
York as may be designated by you, at least 24 hours prior to the First
Closing Date or the Option Closing Date, as the case may be.
It is understood that you may (but shall not be obligated to) make payment
on behalf of any Underwriter or Underwriters for the Shares to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
5. Offering by the Underwriters. After the Registration Statement becomes
effective, the several Underwriters propose to offer for sale to the public the
Firm Shares and any Option Shares which may be sold at the price and upon the
terms set forth in the Final Prospectus.
6. Covenants of the Company and the Selling Shareholders.
(a) The Company covenants and agrees with each of the Underwriters
that:
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<PAGE> 15
(i) The Company shall use its best efforts to comply with the
provisions of and make all requisite filings with the Commission
pursuant to Rules 424, 430A and 434 of the Rules and Regulations and
to notify you promptly (in writing, if requested) of all such filings.
The Company shall notify you promptly of any request by the Commission
for any amendment of or supplement to the Registration Statement, the
Effective Prospectus or the Final Prospectus or for additional
information; the Company shall prepare and file with the Commission,
promptly upon your reasonable request, any amendments of or
supplements to the Registration Statement, the Effective Prospectus or
the Final Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Shares; and the
Company shall not file any amendment of or supplement to the
Registration Statement, the Effective Prospectus or the Final
Prospectus which is not approved by you after reasonable notice
thereof, such approval not to be unreasonably withheld or delayed. The
Company shall advise you promptly of the issuance by the Commission or
any State or other regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement, suspending
or preventing the use of any Preliminary Prospectus, the Effective
Prospectus or the Final Prospectus or suspending the qualification of
the Shares for offering or sale in any jurisdiction, or of the
institution of any proceedings for any such purpose; and the Company
shall use its best efforts to prevent the issuance of any stop order
or other such order and, should a stop order or other such order be
issued, to obtain as soon as possible the lifting thereof.
(ii) The Company will take or cause to be taken all necessary
action and furnish to whomever you direct such information as may be
reasonably required in qualifying the Shares for offering and sale
under the securities or Blue Sky laws of such jurisdictions as the
Underwriters may designate provided, however, that the Company shall
not be obligated to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or take any action that
would subject the Company to general service of process in any
jurisdiction where it would not be so subject as of the date of this
Agreement. In each jurisdiction in which the Shares have been so
qualified, the Company will make and file such statements and reports
as are required by the laws of such jurisdiction to continue such
qualifications in effect for as long as may be reasonably necessary to
complete the distribution in such jurisdictions.
(iii) Within the time during which a Final Prospectus relating to
the Shares is required to be delivered under the Securities Act, the
Company shall comply with all requirements imposed upon it by the
Securities Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as is necessary to
permit the continuance of sales of or dealings in the Shares as
contemplated by the provisions hereof and the Final Prospectus. If
during such period any event occurs as a result of which the Final
Prospectus as
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<PAGE> 16
then amended or supplemented would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing,
not misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Final Prospectus to comply
with the Securities Act, the Company shall promptly notify you and
shall amend the Registration Statement or supplement the Final
Prospectus (at the expense of the Company) so as to correct such
statement or omission or effect such compliance.
(iv) The Company will furnish without charge to the
Representatives and make available to the Underwriters copies of the
Registration Statement (three of which shall be signed and shall be
accompanied by all exhibits, each Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus, and all amendments and
supplements thereto, including any prospectus or supplement prepared
after the effective date of the Registration Statement, in each case
as soon as available and in such quantities as the Underwriters may
reasonably request.
(v) The Company will (A) deliver to you at such office or offices
as you may designate as many copies of the Preliminary Prospectus and
Final Prospectus as you may reasonably request, and (B) for such
period as prospectuses are required to be delivered, send to the
Underwriters as many additional copies of the Final Prospectus and any
supplement thereto as you may reasonably request.
(vi) The Company shall make generally available to its security
holders, in the manner contemplated by Rule 158(b) under the
Securities Act as promptly as practicable and in any event no later
than 90 days after the end of its fiscal quarter in which the first
anniversary of the effective date of the Registration Statement
occurs, an earnings statement satisfying the provisions of Section
11(a) of the Securities Act covering a period of at least 12
consecutive months beginning after the effective date of the
Registration Statement.
(vii) The Company will apply the net proceeds from the sale of
the Shares as set forth under the caption "Use of Proceeds" in the
Final Prospectus.
(viii) During a period of five years from the effective date of
the Registration Statement or such longer period as the Underwriters
may reasonably request, the Company will furnish to the
Representatives copies of all reports and other communications
(financial or other) furnished by the Company to its stockholders and,
as soon as available, copies of any reports or financial statements
furnished or filed by the Company to or with the Commission or any
national securities exchange on which any class of securities of the
Company may be listed.
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<PAGE> 17
(ix) The Company will, from time to time, after the effective
date of the Registration Statement file with the Commission such
reports as are required by the Securities Act and the Exchange Act,
and with state securities commissions in states where the Shares have
been sold by you (as you shall have advised the Company in writing)
such reports as are required to be filed by the securities acts and
the regulations of those states.
(x) Except pursuant to this Agreement, in connection with an
acquisition by the Company made in the ordinary course of business in
which restricted securities are issued as consideration by the Company
or with the written consent of J.C. Bradford & Co., L.L.C., for a
period of 90 days from the date of the Final Prospectus, the Company
agrees that it will not, and the Company has provided agreements
executed by each of the existing stockholders of the Company providing
that for a period of 90 days from the date of the Final Prospectus
such person or entity will not, offer for sale, sell (other than
pursuant to the exercise of options granted pursuant to existing
employee benefit plans and agreements, other existing compensation
agreements and existing stock options), grant any options (other than
pursuant to existing employee benefit plans and agreements, other
compensation agreements and existing stock options), rights or
warrants with respect to any shares of Common Stock, securities
convertible into common stock or any other capital stock of the
Company, or otherwise dispose of, directly or indirectly, any shares
of Common Stock or such other securities or capital stock.
(xi) Neither the Company nor any of its subsidiaries nor any of
their directors, officers or affiliates will take, directly or
indirectly, any action designed to cause or result in, or which might
constitute or be expected to constitute, stabilization or manipulation
of the price of the Common Stock.
(b) Each of the Selling Shareholders covenants and agrees with the
Underwriters that:
(i) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or which might
constitute or be expected to constitute, stabilization or manipulation
of the price of the Common Stock.
7. Expenses. The Company agrees with the several Underwriters that (a)
whether or not the transactions contemplated in this Agreement are consummated
or this Agreement becomes effective or is terminated, the Company will pay all
fees and expenses incident to the performance of its obligations hereunder,
including, but not limited to, (i) the Commission's registration fee (which
shall be shared pro rata with the Selling Shareholders), (ii) the expenses of
printing and distributing the Registration Statement (including the financial
statements therein and all amendments and exhibits thereto), each Preliminary
Prospectus, the Effective Prospectus, the Final Prospectus, any amendments or
supplements thereto, and this Agreement and other underwriting documents,
including Underwriter's Questionnaires, Underwriter's Powers of
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<PAGE> 18
Attorney, Blue Sky Memoranda and Agreements Among Underwriters, (iii) fees and
expenses of accountants and counsel for the Company, (iv) expenses of
qualification of the Shares under state Blue Sky and securities laws, including
the fees and disbursements of counsel to the several Underwriters in connection
therewith, (v) filing fees paid or incurred by the several Underwriters in
connection with filings with the NASD, (vi) any applicable listing fees, (vii)
all travel, lodging and reasonable living expenses incurred by the Company in
connection with marketing, dealer and other meetings attended by the Company and
the Underwriters in marketing the Shares, (viii) the costs and charges of the
Company's transfer agent and registrar and the cost of preparing the
certificates for the Shares, and (ix) all other costs and expenses incident to
the performance of its obligations hereunder not otherwise provided for in this
Section; (b) all out-of-pocket expenses, including counsel fees, disbursements
and expenses, incurred by the several Underwriters in connection with
investigating, preparing to market and marketing the Shares and proposing to
purchase and purchasing the Shares under this Agreement, will be borne and paid
by the Company if the sale of the Shares provided for herein is not consummated
by reason of the termination by the Company pursuant to Section 15(a)(i) of this
Agreement, or if terminated by the Underwriters pursuant to Section 15(b)(ii) of
this Agreement, or because any other condition to the Underwriters' obligation
hereunder is not fulfilled. The Company shall not in any event be liable to any
of the Underwriters for loss of anticipated profits from the transactions
contemplated by this Agreement.
8. Conditions of the Underwriters' Obligations. The respective obligations
of the several Underwriters to purchase and pay for the Firm Shares shall be
subject to the accuracy of the representations and warranties of the Company and
the Selling Shareholders herein as of the date hereof and as of the Closing Date
as if made on and as of the Closing Date, to the accuracy, in all material
respects, of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of all of their covenants and agreements hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective not later than 5:30 P.M., Washington,
D.C. time, on the day following the date of this Agreement, or such later
time and date as shall have been consented to by the Underwriters and all
filings required by Rule 424, Rule 430A and Rule 434 of the Rules and
Regulations shall have been made; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened or,
to the knowledge of the Company or the Underwriters, shall be contemplated
by the Commission; any request of the Commission for additional information
(to be included in the Registration Statement or the Final Prospectus or
otherwise) shall have been complied with to your satisfaction; and the
NASD, upon review of the terms of the public offering of the Shares, shall
not have objected to such offering, such terms or the Underwriters'
participation in the same.
(b) No Underwriter shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any
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<PAGE> 19
amendment or any supplement thereto, contains an untrue statement of fact
which, in your reasonable judgment, is material, or omits to state a fact
which, in your reasonable judgment, is material and is required to be
stated therein or necessary to make the statements therein not misleading,
and the Company shall not have cured such untrue statement of fact or
stated a statement of fact required to be stated therein.
(c) The Underwriters shall have received an opinion, dated the Closing
Date, from Reed, Weitkamp, Schell, Cox & Vice, Kentucky counsel for the
Company to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation under the laws of the Commonwealth of Kentucky with
corporate power and authority to own its properties and conduct its
business as now conducted, and is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions where
the failure to so qualify could have a material adverse effect upon
the Company and its subsidiaries taken as a whole.
(ii) After giving effect to the transactions described in
footnote one to the Selected Supplemental Consolidated Financial Data
in the Final Prospectus, as of the dates specified therein, the
Company had authorized and issued capital stock as set forth under the
caption "Capitalization" in the Final Prospectus. All of the shares of
Common Stock have been duly authorized and are, or upon issuance
thereof and payment therefor as herein provided will be validly
issued, fully paid and non-assessable; such shares will not have been
issued in violation of or subject to any preemptive rights provided
for by law or by the Company's Amended and Restated Articles of
Incorporation.
(iii) Each of the Company's subsidiaries is validly existing and
in good standing under the laws of the state of its incorporation,
with power and authority to own its properties and conduct its
business as now conducted, and is duly qualified or authorized to do
business and is in good standing in all other jurisdictions where the
failure to so qualify could have a material adverse effect upon the
business of the Company and its subsidiaries taken as a whole. The
outstanding shares of the capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully
paid and non-assessable and owned of record and, to such counsel's
knowledge, beneficially by the Company as set forth on Exhibit 1(e)
hereto, free and clear of all liens, encumbrances, equities and
claims. To the knowledge of such counsel, no options or warrants or
other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into any shares of capital
stock or of ownership interests in any of the Company's subsidiaries
are outstanding.
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<PAGE> 20
(iv) No consent, approval, authorization or order of any federal
court or Kentucky governmental agency or body is required for the
performance of this Agreement by the Company or the consummation by
the Company of the transactions contemplated hereby, except such as
have been obtained under the Securities Act and such as may be
required by the NASD and under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
several Underwriters. The performance of this Agreement by the Company
and the consummation by the Company of the transactions contemplated
hereby will not result in a breach or violation by the Company of any
of the terms or provisions of, or constitute a default by the Company
under, any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument known to such counsel to which the
Company or any subsidiary is a party or to which the Company or any
subsidiary or their respective properties is subject and which is
described in, or filed as an exhibit to, the Registration Statement,
the Amended and Restated Articles of Incorporation or bylaws of the
Company, any subsidiary, any statute, or any judgment, decree, order,
rule or regulation known to such counsel of any court or governmental
agency or body applicable to the Company or any of its subsidiaries or
their properties.
(v) The Company has full legal right, power and authority to
enter into this Agreement and to issue, sell and deliver the Shares to
be sold by it to the several Underwriters as provided herein, and this
Agreement has been duly authorized, executed and delivered by the
Company and constitutes the valid and legally binding obligation of
the Company enforceable against the Company in accordance with its
terms, (y) except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities
laws or principles of public policy, (z) subject to the qualification
that the enforceability of the Company's obligations hereunder may be
limited by bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance, fraudulent transfer or other
similar laws relating to or affecting creditors' rights generally, by
general principles of equity regardless of whether considered in a
proceeding in equity or at law and by general principles of equity
(including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible
unavailability of specific performance or injunctive relief)
regardless of whether considered in a proceeding at law or in equity.
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<PAGE> 21
(d) The Underwriters shall have received an opinion, dated the Closing
Date, from Piper & Marbury L.L.P., counsel for the Company and the Selling
Shareholders to the effect that:
(i) The Shares to be sold by the Company, upon issuance thereof
and payment therefor as herein provided will be validly issued, fully
paid and non-assessable; such Shares will not have been issued in
violation of or subject to any preemptive rights provided for by law
or by the Company's Amended and Restated Articles of Incorporation.
All offers and sales of the Company's Common Stock during the past
three fiscal years were at all relevant times duly registered
or exempt from the registration requirements of the Securities Act
and were duly registered or the subject of an exemption from the
registration requirements of applicable state securities or Blue Sky
laws.
(ii) No consent, approval, authorization or order of any federal
court or Kentucky governmental agency or body is required for the
performance of this Agreement by the Company or the consummation by
the Company of the transactions contemplated hereby, except such as
have been obtained under the Securities Act and such as may be
required by the NASD and under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
several Underwriters. The performance of this Agreement by the Company
and the consummation by the Company of the transactions contemplated
hereby will not result in a breach or violation by the Company of any
of the terms or provisions of, or constitute a default by the Company
under, any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument known to such counsel to which the
Company or any subsidiary is a party or to which the Company or any
subsidiary or their respective properties is subject and which is
described in, or filed as an exhibit to, the Registration Statement,
the Amended and Restated Articles of Incorporation or bylaws of the
Company, any subsidiary, any statute, or any judgment, decree, order,
rule or regulation known to such counsel of any court or governmental
agency or body applicable to the Company or any of its subsidiaries or
their properties.
(iii) The Company has full legal right, power and authority to
enter into this Agreement and to issue, sell and deliver the Shares to
be sold by it to the several Underwriters as provided herein, and this
Agreement has been duly authorized, executed and delivered by the
Company and constitutes the valid and legally binding obligation of
the Company enforceable against the Company in accordance with its
terms, (y) except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities
laws or principles of public policy, (z) subject to the qualification
that the enforceability of the Company's obligations hereunder may be
limited by bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance, fraudulent
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<PAGE> 22
transfer or other similar laws relating to or affecting creditors'
rights generally, by general principles of equity regardless of
whether considered in a proceeding in equity or at law and by general
principles of equity (including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing and the
possible unavailability of specific performance or injunctive relief)
regardless of whether considered in a proceeding at law or in equity.
(iv) Except as described in the Effective Prospectus and the
Final Prospectus, there is not pending, or to the knowledge of such
counsel threatened, any action, suit, proceeding, inquiry or
investigation, to which the Company or any of its subsidiaries is a
party, or to which the property of the Company or any of its
subsidiaries is subject, before or brought by any court or
governmental agency or body, which, if determined adversely to the
Company or any of its subsidiaries, would have a Material Adverse
Effect.
(v) To the knowledge of such counsel, no default exists, and no
event has occurred which with notice or after the lapse of time to
cure or both, would constitute a default, in the due performance and
observance by the Company of any term, covenant or condition of any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument known to such counsel to which the Company or
any of its subsidiaries is a party or to which they or their
properties is subject and which is described as an exhibit to, the
Registration Statement, or of the Articles of Incorporation or bylaws
of the Company or any of its subsidiaries where such default would
have a Material Adverse Effect.
(vi) The Registration Statement and all post effective amendments
thereto filed prior to the Closing Date have become effective under
the Securities Act, and, to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted
or are threatened, pending or contemplated by the Commission and all
filings required by Rule 424, Rule 430A and Rule 434 of the Rules and
Regulations have been made; the Registration Statement, the Effective
Prospectus and Final Prospectus, and any amendments or supplements
thereto, and the documents incorporated by reference therein, as of
their respective effective or issue dates, complied as to form in all
material respects with the requirements of the Securities Act and the
Rules and Regulations; the descriptions in the Registration Statement,
the Effective Prospectus and the Final Prospectus of statutes,
regulations, government reimbursement programs, legal and governmental
proceedings, and contracts and other documents are accurate in all
material respects and present fairly the information required to be
shown; and such counsel do not know of any pending or threatened legal
or governmental proceedings, statutes or regulations required to be
described in the Final Prospectus which are not described as required
nor of any contracts or documents of a character required
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<PAGE> 23
to be described in the Registration Statement or the Effective
Prospectus or the Final Prospectus or to be filed as exhibits to the
Registration Statement which are not described and filed as required.
(vii) To the knowledge of such counsel, neither the Company nor
any of its subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any of its subsidiaries or any decree of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries which violation would have a Material Adverse
Effect.
(viii) The statements under "Business--Contracts," "--Government
Regulation and Reimbursement," "--Legal Proceedings" and "Description
of Capital Stock" included or incorporated by reference in the Final
Prospectus, insofar as they are descriptions or summaries of
contracts, agreements or other legal documents, or refer to statements
of law or legal conclusions (except for statements of law or legal
conclusions involving laws of jurisdictions other than the State of
Maryland or the federal law of the United States of America, as to
which no opinion need be expressed), are accurate in all material
respects and present fairly the information required by the Securities
Act to be shown.
(ix) This Agreement and the Custodian Agreement and Power of
Attorney have been duly executed and delivered by or on behalf of each
of the Selling Shareholders and constitute valid and binding
agreements of such Selling Shareholders in accordance with their
terms, except as enforceability may be limited by applicable equitable
principles or by bankruptcy, insolvency, moratorium, reorganization or
similar laws from time to time in effect affecting the enforcement of
creditors' rights, and except as rights to indemnify may be limited by
federal or state securities laws or the public policy underlying such
laws.
(x) The sale of the Shares to be sold by each Selling Shareholder
hereunder and the compliance by such Selling Shareholder with all of
the provisions of this Agreement, the Custodian Agreement and the
Power of Attorney and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach or
violation of any terms or provisions of, or constitute a default under
any material indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which such
Selling Shareholder is a party or by which such Selling Shareholder is
bound or to which any of the property or assets of such Selling
Shareholder is subject, or any statute, order, rule or regulation of
any court or governmental agency or body known to such counsel to be
applicable to such Selling Shareholder or the property of such Selling
Shareholder.
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<PAGE> 24
(xi) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by each Selling Shareholder hereunder, except which
have been duly obtained and in full force and effect, such as have
been obtained under the Securities Act and such as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of such Shares by the Underwriters, as to
which such counsel need express no opinion.
(xii) Each of the Selling Shareholders has the full right, power
and authority to sell, transfer and deliver such Shares pursuant to
this Agreement. By delivery of a certificate or certificates therefor,
the Selling Shareholders will transfer to the Underwriters valid and
marketable title to such shares, free and clear of any pledge, lien,
security interest, charge, claim, equity, or encumbrance of any kind.
(xiii) The Company and each of its subsidiaries has corporate
power and all such Permits as are required under such federal and
state health care laws as specifically regulate the operation of the
facilities, owned, leased or managed by the Company or any subsidiary,
to own their respective properties and to conduct their respective
businesses as now being conducted as described in the Effective
Prospectus and the Final Prospectus and, with respect to those
facilities owned, leased or managed by the Company or any subsidiary
that participate in Medicare, Medicaid or both, to receive
reimbursement thereunder and, to our knowledge, have all other Permits
as are necessary under applicable law to own their respective
properties and to conduct their respective businesses as now being
conducted as described in the Effective Prospectus and the Final
Prospectus, except where the failure to have such Permits would not
have a Material Adverse Effect.
(xiv) To the knowledge of such counsel, after reasonable inquiry,
neither the Company nor any of its subsidiaries is currently engaging
in any activity, whether alone or in concert with others, which
constitutes a violation of any federal or state laws (including, but
not limited to, federal antifraud and abuse or similar laws pertaining
to the Medicare, Medicaid or any other federal or state health or
insurance program, and federal or state laws pertaining to insurance
fraud) prohibiting fraudulent or abusive practices connected in any
way with the provision of healthcare services or the billing for such
services provided to a beneficiary of any federal or state health or
insurance program, except such violations which in the aggregate would
not have a Material Adverse Effect.
(e) The Underwriters shall have received an opinion, dated the Closing
Date, from David S. Waskey, General Counsel to the Company and counsel to
the Selling Shareholders to the effect that:
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<PAGE> 25
(i) The Company and each of its subsidiaries has corporate power
and all such Permits as are required under such federal and state
health care laws as specifically regulate the operation of the
facilities, owned, leased or managed by the Company or any subsidiary,
to own their respective properties and to conduct their respective
businesses as now being conducted as described in the Effective
Prospectus and the Final Prospectus and, with respect to those
facilities owned, leased or managed by the Company or any subsidiary
that participate in Medicare, Medicaid or both, to receive
reimbursement thereunder and, to our knowledge, have all other Permits
as are necessary under applicable law to own their respective
properties and to conduct their respective businesses as now being
conducted as described in the Effective Prospectus and the Final
Prospectus, except where the failure to have such Permits would not
have a Material Adverse Effect.
(ii) To the knowledge of such counsel, after reasonable inquiry,
neither the Company nor any of its subsidiaries is currently engaging
in any activity, whether alone or in concert with others, which
constitutes a violation of any federal or state laws (including, but
not limited to, federal antifraud and abuse or similar laws pertaining
to the Medicare, Medicaid or any other federal or state health or
insurance program, and federal or state laws pertaining to insurance
fraud) prohibiting fraudulent or abusive practices connected in any
way with the provision of healthcare services or the billing for such
services provided to a beneficiary of any federal or state health or
insurance program, except such violations which in the aggregate would
not have a Material Adverse Effect.
In rendering such opinion, such counsel may rely as to matters of fact on
certificates of officers of the Company and its subsidiaries, of the Selling
Shareholders and of government officials, and Piper & Marbury L.L.P., in
rendering its opinion, may rely on opinions of the Company's General Counsel and
Reed, Weitkamp, Schell, Cox & Vice, each as counsel to the Company and the
Selling Shareholders. In addition to the matters set forth above, such opinions
shall also include a statement to the effect that the limitations inherent in
the independent verification of factual matters and the character of
determinations involved in the registration process are such that such counsel
has not verified, and is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement, the Effective Prospectus or the Final Prospectus. Such
counsel participated in the preparation of the Registration Statement and the
Effective Prospectus and the Final Prospectus, however, during the course of
which, among other things, such counsel has examined various documents and other
papers and participated in conferences with representatives of the Company, with
the representatives of the Company's independent public accountants, and with
your representatives and your counsel, at which conferences the contents of the
Registration Statement, the Effective Prospectus and the Final Prospectus and
related matters were discussed. On the basis of the information that was
developed in the course of such counsel's above-described participation, such
counsel has no reason to believe that the Registration Statement at
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<PAGE> 26
the time it became effective contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Effective Prospectus
or the Final Prospectus on the date of filing thereof or at the Time of Delivery
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading
(except that such counsel expresses no opinion or belief as to financial and
other financial or statistical data and related schedules which are or should be
included in the Registration Statement or the Effective Prospectus or the Final
Prospectus).
You acknowledge that as used in the opinions rendered pursuant to
paragraphs (c), (d) and (e), "known to such counsel," "to such counsel's
knowledge" and any similar phrase shall refer solely to the current, actual
knowledge, acquired during the course of such counsel's representation of the
Company and the Selling Shareholders, of those attorneys of the firm who have
rendered legal services in connection with such representation (excluding any
lawyers whose involvement has been limited to reviewing these opinions as part
of the firm's opinion review procedure). In addition to the matters set forth
above, such opinion shall also include a statement to the effect that nothing
has come to the attention of such counsel which leads them to believe that the
Registration Statement, the Effective Prospectus and the Final Prospectus or any
amendment or supplement thereto, or any document incorporated by reference
therein, contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included
therein).
(f) The Underwriters shall have received an opinion or opinions, dated
the Closing Date, of Bass, Berry & Sims PLC, counsel for the several
Underwriters, with respect to the Registration Statement and the Final
Prospectus, and such other related matters as the Underwriters may require,
and the Company shall have furnished to such counsel such documents as they
may reasonably request for the purpose of enabling them to pass upon such
matters.
(g) The Underwriters shall have received from KPMG Peat Marwick LLP, a
letter dated the date hereof and, at the Closing Date, a second letter
dated the Closing Date, in form and substance satisfactory to the
Underwriters, stating that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable Rules and Regulations, and to the effect that:
(i) In their opinion, the consolidated financial statements and
schedules and the supplemental financial statements and schedules
examined by them and included or incorporated by reference in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Securities Act and the
published Rules and Regulations and are presented in accordance with
generally accepted accounting principles; and they
26
<PAGE> 27
have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of any interim
consolidated financial statements, selected financial data and/or
condensed financial statements derived from audited financial
statements of the Company;
(ii) The selected supplemental consolidated financial information
included in the Preliminary Prospectus and the Final Prospectus under
the captions "PROSPECTUS SUMMARY" and "SELECTED SUPPLEMENTAL
CONSOLIDATED FINANCIAL DATA" for the five years ended December 31,
1996, agrees with the corresponding amounts in the audited or
unaudited supplemental consolidated financial statements included or
incorporated by reference in the Final Prospectus or previously
reported by them;
(iii) On the basis of a reading of the latest available interim
consolidated financial statements (unaudited) of the Company and its
subsidiaries, a reading of the minute books of the Company and its
subsidiaries, inquiries of officials of the Company responsible for
financial and accounting matters and other specified procedures, all
of which have been agreed to by the Underwriters, nothing came to
their attention that caused them to believe that:
(A) at a specified date not more than five days prior to the
date of delivery of such respective letter, there was any decline
in total assets, decline in shareholders' equity or increase in
long-term liabilities of the Company and its subsidiaries, in
each case as compared with amounts shown in the latest balance
sheets included in the Final Prospectus, except in each case for
changes, decreases or increases which the Final Prospectus
discloses have occurred or may occur or which are described in
such letters; and
(B) for the period from the closing date of the latest
statements of operations included in the Final Prospectus to a
specified date not more than five days prior to the date of
delivery of such respective letter, there were any decreases in
total net revenues or net income of the Company, in each case as
compared with the corresponding period of the preceding year,
except in each case for decreases which the Final Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information specified by you which are derived from the
general accounting records of the Company, which appear in the Final
Prospectus and have compared and agreed such amounts, percentages and
financial information with the
27
<PAGE> 28
accounting records of the Company or to analyses and schedules
prepared by the Company from its detailed accounting records.
In the event that the letters to be delivered referred to above set forth
any such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that the Underwriters shall have determined,
after discussions with officers of the Company responsible for financial and
accounting matters and with KPMG Peat Marwick, that such changes, decreases or
increases as are set forth in such letters do not reflect a material adverse
change in the total assets, shareholders' equity or long-term debt of the
Company as compared with the amounts shown in the latest balance sheets of the
Company included in the Final Prospectus, or a material adverse change in total
net revenues or net income, of the Company, in each case as compared with the
corresponding period of the prior year.
(h) There shall have been furnished to you a certificate, dated the
Closing Date and addressed to you, signed by the Chief Executive Officer
and by the Executive Vice President of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made at and as of the Closing
Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been initiated or are pending, or to their knowledge,
threatened under the Securities Act;
(iii) all filings required by Rule 424, Rule 430A and Rule 434 of
the Rules and Regulations have been made;
(iv) the signatories of said certificate have carefully examined
the Registration Statement, the Effective Prospectus and the Final
Prospectus, and any amendments or supplements thereto, and such
documents do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and
(v) since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amendment or
supplement to the Registration Statement, the Effective Prospectus or
the Final Prospectus which has not been so set forth.
(i) The representations and warranties of each Selling Shareholder in
Section 2 of this Agreement shall be true and correct as of the Closing
Date and such Selling Shareholders shall deliver to the Representatives a
certificate to that effect, dated the
28
<PAGE> 29
Closing Date, signed by such Selling Shareholder or his or its duly
appointed attorney-in-fact.
(j) Subsequent to the respective dates as of which information is
given in the Registration Statement, the Effective Prospectus and the Final
Prospectus, and except as stated therein, the Company and its subsidiaries
have not sustained material loss or interference with their respective
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any court or governmental action, order or decree, or become a party to or
the subject of any litigation which is material to the Company or its
subsidiaries, nor shall there have been any material adverse change, or any
development involving a prospective material adverse change, in the
business, key personnel, financial position, capitalization, net worth or
results of operations of the Company and its subsidiaries, which loss,
interference, litigation or change, in your reasonable judgment shall
render it unadvisable to proceed with the delivery of the Shares.
All such opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
their counsel. The Company shall furnish to the Underwriters such conformed
copies of such opinions, certificates, letters and documents in such quantities
as the Underwriters shall reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for the Option Shares shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Shares, except that all references to
the "Closing Date" shall be deemed to refer to the Option Closing Date, if it
shall be a date other than the Closing Date.
9. Condition of the Company's and the Selling Shareholders' Obligations.
The obligations hereunder of the Company and the Selling Shareholders are
subject to the condition set forth in Section 8(a) hereof.
10. Indemnification and Contribution.
(a) The Company and each of James R. and Margaret H. Fornear, Ronald
G. Geary and E. Halsey Sandford, jointly and severally, agrees to indemnify
and hold harmless each Underwriter, and each person, if any, who controls
any Underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement made by the Company in Section 1 hereof. The Company and each of
the Selling Shareholders, jointly and severally, agrees to indemnify and
hold harmless each Underwriter, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act, against any
29
<PAGE> 30
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto, or
in any Blue Sky application or other written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or
all of the Shares under the securities laws thereof (a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus or any amendment
or supplement thereto or any Blue Sky Application a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company and the Selling Shareholders will not be liable
in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in the Registration
Statement, the Preliminary Prospectus, the Effective Prospectus or Final
Prospectus or such amendment or such supplement or any Blue Sky Application
in reliance upon and in conformity with written information furnished to
the Company by any Underwriter specifically for use therein. Each of the
Selling Shareholders, severally and not jointly, agrees to indemnify and
hold harmless each Underwriter, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter
or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement made by the Selling Shareholders in Section 2 hereof.
In addition to its other obligations under this Section 10(a), the
Company and the Selling Shareholders agree that, as an interim measure
during the pendency of any claims, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, or any inaccuracy in the representations and
warranties of the Company or the Selling Shareholders herein or failure to
performs its or their obligations hereunder, all as described in this
Section 10(a), it will reimburse each Underwriter on a quarterly basis for
all reasonable legal or other expenses incurred in connection with
investigating or defending any such claims, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's or
the Selling Shareholders' obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so
30
<PAGE> 31
held to have been improper, each Underwriter shall promptly return it to
the Company or the Selling Shareholders. Notwithstanding the foregoing, the
liability of any Selling Shareholder shall be limited to the total net
proceeds received from the Underwriters by such Selling Shareholder in
connection with the sale of Shares hereunder.
The foregoing indemnity agreement is subject to the condition that,
insofar as it relates to any such untrue statement, alleged untrue
statement, omission or alleged omission made in a Preliminary Prospectus
but eliminated or remedied in the Effective or Final Prospectus, such
indemnity agreement shall not inure to the benefit of any Underwriter from
whom the person asserting any loss, liability, claim or damage purchased
the Shares (or to the benefit of any person who controls such Underwriter)
if a copy of the Effective Prospectus or Final Prospectus was not furnished
to such person at or prior to the time such action is required by the
Securities Act.
(b) Each Underwriter will indemnify and hold harmless each of the
Selling Shareholders and the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Securities Act against any
losses, claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or Final Prospectus, or any amendment or supplement
thereto, or any Blue Sky Application, or arise out of or are based upon the
omission or the alleged omission to state in the Registration Statement,
any Preliminary Prospectus, the Effective Prospectus or Final Prospectus or
any amendment or supplement thereto or any Blue Sky Application a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter specifically for
use therein (it being understood that the only information so provided is
the information included in the last paragraph on the cover page and under
the caption "Underwriting" in any Preliminary Prospectus and in the
Effective Prospectus and the Final Prospectus); and will reimburse any
legal or other expenses reasonably incurred by any Selling Shareholder or
the Company or any such director, officer or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
10 of notice of the commencement of any action, including governmental
proceedings, such indemnified party will, if a claim in respect thereof is
to be made against the indemnifying
31
<PAGE> 32
party under this Section 10 notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 10. In case any such action is
brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate therein, and to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section 10 for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation except that you shall have the right to employ separate
counsel if, in your reasonable judgment, it is advisable for you and any
other Underwriters to be represented by separate counsel, and in that event
the fees and expenses of separate counsel shall be paid by the Company and
the Selling Shareholders.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in the
preceding part of this Section 10 is for any reason held to be unavailable
to the Underwriters, the Company or the Selling Shareholders or is
insufficient to hold harmless an indemnified party, then the Company and
the Selling Shareholders shall contribute to the damages paid by the
several Underwriters, and the several Underwriters shall contribute to the
damages paid by the Company and the Selling Shareholders; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. In determining the amount of contribution to which the
respective parties are entitled, there shall be considered the relative
benefits received by each party from the offering of the Shares (taking
into account the portion of the proceeds of the offering realized by each),
the parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity to
correct and prevent any statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company, the Selling
Shareholders and the Underwriters agree that it would not be equitable if
the amount of such contribution were determined by pro rata or per capita
allocation (even if the Underwriters were treated as one entity for such
purpose). No Underwriter or person controlling such Underwriter shall be
obligated to make contribution hereunder which in the aggregate exceeds the
underwriting discount applicable to the Shares purchased by such
Underwriter under this Agreement, less the aggregate amount of any damages
which such Underwriter and its controlling persons have otherwise been
required to pay in respect of the same or any similar claim. The
Underwriters' obligations to contribute hereunder are several in proportion
to their respective underwriting obligations and not joint. For purposes of
this Section, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Securities Act shall have the same rights to
contribution as such Underwriter,
32
<PAGE> 33
and each director of the Company, each officer of the Company who signed
the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act, shall have
the same rights to contribution as the Company.
(e) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is a
party or is (or would be, if a claim were to be made against such
indemnified party) entitled to indemnity hereunder, unless such settlement
includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding.
11. Default of Underwriters. If any Underwriter defaults in its obligation
to purchase Shares hereunder and if the total number of Shares which such
defaulting Underwriter agreed but failed to purchase is ten percent or less of
the total number of Shares to be sold hereunder, the non-defaulting Underwriters
shall be obligated severally to purchase (in the respective proportions which
the number of Shares set forth opposite the name of each non-defaulting
Underwriter in Schedule II hereto bears to the total number of Shares set forth
opposite the names of all the non-defaulting Underwriters), the Shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase. If
any Underwriter so defaults and the total number of Shares with respect to which
such default or defaults occur is more than ten percent of the total number of
Shares to be sold hereunder, and arrangements satisfactory to the other
Underwriters and the Company for the purchase of such Shares by other persons
(who may include the non-defaulting Underwriters) are not made within 36 hours
after such default, this Agreement, insofar as it relates to the sale of the
Shares, will terminate without liability on the part of the non-defaulting
Underwriters or the Company except for (i) the provisions of Section 10 hereof,
and (ii) the expenses to be paid or reimbursed by the Company pursuant to
Section 7. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 11. Nothing herein shall
relieve a defaulting Underwriter from liability for its default.
12. Default by the Selling Shareholders. If the Selling Shareholders shall
fail to sell and deliver the number of Firm Shares or Option Shares, as the case
may be, that the Selling Shareholders are obligated to sell, the Representatives
may, at their option, by notice to the Company, either (a) require the Company
to sell and deliver such number of shares of Common Stock as to which the
Selling Shareholders have defaulted, or (b) elect to purchase the Firm Shares
and the Option Shares that the Company and the non-defaulting Selling
Shareholders have agreed to sell pursuant to this Agreement. In the event of a
default under this Section that does not result in the termination of this
Agreement, either the Representatives or the Company shall have the right to
postpone the First Closing Date or Option Closing Date for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. No action
taken pursuant to this Section shall relieve the Company or the Selling
Shareholder so defaulting from liability, if any, in respect of such default.
33
<PAGE> 34
13. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Selling
Shareholders and the Company, its officers and the several Underwriters set
forth in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors or any Underwriter or any controlling person, (ii) any termination of
this Agreement and (iii) delivery of and payment for the Shares.
14. Effective Date. This Agreement shall become effective at whichever of
the following times shall first occur: (i) at 11:30 A.M., Washington, D.C. time,
on the next full business day following the date on which the Registration
Statement becomes effective or (ii) at such time after the Registration
Statement has become effective as the Underwriters shall release the Firm Shares
for sale to the public; provided, however, that the provisions of Sections 7,
10, 13 and 14 hereof shall at all times be effective. For purposes of this
Section 14, the Firm Shares shall be deemed to have been so released upon the
release by the Underwriters of telegrams or other notifications offering the
Firm Shares for sale to securities dealers, whichever may occur first.
15. Termination.
(a) The Company's obligations under this Agreement may be terminated
by the Company by notice to the Underwriters (i) at any time before it
becomes effective in accordance with Section 14 hereof, or (ii) in the
event that the condition set forth in Section 9 shall not have been
satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the Underwriters by notice to
the Company (i) at any time before it becomes effective in accordance with
Section 14 hereof; (ii) in the event that at or prior to the First Closing
Date the Company or any Selling Shareholder shall have failed, refused or
been unable to perform any agreement on its part to be performed hereunder
or any other condition to the obligations of the Underwriters hereunder is
not fulfilled; (iii) if at or prior to the Closing Date trading in
securities on the New York Stock Exchange, the American Stock Exchange or
the over-the-counter market shall have been suspended or minimum or maximum
prices shall have been established on either of such Exchanges or such
market, or a banking moratorium shall have been declared by Federal or
state authorities; (iv) if at or prior to the Closing Date trading in
securities of the Company shall have been suspended; or (v) if there shall
have been such a material change in general economic, political or
financial conditions or if the effect of international conditions on the
financial markets in the United States shall be such as, in your reasonable
judgment, makes it impractical to proceed with the delivery of the Shares.
(c) Termination of this Agreement pursuant to this Section 15 shall be
without liability of any party to any other party other than as provided in
Sections 7 and 10 hereof.
34
<PAGE> 35
16. Notices. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be mailed or delivered or telegraphed and
confirmed in writing to J. C. Bradford & Co., L.L.C., J. C. Bradford Financial
Center, 330 Commerce Street, Nashville, Tennessee 37201, Attention: Thomas C.
Wylly II, or if sent to the Company shall be mailed, delivered or telegraphed
and confirmed in writing to the Company at 10140 Linn Station Road, Louisville,
Kentucky 40223, Attention: Ronald G. Geary.
17. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company, the Selling Shareholders and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the representations and warranties of the Company and the Selling Shareholders
contained in this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the
Securities Act, and (ii) the indemnities by the Underwriters shall also be for
the benefit of the directors of the Company, officers of the Company who have
signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the Securities Act. No purchaser of
Shares from any Underwriter will be deemed a successor because of such purchase.
The validity and interpretation of this Agreement shall be governed by the laws
of the State of Tennessee. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. You hereby represent and
warrant to the Company that you have authority to act hereunder on behalf of the
several Underwriters, and any action hereunder taken by you will be binding upon
all the Underwriters.
35
<PAGE> 36
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute a binding agreement between the Company, each of
the Selling Shareholders and each of the several Underwriters.
Very truly yours,
RES-CARE, INC.
By:_________________________________________
Title: President and Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the SELLING SHAREHOLDERS
date first above written.
By:_________________________________________
J. C. Bradford & Co., L.L.C. Attorney-in-fact
Montgomery Securities
Equitable Securities Corporation
By: J. C. Bradford & Co., L.L.C.
for themselves and as Representatives
of the Several Underwriters
By: _________________________________
Title: Partner
36
<PAGE> 37
SCHEDULE I
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares
Name Being Offered
---- ----------------
<S> <C>
James R. Fornear................................................. 225,000
Margaret H. Fornear.............................................. 225,000
Ronald G. Geary.................................................. 65,000
E. Halsey Sanford................................................ 100,092
Spiro B. Mitsos.................................................. 50,000
Andrew Eckman.................................................... 10,000
David H. Fornear................................................. 19,250
Diana L. Fornear................................................. 5,000
Stanley M. Goldstein............................................. 227,722
Joseph Parris.................................................... 30,000
Estella J. Wesley................................................ 10,000
Walter A. Winshall............................................... 123,936
</TABLE>
37
<PAGE> 38
SCHEDULE II
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm Shares to
Underwriter Be Purchased
----------- --------------
<S> <C>
J. C. Bradford & Co., L.L.C. ....................................
Montgomery Securities............................................
Equitable Securities Corporation.................................
---------
Total 2,591,000
=========
</TABLE>
38
<PAGE> 1
EXHIBIT 5.1
[Reed Weitkamp Schell Cox & Vice Letterhead]
Res-Care, Inc.
10140 Linn Station Road
Louisville, Kentucky 40223
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Res-Care, Inc., a Kentucky corporation (the
"Company"), in connection with a Registration Statement on Form S-3 which was
filed by the Company under the Securities Act of 1933, as amended, the
"Registration Statement") and the issuance of up to 3,000,000 shares (the
"Shares") of the Common Stock, no par value per share, of the Company, of which
1,500,000 shares are to be sold by the Company and 1,500,000 shares are to be
sold by certain stockholders (the "Selling Stockholders") of the Company, and
up to an additional 450,000 shares which are to be offered by the Company to
cover over-allotments, if any, pursuant to the Registration Statement.
In that capacity, we have reviewed the Amended and Restated Articles of
Incorporation and Bylaws of the Company, the Registration Statement, the
resolutions adopted by the Company's Board of Directors that provide for the
issuance or delivery of the Shares to be issued or delivered pursuant to the
Registration Statement and such other materials and matters as we have deemed
necessary for the issuance of this opinion.
Based upon the foregoing, we are of the opinion and advise you that:
1. The Shares to be sold by the Company have been duly and validly
authorized and, upon issuance and delivery thereof as contemplated in the
Registration Statement, will be legally issued, fully paid, and non-assessable.
2. The Shares to be sold by the Selling Stockholders (other than
E. Halsey Sandford) have been duly and validly authorized and, upon issuance and
delivery thereof as contemplated in the Registration Statement, will be legally
issued, fully paid, and non-assessable. The Shares to be sold by E. Halsey
Sandford, upon exercise of his employee stock options applicable to such Shares
and his payment of the option price provided therein, will be duly and validly
authorized and, upon issuance and delivery thereof as contemplated in the
Registration Statement, will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the prospectus which is a part of the Registration Statement.
Very truly yours,
REED WEITKAMP SCHELL COX & VICE
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
We consent to the inclusion in the Registration Statement on Form S-3 (No.
333-23599) of Res-Care, Inc. of our reports dated February 28, 1997, with
respect to the supplemental consolidated balance sheets of Res-Care, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the related supplemental
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996, and the related
schedule, and to the references to our firm under the headings "Experts" and
"Selected Consolidated Financial Data" in the Prospectus.
KPMG PEAT MARWICK LLP
April 15, 1997
<PAGE> 2
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-3 No. 333-23599) of Res-Care, Inc. of our reports dated February 26,
1997, with respect to the consolidated balance sheets of Res-Care, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1996, and the related schedule,
which reports appear in the Form 10-K for the year ended December 31, 1996.
KPMG PEAT MARWICK LLP
April 15, 1997
