<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
SECURITIES ACT REGISTRATION NO. 333-75875
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4/A
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RES-CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
KENTUCKY 8050 61-0875371
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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
CHAIRMAN, 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, ESQUIRE ROGER E. LAUTZENHISER, ESQUIRE
LAWRENCE R. SEIDMAN, ESQUIRE VORYS, SATER, SEYMOUR AND PEASE LLP
PIPER & MARBURY, L.L.P. 52 EAST GAY STREET
36 SOUTH CHARLES STREET P.O. BOX 1008
BALTIMORE, MARYLAND 21201 COLUMBUS, OHIO 43216
(410) 539-2530 (614) 464-6400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and all other conditions to the merger contemplated by the Agreement
and Plan of Merger dated April 2, 1999 described in the enclosed Proxy
Statement/Prospectus have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering by
Rule 462(b) 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 this Form is a post-effective amendment filed by Rule 462(b) 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. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE (1) PRICE (1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shares.............................. 5,528,000(2) N/A $24,281,825 $6,751*
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------
* Previously paid on April 8, 1999.
(1) The proposed maximum offering price is estimated solely for purposes of
calculating the registration fee in accordance with Rule 457(f)(2) based on
the sum of: (A) the $4,812,028 book value of the PeopleServe common stock
being exchanged in the merger; (B) the $1,100,000 estimated value of certain
assets being acquired from affiliates of PeopleServe prior to the merger in
exchange for PeopleServe common stock; (C) the $12,252,511 book value of
PeopleServe Series B convertible preferred stock (including accrued
dividends) being exchanged in the merger; (D) the $6,017,808 book value of
PeopleServe Series A redeemable preferred stock (including accrued
dividends) being exchanged in the merger and (E) the $99,478 book value of
PeopleServe warrants being exercised for PeopleServe common stock prior to
the merger. All PeopleServe securities will be exchanged for Res-Care common
shares being registered hereby.
(2) The 5,528,000 Res-Care common shares being registered hereby is based on the
assumption that the closing price (as defined in the merger agreement) of
Res-Care common shares is $18.00 per share. The exchange ratio applicable to
PeopleServe common stock and Series B convertible preferred stock becomes
fixed below this price. However, the exchange ratio for the Series A
redeemable preferred stock (including accrued dividends) and the accrued
dividends on the Series B convertible preferred stock would continue to
adjust in the event that the closing price of the Res-Care common shares is
below $18.00.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
RES-CARE LOGO
April 29, 1999
Dear Shareholder:
As part of our strategic plans for Res-Care, we are working to expand our
business and increase our service offerings. I am writing you today about an
important part of our plans.
The Board of Directors of Res-Care has approved a merger that would result
in Res-Care acquiring PeopleServe, Inc. and PeopleServe becoming a wholly-owned
subsidiary of Res-Care. The combined entity will be the leading provider of
services to persons with mental retardation and developmental disabilities and
will continue to be a leader in providing services to at-risk and troubled
youths.
Before we can go ahead with this merger, the shareholders of Res-Care must
vote on the specific proposal that will allow the merger to take place. This
proposal approves the issuance of Res-Care common shares in the merger and in
exchange for PeopleServe stock options. Res-Care common shares are quoted on The
Nasdaq Stock Market's National Market under the symbol "RSCR". We are very
excited about the opportunities we see in merging with PeopleServe, so we are
urging you to vote FOR the proposal explained in the enclosed Proxy
Statement/Prospectus. YOUR BOARD OF DIRECTORS HAS CAREFULLY STUDIED THE TERMS
AND CONDITIONS OF THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT YOU APPROVE THE
PROPOSAL.
YOU SHOULD ALSO CAREFULLY CONSIDER THE RISK FACTORS RELATING TO THE MERGER
THAT WE DESCRIBE STARTING ON PAGE 23 OF THIS PROXY STATEMENT/PROSPECTUS.
In addition, in connection with Res-Care's regular annual shareholders
meeting, we are asking you to vote on the election of directors and the
ratification of the selection of KPMG LLP as Res-Care's independent auditors for
the current fiscal year.
To vote your shares, you may use the enclosed proxy card or attend the
annual shareholders meeting. The meeting will be held on June 14, 1999 at 11:00
a.m., local time, at Louisville Marriott East Hotel, 1903 Embassy Square
Boulevard, Louisville, Kentucky 40299.
The Proxy Statement/Prospectus provides you with detailed information about
the proposed merger. We encourage you to read this document carefully, in its
entirety. In addition, you may obtain additional information about Res-Care from
documents filed with the Securities and Exchange Commission.
YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED PREPAID ENVELOPE. THIS WILL ALLOW YOUR SHARES TO BE VOTED WHETHER OR
NOT YOU ATTEND THE MEETING. IF YOU ATTEND THE MEETING IN PERSON, YOU MAY, IF YOU
WISH, VOTE PERSONALLY ON ALL MATTERS BROUGHT BEFORE THE MEETING EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY.
Sincerely,
RONALD G. GEARY SIGNATURE
Ronald G. Geary
Chairman, President and Chief
Executive Officer
<PAGE> 3
<TABLE>
<S> <C>
RES-CARE, INC. PEOPLESERVE, INC.
PROXY STATEMENT/PROSPECTUS PROXY STATEMENT/PROSPECTUS
FOR ANNUAL MEETING OF SHAREHOLDERS FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON TO BE HELD ON
JUNE 14, 1999 JUNE 14, 1999
</TABLE>
PROSPECTUS
COMMON SHARES
The boards of directors of each of Res-Care, Inc. and PeopleServe, Inc. are
sending you this Proxy Statement/Prospectus in connection with the solicitation
of proxies for the approval of the proposed merger of PeopleServe with Res-Care.
Res-Care shareholders will be asked to approve the issuance of Res-Care common
shares in the merger and in exchange for PeopleServe stock options, in addition
to election of directors and ratification of the selection of independent
auditors. The Res-Care annual shareholders meeting will be held on June 14, 1999
at Louisville Marriott East Hotel, 1903 Embassy Square Boulevard, Louisville,
Kentucky. PeopleServe shareholders will be asked to approve: (1) the merger and
the merger agreement; (2) an amendment to the certificate of incorporation
permitting PeopleServe preferred stock to be exchanged for Res-Care common
shares; and (3) certain severance payments to and option exchanges with
PeopleServe senior officers. The PeopleServe special stockholders meeting will
be held on June 14, 1999 at PeopleServe's executive offices.
If the merger is completed, each share of common stock and Series B
convertible preferred stock of PeopleServe will be exchanged for 0.4523 Res-Care
common shares assuming a closing price for Res-Care common shares of at least
$20 and not more than $26. Each share of PeopleServe Series A redeemable
preferred stock (including accrued dividends) and accrued dividends on the
PeopleServe Series B convertible preferred stock will also be exchanged for
Res-Care common shares based on the applicable closing price. The actual number
of shares issued may be more or less depending upon the closing price. In all
cases, the closing price is the average closing price of Res-Care common shares
for the 15 trading days ending four trading days before the closing date.
Res-Care common shares trade on The Nasdaq Stock Market under the symbol
"RSCR". PeopleServe's securities are not publicly traded. On April 29, 1998, the
closing sale price of Res-Care common shares was $17 7/8.
This Joint Proxy Statement/Prospectus describes the terms and conditions of
the merger agreement and includes, as appendices, a complete copy of the merger
agreement and other major transaction agreements.
------------------------
THE MERGER AND AN INVESTMENT IN RES-CARE COMMON SHARES AS A RESULT OF THE
MERGER INVOLVES CERTAIN RISKS. YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS
BEGINNING ON PAGE 23 BEFORE YOU VOTE ON THE MERGER OR THE PROPOSAL TO ISSUE
RES-CARE COMMON SHARES IN CONNECTION WITH THE MERGER AND IN EXCHANGE FOR
PEOPLESERVE STOCK OPTIONS.
------------------------
THE STOCKHOLDERS OF PEOPLESERVE ALSO WILL CONSIDER AND VOTE ON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, AND THE SHAREHOLDERS OF
RES-CARE ALSO WILL CONSIDER THE ELECTION OF DIRECTORS, THE RATIFICATION OF THE
SELECTION OF INDEPENDENT ACCOUNTANTS, AND OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING, OR, IN THE CASE OF EITHER COMPANY, ANY ADJOURNMENTS OF THE
RESPECTIVE MEETINGS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus is dated April 29, 1999 and is first being sent
to PeopleServe and
Res-Care shareholders on or about May 4, 1999.
<PAGE> 4
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the merger described in this Proxy Statement/Prospectus
or the Res-Care common shares to be issued in the merger, nor have they
determined if this Proxy Statement/Prospectus is accurate or adequate. The
Securities and Exchange Commission has not determined the fairness or the merits
of the merger. Any representation to the contrary is a criminal offense.
This Proxy Statement/Prospectus is dated April 29, 1999 and is first being
mailed to the shareholders of Res-Care on or about May 4, 1999.
<PAGE> 5
PEOPLESERVE, INC.
5555 PARKCENTER CIRCLE, SUITE 200
DUBLIN, OHIO 43017-3586
April 29, 1999
Dear Stockholder:
I am pleased to forward the enclosed Proxy Statement/Prospectus for the
meeting of stockholders of PeopleServe to be held on June 14, 1999, at 10:00
a.m., local time, at 5555 Parkcenter Circle, Suite 200, Dublin, Ohio. At the
meeting, the stockholders of PeopleServe will be asked to consider and vote upon
the following:
- A combination of the businesses of PeopleServe and Res-Care, Inc. through
a merger of Res-Care Sub, Inc., a wholly-owned subsidiary of Res-Care,
into PeopleServe.
- Amendment of the certificate of incorporation of PeopleServe to change
the terms of the Series A redeemable preferred stock and the Series B
convertible preferred stock so that the Series A and Series B preferred
stock will be converted into Res-Care common shares pursuant to the
merger.
- Approval of certain payments by PeopleServe to Vincent D. Pettinelli,
Timothy J. Vogel and Scott T. Macomber under their employment agreements
with PeopleServe and the exchange of PeopleServe stock options held by
Mr. Vogel and Mr. Macomber for Res-Care common shares.
The merger is subject to the terms and conditions of an agreement and plan
of merger dated April 2, 1999. As a result of the merger, each of the issued and
outstanding shares of PeopleServe common stock, Series A redeemable preferred
stock (together with accrued and unpaid dividends) and Series B convertible
preferred stock (together with accrued and unpaid dividends) will be converted,
without any action on the part of the holders of such shares, into the right to
receive Res-Care common shares.
The actual number of Res-Care shares to be issued in the merger to the
holders of PeopleServe common stock and Series B convertible preferred stock
will be based on the average of the closing prices of Res-Care common shares for
each of the fifteen trading days ending four trading days prior to the closing
date of the merger. Assuming that the average closing price of the Res-Care
common shares is in the range of $20 to $26 per share, the holders of each share
of PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will receive 0.4523
Res-Care common shares in the merger. If the average closing price is less than
$20 per share or greater than $26 per share, this exchange ratio will change as
described in the merger agreement and the accompanying Proxy
Statement/Prospectus. PeopleServe warrantholders have agreed to exercise their
warrants prior to the merger, and their PeopleServe common stock will be
exchanged in the merger for Res-Care common shares on the same basis as all
other PeopleServe common stock.
The number of Res-Care common shares issuable in the merger to the holders
of the PeopleServe Series A redeemable preferred stock will be equal to its
liquidation value plus all accrued and unpaid dividends divided by the average
closing price of the Res-Care common shares. The holders of the PeopleServe
Series B convertible preferred stock will also receive, in exchange for their
accrued and unpaid dividends on such shares, Res-Care common shares equal to the
amount of such accrued and unpaid dividends divided by the
<PAGE> 6
average closing price of the Res-Care common shares. The Res-Care common shares
held by stockholders prior to the merger will remain unchanged by the merger.
THE PEOPLESERVE BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED
THE TERMS AND CONDITIONS OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
AND THE MERGER AGREEMENT. THE BOARD BELIEVES THE TERMS AND CONDITIONS OF THE
MERGER AGREEMENT AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE
PEOPLESERVE STOCKHOLDERS. THE BOARD OF DIRECTORS ALSO HAS DECLARED THE
ADVISABILITY OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION. THE BOARD HAS
APPROVED THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION AND THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF
PEOPLESERVE VOTE FOR APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION AND THE MERGER AGREEMENT.
THE PEOPLESERVE BOARD HAS ALSO APPROVED SEVERANCE PAYMENTS TO MR.
PETTINELLI, MR. VOGEL AND MR. MACOMBER UNDER THEIR EMPLOYMENT AGREEMENTS WITH
PEOPLESERVE AND HAS AUTHORIZED THE EXCHANGE OF PEOPLESERVE STOCK OPTIONS HELD BY
MR. VOGEL AND MR. MACOMBER FOR RES-CARE COMMON SHARES AND RECOMMENDS THAT THE
STOCKHOLDERS OF PEOPLESERVE VOTE FOR THESE TRANSACTIONS.
The merger agreement must be approved by the holders of a majority of the
outstanding shares of PeopleServe common stock and Series B convertible
preferred stock, voting together as a single class. In addition, the proposed
amendment to the certificate of incorporation must be approved by the holders of
60% of the outstanding shares of Series B convertible preferred stock, voting
separately, the holders of a majority of the outstanding shares of Series A
redeemable preferred stock, voting separately, and the holders of a majority of
PeopleServe common stock, Series A redeemable preferred stock and Series B
convertible preferred stock, voting together as a single class. The payments to
Messrs. Pettinelli, Vogel and Macomber and the exchange of PeopleServe stock
options held by Mr. Vogel and Mr. Macomber for Res-Care common shares must be
approved by the holders of 75% of the outstanding shares of PeopleServe common
stock (excluding from any vote shares held by the recipient of the payment) and
Series B convertible preferred stock, voting together as a single class. Your
vote on these matters is very important. We urge you to review carefully the
enclosed material and to return your proxy promptly.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE AND
PROMPTLY RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IF YOU
ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY. YOU SHOULD NOT SEND IN THE STOCK CERTIFICATES
FOR YOUR PEOPLESERVE SHARES AT THIS TIME.
On behalf of the Board, I thank you for your support and urge you to vote
FOR approval of the merger agreement as well as the other related items of
business summarized above.
Very truly yours,
TIMOTHY J. VOGEL SIGNATURE
Timothy J. Vogel
President and Chief Executive
Officer
<PAGE> 7
RES-CARE, INC.
10140 LINN STATION ROAD
LOUISVILLE, KENTUCKY 40223
-------------------------
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 14, 1999
-------------------------
The annual meeting of shareholders of Res-Care Inc., a Kentucky
corporation, will be held on Monday, June 14, 1999 at Louisville Marriott East
Hotel, 1903 Embassy Square Boulevard, Louisville, Kentucky 40299, commencing at
11:00 a.m. local time, for the following purposes:
1. To approve the issuance of Res-Care common shares in connection
with the merger of its wholly-owned subsidiary, Res-Care Sub, Inc., with
PeopleServe, Inc. and in exchange for PeopleServe stock options in the
amounts and upon the terms described in the Proxy Statement/Prospectus and
the accompanying merger agreement;
2. To elect seven directors to serve for a term of one year and until
their respective successors are elected and qualified;
3. To ratify the selection of KPMG LLP as Res-Care's independent
auditors for the fiscal year ending December 31, 1999; and
4. To transact such other business as may properly be brought before
the meeting or any adjournment or postponement of the meeting.
The approval of the issuance of Res-Care common shares is a condition to
the consummation of the merger with PeopleServe. A description of the merger
with PeopleServe and other important matters relating to the business to be
conducted at the meeting are described in the attached Proxy
Statement/Prospectus, which you are urged to read carefully.
The Res-Care Board of Directors has fixed the close of business on April
29, 1999 as the record date for the determination of shareholders entitled to
notice of and to vote at the meeting.
By Order of the Board of Directors
/s/ Spiro B. Mitsos
Spiro B. Mitsos
Secretary
Louisville, Kentucky
April 29, 1999
YOUR VOTE IS IMPORTANT.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE> 8
PEOPLESERVE, INC.
5555 PARKCENTER CIRCLE, SUITE 200
DUBLIN, OHIO 43017-3586
NOTICE OF MEETING OF STOCKHOLDERS
TO BE HELD JUNE 14, 1999
A meeting of stockholders of PeopleServe, Inc., a Delaware corporation,
will be held on Monday, June 14, 1999 at 5555 Parkcenter Circle, Suite 200,
Dublin, Ohio, commencing at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve (a) the Agreement and
Plan of Merger, by and among PeopleServe, Inc., Res-Care, Inc. and
Res-Care Sub, Inc., a wholly-owned subsidiary of Res-Care, Inc., and
(b) the merger of Res-Care Sub, Inc. into PeopleServe pursuant to which
PeopleServe will become a wholly-owned subsidiary of Res-Care, Inc. At
the effective time of the merger, each outstanding share of PeopleServe
common stock (including common stock issued on exercise of PeopleServe
warrants), Series A redeemable preferred stock (including accrued and
unpaid dividends) and Series B convertible preferred stock (including
accrued and unpaid dividends) will be converted into Res-Care common
shares. At that time, each outstanding option to purchase PeopleServe
common stock will also be exchanged for Res-Care common shares.
2. To consider and vote upon a proposal to amend the certificate of
incorporation of PeopleServe to (a) require the exchange of the
outstanding Series A redeemable preferred stock, together with accrued
and unpaid dividends, for Res-Care common shares pursuant to the terms
of the Agreement and Plan of Merger referred to above and (b) require
the exchange of the outstanding Series B convertible preferred stock,
together with accrued and unpaid dividends, for Res-Care common shares
pursuant to the terms of the Agreement and Plan of Merger.
3. To consider and vote upon the approval of severance payments to Vincent
D. Pettinelli, Timothy J. Vogel and Scott T. Macomber pursuant to their
employment agreements with PeopleServe and the exchange of PeopleServe
stock options held by Mr. Vogel and Mr. Macomber for Res-Care common
shares.
4. To transact such other business as may properly come before the meeting
of stockholders.
The merger and related transactions are more fully described in the Proxy
Statement/ Prospectus and the attached appendices, including the merger
agreement and the proposed amendment to the certificate of incorporation of
PeopleServe, accompanying this notice. Please read these items carefully.
Only stockholders of record at the close of business on the day prior to
the day this notice is given to stockholders are entitled to notice of and to
vote at the meeting or any adjournment of the meeting. PeopleServe anticipates
that this notice will be given on May 4, 1999.
<PAGE> 9
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE COMPLETE,
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. A STOCKHOLDER WHO EXECUTES A PROXY MAY REVOKE IT AT ANY
TIME BEFORE IT IS EXERCISED BY GIVING WRITTEN NOTICE TO PEOPLESERVE, BY
SUBSEQUENTLY FILING ANOTHER PROXY OR BY ATTENDING THE MEETING AND VOTING IN
PERSON.
By Order of the Board of Directors
ANNE M. STURTZ SIGNATURE
Anne M. Sturtz
Secretary
Dublin, Ohio
April 29, 1999
<PAGE> 10
This Proxy Statement/Prospectus incorporates important business and
financial information about Res-Care that is not included in or delivered with
the document. This information is available without charge to shareholders upon
written or oral request at the following address: Res-Care, Inc., 10140 Linn
Station Road, Louisville, Kentucky 40223; telephone number (502) 394-2100.
If you would like to request any additional documents or information,
please do so by June 7, 1999 to receive them before the meeting.
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE RES-CARE/PEOPLESERVE
MERGER.................................................... i
SUMMARY..................................................... 1
FORWARD-LOOKING STATEMENTS.................................. 21
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 22
RISK FACTORS................................................ 23
GENERAL INFORMATION ABOUT THE MEETINGS...................... 32
Date, Time and Place of the Meetings...................... 32
Record Date and Outstanding Shares........................ 32
Purposes of the Meetings.................................. 32
Vote Required............................................. 34
Voting of Proxies......................................... 36
Authorization to Vote on Adjournment and Other Matters.... 37
Revocation of Proxies..................................... 38
Solicitation of Proxies................................... 38
PROPOSAL ONE -- THE MERGER.................................. 39
THE MERGER................................................ 39
Background of the Merger.................................. 39
PeopleServe Reasons for the Merger........................ 43
Res-Care Reasons for the Merger........................... 44
Opinion of Res-Care's Financial Advisors.................. 46
Interests of Persons in the Merger Other Than as
Shareholders........................................... 49
Composition of Res-Care's Board Following the Merger...... 51
Employment and Non-Competition Agreements................. 51
Affiliate Transactions.................................... 51
Form of the Merger........................................ 54
Consideration for the Merger.............................. 55
Effective Time of the Merger.............................. 56
Procedures for Exchange of PeopleServe Stock
Certificates........................................... 56
Exchange of PeopleServe Stock Options..................... 56
Anticipated Accounting Treatment.......................... 57
Material Federal Income Tax Considerations................ 57
</TABLE>
<PAGE> 11
<TABLE>
<S> <C>
Regulatory Approvals Required............................. 59
Nasdaq Stock Market Listing............................... 59
Appraisal Rights.......................................... 60
Resale of Res-Care Common Shares After the Merger......... 63
THE MERGER AGREEMENT...................................... 65
General................................................... 65
Exchange Ratios; Fractional Shares........................ 65
Exchange of PeopleServe Stock Options..................... 66
Certain Representations and Warranties.................... 67
Certain Covenants and Agreements.......................... 68
Conditions to the Merger.................................. 71
Termination............................................... 74
Termination Fee........................................... 75
Amendment................................................. 75
Waiver.................................................... 75
Expenses.................................................. 75
REGISTRATION RIGHTS AGREEMENT............................. 76
MAJORITY SHAREHOLDERS' AGREEMENT.......................... 77
AMENDMENT TO CERTIFICATE OF INCORPORATION OF
PEOPLESERVE............................................ 78
ABOUT RES-CARE............................................ 80
General Information....................................... 80
Beneficial Ownership of Equity Securities................. 81
Certain Information Incorporated by Reference............. 83
ABOUT PEOPLESERVE......................................... 84
General Discussion of the Business........................ 84
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 85
Results of Operations..................................... 86
Liquidity and Capital Resources........................... 87
Year 2000 Issue........................................... 88
Effect of Recently Issued Accounting Standards............ 89
Quantitative and Qualitative Disclosure About Market
Risk................................................... 89
COMPARISON OF THE RIGHTS OF HOLDERS OF RES-CARE COMMON
SHARES AND PEOPLESERVE CAPITAL STOCK................... 90
Authorized Capital Stock; Blank Check Stock Provisions.... 90
Size of the Board of Directors............................ 93
Classified Board of Directors............................. 94
Cumulative Voting......................................... 95
Removal of Board of Directors; Filling Vacancies.......... 95
Amendment of Articles of Incorporation and Bylaws......... 95
</TABLE>
<PAGE> 12
<TABLE>
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Power to Call Special Meetings of Shareholders............ 95
Advance Notice of Making Nominations at a Meeting or for
Raising Business....................................... 96
Shareholder Action Without a Meeting...................... 97
Shareholder Approval of Certain Business Combinations..... 97
Indemnification and Limitation of Liability............... 98
Dividends and Repurchase of Shares........................ 100
Dissenters' Appraisal Rights.............................. 101
PROPOSAL TWO -- ELECTION OF DIRECTORS....................... 102
Nominees.................................................. 102
Executive Officers of Res-Care............................ 103
Committees of the Board of Directors...................... 103
Certain Relationships and Related Transactions............ 104
Compliance with Section 16(a) of the Exchange Act......... 105
Report on Executive Compensation.......................... 105
Executive Compensation.................................... 107
Employment Agreements..................................... 109
Compensation of Directors................................. 111
Performance Graph......................................... 111
PROPOSAL THREE -- SELECTION OF INDEPENDENT AUDITORS......... 112
FUTURE SHAREHOLDER PROPOSALS................................ 112
OTHER MATTERS............................................... 113
LEGAL MATTERS............................................... 113
EXPERTS..................................................... 113
CONSOLIDATED FINANCIAL STATEMENTS OF PEOPLESERVE, INC....... F-1
AGREEMENT AND PLAN OF MERGER................................ A-1
REGISTRATION RIGHTS AGREEMENT............................... B-1
MAJORITY SHAREHOLDERS' AGREEMENT............................ C-1
OPINION OF J.C. BRADFORD & CO., LLC......................... D-1
AMENDMENT TO PEOPLESERVE CERTIFICATE OF
INCORPORATION............................................. E-1
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW......... G-1
</TABLE>
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QUESTIONS AND ANSWERS ABOUT
THE RES-CARE/PEOPLESERVE MERGER
Q: AS A PEOPLESERVE STOCKHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: If you own PeopleServe common stock, Series B convertible preferred stock or
Series A redeemable preferred stock, your investment in PeopleServe will be
converted into Res-Care common shares as follows:
- Each share of PeopleServe common stock, including common stock issued on
exercise of PeopleServe warrants, will be converted into 0.4523 Res-Care
common shares;
- Each share of PeopleServe Series B convertible preferred stock (excluding
accrued and unpaid dividends) will be converted into 0.4523 Res-Care
common shares; and
- The liquidation value (including accrued and unpaid dividends) of
PeopleServe Series A redeemable preferred stock and the accrued and
unpaid dividends on the PeopleServe Series B convertible preferred stock
will be converted into Res-Care common shares based upon the actual
closing price. Thus, assuming a $23.00 closing price, $100 of accrued
dividends or liquidation value will become 4.3478 Res-Care common shares.
The portion of a Res-Care common share to be exchanged for a share of each
class of PeopleServe securities is based on the closing price. For all purposes,
the closing price is the average closing price for the 15 trading days ending
four trading days before the closing date. If the closing price of Res-Care
common shares is at least $20.00 and not more than $26.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.4523 Res-Care common shares. If the closing price is greater than $26.00 and
less than or equal to $29.00, the amount of Res-Care common shares will be equal
to the quotient of (x) $11.76 divided by (y) the closing price. If the closing
price is less than $20.00 and greater than or equal to $18.00, the amount of
Res-Care common shares will be equal to the quotient of (x) $9.05 divided by (y)
the closing price. If the closing price is less than $18.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.5026 Res-Care common shares. If the closing price is greater than $29.00, each
share of PeopleServe common stock and each share of PeopleServe Series B
convertible preferred stock (excluding accrued and unpaid dividends) will be
exchanged for 0.4055 Res-Care common shares. There are no further adjustments in
the amount of Res-Care common shares issued in exchange for shares of
PeopleServe common stock and Series B convertible preferred stock if the closing
price is less than $18.00 or greater than $29.00.
The Series A redeemable preferred stock, including accrued dividends, and
the accrued dividends on your Series B convertible preferred stock will be
exchanged for Res-Care common shares based on the closing price for the Res-Care
common shares.
PeopleServe warrantholders have agreed to exercise their warrants prior to
the merger, and their PeopleServe common stock will be exchanged in the merger
for Res-Care common shares on the same basis as all other PeopleServe common
stock.
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No fractional shares will be issued. Instead, stockholders will be paid in
cash the amount equal to the fractional share multiplied by the closing price,
after adding up all fractions relating to PeopleServe preferred stock and common
stock held by each PeopleServe stockholder.
Q: IF I HAD OPTIONS TO PURCHASE PEOPLESERVE COMMON STOCK, WHAT WILL I RECEIVE
IN THE MERGER?
A: Simultaneously with the merger, Res-Care will issue Res-Care common shares
to you in an amount representing the fair value of your PeopleServe stock
options. For purposes of this transaction, Res-Care and PeopleServe have
determined the fair value of your PeopleServe stock options to be equal to the
difference between the exercise price of the option and the value of the
PeopleServe shares issuable under the option. This value will be the same as the
value assigned to the PeopleServe common stock in the merger. Res-Care is
required to withhold a portion of the shares to satisfy applicable minimum
federal, state and local tax withholding requirements. For example, assuming a
$23.00 closing price for the Res-Care common shares (which results in a 0.4523
exchange ratio), a $1.48 option exercise price, and a 28% minimum federal, state
and local withholding tax rate, you would receive, net of withholding taxes,
approximately 0.279 of a Res-Care common share for each PeopleServe stock option
held by you. You should note that the actual aggregate minimum tax withholding
rate may be higher, reducing the number of Res-Care common shares issued for
your PeopleServe stock options.
Q: AS A RES-CARE SHAREHOLDER, WILL I RECEIVE ADDITIONAL RES-CARE COMMON SHARES
IN THE MERGER?
A: No. You will continue to hold the same number of Res-Care common shares
after the merger. Res-Care common shares will be issued in the merger only to
the PeopleServe stockholders. Following the merger, you and the other current
Res-Care shareholders will own approximately 79% of the outstanding common
shares of Res-Care; assuming a closing price of $23.00 and reflecting the
exchange of Res-Care common shares for PeopleServe stock options in the merger,
but not giving effect to exercise of Res-Care options or conversion of
outstanding Res-Care convertible notes.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS?
A: We intend that the merger will be treated as a tax-free reorganization for
federal income tax purposes. PeopleServe stockholders will not recognize gain or
loss on the exchange of their PeopleServe common stock and Series B convertible
preferred stock. PeopleServe stockholders will recognize gain or loss on cash
received for a fractional share of Res-Care common shares. PeopleServe
stockholders could recognize income on the Res-Care common shares received for
dividends accrued on the Series B convertible preferred stock and Series A
redeemable preferred stock if these Res-Care common shares are considered to be
received in exchange for anything other than PeopleServe capital stock.
PeopleServe stockholders may recognize gain or loss on exchange of their Series
A redeemable preferred stock. Res-Care shareholders will not recognize any gain
or loss in connection with the merger. Tax matters, however, are very
complicated and the tax consequences of the merger to you will depend on the
facts of your particular situation. We encourage you to contact your tax advisor
to determine the tax consequences of the merger to you.
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Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY SHARES
FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares according to your
directions. Without instructions, your broker will not vote your shares.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail the
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at your shareholders meeting.
If you sign and send in your proxy but do not indicate how you want to vote,
your proxy will be counted as a vote in favor of the merger agreement, the
amendment to the certificate of incorporation, the payments to Mr. Pettinelli,
Mr. Vogel and Mr. Macomber under their employment agreements and the exchange of
PeopleServe stock options held by Mr. Vogel and Mr. Macomber if you are a
PeopleServe stockholder, or in favor of the issuance of Res-Care common shares
in the acquisition of PeopleServe by Res-Care and shares issuable in exchange
for PeopleServe stock options if you are a Res-Care shareholder.
If you are a PeopleServe stockholder and do not vote on the merger or if you
abstain, the effect will be a vote against the merger agreement, the amendment
to the certificate of incorporation and the payments to Mr. Pettinelli, Mr.
Vogel and Mr. Macomber and the exchange of PeopleServe stock options held by Mr.
Vogel and Mr. Macomber. If you are a Res-Care shareholder and do not indicate
how you want to vote, your vote will still be taken into account for purposes of
determining a quorum but will not affect the outcome of the vote on the matter.
In addition, in connection with Res-Care's regular annual shareholders meeting,
shares held by Res-Care shareholders who send in their proxy but do not indicate
how they want to vote will be voted in favor of the election of the people
nominated as directors for a one-year term and the ratification of the selection
of KPMG LLP as independent auditors for the current fiscal year.
Q: IF I AM NOT GOING TO ATTEND THE MEETING, SHOULD I RETURN MY PROXY CARD
INSTEAD?
A: Yes. Please fill out and sign your proxy card and mail it in the enclosed
return envelope as soon as possible. Returning your proxy card ensures that your
shares will be represented at your shareholders meeting.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at your
shareholders meeting. You can do this in any of three ways. First, you can send
a written notice stating that you would like to revoke your proxy. Second, you
can complete and submit a new proxy card. If you choose either of these two
methods, you must submit your notice of revocation or your new proxy card to the
Secretary of Res-Care at the address below if you are a Res-Care shareholder or
to the Secretary of PeopleServe at the address below if you are a PeopleServe
stockholder. Third, you can attend your shareholder meeting and vote in person.
Simply attending the meeting, however, will not revoke your proxy. If you are a
Res-Care shareholder, you should send any written notice or new proxy card to
the Secretary of Res-Care at the following address: Res-Care, Inc., 10140 Linn
Station Road, Louisville, Kentucky 40223, or, if you are a PeopleServe
stockholder, to the
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Secretary of PeopleServe, Inc., at the following address: PeopleServe, Inc.,
5555 Parkcenter Circle, Suite 200, Dublin, Ohio 43017.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send PeopleServe stockholders
written instructions for exchanging their stock certificates. Res-Care
shareholders do not need to exchange their certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible. We currently
expect to complete the merger by June 30, 1999.
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<PAGE> 17
SUMMARY
This summary highlights selected information from this Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a complete description
of the legal terms of the merger, you should read carefully the entire Proxy
Statement/Prospectus and the documents to which we have referred you. The merger
agreement is attached as Appendix A to this Proxy Statement/ Prospectus. For
more information about the two companies, see "Where You Can Find Additional
Information" (page 22). For your reference, we have included page references to
direct you to more complete descriptions of the topics presented in this
summary.
THE COMPANIES
RES-CARE, INC.
10140 Linn Station Road
Louisville, Kentucky 40223
Res-Care, Inc. 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. Res-Care
was formed in 1974 and provides services to approximately 21,700 individuals in
30 states and Puerto Rico. The services provided by Res-Care have historically
been provided by state and local government agencies and not-for-profit
organizations. In recent years, service delivery has shifted from government
agencies toward private organizations, both not-for-profit and for-profit.
Res-Care'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/or disabilities caused by acquired
brain injury, and youths who have special educational or support needs, are from
disadvantaged backgrounds, or have severe emotional disorders. Some of these
youths have entered the juvenile justice system. Res-Care has experienced high
occupancy rates throughout its MR/DD operations. Res-Care currently derives
virtually all of its MR/DD revenues from state and local agency reimbursement
under Title XIX of the Social Security Act. For its youth services, Res-Care's
revenues come from the U.S. Department of Labor for its Job Corps operations and
from state and local agencies for its other youth services.
PEOPLESERVE, INC.
5555 Parkcenter Circle
Suite 200
Dublin, Ohio 43017
PeopleServe, Inc. is one of the nation's largest private providers of
services to people with mental retardation and developmental disabilities.
PeopleServe currently provides services to more than 4,200 persons in 12 states
and the District of Columbia. PeopleServe was founded in 1979, and today,
through its subsidiaries, provides 24-hour daily care services and various
supported living services to people with disabilities. PeopleServe principally
operates Medicaid certified, six to eight bed facilities, commonly referred to
as intermediate care facilities or group homes, for persons with mental
retardation and developmental disabilities. PeopleServe provides the following
services: supported employment, day programs/workshops, case management, respite
services, management contract services, foster care and mental health services.
PeopleServe currently derives virtually all of its revenues from state or local
agency reimbursement under Title XIX of the Social Security Act.
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<PAGE> 18
EXCHANGE RATIOS (PAGE 65)
Shares of PeopleServe common stock, Series B convertible preferred stock or
Series A redeemable preferred stock, will be converted into Res-Care common
shares as follows:
- Each share of PeopleServe common stock, including common stock issued on
exercise of PeopleServe warrants, will be converted into 0.4523 Res-Care
common shares;
- Each share of PeopleServe Series B convertible preferred stock (excluding
accrued and unpaid dividends) will be converted into 0.4523 Res-Care
common shares; and
- The liquidation value (including accrued and unpaid dividends) of
PeopleServe Series A redeemable preferred stock and the accrued and
unpaid dividends on the PeopleServe Series B convertible preferred stock
will be converted into Res-Care common shares based upon the actual
closing price. Thus, assuming a $23.00 closing price, $100 of accrued
dividends or liquidation value will become 4.3478 Res-Care common shares.
The portion of a Res-Care common share to be exchanged for a share of each
class of PeopleServe securities is based on the closing price. For all purposes,
the closing price is the average closing price for the 15 trading days ending
four trading days before the closing date. If the closing price of Res-Care
common shares is at least $20.00 and not more than $26.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.4523 Res-Care common shares. If the closing price is greater than $26.00 and
less than or equal to $29.00, the amount of Res-Care common shares will be equal
to the quotient of (x) $11.76 divided by (y) the closing price. If the closing
price is greater than or equal to $18.00 and less than $20.00, the amount of
Res-Care common shares will be equal to the quotient of (x) $9.05 divided by (y)
the closing price. If the closing price is less than $18.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.5026 Res-Care common shares. If the closing price is greater than $29.00, each
share of PeopleServe common stock and each share of PeopleServe Series B
convertible preferred stock (excluding accrued and unpaid dividends) will be
exchanged for 0.4055 Res-Care common shares. There are no further adjustments in
the amount of Res-Care common shares issued in exchange for shares of
PeopleServe common stock and Series B convertible preferred stock if the closing
price is less than $18.00 or greater than $29.00.
The Series A redeemable preferred stock, including accrued dividends, and
the accrued dividends on Series B convertible preferred stock will be exchanged
for Res-Care common shares based on the closing price for the Res-Care common
shares.
PeopleServe warrantholders have agreed to exercise their warrants prior to
the merger, and their PeopleServe common stock issuable upon the exercise of
these warrants will be exchanged in the merger for Res-Care common shares on the
same basis as all other PeopleServe common stock.
No fractional shares will be issued. Instead, stockholders will be paid in
cash the amount equal to the fractional share multiplied by the closing price,
after adding up all fractions relating to PeopleServe preferred stock and common
stock held by each PeopleServe stockholder.
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<PAGE> 19
MEETINGS TO BE HELD JUNE 14, 1999; RECORD DATES SET (PAGE 32)
The Res-Care annual shareholders meeting will be held at 11:00 a.m. on June
14, 1999 at Louisville Marriott East Hotel, 1903 Embassy Square Boulevard,
Louisville, Kentucky 40299. At the Res-Care meeting, Res-Care shareholders will
be asked to consider and vote on (1) a proposal to issue Res-Care common shares
in the merger and in exchange for PeopleServe stock options, (2) a proposal to
elect directors for a one-year term and (3) a proposal to ratify the selection
of KPMG LLP as independent auditors for the current fiscal year. If you held
Res-Care common shares at the close of business on April 29, 1999, you are
entitled to vote on the issuance of shares, the election of directors, the
ratification of the selection of KPMG LLP and any other matters considered at
the Res-Care meeting.
The PeopleServe meeting will be held at 10:00 a.m. on June 14, 1999 at 5555
Parkcenter Circle, Suite 200, Dublin, Ohio. At the PeopleServe meeting,
PeopleServe stockholders will be asked to consider approving (1) the merger by
approving and adopting the merger agreement, (2) the amendment to the
PeopleServe certificate of incorporation and (3) the payments to Mr. Pettinelli,
Mr. Vogel and Mr. Macomber under their employment agreements and the exchange of
PeopleServe stock options held by Mr. Vogel and Mr. Macomber for Res-Care common
shares. Approval of the amendment to the PeopleServe certificate of
incorporation is a condition to the merger. If you held shares of PeopleServe
common stock and/or PeopleServe Series B convertible preferred stock at the
close of business on the record date of the PeopleServe meeting, you are
entitled to vote on the merger and any other matter considered at the
PeopleServe meeting. If you held shares of PeopleServe common stock, PeopleServe
Series B convertible preferred stock and/or Series A redeemable preferred stock
at the close of business on the record date of the PeopleServe meeting, you are
entitled to vote on the amendment to the PeopleServe certificate of
incorporation.
REQUIRED VOTE (PAGE 34)
A majority of the Res-Care common shares voted at the Res-Care meeting must
vote in favor of the proposal to issue Res-Care common shares in the merger and
in exchange for PeopleServe stock options in order for the proposed share
issuance to be approved. In addition, of the Res-Care common shares voted at the
Res-Care meeting a plurality must vote in favor of the election of directors for
a one-year term and a majority must vote in favor of ratification of the
selection of KPMG LLP as independent auditors in order for such proposals to be
approved. Each share is entitled to one vote on each matter to be voted on at
the Res-Care meeting. As of April 29, 1999, directors and executive officers of
Res-Care and their affiliates owned 5,610,959 Res-Care common shares, which
represented 29.6% of the 18,986,349 Res-Care common shares outstanding on that
date.
The following approvals by PeopleServe stockholders are required:
- a majority of the outstanding shares of PeopleServe common stock and
Series B convertible preferred stock entitled to be voted at the
PeopleServe meeting, voting together as a single class, must vote to
approve the merger and adopt the merger agreement;
- 60% of the Series B convertible preferred stock and a majority of the
Series A redeemable preferred stock, each voting separately as a class,
must vote to amend the certificate of incorporation of PeopleServe to
provide for the automatic conversion of these securities into Res-Care
common shares at the effective time of the merger agreement;
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<PAGE> 20
- a majority of the PeopleServe common stock, Series B convertible
preferred stock and Series A redeemable preferred stock, voting together
as a single class, must vote to amend the certificate of incorporation of
PeopleServe to provide for the automatic conversion of Series B
convertible preferred stock and Series A redeemable preferred stock into
Res-Care common shares; and
- 75% of the PeopleServe common stock (excluding from any vote shares held
by the recipient of the payment) and Series B convertible preferred
stock, voting together as a single class, must vote to approve the
payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber under their
employment agreements and the exchange of PeopleServe stock options held
by Mr. Vogel and Mr. Macomber.
As of April 29, 1999, directors and executive officers of PeopleServe and
their affiliates beneficially owned 5,615,231 shares of PeopleServe common
stock, 3,684,364 shares of PeopleServe Series B convertible preferred stock and
1,000,000 shares of PeopleServe Series A redeemable preferred stock, which
represented all of the outstanding PeopleServe common stock and Series B
convertible preferred stock, considered as a single class of voting stock, and
all of the Series B convertible preferred stock and all of the Series A
redeemable preferred stock outstanding at that date.
REGISTRATION RIGHTS AGREEMENT (PAGE 76)
As a condition to PeopleServe's willingness to enter into the merger
agreement, certain PeopleServe stockholders entered into a registration rights
agreement with Res-Care on April 2, 1999. Res-Care has agreed to grant these
PeopleServe stockholders certain registration rights with respect to 1,250,000
Res-Care common shares to be issued to these PeopleServe stockholders. Under
certain circumstances, these PeopleServe stockholders may include their shares
in a registration statement for a public offering filed by Res-Care within two
years of the effective date of the merger. In addition, on or before March 1,
2000, Res-Care will file a shelf registration statement covering any or all of
the 1,250,000 shares not included in a prior registration, plus an additional
300,000 shares. A copy of the registration rights agreement is attached as
Appendix B.
MAJORITY SHAREHOLDERS' AGREEMENT (PAGE 77)
As a condition to Res-Care's willingness to enter into the merger
agreement, certain PeopleServe stockholders entered into a majority
shareholders' agreement with Res-Care on April 2, 1999. Those stockholders
agreed, among other things, to vote 83.9% of the outstanding shares of
PeopleServe common stock and Series B convertible preferred stock, considered as
a single class of voting securities, 77.0% of the outstanding shares of Series B
convertible preferred stock and 77.0% of the outstanding shares of Series A
redeemable preferred stock, in favor of the merger and the merger agreement and
to amend PeopleServe's certificate of incorporation. The holders of
approximately 93.4% of the PeopleServe common stock and Series B convertible
preferred stock have agreed to approve the contractual payments to Mr.
Pettinelli, Mr. Vogel and Mr. Macomber and the exchange of PeopleServe stock
options held by Mr. Vogel and Mr. Macomber for Res-Care common shares. A copy of
the majority shareholders' agreement is attached as Appendix C.
RES-CARE AND PEOPLESERVE BOARDS RECOMMEND SHAREHOLDER APPROVAL
(PAGE 44 AND PAGE 46)
The Res-Care board of directors is of the opinion that the merger is in the
best interests of Res-Care and the Res-Care shareholders. The Res-Care board of
directors
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<PAGE> 21
unanimously approved issuing Res-Care common shares in the merger and in
exchange for PeopleServe stock options and recommends that Res-Care shareholders
vote FOR the proposal to issue these shares. The Res-Care board also recommends
that Res-Care shareholders approve the proposal to elect directors for a
one-year term and the proposal to ratify the selection of KPMG LLP as
independent auditors for the current fiscal year.
The PeopleServe board of directors has determined that the merger, the
amendment to the PeopleServe certificate of incorporation, the payments to Mr.
Pettinelli, Mr. Vogel and Mr. Macomber under their employment agreements and the
exchange of PeopleServe stock options held by Mr. Vogel and Mr. Macomber are
advisable and in the best interests of PeopleServe and its stockholders. The
PeopleServe board of directors present at the meeting unanimously approved the
merger agreement and the merger and the amendment to the PeopleServe certificate
of incorporation, the payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber
under their employment agreements and the exchange of PeopleServe stock options
held by Mr. Vogel and Mr. Macomber for Res-Care common shares and recommends
that PeopleServe stockholders vote FOR approval of these proposals.
CONSIDERATION TO BE PAID BY RES-CARE FAIR ACCORDING TO FINANCIAL ADVISOR (PAGE
46)
In deciding to approve the merger, the Res-Care board of directors received
and considered the opinion dated March 31, 1999 of J.C. Bradford & Co., LLC, its
financial advisor, as to the fairness to Res-Care of its issuance of the
Res-Care common shares issuable in the merger from a financial point of view as
of that date. The opinion of J.C. Bradford, which was updated on April 29, 1999,
does not constitute a recommendation as to how any Res-Care shareholder should
vote with respect to the proposal to issue shares. You should read the opinion
in its entirety to understand the assumptions made, matters considered and
limitations of the review undertaken by J.C. Bradford in providing its opinion.
A copy of J.C. Bradford's updated opinion is attached to the Proxy Statement/
Prospectus as Appendix D.
REASONS FOR THE MERGER (PAGE 43 AND PAGE 44)
Each of the boards of directors of Res-Care and PeopleServe believes that
the merger (and in the case of Res-Care, the share issuance and in the case of
PeopleServe, the amendment to its certificate of incorporation, the payments to
Mr. Pettinelli, Mr. Vogel and Mr. Macomber under their employment agreements and
the exchange of PeopleServe stock options held by Mr. Vogel and Mr. Macomber for
Res-Care common shares) is in the best interests of their respective companies
and the shareholders of their respective companies. The terms of the merger were
the result of arm's-length negotiations between representatives of PeopleServe
and representatives of Res-Care. Each board of directors approved the
transactions contemplated by the merger agreement. In reaching these decisions,
the boards of directors separately considered several factors, including:
FOR PEOPLESERVE
- the merger will provide liquidity for PeopleServe's stockholders through
their ownership of publicly-traded Res-Care common shares;
- the merger will create the opportunity to generate significant savings in
general and administrative expenses by enabling PeopleServe to use
Res-Care's administrative infrastructure;
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<PAGE> 22
- the potential compatibility between Res-Care and PeopleServe, based on
their substantially similar businesses, will result in a larger combined
company with greater financial and human resources than either Res-Care
or PeopleServe as separate entities;
- information concerning PeopleServe's and Res-Care's respective
businesses, prospects, financial performance and condition, operations,
management and future development plans;
- the value of the consideration to be received by PeopleServe stockholders
in the merger, which entailed a review of financial information for
Res-Care and PeopleServe, current financial market conditions and
historical market prices, and volatility and trading information with
respect to Res-Care common shares;
- the fact that the number of Res-Care common shares issuable in exchange
for PeopleServe common stock and Series B convertible preferred stock
will be adjusted automatically if the closing price of Res-Care common
shares falls above or below agreed price levels and that the PeopleServe
board will be permitted to terminate the merger agreement if the closing
price of Res-Care shares falls below an agreed level;
- the fact that the merger is generally expected to qualify as a tax-free
reorganization for federal income tax purposes; and
- the anticipated impact of the merger upon individuals served by
PeopleServe's consumers and their parents and other family members or
guardians and the expected impact on PeopleServe's payors.
FOR RES-CARE
- information pertaining to Res-Care's and PeopleServe's respective
businesses, prospects, quality of services delivered, historical and
projected financial performances, financial conditions and operations;
- analyses of the respective projected contributions to net revenue,
operating profit and net income of the combined company;
- PeopleServe's established operations in a number of states in which
Res-Care already has operations or seeks to gain a market presence as
well as various operational and administrative strengths that PeopleServe
could bring to the combined company;
- the fact that the number of Res-Care common shares issuable in exchange
for PeopleServe common stock and Series B convertible preferred stock
will be adjusted automatically if the closing price of Res-Care common
shares falls above or below agreed price levels and that the Res-Care
board will be permitted to terminate the merger agreement if the closing
price of Res-Care shares falls below an agreed level;
- the fact that the merger is expected to qualify as a tax-free
reorganization for federal income tax purposes;
- the judgment of Res-Care's management that Res-Care's and PeopleServe's
existing management and Res-Care's administrative infrastructure can
support a substantially larger operation, thus enabling Res-Care to
eliminate duplicate corporate and administrative costs following the
transaction;
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- analysis of the business and capabilities of the combined company;
- the business, reputation and capabilities of the management of
PeopleServe, as well as the compatibility of the management teams and
corporate cultures of Res-Care and PeopleServe; and
- the opinion of J.C. Bradford that the merger consideration is fair to
Res-Care from a financial point of view.
BENEFITS TO CERTAIN PEOPLESERVE OFFICERS AND DIRECTORS IN THE MERGER (PAGE 49)
In considering the recommendation of the PeopleServe board of directors to
approve and adopt the merger agreement, as a PeopleServe stockholder, you should
be aware of interests that PeopleServe's directors and certain officers have in
the merger that are different from your and their interests as stockholders.
These interests arise from certain officers' ownership of entities that lease
properties to PeopleServe or non-profit corporations with which PeopleServe has
management agreements, or their interests under their employment arrangements.
With respect to entities owning a total of 55 properties leased to
PeopleServe or its subsidiaries:
- PeopleServe will issue a total of 101,652 shares of common stock (which
will be exchanged for 45,977 Res-Care common shares, assuming a closing
price of $23.00) to Mr. Pettinelli, Mr. Vogel and Ray Anderson, an
officer of a subsidiary of PeopleServe, in exchange for their interest in
these properties; and
- PeopleServe will repay or assume debt of these entities (including all
prepayment and other fees) at or prior to closing of the merger. This
debt totaled approximately $6.8 million as of March 31, 1999.
Mr. Pettinelli will continue to have an interest in partnerships that own a
total of 60 properties leased to PeopleServe or non-profit corporations with
which PeopleServe has management agreements. With regard to these properties:
- Mr. Pettinelli will indemnify PeopleServe and hold it harmless from
certain obligations of, and increased rental payments due to, these
partnerships;
- Mr. Pettinelli will secure his obligations under the indemnity with a
pledge of approximately $4.5 million worth of Res-Care common shares or
other marketable securities acceptable to Res-Care;
- Mr. Pettinelli will agree that the indebtedness of these partnerships
will not be modified without PeopleServe's consent; and
- If requested by Mr. Pettinelli, PeopleServe will extend the term of
certain leases with two partnerships to November 1, 2006, so long as Mr.
Pettinelli causes a reduction in the term of other specified leases with
another partnership to November 1, 2006.
With respect to employment-related arrangements:
- Mr. Pettinelli, Mr. Vogel and Mr. Macomber will receive severance
payments totaling up to $3.0 million;
7
<PAGE> 24
- Mr. Vogel and Mr. Macomber will receive approximately 85,000 Res-Care
common shares (assuming a closing price of $23.00 per share and
applicable tax withholding) in exchange for all of their vested and
unvested PeopleServe stock options;
- Mr. Vogel will enter into a consulting and noncompetition agreement with
Res-Care; and
- Mr. Pettinelli will enter into a noncompetition agreement with Res-Care.
TREATMENT OF PEOPLESERVE STOCK OPTIONS IN THE MERGER (PAGE 56 AND 66)
Simultaneously with the merger, Res-Care will issue Res-Care common shares
in exchange for PeopleServe stock options in an amount representing the fair
value of PeopleServe stock options. For purposes of this transaction and as
provided by the PeopleServe stock option plan, Res-Care and PeopleServe have
determined the fair value of PeopleServe stock options to be equal to the
difference between the exercise price of the option and the value of the
PeopleServe shares issuable under the option. This value will be the same as the
value assigned to the PeopleServe common stock in the merger. Res-Care is
required to withhold a portion of the shares to satisfy applicable minimum
federal, state and local tax withholding requirements. Assuming a $23.00 closing
price for the Res-Care common shares (which results in a 0.4523 exchange ratio),
a $1.48 option exercise price, and a 28% minimum federal, state and local
withholding tax rate, you would receive, net of withholding taxes, approximately
0.279 of a Res-Care common share for each PeopleServe stock option . You should
note that the actual aggregate minimum tax withholding rate may be higher,
reducing the number of Res-Care common shares issued for your PeopleServe stock
options. See "The Merger -- Procedures for Exchange of PeopleServe Stock
Certificates" for additional information.
CONDITIONS TO THE MERGER (PAGE 71)
The merger will not be completed unless we satisfy several conditions,
including:
- holders of a majority of the voting power of the PeopleServe common stock
and Series B convertible preferred stock, voting together as a single
class, must vote to adopt the merger agreement and to approve the merger;
- 60% of the voting power of the PeopleServe Series B convertible preferred
stock, a majority of the voting power of the Series A Redeemable
preferred stock and a majority of the voting power of the PeopleServe
common stock, Series B convertible preferred stock and Series A
redeemable preferred stock, voting together as a single class, must vote
to amend the certificate of incorporation of PeopleServe to provide for
the automatic conversion of these securities (including accrued and
unpaid dividends) into Res-Care common shares;
- 75% of the voting power of the PeopleServe common stock (excluding from
any vote shares held by the recipient of the payment) and Series B
convertible preferred stock, voting together as a single class, must vote
to approve the payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber
under their employment agreements and the exchange of PeopleServe stock
options held by Mr. Vogel and Mr. Macomber for Res-Care common shares;
- holders of all of the warrants for PeopleServe common stock exercise
those warrants;
8
<PAGE> 25
- Res-Care exchanges its common shares for PeopleServe employee stock
options as provided in the merger agreement;
- no legal restraints or prohibitions prevent the consummation of the
merger;
- Res-Care and PeopleServe must receive all material approvals and
authorizations;
- PeopleServe's lawyers deliver certain tax opinions;
- PeopleServe's and Res-Care's lawyers deliver certain other legal
opinions;
- Res-Care's financial advisor delivers its opinion that the merger is fair
to Res-Care from a financial point of view;
- Mr. Pettinelli executes a noncompetition agreement;
- Mr. Vogel executes a consulting and noncompetition agreement;
- no event has occurred since April 2, 1999, which has had or reasonably
could have a material adverse effect on the other party;
- PeopleServe obtains releases from its guarantees on specific properties;
- accountants for both Res-Care and PeopleServe deliver letters that the
merger qualifies as a pooling-of-interests for financial reporting
purposes; and
- the representations and warranties of Res-Care and PeopleServe are true.
Res-Care and PeopleServe may not waive those conditions that are required
by law to complete the merger, including the requirements for shareholder
approval and that the registration statement be effective on the closing date of
the merger. Unless prohibited by law or the merger agreement, either Res-Care or
PeopleServe could waive a condition that has not been satisfied and complete the
merger. Neither Res-Care nor PeopleServe intends to waive any material condition
to the merger.
TERMINATION AND AMENDMENT OF THE MERGER AGREEMENT
(PAGE 74 AND PAGE 75)
Res-Care and PeopleServe can mutually agree at any time to terminate the
merger agreement without completing the merger. Either company can also
terminate the merger agreement if, among other reasons:
- the merger has not been completed by August 31, 1999;
- any government or court issues an order or takes another action enjoining
or prohibiting the merger;
- the other party materially breaches any of its representations,
warranties or agreements under the merger agreement, and such breach is
not cured within 30 days or cannot be cured by August 31, 1999;
- the average closing sale price per share of the Res-Care common shares on
The Nasdaq Stock Market for fifteen trading days ending on the fourth day
before the closing is below $16.00 per share; or
9
<PAGE> 26
- the other party breaches any of its representations or warranties under
the merger agreement which could have a material adverse effect on the
completion of the merger.
Res-Care may terminate the merger agreement if, among other reasons, it
does not obtain shareholder approval of the share issuance or if, in Res-Care's
opinion, the number of PeopleServe stockholders who exercise appraisal rights
will jeopardize the accounting treatment of the merger as a pooling-of-interest.
PeopleServe may terminate the merger agreement if, among other reasons, it
receives and accepts, consistent with the merger agreement, a superior proposal
and pays a termination fee to Res-Care.
At any time prior to the completion of the merger, Res-Care and PeopleServe
may amend the merger agreement in any way. Once the merger agreement is approved
by shareholders of either company, any amendment must be approved by Res-Care
shareholders if such approval is required under Kentucky law and by PeopleServe
stockholders if such approval is required under Delaware law.
TERMINATION FEE (PAGE 75)
The merger agreement requires PeopleServe to pay Res-Care a termination fee
of $7.5 million plus fees and expenses related to the merger, upon termination
of the merger agreement if PeopleServe receives and accepts a superior proposal.
REGULATORY APPROVALS (PAGE 59)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act,
prohibits Res-Care and PeopleServe from completing the merger until each company
has furnished certain information and materials to the Antitrust Division of the
Department of Justice and the Federal Trade Commission, or FTC, and the required
waiting period has expired or been terminated. On April 9, 1999, Res-Care,
PeopleServe and certain affiliated parties filed the required notification and
report forms with the Antitrust Division of the Department of Justice and the
FTC. Early termination of the waiting period was granted on April 21, 1999.
RES-CARE TO USE POOLING-OF-INTERESTS ACCOUNTING TREATMENT (PAGE 57)
We expect the merger to qualify as a pooling-of-interests, which means that
both companies will be treated as if they had always been combined for
accounting and financial reporting purposes. Accounting for the transaction as a
pooling-of-interests results in no recognition of goodwill relating to the
merger. Therefore, Res-Care would avoid charges against future earnings
resulting from the amortization of goodwill which would have been created had
this accounting treatment not been utilized. We have conditioned the merger upon
the receipt of letters from the independent public accountants of both companies
stating their opinions that the merger will qualify for pooling-of-interests
accounting treatment.
APPRAISAL RIGHTS (PAGE 60)
Record holders of PeopleServe Series A redeemable preferred stock,
PeopleServe Series B convertible preferred stock and PeopleServe common stock
who follow the appropriate procedures are entitled to appraisal rights
(sometimes referred to as dissenters' rights) under Section 262 of the Delaware
General Corporation Law in connection with
10
<PAGE> 27
the merger. However, Section 262 appraisal rights are not available to any
shareholder of a corporation who votes in favor of or consents in writing to a
merger. By the terms of the majority shareholders' agreement, certain
PeopleServe stockholders have agreed to vote in favor of the merger and to take
any and all action reasonably requested by PeopleServe's board of directors
necessary to execute the transactions contemplated by the merger agreement. In
complying with these terms of the majority shareholders' agreement, those
holders of PeopleServe Series A redeemable preferred stock, PeopleServe Series B
convertible preferred stock and PeopleServe common stock who are parties to the
majority shareholders' agreement would waive any claim to appraisal rights under
Section 262.
Because Res-Care is not a party to the merger (a wholly-owned subsidiary of
Res-Care, Res-Care Sub, will merge with PeopleServe), Res-Care shareholders will
not be entitled to appraisal rights in connection with the merger.
LISTING OF RES-CARE COMMON SHARES (PAGE 59)
Res-Care will list the common shares to be issued in the merger and in
exchange for PeopleServe stock options on The Nasdaq Stock Market.
NO FEDERAL INCOME TAX ON SHARES RECEIVED IN THE MERGER (PAGE 57)
PeopleServe has received an opinion of its tax counsel concluding, among
other things, that no gain or loss generally will be recognized by a PeopleServe
stockholder for federal income tax purposes on the exchange of shares of
PeopleServe common stock and Series B convertible preferred stock solely for
Res-Care common shares. Such PeopleServe stockholders, however, will recognize
gain or loss on the receipt of cash instead of a fractional share of Res-Care
common shares. PeopleServe stockholders could recognize income to the extent
that Res-Care common shares are considered to be received in exchange for other
than PeopleServe capital stock, such as dividends accrued on Series B
convertible preferred stock and Series A redeemable preferred stock. Finally,
holders of Series A redeemable preferred stock may recognize gain or loss on the
conversion of their shares into Res-Care common shares.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON YOUR PERSONAL CIRCUMSTANCES. WE URGE YOU TO CONSULT YOUR OWN
TAX ADVISOR TO UNDERSTAND FULLY THE TAX CONSEQUENCES TO YOU.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS (PAGE 21)
Statements in this Proxy Statement/Prospectus and in the documents
incorporated by reference are forward-looking. You can identify these statements
by the use of words like "may," "will," "expect," "anticipate," "estimate," or
"continue," or similar expressions. Forward-looking statements represent
Res-Care's and PeopleServe's judgment about the future and are not guarantees of
future performance. Certain risks and uncertainties could cause actual operating
results and financial position to differ materially from these projections. We
caution you not to place undue reliance on forward-looking statements.
Forward-looking statements represent Res-Care's and PeopleServe's estimates and
assumptions only as of the date of this Proxy Statement/Prospectus.
11
<PAGE> 28
MARKET PRICES AND COMPARISON OF DIVIDEND POLICIES
MARKET PRICES
Res-Care common shares are traded on The Nasdaq Stock Market under the
symbol "RSCR". The following table shows, for the periods indicated, the high
and low sale prices per share on The Nasdaq Stock Market, based on published
financial sources. The Res-Care share prices have been adjusted for each period
presented to reflect a 3-for-2 stock split to shareholders of record on May 22,
1998. Following the merger, Res-Care common shares will continue to be traded on
The Nasdaq Stock Market. PeopleServe common stock is not currently traded on any
public market.
<TABLE>
<CAPTION>
RES-CARE
COMMON
SHARES
-----------------
CALENDAR PERIOD HIGH LOW
- --------------- ---- ---
<S> <C> <C>
Quarter ended March 31, 1997................................ 13 7/8 11
Quarter ended June 30, 1997................................. 13 7/16 9 7/8
Quarter ended September 30, 1997............................ 16 11/16 12 1/2
Quarter ended December 31, 1997............................. 19 7/8 13 11/16
Quarter ended March 31, 1998................................ 25 11/16 17 1/2
Quarter ended June 30, 1998................................. 26 1/2 18 1/4
Quarter ended September 30, 1998............................ 20 3/16 13 1/4
Quarter ended December 31, 1998............................. 25 1/4 15 1/2
Quarter ended March 31, 1999................................ 26 19 1/2
Quarter ending June 30, 1999 (through April 29, 1999)....... 23 1/8 17 5/8
</TABLE>
As of the record date, there were approximately 8,900 beneficial owners of
Res-Care common shares, including approximately 378 holders of record. As of the
record date, there were four record owners of PeopleServe common stock, eight
record owners of PeopleServe Series B convertible preferred stock, and eight
record owners of PeopleServe Series A redeemable preferred stock.
The following table presents trading information for Res-Care common shares
on The Nasdaq Stock Market on April 1, 1999 (the last full trading day prior to
announcement of the signing of the merger agreement) and April 29, 1999 (the
last practicable trading day for which information was available prior to the
date of this Proxy Statement/Prospectus). Also stated below for each of those
dates is the equivalent pro forma price of PeopleServe common stock. This was
determined by multiplying the applicable price of Res-Care common shares by the
0.4523 exchange ratio, assuming that the closing price of Res-Care common shares
is between $20.00 and $26.00 per share. Because the exchange ratio and the
market price of Res-Care common shares are subject to fluctuation, the market
value of the Res-Care common shares that PeopleServe stockholders will receive
in the merger may increase or decrease prior to and following the completion of
the merger. We urge you to obtain current market quotations.
<TABLE>
<CAPTION>
APRIL 1, 1999 APRIL 29, 1999
------------- ----------------
HIGH LOW HIGH LOW
----- ---- ------ -----
<S> <C> <C> <C> <C>
Res-Care........................................... 22 7/8 22 18 3/16 17 5/8
PeopleServe Pro Forma.............................. 10 3/8 9 15/16 8 1/4 8
</TABLE>
12
<PAGE> 29
DIVIDEND POLICIES
Since its initial public offering in December 1992, Res-Care has not
declared or paid cash dividends on its common shares and is limited in paying
cash dividends under its credit facility. Res-Care does not anticipate paying
any cash dividends following the completion of the merger or in the foreseeable
future, and it intends to retain future earnings for the development and
expansion of its business.
13
<PAGE> 30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF RES-CARE
The annual selected historical financial data presented below is derived
from the audited consolidated financial statements of Res-Care. As this
information is only a summary, you should read it in conjunction with the
historical financial statements (and related notes) of Res-Care contained in its
annual and quarterly reports, as amended, and other information that Res-Care
has filed with the Securities and Exchange Commission ("SEC"). See "Where You
Can Find Additional Information" on page 22.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA(1):
Net revenues....................... $522,682 $306,054 $224,265 $177,428 $142,958
Operating income................... 42,110 23,593 15,891 11,786 8,413
Income from continuing
operations....................... 19,466 12,977 9,443 7,311 5,125
Net income(2)...................... 19,466 12,977 9,443 16,558 6,179
Basic earnings per share:
Income from continuing
operations.................... $ 1.04 $ 0.75 $ 0.64 $ 0.50 $ 0.35
Net income....................... 1.04 0.75 0.64 1.13 0.42
Diluted earnings per share:
Income from continuing
operations.................... 0.94 0.72 0.60 0.48 0.34
Net income....................... 0.94 0.72 0.60 1.09 0.41
Pro forma net earnings per
share(1):
Basic............................ 1.04 0.75 0.62 1.12 0.42
Diluted.......................... 0.94 0.72 0.59 1.09 0.41
Weighted average shares
outstanding(3)
Basic............................ 18,753 17,409 14,851 14,697 14,672
Diluted.......................... 26,080 18,569 15,614 15,134 15,121
CONSOLIDATED BALANCE SHEET DATA(1):
Working capital.................... $ 63,593 $ 90,082 $ 23,353 $ 17,123 $ 16,790
Total assets....................... 396,614 255,144 115,312 87,440 50,368
Long-term debt..................... 193,282 108,470 30,672 18,644 5,742
Shareholders' equity............... 129,445 104,609 58,095 47,069 30,279
</TABLE>
- -------------------------
(1) In January 1997, Res-Care acquired the partnership interests in Premier
Rehabilitation Centers in a transaction accounted for as a
pooling-of-interests. Res-Care's financial statements have been restated for
all periods presented to include the financial condition and results of
operations of Premier. Pro forma amounts have been presented to reflect the
tax effect of the Premier partnership interests in prior years.
(2) Net income includes income from operation of an unconsolidated affiliate
sold, accounted for as a discontinued operation, of $428 and $1,054 in 1995
and 1994, respectively. Net income also 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 is as follows: basic $0.63 and
$0.07, diluted $0.61 and $0.07 in 1995 and 1994, respectively.
(3) Restated to reflect the 3-for-2 stock split to shareholders of record on May
22, 1998.
14
<PAGE> 31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PEOPLESERVE
The annual selected historical data presented below is derived from the
audited consolidated financial statements of PeopleServe. As this information is
only a summary, you should read it in conjunction with the historical financial
statements (and related notes) of PeopleServe found in the Financial Statements
included with this Proxy Statement/Prospectus on page F-1.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Total revenues.................... $183,567 $162,450 $92,745 $79,904 $71,109
Operating income.................. 10,199 8,769 4,217 3,284 2,957
Net income available for common
stockholders.................... 1,627 1,032 974(1) 898 800
Earnings per share
Basic........................... $ 0.29 $ 0.18 $ 0.17 $ 0.16 $ 0.14
Diluted......................... 0.26 0.17 0.17 0.16 0.14
Average shares outstanding
Basic........................... 5,601 5,600 5,600 5,600 5,600
Diluted......................... 6,324 6,181 5,689 5,600 5,600
CONSOLIDATED BALANCE SHEET DATA:
Total assets...................... $109,494 $ 89,157 $74,717 $39,006 $35,252
Working capital................... 15,535 15,919 16,122 5,476 571
Long-term debt, including capital
lease obligations............... 58,400 42,440 33,198 16,532 16,057
Stockholders' equity.............. 4,812 3,019 1,865 2,324 2,121
</TABLE>
- -------------------------
(1) PeopleServe converted from S-Corporation to C-Corporation tax status on
November 1, 1996. Net income available for common stockholders has been
adjusted to reflect charges in lieu of income taxes in the amounts of
$346,990, $650,564 and $579,291, in 1996, 1995 and 1994, respectively.
15
<PAGE> 32
SUMMARY OF RECENT SELECTED OPERATING RESULTS
Res-Care and PeopleServe believe that shareholders' understanding of the
merger will be aided by inclusion of preliminary operating results for the three
months ended March 31, 1999 for both companies. The companies do not have
sufficient data at the present time to prepare pro forma financial statements
for the three months ended March 31, 1999 on the same basis as the pro forma
financial statements contained elsewhere in this Proxy Statement/Prospectus.
The following sets forth certain preliminary unaudited operating results
for Res-Care for the three months ended March 31, 1999 and 1998. This data is
qualified in its entirety by reference to Res-Care's Quarterly Report on Form
10-Q for the three months ended March 31, 1999, which will be filed with the
Securities and Exchange Commission subsequent to the date of this Proxy
Statement/Prospectus but prior to the date of Res-Care's annual meeting of
shareholders. In the opinion of Res-Care's management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for these periods have been included.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net revenues................................................ $150,492 $105,938
Operating income............................................ 12,851 7,526
Income before cumulative effect of accounting change(1)..... 5,738 3,837
Net income.................................................. 1,806 3,837
</TABLE>
- ---------------
(1) Effective January 1, 1999, Res-Care changed its policy to conform to a new
accounting standard, Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities," which requires that pre-opening and start-up costs be
expensed as incurred rather than capitalized. The cumulative effect of the
change in accounting totaled $3.9 million, net of taxes.
The following data sets forth certain preliminary unaudited operating
results for PeopleServe. In the opinion of PeopleServe's management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for these periods have been
included.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net revenues................................................ $49,750 $43,262
Operating income............................................ 2,661 2,238
Net income available to common stockholders................. 474 419
</TABLE>
16
<PAGE> 33
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The merger is expected to be accounted for as a pooling-of-interests, which
means that for accounting and financial reporting purposes, the companies will
be treated as if they had always been combined.
The following table shows unaudited pro forma condensed combined financial
information that reflects the pooling-of-interests method of accounting. This
information is included to give you a better picture of what the results of
operations and financial position of the combined businesses of Res-Care and
PeopleServe might have been had the merger occurred on an earlier date. The
unaudited pro forma combined condensed statement of operations data combines
information from the historical consolidated statements of income of Res-Care
and PeopleServe giving effect to the merger. The unaudited pro forma combined
condensed balance sheet data combines information from the historical
consolidated balance sheet of Res-Care and the historical consolidated balance
sheet of PeopleServe giving effect to the merger as if the merger were completed
on December 31, 1998.
This information is provided for illustrative purposes only. It does not
necessarily reflect what the results of operations or financial position of the
combined company would have been if the merger had actually occurred at the
beginning of the earliest period presented. This information also does not
necessarily indicate what the combined company's future operating results or
consolidated financial position will be. This information does not reflect (a)
the effect of any potential changes in revenues or any operating synergies which
may be achieved by combining the resources of the companies, (b) investment
banking, legal and miscellaneous transaction costs related to the merger, which
will be reflected as an expense in the period the merger is completed and (c)
costs associated with combining the companies which cannot presently be
estimated. These costs relate to personnel and other corporate and
administrative expenses that will be eliminated as we consolidate some corporate
functions.
In addition to any cost savings and operating synergies that may be
realized, Res-Care estimates that it will realize annualized corporate and
administrative cost savings of approximately $9.1 million. These charges include
administrative office expenses of $1.0 million, corporate and administrative
personnel costs of $6.0 million, miscellaneous administrative expenses of $0.6
million and professional services costs of $1.5 million. The pro forma combined
condensed financial data does not reflect the impact of these charges. These
costs will be charged to operations as a non-recurring charge in the quarter the
merger occurs.
17
<PAGE> 34
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS DATA:
Net revenues...................................... $706,249 $468,504 $317,010
Operating income.................................. 52,309 32,362 20,108
Income from continuing operations before income
taxes........................................... 38,416 26,618 16,740
Income from continuing operations available for
common shareholders............................. 22,932 15,631 10,822
Income from continuing operations per common
share:
Basic........................................... $ 0.95 $ 0.69 $ 0.54
Diluted......................................... 0.89 0.67 0.52
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Working capital............................................. $ 79,129
Total assets................................................ 506,108
Long-term debt.............................................. 251,682
Shareholders' equity........................................ 152,627
</TABLE>
PARTIAL NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The unaudited pro forma financial information presented above was based on
the historical financial information of Res-Care and PeopleServe. As a result
of the transaction, it may be necessary to restate certain amounts in the
consolidated historical financial statements of the companies to conform to
those accounting policies which are most appropriate for the combined
company. Any such restatements are not expected to be material.
2) No adjustment has been made to the historical financial statements of
Res-Care or PeopleServe to reflect any cost savings or synergies expected as
a result of the transaction.
3) The 1998 historical financial information of PeopleServe includes an expense
related to the early adoption of Statement of Position (SOP) 98-5, Reporting
on the Cost of Start-up Activities. The adoption of SOP 98-5 was not material
to the consolidated financial statements of PeopleServe.
The SOP requires that all costs of start-up activities and organization costs
be expensed as incurred. Initial application of the SOP requires the
write-off of any unamortized start-up and organization costs, the impact of
which will be reported as the cumulative effect of a change in accounting
principles. Res-Care adopted the provisions of SOP 98-5 effective January 1,
1999. As of December 31, 1998 deferred start-up and organization costs of
$6.2 million (net of accumulated amortization of $4.7 million) were included
in other assets on Res-Care's consolidated balance sheet. The impact of the
adoption of this pronouncement is not reflected in these pro forma financial
statements.
18
<PAGE> 35
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information on the earnings and book value per
common share for our respective companies on a historical, pro forma combined
and pro forma equivalent basis.
Pro forma combined earnings per share (basic and diluted) is derived from
the pro forma combined information presented under "Summary Unaudited Pro Forma
Combined Condensed Financial Data." The pro forma information is calculated by
multiplying the Res-Care and PeopleServe pro forma information by the applicable
ratio of Res-Care common shares for each share of PeopleServe common stock as
follows:
<TABLE>
<CAPTION>
RES-CARE SHARE PRICE: EXCHANGE RATIO:
--------------------- ---------------
<S> <C>
Between $20.00 and $26.00............................ 0.4523
$29.00............................................... 0.4055
$18.00............................................... 0.5026
</TABLE>
The Res-Care historical and PeopleServe historical book value per share is
based upon outstanding common shares. The numbers of outstanding common shares
used in the Res-Care and PeopleServe pro forma amounts have been adjusted to
include the Res-Care common shares to be issued in the merger.
The information shown below is only a summary and you should read it
together with the respective audited consolidated financial statements of
Res-Care and PeopleServe. See "Where You Can Find Additional Information" on
page 22.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Res-Care historical......................................... $1.04 $0.75 $0.64
PeopleServe historical...................................... 0.29 0.18 0.17
Res-Care and PeopleServe pro forma income from continuing
operations(1):
Assuming stock price is between $20.00 and $26.00......... $0.95 $0.69 $0.54
Assuming stock price is $29.00............................ 0.98 0.71 0.55
Assuming stock price is $18.00............................ 0.93 0.67 0.52
PeopleServe equivalent pro forma(2):
Assuming stock price is between $20.00 and $26.00......... $0.43 $0.31 $0.24
Assuming stock price is $29.00............................ 0.40 0.29 0.22
Assuming stock price is $18.00............................ 0.47 0.34 0.26
DILUTED NET INCOME PER SHARE:
Res-Care historical......................................... $0.94 $0.72 $0.60
PeopleServe historical...................................... 0.26 0.17 0.17
Res-Care and PeopleServe pro forma income from continuing
operations(1):
Assuming stock price is between $20.00 and $26.00......... $0.89 $0.67 $0.52
Assuming stock price is $29.00............................ 0.74 0.67 0.53
Assuming stock price is $18.00............................ 0.72 0.64 0.50
PeopleServe equivalent pro forma(2):
Assuming stock price is between $20.00 and $26.00......... $0.40 $0.31 $0.23
Assuming stock price is $29.00............................ 0.30 0.27 0.22
Assuming stock price is $18.00............................ 0.36 0.32 0.25
</TABLE>
19
<PAGE> 36
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
BOOK VALUE PER SHARE:
Res-Care historical......................................... $4.96
PeopleServe historical...................................... $0.86
Res-Care and PeopleServe pro forma combined(1):
Assuming stock price is between $20.00 and $26.00......... $4.87
Assuming stock price is $29.00............................ 4.96
Assuming stock price is $18.00............................ 4.78
PeopleServe equivalent pro forma(2):
Assuming stock price is between $20.00 and $26.00......... $2.20
Assuming stock price is $29.00............................ 2.01
Assuming stock price is $18.00............................ 2.40
</TABLE>
- -------------------------
(1) Gives pro forma effect to the merger.
(2) PeopleServe equivalent per share amounts are calculated by multiplying the
Res-Care and PeopleServe pro forma per share amounts by the merger exchange
ratio as follows:
<TABLE>
<S> <C>
Assuming stock price is between $20.00 and $26.00......... 0.4523
Assuming stock price is $29.00............................ 0.4055
Assuming stock price is $18.00............................ 0.5026
</TABLE>
20
<PAGE> 37
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains and incorporates by reference
statements that constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include all statements regarding the intent, belief or current
expectations relating to the matters discussed or incorporated by reference in
this Proxy Statement/Prospectus, including statements as to beliefs,
expectations, anticipations, intentions or similar words, and all statements
which are not statements of historical fact. These statements are subject to
risks, uncertainties and assumptions, including, but not limited to:
- risks related to the realization of anticipated revenues, profitability and
cost savings of the combined company; and
- other risks and uncertainties described in "Risk Factors" or in the other
SEC filings of Res-Care.
Should one or more of these risks or uncertainties affect the business of
Res-Care or should underlying assumptions prove incorrect, Res-Care's actual
results, performance or achievements in 1999 and beyond could differ materially
from those expressed in, or implied by, such forward-looking statements.
Res-Care's common shares are quoted on The Nasdaq National Market. The
trading symbol for Res-Care is "RSCR". You may inspect reports and other
information concerning Res-Care at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS. NO ONE IS AUTHORIZED TO PROVIDE
YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN
THIS PROXY STATEMENT/ PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE
ON THE FRONT COVER OF THIS DOCUMENT.
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<PAGE> 38
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Res-Care files annual, quarterly and other periodic reports, proxy
statements and other information with the SEC. You may read and copy any
materials that Res-Care files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet web site that contains reports, proxy and information
statements and other information with respect to Res-Care at http://www.sec.gov.
This information is also available for inspection at the office of The Nasdaq
Stock Market, 1735 K Street, N.W., Washington DC 20006.
The SEC allows Res-Care to "incorporate by reference" information into this
Proxy Statement/Prospectus, which means that Res-Care can disclose important
information by referring to another document filed separately with the SEC. Any
statement incorporated by reference shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained in this document or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this document modifies
or supersedes such statement. Any such modified or superseded statement shall be
deemed to constitute a part of this Proxy Statement/ Prospectus.
Res-Care (SEC File No. 0-20372) incorporates the following documents by
reference in this Proxy Statement/Prospectus:
(1) Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended by Form 10-K/A filed on April 30, 1999;
(2) Current Report on Form 8-K dated April 8, 1999;
(3) The description of Res-Care common shares contained in its
Registration Statement on Form 8-A, filed with the SEC on June 25, 1992;
and
(4) All other documents Res-Care files with the SEC pursuant to
Section 13(a), 13(c) or 15(d) of the Securities Exchange Act of 1934 after
the date of this Proxy Statement/Prospectus and before the end of the
Res-Care annual shareholders meeting.
Documents incorporated by reference into this Proxy Statement/Prospectus
(not including exhibits to such documents other than exhibits specifically
incorporated by reference into such documents) will be sent to any person,
including any beneficial owner of Res-Care common shares to whom this Proxy
Statement/Prospectus is delivered, without charge, upon written or oral request,
by first class mail within one business day of receipt of such request. Requests
for documents should be directed to the Vice-President of Communications at
Res-Care, Inc., 10140 Linn Station Road, Louisville, Kentucky, 40223, Telephone
Number (502) 394-2100.
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<PAGE> 39
RISK FACTORS
In addition to the other information provided or incorporated by reference
in this Proxy Statement/Prospectus, you should consider the following factors
carefully in evaluating whether to vote in favor of the merger or the issuance
of Res-Care common shares in connection with the merger. You should also refer
to "Forward-Looking Statements" on page 21.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE PEOPLESERVE INTO RES-CARE'S
BUSINESS
INTEGRATING THE TWO COMPANIES MAY BE DIFFICULT. Integrating Res-Care and
PeopleServe will be a complex, time-consuming and expensive process. Before the
merger, Res-Care and PeopleServe operated independently, each with its own
business, business culture, employees and systems. After the merger, Res-Care
and PeopleServe must operate as a combined organization utilizing common:
- information and communication systems;
- operating procedures;
- financial controls; and
- human resource practices, including benefit, training and professional
development programs.
RES-CARE MAY NOT BE ABLE TO ACHIEVE THE INTENDED BENEFITS OF THE
MERGER. There may be substantial difficulties, costs, delays and other negative
effects involved in integrating Res-Care and PeopleServe. Res-Care and
PeopleServe may not achieve the intended benefits of the merger if Res-Care is
unable to integrate PeopleServe's business successfully with its own. Res-Care
could encounter the following difficulties as a result of the merger:
- distraction of management from the business of the combined company;
- potential incompatibility of business cultures;
- perceived uncertainty in career opportunities and benefits, including the
perceived value of stock options and other incentives;
- costs and delays in implementing common business systems, including
computer systems, and procedures;
- delays in completing the integration of the companies;
- retaining PeopleServe's clients;
- maintaining and increasing PeopleServe's competitive presence in the
industry;
- obtaining approvals to transfer licenses and maintaining licenses after
transfer;
- continuing to operate PeopleServe's business efficiently;
- potential uncertainties in renewing collective bargaining agreements with
some PeopleServe employees;
- retaining key PeopleServe employees; or
- unforeseen actual or contingent liabilities of PeopleServe.
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<PAGE> 40
WE NEED THE SERVICES OF KEY EMPLOYEES TO COMPLETE THE INTEGRATION. The
successful integration of PeopleServe depends on the contribution of certain key
PeopleServe employees. While it is contemplated that certain individuals,
including Timothy J. Vogel and Dennis C. Henegar, will be subject to employment,
consulting and/or non-competition agreements with Res-Care after the merger,
there can be no assurance that these agreements will result in the retention of
these persons for any significant period of time. The loss of these individuals
or any of PeopleServe's other key employees could result in difficulties in the
transition process and less efficient business operations for the combined
company and could seriously harm its business.
Many of these factors are outside the control of either company. The
failure to integrate Res-Care and PeopleServe would have a material adverse
effect on the business, financial condition and results of operations of the
combined company.
RES-CARE AND PEOPLESERVE FACE RISKS CONCERNING THE YEAR 2000 ISSUES
IF GOVERNMENTAL OR OTHER PAYORS OR VENDORS DO NOT ADEQUATELY PREPARE FOR
THE YEAR 2000, THE OPERATIONS OF THE COMBINED COMPANIES COULD BE MATERIALLY
ADVERSELY AFFECTED. A substantial portion of the revenues of Res-Care and
PeopleServe are derived from Medicaid programs. If federal and state
governmental agencies are unable to comply with Year 2000 requirements, cash
flows, liquidity and results of operations will be adversely affected. To fund
any working capital shortfall caused by the inability of government payors to
make timely payments, Res-Care may need to use its revolving credit facility to
fund working capital needs or seek additional external financing. Use of credit
facilities for these purposes could adversely affect growth plans. Adequate
financing may not be made available.
Res-Care and PeopleServe are in the process of surveying third-party
vendors, such as payroll processors and significant banks, for their Year 2000
readiness. Third-party systems may not be compliant, and any noncompliance could
have a material adverse effect on the operations of the combined company.
RES-CARE MAY NOT BE ABLE TO COMPLETE ITS YEAR 2000 COMPLIANCE
EFFORTS. Res-Care has surveyed all of its mission critical systems for Year
2000 compliance and has determined that it must modify or replace certain
portions of its information system. Res-Care is also in the process of updating
its accounts receivable and billing systems. The estimated completion date for
installation and testing of this new billing system is October 31, 1999. If
Res-Care experiences delays in installing these modifications and new systems or
is unable to implement the necessary changes, Res-Care's operations could be
adversely affected.
Res-Care is in the process of identifying potential Year 2000 problems with
all of its medical equipment and physical facilities. Although its target date
for completing the assessment is June 30, 1999 and any required remediation is
September 30, 1999, Res-Care cannot provide any assurance that Year 2000
problems discovered in the course of this survey will not have a material
adverse effect on operations.
Res-Care has not established a formal contingency plan for Year 2000
issues, but plans to complete this plan during 1999. If the contingency plan is
not developed or does not cover all major contingencies, Res-Care's ability to
deal with unanticipated situations brought about by the Year 2000 could be
significantly impaired.
PEOPLESERVE MAY NOT BE ABLE TO COMPLETE ITS YEAR 2000 COMPLIANCE EFFORTS.
PeopleServe has determined that it will be required to modify, replace or
upgrade portions
24
<PAGE> 41
of its software and hardware in order to be Year 2000 compliant. PeopleServe
anticipates substantial completion of these efforts by November 1999. Any delay
in this process or failure to adequately address Year 2000 compliance issues
could have a material adverse effect on operations.
PeopleServe is currently surveying the status of Year 2000 compliance
efforts of its third-party vendors. PeopleServe cannot currently predict whether
its major vendors will be Year 2000 compliant.
PeopleServe has not established a formal contingency plan for Year 2000
issues, but plans to complete this plan during 1999. If the contingency plan is
not developed or does not cover all major contingencies, PeopleServe's ability
to deal with unanticipated situations brought about by the Year 2000 could be
significantly impaired. After completion of the merger, Res-Care's remediation
and contingency plans for Year 2000 issues will cover PeopleServe's Year 2000
efforts.
THE MERGER MAY FAIL TO QUALIFY FOR TAX-FREE TREATMENT
We have structured the merger to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, or the Code. Although the
Internal Revenue Service, or the IRS, has not provided a ruling on the matter,
PeopleServe has obtained a legal opinion that the merger qualifies as a tax-free
reorganization. This opinion neither binds the IRS nor prevents the IRS from
adopting a contrary position. If the merger fails to qualify as a tax-free
reorganization, as a PeopleServe stockholder, you would recognize gain or loss
on each PeopleServe share surrendered in the amount of the difference between
your basis in those shares and the fair market value of the Res-Care common
shares and other consideration you receive in exchange for your PeopleServe
shares at the time of the merger. See "The Merger -- Material Federal Income Tax
Considerations."
RES-CARE AND PEOPLESERVE DEPEND ON REIMBURSEMENT FROM THE GOVERNMENT
MEDICAID REIMBURSEMENT. Revenues of each of Res-Care's and PeopleServe's
disabilities services segment are highly dependent on reimbursement under
federal and state Medicaid programs. Generally, each state has its own Medicaid
reimbursement regulations and formula. The combined company's revenues and
operating profitability will depend on its 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 or
reviewed in one or more of the states where the combined company operates 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.
BUDGET CONSTRAINTS. The combined company's cash flow will be subject to
the receipt of sufficient funding and timely payment by applicable government
entities. Res-Care and PeopleServe conduct their businesses primarily under
contracts with federal, state and local governments and government agencies, and
a substantial portion of their revenues are attributable to these contracts. If
a government agency does not receive sufficient appropriations to cover its
contractual obligations, the agency may terminate the contract or defer or
reduce the combined company's compensation. This could negatively affect the
combined company's cash flow. A number of federal, state and local governments,
including some of those with which Res-Care and PeopleServe have contracts, have
from
25
<PAGE> 42
time to time experienced fiscal difficulties. In addition, the combined company
will rely on government entities to refer individuals to occupy its facilities
and programs. If the combined company does not receive a sufficient number of
referrals, this may have a material adverse effect on the combined company's
business, financial condition and results of operations.
THERE ARE RISKS ASSOCIATED WITH RES-CARE'S GROWTH STRATEGY
DEVELOPMENT ACTIVITIES. Changes in Res-Care's future revenues depend
significantly upon the success of its development activities, and in particular
on its ability to acquire other providers and programs and to obtain additional
contracts to provide services to the special needs populations it serves.
Res-Care has historically obtained additional contracts, and has increased the
number of individuals it serves, through:
- acquisitions of other new businesses;
- acquisition of facilities or management contract rights to operate
facilities;
- awards in response to requests for proposals for new facilities or
programs or for facilities being privatized by government agencies; or
- other development activities.
Res-Care actively seeks acquisitions of other companies, facilities and
assets to increase the number of consumers it serves. Changes in the market for
acquisition prospects, including increasing competition for and increasing
pricing of acquisition prospects, could adversely affect the timing and/or
viability of future development activities. Future revenues also depend on
Res-Care's ability to maintain and renew its existing services contracts and its
leases.
INTEGRATION OF NEW OPERATIONS. Res-Care's future growth depends to a major
extent on its ability to successfully integrate these new operations into its
business and to operate them profitably. Acquisitions may also involve a number
of special risks including:
- adverse short-term effects on the business and results of operations
during the transition period;
- retaining key personnel;
- charges against earnings resulting from the amortization of acquired
intangible assets; and
- risks associated with unanticipated liabilities and contingencies.
To achieve its growth successfully, Res-Care may require additional debt or
equity financing for future acquisitions or working capital, which may not be
available on favorable terms, if at all. The holdings of existing shareholders
may be diluted if Res-Care uses its preferred or common shares for all or a
portion of the consideration paid for future acquisitions or sells additional
shares in the market to raise capital. In the event that Res-Care's preferred or
common shares do not maintain sufficient value or acquisition candidates are
unwilling to accept Res-Care's preferred or common shares as consideration for
the sale of their businesses, Res-Care may need to use more of its cash
resources or borrowing capacity, if available, to continue its acquisition
program. If Res-Care does not have sufficient cash resources or borrowing
capacity or is not able to use its preferred or common shares as consideration
for acquisitions or to raise additional capital, its growth through acquisitions
could be severely limited.
26
<PAGE> 43
RES-CARE MAY NOT BE ABLE TO EXPAND ITS YOUTH SERVICES OPERATIONS
Res-Care has not yet developed significant experience in operating
special-needs youth programs other than Job Corps centers. Res-Care may not be
able to expand materially its business in this sector. 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,
Res-Care began intensive efforts to expand its at-risk and troubled youth
services operations only within the past three years. Some of Res-Care's
competitors have more experience in developing and implementing these services.
The market for delivery of at-risk and troubled youth services is highly
competitive. The youth services industry is highly-fragmented and the barriers
to entry remain low. As a result, Res-Care may experience intensive competition
as it seeks to expand in this area, including competition from companies with
substantially greater resources than Res-Care. Although state and local
government authorities have begun to accept the movement towards privatized
management of programs for at-risk and troubled youths, this level of acceptance
could stay the same or decrease. Res-Care may not succeed in its goal to
increase significantly the revenues and operating income from its at-risk and
troubled youth services operations.
WE DEPEND ON GOVERNMENT CONTRACTS
Government contracts are typically subject to renewal (or in the case of
Job Corps contracts, extension) annually. The financial terms of and renewal of
each contract depend upon many factors, including:
- the quality and type of services provided;
- government 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.
CONTRACT REVIEW AND RENEWAL. 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
government customers generally may terminate their contracts with Res-Care or
PeopleServe for cause and upon certain other specified conditions. The loss or
renewal on less favorable terms of some of or a group of contracts could have a
material adverse effect on the combined company's business, financial condition
and results of operations.
PROVIDERS OF RECORD. In various states Res-Care and PeopleServe contract
with providers of record to manage and operate MR/DD facilities for them. In
these cases, Res-Care and PeopleServe depend on the relationship between the
state and local governments or government agencies and the contractual providers
of record in obtaining and securing contracts. Each state and local government
or government 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 Res-Care's or PeopleServe's control. These actions could adversely
affect the ability of the providers of record to pay Res-Care and PeopleServe
under these management agreements.
27
<PAGE> 44
JOB CORPS. Res-Care derives revenue from the operation of multiple Job
Corps contracts awarded by the United States Department of Labor. The Department
of Labor evaluates performance at each Job Corps center using certain objective
and subjective criteria. Contracts for Job Corps centers not meeting Department
of Labor expectations may not be extended or awarded during rebid. In 1996,
Res-Care'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. In October 1997, Res-Care was not successful in retaining
the contract to operate the Gulfport, Mississippi Job Corps Center when it was
competitively rebid. The Department of Labor has recently made efforts to
encourage new participants in the program. The entrance of minority-owned and
small business entities and more recently, several companies with government
contracting experience has increased the competition for these contracts. The
Department of Labor may not extend Res-Care's Job Corps contracts or award
Res-Care additional Job Corps contracts in the future.
OUR INDUSTRY IS SUBJECT TO GOVERNMENT REGULATION
Res-Care and PeopleServe are subject to extensive federal, state and local
regulations governing:
- licensure;
- conduct of operations and delivery of services at existing facilities and
programs; and
- opening of new facilities and programs.
These regulations cover:
- quality of services provided;
- purchase or lease of existing facilities;
- addition of new services or extension of existing services into new
geographic areas;
- capital expenditures; and
- reimbursement for services rendered.
If Res-Care or PeopleServe fails to meet applicable standards it 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, the delay or loss of
reimbursement or the loss of an ability to expand services have not been a
significant factor in Res-Care's or PeopleServe's operations. Federal, state or
local governments may impose additional restrictions on the operations of
Res-Care or PeopleServe that might adversely affect its business, financial
condition and results of operations. For more information on government
regulation of our business, please refer to Res-Care's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 which is incorporated by
reference into this Proxy Statement/Prospectus.
THE PUBLIC MAY OPPOSE THE LOCATION OF A PROGRAM OR FACILITY AND WE MAY RECEIVE
NEGATIVE PUBLICITY
The combined company's success in obtaining new contracts depends, in part,
upon its ability to locate facilities that can be leased or acquired on
favorable terms. 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. These locations may generate legal action or
other forms of opposition from residents in areas
28
<PAGE> 45
surrounding a proposed site. These operations are subject to public scrutiny
and, consequently, could be significantly affected by negative publicity,
negative public reaction, government investigations of the combined company's
policies or operations, or the actions of consumers under its care. Reputation
is very important to the retention and procurement of contracts. Negative
publicity or government investigation of the combined company's policies or
operations or the actions of individuals under its care could have a material
adverse effect on the combined company's business, financial condition and
results of operations.
WE DEPEND ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
Res-Care's success depends on and the combined company's success will
depend on the efforts and abilities of Ronald G. Geary, the chairman, president
and chief executive officer; E. Halsey Sandford, senior executive; Jeffrey M.
Cross, executive vice president of operations; Paul G. Dunn, executive vice
president of development; Ralph G. Gronefeld, Jr., executive vice president of
finance and administration; and other members of Res-Care's senior management
team. Res-Care has entered into separate employment agreements with these
executives and its regional vice presidents containing customary noncompetition,
nondisclosure, and nonsolicitation covenants.
After the merger, most of the senior operations managers of PeopleServe
will continue working in their existing or expanded roles with the combined
company. In addition, it is expected that Timothy J. Vogel and Dennis C.
Henegar, current executives of PeopleServe, will remain with the combined
company as a consultant or employee following the merger. These individuals also
will have restrictive covenants in their agreements with the combined company.
The loss of the services of one or more of the senior executives could have
a material adverse effect upon business, financial condition and results of
operations of Res-Care and the combined company.
WE MAY BE SUBJECT TO LAWSUITS
The combined company's business 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 its facilities, programs,
personnel or participants. In addition, certain contracts and some state laws
require maintenance of adequate insurance for operations and indemnification of
the government agency against any damages to which the government agency may be
subject in connection with these claims or litigation. Each of Res-Care and
PeopleServe has occasionally been sued by third parties. Res-Care and
PeopleServe each maintains, and the combined company will maintain, insurance
programs that provide coverage for certain liability risks, including wrongful
death, personal injury, bodily injury or property damage to a third party where
the company is found to be negligent. The combined company's insurance may not
be adequate to cover all potential third-party claims.
POSSIBLE SHORTAGES OF QUALIFIED PERSONNEL; INCREASES IN LABOR COSTS
A possible shortage of professional personnel or direct service staff or
other outside pressures, including collective bargaining efforts, may require
the combined company to enhance its wage and benefits package in order to
compete in the hiring and retention of such personnel. The combined company will
compete with many other providers of long-term care as well as other employers
in each community in attracting and retaining
29
<PAGE> 46
qualified and skilled personnel. The combined company will depend on the
available labor pool of human services employees in each of the markets in which
it operates. The combined 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, effective management of direct service staff,
and changes in consumer services models, such as the trends toward supported
living and managed care. The combined company's labor costs are expected to
increase. As a result, the combined company may not be able to offset an
increase in costs by corresponding increases in reimbursement rates for
services.
PeopleServe's VOCA division has collective bargaining agreements with
certain employees in Ohio, West Virginia and the District of Columbia. The
collective bargaining agreement with approximately 600 employees in Ohio expires
on June 30, 1999. The collective bargaining agreement with approximately 275
employees in West Virginia expires on August 30, 1999. These employees in Ohio
and West Virginia are represented by District 1199, SEIU. The collective
bargaining agreement with employees in the District of Columbia expires on
December 31, 1999. The employees in the District of Columbia are represented by
District 1199, SEIU -- E. At the present time, Res-Care cannot predict the
outcome of the negotiations with these unions. Res-Care also cannot guarantee
that these unions will not try to organize other employees of the combined
company. Increased labor costs resulting from the pending union negotiations or
any organizing activities that may occur in the future could adversely affect
Res-Care's profitability.
COMPETITION
Our business is highly competitive, and we expect that competition from new
and existing companies will intensify. Many factors affect competition in the
disabilities and youth services industries, including:
- reputation in the community and with licensing agencies and other payors;
- quality of services provided;
- cost-effectiveness of services;
- reimbursement and regulatory expertise; 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, some competitors
operate in multiple jurisdictions and may be well capitalized. The combined
company faces significant competition from not-for-profit organizations and
proprietary competitors in the states where it now operates and expects to face
similar competition in any state that it may enter in the future. A number of
the combined company's competitors have greater resources. Competition may
adversely affect the combined company's ability to obtain new contracts and
complete acquisitions on favorable terms.
WE ARE SUBJECT TO ENVIRONMENTAL AND EMPLOYEE SAFETY LAWS
Various federal and state laws and regulations that govern the handling and
disposal of medical and infectious waste apply to the operation of Res-Care's
and PeopleServe's businesses. Failure to comply with these laws or regulations
could subject the combined company to fines, criminal penalties and other
enforcement actions. Res-Care and PeopleServe have developed and implemented
policies for handling and disposal of medical
30
<PAGE> 47
and infectious waste. Res-Care and PeopleServe believe they are in compliance
with these laws and regulations. The Occupational Safety and Health
Administration's regulations impose additional requirements with regard to
protecting employees from exposure to bloodborne pathogens. Res-Care and
PeopleServe believe that they have complied, and will continue to be able to
comply, with these regulations. However, these regulations may adversely affect
the combined company's business, financial condition and results of operations.
ANTI-TAKEOVER PROVISIONS MAY INHIBIT CHANGES OF CONTROL
Res-Care's articles of incorporation and bylaws contain provisions which
could make it more difficult for a third party to acquire Res-Care, even if such
a change of control would benefit shareholders.
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GENERAL INFORMATION ABOUT THE MEETINGS
DATE, TIME AND PLACE OF THE MEETINGS
The meeting of the Res-Care shareholders will be held at 11:00 a.m., local
time (EDT), on June 14, 1999, at Louisville Marriott East Hotel, 1903 Embassy
Square Boulevard, Louisville, Kentucky 40299.
The meeting of the PeopleServe stockholders will be held at 10:00 a.m.,
local time (EDT), on June 14, 1999 at 5555 Parkcenter Circle, Suite 200, Dublin,
Ohio.
RECORD DATE AND OUTSTANDING SHARES
The Res-Care board of directors has fixed the close of business on April
29, 1999 as the record date for the Res-Care meeting. Only shareholders of
record on the record date are entitled to notice of and to vote at the Res-Care
meeting. As of the Res-Care record date, there were issued and outstanding
18,986,349 Res-Care common shares, held by approximately 8,900 persons including
beneficial holders and holders of record. Each holder of Res-Care common shares
is entitled to one vote per share held of record on the record date.
The close of business on the day prior to the day notice of the PeopleServe
meeting is given to stockholders (anticipated to be May 4, 1999) will be the
record date for the determination of the holders of PeopleServe stock entitled
to receive notice of and to vote at the PeopleServe meeting. Only holders of
record of shares of PeopleServe stock on the record date will be entitled to
receive notice of and to vote at the PeopleServe meeting. Each holder of
PeopleServe stock is entitled to one vote per share held on the record date. The
following shows the number of shares outstanding and the number of holders of
these shares on the record date:
- 5,615,231 shares of PeopleServe common stock held by four holders;
- 3,684,364 shares of Series B convertible preferred stock held by eight
holders; and
- 1,000,000 shares of Series A redeemable preferred stock held by eight
holders.
PURPOSES OF THE MEETINGS
RES-CARE
Res-Care is furnishing this Proxy Statement/Prospectus to its shareholders
in connection with the solicitation of proxies by Res-Care's board of directors
for use at the Res-Care annual shareholders meeting. At the Res-Care meeting,
Res-Care shareholders will be asked to approve:
- a proposal to issue Res-Care common shares to the PeopleServe
stockholders in the merger and in exchange for PeopleServe stock options;
- a proposal to elect directors for a one-year term;
- a proposal to ratify the selection of KPMG LLP as independent auditors
for the current fiscal year; and
- such other matters as may properly come before the Res-Care meeting.
THE RES-CARE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED IN CONNECTION WITH THE MERGER AND THE ISSUANCE
OF RES-CARE COMMON SHARES, AND HAS DETERMINED THAT THE ISSUANCE OF UP TO
APPROXIMATELY
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5,844,000 RES-CARE COMMON SHARES TO THE PEOPLESERVE STOCKHOLDERS IN THE MERGER,
INCLUDING RES-CARE COMMON SHARES ISSUED IN EXCHANGE FOR PEOPLESERVE STOCK
OPTIONS, IS IN THE BEST INTERESTS OF RES-CARE SHAREHOLDERS.
THE RES-CARE BOARD OF DIRECTORS ALSO RECOMMENDS THE APPROVAL OF:
- THE ELECTION OF THE NOMINEES FOR DIRECTOR FOR A ONE-YEAR TERM; AND
- THE RATIFICATION OF THE SELECTION OF KPMG LLP AS INDEPENDENT AUDITORS FOR
THE CURRENT FISCAL YEAR.
THE RES-CARE BOARD OF DIRECTORS RECOMMENDS THAT RES-CARE SHAREHOLDERS VOTE
FOR THESE PROPOSALS.
PEOPLESERVE
PeopleServe is furnishing this Proxy Statement/Prospectus to its
stockholders in connection with the solicitation of proxies by PeopleServe's
board of directors for use at the PeopleServe meeting. The purpose of the
meeting is to consider and vote upon the proposal to approve the merger and
adopt the merger agreement, the amendment to the certificate of incorporation,
the payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber under their
employment agreements and the exchange of PeopleServe stock options held by Mr.
Vogel and Mr. Macomber and to transact such other business as may properly come
before the meeting or any adjournments or postponements. Under the merger
agreement, at the effective time of the merger, PeopleServe will become a
wholly-owned subsidiary of Res-Care and the former stockholders of PeopleServe
will receive Res-Care common shares for their PeopleServe shares. Stockholders
of PeopleServe will receive consideration in the merger as follows:
- Each share of PeopleServe common stock, including common stock issued on
exercise of PeopleServe warrants, will be converted into 0.4523 Res-Care
common shares;
- Each share of PeopleServe Series B convertible preferred stock (excluding
accrued and unpaid dividends) will be converted into 0.4523 Res-Care
common shares; and
- The liquidation value (including accrued and unpaid dividends) of
PeopleServe Series A redeemable preferred stock and the accrued and
unpaid dividends on the PeopleServe Series B convertible preferred stock
will be converted into Res-Care common shares based upon the actual
closing price. Thus, assuming a $23.00 closing price, $100 of accrued
dividends or liquidation value will become 4.3478 Res-Care common shares.
The portion of a Res-Care common share to be exchanged for a share of each
class of PeopleServe securities is based on the closing price. For all purposes,
the closing price is the average closing price for the 15 trading days ending
four trading days before the closing date. If the closing price of Res-Care
common shares is at least $20.00 and not more than $26.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.4523 Res-Care common shares. If the closing price is greater than $26.00 and
less than or equal to $29.00, the amount of Res-Care common shares will be equal
to the quotient of (x) $11.76 divided by (y) the closing price. If the closing
price is less than $20.00 and greater than or equal to $18.00, the amount of
Res-Care common shares will be equal to the quotient of (x) $9.05 divided by (y)
the closing price. If the closing price is less than $18.00, each share of
PeopleServe common stock and each share
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of PeopleServe Series B convertible preferred stock (excluding accrued and
unpaid dividends) will be exchanged for 0.5026 Res-Care common shares. If the
closing price is greater than $29.00, each share of PeopleServe common stock and
each share of PeopleServe Series B convertible preferred stock (excluding
accrued and unpaid dividends) will be exchanged for 0.4055 Res-Care common
shares. There are no further adjustments in the amount of Res-Care common shares
issued in exchange for shares of PeopleServe common stock and Series B
convertible preferred stock if the closing price is less than $18.00 or greater
than $29.00.
The Series A redeemable preferred stock, including accrued dividends, and
the accrued dividends on Series B convertible preferred stock will be exchanged
for Res-Care common shares based on the closing price for the Res-Care common
shares.
PeopleServe warrantholders have agreed to exercise their warrants prior to
the merger, and their PeopleServe common stock issued in exchange for their
warrants will be exchanged in the merger for Res-Care common shares on the same
basis as all other PeopleServe common stock.
No fractional shares will be issued. Instead, stockholders will be paid in
cash the amount equal to the fractional share multiplied the closing price,
after adding up all fractions relating to PeopleServe preferred stock and common
stock held by each PeopleServe stockholder.
AT A MEETING OF THE PEOPLESERVE BOARD OF DIRECTORS, ALL DIRECTORS IN
ATTENDANCE APPROVED:
- THE MERGER AND THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED IN
CONNECTION WITH THE MERGER;
- THE AMENDMENT TO PEOPLESERVE'S CERTIFICATE OF INCORPORATION; AND
- THE PAYMENTS TO MR. PETTINELLI, MR. VOGEL AND MR. MACOMBER UNDER THEIR
EMPLOYMENT AGREEMENTS AND THE EXCHANGE OF PEOPLESERVE STOCK OPTIONS HELD
BY MR. VOGEL AND MR. MACOMBER.
THE PEOPLESERVE BOARD DETERMINED THAT THESE PROPOSALS ARE ADVISABLE AND IN
THE BEST INTERESTS OF THE PEOPLESERVE STOCKHOLDERS AND RECOMMENDS THAT THE
PEOPLESERVE STOCKHOLDERS VOTE FOR APPROVAL OF EACH OF THESE PROPOSALS.
VOTE REQUIRED
RES-CARE
Assuming that a quorum is present at the Res-Care meeting, approval of the
proposal to issue Res-Care common shares in the merger and in exchange for the
PeopleServe stock options requires the affirmative vote, either in person or by
proxy, of a majority of Res-Care common shares voted at the Res-Care meeting. In
addition, in connection with Res-Care's regular annual shareholders meeting, you
are being asked to vote on the election of directors and the ratification of the
selection of KPMG LLP as Res-Care's independent auditors for the current fiscal
year. In order for these proposals to be approved, a plurality of the shares
voted at the meeting must elect directors and a majority of the shares voted at
the meeting must ratify the appointment of KPMG LLP.
Res-Care shareholders do not have dissenters' rights of appraisal with
respect to the issuance of Res-Care common shares in the merger and in exchange
for PeopleServe stock options.
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Res-Care shareholders are entitled to one vote for each Res-Care common
share on all matters submitted to a vote of Res-Care shareholders. The presence
at the Res-Care meeting, either in person or by proxy, of the holders of a
majority of the votes entitled to be cast at the meeting constitutes a quorum
for the transaction of business. Under the rules of The Nasdaq Stock Market,
brokers who hold shares in street name for customers will not have the authority
to vote on the proposed issuance of shares in connection with the merger unless
they receive specific instructions from the beneficial owners. For purposes of
determining whether there is a quorum at the Res-Care meeting, abstentions and
broker non-votes will be treated as shares that are present and entitled to
vote. Abstentions and broker non-votes will not be counted in determining
whether Res-Care shareholders have approved the issuance of shares in connection
with the merger and the other proposals.
As of April 29, 1999, directors and executive officers of Res-Care and
their affiliates beneficially owned and were entitled to vote 5,610,959 Res-Care
common shares, which represented 29.6% of the 18,986,349 Res-Care common shares
then outstanding.
PEOPLESERVE
Each share of PeopleServe common stock and Series B convertible preferred
stock is entitled to one vote per share with respect to the merger and the
merger agreement, the amendment to the certificate of incorporation, the
payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber under their employment
agreements and the exchange of PeopleServe stock options held by Mr. Vogel and
Mr. Macomber and other matters properly submitted at the PeopleServe meeting.
Each share of Series A redeemable preferred stock is entitled to one vote per
share with respect to the amendment to the certificate of incorporation.
The following approvals by PeopleServe stockholders are required:
- a majority of the outstanding shares of PeopleServe common stock and
Series B convertible preferred stock entitled to be voted at the
PeopleServe meeting, voting together as a single class, must vote to
approve the merger and the merger agreement;
- 60% of the Series B convertible preferred stock and a majority of the
Series A redeemable preferred stock, each voting separately as a class,
must vote to amend the certificate of incorporation of PeopleServe to
provide for the automatic conversion of these securities into Res-Care
common shares at the effective time of the merger agreement;
- a majority of the PeopleServe common stock, Series B convertible
preferred stock and Series A redeemable preferred stock, voting together
as a single class, must vote to amend the certificate of incorporation of
PeopleServe to provide for the automatic conversion of Series B
convertible preferred stock and Series A redeemable preferred stock into
Res-Care common shares; and
- 75% of the PeopleServe common stock (excluding from any vote shares held
by the recipient of the payment) and Series B convertible preferred
stock, voting together as a single class, must vote to approve the
payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber under their
employment agreements and the exchange of PeopleServe stock options held
by Mr. Vogel and Mr. Macomber.
Stockholder approval of the merger agreement and the amendment to the
certificate of incorporation also are required under Delaware law. Stockholder
approval of the merger
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agreement and the amendment of PeopleServe's certificate of incorporation are
conditions to the merger agreement.
The presence, in person or by properly executed proxy, of the following
number of shares of the three classes of PeopleServe capital stock outstanding
and entitled to vote is necessary to constitute a quorum at the PeopleServe
meeting:
- a majority of the PeopleServe common stock and Series B preferred stock
to approve the merger and the merger agreement;
- a majority of the PeopleServe common stock and Series B convertible
preferred stock to approve the payments to Mr. Pettinelli, Mr. Vogel and
Mr. Macomber and the exchange of PeopleServe stock options held by Mr.
Vogel and Mr. Macomber; and
- 60% of the Series B convertible preferred stock, a majority of the Series
A redeemable preferred stock and a majority of the PeopleServe common
stock, to approve the amendment to the PeopleServe certificate of
incorporation.
Abstentions and broker non-votes, therefore, will be included in
determining whether a quorum is present, but will have the same effect as a vote
against each proposal that requires approval by the affirmative vote of a
specified percentage of the outstanding stock to be voted.
Some of the holders of PeopleServe common stock, Series B convertible
preferred stock and Series A redeemable preferred stock have executed a majority
shareholders' agreement to vote their shares in favor of the merger agreement
and the other matters to be considered at the PeopleServe meeting. Stockholders
who are parties to the majority shareholders' agreement have agreed to vote
83.9% of the outstanding shares of PeopleServe common stock and Series B
convertible preferred stock, considered as a single class of voting securities,
77.0% of the outstanding shares of Series B convertible preferred stock and
77.0% of the outstanding shares of Series A redeemable preferred stock in favor
of the merger, the merger agreement, and the amendment to PeopleServe's
certificate of incorporation. In addition, stockholders who are parties to the
majority shareholders' agreement have agreed to vote approximately 93.4% of the
PeopleServe common stock and Series B convertible preferred stock, considered as
a single class, to approve the contractual payments to Mr. Pettinelli, Mr. Vogel
and Mr. Macomber and the exchange of PeopleServe stock options held by Mr. Vogel
and Mr. Macomber for Res-Care common shares.
VOTING OF PROXIES
RES-CARE
If the accompanying proxy card is properly signed and returned to Res-Care
and not revoked before a vote is taken at the Res-Care meeting, it will be voted
in accordance with the instructions contained in the proxy card. If the proxy
card is signed and returned, but voting directions are not marked, the proxy
will be voted FOR approval of issuing Res-Care common shares in the merger and
in exchange for PeopleServe stock options, the proposal to elect directors for a
one-year term and the proposal to ratify the selection of KPMG LLP as
independent auditors for the current fiscal year.
At the Res-Care meeting, persons appointed by the Res-Care board of
directors to act as inspectors of election will tabulate the shareholder votes.
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Res-Care is aware of no matters, except as described in this Proxy
Statement/ Prospectus, that may come before the Res-Care meeting. If any other
matters are properly presented to the Res-Care meeting for action, the persons
named in the proxy will vote on these matters in their best judgment, unless you
withhold authority.
PEOPLESERVE
Stockholders of record on the PeopleServe record date are entitled to cast
their votes, in person or by properly executed proxy, at the PeopleServe
meeting. All shares of PeopleServe common stock, Series B convertible preferred
stock and Series A redeemable preferred stock represented at the PeopleServe
meeting by properly executed proxies received at or prior to the PeopleServe
meeting, unless properly revoked, will be voted at the PeopleServe meeting in
accordance with instructions indicated on those proxies. If a proxy is signed
and returned without indicating any voting instructions, shares of PeopleServe
common stock, Series B convertible preferred stock and Series A redeemable
preferred stock represented by the proxy will be voted FOR approval of the
merger and adoption of the merger agreement, the amendment to the certificate of
incorporation, the payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber under
their employment agreements and the exchange of PeopleServe stock options held
by Mr. Vogel and Mr. Macomber.
PeopleServe is not aware of any business to be acted upon at the
PeopleServe meeting other than as described in this Proxy Statement/Prospectus.
If, however, other matters are properly brought before the PeopleServe meeting,
or any adjournments or postponements thereof, the persons appointed as proxies
or their substitutes will have discretion to vote or act on the matter in their
best judgment and applicable law unless the proxy indicates otherwise.
AUTHORIZATION TO VOTE ON ADJOURNMENT AND OTHER MATTERS
RES-CARE
By signing the proxy, a Res-Care shareholder authorizes the proxy holder to
vote in his discretion regarding any procedural motions which may come before
the Res-Care meeting. For example, this authority could be used to adjourn the
meeting if Res-Care believes it is desirable to do so. Adjournment or other
procedures could be used to obtain more time before a shareholder vote in order
to solicit additional proxies or to provide additional information to Res-Care
shareholders. Res-Care has no plans to adjourn the meeting at this time, but it
intends to attempt to do so if it believes that doing so would promote
shareholder interests.
PEOPLESERVE
If a quorum is not present at the time the meeting is convened, or if for
any other reason the PeopleServe board of directors believes that additional
time should be allowed for the solicitation of proxies or for the satisfaction
of conditions to the merger agreement, PeopleServe may adjourn the PeopleServe
meeting with a vote of the holders of a majority of the PeopleServe common stock
and Series B convertible preferred stock, voting together as a single class,
present or represented at the meeting. To the extent a PeopleServe stockholder
intends to vote against the merger agreement, the stockholder would have no
incentive to vote in favor of discretionary adjournment by the PeopleServe board
of directors, which would allow PeopleServe to adjourn the meeting in order to
solicit additional votes in favor of the merger agreement, the amendment to
PeopleServe's
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certificate of incorporation, the payments to Mr. Pettinelli, Mr. Vogel and Mr.
Macomber under their employment agreements or the exchange of PeopleServe stock
options held by Mr. Vogel and Mr. Macomber.
The failure to return a proxy or to vote in person will have no effect on
the vote on adjournment, except to reduce the total number of votes counted.
Brokers who hold shares in street name for customers will not have the authority
to vote unless they receive specific instructions from beneficial owners. Under
Delaware law, an adjournment proposal requires the affirmative vote of a
majority of the votes cast by PeopleServe stockholders present or represented at
the meeting. Broker non-votes and abstentions will have no effect on the voting
if a quorum is present.
REVOCATION OF PROXIES
A shareholder of Res-Care or of PeopleServe may revoke a proxy at any time
before it is voted by (1) filing written notice of revocation with the Secretary
of Res-Care or PeopleServe (as applicable) which is actually received prior to
the vote of shareholders, (2) filing with such Secretary before the vote of
shareholders a duly executed proxy bearing a later date or (3) attending the
Res-Care or PeopleServe meeting (as applicable) and voting in person. Attendance
at a meeting will not by itself revoke the proxy.
A Res-Care shareholder should send any such filing to the Secretary of
Res-Care at Res-Care, Inc., 10140 Linn Station Road, Louisville, Kentucky 40223.
A PeopleServe stockholder should send any such filing to the Secretary of
PeopleServe at PeopleServe, Inc., 5555 Parkcenter Circle, Suite 200, Dublin,
Ohio 43017.
SOLICITATION OF PROXIES
Each company will bear the cost of soliciting proxies from its
shareholders. In addition to solicitation by mail, the directors, officers and
employees of each company may solicit proxies from shareholders of that company
by telephone or personal communication or by other means. These persons will not
receive additional compensation, but they may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation.
Res-Care will make arrangements with brokerage houses and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of Res-Care common shares held of record by such persons, and each
company will reimburse custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection with this service.
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PROPOSAL ONE -- THE MERGER
THE MERGER
BACKGROUND OF THE MERGER
Res-Care's management considers acquisitions in the disabilities and youth
services industry a primary means of expanding its business. As a result of a
combination of strategic acquisitions and internal growth, Res-Care provided
services to approximately 20,400 persons with special needs in 30 states and
Puerto Rico at December 31, 1998, compared to approximately 4,500 persons at
December 31, 1993, representing a five-year compound annual growth rate of
approximately 35%. Res-Care's management has at various times identified
companies in the disabilities and youth services industry as possible
acquisition candidates and identified PeopleServe as a significant opportunity
to further its strategic goals in this area.
PeopleServe's management and board of directors had determined that growing
PeopleServe as an independent company, including pursuing an initial public
offering of PeopleServe common stock if practical, would best maximize values
for its stockholders in the long term. PeopleServe had not considered the
possibility of strategic combinations with other companies where it would not be
the surviving entity.
In early September 1998, Timothy J. Vogel, President and Chief Executive
Officer of PeopleServe, contacted Ronald G. Geary, Chairman, President and Chief
Executive Officer of Res-Care to discuss general industry issues. On September
29, 1998, Mr. Geary visited the offices of PeopleServe and met with Mr. Vogel to
continue the discussion of industry issues. At that time, there were no
discussions of any possible business combination.
On November 11, 1998, Mr. Vogel visited Res-Care, toured Res-Care's offices
and met with some senior-level management personnel. At this time, Mr. Geary
showed to Mr. Vogel Res-Care's company presentation which had been used publicly
at industry and financial conferences and meetings. At the end of this visit,
Res-Care indicated its interest in pursuing further discussions that could
result in a possible business combination if PeopleServe were interested. Both
parties agreed to enter into a confidentiality agreement before having further
discussions.
During the week of November 23, 1998, Paul Dunn, Executive Vice President,
Development of Res-Care called Mr. Vogel and explained that Res-Care was not
prepared to begin any information exchange or discussions with PeopleServe at
that time. He noted that Res-Care wanted to consider the issue of entering into
discussions with PeopleServe with its board of directors at their December
meeting and after that time would let PeopleServe know if there was any interest
in beginning discussions. Mr. Vogel requested that the parties execute a
confidentiality agreement regardless of whether any further discussions would
ever be held. On November 23, 1998, the parties entered into a confidentiality
agreement, which was later amended on February 23, 1999.
During the week of December 21, 1998, Mr. Dunn spoke with Mr. Vogel and
indicated that Res-Care's board of directors decided they would be interested in
having management enter into discussions directed at the possibility of a
business combination with PeopleServe.
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On January 11, 1999, Mr. Vogel faxed PeopleServe's summary financial data
to Mr. Dunn. On January 14, 1999, Mr. Vogel sent Mr. Dunn summary quality survey
information on PeopleServe.
On January 21, 1999, Mr. Dunn met with Mr. Vogel. At this meeting, Mr. Dunn
presented Res-Care's views on combining the companies, including structure and
valuation. On the same day, Mr. Vogel had individual conversations with several
of PeopleServe's principal stockholders or their representatives. These
individuals indicated a willingness to have management explore a combination of
the two companies. A stockholder recommended that PeopleServe retain Bear,
Stearns & Co. Inc. to assist in the process.
On January 28, 1999, Vincent Pettinelli, Joseph Madigan, Timothy Vogel and
Michael Foster, and Michael Gorman, had a conference call with Robert Fraiman of
Bear Stearns to discuss Bear Stearns' views on a possible combination and
suggested approach to the transaction. On January 29, 1999, PeopleServe entered
into an agreement with Bear Stearns to advise PeopleServe on any possible
transaction with Res-Care, which agreement was amended on March 15, 1999.
On February 2, 1999, Mr. Fraiman and Mr. Vogel met with Mr. Geary and Mr.
Dunn. During this meeting Mr. Vogel and Mr. Dunn each presented their views on
deal structure and valuation. The PeopleServe representatives indicated that
given the rapid pace of the discussions between the two parties, they had not
had time to get authorization to agree on any terms. After PeopleServe presented
its view on valuation and structure, Res-Care adjourned for an early afternoon
conference call to discuss PeopleServe's views with members of its board of
directors and representatives of J. C. Bradford, Res-Care's financial advisor.
During this meeting, the principals of Res-Care and PeopleServe identified
the following major points that would need to be resolved in order for both
parties to proceed with a possible transaction:
- valuation of PeopleServe's business;
- price protection mechanisms that took into account fluctuations in the
market price of Res-Care common shares;
- ability to account for the transaction as a pooling-of-interests;
- type of merger documentation Res-Care would be willing to use; and
- mechanisms to provide market liquidity to PeopleServe's principal
stockholders.
On February 4, 1999, the board of directors of PeopleServe met to discuss
the proposal of a merger with Res-Care. The board of directors of PeopleServe
authorized Mr. Fraiman and Mr. Vogel to negotiate the transaction for
PeopleServe.
On February 6, 1999, the parties and certain of their legal and financial
advisors held a conference call to discuss valuation, structural, accounting and
stockholder liquidity issues. No agreements were reached, but the parties agreed
that it would be appropriate to commence financial, business, operational and
legal due diligence. Res-Care promptly began to organize its due diligence
activities.
From February 10 through March 29, 1999, representatives of Res-Care
conducted due diligence, including management interviews, document review and
site visits to PeopleServe facilities.
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On February 19, 1999, Res-Care's lawyers delivered an initial draft of the
merger agreement to PeopleServe and its lawyers.
On February 25, 1999, the Res-Care board of directors met to discuss a
possible transaction with PeopleServe. After a presentation by members of
Res-Care's management of an overview of the proposed transaction, the board
authorized Res-Care's executive officers to negotiate the transaction as
presented to the board. The board requested that management make a detailed
presentation on its due diligence findings when they sought approval of the
transaction.
On February 26, 1999, Mr. Dunn discussed structural, tax, accounting and
liquidity issues with representatives of Bear Stearns.
On March 8 and 9, 1999, senior management of Res-Care and PeopleServe,
their lawyers and a representative from Bear Stearns met to negotiate certain
specific terms of the merger agreement and other documents. Further negotiations
continued through the end of March 1999.
During these meetings, the parties discussed and reached preliminary
understandings on a number of significant transaction issues, including:
- treatment of the Series A preferred stock in the transaction;
- transaction valuation methodologies and the effect on the proposed share
exchange;
- treatment of the accrued dividends on the PeopleServe preferred stock in
the transaction;
- treatment of the PeopleServe warrants and employee stock options in the
transaction;
- the manner of computing exchange ratios for the various PeopleServe
equity securities;
- agreement on the prices below $20 and above $26 at which the share
exchange ratios would fluctuate or again become fixed;
- issues related to pooling-of-interests accounting treatment;
- treatment of properties owned by entities in which Mr. Pettinelli has an
interest that would be included in the transaction; and
- the compensation of PeopleServe's financial advisor.
On March 9, 1999, the parties continued to approach an understanding on
major transaction issues, including valuation price and protection, but were
unable to agree on the mechanism to address major stockholder liquidity.
On March 17, 1999, Ray Hayes, an officer of PeopleServe, visited Res-Care
to discuss, among other things, operational and integration issues.
On March 19, 1999, Dennis C. Henegar, an officer of PeopleServe, visited
Res-Care and met with Jeffrey Cross, an officer of Res-Care, and Mr. Dunn to
discuss Mr. Henegar's role with PeopleServe's Texas operations and Mr. Henegar's
contribution to the combined company. On March 20, 1999, Mr. Henegar met with
Mr. Geary, Mr. Cross, Mr. Dunn, E. Halsey Sandford and Ralph G. Gronefeld, Jr.,
officers of Res-Care, to discuss PeopleServe's personnel and business culture.
During this meeting, the participants discussed the integration of the combined
company's Texas operations, as well
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as Mr. Henegar's potential role in the combined operations. On March 21, 1999,
Mr. Geary and Mr. Henegar met again to continue these discussions.
During the week of March 22nd, representatives of PeopleServe visited
Res-Care's facilities and corporate office to conduct due diligence. From March
23 to 25, 1999, representatives of PeopleServe met with KPMG LLP, Res-Care's
independent auditors.
On March 31, 1999, the Res-Care board of directors met to discuss the
particular terms of the transaction with People-Serve. Prior to the meeting,
drafts of the transaction agreements were distributed to the board, along with
extensive due diligence information collected by Res-Care's management. During
the meeting, a representative of J.C. Bradford made a detailed presentation of
the financial aspects of the proposed transaction and expressed his firm's
opinion that, assuming Res-Care could achieve the projected post-merger cost
savings and other customary qualifications, the merger consideration was fair to
Res-Care from a financial point of view. At this meeting, the board approved the
merger with PeopleServe and authorized the issuance of up to approximately
5,844,000 Res-Care common shares in connection with the merger and the exchange
of PeopleServe stock options.
The board's approval was conditioned on Res-Care's management being
satisfied with the results of a meeting to be held with Texas regulatory
officials and Mr. Henegar at which the representatives of Res-Care and
PeopleServe would make a preliminary assessment of the Texas officials' reaction
to the merger and any issues related to Texas officials approving the
transaction. The board and management thought this would be appropriate because
Texas represents the largest proportion of the combined company's revenues.
At the March 31 meeting, Res-Care's board of directors passed a resolution,
which confirmed a prior verbal commitment to James R. Fornear, granting Mr.
Fornear two-year piggy-back registration rights for up to 1 million Res-Care
common shares and one-half of any underwriters' over-allotment option in an
underwritten offering covered by the registration rights agreement with the
PeopleServe stockholders.
On March 31, 1999, the PeopleServe board of directors met to discuss the
terms of the transaction with Res-Care. All but one of the directors
participated in the meeting. Prior to the meeting, drafts of the transaction
agreements were distributed to the directors, together with materials prepared
by Bear Stearns. At this meeting the board, by the unanimous vote of the
directors in attendance, approved:
- the merger agreement and the merger;
- the amendments to the certificate of incorporation to permit the
PeopleServe preferred stocks to be exchanged for Res-Care common shares
in the merger;
- the payments to Mr. Pettinelli, Mr. Vogel and Mr. Macomber under their
employment agreements and the exchange of stock options held by Mr. Vogel
and Mr. Macomber; and
- the exchange under PeopleServe's stock option plan of Res-Care common
shares for PeopleServe employee stock options.
On April 2, 1999, Mr. Geary, Mr. Cross and Mr. Henegar met with Texas
regulatory officials and discussed the proposed combination of the two
companies. Later that day Res-Care and PeopleServe signed a definitive merger
agreement.
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On April 5, 1999, Res-Care and PeopleServe issued a press release
announcing the merger.
PEOPLESERVE REASONS FOR THE MERGER
The board of directors of PeopleServe has approved the merger agreement and
the merger and has determined that the merger is advisable and fair to, and in
the best interests of, PeopleServe and its stockholders. The PeopleServe board
of directors, therefore, recommends that the holders of PeopleServe common
stock, Series B convertible preferred stock and Series A redeemable preferred
stock vote FOR the merger, the merger agreement and the transactions
contemplated by the merger agreement, the amendment to the certificate of
incorporation of PeopleServe, the payments to Mr. Pettinelli, Mr. Vogel and Mr.
Macomber under their employment agreements with PeopleServe and the exchange of
PeopleServe stock options held by Mr. Vogel and Mr. Macomber for Res-Care common
shares.
In reaching its determination, the PeopleServe board of directors consulted
with PeopleServe management, as well as its financial advisor, legal counsel and
accountants, and gave significant consideration to a number of factors bearing
on its decision. Among other things, the PeopleServe board considered the
following strategic factors:
- the merger will provide liquidity for PeopleServe's stockholders through
their ownership of publicly-traded Res-Care common shares;
- the merger will result in enhanced career opportunities for many
employees in the combined company;
- the merger will create the opportunity to generate significant savings in
general and administrative expenses in particular by enabling PeopleServe
to use Res-Care's administrative infrastructure;
- the potential compatibility between Res-Care and PeopleServe, based on
their substantially similar businesses, will result in a larger combined
company with greater financial and human resources than either company
separately;
- the merger should provide PeopleServe with access to lower cost capital
for expansion of its business operations; and
- the merger will result in a significantly larger business organization
that will be able to deliver better and higher quality services
nationwide.
In the course of its deliberations, the PeopleServe board reviewed a number
of additional factors relevant to the merger. These factors included:
- information concerning PeopleServe's and Res-Care's respective
businesses, prospects, financial performance and condition, operations,
management and future development plans;
- the financial condition, results of operations and businesses of
PeopleServe and Res-Care as separate entities before the merger and as a
combined entity following the merger;
- the value of the consideration to be received by PeopleServe stockholders
in the merger, which entailed a review of financial information for
Res-Care and PeopleServe, current financial market conditions and
historical market prices and volatility and trading information with
respect to Res-Care common shares;
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- a comparison of selected recent acquisitions and merger transactions in
the industry;
- results of due diligence investigation of Res-Care by PeopleServe's
management;
- the fact that the number of Res-Care common shares issuable in exchange
for PeopleServe common stock and Series B convertible preferred stock
will be adjusted automatically if the price of Res-Care common shares
falls above or below agreed price levels and that the PeopleServe board
will be permitted to terminate the merger agreement if the price of
Res-Care shares falls below an agreed level;
- the fact that the merger is generally expected to qualify as a tax-free
reorganization for federal income tax purposes;
- the anticipated impact of the merger upon individuals served by
PeopleServe, their parents and other family members or guardians, and
PeopleServe's payors; and
- the terms of the merger agreement.
The board of directors of PeopleServe also considered a number of
potentially negative factors in its deliberations concerning the merger. These
factors included:
- the loss of control over the future operations of the PeopleServe
business following the merger;
- the anticipated loss of jobs by some PeopleServe employees;
- market and contractual limitations on the ability of PeopleServe
stockholders following the merger to sell their Res-Care common shares if
they should so choose;
- the risk that benefits sought to be achieved in the merger will not be
achieved; and
- the other risks described under "Risk Factors."
The foregoing discussion of the information and factors considered by the
PeopleServe board is not intended to be exhaustive but represents material
factors that PeopleServe's board considered. The PeopleServe board did not
quantify or assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the PeopleServe
board may have given different weights to different factors. However, after
taking into account all of the factors set forth above, the PeopleServe board of
directors agreed that the merger and the merger agreement were fair to, and in
the best interests of, PeopleServe and its stockholders and that PeopleServe
should proceed with the merger and the merger agreement.
PEOPLESERVE'S BOARD OF DIRECTORS RECOMMENDS THAT PEOPLESERVE STOCKHOLDERS
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT, THE
AMENDMENT
TO THE CERTIFICATE OF INCORPORATION, THE PAYMENTS TO MR. PETTINELLI, MR. VOGEL
AND MR. MACOMBER UNDER THEIR EMPLOYMENT AGREEMENTS AND THE EXCHANGE OF
PEOPLESERVE STOCK OPTIONS HELD BY MR. VOGEL AND MR. MACOMBER.
RES-CARE REASONS FOR THE MERGER
The Res-Care board of directors believes that the merger is in the best
interests of Res-Care and its shareholders and unanimously approved the merger
agreement and the issuance of shares in connection with the merger and in
exchange for PeopleServe stock options. The board also unanimously recommended
that shareholders approve the issuance of shares in the merger and in exchange
for PeopleServe stock options as required by Res-
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Care's listing agreement with The Nasdaq Stock Market. In reaching this
determination, the Res-Care board of directors considered a number of factors,
including, among others:
- information pertaining to Res-Care's and PeopleServe's respective
businesses, prospects, quality of services delivered, historical and
projected financial performances, financial conditions and operations;
- analyses of the respective projected contributions to net revenue,
operating profit and net income of the combined company;
- PeopleServe's established operations in a number of states in which
Res-Care already has operations or seeks to gain a market presence as
well as various operational and administrative strengths that PeopleServe
could bring to the combined company;
- the addition of certain PeopleServe key management to the combined
company;
- analysis of the business and capabilities of the combined company;
- reports from management on Res-Care's due diligence investigation of
PeopleServe;
- the business, reputation and capabilities of the management of
PeopleServe, as well as the compatibility of the management teams and
corporate cultures of Res-Care and PeopleServe;
- the opinion of J.C. Bradford that the merger consideration is fair from a
financial point of view, described below;
- the fact that the number of Res-Care common shares issuable in exchange
for PeopleServe common stock and Series B convertible preferred stock
will be adjusted automatically if the closing price of Res-Care common
shares falls above or below agreed price levels and that the Res-Care
board will be permitted to terminate the merger agreement if the closing
price of Res-Care shares falls below an agreed level;
- the fact that the merger is expected to qualify as a tax-free
reorganization for federal income tax purposes;
- the judgment of Res-Care's management that Res-Care's and PeopleServe's
existing management and Res-Care's administrative infrastructure can
support a substantially larger operation, thus enabling Res-Care to
eliminate duplicate corporate and administrative costs following the
transaction; and
- the strategic benefits of combining with another leading national
provider of services to persons with disabilities to strengthen
significantly Res-Care's national service delivery system.
In its deliberations concerning the merger, the Res-Care board of directors
also considered various additional risks and uncertainties, including:
- the historical and projected future financial and operating performance
of PeopleServe;
- the percentage of ownership dilution to Res-Care shareholders resulting
from the issuance of Res-Care common shares to the PeopleServe
stockholders;
- the risk that the public market price of Res-Care common shares might be
adversely affected by the announcement of the merger;
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- PeopleServe's position in the disabilities services industry and the
competitive nature of that business;
- the risk that the combined company might not achieve revenue equal to the
sum of the separate companies' anticipated revenues;
- the risk that Res-Care will not be able to obtain the other benefits
Res-Care seeks from the merger, including the ability to successfully
strengthen its service delivery capabilities and leverage on the existing
management and administrative infrastructure;
- the cost of the integration of PeopleServe into Res-Care and its impact
on the results of the combined company after the merger;
- unanticipated liabilities and contingencies of PeopleServe to which
Res-Care could become liable in the merger; and
- other risks described under "Risk Factors" above.
The foregoing discussion of the information and factors considered by
Res-Care's board of directors is not intended to be exhaustive. The board of
directors of Res-Care did not assign any relative or specific weights to the
foregoing or other factors, and individual directors may have given different
weights to the various factors. The board of directors also received the advice
of J.C. Bradford and relied on this firm's opinion that the merger consideration
is fair to Res-Care from a financial point of view. The terms of the merger were
the result of arm's-length negotiations between representatives of PeopleServe
and representatives of Res-Care. Based upon the consideration of the foregoing
factors, the Res-Care board of directors unanimously approved the merger
agreement and the transactions contemplated thereby as being in the best
interests of Res-Care and its shareholders.
RES-CARE'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT RES-CARE
SHAREHOLDERS VOTE IN FAVOR OF ISSUING RES-CARE COMMON SHARES IN CONNECTION WITH
THE MERGER AND IN EXCHANGE FOR PEOPLESERVE STOCK OPTIONS.
OPINION OF RES-CARE'S FINANCIAL ADVISORS
At the request of the Res-Care board, J.C. Bradford delivered materials
outlining its financial analysis of the proposed transaction on March 30, 1999
and an oral opinion to the Board of Directors on March 31, 1999, followed by a
written opinion dated as of the same date, that the merger consideration is fair
to Res-Care from a financial point of view. On April 29, 1999, J.C. Bradford
delivered an updated fairness opinion to Res-Care's board.
The full text of the updated J.C. Bradford opinion, attached as Appendix D,
sets forth the assumptions made by J.C. Bradford in arriving at its opinion as
well as certain qualifications to the opinion. The full text of the J.C.
Bradford opinion also describes the information reviewed by J.C. Bradford and
briefly describes the qualifications of J.C. Bradford to render an opinion as to
the fairness to Res-Care, from a financial point of view, of the merger
consideration. This summary of the J.C. Bradford opinion is qualified by
reference to the full text of the J.C. Bradford opinion, which shareholders of
Res-Care should read in its entirety.
In preparing its report to Res-Care's board of directors, J.C. Bradford
performed a variety of financial and comparative analyses, which are described
below. In arriving at its opinion, J.C. Bradford did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance
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of each analysis and factor. Accordingly, J.C. Bradford believes that Res-Care
shareholders should consider its analysis as a whole and that selecting portions
of its analyses and the factors considered by it, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion.
The following is a summary of the material portion of the analyses J.C.
Bradford performed in connection with its opinion:
(a) PRO FORMA MERGER ANALYSIS. Using information obtained from the
senior managements of Res-Care and PeopleServe, J.C. Bradford compared the
projected earnings per share both before and after the proposed transaction
through fiscal year 2000. When comparing to Res-Care's stand-alone
projected earnings per share for fiscal year 1999 and 2000, J.C. Bradford
relied primarily on its research analyst's published estimates. In making
its comparisons, J.C. Bradford also assumed and relied solely upon Res-Care
management's estimates of certain savings related to general and
administrative and other expenses expected to be eliminated as a result of
the merger. J.C. Bradford's analysis concluded that the pro forma earnings
per share for fiscal 1999, after giving effect to the transaction and
identified cost savings, would be neutral to accretive to Res-Care's
stand-alone projected earnings per share and for fiscal 2000 would be
accretive to Res-Care's stand-alone projected earnings per share.
(b) DISCOUNTED CASH FLOW ANALYSIS. Based primarily on information
obtained from the senior management of PeopleServe, J.C. Bradford
discounted to present value the future cash flows that PeopleServe is
projected to generate through 2003, under various circumstances. J.C.
Bradford calculated terminal values for PeopleServe (the values at the 2003
fiscal year-end) by applying multiples of EBITDA in fiscal year 2003. The
cash flow streams and terminal values were then discounted to present
values using different discount rates chosen to reflect different
assumptions regarding PeopleServe's cost of capital. Based on the above
described analysis, the implied value of PeopleServe common stock (without
taking into account the net present value of assumed cost savings) ranged
from $83.0 million to $138.7 million as compared to an equity value in the
transaction (assuming a price of $23.00 per Res-Care common share) of
$121.0 million.
(c) COMPARABLE COMPANY ANALYSIS. Using publicly available
information, J.C. Bradford reviewed certain financial and operating data
for several publicly-traded companies that are generally characterized as
being in either the privatization industry or the long-term care industry.
The privatization group included Children's Comprehensive Services, Inc.,
Cornell Corrections, Inc., Correctional Services Corporation, Maximus,
Inc., Ramsay Youth Services, Inc., Wackenhut Corrections Corporation and
Youth Services International Inc. (which we call the privatization group).
The long-term care group included Advocat, Beverly Enterprises, Genesis
Health Ventures, HCR Manor Care, Integrated Health Services, Mariner
Post-Acute Network, National Healthcare, Sun Healthcare Group, and Vencor,
Inc. (which we call the long-term care group). The following table compares
the adjusted average multiples at which the comparable companies were
trading on the date of the opinion to the
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multiples implied by the transaction value (assuming a closing price of
$23.00 per Res-Care common share).
<TABLE>
<CAPTION>
MERGER
PRIVATIZATION LONG-TERM (WITH ASSUMED
GROUP CARE GROUP COST SAVINGS)
------------- ---------- -------------
<S> <C> <C> <C>
Latest Twelve Months Earnings........... 18.7x 9.2x 11.4x
1999 Earnings........................... 15.0x 9.3x 11.6x
2000 Earnings........................... 11.6x 5.8x 10.0x
Latest Twelve Months EBITDA............. 12.2x 7.1x 6.9x
Latest Twelve Months Revenue............ 1.1x 0.7x 1.0x
</TABLE>
Res-Care cautions its shareholders that no company in the
privatization group or the long-term care group is identical to Res-Care.
Accordingly, an examination of the results of the foregoing analysis
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of Res-Care and the
other public companies in the privatization and long-term care groups.
(d) COMPARABLE TRANSACTION ANALYSIS. Using comparable transaction
analysis, J.C. Bradford calculated the multiples paid in acquisitions of
companies in the privatization and long-term care businesses since January
1, 1997. J.C. Bradford calculated the aggregate consideration paid for each
acquired company as a multiple of the latest twelve months EBITDA, which
ranged from 5.8x to 12.1x with an adjusted average multiple of 9.1x for the
privatization businesses, and which ranged from 4.3x to 15.2x with an
adjusted average multiple of 10.1x for the long-term care businesses. Based
on this analysis, J.C. Bradford noted that this range of multiples compares
favorably to the multiple of latest twelve months EBITDA (with assumed cost
savings) of 6.9x implied by the transaction value (assuming a closing price
of $23.00 per Res-Care common share).
(e) STOCK TRADING ANALYSIS. J.C. Bradford reviewed and analyzed the
historical trading volume and prices at which the Res-Care common shares
have traded since April 3, 1998 as compared to the historical trading
volume and prices for the privatization group (including Res-Care) and the
long-term care group. J.C. Bradford also reviewed and analyzed the
historical trading volume and prices at which the Res-Care common shares
have traded since April 3, 1998 as compared to the historical trading
prices for the S&P 500 Composite Index, the Nasdaq Composite Index, and the
Russell 2000 Index.
J.C. Bradford has acted as an underwriter in various public offerings of
Res-Care and has provided financial advisory services to Res-Care, for which
J.C. Bradford has received customary fees. In the ordinary course of business,
J.C. Bradford makes a market in Res-Care securities and may at any time hold a
long or short position in these securities. Pursuant to the terms of an
engagement letter dated March 15, 1999, Res-Care agreed to pay J.C. Bradford a
fee for acting as financial advisor to the Board of Directors in connection with
the merger as follows:
- $200,000 paid in cash upon delivery of the initial opinion, and
- an additional $400,000 payable in cash upon the closing of the
transaction.
In addition, Res-Care has agreed to indemnify J.C. Bradford and certain related
persons against certain liabilities relating to or arising out of its
engagement, including certain
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liabilities under the federal securities laws. In the event that the merger
agreement is terminated and a termination fee is paid to Res-Care, J.C. Bradford
will receive 15% of the termination fee (after Res-Care pays its expenses) up to
$100,000.
Res-Care's board of directors engaged J.C. Bradford to render an opinion in
connection with the board's discharge of its fiduciary obligations. J.C.
Bradford has advised the board of directors that it does not believe that any
person (including a shareholder of Res-Care) other than the board of directors
has the legal right to rely upon the opinion for any claim arising under state
law and that, should any claim be brought against it, J.C. Bradford will raise
this assertion as a defense. Resolution of this matter under state law, however,
will have no effect on the rights and responsibilities of any person under the
federal securities laws or on the rights and responsibilities of Res-Care's
board of directors under applicable law.
INTERESTS OF PERSONS IN THE MERGER OTHER THAN AS SHAREHOLDERS
In considering the recommendations of the boards of directors of Res-Care
and PeopleServe relating to the stock issuance, the merger and the other items
to be voted on by PeopleServe stockholders, securityholders of Res-Care and
PeopleServe should be aware that certain directors and officers of PeopleServe
have interests in the merger in addition to their investments as
securityholders. Each board of directors took these interests in account in
recommending the merger and related matters to their securityholders for
approval. Among the interests are the following:
- Mr. Pettinelli will be elected to Res-Care's board of directors following
the merger;
- With respect to entities owning a total of 55 properties leased to
PeopleServe:
- PeopleServe will issue a total of 101,652 shares of common stock
(which will be exchanged for 45,977 Res-Care common shares, assuming a
closing price of $23.00) to Mr. Pettinelli, Mr. Vogel and Mr.
Anderson, in exchange for their interest in these properties;
- PeopleServe will repay or assume debt of these entities owed to third
parties (including all prepayment and other fees) prior to closing of
the merger. This debt totaled approximately $6.8 million as of March
31, 1999; and
- PeopleServe will indemnify Mr. Pettinelli, Mr. Vogel and Mr. Anderson
with respect to the $6.8 million of debt associated with these
properties or will repay this debt at closing.
Mr. Pettinelli will continue to have an interest in partnerships that own a
total of 60 properties leased to PeopleServe or to non-profit corporations with
which PeopleServe has management agreements. With regard to these properties:
- Mr. Pettinelli will indemnify PeopleServe and hold it harmless from
all obligations of, and increased rental payments due to, these
partnerships;
- Mr. Pettinelli will secure his obligations under the indemnity with a
pledge of up to $4.5 million worth of Res-Care common shares or other
marketable securities acceptable to Res-Care;
- Mr. Pettinelli will agree that the indebtedness of these partnerships
will not be modified without PeopleServe's consent; and
- if requested by Mr. Pettinelli, PeopleServe will extend the term of
certain leases with two partnerships to November 1, 2006, so long as
Mr. Pettinelli
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causes a reduction in the term of other specified leases with another
partnership to November 1, 2006.
- Res-Care will continue the indemnification rights under PeopleServe's
certificate of incorporation and its directors' and officers' liability
insurance for five years from the date of the merger; and
- PeopleServe directors, officers and employees will receive approximately
280,884 Res-Care common shares at the time of the merger in exchange for
their PeopleServe stock options (assuming a closing price between $20.00
and $26.00 per Res-Care common share and a 28% minimum combined federal,
state and local tax withholding rate).
Further information on transactions relating to properties Mr. Pettinelli
is transferring to PeopleServe. Mr. Pettinelli and a corporation controlled by
him are general partners in two partnerships which own and lease an aggregate of
23 properties to subsidiaries of PeopleServe. Mr. Pettinelli is the controlling
shareholder of a corporation which owns and leases to PeopleServe subsidiaries a
total of 32 properties. Mr. Vogel and Mr. Anderson, an officer of a PeopleServe
subsidiary, are minority shareholders in both of these corporations. PeopleServe
is acquiring all of these properties for the consideration described above.
These leases are generally for terms ranging from 10 to 20 years. The board
of directors of PeopleServe believes that the terms of these leases approximate
the terms that would result from arm's-length leasing transactions.
PeopleServe has guaranteed or in some other manner agreed to be obligated
for the payment of funds borrowed by these entities from third-party lenders.
This indebtedness was originally incurred in the acquisition, construction or
development of the properties. As of March 31, 1999, PeopleServe had guaranteed
approximately $5.5 million of indebtedness owed by these entities to their
lenders. In addition, as of March 31, 1999, these entities had outstanding
indebtedness to PeopleServe in the amount of approximately $4.4 million. This
debt was created in the development and purchase of properties leased to
PeopleServe.
Further information on transactions related to properties Mr. Pettinelli
will continue to lease to PeopleServe. Mr. Pettinelli and a corporation
controlled by him will continue to serve as general partners of several
partnerships which lease a total of 32 properties to PeopleServe subsidiaries
and 28 properties to non-profit corporations which have management agreements
with PeopleServe subsidiaries. Mr. Vogel and Mr. Anderson are minority
shareholders in this corporation.
These leases are generally for terms ranging from 10 to 25 years. The board
of directors of PeopleServe believes that the terms of these leases approximate
the terms that would result from arms's-length leasing transactions.
PeopleServe has guaranteed or in some other manner agreed to be obligated
for the payment of funds borrowed by these entities from third party lenders.
This indebtedness was originally incurred in the acquisition, construction or
development of the properties. As of March 31, 1999, PeopleServe had guaranteed
approximately $7.5 million of indebtedness owed by these entities to their
lenders. PeopleServe has also guaranteed approximately $600,000 of additional
indebtedness relating to properties leased to an unaffiliated party.
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COMPOSITION OF RES-CARE'S BOARD FOLLOWING THE MERGER
In connection with the merger and the transactions contemplated thereby,
Res-Care's board of directors, consistent with their fiduciary duties and in
accordance with Kentucky law, will appoint Mr. Pettinelli, currently a member of
PeopleServe's board of directors, to become a member of Res-Care's board of
directors promptly after the effective time of the merger.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Some officers of PeopleServe will enter into agreements with Res-Care in
which they will agree not to compete with Res-Care, hire its employees or
disclose confidential information over certain periods. These agreements are as
follows:
- Mr. Vogel will enter into a one-year consulting agreement with
noncompetition, confidentiality and nonsolicitation provisions which last
one year after this agreement terminates; and
- Mr. Pettinelli will enter into a 15-year noncompetition, confidentiality
and nonsolicitation agreement.
Mr. Pettinelli, Mr. Vogel and Mr. Macomber will receive payments required
under their respective employment agreements. See " -- Affiliate
Transactions -- Change in Control Payments and Related Benefits" for more
information.
AFFILIATE TRANSACTIONS
Indemnification and Insurance
All rights to indemnification and exculpation existing in favor of any
director or officer of PeopleServe and its subsidiaries, as provided in their
respective charters, bylaws and applicable indemnification agreements shall
survive for five years after the effective time of the merger. If any claim is
asserted within the five-year period, all rights to indemnification until final
disposition of such claim shall continue until final disposition. In addition,
pursuant to the merger agreement, following the merger Res-Care shall cause
PeopleServe to perform all of its indemnification and exculpation obligations.
For five years after the effective time of the merger, PeopleServe, as the
surviving corporation, shall maintain the policies of director and officer
liability insurance currently carried by PeopleServe. The surviving corporation
may substitute policies of at least the same coverage, containing terms and
conditions which are no less advantageous to the indemnified parties, provided
that such substitution will not result in any gaps or lapses in coverage with
respect to matters occurring prior to the effective time of the merger. In
addition, the surviving corporation will not be required to pay an annual
premium in excess of 150% of the current annual premium (the "Maximum Amount")
paid by PeopleServe. If the surviving corporation is unable to obtain such
coverage for the Maximum Amount, it will obtain as much comparable insurance as
possible for an annual premium equal to the Maximum Amount.
In the event that Res-Care merges or is acquired in a transaction in which
it is not the surviving corporation, or if Res-Care sells substantially all of
its assets, Res-Care shall ensure that its successor or acquiror will assume
such indemnification and insurance obligations.
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Change in Control Payments and Related Benefits
APPLICABLE TAX LAWS. Under Section 280G of the Code, certain compensatory
payments to employees or other individuals who perform services for a
corporation and who are officers, highly-compensated individuals or significant
shareholders are considered "parachute payments" if such payments are contingent
upon a change in control of the corporation and the payments exceed three times
the "base amount." The base amount generally means an individual's annualized
compensation for the five most recent tax years ending before the change of
control or, if an individual has been employed by the employer for less than
five years, the period of his actual employment. Payments made under an
agreement entered into within one year prior to, or in connection with, a change
in control are presumed to be contingent on the change in control. On the other
hand, payments are not considered parachute payments if the taxpayer can show by
clear and convincing evidence that they constitute reasonable compensation for
personal services to be performed after the change in control or that they
otherwise are not contingent on the change in control. Severance payments which
are payable upon or in connection with a change in control and the value of the
accelerated vesting of shares of stock or options to purchase such shares are
considered compensatory payments for this purpose.
Excess parachute payments are not deductible by the corporation, and the
recipient must pay a nondeductible excise tax equal to 20% of the excess
parachute payment in addition to federal income and other taxes on those
payments. An "excess parachute payment" means an amount equal to the excess of
any parachute payment over the base amount allocated to such payment. An excess
parachute payment is reduced by any portion of the payment that the taxpayer
establishes by clear and convincing evidence is reasonable compensation for
personal services actually performed before the change in control. These
payments are applied first to offset the base amount.
Under an exemption, if the stock of the corporation making the payments is
not publicly-traded and if the compensatory payments have been approved by the
shareholders of the corporation, the payments are not considered parachute
payments. The approval of the payments must be by a separate vote of the holders
of stock possessing more than 75% of the voting power of the corporation's
outstanding capital stock immediately before the change in control, after the
material terms of the payments have been disclosed to shareholders. For this
purpose, stock actually or constructively owned by the intended recipient of the
payments is disregarded. Under the rules for determining constructive ownership
of stock, stock owned by a partnership is considered owned proportionately by
its partners, and stock owned by a corporation is considered proportionately
owned by any shareholder owning at least 50% of the corporation's stock. If a
shareholder is not an individual and a substantial portion of its assets
consists of the stock of the corporation making the parachute payments, the
approval by that shareholder must be made by a separate vote of the persons who
hold more than 75% of the voting power of the stock or interests in that
shareholder. Where a general partner of a limited partnership has the authority
to vote on issues involving the management of the partnership's investments, the
general partner has authority to vote to approve compensation payments under
Section 280G of the Code.
The above exemption for shareholder-approved payments requires that the
vote by the shareholders be determinative as to whether the intended recipient
would be entitled to the payments. Thus, the terms of the agreement under which
the payments are made must provide that if the shareholders do not approve the
payments, the intended recipient will not be entitled to receive or retain the
payments.
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PeopleServe proposes to extend certain compensatory payments and benefits
to Vincent D. Pettinelli and Timothy J. Vogel, directors and officers of
PeopleServe, and to Scott T. Macomber, an officer of PeopleServe, that may be
considered excess parachute payments, absent shareholder approval. Accordingly,
PeopleServe is requesting shareholder approval of parachute payments and
benefits.
VINCENT D. PETTINELLI. Mr. Pettinelli is a party to an employment
agreement with PeopleServe dated December 1, 1996. The agreement has a
three-year term which is automatically renewed each year unless earlier
terminated. Under the employment agreement, Mr. Pettinelli will be entitled to
certain severance benefits if, after a change in control, his employment is
terminated or is not renewed without "good cause" (as defined in the employment
agreement), or if he resigns upon making a good faith determination that his
employment status or employment responsibilities have been materially and
adversely affected by the change in control. Res-Care has advised Mr. Pettinelli
that his current employment responsibilities will not continue following the
merger.
Mr. Pettinelli's severance benefits would include: (i) a severance payment
equal to 2.99 times his "Average Annual Compensation;" (ii) full vesting and
immediate payment of the cash value of any long term incentives payable to him
under any long term incentive compensation plans, including the Executive
Retirement Plan, the Executive Long-Term Incentive Plan and any Stock Option
Plan; and (iii) health and other specified welfare benefits until he begins
full-time employment with a new employer, up to 36 months. His "Average Annual
Compensation" is his average annual compensation includable in gross income for
the most recent two taxable years ending before the change in control. The
employment agreement provides that if the severance benefits (alone or with
other payments and benefits), would constitute excess parachute payments, those
benefits will be reduced to the extent necessary so that no portion of the
benefits will be parachute payments (i.e., reduced as necessary so that the
payments and benefits will not exceed three times Mr. Pettinelli's base amount).
The value of Mr. Pettinelli's severance benefits is approximately $1,773,000, as
determined under applicable proposed regulations under Section 280G of the Code,
which exceeds three times his base amount ($1,249,000) by approximately
$524,000.
PeopleServe intends to pay to Mr. Pettinelli, immediately after the merger,
the sum of approximately $1,744,000 in consideration for Mr. Pettinelli's
agreement to terminate his employment agreement and his employment with
PeopleServe. In addition, following the merger, PeopleServe will continue to
provide customary insurance and fringe benefits as provided by his employment
agreement. These benefits have an approximate value of $29,000.
If the payments and benefits to Mr. Pettinelli described above are not
approved by the stockholders of PeopleServe, then the severance benefits will be
reduced to the extent necessary so that no portion of the severance benefits
will be deemed parachute payments.
TIMOTHY J. VOGEL. Mr. Vogel is a party to an employment agreement with
PeopleServe dated January 1, 1999. Under the employment agreement, in the event
of a change in control the agreement will terminate and Mr. Vogel will be
entitled to receive a lump sum payment equal to his base salary for a
thirty-month period calculated at the rate in effect immediately before the
change in control.
The merger will constitute a change in control under, and result in the
termination of, the employment agreement. The lump sum payment to Mr. Vogel
would be $875,000.
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Mr. Vogel holds stock options to purchase 163,522 shares of PeopleServe
common stock at a per-share exercise price of $2.714, which is vested as to 50%
of the shares and will be vested as to an additional 25% of the shares on each
of January 1, 2000, and January 1, 2001. He also holds an option to purchase
48,803.23 shares of PeopleServe common stock at a per-share exercise price of
$1.48, which is 100% vested. In connection with the merger, Mr. Vogel's stock
options (including both the vested and unvested portions) will be exchanged for
Res-Care common shares.
The lump sum termination payment to Mr. Vogel and the exchange of the
unvested portions of his stock options for Res-Care common shares are being
submitted to the stockholders of PeopleServe for approval because the value of
those merger benefits may exceed the threshold amount specified in Section 280G
of the Code and may be considered excess parachute payments. If the PeopleServe
stockholders do not approve these merger benefits to Mr. Vogel, he will forfeit
such portions of the benefits as would constitute parachute payments under
Section 280G of the Code (i.e., the forfeiture will be an amount as necessary so
that the aggregate benefits that would otherwise be parachute payments will be
less than three times his base amount). The value of Mr. Vogel's merger benefits
is approximately $939,000, as determined under applicable proposed regulations
under Section 280G of the Code, which exceeds three times his base amount
(approximately $917,000) by $22,000. Mr. Vogel has agreed to a forfeiture of the
excess benefits if stockholder approval is not obtained.
SCOTT T. MACOMBER. Mr. Macomber is a party to an employment agreement with
PeopleServe dated January 28, 1999. Under the employment agreement, Mr.
Macomber's employment will terminate upon a change in control and he will be
entitled to a severance payment of $235,000 or $352,500 if, prior to the merger,
he relocated his principal residence. The merger will constitute a change in
control under the employment agreement and will result in Mr. Macomber's
entitlement to the severance payment. In addition, Mr. Macomber holds an
unvested stock option granted on January 27, 1999, to purchase up to 150,000
shares of PeopleServe common stock for $3.60 per share which is not currently
exercisable. By its terms, the option will become vested as to 25% of the shares
on each of the first four anniversaries of the grant date. The option will be
exchanged for Res-Care shares simultaneously with the merger. The severance
payment to Mr. Macomber and the acceleration of the vesting of his stock option
are being submitted to the PeopleServe stockholders because the value of these
merger benefits may exceed the threshold amount specified in Section 280G of the
Code. If the PeopleServe stockholders do not approve these merger benefits, Mr.
Macomber will forfeit such portion of the benefits as would constitute excess
parachute payments under Section 280G (i.e., the forfeiture will be an amount as
necessary so that the aggregate benefits that would otherwise be parachute
payments will be less than three times Mr. Macomber's base amount). Assuming a
$352,500 severance payment and a closing price of $23.00 per Res-Care common
share, the value of Mr. Macomber's merger benefits is approximately $631,000, as
determined under applicable proposed regulations under Section 280G of the Code,
which does not exceed three times his base amount ($780,000). However, the value
of Mr. Macomber's merger benefits might exceed three times his base amount if
the closing price is substantially in excess of $23.00 per share. Mr. Macomber
has agreed to a forfeiture of the excess benefits if stockholder approval is not
obtained.
FORM OF THE MERGER
If the merger agreement is approved by the requisite votes of the
shareholders of Res-Care and PeopleServe and all other conditions to the merger
are satisfied or waived, where
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permissible, Res-Care Sub will be merged with and into PeopleServe, with
PeopleServe being the surviving corporation after the merger. Each share of
Res-Care Sub common stock outstanding immediately prior to the merger will be
converted into one share of PeopleServe common stock. Res-Care Sub's current
charter and bylaws will become those of the surviving corporation. Res-Care and
PeopleServe anticipate that the closing date will occur as promptly as
practicable after the meetings.
CONSIDERATION FOR THE MERGER
The merger agreement provides that, at the effective time of the merger,
each share of PeopleServe common stock and Series B convertible preferred stock
issued and outstanding immediately prior to the effective time of the merger
(other than any shares owned by PeopleServe, Res-Care or Res-Care Sub) will be
converted into the right to receive 0.4523 Res-Care common shares. In addition,
assuming a $23.00 closing price, 4.3478 Res-Care common shares will be issued
for each $100 of accrued and unpaid dividends on the Series B convertible
preferred stock and each $100 of liquidation value (including accrued and unpaid
dividends) on each share of Series A redeemable preferred stock. Former
PeopleServe stockholders will hold approximately 21% of the outstanding Res-Care
common shares after the merger.
The portion of a Res-Care common share to be exchanged for a share of each
class of PeopleServe securities is based on the closing price. For all purposes,
the closing price is the average closing price for the 15 trading days ending
four trading days before the closing date. If the closing price of Res-Care
common shares is at least $20.00 and not more than $26.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.4523 Res-Care common shares. If the closing price is greater than $26.00 and
less than or equal to $29.00, the amount of Res-Care common shares will be equal
to the quotient of (x) $11.76 divided by (y) the closing price. If the closing
price is less than $20.00 and greater than or equal to $18.00, the amount of
Res-Care common shares will be equal to the quotient of (x) $9.05 divided by (y)
the closing price. If the closing price is less than $18.00, each share of
PeopleServe common stock and each share of PeopleServe Series B convertible
preferred stock (excluding accrued and unpaid dividends) will be exchanged for
0.5026 Res-Care common shares. If the closing price is greater than $29.00, each
share of PeopleServe common stock and each share of PeopleServe Series B
convertible preferred stock (excluding accrued and unpaid dividends) will be
exchanged for 0.4055 Res-Care common shares. There are no further adjustments in
the amount of Res-Care common shares issued in exchange for shares of
PeopleServe common stock and Series B convertible preferred stock if the closing
price is less than $18.00 or greater than $29.00.
The Series A redeemable preferred stock (including accrued dividends) and
the accrued dividends on the Series B convertible preferred stock will be
exchanged for Res-Care common shares based on the actual closing price for the
Res-Care common shares.
Instead of fractional Res-Care common shares, Res-Care will pay cash equal
to the product of (1) the fractional share interest of a PeopleServe
stockholder, after taking into account all shares of PeopleServe stock held
immediately prior to the effective time of the merger and (2) the average of the
closing prices for Res-Care common shares on The Nasdaq Stock Market for each of
the 15 trading days ending four trading days before the closing date.
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EFFECTIVE TIME OF THE MERGER
The "effective time of the merger" will be when the certificate of merger
is filed with the Secretary of State of Delaware or at any other time specified
in the certificate of merger. This filing will be made at the same time as the
closing of the merger.
PROCEDURES FOR EXCHANGE OF PEOPLESERVE STOCK CERTIFICATES
The conversion of PeopleServe common stock, Series B convertible preferred
stock and Series A redeemable preferred stock into the right to receive Res-Care
common shares will occur automatically at the effective time of the merger. The
PeopleServe common stock, Series B convertible preferred stock and Series A
redeemable preferred stock are sometimes referred to in this document as the
PeopleServe capital stock. Any shares of PeopleServe capital stock owned
immediately prior to the effective time of the merger by PeopleServe, Res-Care
or Res-Care Sub will be canceled.
After the effective time of the merger, Res-Care will designate a bank or
trust company to act as exchange agent, and shall deliver to the exchange agent
certificates representing the Res-Care common shares issuable in the merger. The
exchange agent will deliver the certificates representing Res-Care common shares
and cash instead of fractional shares, in the form of a check, upon surrender
for exchange of certificates representing shares of PeopleServe capital stock.
YOU SHOULD NOT FORWARD PEOPLESERVE CAPITAL STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL YOU RECEIVE A LETTER OF TRANSMITTAL WITH INSTRUCTIONS FROM
THE EXCHANGE AGENT.
PeopleServe stockholders will not receive any dividends or distributions on
Res-Care common shares with a record date on or after the effective time of the
merger until they surrender their PeopleServe capital stock certificates.
Subject to applicable law, when certificates are surrendered, any unpaid
dividends payable as described above will be paid without interest.
If a PeopleServe stockholder requests that any cash or certificates
representing Res-Care common shares be paid to or issued in a different name,
then the certificate surrendered must be properly endorsed. The PeopleServe
stockholder must show that any transfer taxes have been paid or pay the amount
of these taxes to the exchange agent. Res-Care and the exchange agent may
withhold funds from consideration to be paid to any certificate holder as
required by any tax law; however, the holder will be deemed to have received the
full consideration for purposes of the merger agreement.
EXCHANGE OF PEOPLESERVE STOCK OPTIONS
PeopleServe stock options will be automatically exchanged for Res-Care
common shares simultaneously with the merger and without any action on the part
of the option holders. Additionally, Res-Care will make any necessary tax
withholding payments by reducing the number of shares issuable to the extent of
the withholding requirement. The manner of computing the Res-Care common shares
issuable is described in Section 2.2(d) of the merger agreement. The effect of
this provision is that Res-Care will issue Res-Care common shares in an amount
representing the fair value of PeopleServe stock options. For purposes of this
transaction, Res-Care and PeopleServe have determined the fair value of
PeopleServe stock options to be equal to the difference between the exercise
price of the option and the value of the PeopleServe common shares issuable
under the option. This value will be the same as the value assigned to the
PeopleServe common stock in the merger. Thus, assuming a $23.00 closing price
for the Res-Care common shares (which
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results in a 0.4523 exchange ratio), a $1.48 option exercise price, and a 28%
minimum federal, state and local withholding tax rate, an option holder would
receive, net of withholding taxes, approximately 0.279 of a Res-Care common
share for each PeopleServe option.
Prior to the effective date of the merger, Res-Care will file a
registration statement on Form S-8 registering the Res-Care common shares to be
issued in exchange for the PeopleServe stock options. This registration
statement becomes automatically effective upon filing under the SEC's rules.
Option holders who are affiliates of PeopleServe will be subject to the same
restrictions on resale applicable to Res-Care common shares issued to them in
the merger.
Option holders will automatically receive Res-Care common shares in full
satisfaction of all rights under their PeopleServe stock option agreements.
Option holders will not have to take any action or sign any paperwork to receive
these common shares.
ANTICIPATED ACCOUNTING TREATMENT
Res-Care and PeopleServe intend for the merger to be accounted for as a
pooling-of-interests in accordance with generally accepted accounting
principles. Res-Care will restate, retroactively at the effective time of the
merger, its consolidated financial statements to include the assets,
liabilities, shareholders' equity and results of operations of PeopleServe,
subject to any adjustments required to conform with the accounting policies and
financial statement classifications of the two companies, as if the companies
had been combined at the first date covered by the combined financial
statements. In future financial statements, the results of operations of the
combined entity will include the results of both Res-Care and PeopleServe for
the entire fiscal year in which the merger occurs and all prior fiscal periods
presented.
The unaudited pro forma combined condensed financial data contained in this
Proxy Statement/Prospectus with respect to Res-Care and PeopleServe have been
prepared using the pooling-of-interests accounting method to account for the
merger. See "Summary Unaudited Pro Forma Combined Condensed Financial Data."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences of the merger to the PeopleServe stockholders. The summary is based
on the Code, Treasury regulations, administrative rulings and pronouncements and
judicial decisions as of the date of this Proxy Statement/Prospectus, each of
which is subject to change at any time. Any such change, which may or may not be
retroactive, could alter the tax considerations discussed below. The discussion
below is for general information only and does not address all aspects of United
States federal income taxation that may be material to you in connection with
the merger in light of your particular status or circumstances, including,
without limitation, PeopleServe stockholders who are (1) foreign persons, (2)
insurance companies, (3) tax-exempt entities, (4) retirement plans, (5) dealers
in securities, (6) persons whose shares of PeopleServe capital stock were
acquired pursuant to the exercise of employee stock options or otherwise as
compensation, (7) persons subject to the alternative minimum tax and (8) persons
in whose hands the PeopleServe capital stock does not represent a capital asset.
The discussion below does not address the effect of any applicable state, local
or foreign tax laws, or the effect of any federal tax laws other than federal
income tax laws. The parties will not request a ruling from the IRS in
connection with any federal income tax consequences of the merger.
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YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE UNITED STATES
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN LIGHT OF
YOUR PARTICULAR TAX CIRCUMSTANCES AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
AND OTHER TAX LAWS.
PeopleServe has received an opinion from its tax counsel, Vorys, Sater,
Seymour and Pease LLP, that the merger will qualify as a tax-free reorganization
within the meaning of Section 368 of the Code. The tax opinion is based on
certain assumptions and upon representations as to certain factual matters made
by PeopleServe and Res-Care. Such representations, if incorrect, could
jeopardize the conclusions reached in the tax opinion. The tax opinion neither
binds the IRS nor precludes the IRS from adopting a contrary position. An
opinion of counsel only represents such counsel's best legal judgment and has no
binding effect or official status of any kind, and no assurance can be given
that contrary positions will not be taken by the IRS or a court considering the
issues.
The material United States federal income tax consequences to a holder of
PeopleServe common stock or Series B convertible preferred stock that will
result from the merger qualifying as a reorganization are as follows:
(1) a PeopleServe stockholder will not recognize any gain or loss upon
the receipt of Res-Care common shares solely in exchange for his shares of
PeopleServe common stock or Series B convertible preferred stock pursuant
to the merger;
(2) the aggregate tax basis of Res-Care common shares received by a
PeopleServe stockholder in the merger (including fractional shares for
which cash is received) will equal the aggregate tax basis of that
stockholder in the PeopleServe common stock or Series B convertible
preferred stock surrendered by that stockholder in the merger (if a
stockholder holds both PeopleServe common stock and Series B convertible
preferred stock, the basis of each class will be allocated separately to
the Res-Care common shares received with respect to each class);
(3) the receipt by a PeopleServe stockholder of cash instead of a
fractional Res-Care common share will result in the recognition of capital
gain or loss equal to the difference between the amount of cash received
instead of the fractional share and the PeopleServe stockholder's basis in
the fractional shares unless the receipt of cash is essentially equivalent
to a dividend within the meaning of Section 302(b)(1) of the Code; and
(4) the holding period of the Res-Care common shares received by a
PeopleServe stockholder in the merger (including fractional shares) will
include the period during which the stockholder held the PeopleServe common
stock or Series B convertible preferred stock, as the case may be,
surrendered in the merger in exchange for the Res-Care common shares.
A holder of Series B convertible preferred stock could recognize income to
the extent that Res-Care common shares are considered to be received in exchange
for consideration other than Series B convertible preferred stock, such as
dividends accrued on the Series B convertible preferred stock.
Holders of Series A redeemable preferred stock may recognize gain or loss
on the exchange of their shares for Res-Care common shares. Alternatively, a
holder of Series A redeemable preferred stock could recognize income to the
extent that Res-Care common shares are considered to be received in exchange for
consideration other than Series A redeemable preferred stock, such as dividends
accrued on the Series A redeemable
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preferred stock. The tax opinion expresses no view about the federal income tax
consequences of the exchange of Series A redeemable preferred stock in the
merger.
If a PeopleServe stockholder dissents to the merger and receives only cash
in exchange for his PeopleServe capital stock, the cash received will be treated
as having been received as a distribution in redemption of PeopleServe capital
stock, subject to the provisions and limitations of Section 302 of the Code. See
"-- Appraisal Rights." Unless the redemption is treated as a dividend under
Section 302(d) of the Code, a stockholder will recognize gain or loss measured
by the difference between the amount of cash received and the tax basis of the
PeopleServe capital stock redeemed. This gain or loss will be capital gain or
loss. If, on the other hand, the redemption is treated as a dividend under
Section 302(d) of the Code, the full amount of cash received by the shareholder
will be treated as ordinary income to the extent of PeopleServe's current or
accumulated earnings and profits.
Under the tests of Section 302 of the Code, the redemption of a dissenting
PeopleServe stockholder's PeopleServe capital stock generally will be treated as
a dividend unless the redemption (i) results in a "complete termination" of the
stockholder's direct or indirect stock interest under Section 302(b)(3) of the
Code, (ii) is "substantially disproportionate" with respect to the shareholder
under Section 302(b)(2) of the Code or (iii) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
In order to determine whether there has been a complete termination, a
substantially disproportionate redemption or a redemption not essentially
equivalent to a dividend with respect to a dissenting PeopleServe stockholder,
it is necessary to consider the capital stock owned by persons from whom
ownership is attributed to such shareholder under the rules of Section 318 of
the Code. Under Section 318 of the Code, a stockholder is considered to own
shares that are directly or indirectly owned by certain members of his family or
by certain trusts, partnerships or corporations in which he has an ownership or
beneficial interest. A stockholder is also considered to own any shares
underlying exercisable options he holds. In some cases, a dissenting PeopleServe
stockholder may be constructively deemed to own capital stock held by persons
who do not exercise appraisal rights.
REGULATORY APPROVALS REQUIRED
The HSR Act requires both Res-Care and PeopleServe to furnish certain
information and materials to the Antitrust Division of the Department of Justice
and the FTC and requires a 30-day waiting period to expire or be terminated
before the merger can be completed. This waiting period may be extended by
requests for additional information. On April 9, 1999, PeopleServe, Res-Care and
certain affiliates of PeopleServe filed the required notification and report
forms with the Antitrust Division and FTC. Early termination of the waiting
period was granted on April 21, 1999. States where PeopleServe does business may
require approval of the merger for licensure, certification under Medicaid or
other reimbursement programs, or certificate of need purposes.
NASDAQ STOCK MARKET LISTING
It is a condition to the merger that any Res-Care common shares issuable in
the merger and in exchange for PeopleServe stock options be authorized for
listing on The Nasdaq Stock Market, subject to official notice of issuance.
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APPRAISAL RIGHTS
PeopleServe Stockholders
Section 262 of the Delaware General Corporation Law provides appraisal
rights, sometimes referred to as "dissenters' rights," under certain
circumstances to shareholders of a Delaware corporation, such as PeopleServe,
that is involved in a merger. Record holders of PeopleServe capital stock who
follow the appropriate procedures are entitled to appraisal rights under Section
262 in connection with the merger. However, Section 262 appraisal rights are not
available to any shareholder of a corporation who votes in favor of or consents
in writing to a merger. The majority shareholders' agreement between certain
PeopleServe stockholders and Res-Care provides that these stockholders will vote
in favor of the merger and will take any and all action reasonably requested by
PeopleServe's board of directors necessary to execute the merger. By complying
with the terms of the majority shareholders' agreement and voting in favor of
the merger, PeopleServe stockholders who are parties to the majority
shareholders' agreement waive any claim to appraisal rights under Section 262.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DELAWARE GENERAL CORPORATION LAW AND IS QUALIFIED
IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 262, WHICH IS REPRINTED IN ITS
ENTIRETY AS APPENDIX G TO THIS PROXY STATEMENT/PROSPECTUS. ALL REFERENCES IN
SECTION 262 TO A "STOCKHOLDER" AND IN THIS DISCUSSION TO A "RECORD HOLDER" ARE
TO THE RECORD HOLDER OF THE SHARES OF PEOPLESERVE CAPITAL STOCK IMMEDIATELY
PRIOR TO THE EFFECTIVE TIME OF THE MERGER AS TO WHICH APPRAISAL RIGHTS ARE
ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES OF PEOPLESERVE CAPITAL
STOCK HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE,
MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED
BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
Under the Delaware General Corporation Law, record holders of PeopleServe
capital stock who follow the procedures set forth in Section 262 will be
entitled to have their shares of PeopleServe capital stock appraised by the
Delaware Court of Chancery and to receive payment of the "fair value" of such
shares, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, as determined
by the Delaware Court of Chancery.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the PeopleServe
meeting, not less than 20 days prior to the meeting, PeopleServe must notify
each of its stockholders entitled to appraisal rights that appraisal rights are
available and include in the notice a copy of Section 262. Any holder of
PeopleServe capital stock who wishes to exercise appraisal rights or wishes to
preserve his right to do so should review the following discussion and Appendix
G carefully because failure to timely and properly comply with the procedures
specified in Section 262 will result in the loss of appraisal rights under
Delaware law.
THIS PROXY STATEMENT/PROSPECTUS CONSTITUTES NOTICE OF APPRAISAL RIGHTS TO
THE HOLDERS OF PEOPLESERVE CAPITAL STOCK.
A holder of PeopleServe capital stock wishing to exercise his appraisal
rights must deliver to PeopleServe, before the vote on the approval and adoption
of the merger agreement at the PeopleServe meeting, a written demand for
appraisal of his shares and must reasonably inform PeopleServe of the identity
of the holder of record as well as the intention of the holder to demand an
appraisal of the fair value of the shares held. A proxy
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or vote against the merger shall not constitute a demand of appraisal. In
addition, a holder of PeopleServe capital stock wishing to exercise appraisal
rights or wishing to preserve his right to do so must be a record holder of
these shares on the date the written demand for appraisal is made and must
continue to hold these shares through the effective time of the merger.
Only a holder of record of PeopleServe capital stock is entitled to assert
appraisal rights for the shares registered in his name. A demand for appraisal
should be executed by or on behalf of the holder of record, fully and correctly,
as his name appears on his stock certificates, and must state that he intends to
demand appraisal of his shares of PeopleServe capital stock.
If the shares of PeopleServe capital stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and, if these shares are owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be executed by or on behalf of all joint owners. An authorized
agent, including one or more joint owners, may execute a demand for appraisal on
behalf of a holder of record; however, the agent must identify the record owner
or owners and expressly disclose the fact that, in executing the demand, the
agent is agent for the owner or owners. A record holder, such as a broker who
holds stock as nominee for several beneficial owners, may exercise appraisal
rights with respect to the shares held for one or more beneficial owners while
not exercising such rights with respect to the shares held for other beneficial
owners. In this case, however, the written demand should set forth the number of
shares as to which appraisal is sought. If no number of shares is expressly
mentioned, the demand will be presumed to cover all shares held in the name of
the record owner. Holders of PeopleServe capital stock who hold their shares in
brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal.
All written demands for appraisal of PeopleServe capital stock should be
mailed or delivered to PeopleServe at 5555 Parkcenter Circle, Suite 200, Dublin,
Ohio 43017, Attention: Corporate Secretary, and must be received by PeopleServe
within the time period specified by Section 262 of the Delaware General
Corporation Law.
Within 10 days after the effective time, PeopleServe, as the surviving
corporation, must send a notice as to the effectiveness of the merger to each
person who has satisfied the appropriate provisions of Section 262. Within 120
days after the effective time, but not later, PeopleServe or any holder of
PeopleServe capital stock entitled to appraisal rights under Section 262 and who
has complied with these procedures, may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of his shares. PeopleServe
is not under any obligation, and has no present intention, to file a petition
for the appraisal of the fair value of the PeopleServe capital stock. The
holders of the shares of PeopleServe capital stock have an obligation to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262.
Within 120 days after the effective time, any record holder of PeopleServe
capital stock who has complied with the requirements for exercise of appraisal
rights will be entitled to request in writing a statement from PeopleServe
stating the aggregate number of shares of capital stock for which demands for
appraisal have been received and the aggregate number of holders of these
shares. PeopleServe must mail the statement within 10 days after receiving the
written request or within 10 days after expiration of the period for delivery of
demands for appraisal, whichever is later. At any time within 60 days after
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the effective time, any record holder of PeopleServe capital stock who has
complied with the requirement for exercise of appraisal rights has the right to
withdraw a demand for appraisal and accept the terms offered by the merger.
If a holder of PeopleServe capital stock timely files a petition for
appraisal and serves a copy of the petition upon PeopleServe, PeopleServe will
then be obligated within 20 days after service to file with the Delaware
Register in Chancery a duly verified list containing the names and addresses of
all shareholders who have demanded an appraisal of their shares and with whom
agreements as to the value of their shares have not been reached. After notice
to these stockholders as required by the Delaware Court of Chancery, the
Delaware Court of Chancery is empowered to conduct a hearing on the petition to
determine those stockholders who have complied with Section 262 and who have
become entitled to appraisal rights. The Delaware Court of Chancery may require
the holders of shares of PeopleServe capital stock who demanded payment for
their shares to submit their stock certificates to the Delaware Register in
Chancery for notation of the pendency of the appraisal proceeding. If any
stockholder fails to comply with this direction, the Delaware Court of Chancery
may dismiss the proceedings as to that stockholder.
After determining the holders of PeopleServe capital stock entitled to
appraisal, the Delaware Court of Chancery will appraise the fair value of their
shares, excluding any value attributable to the merger, plus a fair rate of
interest, if any, paid upon the fair value. Holders considering seeking
appraisal should be aware that the fair value of their shares as determined
under Section 262 could be more than, the same as or less than the value of the
consideration that they would otherwise receive in the merger if they did not
seek appraisal of their PeopleServe capital stock. Investment banking opinions
as to fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262.
The Delaware Supreme Court has stated that "proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court" should be considered in the
appraisal proceedings. More specifically, the Delaware Supreme Court has stated
that: "Fair Value, in an appraisal context, measures 'that which has been taken
from the shareholder, viz., his proportionate interest in a going concern.' In
the appraisal process the corporation is valued 'as an entity,' not merely as a
collection of assets or by the sum of the market price of each share of its
stock. Moreover, the corporation must be viewed as an on-going enterprise,
occupying a particular market position in the light of future prospects." In
addition, Delaware courts have decided that the statutory appraisal remedy,
depending on factual circumstances, may or may not be a stockholder's exclusive
remedy. The costs of the action may be determined by the Delaware Court of
Chancery and taxed upon the parties as the Delaware Court of Chancery deems
equitable. The Delaware Court of Chancery may also order that all or a portion
of the expenses incurred by any holder of PeopleServe capital stock in
connection with an appraisal, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all of the shares entitled
to appraisal.
Any holder of PeopleServe capital stock who has demanded an appraisal in
compliance with Section 262 will not, after the effective time, be entitled to
vote the shares subject to the demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends or
other distributions payable to holders of record of shares as of a date prior to
the effective time).
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If any holder of PeopleServe capital stock who demands appraisal of his
shares under Section 262 fails to perfect, or effectively withdraws or loses his
right to appraisal, as provided in the Delaware General Corporation Law, his
shares will be converted into Res-Care common shares according to the merger
agreement, without interest, as more fully described under "-- Consideration for
the Merger." If a holder of PeopleServe capital stock fails to file a petition
for appraisal within 120 days after the effective time, he will fail to perfect
or effectively lose the right to appraisal. A holder may withdraw a demand for
appraisal by delivering to PeopleServe a written withdrawal of the demand for
appraisal and an acceptance of the merger. Any attempt to withdraw made more
than 60 days after the effective time of the merger will, however, require the
written approval of PeopleServe. The appraisal proceeding may not be dismissed
as to any holder without court approval once a petition for appraisal is filed.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING
APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF APPRAISAL RIGHTS, AND A HOLDER OF
PEOPLESERVE CAPITAL STOCK WILL BE ENTITLED TO RECEIVE ONLY THE CONSIDERATION
DESCRIBED IN THE MERGER AGREEMENT FOR EACH SHARE ISSUED AND OUTSTANDING
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME OF THE MERGER OWNED BY THE HOLDER.
Res-Care Shareholders
Because Res-Care is not a party to the merger (a wholly-owned subsidiary of
Res-Care, Res-Care Sub, will merge with PeopleServe), Res-Care shareholders will
not be entitled to appraisal rights in connection with the merger.
RESALE OF RES-CARE COMMON SHARES AFTER THE MERGER
Res-Care common shares issued in the merger or in exchange for PeopleServe
stock options will not be subject to any restrictions on transfer arising under
the Securities Act of 1933, as amended, except for shares issued to any
PeopleServe stockholder who may be deemed to be an "affiliate" of PeopleServe
for purposes of Rule 145 under the Securities Act.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT COVER RESALES OF RES-CARE COMMON
SHARES RECEIVED BY ANY PERSON WHO MAY BE DEEMED TO BE AN AFFILIATE.
Persons who may be deemed to be affiliates of PeopleServe generally include
individuals or entities that control, are controlled by, or are under common
control with PeopleServe, and generally include the executive officers and
directors of PeopleServe and entities controlled by executive officers and
directors of PeopleServe. These affiliates may not sell their Res-Care common
shares acquired in connection with the merger, except under an effective
registration under the Securities Act covering these shares or in compliance
with Rule 145 under the Securities Act (or Rule 144 under the Securities Act in
the case of persons who become affiliates of Res-Care) or another applicable
exemption from the registration requirements of the Securities Act. In general,
Rule 145 under the Securities Act provides that, for one year following the
effective time of the merger, an affiliate of PeopleServe (together with certain
related persons) would be entitled to sell Res-Care common shares acquired in
the merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144 under the
Securities Act. Additionally, the number of shares sold by an affiliate
(together with certain related persons and certain persons acting in concert)
within any three-month period under Rule 145 of the Securities Act may not
exceed the greater of 1% of the outstanding Res-Care common shares or the
average weekly trading volume
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of such shares during the four calendar weeks preceding such sale. Rule 145
under the Securities Act will remain available to affiliates if Res-Care timely
files reports under the Exchange Act with the SEC. One year after the effective
time of the merger, an affiliate will be able to sell such Res-Care common
shares without being subject to the manner of sale or volume limitations,
provided that Res-Care is current with its Exchange Act informational filings
and such affiliate is not then an affiliate of Res-Care. One year after the
effective time of the merger, an affiliate will be able to sell such Res-Care
common shares without any restrictions so long as such affiliate had not been an
affiliate of Res-Care for at least three months prior to the date of such sale.
PeopleServe stockholders who are party to the majority shareholders'
agreement and Res-Care have agreed that, among other things, the stockholders
will not sell any shares of capital stock or other securities of PeopleServe or
Res-Care beneficially owned by them or otherwise reduce their risk relative to
their securities position in either PeopleServe or Res-Care until after Res-Care
has published the combined financial results of Res-Care and PeopleServe for a
period of at least 30 days of combined operations of Res-Care and PeopleServe
following the effective time of the merger (which shall be within 135 days of
the effective date of the merger).
As a condition to PeopleServe's willingness to enter into the merger
agreement, substantially all of the PeopleServe stockholders entered into a
registration rights agreement with Res-Care on April 2, 1999. Res-Care has
agreed to grant these PeopleServe stockholders certain registration rights with
respect to the greater of (i) 1,250,000 Res-Care common shares to be issued to
these PeopleServe stockholders or (ii) 55.5% of the Res-Care common shares
included in a registration statement by certain Res-Care shareholders, as well
as up to one-half of the aggregate underwriters' over-allotment option, if any.
Under certain circumstances, these PeopleServe stockholders may include their
shares in a registration statement for a public offering filed by Res-Care
within two years of the effective date of the merger. Res-Care is obligated to
file a shelf registration statement by March 1, 2000, for any or all Res-Care
common shares issued to PeopleServe stockholders not included in a public
offering registration statement filed by Res-Care plus 300,000 additional
Res-Care common shares. A copy of the registration rights agreement is attached
as Appendix B.
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement.
This summary is qualified in its entirety by reference to the merger agreement,
which is incorporated by reference in its entirety and attached to this Proxy
Statement/Prospectus as Appendix A. Res-Care and PeopleServe stockholders are
urged to read the merger agreement in its entirety for a more complete
description of the merger.
GENERAL
The merger agreement provides that Res-Care Sub will merge with and into
PeopleServe, with PeopleServe surviving the merger. As a result of the merger,
PeopleServe will become a wholly-owned subsidiary of Res-Care. The stockholders
of PeopleServe will receive the consideration described below. The merger will
become effective when the certificate of merger is filed with the Secretary of
State of Delaware or at a later date specified in the certificate of merger.
This filing will be made at the same time as or immediately after the closing of
the merger, which shall occur as soon as possible after all of the conditions to
completion of the merger have been satisfied or waived, or on another date to
which Res-Care and PeopleServe agree in writing.
EXCHANGE RATIOS; FRACTIONAL SHARES
Shares of PeopleServe common stock, Series B convertible preferred stock or
Series A redeemable preferred stock will be converted into Res-Care common
shares as follows:
- Each share of PeopleServe common stock, including common stock on
exercise of PeopleServe warrants, will be converted into 0.4523 Res-Care
common shares;
- Each share of PeopleServe Series B convertible preferred stock (excluding
accrued and unpaid dividends) will be converted into 0.4523 Res-Care
common shares; and
- The liquidation value (including accrued and unpaid dividends) of
PeopleServe Series A redeemable preferred stock and the accrued and
unpaid dividends on the PeopleServe Series B convertible preferred stock
will be converted into Res-Care common shares based upon the actual
closing price. Thus, assuming a $23.00 closing price, $100 of accrued
dividends or liquidation value will become 4.3478 Res-Care common shares.
The portion of a Res-Care common share to be exchanged for each share of
PeopleServe common stock and the PeopleServe Series B convertible preferred
stock (excluding accrued and unpaid dividends) assumes that the closing price of
Res-Care common shares (determined for the 15 trading days ending four trading
days before the closing date) is at least $20.00 and not more than $26.00. If
the closing price is greater than $26.00 and less than or equal to $29.00, the
amount of Res-Care common shares will be equal to the quotient of (x) $11.76
divided by (y) the closing price. If the closing price is less than $20.00 and
greater than or equal to $18.00, the amount of Res-Care common shares will be
equal to the quotient of (x) $9.05 divided by (y) the closing price. If the
closing price is less than $18.00, each share of PeopleServe common stock and
each share of PeopleServe Series B convertible preferred stock (excluding
accrued and unpaid dividends) will be exchanged for 0.5026 Res-Care common
shares. If the closing price is greater than $29.00, each share of PeopleServe
common stock and each share of PeopleServe Series B convertible preferred stock
(excluding accrued and unpaid dividends) will be exchanged for 0.4055 Res-Care
common shares. There are no further adjustments in the amount of Res-Care common
shares issued in exchange for shares of PeopleServe
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common stock and Series B convertible preferred stock if the closing price is
less than $18.00 or greater than $29.00.
The Series A redeemable preferred stock and the accrued dividends on the
Series B convertible preferred stock will be exchanged for Res-Care common
shares based on the actual closing price for the Res-Care common shares.
PeopleServe warrantholders have agreed to exercise their warrants prior to
the merger, and their PeopleServe common stock issuable upon exercise of these
warrants will be exchanged in the merger for Res-Care common shares on the same
basis as all other PeopleServe common stock.
No fractional shares will be issued. Instead, stockholders will be paid in
cash equal to the fractional share multiplied by the closing price of one
Res-Care common share on the date the merger is completed, after we add up all
fractions relating to PeopleServe preferred stocks and common stock held by each
PeopleServe stockholder.
EXCHANGE OF PEOPLESERVE STOCK OPTIONS
PeopleServe stock options will be automatically exchanged for Res-Care
common shares simultaneously with the merger and without any action on the part
of the option holders. Res-Care will make any necessary tax withholding payments
by reducing the number of shares issuable to the extent of the withholding
requirement. The manner of computing the Res-Care shares issuable is described
in Section 2.2(d) of the merger agreement. The effect of this provision is that
Res-Care will issue Res-Care common shares in an amount representing the fair
value of the PeopleServe stock options. For purposes of this transaction,
Res-Care and PeopleServe have determined the fair value of the PeopleServe stock
options to be equal the difference between the exercise price of the option and
the value of the PeopleServe shares that would be issued under the option. This
value will be the same as the value assigned to the PeopleServe common stock in
the merger. Thus, assuming a $23.00 closing price for the Res-Care common shares
(which results in a 0.4523 exchange ratio), a $1.48 option exercise price, and a
28% minimum federal, state and local withholding tax rate, an option holder
would receive, net of withholding taxes, approximately 0.279 of a Res-Care
common share for each PeopleServe stock option.
Prior to the effective date of the merger, Res-Care will file a
registration statement on Form S-8 registering the Res-Care common stock to be
issued in exchange for the PeopleServe options. This registration statement
becomes automatically effective upon filing under the SEC's rules. Option
holders who are affiliates of PeopleServe will be subject to the same
restrictions on resale applicable to Res-Care shares issued to them in the
merger.
Option holders will automatically receive Res-Care shares in full
satisfaction of all rights under their PeopleServe option agreements. Option
holders will not have to take any action or sign any paperwork to receive these
common shares.
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CERTAIN REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
PeopleServe and each of its subsidiaries (which are subject, in certain cases,
to specified exceptions) relating to, among other things:
- corporate organization, existence and good standing and similar corporate
matters;
- capitalization;
- authorization, execution, delivery, consummation and enforceability of
the merger agreement and related matters;
- compliance with applicable laws;
- non-contravention of certain contracts, organizational documents and
laws;
- financial statements and records;
- the absence of certain undisclosed liabilities;
- the absence of certain changes or events after December 31, 1998
constituting a material adverse effect on PeopleServe;
- consents or approvals by government entities or other third parties;
- title to properties, absence of liens and encumbrances;
- licenses and certifications;
- certain contracts and debt instruments;
- taxes and tax matters;
- labor matters, benefit plans and other matters relating to the Employee
Retirement Income Security Act of 1974, or ERISA;
- insurance;
- accounts receivable;
- books and records;
- transactions with affiliates;
- environmental matters;
- ownership and validity of intellectual property rights;
- Year 2000 compliance;
- brokers;
- accounting treatment of the merger as a pooling-of-interests;
- the accuracy of information supplied by PeopleServe in connection with
the registration statement and this Proxy Statement/Prospectus; and
- the absence of certain government actions or proceedings or material
litigation.
The merger agreement also contains customary representations and warranties
of Res-Care and Res-Care Sub (which are subject, in certain cases, to specified
exceptions) relating to, among other things:
- corporate organization, existence and good standing and similar corporate
matters;
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- capitalization;
- authorization, execution, delivery, and enforceability of the merger
agreement and related matters;
- non-contravention of certain contracts, organizational documents and
laws;
- documents filed with the SEC;
- financial statements;
- the absence of certain undisclosed liabilities;
- the absence of certain changes or events after December 31, 1998
constituting a material adverse effect on Res-Care;
- consents by governmental entities or other third parties;
- the absence of material litigation and certain governmental actions or
proceedings;
- brokers;
- accounting treatment of the merger as a pooling-of-interests;
- the accuracy of information supplied by Res-Care or Res-Care Sub in
connection with the registration statement and this Proxy
Statement/Prospectus; and
- Year 2000 compliance.
The representations and warranties of PeopleServe, Res-Care and Res-Care
Sub are not waived or affected by any investigation made by any party and do not
survive beyond the effective time of the merger. There is no right of
indemnification for the breach of any representation or warranty.
CERTAIN COVENANTS AND AGREEMENTS
Conduct of Business Pending Merger
Under the merger agreement, PeopleServe has agreed to conduct its business
in the ordinary course consistent with past and current practices and to use its
and its subsidiaries' respective reasonable efforts to (1) preserve intact key
business organizations, (2) keep available the services of current officers and
employees and (3) preserve existing relationships with suppliers, distributors
and others having business relationships with it and them. PeopleServe has also
agreed that, pending the merger, it will not, nor will it permit any of its
subsidiaries to:
- amend the PeopleServe certificate of incorporation or bylaws or
comparable documents of any subsidiary;
- split, combine or reclassify any shares of its outstanding capital stock
or issue or authorize the issuance of any other securities in respect of,
in lieu of, or in substitution for, shares of its outstanding capital
stock;
- incur any obligation or liability, except in the ordinary course of
business consistent with past practices, which individually or in the
aggregate, has a material adverse effect on PeopleServe or its
subsidiaries;
- discharge or satisfy any lien, security interest or other encumbrance,
except in the ordinary course of business, consistent with past
practices;
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- declare, set aside or pay any dividend or other distribution payable in
cash, stock or property on any class of its capital stock;
- directly or indirectly redeem or otherwise acquire any shares of its
capital stock or equity interests, of any of its subsidiaries or any
other securities thereof;
- mortgage or otherwise encumber any of its assets or properties;
- acquire or purchase an equity interest in, or a substantial portion of
the assets of, another entity or otherwise acquire any material assets
outside the ordinary course of business, consistent with past practice;
- enter into any material contract, commitment or transaction outside the
ordinary course of business and consistent with past practice;
- release, transfer or otherwise dispose of any of its assets or properties
outside the ordinary course of business consistent with past practice;
- subject to limited exceptions, cause the total consolidated liabilities
minus the total consolidated current assets of PeopleServe to exceed $53
million;
- materially reduce the amount of coverage provided by any insurance policy
naming PeopleServe or any of its subsidiaries as a beneficiary or a loss
payee;
- subject to limited exceptions, except in the ordinary course of business
consistent with past practice, increase the wages or salaries of any
group of employees generally, enter into or modify any employment
contract with, or make any loan to, or enter into any transaction of any
nature with any PeopleServe stockholder, or any officer or employee of
PeopleServe or its subsidiaries;
- take any action that would prevent Res-Care from accounting for the
merger as a pooling-of-interests;
- forgive, release, cancel, compromise or permit to lapse any debt or claim
other than in the ordinary course of business, consistent with past
practices;
- waive, release, transfer or grant any rights or permit any license or
permit to lapse, or terminate or permit termination of any management
agreement;
- amend, terminate or waive any material right under any agreement,
contract or other written commitment to which it is party or by which it
is bound;
- enter into any transaction other than on an arm's-length basis or other
than in the ordinary course of business;
- enter into any transaction to purchase the business or assets of any
other person or entity; or
- suffer any casualty loss or damage (whether or not such loss or damage is
covered by insurance), which would have a material adverse effect on
PeopleServe or any of its subsidiaries.
No Solicitation
The merger agreement provides that, prior to the effective time of the
merger, neither PeopleServe nor any of its subsidiaries will, or will permit any
of its or their officers, directors, employees, agents or representatives, to
solicit or encourage the initiation or submission of any inquiries or offer
regarding any acquisition, merger, take-over bid, sale of all or any significant
part of the assets or capital stock of PeopleServe or any of its
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subsidiaries, an "Acquisition Transaction." Prior to approval of the merger by
the PeopleServe stockholders, PeopleServe may, as required by the fiduciary
obligations of its board of directors, as determined in good faith by it based
on the advice of outside counsel:
- furnish information concerning PeopleServe to a party who has made an
unsolicited proposal for an Acquisition Transaction under an appropriate
confidentiality agreement substantially similar to the confidentiality
agreement in effect between PeopleServe and Res-Care; or
- participate in negotiations with a third party who has made an
unsolicited proposal for an Acquisition Transaction.
Except as described below, the PeopleServe board of directors may not:
- withdraw or modify, in a manner adverse to Res-Care or Res-Care Sub, its
approval or recommendation of the merger agreement or the merger;
- approve any letter of intent, agreement in principle, acquisition
agreement or similar agreement relating to any Acquisition Transaction;
or
- approve or recommend any Acquisition Transaction.
If the PeopleServe board of directors determines in good faith, based on
advice from outside counsel and financial advisors, that it would be
inconsistent with its fiduciary obligations not to approve or recommend a
Superior Proposal (defined below) then the PeopleServe board of directors may
take the actions listed above after the following conditions have been
satisfied:
- PeopleServe notifies Res-Care in writing of the Superior Proposal;
- the Superior Proposal remains a Superior Proposal at least 5 business
days after Res-Care receives this notice;
- the PeopleServe board of directors again determines that failure to take
any action would result in a breach of its fiduciary obligation; and
- PeopleServe terminates the merger agreement and pays Res-Care the
termination fee.
We refer to action that may be taken by PeopleServe's board of directors as
the "PeopleServe Fiduciary Duty Termination" in this Proxy Statement/Prospectus.
The term "Superior Proposal" means a bona fide, written and unsolicited proposal
or offer, including a new or unsolicited proposal received by PeopleServe from a
person whose initial contact with PeopleServe may have been solicited by
PeopleServe or its representatives prior to signing the merger agreement, made
by any person or group, other than Res-Care or any of its subsidiaries, for an
Acquisition Transaction on terms and conditions that the PeopleServe board of
directors determines in good faith, in the exercise of reasonable judgement,
based on the advice of independent financial advisors and outside legal counsel,
to be superior from a financial point of view to PeopleServe's stockholders than
the merger.
Those PeopleServe stockholders who are party to the majority shareholders'
agreement have also agreed that, in their capacity as PeopleServe stockholders,
they will not directly or indirectly solicit, initiate or encourage an
Acquisition Transaction, except as they may be obligated as a director of
PeopleServe under a PeopleServe Fiduciary Duty Termination.
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Composition of Res-Care's Board of Directors Following the Merger
In connection with the merger, Res-Care has agreed to cause its board of
directors, consistent with their fiduciary duties and in accordance with
Kentucky law, to appoint Mr. Pettinelli, currently a member of PeopleServe's
board of directors, to become a member of Res-Care's board of directors promptly
after the effective time of the merger.
Indemnification; Insurance
All rights to indemnification and exculpation existing in favor of any
director or officer of PeopleServe and its subsidiaries, as provided in their
respective charters and bylaws, shall survive for five years after the merger.
For five years after the merger, PeopleServe, as the surviving corporation,
shall maintain the policies of director and officer liability insurance and
fiduciary liability insurance currently carried by PeopleServe. See "The
Merger -- Affiliate Transactions -- Indemnification and Insurance."
CONDITIONS TO THE MERGER
Each party's obligation to effect the merger is subject to the satisfaction
or waiver, prior to or at the time of the merger, of the following conditions,
among others:
SHAREHOLDER APPROVAL. The Res-Care shareholders shall have approved the
proposal to issue Res-Care common shares in the merger and in exchange for
PeopleServe stock options. The PeopleServe stockholders shall have approved and
adopted the merger agreement and approved the merger, the amendment to the
PeopleServe certificate of incorporation, the payments to Mr. Pettinelli, Mr.
Vogel and Mr. Macomber under their respective employment agreements and the
exchange of the PeopleServe stock options held by Mr. Vogel and Mr. Macomber for
Res-Care common shares.
NO LITIGATION. No action or proceeding challenging the merger or seeking
material damages in connection with the mergers shall be threatened or pending.
HSR AND OTHER APPROVALS. Waiting periods applicable to the merger under
the HSR Act and other applicable laws shall have been terminated or shall have
expired. All material licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and other third parties as
are necessary in connection with the merger contemplated by the merger agreement
shall have been obtained, except where failure to obtain them would not have a
material adverse effect on the combined company.
EFFECTIVENESS OF REGISTRATION STATEMENT. The registration statement on
Form S-4 of which this Proxy Statement/Prospectus is a part, shall have become
effective in accordance with the provisions of the Securities Act. There must be
no stop order suspending the effectiveness of the Registration Statement issued
by the SEC, and no proceedings for that purpose shall have been initiated by the
SEC.
NO INJUNCTIONS. No order issued by any government entity having
jurisdiction over Res-Care, PeopleServe, or any of their subsidiaries that
materially restricts, prevents or prohibits the consummation of the merger shall
be in effect. The parties must use their reasonable efforts to prevent such
orders and to appeal any that may be issued.
NASDAQ LISTING. The Res-Care common shares issued in connection with the
merger and in exchange of PeopleServe stock options shall have been approved for
listing on The Nasdaq Stock Market, subject to official notice of issuance.
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AFFILIATE TRANSACTIONS. The following transactions involving entities that
own 55 properties that are leased to PeopleServe shall have been completed prior
to the closing date:
- one company that owns 32 of these properties and is owned by Mr.
Pettinelli and certain other persons who are officers of PeopleServe
shall become a wholly-owned subsidiary of PeopleServe;
- this company shall cease to be the general partner of a partnership that
leases real estate to unaffiliated companies without any cost to
PeopleServe or this company;
- PeopleServe shall complete the acquisition of the other 23 properties
owned by Mr. Pettinelli and certain other officers of PeopleServe;
- in connection with this property acquisition, PeopleServe will assume
certain indebtedness to be repaid with funds provided by Res-Care up to
$6.8 million; and
- obligations totaling $250,000 owed to PeopleServe by Mr. Pettinelli and
Mr. Vogel will be offset in the transaction.
EXCHANGE OF PEOPLESERVE STOCK OPTIONS. The PeopleServe stock options shall
be automatically exchanged for Res-Care common shares at the effective time.
In addition, each party's obligation to complete the merger is subject to
the satisfaction by the other party of the following conditions:
REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties
of the other party in the merger agreement that is qualified as to materiality
shall be true and correct. Other representations and warranties shall be true
and correct in all material respects. In each case, the representations and
warranties shall be true and correct as of the date of the merger agreement,
and, unless representations and warranties relate to an earlier date, as of the
effective time of the merger. Each of the companies will deliver to the other
company a certificate signed by an authorized officer confirming the
representations and warranties.
PERFORMANCE OF OBLIGATIONS. The other party shall have performed in all
material respects all obligations required to be performed by it under the
merger agreement prior to the effective time of the merger. Each of the
companies will deliver to the other company a certificate signed by an
authorized officer confirming performance of their obligations.
MATERIAL ADVERSE EFFECT. Since April 2, 1999, there shall have been no
event or occurrence which has had or reasonably could be expected to have a
material adverse effect on the other party. Each of the companies will deliver
to the other company a certificate signed by an authorized officer confirming
that no such event or occurrence has happened.
TAX OPINION. PeopleServe shall receive an opinion from its tax counsel
that, among other things, the merger will qualify as a tax-free reorganization
for United States federal income tax purposes.
LEGAL OPINIONS. Counsel for Res-Care, PeopleServe and some of the
PeopleServe stockholders shall deliver opinions regarding each of their
authorizations to execute the merger agreement and other documents and various
other legal matters.
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The obligation of Res-Care or PeopleServe to effect the merger is subject
to the satisfaction of the following additional conditions:
CONSENTS. PeopleServe shall obtain the consents or approvals required in
connection with the transactions contemplated by the merger agreement under any
contract, except where the failure to obtain such consent would not reasonably
be expected, individually or in the aggregate, to have a material adverse effect
on PeopleServe or the combined company.
POOLING LETTERS. Res-Care and PeopleServe shall receive letters from each
of KPMG LLP and Ernst & Young LLP, respectively, each dated not more than five
days prior to the closing date of the merger, stating that the merger will
qualify as a pooling-of-interests for financial reporting purposes.
RESIGNATIONS. Each director of PeopleServe or any of its subsidiaries as
requested by Res-Care shall resign by the effective time of the merger.
LIMITATION ON EXERCISE OF APPRAISAL RIGHTS. No more than 3.5% of the
aggregate number of shares of PeopleServe common stock, Series B convertible
preferred stock and Series A redeemable preferred stock can have exercised, and
not withdrawn, their appraisal rights.
FAIRNESS OPINION. Res-Care shall receive an opinion from J.C. Bradford
that the issuance of Res-Care common shares in the merger is fair to Res-Care
from a financial point of view.
RELEASE OF GUARANTEES. PeopleServe shall obtain releases from its
guarantees on certain properties.
TERMINATION OF EXISTING EMPLOYMENT AGREEMENTS. PeopleServe shall terminate
the employment agreements of Mr. Pettinelli, Mr. Vogel and Mr. Macomber by the
effective time of the merger.
OCCUPANCY STANDARD. Five business days prior to the closing date, the
aggregate number of clients receiving services directly or indirectly from
PeopleServe must total at least 4,065.
NONCOMPETITION AGREEMENTS. At the closing, Mr. Pettinelli will execute a
noncompetition agreement and Mr. Vogel will execute a consulting and
noncompetition agreement.
EXERCISE OF WARRANTS. Prior to the effective time of the merger, holders
of PeopleServe warrants shall exercise their warrants.
MAJORITY SHAREHOLDERS' AGREEMENT. The representations and warranties
contained in the majority shareholders' agreement shall be accurate as of the
closing date. Each shareholder party to the majority shareholders' agreement
must perform and comply in all material respects with all its obligations under
the majority shareholders' agreement by the closing date.
INDEMNITY AND STOCK PLEDGE AGREEMENTS. Mr. Pettinelli shall have executed
an indemnification agreement and a stock pledge agreement in favor of
PeopleServe in which he indemnifies PeopleServe and certain of its subsidiaries
for certain liabilities for indebtedness of entities owned in part by Mr.
Pettinelli and pledges $4.5 million in value of Res-Care common shares received
by him in the merger or other marketable securities acceptable to Res-Care. The
indemnification agreement also requires PeopleServe to cause
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Mr. Pettinelli, Mr. Vogel and Mr. Anderson to be released from certain
guarantees on certain indebtedness secured by properties assumed by PeopleServe
and its subsidiaries no later than 90 days after the closing.
At any time prior to the effective time of the merger, each of Res-Care and
PeopleServe may waive in writing the compliance with any conditions that legally
may be waived. However, Res-Care and PeopleServe may not waive conditions that
are required by law to complete the merger, including (1) the requirement for
shareholder approval and (2) the requirement that the registration statement be
effective on the closing date. After approval of the merger agreement by the
stockholders of PeopleServe and the approval of the issuance of Res-Care common
shares in the merger by Res-Care shareholders, the parties cannot waive any
conditions that under applicable law would require further approval of
shareholders without obtaining their approval. See "-- Waiver."
TERMINATION
The merger agreement may be terminated and the merger abandoned at any time
prior to the effective time of the merger, whether before or after approval by
the shareholders of each of Res-Care and PeopleServe:
(1) by mutual written consent of Res-Care and PeopleServe;
(2) by either Res-Care or PeopleServe, if (a) the merger has not been
completed on or before August 31, 1999, unless the failure to complete the
merger results from the failure of the party seeking termination to perform
its obligations under the merger agreement, or (b) if the conditions to the
merger agreement have not been satisfied or waived, unless the failure to
satisfy the condition results from the failure of the party seeking to
terminate the merger agreement;
(3) by either Res-Care or PeopleServe, if any permanent injunction,
order, decree or ruling by any governmental entity preventing the
completion of the merger becomes final and non-appealable;
(4) by Res-Care, if (a) there has been a material breach of any of the
representations, warranties, covenants or agreements of PeopleServe in the
merger agreement, which is not curable by August 31, 1999, or, if curable,
is not cured within 30 days after Res-Care gives written notice of such
breach to PeopleServe, or (b) if Res-Care does not obtain shareholder
approval;
(5) by Res-Care if (a) there has been a misrepresentation or breach of
any of the representations or warranties of PeopleServe in the merger
agreement which has had or is reasonably likely to have a material adverse
effect on PeopleServe or is reasonably likely to impair the ability of
Res-Care to complete the merger or (b) PeopleServe does not perform its
obligations under the merger agreement in all material respects;
(6) by PeopleServe, if (a) the PeopleServe board of directors decides
to effect a PeopleServe Fiduciary Duty Termination and (b) PeopleServe pays
to Res-Care a termination fee of $7.5 million plus Res-Care's expenses
related to the merger;
(7) by PeopleServe, if there has been a material breach of any of the
representations, warranties, covenants or agreements of Res-Care or
Res-Care Sub in the merger agreement, which is not curable by August 31,
1999, or, if curable, is not cured within 30 days after written notice of
such breach is given by PeopleServe to Res-Care;
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(8) by either Res-Care or PeopleServe, if the average closing price
per share of Res-Care common shares on The Nasdaq Stock Market, for a
specified 15 trading days immediately before the merger, is less than
$16.00; or
(9) by PeopleServe if (a) there has been a misrepresentation or breach
of any of the representations or warranties of Res-Care or Res-Care Sub in
the merger agreement which has had or is reasonably likely to have a
material adverse effect on Res-Care or is reasonably likely to impair the
ability of Res-Care to complete the merger or (b) Res-Care does not perform
its obligations under the merger agreement in all material respects.
In addition, Res-Care may terminate the merger agreement if, among other
reasons, it does not obtain shareholder approval of the share issuance or if, in
Res-Care's opinion, the number of PeopleServe stockholders who exercise
appraisal rights will jeopardize the accounting treatment of the merger as a
pooling-of-interest.
TERMINATION FEE
PeopleServe has agreed to pay Res-Care a fee of $7.5 million plus all
reasonable expenses, including legal, accounting, valuation and tax expenses
related to the merger, in cash if PeopleServe receives and accepts a Superior
Proposal.
AMENDMENT
At any time prior to the effective time of the merger, the parties may
amend or modify any of the terms of the merger agreement only by written
agreement; provided, however, that after any approval by the shareholders of
Res-Care or PeopleServe relating to the merger, no amendment shall be made which
under applicable law requires the approval of shareholders, without the further
approval of shareholders.
WAIVER
At any time prior to the effective time of the merger, Res-Care or
PeopleServe may, in writing, (1) extend the time for the performance of any of
the obligations or other acts of the other party, (2) waive any inaccuracies in
the representations and warranties of the other party in the merger agreement or
any related documents and (3) subject to limited exceptions and the following of
specified procedures, waive compliance by the other party with any of the
agreements or conditions in the merger agreement that may be legally waived.
EXPENSES
Whether or not the merger is completed, except as described under
"-- Termination Fee" above and the expenses of the exchange agent which Res-Care
shall reimburse PeopleServe, all costs and expenses associated with the merger
and related transactions will be paid by the party incurring those expenses.
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REGISTRATION RIGHTS AGREEMENT
The following is a summary of certain provisions of the registration rights
agreement which is attached as Appendix B to this Proxy Statement/Prospectus.
The following summary is qualified in its entirety by reference to the
registration rights agreement. You are encouraged to read the registration
rights agreement in its entirety.
In connection with the merger, Res-Care entered into a registration rights
agreement on April 2, 1999 with substantially all of the PeopleServe
stockholders, granting such PeopleServe stockholders "piggy-back" registration
rights with respect to the greater of (i) 1,250,000 shares of Res-Care common
shares to be issued to these PeopleServe stockholders or (ii) 55.5% of the
Res-Care common shares included by certain Res-Care shareholders, as well as up
to one-half of the aggregate underwriters' over-allotment option, if any. If
Res-Care proposes to register its equity securities under the Securities Act
within two years after the merger, these shareholders will be entitled to notice
of the registration and to include their Res-Care common shares in the
registration. The underwriters for the proposed offering may limit the number of
shares included in the registration if they determine that marketing factors
require a limitation on the number of shares to be underwritten. If the
underwriter limits the number of Res-Care common shares of a shareholder which
may be included in the registration, or if Res-Care does not effect an
underwritten offering, then Res-Care must file a shelf registration statement on
Form S-3 and those shareholders may include their Res-Care common shares that
were excluded from the offering, or their pro rata share as applicable, in the
shelf registration statement. Res-Care will pay all expenses related to the
registration except for fees and expenses of their counsel over $10,000, fees
and expenses of their accountants, any underwriting discounts and commissions,
and transfer taxes relating to the Res-Care common shares to be registered.
By March 1, 2000 Res-Care must file a shelf registration statement on Form
S-3 for the PeopleServe stockholders who are a party to the registration rights
agreement and have this registration statement remain effective for at least 90
days. This registration statement would cover at least 300,000 Res-Care common
shares or 1,550,000 shares if the underwritten registration has not occurred by
March 1, 2000.
The registration rights agreement provides for reciprocal indemnification
and contribution obligations between Res-Care and any seller against civil
liabilities in connection with a registered offering of the Res-Care common
shares received in the merger, including liabilities under the Securities Act.
Res-Care has been informed that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and may be therefore
unenforceable.
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MAJORITY SHAREHOLDERS' AGREEMENT
The following is a summary of certain provisions of the majority
shareholders' agreement which is attached as Appendix C to this Proxy
Statement/Prospectus. The following summary is qualified in its entirety by
reference to the majority shareholders' agreement. You are encouraged to read
the majority shareholders' agreement in its entirety.
As a condition to Res-Care's entering into the merger agreement, one of the
directors and some of the holders of PeopleServe Series B convertible preferred
stock and Series A redeemable preferred stock entered into a majority
shareholders' agreement with Res-Care on April 2, 1999. Under the majority
shareholders' agreement, the parties agreed to vote 83.9% of the outstanding
shares of PeopleServe common stock and Series B convertible preferred stock,
considered as a single class of voting securities, 77.0% of the outstanding
shares of Series B convertible preferred stock and 77.0% of the outstanding
shares of Series A redeemable preferred stock, including any shares subsequently
acquired, in favor of the merger and against any other proposal or transaction
that could prevent or delay any transactions contemplated by the merger
agreement except related to their fiduciary duties as directors. They also
agreed to vote their shares of PeopleServe capital stock in favor of the
amendment to the certificate of incorporation. The holders of approximately
93.4% of the PeopleServe common stock and Series B convertible preferred stock
have agreed to approve the payments to Mr. Pettinelli, Mr. Vogel and Mr.
Macomber under their employment agreements and the exchange of PeopleServe stock
options held by Mr. Vogel and Mr. Macomber. These shareholders also agreed not
to purchase or sell any securities of PeopleServe or Res-Care until Res-Care had
published financial statements covering at least 30 days of combined operations
of Res-Care and PeopleServe and that they had not and would not take any action
that would prevent the merger from being accounted for as a
pooling-of-interests. Those PeopleServe shareholders who are party to the
majority shareholders' agreement have also agreed that, in their capacity as
PeopleServe stockholders, they will not directly or indirectly solicit, initiate
or encourage an Acquisition Transaction, except as they may be obligated as a
director of PeopleServe under a PeopleServe Fiduciary Duty Termination. The
majority shareholders' agreement will terminate on the earlier of the effective
time of the merger or immediately upon the termination of the merger agreement.
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AMENDMENT TO CERTIFICATE OF
INCORPORATION OF PEOPLESERVE
The following is a summary of certain provisions of the amendment to
PeopleServe's certificate of incorporation which is attached as Appendix E to
this Proxy Statement/Prospectus. The following summary is qualified in its
entirety by reference to the amendment. You are encouraged to read the amendment
in its entirety.
PeopleServe stockholders are being asked to approve an amendment to the
PeopleServe certificate of incorporation. The amendment will change the terms of
the Series A redeemable preferred stock and the Series B convertible preferred
stock to permit the shares to be exchanged for Res-Care common shares in the
merger without any action on the part of the holders of either series of
preferred stock. If adopted by the PeopleServe stockholders, the amendment to
the certificate of incorporation will not become effective until immediately
before the effective time of the merger.
PeopleServe's certificate of incorporation now provides that an acquisition
of PeopleServe by merger with another corporation in which the shares of
PeopleServe are converted into shares of the other corporation in the merger is
equivalent to a liquidation of PeopleServe. A liquidation of PeopleServe
entitles the holders of the Series A redeemable preferred stock and Series B
convertible preferred stock to receive, in the case of the Series A redeemable
preferred stock, cash equal to $5.00 per share plus all accrued and unpaid
dividends on such shares and, in the case of the Series B convertible preferred
stock, cash equal to $2.714 per share plus all accrued and unpaid dividends on
these shares. If the consideration payable in a "liquidation merger" involves
securities, then the holders of the Series B convertible preferred stock have
the option of (A) treating the merger as a liquidation of PeopleServe and
receiving the liquidation amount for these shares as described above, or (B)
converting the Series B convertible preferred stock into PeopleServe common
stock and receiving all accrued and unpaid dividends on such shares plus the
consideration distributable to holders of the PeopleServe common stock in the
merger.
The proposed amendment to PeopleServe's certificate of incorporation makes
the following changes to the certificate of incorporation:
- The holders of the Series A redeemable preferred stock would be entitled
to receive, instead of cash, the liquidation value in securities or other
property which the PeopleServe board of directors has determined has a
fair value equal to the liquidation amount.
- The holders of the Series B convertible preferred stock would be entitled
to receive (A) the consideration distributable in the merger to the
holders of PeopleServe common stock as if the shares of Series B
convertible preferred stock had been converted into such common stock
immediately prior to the merger and (B) shares or other property having a
fair value equal to the amount of the accrued and unpaid dividends
through the date of the merger, as determined by the PeopleServe board of
directors, instead of cash.
PeopleServe's certificate of incorporation now provides that upon a "Change
in Control" of PeopleServe, PeopleServe will redeem the Series A redeemable
preferred stock for cash for an amount equal to the Series A original cost of,
$5.00 per share, plus all accrued but unpaid dividends on these shares.
PeopleServe's certificate of incorporation defines a "Change in Control" to
include a transaction in which the holders of PeopleServe common stock
immediately prior to the transaction own less than a majority of the
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outstanding common stock of PeopleServe following the transaction. Under this
definition, the merger would constitute a "Change in Control" of PeopleServe.
The proposed amendment to the certificate of incorporation would clarify the
definition of "Change in Control" to eliminate from the definition a transaction
in which the holders of Series B convertible preferred stock would receive
shares or other property in exchange for their shares, as described above.
The purpose and effect of the proposed amendment are to enable the shares
of Series A redeemable preferred stock and Series B convertible preferred stock
to be converted and exchanged in the merger for Res-Care common shares according
to the merger agreement. Approval of the amendment to the certificate of
incorporation is a condition to the merger. Without the amendment to the
certificate of incorporation, the holders of the Series A redeemable preferred
stock would receive a cash redemption amount for their shares and all accrued
and unpaid dividends, which would result in the merger not qualifying as a
"pooling-of-interests" for accounting purposes, as described above under "The
Merger -- Anticipated Accounting Treatment." If the amendment to the certificate
of incorporation were not adopted, the holders of Series B convertible preferred
stock would have the right to elect to receive, in exchange for their shares,
cash equal to the liquidation value of the Series B convertible preferred stock
and all accrued and unpaid dividends. If the holders of Series B convertible
preferred stock in the merger receive cash for their shares or the accrued and
unpaid dividends on the shares, the merger could not be accounted for as a
"pooling-of-interests."
Dividends accrue at the annual rate of $0.50 per share on the Series A
redeemable preferred stock and $0.27 per share on the Series B convertible
preferred stock. As of March 31, 1999, dividends were accrued and unpaid on each
share of the Series A redeemable preferred stock in the amount of $1.14 and on
each share of Series B convertible preferred stock in the amount of $0.62.
The proposed amendment to the PeopleServe certificate of incorporation must
be approved by the affirmative vote of the holders of (A) 60% of the outstanding
shares of the PeopleServe Series B convertible preferred stock, voting
separately, (B) a majority of the outstanding shares of the PeopleServe Series A
redeemable preferred stock, voting separately, and (C) a majority of the holders
of the PeopleServe common stock, Series A redeemable preferred stock and Series
B convertible preferred stock, voting together as a single class.
THE BOARD OF DIRECTORS OF PEOPLESERVE RECOMMENDS THAT THE STOCKHOLDERS OF
PEOPLESERVE VOTE FOR THE PROPOSED AMENDMENT TO THE PEOPLESERVE CERTIFICATE OF
INCORPORATION.
If approved, the proposed amendment to the PeopleServe certificate of
incorporation will only be filed and become effective immediately prior to the
effective time of the merger, after satisfaction or waiver of all conditions to
the closing. If the merger fails to occur, PeopleServe will take all necessary
action to rescind the proposed amendment.
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ABOUT RES-CARE
GENERAL INFORMATION
Res-Care, Inc. 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 Res-Care have historically been provided by state and local
government agencies and not-for-profit organizations. In recent years, service
delivery has shifted from government agencies toward private organizations, both
not-for-profit and for-profit. Res-Care'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, and youths who have special
educational or support needs, are from disadvantaged backgrounds, or have severe
emotional disorders. Some of these youths have entered the juvenile justice
system. Res-Care has experienced high occupancy rates throughout its MR/DD
operations. Res-Care currently derives virtually all of its MR/DD revenues from
state and local agency reimbursement under Title XIX of the Social Security Act.
For its youth services, Res-Care's revenues come from the U.S. Department of
Labor for its Job Corps operations and from state and local agencies for its
other youth services.
Res-Care currently provides services to approximately 21,700 individuals
with special needs in 30 states and Puerto Rico. Services to approximately
12,500 persons with disabilities are provided in larger facilities, group homes,
personal residences and other community-based programs. Services to
approximately 9,200 at-risk and troubled youths are provided in federally-funded
Job Corps centers and juvenile treatment programs and facilities operated for
state and local agencies.
Res-Care's principal executive offices are located at 10140 Linn Station
Road, Louisville, Kentucky 40223, and its telephone number at that location is
(502) 394-2100.
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BENEFICIAL OWNERSHIP OF EQUITY SECURITIES
The following table shows certain information about the beneficial
ownership of Res-Care common shares as of April 29, 1999 by:
- each person whom Res-Care knows beneficially owns more than 5 percent of
the outstanding of Res-Care common shares,
- each of Res-Care's directors,
- each of Res-Care's executive officers named in the Summary Compensation
Table, and
- all directors and executive officers of Res-Care as a group.
Unless otherwise indicated, to the knowledge of Res-Care, each of the
shareholders listed below has sole voting and investment power over the shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS(1) BENEFICIALLY OWNED(2) PERCENT OF TOTAL
- ------------------- --------------------- ----------------
<S> <C> <C>
James R. Fornear............................ 2,753,337(3)(4) 14.5%
Pilgrim Baxter & Associates, Ltd. .......... 1,803,250(5) 9.5%
Ronald G. Geary............................. 1,503,327(6) 7.9%
Margaret H. Fornear......................... 1,399,676(3)(7) 7.4%
FMR Corporation............................. 1,375,000(8) 7.3%
Spiro B. Mitsos, Ph.D. ..................... 283,265(9) 1.5%
E. Halsey Sandford.......................... 157,714(10) *
Jeffrey M. Cross............................ 81,215(11) *
W. Bruce Lunsford........................... 53,250(12) *
Paul G. Dunn................................ 42,040(13) *
Seymour L. Bryson, Ph.D. ................... 24,188(14) *
Ralph G. Gronefeld, Jr. .................... 10,656(15) *
Olivia F. Kirtley........................... 4,500 *
All directors and executive officers as a
group (10 persons)........................ 4,913,492(16) 24.8%
</TABLE>
- -------------------------
* Indicates less than 1 percent of outstanding common stock.
(1) The following are addresses of the people whom Res-Care knows to
beneficially own more than five percent of the outstanding common stock:
James R. and Margaret H. Fornear, 4331 U.S. 60 East, Marion, Kentucky
42064; Ronald G. Geary, 10140 Linn Station Road, Louisville, Kentucky
40223; FMR Corporation, 82 Devonshire Street, Boston, Massachusetts 92109;
and Pilgrim Baxter & Associates, Ltd., 825 Duportail Road, Wayne,
Pennsylvania 19087.
(2) Each named person or group is considered to be the beneficial owner of
securities which the person may acquire within 60 days through the exercise
or conversion of options, warrants and rights, if any. Those securities are
included in the total number of outstanding shares when computing the
percentage beneficially owned by the person or group. The securities are
not included in the total number of outstanding shares when computing the
percentage of stock beneficially owned by any other
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person or group. The number of shares includes shares that would be issued when
a person converts convertible securities or when a person or group exercises
options (including employee stock options).
(3) As husband and wife, James R. Fornear and Margaret H. Fornear each may be
considered the beneficial owner of the shares of common stock owned by the
other under the applicable rules of the Securities and Exchange Commission.
Each of Mr. and Mrs. Fornear disclaim beneficial ownership of the common
shares held by their spouse. Does not include shares owned by Mr. and Mrs.
Fornear's adult children.
(4) Includes 1,500,757 shares over which Mr. Fornear shares voting and
investment power, including 702,209 shares over which Mr. Fornear shares
voting and investment power with Mrs. Fornear as trustee of three trusts of
which she is the beneficiary.
(5) The information for Pilgrim Baxter & Associates, Ltd., based on the
Schedule 13G dated January 19, 1999 filed with the Securities and Exchange
Commission, states that these shares were acquired in the ordinary course
of business solely for investment purposes and not for the purpose or
effect of changing or influencing the control of Res-Care.
(6) Includes 703,546 shares subject to options that are presently exercisable,
3,125 shares held by two family members and 1,780 shares held as of
September 30, 1998 for the benefit of Mr. Geary by a retirement savings
plan over which Mr. Geary has no voting power but does have investment
power.
(7) Includes 702,209 shares over which Mrs. Fornear has shared voting and
investment power as beneficiary of three trusts of which Mr. Fornear is
trustee.
(8) The information for FMR Corporation and its controlling stockholders,
Edward D. Johnson, III and Abigail P. Johnson, based on the Schedule 13G
dated February 12, 1999 filed with the Securities and Exchange Commission,
states that these shares were acquired in the ordinary course of business
solely for investment purposes and not for the purpose or effect of
changing or influencing the control of Res-Care.
(9) Represents shares owned jointly by Dr. and Mrs. Mitsos over which they
share voting and investment power.
(10) Includes 2,025 shares subject to options that are presently exercisable.
Does not include 115,622 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 in which he
disclaims any beneficial interest.
(11) Represents shares owned jointly by Mr. and Mrs. Cross over which they share
voting and investment power. Includes 58,265 shares subject to options that
are presently exercisable.
(12) Includes 15,750 shares subject to options that are presently exercisable.
(13) Represents shares owned jointly by Mr. and Mrs. Dunn over which they share
voting and investment power. Includes 41,240 shares subject to options that
are presently exercisable.
(14) Includes 15,750 shares subject to options that are presently exercisable.
(15) Includes 10,651 shares subject to options that are presently exercisable
and 5 shares held by a retirement savings plan over which Mr. Gronefeld has
no voting power, but does have investment power.
(16) Includes 847,227 shares subject to options that are presently exercisable.
Does not include Pamela M. Spaniac who resigned from Res-Care effective
October 1998.
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Based on information from the last Form 4 filed with the Commission and
records maintained by Res-Care, Ms. Spaniac beneficially owned 400 shares
held by her husband's retirement plan.
CERTAIN INFORMATION INCORPORATED BY REFERENCE
Res-Care's Annual Report on Form 10-K for the year ended December 31, 1998,
is incorporated by reference to this document and contains a more thorough
discussion of the business of Res-Care. Shareholders of Res-Care and PeopleServe
desiring a copy of Res-Care's 1998 Annual Report may contact Res-Care by mail at
10140 Linn Station Road, Louisville, Kentucky 40223 Attention: Vice President of
Communications or by telephone at (502) 394-2100 as indicated under "Where You
Can Find Additional Information."
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ABOUT PEOPLESERVE
GENERAL DISCUSSION OF THE BUSINESS
PeopleServe is one of the nation's largest providers of services to people
with mental retardation and developmental disabilities. As of December 31, 1998,
PeopleServe provided services to more than 4,200 persons from approximately 600
service sites and with over 7,000 employees. PeopleServe was founded in 1979,
and today, through its subsidiaries, provides 24-hour daily care services and
various supported living services to people with disabilities in twelve states
and the District of Columbia. PeopleServe principally operates Medicaid
certified six to eight bed facilities, commonly referred to as intermediate care
facilities or group homes, for persons with mental retardation and developmental
disabilities. Services provided include: supported living services, supported
employment, day programs/workshops, case management, respite services,
management contract services, foster care and mental health services.
PeopleServe currently derives virtually all of its revenues from state or local
agency reimbursement under Title XIX of the Social Security Act.
From its headquarters in Dublin, Ohio, PeopleServe manages operations in
Delaware, Florida, Indiana, Maryland, Missouri, Nevada, New Jersey, New Mexico,
North Carolina, Ohio, Texas, Washington, D.C. and West Virginia. PeopleServe has
achieved considerable growth through acquisitions and by service expansion in
existing locations.
PeopleServe has sought to participate in the growth and consolidation of
the market for service delivery to persons with disabilities. In pursuing this
goal, PeopleServe relies on its comprehensive service offerings, proven programs
and operating systems, financial strength, economies of scale, geographic
diversification and experience working with special needs populations and
government agencies.
PeopleServe is committed to enhancing the quality of life for individuals
with disabilities through the operation of efficient and flexible programs.
PeopleServe's business strategy is based upon the following key elements:
- comprehensive service offerings;
- expansion of its leadership position as a provider of quality
disabilities services;
- a consumer-focused approach involving the implementation and maintenance
of high quality, cost-effective alternatives to programs operated
directly by government entities and private agencies; and
- proven management systems and procedures for efficient application of
financial and human resources.
PeopleServe began providing services to persons with disabilities, in 1979,
through community-based group homes and, in 1990, through supported living
programs to persons who live in their own residences with outside support
provided as needed. Some of these individuals require 24-hour staffing while
others need only drop-in services, day programs, supported employment or
transportation. 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. Approximately 98% of
PeopleServe's clients with developmental disabilities are being served in
community-based settings.
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PeopleServe's programs focus predominantly 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 PeopleServe's services and support and training programs
make it attractive to state and local government agencies and not-for-profit
providers. Programs are designed to offer specialized support not generally
available in larger state institutions and traditional long-term care
facilities. In each of PeopleServe's programs, services are administered by
PeopleServe employees and contractors, such as qualified mental retardation
professionals or service coordinators, nurses, psychologists, therapists, social
workers and other direct service staff. These services include social,
functional and vocational skills training, supported employment and emotional
and psychological counseling or therapy as needed for each individual.
The following table contains information as of December 31, 1998 regarding
PeopleServe's operations:
<TABLE>
<CAPTION>
INITIAL
# OF OPERATION
STATE CLIENTS IN STATE
- ----- ------- ---------
<S> <C> <C>
Delaware
10 1998
Florida
26 1997
Indiana
284 1997
Maryland
20 1990
Missouri
243 1997
Nevada
242 1996
New Jersey
86 1993
New Mexico
125 1996
North Carolina
492 1989
Ohio
646 1980
Texas
1,553 1996
Washington, D.C.
305 1982
West Virginia
247 1987
-----
Total
4,279
=====
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
PeopleServe receives revenues primarily from delivering residential and
support services to persons with mental retardation and other developmental
disabilities. PeopleServe derives its revenues primarily from state government
agencies under the Medicaid reimbursement system and from management contracts
with private operators. These private operators are 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
fee-based or cost-based applied on a per person, per diem or per hour basis.
Generally, states adjust their rates annually based upon historical costs
incurred by PeopleServe and/or other service providers, and/or on inflation.
Expenses incurred under government agency contracts and management contracts
with
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providers of record for these agencies, are subject to audit by agencies
administering the contracts and services. PeopleServe records any resulting
adjustments as contractual adjustments to revenues in the period in which it
makes the adjustment.
PeopleServe's revenues and net income may fluctuate from quarter to
quarter, in part because annual Medicaid rate adjustments may be announced by
various states inconsistently and are sometimes retroactive to the beginning of
the particular state's reporting period. PeopleServe 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues for 1998 were $183.6 million, an increase of $21.1 million
or 13.0% over 1997. The increase in revenues resulted from program development,
reimbursement increases and acquisitions. In 1998, PeopleServe completed five
acquisitions which contributed $3.6 million to the year-to-year increase in
total revenues. Support services revenue, management contract revenue and other
revenue represented 84.5%, 14.9% and 0.6% of total revenues, respectively, in
1998 as compared to 83.7%, 15.5% and 0.8% of total revenues, respectively, in
1997.
Operating expenses increased $19.7 million to $173.4 million or 94.4% of
total revenues in 1998 compared to $153.7 million or 94.6% of total revenues in
1997. Salaries, wages and benefits represented 71.1% of total revenues in 1998
as compared to 71.8% in 1997, and contributed $14.0 million or 71.1% of the
year-to-year increase in total operating expenses. General operating expenses
represented 20.9% of total revenues in 1998 as compared to 20.7% in 1997 and
contributed $4.7 million or 23.8% of the year-to-year increase. The increase in
these operating expenses resulted from the acquisitions as well as the increase
in staff to support new programs. Depreciation and amortization increased $1.0
million in 1998 to $4.5 million or 2.5% of total revenues as compared to $3.5
million or 2.2% of total revenues in 1997, primarily due to the depreciation of
capital additions and the amortization of goodwill arising from acquisitions.
Interest expense increased $205,000 to $4.3 million in 1998 primarily due
to the increase in borrowings under PeopleServe's revolving credit facility
incurred to finance acquisitions and working capital. The effective income tax
rate in 1998 was 43.8% compared to 45.9% in 1997.
As a result of the factors noted above, net income in 1998 increased to
$3.5 million or 1.9% of total revenues as compared to $2.7 million or 1.6% of
total revenues in 1997. This represents a 30.6% year-to-year increase.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues for 1997 were $162.4 million, an increase of $69.7 million
or 75.2% over 1996. The increase in revenues resulted from program development,
reimbursement increases and acquisitions, including the October 1996 acquisition
of EduCare Community Living Corporation-America which generated $53.7 million of
revenue in 1997 and $6.7 million of revenue in 1996. In 1997, PeopleServe
completed three acquisitions which contributed $16.0 million to the year-to-year
increase in total revenues. Support services
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revenue, management contract revenue and other revenue represented 83.7%, 15.5%
and 0.8% of total revenues, respectively, in 1997 as compared to 73.4%, 25.7%
and 0.9% of total revenues, respectively, in 1996.
Operating expenses increased $65.2 million to $153.7 million or 94.6% of
total revenues in 1997 compared to $88.5 million or 95.5% of total revenues in
1996. Salaries, wages and benefits represented 71.8% of total revenues in 1997
as compared to 68.4% in 1996 and contributed $53.2 million or 81.6% of the
year-to-year increase in total operating expenses. General operating expenses
represented 20.7% of total revenues in 1997 as compared to 24.5% in 1996 and
contributed 16.7% of the year-to-year increase. The increase in these operating
expenses resulted from the acquisitions as well as the increase in staff to
support new programs. Depreciation and amortization increased $1.1 million in
1997 to $3.5 million or 2.2% of total revenues, as compared to $2.4 million or
2.6% of total revenues in 1996 primarily due to the amortization of goodwill
arising from acquisitions.
Interest expense increased $1.5 million to $4.1 million in 1997 primarily
due to the increase in borrowings under PeopleServe's revolving credit facility
incurred to finance acquisitions and working capital. The effective income tax
rate in 1997 was 45.9%. The effective income tax rate in 1996 was not meaningful
as PeopleServe converted from an S Corporation to C Corporation tax status in
November 1996.
As a result of the factors mentioned above, net income in 1997 increased to
$2.7 million or 1.6% of total revenues as compared to $1.4 million or 1.5% of
total revenues in 1996. This represents a 92.5% year-to-year increase.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1998, cash provided by operating
activities was $5.1 million compared to $2.4 million for 1997 and $2.2 million
for 1996. The yearly changes were primarily due to increases in net income,
depreciation and amortization, accounts payable and accrued expenses offset by
increases in accounts receivable. These increases were primarily due to the
growth of PeopleServe through acquisitions and program development.
During the years ended December 31, 1998, 1997 and 1996, cash used in
investing activities was $22.6 million, $10.3 million and $26.4 million,
respectively, relating primarily to acquisitions and purchases of property and
equipment.
Cash provided by financing activities for 1998, 1997 and 1996 was $15.4
million, $6.1 million and $27.6 million, respectively. This related primarily to
borrowings under PeopleServe's credit facilities and, in 1996, proceeds from the
sale of preferred stock. As of December 31, 1998, PeopleServe had $11.8 million
available under its revolving credit facility and it also had $1.0 million in
cash and cash equivalents.
On October 31, 1996, PeopleServe entered into a credit and security
agreement with a bank for an aggregate amount of $34.0 million, consisting of a
$10.0 million revolving loan, a $16.0 million term loan and an $8.0 million time
loan. The time loan was paid off with the proceeds from the sale of preferred
stock in December 1996. In June 1997, the revolving loan was increased to $20.0
million. On October 2, 1998, PeopleServe entered into an amended and restated
credit and security agreement which, among other changes, increased the
revolving loan to $40.0 million.
PeopleServe has historically satisfied its working capital requirements,
capital expenditures, acquisitions and scheduled debt payments from its
operating cash flow, utilization of its credit facility and, in 1996, the sale
of preferred stock. PeopleServe
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believes that cash generated from operations and availability under its credit
facility will continue to be sufficient to meet its working capital, planned
capital expenditure, business acquisition and scheduled debt repayment
requirements over the next twelve months.
YEAR 2000 ISSUE
Historically, certain information technology (IT) systems of PeopleServe
used two digits rather than four digits to define the applicable year, which
could result in such systems recognizing a date using "00" as the year 1900
rather than the year 2000. IT systems include computer software and hardware in
the mainframe and midrange and desktop environments as well as
telecommunications. Additionally, the impact of the problem extends to non-IT
systems, such as equipment used in PeopleServe's group homes, which may contain
non-compliant computer chips.
Based on a recent assessment, PeopleServe determined that it will be
required to modify, replace or upgrade portions of its software and hardware so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. As part of this assessment, a compliance plan, which
includes the formation of a steering committee (including members of senior
management) and a timetable for identifying, evaluating and resolving its Year
2000 issues, has been developed. PeopleServe presently believes that with
modifications to existing systems, the Year 2000 Issue will not pose significant
operational problems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of PeopleServe. PeopleServe will utilize both internal
and external resources to reprogram, replace and upgrade systems for Year 2000.
PeopleServe anticipates substantial completion of the Year 2000 project by
November 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at $1 million to
$2 million and is expected to be funded through operating cash flows. The range
of these cost estimates is a function of ongoing evaluation as to whether
certain systems and equipment will be corrected or replaced, which is largely
dependent on information to be obtained from suppliers or other external
sources. This amount will primarily be expended during 1999. Internal and
external costs for system maintenance and modification are expensed as incurred
while spending for new hardware, software or equipment will be capitalized and
depreciated over the assets' useful lives.
PeopleServe has initiated formal communications with all of its significant
vendors and government agencies in states where PeopleServe does business to
determine the extent to which PeopleServe's interface systems and business
continuity are vulnerable to third-party Year 2000 issues. However, there can be
no guarantee that the systems of these third parties will be timely converted to
avoid an adverse effect on PeopleServe. PeopleServe will continue to monitor and
update the status of its third-party Year 2000 projects to minimize the risk of
business interruptions.
The costs of the project and the date on which PeopleServe believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were based on numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved. As such, actual results could differ from those anticipated. Specific
factors that might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
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PeopleServe anticipates timely completion of its Year 2000 remediation.
PeopleServe is continuously reviewing the status of its remediation efforts and,
as a necessary part of the compliance plan discussed above, a contingency plan
will be created during 1999 to address options for minimizing business
disruptions resulting from any failure by PeopleServe or its vendors or
government funding sources to be Year 2000 compliant. The plan will address
alternative solutions to PeopleServe's Year 2000 issues.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities.
The SOP requires that all costs of start-up activities and organization costs be
expensed as incurred. The SOP is effective for PeopleServe's fiscal year ending
December 31, 1999. PeopleServe adopted the provisions of the SOP in December of
1998 by writing-off all unamortized start-up and organizational costs. The
adoption of this SOP and the write-off of these costs did not have a material
effect on the 1998 financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PeopleServe may be exposed to changes in interest rates as a result of
variable rate interest on certain credit facilities. It does not currently
utilize any derivative financial instruments related to its interest rate
exposure. PeopleServe believes that its exposure to market risk will not result
in a material adverse effect on PeopleServe's consolidated financial condition,
results of operations or liquidity.
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COMPARISON OF THE RIGHTS OF HOLDERS OF RES-CARE COMMON SHARES
AND PEOPLESERVE CAPITAL STOCK
Upon completion of the merger, the stockholders of PeopleServe, a Delaware
corporation, will become shareholders of Res-Care, a Kentucky corporation. The
rights of these shareholders will be governed by Kentucky law, including the
Kentucky Business Corporation Act, and by the articles of incorporation and
bylaws of Res-Care. Delaware law, including the Delaware General Corporation
Law, and the certificate of incorporation and bylaws of PeopleServe will no
longer apply to the rights of the holders of PeopleServe capital stock.
It is not practical to compare all of the differences between applicable
Kentucky and Delaware laws and between the governing documents of Res-Care and
PeopleServe. The following provides a summary of certain differences that may
significantly affect the rights of PeopleServe stockholders. PeopleServe
stockholders should consult with their own legal counsel with respect to
specific differences and changes in their rights as shareholders which will
result from the proposed merger.
AUTHORIZED CAPITAL STOCK; BLANK CHECK STOCK PROVISIONS
Res-Care's articles of incorporation currently authorize 40,000,000
Res-Care common shares, all of the same class. As of December 31, 1998,
18,911,726 shares were outstanding, 6,665,999 shares were reserved for issuance
upon conversion of approximately $131 million of outstanding convertible notes
and 2,981,127 shares were reserved for issuance upon exercise of outstanding
employee stock options. The articles of incorporation also authorize 1,000,000
preferred shares and grant broad authority to the Res-Care board of directors to
determine the voting powers, designations, preferences and rights of each series
of preferred stock without shareholder approval. No preferred shares have been
issued or are outstanding. Subject to the rights of any preferred stock issued,
as determined by the Res-Care board of directors or otherwise provided under
Kentucky law, each holder of Res-Care common shares is entitled to dividends, if
any, as may be declared by Res-Care's board of directors. Each holder of
Res-Care common shares has one vote per share on all matters on which holders of
Res-Care common shares are entitled to vote. In the event of the liquidation,
dissolution or winding up of Res-Care, holders of Res-Care common shares are
entitled to receive on a pro rata basis any assets remaining after provision for
payment of creditors and after payment of any liquidation preference to holders
of Res-Care preferred shares, if any.
The authorized preferred shares of Res-Care are available for issuance from
time to time in one or more series at the discretion of the Res-Care board of
directors without shareholder approval. The Res-Care board of directors has the
authority to prescribe for each series of preferred shares:
- the number of shares in that series;
- the voting rights, if any, to which such shares in that series are
entitled;
- the consideration for such shares in that series; and
- the designations, powers, preferences and voting, relative participation,
optional or other rights, and such qualifications, limitations or
restrictions of the shares in that series.
Depending upon the rights of these preferred shares, the issuance of preferred
shares could have an adverse effect on holders of common shares by delaying or
preventing a change in
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control of Res-Care, making removal of the present management of Res-Care more
difficult or resulting in restrictions upon the payment of dividends and other
distributions to the holders of its common shares.
PeopleServe's certificate of incorporation authorizes 15,000,000 shares of
common stock with a par value of $.01 per share, all of the same class, of which
5,615,231 shares were outstanding as of March 31, 1999. The certificate of
incorporation also authorizes the board of directors to issue 5,000,000 shares
of preferred stock, with a par value of $.01 per share, of which 1,000,000
shares are designated as Series A redeemable preferred stock and 3,684,364
shares are designated as Series B convertible preferred stock. Currently
1,000,000 shares of Series A redeemable preferred stock and 3,684,364 shares of
Series B convertible preferred stock are issued and outstanding. The certificate
of incorporation also grants broad authority to the PeopleServe board of
directors to determine the number of shares, designations, powers, preferences,
rights, qualifications, limitations and restrictions of the remaining
undesignated preferred stock without vote or action by the stockholders. Subject
to certain exceptions, dividends accrue with respect to the Series A redeemable
preferred stock at the rate of $0.50 per share per annum and with respect to the
Series B convertible preferred stock at the rate of $0.27 per share per annum.
Subject to the rights of the holders of PeopleServe preferred stock, each holder
of PeopleServe common stock is entitled to dividends, if any, as may be declared
by PeopleServe's board of directors. Each holder of PeopleServe common stock has
one vote per share on all matters on which holders of PeopleServe common stock
are entitled to vote. Each holder of PeopleServe Series B convertible preferred
stock shall be entitled to one vote per share, and shall have voting rights and
powers equal to the voting rights and powers of the common stock, except as
otherwise expressly required by law. The shares of Series A redeemable preferred
stock are non-voting unless otherwise required by law.
There are no preemptive or other subscription rights, conversion rights or
redemption or sinking fund provisions relating to shares of PeopleServe common
stock. All of the outstanding shares of PeopleServe common stock are fully paid
and nonassessable.
In addition to any other rights provided by Delaware law, so long as any
shares of PeopleServe preferred stock are outstanding and there has not been an
initial public offering of the PeopleServe common stock, 60% of the outstanding
shares of Series B convertible preferred stock must approve certain actions.
These actions include:
- paying or declaring any dividend on PeopleServe's common stock or other
equity securities or the redemption, purchase or other acquisition for
value (or pay into or set aside for a sinking fund for this purpose) of
PeopleServe's common stock or other equity securities other than
repurchases from employees out of the proceeds of key-man life insurance
policies for the benefit of PeopleServe or redemptions of the Series A
redeemable preferred stock or Series B convertible preferred stock;
- altering or changing the certificate of incorporation or bylaws of
PeopleServe;
- reclassifying any shares of PeopleServe's common stock or other equity
securities other than the Series A redeemable preferred stock or Series B
convertible preferred stock into shares having any preference or priority
as to dividends or assets superior to or on parity with Series A
redeemable preferred stock or Series B convertible preferred stock;
- issuing any equity interests in PeopleServe or any subsidiary of
PeopleServe which are on parity with or senior to the Series A redeemable
preferred stock or Series B convertible preferred stock as to payment of
dividends or in liquidation or any
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subordinated indebtedness of PeopleServe or any subsidiary of PeopleServe
other than as consideration for the acquisition of another business
enterprise;
- authorizing, issuing or granting any options or rights to acquire equity
securities of PeopleServe or any subsidiary of PeopleServe or issuing
equity securities or rights of PeopleServe or any subsidiary to employees
or members of management of PeopleServe, other than up to 1,215,840
shares of PeopleServe common stock (adjusted for any combinations,
consolidations, stock splits or stock distributions or dividends with
respect to such shares issued or guaranteed or reserved for issuance or
grant to members of PeopleServe's management); or
- authorizing or approving any acquisition of PeopleServe through:
- the merger of PeopleServe with or into any other corporation or other
entity in which PeopleServe is not the continuing surviving entity of
the transaction;
- a transaction in which PeopleServe is the surviving entity but the
shares of PeopleServe capital stock outstanding immediately prior to
the transaction are exchanged or converted into other property,
whether in the form of securities, cash or otherwise; or
- a sale of substantially all of the assets of PeopleServe, unless the
holders of the Series B convertible preferred stock receive cash or
readily marketable securities equal to specified multiples of the
liquidation preference of the Series B convertible preferred stock.
PeopleServe's certificate of incorporation provides that the holders of the
Series A redeemable preferred stock are entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of
PeopleServe to the holders of PeopleServe common stock, $5.00 per share plus the
accrued but unpaid dividends whether or not earned or declared on such shares.
The holders of the Series B convertible preferred stock are entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of PeopleServe to the holders of the PeopleServe common stock, $2.714 per
share plus the accrued but unpaid dividends. If the assets and funds distributed
among holders of the Series A redeemable preferred stock and the Series B
convertible preferred stock are insufficient to permit the full payment of those
preferential amounts, then the entire assets and funds of PeopleServe available
for distribution will be distributed ratably among the holders of the Series A
redeemable preferred stock and Series B convertible preferred stock in
proportion to their relative liquidation rights. After completion of
distributions in preference to the holders of PeopleServe preferred stock, the
remaining assets and funds of PeopleServe legally available for distribution
will be distributed among the holders of its common stock in proportion to the
number of shares held by them.
PeopleServe's certificate of incorporation provides that the following
transactions will be treated as a liquidation, dissolution or winding up of
PeopleServe and will entitle the holders of the Series A redeemable preferred
stock and Series B convertible preferred stock to receive cash in an amount
equal to the liquidation preference, plus all accrued and unpaid dividends:
- any acquisition of PeopleServe by means of a merger of PeopleServe with
or into any other corporation or other entity in which PeopleServe is not
the continuing or surviving entity;
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- a transaction in which PeopleServe is the surviving entity but the shares
of PeopleServe's capital stock outstanding immediately prior to the
transaction are exchanged or converted into other property, whether in
the form of securities, cash or otherwise; or
- a sale of substantially all of the assets of PeopleServe.
In addition, the PeopleServe certificate of incorporation provides that if
the consideration paid in a transaction involves securities or other property,
the holders of the Series B convertible preferred stock have the option of:
- treating the transaction as if it were a liquidation, dissolution or
winding up and receiving the cash consideration equal to their
liquidation preference; or
- converting their shares of Series B convertible preferred stock into
PeopleServe common stock and receiving all accrued and unpaid dividends
on their shares of Series B convertible preferred stock plus the
consideration distributable to holders of PeopleServe common stock.
PeopleServe's certificate of incorporation provides that the holders of the
Series B convertible preferred stock have the right at the option of the holder,
at any time after the issuance of these shares to convert these shares into an
equivalent number of shares of PeopleServe common stock. In addition, each share
of Series B convertible preferred stock will be automatically converted into
PeopleServe common stock upon the earlier to occur of:
- the date specified by vote or written consent or agreement of holders of
at least 60% of the then outstanding shares of Series B convertible
preferred stock, voting as a class; or
- at the option of PeopleServe, concurrently with the closing of an initial
public offering under an effective registration statement under the
Securities Act providing for a minimum amount of gross proceeds to
PeopleServe and at a minimum sale price per share.
The merger agreement requires as a condition to the merger that the holders
of PeopleServe common stock, Series A redeemable preferred stock and Series B
convertible preferred stock approve the amendment to the PeopleServe certificate
of incorporation to provide that those holders of Series A redeemable preferred
stock and Series B convertible preferred stock shall receive Res-Care common
shares in the merger in consideration for their preferred stock plus all accrued
and unpaid dividends as specified in the merger agreement.
SIZE OF THE BOARD OF DIRECTORS
Kentucky law requires the board of directors to consist of one or more
individuals, with the number specified in or fixed by the articles of
incorporation or bylaws. The board may increase or decrease by up to 30% the
number of directors approved by the shareholders. Shareholders may increase or
decrease by more than 30% the number of directors last approved by the
shareholders. The articles of incorporation or bylaws may establish a range for
the size of the board of directors by fixing a minimum and maximum number of
directors. If a range is established, the number of directors may be fixed or
changed from time to time, within the minimum and maximum, by the shareholders
or the board of directors. Only the shareholders may change the range for the
size of the board or change from a fixed to a variable-range size board or vice
versa. Res-Care's articles of
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incorporation authorize the number of directors to be specified in accordance
with the bylaws. For more information on the structure of Res-Care's board of
directors, see "-- Classified Board of Directors" below. The Res-Care board of
directors currently consists of seven directors. If the merger transaction is
completed, Res-Care will cause its board, consistent with their fiduciary duties
and under Kentucky law, to appoint Vincent D. Pettinelli, the chairman of
PeopleServe and its majority stockholder, as an additional Res-Care director.
Delaware law provides that the number of directors shall be fixed by or in
the manner provided in the bylaws, unless the certificate of incorporation fixes
the number of directors, in which case a change in the number of directors shall
be made only by amendment of the certificate. PeopleServe's certificate of
incorporation provides that the board of directors shall consist of eight
directors. Currently, there are seven directors and one vacancy on the
PeopleServe board. The holders of Series B convertible preferred stock, as a
class, are entitled to elect two members of the board of directors. The holders
of the PeopleServe common stock and Series B convertible preferred stock voting
together as one class are entitled to elect the remaining members of the board
of directors. In the event of the breach by PeopleServe of its obligations with
respect to the Series B convertible preferred stock or the Series A redeemable
preferred stock, the holders of the Series B convertible preferred stock have
the right to elect a majority of the PeopleServe board of directors.
CLASSIFIED BOARD OF DIRECTORS
On a classified board of directors some, but not all, of the directors are
elected on a rotating basis each year. A Kentucky corporation may classify its
board into two or three groups. Changing the board of directors, and control of
a corporation, is more difficult and time consuming with a classified board. The
Res-Care board of directors is not classified. The Res-Care articles of
incorporation provide that if the number of directors equals or exceeds nine the
board will be classified into three classes, as nearly equal in number, with the
number of directors in any one class not exceeding the number of directors in
any other class by more than one. The initial allocation of directors among
classes is to be established by a resolution adopted by a majority of the
Res-Care board of directors. The Res-Care articles of incorporation provide that
if the board is not classified, each director is elected for a term ending on
the date of the first annual meeting following the annual meeting at which the
director was elected. If the board of directors has been classified, each
director assigned to the first class shall serve for a term ending on the date
of the first annual meeting following the annual meeting at which such director
was elected; each director assigned to the second class shall serve for a term
ending on the date of the second annual meeting following the annual meeting at
which such director was elected; and each director assigned to the third class
shall serve for a term ending on the date of the third annual meeting following
the annual meeting at which such director was elected. At each annual meeting
held after the initial election of directors according to classes, the directors
chosen to succeed those whose terms have expired shall be elected to serve for a
term ending on the date of the third annual meeting following the annual meeting
at which they were elected.
A Delaware corporation may stagger the terms of directors by dividing the
total number of directors into one, two or three classes. PeopleServe's board of
directors is not divided into classes.
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CUMULATIVE VOTING
Cumulative voting permits a shareholder to cumulate the total shareholder
votes for a single candidate in an election of directors. Cumulative voting
increases the chances that a minority shareholder could elect a member to the
board of directors. Under Kentucky law, Res-Care shareholders are entitled to
cumulate their votes. Under Delaware law, shareholders do not have the right to
cumulate their votes for directors unless provided for by the certificate of
incorporation. PeopleServe's certificate of incorporation does not provide for
cumulative voting.
REMOVAL OF BOARD OF DIRECTORS; FILLING VACANCIES
Under Res-Care's articles of incorporation, any director or directors or
the entire board may be removed from office at any time, but only for cause and
by the affirmative vote of the holders of a majority of all shares outstanding
and then entitled to vote generally in the election of directors, voting
together as a single class. If less than the entire board is to be removed, no
one director may be removed if the votes cast against the director's removal
would be sufficient to elect the director. Vacancies are filled by a majority of
the remaining directors then in office.
PeopleServe's bylaws provide that any director may be removed, with or
without cause, at any time by the affirmative vote of a majority of the
outstanding shares then held of record by the shareholders entitled to vote. Any
vacancy in the board caused by any removal may be filled by the stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Kentucky law allows a corporation to amend its articles of incorporation at
any time. Res-Care's articles of incorporation require the approval of at least
80% of all shares of Res-Care outstanding and entitled to vote to amend or
repeal the Res-Care articles of incorporation regarding the board of directors.
Amendments to the other provisions of the Res-Care articles of incorporation
require only a majority vote of the outstanding shares.
The Res-Care board has the power and authority to alter, amend or repeal
its bylaws and to make new bylaws by the vote of a majority of the entire board,
subject to the power of the shareholders to change or repeal the action.
Delaware law authorizes amendments to the certificate of incorporation by
the stockholders and amendment to the by-laws by the stockholders or board of
directors. PeopleServe's certificate of incorporation provides that so long as
any shares of preferred stock are outstanding, holders of common stock may not
alter or change the certificate of incorporation and the board of directors or
holders of common stock may not alter or change the bylaws without first
obtaining the approval of the holders of at least 60% of the outstanding shares
of Series B convertible preferred stock.
POWER TO CALL SPECIAL MEETINGS OF SHAREHOLDERS
Res-Care's bylaws provide that a special meeting of the shareholders may be
called by the chairman of the board or the president if he is the chief
executive officer. The chairman must call a meeting at the written request of a
majority of the members of the board or upon the written demand of the holders
of at least 33% of all the outstanding shares entitled to vote at the meeting.
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PeopleServe's bylaws allow a special meeting of stockholders to be called:
- by the President;
- by any other officer authorized by the bylaws or otherwise by the board
to call such meetings;
- by a majority of the members of the board; or
- by the request of holders of 25% or more of the shares then outstanding
and entitled to vote.
ADVANCE NOTICE OF MAKING NOMINATIONS AT MEETINGS OR FOR RAISING BUSINESS
Res-Care's bylaws provide for notice to shareholders no less than ten days
nor more than sixty days before the date of any shareholders meeting. The notice
must specify the date, time and place of each annual or special shareholders
meeting to be held. In the case of a special meeting, the notice must state the
purpose of the meeting. Notice shall be given in written form, delivered
personally or by telegraph, teletype, any other form of wire or wireless written
communication or by mail or private carrier, by or at the direction of the
chairman or the secretary.
At any annual meeting of Res-Care shareholders, only business that has been
properly brought before the meeting may be conducted at the meeting. To be
properly brought before an annual meeting, business must be:
- specified in the notice of meeting given by or at the direction of the
board;
- otherwise properly brought before the meeting by or at the direction of
the board; or
- otherwise properly brought before the meeting by a shareholder.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must give timely notice in writing to the
secretary. To be timely, a shareholder's notice must be delivered to or mailed
and received at the principal office, not less than sixty nor more than ninety
days prior to the meeting; provided, however, if less than seventy days' notice
or prior public disclosure of the date of the meeting is given or made to
shareholders, the notice must be received ten days from when the notice was
mailed or publicly disclosed. A shareholder's notice to the secretary must state
the following for each matter to be brought before the annual meeting:
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting;
- the name and address, as they appear on Res-Care's share transfer books,
of the shareholder proposing such business;
- the class and number of shares of Res-Care which are beneficially owned
by the shareholder; and
- any material interest of the shareholder in such business.
Only persons who are nominated according to the procedures described below
are eligible for election as directors. Nominations for election to the board of
directors of Res-Care may be made at a meeting of shareholders by or at the
direction of the board or by any shareholder of Res-Care entitled to vote for
the election of directors at the meeting who complies with the notice
procedures. Nominations, other than those made by or at the
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direction of the board, shall be made by timely notice in writing to the
secretary of Res-Care and comply with the above notice provisions. The
shareholder's notice must state the following:
- for each director whom the shareholder proposes to nominate for election
or re-election as a director, (i) their name, age, business address and
residence address, (ii) their principal occupation or employment, (iii)
the class and number of shares of the corporation which they beneficially
own and (iv) any other information required to be disclosed in
solicitations of proxies for election of directors; and
- for the shareholder giving the notice, (i) their name and address, as
they appear on Res-Care's share transfer books, and (ii) the class and
number of shares of Res-Care which they beneficially own.
At the request of the board, any person nominated by the board for election
as a director shall furnish to the secretary of Res-Care that information
required in a shareholder's notice of nomination.
PeopleServe's bylaws require that written notice of the time and place of
any meeting of stockholders must be given to each stockholder of record entitled
to vote at the meeting by the president or the secretary or, if they fail to do
so, by the person or persons entitled to call the meeting. Generally, notice of
any meeting of stockholders must be given not more than sixty days nor less than
ten days before the meeting, by serving the notice personally upon each
stockholder or by mailing the same to the address of each stockholder as last
shown upon the records of PeopleServe. The PeopleServe bylaws also require every
notice of a special meeting of stockholders to state briefly the purpose
specified by the person or persons calling such meeting. Any business other than
that stated in the notice may only be considered at the meeting with the
unanimous written consent of the holders of all the shares entitled to vote at
the meeting.
SHAREHOLDER ACTION WITHOUT A MEETING
Because the Res-Care articles of incorporation do not provide otherwise,
Kentucky law permits action by Res-Care shareholders without a meeting only by
unanimous written consent. Delaware law allows actions to be taken by written
consent if the consent is signed by the holders of outstanding stock having at
least the minimum number of votes necessary to authorize or take action at a
meeting.
SHAREHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
Kentucky law provides for certain additional voting rights of shareholders
in certain business combinations involving a Kentucky corporation with an
interested shareholder for five years following the time the shareholder became
an interested shareholder. An interested shareholder for this purpose is a
shareholder owning directly or indirectly ten percent or more of the outstanding
voting stock of the corporation or any affiliate or associate of the interested
shareholder. The business combinations described in the statute include:
- any merger or share exchange involving the corporation;
- any sale, lease, transfer, or other disposition, other than in the
ordinary course of business, in one transaction or a series of
transactions in any twelve-month period of the assets of the corporation,
with an aggregate book value as of the end of the corporation's most
recently ended fiscal quarter of five percent or more of the total
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market value of the outstanding stock of the corporation or of its net
worth as of the end of its most recently ended fiscal quarter; or
- the issuance or transfer by the corporation, in one transaction or a
series of transactions in any twelve-month period of any equity
securities of the corporation having an aggregate market value of five
percent or more of the total market value of the corporation's shares.
A business combination meeting these tests must also be approved by:
- a majority of the independent members of the board of directors who are
also continuing directors;
- 80% of the votes entitled to be cast by outstanding shares of voting
stock of the corporation, voting together as a single voting group; or
- two-thirds of the votes entitled to be cast by holders of voting stock
other than voting stock beneficially owned by the interested shareholder
who is, or whose affiliate is, a party to the business combination,
voting together as a single voting group.
Failure of a business combination to comply with these voting requirements
renders the business combination void.
Delaware law requires that a corporation must not engage in any business
combination with any interested stockholder for three years following the time
that the stockholder became an interested stockholder, unless:
- before the board of directors of the corporation approved either the
business combination or the transaction which resulted in the shareholder
becoming an interested stockholder;
- upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- at or after the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Kentucky law permits a corporation to indemnify its directors, officers,
employees or agents. Under a statutory scheme, a corporation may, with certain
exceptions, indemnify a director, officer, employee or agent of the corporation
who was, is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative, because the person was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise. This indemnity may include the obligation to pay any judgment,
settlement, penalty, fine
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and reasonable expenses incurred in the proceeding, only if the director,
officer, agent or employee:
- conducted himself in good faith;
- reasonably believed that any action taken in his official capacity with
the corporation was in the best interest of the corporation or that in
all other cases his conduct at least was not opposed to the corporation's
best interest; and
- in the case of any criminal proceeding, had no reasonable cause to
believe his conduct was unlawful.
The corporation's board of directors, a committee of directors, special
legal counsel or the shareholders may determine whether the director has met the
standard of conduct for indemnification.
A corporation may not indemnify a director under the statutory scheme in a
proceeding by or in the right of the corporation where the director was held
liable to the corporation or in a proceeding where a director was held liable by
having received an improper personal benefit.
Kentucky law also permits a corporation to indemnify or agree to indemnify
any of its directors, officers, employees or agents against liability and
expenses in any proceeding arising out of their status or their activities in
these capacities. Liabilities or expenses incurred on account of activities that
were, at the time taken, known or believed by the person to be clearly in
conflict with the best interests of the corporation may not be indemnified.
Res-Care's articles of incorporation and bylaws provide for indemnification to
the fullest extent permitted under Kentucky law; provided, however, that
Res-Care will indemnify any person seeking indemnification in a proceeding
initiated by the person only if the proceeding was authorized by the board of
directors.
In addition, Kentucky law requires a corporation, unless its articles of
incorporation provide otherwise, to indemnify a director or officer who has been
wholly successful, on the merits or otherwise, in the defense of any proceeding
to which such director or officer was a party. Unless prohibited by the articles
of incorporation, a director or officer also may make application and obtain
court-ordered indemnification if the court determines that such director or
officer is fairly and reasonably entitled to such indemnification. Res-Care's
articles of incorporation are inconsistent with these statutory provisions.
Finally, Kentucky law provides that a corporation may purchase and maintain
insurance on behalf of an individual who is or was a director, officer, employee
or agent of the corporation against certain liabilities incurred by these
persons, whether or not the corporation is otherwise authorized under Kentucky
law to indemnify such party. Res-Care currently maintains directors' and
officers' insurance policies covering its directors and officers.
As permitted by Kentucky law, Res-Care's articles of incorporation limit
the personal liability of directors for monetary damages for breaches of duty as
a director, provided that, under Kentucky law, such limitation will not apply
to:
- acts or omissions relating to a transaction in which the director has a
personal financial interest which is in conflict with the financial
interests of Res-Care or its shareholders;
- acts or omissions not in good faith or involving intentional misconduct
or conduct known to the director to be a violation of the law;
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- any unlawful distribution; or
- an act or omission relating to a transaction from which the director
derives an improper personal benefit.
Delaware law provides, in certain situations, for mandatory and permissive
indemnification of directors and officers. Statutory indemnification does not
exclude any other rights to which a director or officer seeking indemnification
may be entitled. No indemnification shall be made for any claim, issue or matter
which the person was held liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which the action or
suit was brought determines that, despite the adjudication of liability but in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for expenses which the Court of Chancery or another court
deems proper. PeopleServe's certificate of incorporation and bylaws contain
provisions obligating PeopleServe to indemnify its directors and officers to the
fullest extent permitted by Delaware law.
In addition, Delaware law provides that a corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee or agent of the corporation, or who, while in that capacity, is or was
serving at the request of the corporation as a director, officer, employee or
agent of the corporation against liability asserted against or incurred by the
individual in that capacity or arising from the individual's status whether or
not the corporation would have the power to indemnify the individual against the
same liability under Delaware law. PeopleServe currently maintains directors'
and officers' insurance policies covering its directors and officers.
PeopleServe's certificate of incorporation provides that PeopleServe will
indemnify against liability, and advance expenses to, any present or former
director or officer of PeopleServe to the fullest extent allowed by Delaware
law. Additionally, the certificate of incorporation provides that no director
will be personally liable to PeopleServe or any of its stockholders for monetary
damages for breach of any fiduciary duty except for liability arising from:
- any breach of a director's duty of loyalty to PeopleServe or its
stockholders;
- acts or omissions not in good faith or which involved intentional
misconduct or a knowing violation of law;
- any unlawful distributions; or
- receipt of any improper personal benefit.
PeopleServe has entered into indemnification agreements with each of its
directors and executive officers.
DIVIDENDS AND REPURCHASE OF SHARES
Under Kentucky law, a corporation may not make any distribution, including
dividends, redemptions or repurchases of its shares, if it would result in
either:
- the corporation being unable to pay its debts when they become due; or
- the corporation's assets being less than the sum of its liabilities plus
any preferential liquidation rights of shareholders.
A director of a Kentucky corporation may be personally liable to the
corporation for the amount the distribution exceeds permissible amounts if it is
established that he did not
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perform his duties as a director in good faith, with reasonable care in a manner
which he believes to be in the best interests of the corporation. A director
held liable for unlawful distributions is entitled to contribution from other
directors voting in favor of the distribution and reimbursement from each
shareholder of the amount the shareholder accepted with knowledge the unlawful
distribution.
Delaware law provides that a corporation generally may make dividends or
other distributions to its shareholders either:
- out of surplus; or
- if there is no surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or preceding fiscal year.
If the capital of the corporation is diminished to an amount less than the
aggregate amount of capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets, the corporation
may not declare or pay dividends until the deficiency has been repaired. A
director of a Delaware corporation may be personally liable to the corporation
by the amount the distribution exceeds permissible amounts if it is established
that he did not perform his duties as a director in good faith, with reasonable
care in a manner which he believes to be in the best interests of the
corporation. A director held liable for unlawful distributions is entitled to
contribution from other directors voting in favor of the distribution and
reimbursement from each stockholder of the amount which the stockholder accepted
with knowledge of the unlawful distribution.
DISSENTERS' APPRAISAL RIGHTS
Under Kentucky law, a shareholder of a corporation participating in certain
major corporate transactions may be entitled to appraisal rights. Under these
appraisal rights, a stockholder may receive cash equal to the fair market value
of their shares instead of the consideration he would otherwise receive in the
transaction. In Kentucky, appraisal rights are also available for certain
amendments to a corporation's articles of incorporation that would adversely
affect appraisal rights.
Delaware law generally provides appraisal rights for mergers and share
exchanges that require shareholder approval, sales of substantially all the
assets (other than sales that are in the usual and regular course of business
and certain liquidations and court-ordered sales) and, if provided in its
certificate of incorporation, amendments to the certificate of incorporation
that materially and adversely affect rights of a dissenter's shares. Under
Delaware law, the holders of PeopleServe common stock, Series B convertible
preferred stock and Series A redeemable preferred stock are entitled to exercise
appraisal rights in connection with the merger.
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PROPOSAL TWO -- ELECTION OF DIRECTORS
NOMINEES
At the meeting, shareholders will elect seven people to the board of
directors to serve until the next annual meeting and until their respective
successors are elected and qualified. In October 1998, the board of directors
elected Olivia F. Kirtley to be a member of the Board which increased the number
of directors from six to seven. The proxies, unless you instruct them otherwise,
intend to vote the shares covered by valid proxies evenly FOR the election of
the seven people named in the following table to the board of directors. If any
of these people becomes unable or unwilling to serve between now and the
meeting, your proxies will be voted FOR the election of a replacement chosen by
the board of directors or withhold their vote for any additional nominees named
by shareholders. The board of directors are not aware of any circumstances which
would make any of the following people unavailable to continue to serve as a
director, if elected.
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE OFFICER SINCE PRINCIPAL OCCUPATION
- ---- --- ------------- --------------------
<S> <C> <C> <C>
James R. Fornear...... 68 1974 Retired, Director of Res-Care
Ronald G. Geary....... 51 1990 Chairman of the Board, President and
Chief Executive Officer of
Res-Care
E. Halsey Sandford.... 66 1984 Senior Executive of Res-Care
Spiro B. Mitsos....... 66 1974 Practicing Psychologist
Seymour L. Bryson..... 61 1989 Executive Assistant to President,
Southern Illinois University at
Carbondale
W. Bruce Lunsford..... 51 1992 Chairman of the Board of Ventas,
Inc.
Olivia F. Kirtley..... 48 1998 Vice President of Finance, Chief
Financial Officer, Vermont
American Corporation
</TABLE>
The business experience during the past five years of each of the nominees
is described below:
JAMES R. FORNEAR, the founder of Res-Care, served as Chairman of the Board
of Res-Care from 1984 until 1998. Mr. Fornear was the President of Res-Care from
1974 to 1990 and Chief Executive Officer of Res-Care from 1989 to 1993.
RONALD G. GEARY, an attorney and certified public accountant, has served as
a director and President of Res-Care since 1990 and as Chief Executive Officer
since 1993. He was elected Chairman of the Board in June 1998 when Mr. Fornear
retired. Before he was named Chief Executive Officer, Mr. Geary was Chief
Operating Officer of Res-Care from 1990 to 1993. Mr. Geary is a director of
Ventas, Inc., a real estate investment trust.
E. HALSEY SANDFORD has been a director of Res-Care since 1984 and has been
Senior Executive since 1997. From 1992 to 1997, Mr. Sandford served as Executive
Vice President responsible for development for Res-Care's Division for Persons
with Disabilities.
SPIRO B. MITSOS, PH.D., a psychologist, has been a director of Res-Care
since 1974. He has been Secretary of Res-Care since 1984 and he served as
Treasurer of Res-Care from 1984 until 1998. Dr. Mitsos has been employed by
Res-Care to provide psychological consultation services to facilities operated
by Res-Care since 1984. Dr. Mitsos has served as an adjunct faculty member at
Southern Illinois University, the University of Kentucky and the University of
Evansville.
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SEYMOUR L. BRYSON, PH.D., has served as a director of Res-Care since 1989.
Since 1984, Dr. Bryson has held several 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.
W. BRUCE LUNSFORD, an attorney and certified public accountant, has been a
director of Res-Care since 1992. He served as Chairman of the Board, President
and Chief Executive Officer of Vencor, Inc., the nation's leading provider of
long-term hospital care to chronically ill patients, from 1985 until January
1999 and is Chairman of the Board of Ventas, Inc., a real estate investment
trust. Mr. Lunsford is a director of National City Corporation, a bank holding
company, and Churchill Downs, Incorporated.
OLIVIA F. KIRTLEY, a certified public accountant, was appointed a director
of Res-Care in October 1998. Ms. Kirtley has served as Vice President of Finance
and Chief Financial Officer of Vermont American Corporation, a manufacturer and
marketer of power tool accessories since 1991. Ms. Kirtley also currently serves
as Chair of the American Institute of Certified Public Accountants.
Directors of Res-Care are elected annually to serve until the next meeting
of shareholders and until their successors have been duly elected and qualified.
During 1998, there were seven meetings of the board of directors. Each
director attended at least 75% of all meetings of the board of directors and of
the committees on which he or she served during the year.
EXECUTIVE OFFICERS OF RES-CARE
In addition to Messrs. Geary and Sandford, Jeffrey M. Cross, Paul G. Dunn
and Ralph G. Gronefeld, Jr. are executive officers of Res-Care.
Mr. Cross, age 45, has served as Executive Vice President of Operations,
Division for Persons with Disabilities since 1994. He has been employed with
Res-Care since 1984 except for a period between 1987 and 1989. He has served in
various administrative positions in Res-Care's Division for Persons with
Disabilities. In 1991, he was named Vice President for Operations in Kentucky
and Indiana.
Paul G. Dunn, age 33, has served as Executive Vice President, Development,
since 1997 and currently has responsibility for overseeing all Res-Care's
development activities. From 1992 to 1997, Mr. Dunn was employed by Laidlaw,
Inc., most recently as Corporate Director, Financial Operations for the Laidlaw
Medical Transportation, Inc. subsidiary.
Mr. Gronefeld, age 40, was named Executive Vice President of Finance and
Administration in May 1998 after serving as Executive Vice President of
Operations for the Division for Youth Services since January 1998 and Vice
President responsible for Res-Care's Alternative Youth Services subsidiary since
January 1997. Mr. Gronefeld joined Res-Care in June 1995 as Director of Internal
Audit and from July 1995 through March 1996, he served as interim senior
administrator for Res-Care's west region in its Division for Persons with
Disabilities. In December 1995, was elected to the board of directors of
Res-Care's Youthtrack subsidiary. From November 1990 until June 1995, Mr.
Gronefeld served as President of Total Color Corporation, a graphic arts firm in
Louisville, Kentucky.
COMMITTEES OF THE BOARD OF DIRECTORS
Res-Care's board of directors has an Executive Committee, an Audit
Committee, and an Executive Compensation Committee. The board of directors
appoints the members of
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each committee for a term beginning after the first regular meeting of the Board
and until their respective successors are elected and qualified.
EXECUTIVE COMMITTEE. The Executive Committee is appointed by the directors
and currently consists of the Chairman of the Board and the Senior Executive.
The Executive Committee's primary responsibility is to act as an interim board
on business matters normally brought before the directors. The Executive
Committee is responsible for developing and monitoring Res-Care's long-range
plans, determining the types and frequency of reports required by the Board,
reviewing all expansion plans for recommendation to the Board, assisting in
monitoring relationships with financial institutions and reviewing performance
evaluations, salary increases and bonuses for key staff members. Messrs. Geary
and Sandford serve as members of the Executive Committee. Mr. Fornear served
until June 1998 when he retired from the committee. During 1998, there were five
meetings of the Executive Committee and all committee members participated in
all meetings.
AUDIT COMMITTEE. The Audit Committee recommends to the Board the auditing
firm to be selected each year as independent auditors of Res-Care's financial
statements and to perform services related to the audit. The Audit Committee is
also responsible for:
- reviewing the scope and results of the audit with the independent
auditors,
- reviewing Res-Care's financial condition and results of operations with
management and the independent auditors,
- considering the adequacy of Res-Care's internal accounting and control
procedures, and
- reviewing any non-audit services and special engagements to be performed
by the independent auditors and considering the effect of such
performance on the auditors' independence.
The Audit Committee also reviews, at least once each year, the terms of all
material transactions and arrangements between Res-Care and its affiliates.
Messrs. Sandford, Bryson and Lunsford serve as members of the Audit Committee.
The Committee met twice during 1998 and all committee members participated in
those meetings.
EXECUTIVE COMPENSATION COMMITTEE. The Executive Compensation Committee
determines the cash and other incentive compensation, if any, to be paid to
Res-Care's executive officers. Messrs. Bryson and Lunsford serve as members of
the Executive Compensation Committee and are "non-employee directors" (within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934). The
Committee met twice during 1998 and both committee members participated in those
meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, Res-Care acquired the stock of Tangram Rehabilitation
Network, Inc. As part of that transaction, immediately before the closing,
Tangram sold ten real estate properties to Ventas, Inc., a real estate
investment trust. Tangram then leased the properties back from Ventas. The lease
is for a term of twelve years with options to renew for four five-year terms.
The annual rent is 10.25 percent of the sales price annually adjusted based on
the Consumer Price Index subject to some limitations specified in the agreement.
For 1999, the annual rent will be approximately $731,000.
Mr. Lunsford, a director of Res-Care, is Chairman of the Board of Ventas.
Mr. Lunsford owns less than 5 percent of its common stock and less than 1
percent of Res-Care common shares. Mr. Lunsford serves on the Executive
Compensation
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Committee of the Res-Care board of directors. Ronald G. Geary, a director and
Chairman of the Board, President and Chief Executive Officer of Res-Care, is a
director of Ventas. Mr. Geary is the beneficial owner of approximately 8 percent
of Res-Care common shares and less than 1 percent of Ventas common stock. Mr.
Geary serves on the Executive Compensation Committee of Ventas. Messrs. Lunsford
and Geary did not participate when the Boards of Ventas and Res-Care discussed
and voted on the transaction.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Res-Care's
directors and executive officers and people who own more than 10% of Res-Care's
common stock to file initial stock ownership reports and reports of changes in
ownership with the Securities and Exchange Commission. Based on a review of
these reports, due in each case to oversight, Reports on Form 4 were filed one,
two and three months late for Seymour Bryson, Margaret H. Fornear and Spiro B.
Mitsos respectively, and the Report on Form 3 for Olivia F. Kirtley was filed
six days late. A Form 4 for each of Jeffrey M. Cross, Ralph G. Gronefeld and
Paul G. Dunn was filed twelve days late because of a mailing error.
REPORT ON EXECUTIVE COMPENSATION
Compensation Philosophy and Policies for Executive Officers
The Executive Compensation Committee believes the most effective executive
compensation program is in the best interest of both stockholders and
executives. Res-Care's primary objective is to provide quality services to
people with special needs while enhancing long-term stockholder value. The
Executive Compensation Committee is committed to a strong, positive link between
Res-Care's strategic business goals and its compensation and benefit goals.
Res-Care's executive compensation program has been designed to support the
objective of creating stockholder value by:
- directly aligning the interests of executives with the long-term
interests of shareholders by making stock appreciation over the long run
a cornerstone of executive compensation through award opportunities that
can result in the ownership of substantial amounts of the common stock;
- providing compensation opportunities that create an environment that
attracts and retains talented employees on a long-term basis; and
- providing rewards that are closely linked to individual, divisional and
company-wide performance in achieving quality of service and financial
goals.
The Executive Compensation Committee determined that employment contracts
with executive officers as well as other key employees serve to attract and
retain the high quality employees that Res-Care needs. The employment contracts
for the executive officers are described in this Proxy Statement.
Res-Care's executive compensation program has three components: base
salary, annual cash incentive (bonus) and long-term incentive opportunity in the
form of incentive and non-qualified stock options. The annual incentive bonus
and the long-term stock-based incentive are related to the performance of the
individual, the division and Res-Care in achieving quality of service and
financial goals.
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Base Salaries
Individually negotiated employment contracts determine the base salaries of
the named executive officers. The base salaries which are generally subject to
annual cost-of-living increases are designed to be market competitive with other
similar companies.
Annual Incentives
Under Res-Care's annual bonus plan, Res-Care makes awards that are based on
achieving individual, division and company-wide quality of service and financial
performance goals.
Stock Options
Res-Care's incentive stock option plan ties the interests of the executives
to the interests of the shareholders and to Res-Care's long-term performance.
Grants of options are related to an employee's position, responsibility and
performance.
Executive Compensation
Mr. Sandford's individually negotiated employment agreement establishes his
compensation for 1998. It provides for a continued reduced time commitment of 32
hours a week and continues his salary of $100,000 to reflect the reduced time
commitment. We believe Mr. Sandford's compensation continues to reflect his
performance with Res-Care.
Mr. Geary's individually negotiated employment agreement establishes his
compensation for 1998. In 1995, we had reviewed salary studies which indicated
that Res-Care should increase Mr. Geary's compensation and that he should be
granted options, based on comparisons with similar companies. Mr. Geary's
bonuses are based on performance criteria of Res-Care that Mr. Geary and the
members of the committee determine before January 1 for the upcoming year. For
1998, Res-Care awarded Mr. Geary stock options for 28,100 shares in place of a
cash bonus of 50 percent of his base salary based on achieving his performance
goals.
Since Mr. Fornear has retired as Chairman of the Board and from the
Executive Committee, Res-Care no longer pays him a salary. We believe his
compensation in 1998 before his retirement adequately reflects his contributions
to Res-Care. We had also concluded that it was not necessary to provide
performance-based incentive compensation to Mr. Fornear since his substantial
ownership of common stock already closely aligns his interests with those of
Res-Care's shareholders.
In light of their considerable contributions and value to the operations of
Res-Care and as an inducement to them to remain employed by Res-Care, Res-Care
entered into employment agreements with Messrs. Cross, Dunn and Gronefeld in
1997. The terms of these contracts are described in this Proxy Statement.
Because we do not contemplate that Res-Care will pay its executive officers
any compensation that will be subject to the $1 million limitation on deductions
imposed by Section 162(m) of the Internal Revenue Code, we have not adopted any
policies with respect to limiting executive compensation to amounts that are
deductible.
Executive Compensation Committee
Seymour L. Bryson
W. Bruce Lunsford
106
<PAGE> 123
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information concerning compensation awarded
to, earned by or paid to the executive officers of Res-Care during the year
ended December 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION OPTIONS/SAR ALL OTHER
AS OF DECEMBER 31, 1998 YEAR SALARY BONUS(1) (SHARES)(2) COMPENSATION(3)
- --------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ronald G. Geary............ 1998 $311,279 $ 0 253,100 $36,669
Chairman of the Board, 1997 309,752 145,105 90,000 18,585
President and Chief 1996 308,951 0 127,777 16,965
Executive Officer
E. Halsey Sandford......... 1998 100,000 0 0 10,173
Senior Executive 1997 100,000 0 0 6,000
1996 108,553 0 2,025 9,772
Jeffrey M. Cross........... 1998 152,267 0 93,700 18,463
Executive Vice President 1997 149,034 30,469 38,750 8,941
Operations Division for 1996 114,891 0 13,750 10,204
Persons with Disabilities
Paul G. Dunn............... 1998 150,000 0 93,700 17,810
Executive Vice President, 1997 96,346 25,001 37,500 43,268
Development
Ralph G. Gronefeld, Jr..... 1998 135,736 0 127,500 9,538
Executive Vice President 1997 84,661 10,296 13,500 0
Finance & Administration/ 1996 65,842 0 6,750 0
Chief Financial Officer
Pamela M. Spaniac(4)....... 1998 98,357 20,729 0 33,125
Former Executive Vice
President Finance &
Administration
</TABLE>
- -------------------------
(1) Bonuses paid to the executive officers are based on their employment
agreements. For 1996, there were no bonuses and additional options were
granted under Res-Care's 1991 Incentive Stock Option Plan. In September
1998, additional options were granted under Res-Care's 1998 Omnibus Stock
Option Plan instead of bonuses that would have been awarded in February 1999
for the year 1998.
(2) Options reflect the 3-for-2 stock splits that were effective in June 1996
and 1998.
(3) All Other Compensation represents Res-Care contributions to the Retirement
Savings Plan and to the 401(k) Restoration Plan which is described later.
Mr. Dunn's other compensation for 1997 includes reimbursement for moving
expenses and for 1998 includes forgiveness of the balance of $6,274 due on a
loan Res-Care made to him when he moved. Mr. Dunn was not eligible to
participate in the Retirement Savings Plan in 1997. Ms. Spaniac's other
compensation for 1998 includes reimbursement for moving expenses.
(4) Ms. Spaniac resigned from Res-Care effective October 1, 1998. Ms. Spaniac
received payments based on her separation agreement with Res-Care.
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<PAGE> 124
Res-Care has established the 401(k) Restoration Plan to permit certain
members of management to defer compensation pre-tax and to permit Res-Care to
contribute on behalf of such employees without the restrictions imposed by the
Internal Revenue Code on the tax-qualified Retirement Savings Plan. Res-Care's
matching contribution on behalf of each participant matches the employee's
contribution dollar for dollar up to 6 percent of the employee's salary which is
the same as the contribution Res-Care makes for employees who participate in
Res-Care's Retirement Savings Plan.
Option Grants for 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS(5) VALUE AT
--------------------------- ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(4)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------ ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Geary(1)......... 112,500 6.2 $23.00 02-25-03 $714,900 $1,579,700
140,600 7.8 14.13 09-01-04 675,400 1,532,300
Jeffrey M. Cross(2)........ 75,000 4.2 15.25 08-15-03 316,000 698,300
18,700 1.0 14.13 09-01-03 73,000 161,300
Paul G. Dunn(2)............ 75,000 4.2 15.25 08-15-03 316,000 698,300
18,700 1.0 14.13 09-01-03 73,000 161,300
Ralph G. Gronefeld,
Jr.(3)................... 15,000 0.8 23.00 02-25-03 95,300 646,800
37,500 2.1 15.25 08-15-03 158,000 349,100
75,000 4.2 14.13 09-01-03 292,700 210,600
</TABLE>
- -------------------------
(1) The options were granted to Mr. Geary on February 26, 1998 and September 1,
1998 and were exercisable as of those dates. All are non-qualified stock
options.
(2) Half of the options for 75,000 shares may be exercised beginning August 15,
1999 and the other half beginning August 15, 2000. The options for 18,700
shares may be exercised in 20 percent increments each year for five years
beginning September 1, 1998. Of Mr. Cross' options, 10,395 qualify as
incentive stock options and 83,305 are non-qualified. Of Mr. Dunn's options,
17,777 qualify as incentive stock options and 75,923 are non-qualified.
(3) The options for 15,000 shares may be exercised in 20 percent increments each
year for five years beginning on February 26, 1998. All of the options for
37,500 shares may be exercised on August 15, 1999. Half of the options for
75,000 shares may be exercised beginning September 1, 1999 and the other
half beginning September 1, 2000. Of Mr. Gronefeld's options, 13,774 qualify
as incentive stock options and 113,726 are non-qualified.
(4) The dollar amounts in this table represent the potential value that may be
realized of the stock options granted, assuming that the market price of the
shares increases from the date of grant to the end of the option term at
annualized rates of five and ten percent. Therefore, these amounts are not
the actual value of the options granted and are not intended to forecast
possible future appreciation, if any, of the prices of Res-Care common
shares. We cannot assure that the stock prices will appreciate at these
rates or appreciate at all.
(5) If there is a change of control of Res-Care, all of the options vest and
become exercisable unless the board of directors decides to limit this
provision.
108
<PAGE> 125
Mr. Cross exercised stock options during the year ending December 31, 1998.
The following table indicates the total number of exercisable and unexercisable
stock options on December 31, 1998 held by the executive officers named in the
Summary Compensation Table and the related value of such options based on the
last sales price of the common stock on The Nasdaq National Market on December
31, 1998 of $24.69 per share.
Aggregated Option Exercises
in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE DECEMBER 31, 1998 AT DECEMBER 31, 1998
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Geary.................. 0 $ 0 703,546 0 $8,302,630 $ 0
E. Halsey Sandford............... 0 0 2,025 0 24,005 0
Jeffrey M. Cross................. 6,750 129,375 80,315 109,760 1,075,109 1,153,039
Paul G. Dunn..................... 0 0 41,240 89,960 452,784 865,828
Ralph G. Gronefeld, Jr........... 0 0 10,651 134,400 103,923 1,300,049
Pamela M. Spaniac................ 37,500 171,874 0 0 0 0
</TABLE>
- -------------------------
(1) Market value on the date of exercise of the shares acquired upon exercise,
less the option exercise price.
EMPLOYMENT AGREEMENTS
Mr. Geary has an employment agreement with Res-Care that extends for a
five-year term. It expires in September 2000; however, it automatically renews
for one-year periods beginning one year before the expiration date so that the
remaining term equals two years. Under the agreement which was signed in 1995,
Mr. Geary receives a base salary of $300,000 which is adjusted each year based
on the increase in the Consumer Price Index for Urban Wage Earners and Clerical
Workers. Mr. Geary is eligible for an annual bonus up to 50 percent of his base
salary based on performance criteria that Mr. Geary and the Executive
Compensation Committee of the board of directors mutually agree to on or before
January 1 of each year. Under the agreement, Mr. Geary was granted options to
purchase 97,500 shares (adjusted for the stock splits) of common stock at a
price of $16.00 per share which could be exercised beginning with the date of
the grant. In addition, Res-Care will grant options to purchase 112,500 shares
(adjusted for the stock splits) of common stock at the fair market value on the
last Thursday of February during each of the remaining years of the term of the
agreement. Res-Care also agreed to reimburse Mr. Geary for a portion of federal
and state income taxes that Mr. Geary has to pay because of his exercise of
options granted in his prior agreement under a formula outlined in the current
agreement. In November 1996, the agreement was amended to grant Mr. Geary
options to purchase 112,797 shares of common stock at the closing price on the
date of the grant, or $15.25, and to delete Res-Care's obligation to reimburse
the taxes.
In addition, Res-Care provides Mr. Geary with the maximum disability
insurance coverage permitted under Res-Care's current benefit plan, equips an
office in Mr. Geary's home, pays fees for personal tax and financial planning
and for an annual physical. The agreement also provides that if Mr. Geary's
employment is terminated following a change in the control of Res-Care, Mr.
Geary shall be entitled to receive the unpaid balance of his
109
<PAGE> 126
full base salary through the effective termination date of the employment
agreement and for an additional two years. The agreement may be terminated with
or without cause at any time. If it is terminated without cause, Mr. Geary will
continue to receive his base salary for the balance of the term. He would also
receive a prorated bonus earned for that year plus any unpaid cash bonus for a
prior year. If there is a change of control of Res-Care, or if the agreement is
terminated without cause, Res-Care will repurchase unexercised vested options.
Mr. Sandford has had an employment agreement with Res-Care since March 1,
1992. The agreement was amended as of March 1, 1996 and extended for an
additional one-year term on substantially the same terms and conditions except
that it reduced Mr. Sandford's time commitment to 32 hours a week and his base
salary was $100,000. In addition, Res-Care partially equips Mr. Sandford's home
office. The agreement automatically renewed effective March 1, 1997 for a
one-year term. In January 1998, Res-Care entered into a new employment agreement
with Mr. Sandford on basically the same terms and conditions effective as of
March 1, 1998 for a term of one year which was renewed effective March 1, 1999.
Mr. Sandford does not participate in Res-Care's incentive stock option plan nor
the annual bonus plan.
Res-Care has employment agreements with Messrs. Cross, Dunn and Gronefeld
that contain basically the same terms and conditions. The agreements are for
initial terms of three years commencing January 1, 1997, May 1, 1997 and January
1, 1998 respectively. They provide for base salaries of $150,000, except for Mr.
Gronefeld whose base salary is $155,000, subject to annual increases based on
the Consumer Price Index "All Items" category. Each of these executives also
participates in Res-Care's Compensation/ Evaluation Bonus Plan and is eligible
to receive an annual bonus of up to 25% of that year's base salary. Under the
agreements, Messrs. Cross and Dunn were granted options on August 15, 1997 to
purchase 37,500 shares of common stock exercisable on August 15, 1998. On August
15, 1998 each of these executives were granted options to purchase 75,000 shares
of common stock which will vest in 50% increments on August 15, 1999 and 2000.
Under his agreement, on August 15, 1998, Mr. Gronefeld was granted options to
purchase 37,500 shares of common stock exercisable on August 15, 1999. On
September 1, 1998, he was granted options to purchase 75,000 shares of common
stock which will vest in 50% increments on September 1, 1999 and 2000. The
exercise price for the options under all of the agreements is the closing sale
price of the common stock on the grant date. On September 1, 1998, Messrs. Dunn
and Cross were granted options for 18,700 shares of common stock instead of a
cash bonus for 1998. Mr. Gronefeld also will receive no cash bonus for 1998 in
consideration of a portion of the options granted on September 1, 1998.
Bonuses awarded under the Compensation/Evaluation Bonus Plan are based on
achieving various individual, department, division and Company goals, including
goals that relate to such matters as quality control compliance, divisional
revenue growth and budgetary compliance. Bonuses are calculated on the basis of
the percentage of goals met during the year.
The agreements for Messrs. Cross, Dunn and Gronefeld renew automatically
for one-year periods after the expiration of their respective terms unless
either Res-Care or the employee gives notice of termination. Res-Care may
terminate all of the agreements with or without cause at any time. If any of the
agreements with Messrs. Sandford, Cross, Dunn and Gronefeld are terminated
without cause, the employee will receive the full base salary for six months
after the date of termination, unless the termination is after a change
110
<PAGE> 127
of control in which case he will receive the full base salary for one year after
termination. In case of termination without cause, Messrs. Cross, Dunn and
Gronefeld will also receive a cash bonus prorated based on the number of full
months that have passed from the immediately preceding January 1 (May 1 for Mr.
Dunn) until the date of termination, plus any earned but unpaid cash bonus from
a prior period. If Res-Care terminates an executive's employment agreement for
cause, the executive would not be entitled to any compensation following the
date of termination other than the pro rata amount of the then current base
salary through such date. If employment is terminated for any reason, Mr.
Sandford will be prohibited from competing with Res-Care for five years and
Messrs. Geary, Cross, Dunn and Gronefeld will be prohibited for one year.
COMPENSATION OF DIRECTORS
Directors who are employees of Res-Care receive no compensation for their
services as directors. Res-Care's non-employee directors, Messrs. Fornear,
Bryson and Lunsford and Ms. Kirtley, receives $6,000 annually plus $1,000 for
each Board meeting that they attend and $500 for each committee meeting they
attend as members of committees of the board of directors. In addition, the
non-employee directors participate in Res-Care's 1993 Non-Employee Directors
Stock Ownership Incentive Plan which provides for the grant of options to
purchase 4,500 Res-Care common shares to each non-employee director on the first
business day of July of each year that the director serves on the Board.
PERFORMANCE GRAPH
The following graph shows the cumulative total shareholder return
experienced by Res-Care's shareholders during the period from December 15, 1993
through December 31, 1998, as compared to the Nasdaq Stock Market Index (U.S.
Companies) and the Nasdaq Health Services Index, an index which contained
approximately 115 companies as of December 31, 1998. The Nasdaq Health Services
Index is prepared for Nasdaq by the Center for Research in Security Prices at
the University of Chicago using companies within Standard Industrial
Classification code 80 (Health Care). Res-Care will provide to shareholders
promptly upon request a list of all companies included in this Index. The graph
assumes the investment of $100 on December 31, 1993 in Res-Care's common stock
at the closing trading price on that date. Cumulative total shareholder return
for a given period is measured by the dividends paid, assuming dividend
reinvestment, and the change in the share price during that period; the sum of
these two factors is then divided by the per share price at the beginning of
that period. Because Res-Care has declared no dividends on its common stock
since it became publicly-traded, cumulative total shareholder return on
Res-Care's common stock since December 31, 1993 is based on its closing trading
price.
111
<PAGE> 128
<TABLE>
<CAPTION>
RSCR NASDAQ NASDAQ HEALTH
---- ------ -------------
<S> <C> <C> <C>
'1993' 100.00 100.00 100.00
'1994' 103.12 97.75 107.29
'1995' 104.68 138.26 136.11
'1996' 164.07 170.01 135.89
'1997' 271.87 208.58 138.49
'1998' 347.17 293.21 118.76
</TABLE>
PROPOSAL THREE -- SELECTION OF INDEPENDENT AUDITORS
The board of directors has selected, subject to ratification by Res-Care
shareholders at the meeting, the firm of KPMG LLP as the independent auditors
for Res-Care to audit Res-Care's financial statements for its fiscal year ending
December 31, 1999. KPMG LLP has served as the independent auditors for Res-Care
for all fiscal years beginning with the fiscal year ending December 31, 1989 and
is, therefore, familiar with the affairs and financial procedures of Res-Care. A
representative of KPMG LLP is expected to be present at the meeting, will have
the opportunity to make a statement if he or she desires to do so, and will be
available to respond to appropriate questions.
The board of directors recommends that the shareholders vote FOR
ratification of the selection of KPMG LLP as Res-Care's independent auditors.
FUTURE SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 promulgated under the Exchange Act, Res-Care
shareholders may present proposals for inclusion in the Res-Care proxy statement
for consideration at the next annual meeting of its shareholders by submitting
their proposals to Res-Care in a timely manner. PeopleServe stockholders who
become shareholders of Res-Care may present proposals for inclusion in the
Res-Care proxy statement for its 2000 annual meeting, as the date for inclusion
in the proxy statement for the 1999 annual meeting has already passed. Any such
proposal must comply with Rule 14a-8.
Res-Care's by-laws require shareholders who intend to propose business for
consideration by shareholders at an annual meeting, other than shareholder
proposals that are included in the proxy statement, to give written notice to
the Secretary of Res-Care not less than sixty days and not more than ninety days
before the meeting. If shareholders receive less than seventy days notice or
prior public disclosure of the date of the meeting, the Secretary of Res-Care
must receive notice of business to be proposed not later than the tenth day
following the day on which Res-Care mailed or publicly disclosed notice of
112
<PAGE> 129
the meeting. A shareholder must submit a matter to be raised at Res-Care's 2000
meeting of shareholders and included in the proxy statement no later than
January 4, 2000. The written notice should be sent to Res-Care's principal
office (to the attention of the Secretary) and must include a brief description
of the business, the reasons for conducting such business, any material interest
the shareholder has in such business, the name and address of the shareholder as
they appear on Res-Care's books and the class and number of Res-Care common
shares the shareholder beneficially owns.
SEC rules set forth standards for what shareholder proposals Res-Care is
required to include in a proxy statement for an annual meeting.
OTHER MATTERS
The board of directors does not know of any other business to be presented
at the meeting. If other matters properly come before the meeting, the persons
named in the proxy intend to vote on the matters based on their best judgment.
Res-Care will bear the cost of the meeting and the cost of soliciting
proxies, including the cost of mailing the proxy materials. In addition to
solicitation by mail, directors, officers and regular employees of Res-Care
(none of whom will be specifically compensated for such services) may solicit
proxies by telephone or otherwise. Arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send proxy cards and
proxy materials to the shareholders they represent and Res-Care will reimburse
them for their expenses.
Res-Care will furnish, and upon request, without charge, to each person
whose proxy is being solicited, a copy of its Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as filed with the Securities and Exchange
Commission, including the financial statements, notes to the financial
statements and the financial schedules contained in the report. Res-Care will
also furnish copies of any exhibits to the report but may charge a reasonable
copying charge. Shareholders should address requests for copies of any of these
materials to Vice President of Communications, Res-Care, Inc., 10140 Linn
Station Road, Louisville, Kentucky 40223.
LEGAL MATTERS
Reed Weitkamp Schell & Vice PLLC has issued a legal opinion concerning the
legality of the common shares of Res-Care to be issued to PeopleServe
stockholders. Reed Weitkamp lawyers own in the aggregate approximately 18,575
Res-Care common shares. Certain matters relating to the merger will be passed
upon as of the effective time of the merger by Piper & Marbury L.L.P., as
special counsel to Res-Care. Certain of the tax consequences and other matters
relating to the merger will be passed upon as of the effective time of the
merger by Vorys, Sater, Seymour and Pease LLP, as counsel to PeopleServe.
EXPERTS
The consolidated financial statements of Res-Care, Inc. as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, have been incorporated by reference in this Proxy Statement/Prospectus
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public
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<PAGE> 130
accountants, incorporated by reference to this document, and upon the authority
of this firm as experts in accounting and auditing.
The consolidated financial statements of PeopleServe, Inc. at December 31,
1998 and 1997, and for each of the years in the period ended December 31, 1998,
which are included in this Proxy Statement/Prospectus have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report appearing
elsewhere in this document, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
114
<PAGE> 131
PEOPLESERVE, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 132
LOGO
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PeopleServe, Inc.
We have audited the accompanying consolidated balance sheets of PeopleServe,
Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PeopleServe, Inc.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 31, 1999
F-2
<PAGE> 133
PEOPLESERVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,017,367 $ 3,108,870
Accounts receivable, net of allowance for doubtful
accounts of $1,935,000 in 1998 and $1,837,000 in
1997............................................. 29,187,470 25,637,267
Current portion of related party receivables........ 4,064,994 3,822,977
Prepaid expenses and other.......................... 1,215,043 1,134,992
Income taxes refundable............................. 100,000 1,539,000
Deferred income taxes............................... 2,259,946 1,107,140
------------ ------------
Total current assets.................................. 37,844,820 36,350,246
Property and equipment
Land, buildings, and improvements................... 4,554,356 2,773,616
Land and buildings under capital lease.............. 20,759,984 20,759,984
Furniture and equipment............................. 17,485,530 10,881,671
Less accumulated depreciation and amortization...... (16,875,741) (13,690,675)
------------ ------------
25,924,129 20,724,596
Related party receivables, less current portion....... 844,306 221,774
Goodwill.............................................. 39,774,118 27,366,763
Deferred costs and other assets....................... 3,052,132 2,416,425
Net lease receivable.................................. 868,326 935,381
Deferred income taxes................................. 1,186,299 1,141,419
------------ ------------
Total assets.......................................... $109,494,130 $ 89,156,604
============ ============
</TABLE>
F-3
<PAGE> 134
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ 9,832,809 $ 6,334,335
Accrued salaries and wages.......................... 9,415,035 9,722,273
Income taxes payable................................ -- 727,705
Current maturities of lease obligations............. 774,014 719,622
Current maturities of long-term debt................ 2,287,524 2,927,014
------------ ------------
Total current liabilities............................. 22,309,382 20,430,949
Long-term debt, less current maturities............... 40,565,913 23,830,567
Obligations under capital leases, less current
maturities:
Related to land and buildings....................... 16,965,865 17,674,202
Related to net lease receivable..................... 868,326 935,381
Accounts payable -- government agencies............... 2,538,946 2,939,321
Accrued liabilities -- payroll and other.............. 3,063,873 3,668,567
Redeemable preferred stock, $5 par value, 1,000,000
shares authorized, issued, and outstanding
(including accrued dividends of $1,017,808)......... 6,017,808 5,517,808
Common stock warrants................................. 99,478 106,110
Convertible preferred stock, $.01 par value, 4,000,000
shares authorized, 3,684,364 shares issued and
outstanding (including accrued dividends and
accretion of $2,252,511)............................ 12,252,511 11,034,914
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares
authorized, 5,615,231 and 5,600,231 shares issued
and outstanding at December 31, 1998 and 1997,
respectively..................................... 56,150 56,000
Additional paid-in capital.......................... 2,557,037 2,512,187
Retained earnings................................... 2,198,841 450,598
------------ ------------
4,812,028 3,018,785
------------ ------------
Total liabilities and stockholders' equity............ $109,494,130 $ 89,156,604
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 135
PEOPLESERVE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Management contracts.................. $ 27,261,031 $ 25,211,305 $23,829,200
Support services...................... 155,092,250 135,956,763 68,120,902
Other................................. 1,213,967 1,281,910 795,051
------------ ------------ -----------
Total revenues.......................... 183,567,248 162,449,978 92,745,153
Operating Expenses:
Salaries, wages, and benefits......... 130,567,725 116,578,326 63,408,997
General operating expenses............ 38,284,589 33,592,428 22,698,567
Depreciation and amortization......... 4,515,567 3,510,247 2,420,825
------------ ------------ -----------
Total operating expenses................ 173,367,881 153,681,001 88,528,389
------------ ------------ -----------
Operating income........................ 10,199,367 8,768,977 4,216,764
Other expenses (income)
Interest expense...................... 4,260,961 4,056,341 2,588,306
Interest income....................... (227,434) (191,023) (150,089)
------------ ------------ -----------
Income before income taxes.............. 6,165,840 4,903,659 1,778,547
Income taxes............................ 2,700,000 2,250,000 400,000
------------ ------------ -----------
Net income.............................. 3,465,840 2,653,659 1,378,547
Amortization of preferred stock offering
costs................................. (121,428) (121,428) NM
Dividends on redeemable preferred
stock................................. (500,000) (500,000) NM
Dividends on and accretion of
convertible preferred stock........... (1,217,597) (999,936) NM
------------ ------------ -----------
Net income available for common
stockholders.......................... $ 1,626,815 $ 1,032,295 $ NM
============ ============ ===========
</TABLE>
See accompanying notes.
Note: 1996 net income available for common shareholders is not meaningful and
has not been presented because the Company converted from S-Corp. to
C-Corp. tax status in November 1996.
F-5
<PAGE> 136
PEOPLESERVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------- -------------------- RETAINED
NUMBER OF NUMBER OF ADDITIONAL EARNINGS
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL (DEFICIT)
--------- ------- --------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 3,560 $ 2,080 235 $(12,766) $ 664,953 $ 1,670,021
Net income................. -- -- -- -- -- 1,378,547
Dividends on redeemable
preferred stock......... -- -- -- -- -- (17,808)
Dividends on convertible
preferred stock......... -- -- -- -- -- (34,978)
Reclassification of
preferred stock offering
costs................... -- -- -- -- -- (728,566)
Common shares retired upon
reorganization.......... (3,560) (2,080) -- -- -- --
Common shares issued upon
reorganization.......... 5,600,231 56,000 -- -- -- --
Retirement of treasury
stock................... -- -- (235) 12,766 (12,766) --
Common stock warrants
issued.................. -- -- -- -- -- (116,610)
Cash contributions......... -- -- -- -- 1,860,000
Cash distributions......... -- -- -- -- -- (2,853,731)
--------- ------- ---- -------- ---------- -----------
Balances at December 31,
1996....................... 5,600,231 56,000 -- -- 2,512,187 (703,125)
Net income................. -- -- -- -- -- 2,653,659
Dividends on redeemable
preferred stock......... (500,000)
Dividends on convertible
preferred stock......... -- -- -- -- -- (999,936)
--------- ------- ---- -------- ---------- -----------
Balances at December 31,
1997....................... 5,600,231 56,000 -- -- 2,512,187 450,598
Net income................. -- -- -- -- -- 3,465,840
Dividends on redeemable
preferred stock......... (500,000)
Common shares issued....... 15,000 150 -- -- 44,850
Dividends on and accretion
of convertible preferred
stock................... -- -- -- -- -- (1,217,597)
--------- ------- ---- -------- ---------- -----------
Balances at December 31,
1998....................... 5,615,231 $56,150 -- $ -- $2,557,037 $ 2,198,841
========= ======= ==== ======== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 137
PEOPLESERVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 3,465,840 $ 2,653,659 $ 1,378,547
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred income taxes................ (713,781) (983,675) 197,997
Depreciation and amortization........ 4,515,567 3,510,247 2,420,825
Changes in assets and liabilities,
net of acquisitions
Accounts and related party
receivables..................... (4,388,326) (4,269,332) (6,604,197)
Prepaid expenses and other
assets.......................... (680,008) (990,917) (871,864)
Accounts payable and accrued
expenses........................ 2,493,405 139,710 1,968,608
Accrued salaries, wages and
other........................... (307,238) 1,714,537 3,475,348
Income taxes payable.............. 711,295 611,705 201,000
------------ ------------ ------------
Net cash provided by operating
activities........................... 5,096,754 2,385,934 2,166,264
INVESTING ACTIVITIES
Net purchases of property and
equipment............................ (7,169,790) (1,982,213) (1,582,637)
Purchases of subsidiaries, net of
cash acquired........................ (15,431,601) (8,343,990) (24,844,362)
------------ ------------ ------------
Net cash used for investing
activities........................... (22,601,391) (10,326,203) (26,426,999)
FINANCING ACTIVITIES
Proceeds from sale of stock (net of
related expenses).................... 45,000 -- 14,271,434
Principal payments on long-term debt... (4,154,695) (2,460,675) (2,178,499)
Long term debt borrowings.............. 20,243,919 9,150,630 17,130,223
Payments on obligations under capital
leases............................... (721,090) (561,843) (649,742)
Net cash distributions................. -- -- (993,731)
------------ ------------ ------------
Net cash provided by financing
activities........................... 15,413,134 6,128,112 27,579,685
------------ ------------ ------------
Increase (decrease) in cash............ (2,091,503) (1,812,157) 3,318,950
Cash and cash equivalents at beginning
of year.............................. 3,108,870 4,921,027 1,602,077
------------ ------------ ------------
Cash and cash equivalents at end of
year................................. $ 1,017,367 $ 3,108,870 $ 4,921,027
============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 138
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
PeopleServe, Inc. and its consolidated subsidiaries (collectively referred to as
the Company). The Company was incorporated in October 1996 for the purpose of
becoming the parent of a group of companies which were previously commonly
owned. Effective October 31, 1996, the shareholders of these entities exchanged
their common stock for common stock in the Company. The exchange transaction has
been accounted for in a manner similar to a pooling-of-interests. All
intercompany transactions and balances have been eliminated in the
consolidation. Subsequent to October 31, 1996, the Company (formally known as
VOCA Holdings, Inc.) changed its name to PeopleServe, Inc. PeopleServe is the
parent company of two primary operating divisions: VOCA of America (VOCA) and
EduCare Community Living Corporation -- America (EduCare).
The Company receives revenues primarily from the delivery of residential,
vocational training, educational support and employment services (Support
Services) to people with disabilities, both directly and through management
contracts. Such services are provided for consumers who exhibit a broad range of
disabilities. These services are designed to meet the needs of each individual
consumer. Currently, the Company provides services in 12 states and the District
of Columbia.
2. SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT CONTRACTS
The Company has entered into management contracts with unrelated organizations
which operate in Ohio, the District of Columbia, Texas, Nevada, and North
Carolina. Similar to the Company, these unrelated organizations derive their
revenue from governmental agency programs. In addition to a management fee, some
contracts require the subsidiaries to employ and provide the necessary personnel
to operate the residential programs. Under these contracts the Company is
reimbursed for the salaries and benefits of such employees. Such reimbursements
totaled $21,686,000, $20,849,000 and $20,611,000 for the years ended December
31, 1998, 1997 and 1996 respectively, and are included in management contracts
revenue in the financial statements.
SUPPORT SERVICES REVENUES
Support Services revenues are recorded at established rates under contractual
arrangements with the various programs in each applicable state, or based on
specific calculations utilizing the respective cost of providing the Support
Services. Substantially all of the revenues of the Company are derived from
various governmental agencies in the respective states.
GOVERNMENTAL AGENCIES
Under certain Medicaid programs, for an initial period, the Company is
reimbursed for services to qualified residents based on allowable costs. Interim
reimbursement during this period is based on estimates of costs to be incurred
and final settlement is based on actual costs incurred, subject to
reasonableness and audits or reviews. Provisions are made in the
F-8
<PAGE> 139
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements for estimated settlements owed to the various governmental
agencies for the initial period.
Additionally, accruals are made in the financial statements for estimated
settlements due from the various governmental agencies. Settlement receivables
recorded and included in accounts receivable amounted to $679,000 and $1,263,000
at December 31, 1998 and 1997, respectively. The estimated settlements recorded
at December 31, 1998 could differ from actual settlements based on the results
of cost report audits. Changes in the state agency programs and the reduction of
funding could have an adverse impact on the Company.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, including
assets under capital lease which are amortized over the term of their respective
leases. Building and improvements are depreciated over 30 years, furniture and
equipment is depreciated over 3 to 8 years. Amortization of capital lease assets
is included in amortization expense. Improvements to leased property are
amortized over the lesser of the estimated useful life of the improvement or the
term of the lease. Depreciation expense, including amortization of assets under
capital lease, was approximately $2,897,000, $2,258,000 and $1,883,000 in 1998,
1997 and 1996, respectively.
DEFERRED COSTS AND OTHER ASSETS
The Company's deferred costs and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Long-term debt financing costs........................ $1,421,895 $1,210,926
Covenants not to compete.............................. 463,733 252,704
Deposits.............................................. 554,474 433,406
Long-term receivables................................. 612,030 519,389
---------- ----------
$3,052,132 $2,416,425
========== ==========
</TABLE>
GOODWILL
Goodwill is being amortized on the straight-line method over primarily 40 years.
Accumulated amortization of goodwill is approximately $1,676,000 and $824,000 at
December 31, 1998 and 1997, respectively. Amortization of goodwill was
approximately $913,000, $694,000 and $119,000 in 1998, 1997 and 1996,
respectively.
F-9
<PAGE> 140
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 is a liability method approach whereby deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
In connection with the exchange transaction described in Note 1, the companies
that were a party to the exchange transaction converted from S Corporation to C
Corporation tax status. As a result of this conversion, deferred income tax
assets of approximately $1,700,000 and deferred income tax liabilities of
approximately $1,100,000 were recorded. Because the taxable income or loss of S
Corporations is includable in the stockholders' income tax returns, no provision
for income taxes has been reflected in the accompanying financial statements for
income prior to October 31, 1996.
FINANCIAL INSTRUMENTS
Various methods and assumptions were used by the Company in estimating the 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. The carrying value of the common stock warrants approximate
their fair value. Fair value of the warrants is calculated by multiplying the
number of warrants outstanding times the difference between the Company's common
stock value and warrant exercise price, discounted based on the probability of
the warrants being exercised.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
LOSS CONTINGENCIES
The Company is subject to pending and threatened legal actions which arise in
the normal course of its activities. Claims for incidents which may give rise to
litigation have been asserted against the Company by various claimants. The
claims are in various stages of processing and some may ultimately be brought to
trial. There are also known incidents that have occurred through December 31,
1998 that may result in the assertion of additional claims. At December 31, 1998
and 1997, management has accrued their best estimate of these contingent losses.
F-10
<PAGE> 141
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Workers' compensation policies covering operations in Ohio are covered under
large deductible or retrospective policies. The Company is responsible for
paying the first $250,000 for each claim and for all claims in excess of the
aggregate stop loss. Estimated future payments for claims incurred through
December 31, 1998 have been accrued.
RECLASSIFICATIONS
Certain reclassifications were made to the 1996 and 1997 financial statements to
conform with the 1998 presentation.
3. ACQUISITIONS
During the three years ended December 31, 1998, the Company made ten
acquisitions, all of which have been accounted for as purchases. The
consolidated financial statements include the operating results of each business
acquired from the date of its acquisition.
On October 31, 1996, the Company acquired EduCare Community Living
Corporation -- America (EduCare). EduCare provides long-term care and support
services for people with disabilities under various governmental agency
programs. These services are broadly categorized as residential services,
independent living (or in-home) services, and vocational training and employment
services. EduCare has operations in Texas, North Carolina, New Mexico and
Nevada. The cost of the acquisition has been allocated on the basis of the
estimated fair value of the assets acquired and the liabilities assumed.
On March 1, 1997, the Company acquired Residential Management Services of
Indiana, Inc. (RMS). RMS provides long-term care and support services for people
with disabilities in the State of Indiana. The cost of the acquisition has been
allocated on the basis of the estimated fair value of the assets acquired and
the liabilities assumed.
The following table sets forth the allocation of purchase price, including
EduCare and RMS, for these ten acquisitions:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Buildings, land and equipment............ $ 1,388,000 $ 889,000 $ 4,666,000
Excess of acquisition cost over net
assets acquired........................ 13,774,000 7,627,000 20,139,000
Other.................................... 270,000 316,000 --
----------- ---------- -----------
Total purchase price..................... $15,432,000 $8,832,000 $24,805,000
</TABLE>
The following summary of results of operations on a pro forma basis gives effect
to the ten acquisitions completed since January 1, 1996, as though those
acquisitions had taken place as of January 1 of the year preceding the year of
each acquisition:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues....................... $192,467,000 $178,752,000 $150,059,000
Net income........................... 3,490,000 2,945,000 3,123,000
</TABLE>
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisitions
F-11
<PAGE> 142
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been consummated as of the above date, nor are they necessarily indicative of
future operating results.
4. LEASE OBLIGATIONS
As described in Note 2, the Company leases certain land and buildings used in
operations under capital leases. These leases expire at various dates through
2022 (including renewal options) and generally require the Company to pay
property taxes, insurance and maintenance costs. The majority of these assets
are leased from the Affiliated Partnerships (see Note 6).
The Company also leases certain facilities, furniture and equipment under
non-cancelable operating leases with third parties. These leases expire at
various dates through 2013 (including renewal options), and generally require
the Company to pay property taxes, insurance and maintenance costs. Rent expense
under these leases was $8,853,000 in 1998, $6,566,000 in 1997 and $1,999,000 in
1996.
Future minimum lease payments under capital leases, together with the net
minimum lease payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASE
CAPITAL UNDER OPERATING
LEASES SUBLEASE LEASES
------------ ---------- -----------
<S> <C> <C> <C>
1999.................................. $ 2,328,575 $ 156,920 $ 6,522,924
2000.................................. 2,328,575 151,880 5,076,262
2001.................................. 2,328,575 146,840 3,763,225
2002.................................. 2,328,575 141,800 2,612,045
2003.................................. 2,328,575 136,760 1,600,967
Thereafter............................ 23,677,628 781,774 946,432
------------ ---------- -----------
Total minimum lease payments.......... 35,320,503 1,515,974 $20,521,855
===========
Less amounts representing interest.... (17,647,679) (580,593)
------------ ----------
Present value of minimum lease
payments............................ 17,672,824 935,381
Less current maturities............... (706,959) (67,055)
------------ ----------
Total long-term obligations under
capital leases (less current
maturities)......................... $ 16,965,865 $ 868,326
============ ==========
</TABLE>
F-12
<PAGE> 143
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Notes payable, interest at 9.5%, monthly payments of
$242,787, until October 2001, balloon payment of
$7,154,000 due October 2001....................... $12,351,078 $14,332,538
Notes payable to banks under a revolving credit
facility with an aggregate authorization of
$40,000,000 at December 31, 1998; $10,993,512 at
the prime rate of interest (7.75% prime rate at
December 31, 1998), and $17,200,000 at 2.0% over
the LIBOR rate, due October 2, 2000............... 28,193,512 10,206,446
Note payable, interest at 7.5%, quarterly interest
payments only through February 2000, principal due
February 2000..................................... 500,000 500,000
Note payable, interest at 1% above prime, monthly
payments of $13,333 plus interest through March 1,
2000.............................................. 386,667 386,667
Note payable, interest at 1% above prime, quarterly
interest payments only through October 1998,
principal due October 1998........................ -- 934,000
Note payable, interest at 8.5%, monthly payments of
$22,727 through October 2000...................... 461,513 --
Notes payable, interest at 8.5%, quarterly interest
payments only through June 1999, principal due
July 1999......................................... 200,000 --
Notes payable related to a 1998 business
acquisition, interest rates ranging from 6.5% to
10%, principal paid in January 1999............... 565,972 --
Other............................................... 194,695 397,930
----------- -----------
Total notes payable and long-term debt.............. 42,853,437 26,757,581
Less current portion................................ (2,287,524) (2,927,014)
----------- -----------
Long-term debt, less current maturities............. $40,565,913 $23,830,567
=========== ===========
</TABLE>
The notes payable to banks under lines of credit are collateralized by accounts
receivable and contain certain borrowing limits based on accounts receivable.
Substantially all of the Company's assets are secured under these various loan
agreements. Covenants under lines of credit require, among other things, the
Company to maintain certain financial ratios and impose limitations on capital
expenditures and preclude the payment of cash dividends on common stock.
The Company's long-term debt matures as follows: 1999 -- $2,287,524; 2000 --
$31,207,921; 2001 -- $8,744,039; 2002 -- $36,007; and 2003 and
beyond -- $577,946.
F-13
<PAGE> 144
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest paid in 1998, 1997 and 1996 was $3,995,000, $4,056,000 and $2,588,000,
respectively.
6. RELATED PARTY TRANSACTIONS
The Company's related party receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Note receivable from Affiliated Partnership,
interest at approximately 4%...................... $ 4,064,994 $ 3,822,977
Receivable from an affiliated company............... 442,600 442,600
Notes receivable from stockholders and employees,
interest ranging from 0% to 5%.................... 325,000 250,000
Various receivables from Affiliated Partnerships.... 350,706 346,174
----------- -----------
5,183,300 4,861,751
Allowance for doubtful receivables.................. (274,000) (817,000)
----------- -----------
$ 4,909,300 $ 4,044,751
Less current portion................................ (4,064,994) (3,822,977)
----------- -----------
Long-term related party receivables................. $ 844,306 $ 221,774
=========== ===========
</TABLE>
The majority stockholder of the Company is also a general partner in various
Affiliated Partnerships which own real estate. The real estate properties are
leased to both the Company and other unrelated organizations. The Company has
guaranteed or jointly signed certain obligations of Affiliated Partnerships
which totaled approximately $16,046,000 (including mortgage indebtedness under
the refinancing agreement described below) and $22,722,000 at December 31, 1998
and 1997, respectively, and generally expire in decreasing amounts through 2010.
These obligations are collateralized by real property owned by the Affiliated
Partnerships. Company management believes the degree of risk to these guarantees
is minimal because of the leases entered into between the Company and the
Affiliated Partnerships and the fact that the real property has current market
values significantly in excess of the related guarantees.
In November 1996, certain Affiliated Partnerships (the Borrowers) of the Company
entered into a refinancing arrangement with a bank which matures in November
2001. A grantor trust was established to pay off certain existing mortgage
indebtedness of the Borrowers totaling $9,750,000. All of the mortgaged
properties are leased by the Company. Pursuant to this agreement, an irrevocable
letter of credit has been issued to the trustee by the bank. The Company has
guaranteed the Borrowers' obligations and has established a $400,000 letter of
credit with a bank to secure its guarantee. Additionally, the Company has
granted a security interest in its assets related to the leased properties, and
is required to deposit with the trustee all Medicaid receipts related to the
properties for purposes of paying the Affiliated Partnerships' debt service. The
excess of these receipts over the debt service (rental payment) is returned to
the Company.
F-14
<PAGE> 145
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PREFERRED STOCK AND COMMON STOCK WARRANTS
The Company is authorized to issue five million shares of preferred stock at a
par value of $.01 to $5 per share. On December 17, 1996, the Company issued
Series A Redeemable Preferred Stock, Series B Convertible Preferred Stock, and
common stock warrants in exchange for $15 million. The following provides a
general description of the relevant terms and conditions associated with each of
these securities.
SERIES A REDEEMABLE PREFERRED STOCK: A total of 1,000,000 shares were
issued at $5 per share. The shares are nonvoting and have a liquidation
value of $5 per share plus the amount of any accrued but unpaid dividends.
Dividends accrue at the rate of fifty cents per share, (increasing to $.75
per share if an Event of Default, as defined, occurs) payable upon
redemption or any liquidation, dissolution or winding up of the Company.
The stock must be redeemed at the earlier of the closing of a Qualified IPO
(initial public offering), (as defined) of the Company's Common Stock, the
sixth anniversary date of the original issue date of the stock, the
occurrence of a change in control (as defined), or the occurrence of a
bankruptcy event (as defined).
SERIES B CONVERTIBLE PREFERRED STOCK: A total of 3,684,364 shares were
issued at $2.714 per share. The holder of each share of stock is entitled
to the number of votes as is equal to the number of shares of Common Stock
into which the stock could be converted. The stock is initially convertible
on a one-for-one basis into Common Stock. The stock accrues dividends at
the rate of twenty-seven cents per share (increasing to $.41 per share if
an Event of Default, as defined, occurs) and is payable upon any
liquidation, dissolution or winding up of the Company, or upon conversion
of the shares into Common Stock. The right to convert the stock into Common
Stock may occur at any time at the option of the holder, or automatically
upon the earlier to occur of a date specified by a vote of at least 60
percent of the Series B stockholders, or at the option of the Company
concurrently with the closing of a Qualified IPO. In the event of a
Qualified IPO, the stock ceases to accrue dividends and any accrued and
unpaid dividends are not required to be paid. For accounting purposes the
convertible preferred stock is considered temporary equity. The related
dividends are a reduction of retained earnings.
COMMON STOCK WARRANTS: The warrants were issued to the purchasers of the
Series B Convertible Preferred Stock at the rate of three warrants for
every twenty Series B shares. The delivery of a warrant and a payment of
the book value of common stock (as defined) at December 31, 1996 entitles
the holder to a share of Common Stock. The warrants may also be exercised
through the use of a cashless exercise provision. The warrants are
exercisable commencing December 17, 2002 and expire if not exercised on
December 11, 2006. Additionally, the warrants expire and may not be
exercised if a Qualified IPO closes on or before December 11, 2002. The
warrants may be exercised if the events described in the above sales
transaction, change in control, or an IPO which is not a Qualified IPO
occurs.
The preferred shareholders are entitled to receive dividends prior and in
preference to the Company's common stock or other equity securities. The Series
B Convertible Preferred Shareholders are also entitled to certain protective
provisions which require the Company to obtain an affirmative vote of at least
60 percent of the outstanding shares of the
F-15
<PAGE> 146
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series B Preferred Stock. These provisions, among other things, encompass the
declaration or payment of dividends, limitations on the declaration of options
to acquire equity securities or other forms of stock compensation, and the
issuance of certain other equity securities. In addition, commencing December
17, 2002, holders of the Series B Convertible preferred shares and the Common
Stock Warrants may exercise the right to require the Company to purchase the
investors' preferred shares and warrants if a Qualified IPO has not occurred.
8. STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option Plan (the "Plan"). The Plan
provides for the grant of options to acquire the Company's common stock to
employees, directors, and consultants (i.e., service providers). The Plan
provides a committee of the board of directors with broad discretion as to who
should be granted options and the relevant terms. The maximum number of
additional shares available for grant under the Plan is 31,143 at December 31,
1998. The options vest over three to four years. If not exercised, the options
expire ten years from the date of grant.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The Statement allows for a fair value-based method of accounting
for employee stock options and similar equity instruments. In accordance with
the provisions of SFAS No. 123, the Company has elected to account for options
granted under the Plan in accordance with APB Opinion 25, "Accounting for Stock
Issued to Employees" and related interpretations. If the Company had elected to
recognize compensation cost based on the fair value of options at the grant date
as prescribed by SFAS No. 123, net income would have decreased by $171,000,
$254,000 and $32,000 in 1998, 1997 and 1996, respectively. The assumptions used
in the model included an expected dividend yield of 0 percent, an expected stock
price volatility of .01, a risk-free interest rate of 6.0 percent and an
expected life of the options of 10 years. The financial effects of applying SFAS
No. 123 are not likely to be representative of the effects on reported results
of operations for future years.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year................. 976,798 181,480 --
Granted.......................................... 61,073 862,615 181,480
Exercised........................................ -- -- --
Cancelled........................................ 129,303 67,297 --
------- ------- -------
Outstanding at end of year....................... 908,568 976,798 181,480
</TABLE>
No Company stock options were exercisable as of December 31, 1998, 1997 or 1996.
The range of exercise prices of options outstanding at December 31, 1998 is
$1.48 to $3.00. The weighted-average exercise price of those options is $2.54
and the weighted-average contractual life is 8.0 years.
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<PAGE> 147
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Current expense (benefit):
United States federal...................... $2,506,552 $2,437,711 $ 0
State and local............................ 907,229 795,964 202,003
---------- ---------- --------
Total............................ 3,413,781 3,233,675 202,003
---------- ---------- --------
Deferred expense (benefit):
United States federal...................... (454,656) (834,627) 213,493
State and local............................ (259,125) (149,048) (15,496)
---------- ---------- --------
Total............................ (713,781) (983,675) 197,997
---------- ---------- --------
Total income taxes......................... $2,700,000 $2,250,000 $400,000
========== ========== ========
</TABLE>
The differences between the Company's effective tax rate and the statutory
federal income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Amount based on statutory rate............ $2,094,000 $1,664,000 $ 605,000
State and local taxes, net of Federal
benefit................................. 446,000 339,000 25,000
Nondeductible Goodwill.................... 191,000 174,000 27,000
Income taxes as an S Corporation.......... 0 0 (544,000)
Deferred tax liability set up on C
Corporation
conversion.............................. 0 0 263,000
Other..................................... (31,000) 73,000 24,000
---------- ---------- ---------
Total income taxes........................ $2,700,000 $2,250,000 $ 400,000
========== ========== =========
Effective tax rate........................ 43.8% 45.9% 22.5%
</TABLE>
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<PAGE> 148
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's net deferred tax asset at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Capital Lease Obligations................................. $1,668,903 $1,155,542
Vacation Accrual.......................................... 859,289 719,372
Receivable Allowances..................................... 799,288 881,219
State Net Operating Loss Carryforward..................... 754,599 414,729
Accrued Bonus............................................. 475,496 136,656
Accrued Worker's Compensation............................. 259,318 475,519
Executive 401k............................................ 176,412 0
Accrued Benefits/Health Insurance......................... 168,964 319,007
Other..................................................... 478,884 279,435
---------- ----------
Total................................................ 5,641,153 4,381,479
Less valuation allowance.................................. (742,361) (298,627)
---------- ----------
Deferred tax assets.................................. 4,898,792 4,082,852
---------- ----------
Deferred Tax Liabilities:
Accelerated Depreciation/Amortization..................... 504,483 130,225
S Corporation to C Corporation cash to accrual
adjustment.............................................. 863,646 1,669,679
Other..................................................... 84,418 34,389
---------- ----------
Deferred tax liabilities............................. 1,452,547 1,834,293
---------- ----------
Net Deferred Tax Asset.................................... $3,446,245 $2,248,559
---------- ----------
</TABLE>
The Company has State net operating loss carryforwards of approximately
$8,584,000 that expire from fiscal 2003 through fiscal 2013. Approximately
$8,320,000 of the State net operating loss carryforwards have been fully
reserved by a valuation allowance due to the uncertainties related to their
future utilization.
The valuation allowance increased during 1998 by $443,734 primarily as a result
of the losses generated by the Ohio holding companies in the current year, and
the uncertainty related to their future utilization.
Income taxes paid were $4,381,000 in 1998 and $3,112,000 in 1997.
10. EMPLOYEE BENEFIT PLANS
The Company provides defined contribution retirement plans with a 401(k)
provision to certain Company employees. Any Company contributions are equal to
25 percent of certain employees' voluntary contributions, up to a maximum of
1.25 percent of qualified wages. Contribution expense was $144,000, $132,000 and
$111,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
Historically, certain information technology ("IT") systems of the Company have
used two digits rather than four digits to define that applicable year, which
could result in
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<PAGE> 149
PEOPLESERVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognizing a date using "00" as the year 1900 rather than the year 2000. IT
systems include computer software and hardware in the mainframe, midrange and
desktop environments as well as telecommunications. Additionally, the impact of
the problem extends to non-IT systems, such as equipment used in the Company's
homes which may contain a non-compliant computer chip.
Based on a recent assessment, the Company determined that it will be required to
modify, replace or upgrade portions of its software and hardware so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. As part of this assessment, a compliance plan, which includes
the formation of a steering committee, (including members of senior management),
and a timetable for identifying, evaluating, resolving and testing its Year 2000
issues, has been developed. The Company presently believes that with
modifications to existing systems, the Year 2000 Issue will not pose significant
operational problems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company. The Company will utilize both internal
and external resources to reprogram, replace and upgrade systems for Year 2000.
The Company anticipates substantial completion of the Year 2000 project by
November 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at $1 million to
$2 million and is being funded through operating cash flows. The range is a
function of ongoing evaluation as to whether certain systems and equipment will
be corrected or replaced, which is largely dependent on information to be
obtained from suppliers or other external sources. This amount will primarily be
expended during 1999. Internal and external costs for system maintenance and
modification are expensed as incurred while spending for new hardware, software
or equipment will be capitalized and depreciated over the assets' useful lives.
The Company has initiated formal communications with all of its significant
vendors and governmental agencies in states where the Company does business to
determine the extent to which the Company's interface systems and business
continuity are vulnerable to third party Year 2000 issues. However, there can be
no guarantee that the systems of these third parties will be timely converted,
avoiding an adverse effect on the Company. The Company will continue to monitor
and update the status of the third party Year 2000 projects to ensure no
business interruption occurs.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved. As such, actual results could differ from those anticipated.
Specific factors that might cause such differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
The Company anticipates timely completion of its Year 2000 remediation. The Year
2000 steering committee is continuously reviewing the status of the Company's
remediation efforts and, as a necessary part of the compliance plan discussed
above, a contingency plan will be created during 1999. The plan will address
alternative solutions to the Company's Year 2000 issues.
F-19
<PAGE> 150
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into this 2nd day of April, 1999, by and among (i) RES-CARE, INC., a Kentucky
corporation ("Res-Care"); (ii) RES-CARE SUB, INC., a Delaware corporation ("Res-
Care Sub"); and (iii) PEOPLESERVE, INC., a Delaware corporation ("Company").
RECITALS
A. Res-Care Sub is a wholly-owned subsidiary of Res-Care.
B. The respective Boards of Directors of Res-Care, Res-Care Sub and
Company deem it desirable to merge Res-Care Sub with and into Company (the
"Merger") with Company as the surviving corporation and a wholly-owned
subsidiary of Res-Care, upon the terms and conditions set forth in this
Agreement, and the respective Boards of Directors have approved the Merger in
accordance with the laws of the state of incorporation of each such corporation.
C. Pursuant to the Merger, Res-Care Sub will be merged with and into
Company, with Company as the surviving corporation, and all of the Exchanged
Securities (as defined in Section 1.1 hereof) will be exchanged for Res-Care
Shares (as defined in Section 1.1 hereof).
D. The parties desire by this Agreement to set forth the terms and
conditions upon which they are willing to consummate the Merger.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement and the Exhibits and
Schedules attached hereto, and in addition to any and all definitions and
interpretations otherwise provided throughout this Agreement, the following
words and phrases shall have the meaning set forth below:
"Adjusted Closing Price" shall be as defined in Section 2.2(e) hereof.
"Affiliate" shall have the meaning ascribed by Rule 12b-2 promulgated under
the Exchange Act.
"Agency" means any applicable governmental or regulatory agency, commission
or body or other governmental or regulatory entity.
"Agreement" means this Agreement and Plan of Merger, including the Exhibits
and Schedules attached hereto, all as amended or otherwise modified from time to
time in accordance with Section 11.9 hereof.
"Business Day" means any day other than (i) Saturday, (ii) Sunday, or (iii)
any other day that the Louisville, Kentucky office of the Exchange Agent is not
open generally for banking business.
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<PAGE> 151
"Client Trust Accounts" means all of the Target Entities' right, title and
interest in and to the client trust funds held by the Target Entities on behalf
of any of the clients served by the Target Entities.
"Closing" and "Closing Date" shall be as defined in Section 2.4 hereof.
"Closing Price" means the average closing sale price per share of the
Res-Care Shares as quoted on the Nasdaq National Market during the period of
fifteen (15) trading days prior to the date which is three (3) trading days
prior to the Closing.
"Common Certificates" means the certificates (or affidavits of loss in lieu
thereof) for the Common Shares.
"Common Shares" means the outstanding shares of common stock, par value
$.01 per share, of the Company.
"Company Stock Option Plan" means the VOCA Holdings, Inc. 1996 Stock Option
Plan, dated January 1, 1996, as amended.
"Company Warrants" means Warrants to Purchase Common Stock of VOCA
Holdings, Inc. dated December 17, 1996, which entitle the holders to purchase an
aggregate of 552,654 shares of common stock of the Company at an exercise price
of $0.60 per share of common stock.
"Confidentiality Letter" means that certain letter agreement dated November
23, 1998 executed by Res-Care and the Company, as amended.
"Contract" means any lease, maintenance contract, service contract,
employment agreement, supply agreement or other agreement to which any of the
Target Entities is a party (other than the Program Agreements, Management
Agreements and the Facility Leases).
"Convertible Certificates" means the certificates (or affidavits of loss in
lieu thereof) for the Convertible Shares.
"Convertible Shares" means the outstanding shares of Series B Convertible
Preferred Stock, par value $.01 per share, of the Company, including, where the
context indicates, all accrued and unpaid dividends thereon.
"DGCL" means the General Corporation Law of the State of Delaware, as
amended.
"Effective Time" shall be as defined in Section 2.4 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Exchange Agent" shall be as defined in Section 2.7(a) hereof.
"Exchange Ratio" shall be as defined in Section 2.2(e) hereof.
"Exchanged Certificates" means the (i) Common Certificates, (ii)
Convertible Certificates, and (iii) Redeemable Certificates.
"Exchanged Securities" means the (i) Common Shares, (ii) Convertible
Shares, and (iii) Redeemable Shares, issued and outstanding immediately before
the Effective Time.
"Executive Employment Agreements" means the employment agreements between
any of the Target Entities and each of the individuals listed on Schedule
1.1(a).
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<PAGE> 152
"Facilities" means the real properties, together with the buildings,
fixtures and improvements located thereon, which are listed on Schedule 1.1(b).
"Facility Leases" means each of the existing lease agreements relating to
the Facilities, which are listed on Schedule 1.1(c).
"Governing Documents" means in the case of a corporation, its certificate
or articles of incorporation and bylaws, in the case of a limited liability
company, its articles of organization and operating agreement, and in the case
of a partnership, its partnership agreement and certificate of limited
partnership, if applicable.
"Group I Facilities" means the Facilities which are owned by the Group I
Lessors, which are noted as "Group I Facilities" on Schedule 1.1(d).
"Group I Facility Leases" means the Facility Leases between the respective
Target Entities and the Group I Lessors, which are noted as "Group I Facility
Leases" on Schedule 1.1(d).
"Group I Lessors" means the entities identified on Schedule 1.1(d).
"Group II Facilities" means the Facilities which are owned by the Group II
Lessors, which are noted as "Group II Facilities" on Schedule 1.1(e).
"Group II Facility Leases" means the Facility Leases between the respective
Target Entities and the Group II Lessors, which are noted as "Group II Facility
Leases" on Schedule 1.1(e).
"Group II Lessors" means the entities identified on Schedule 1.1(e).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Intellectual Property Rights" means (i) all patents and matters or
inventions (whether or not patentable), (ii) all trademarks, service marks,
trade names, entity names and logos, (iii) all computer software and related
documentation, (iv) all copyrights or writings which are copyrightable, and (v)
all applications, extensions, renewals, copies and rights of any nature relating
to the same.
"Issued Shares" means the Res-Care Shares issued to the Shareholders in
connection with the Merger.
"Joint Proxy Statement" means the proxy statement of Company to be included
in the Registration Statement for the purposes of obtaining approval by the
Shareholders of this Agreement and the amendment of the terms of the Convertible
Shares and the Redeemable Shares and the proxy statement/prospectus of Res-Care
to be included in the Registration Statement for the purposes of obtaining
approval by the shareholders of Res-Care of the issuance of the Res-Care Shares
to the Shareholders pursuant to this Agreement, including Res-Care Shares
issuable in exchange for Company Options.
"Knowledge" means the knowledge of the officers and directors of the Target
Entities or the knowledge of the officers and directors of Res-Care, as the
context requires, and in each case shall mean facts, circumstances or
occurrences the respective individuals actually knew or reasonably should have
known given his or her involvement in the respective businesses of the Target
Entities or Res-Care, as applicable, and the information available to such
individual.
"Licenses" means all licenses, certifications, qualifications, permits and
other authorizations from all Agencies, necessary for the Target Entities to
conduct their
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respective businesses and to receive reimbursement for MR/DD Services and/or
Managed Services.
"Managed Operations" means the provision of MR/DD Services by the Managed
Providers, which operations are more fully described on Schedule 1.1(f).
"Managed Providers" means the entities that entered into any Management
Agreements with any of the Target Entities as set forth on Schedule 1.1(g).
"Managed Services" means the services provided with respect to the Managed
Operations by any of the Target Entities pursuant to the Management Agreements.
"Management Agreements" means the agreements by which any of the Target
Entities provide management, consulting and/or other services to the Managed
Providers, which agreements are more fully described on Schedule 1.1(g).
"Material Adverse Effect" on a party shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on the financial condition, results of
operations, or the business, properties, assets or liabilities of (i) Res-Care
and its subsidiaries or (ii) the Target Entities, as the context requires, in
each case taken as a whole.
"MR/DD Services" means services to persons with mental retardation and/or
developmental or other disabilities, including persons who are dually diagnosed
or require mental health, youth or other support services, whether by the Target
Entities or by the Managed Providers at the Managed Operations.
"Noncompetition Agreements" means the consulting, noncompetition,
nonsolicitation and confidentiality agreements to be executed by Res-Care and
each of the individuals listed on Schedule 1.1(h) in the forms attached hereto
as Exhibits B-1 and B-2.
"Occupancy Standard" shall mean the requirement that the number of clients
receiving MR/DD Services from the Target Entities or Managed Providers in the
states described on Schedule 1.1(i) shall be not less than 4,065 clients. A
client shall be taken into account for purposes of such Occupancy Standard only
to the extent (x) such client is fully qualified for funding by the Agencies
having jurisdiction over such services, (y) after the Closing the respective
Target Entity or Managed Provider will be entitled to continue to provide such
services in the same manner and on the same conditions as previously provided by
such Target Entity or Managed Provider and (z) the respective Target Entity or
Managed Provider will be entitled to continue to receive all of such funding
after the Closing. A client shall not be taken into account for purposes of such
Occupancy Standard if any of the Target Entities or Res-Care shall have received
notice (verbally or in writing) that (i) such client intends to terminate any
agreement or contract for such services, (ii) any of the Agencies having
jurisdiction over such services intend that any such agreement or contract be
terminated or modified in any adverse manner, or (iii) the Management Agreement
between the respective Target Entity or Managed Provider is to be terminated or
modified in any adverse manner. In addition, clients of the Managed Providers
shall not be taken into account for purposes of such Occupancy Standard if none
of the Target Entities provide Managed Services with respect to such client and
currently receive management fees with respect thereto.
"Personal Property" means all tangible personal property owned or leased by
the Target Entities. Personal Property shall include, but shall not be limited
to, the following items: beds, nursing equipment, therapy equipment, vehicles,
food service preparation and distribution equipment, housekeeping equipment,
vocational and educational equipment
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<PAGE> 154
and materials, maintenance equipment, furniture and furnishings, activities and
entertainment equipment, and office equipment (including but not limited to
computers).
"Program Agreements" means the agreements or arrangements under which the
Target Entities or the Managed Providers provide MR/DD Services, and which are
more fully described on Schedule 1.1(j).
"Redeemable Certificates" means the certificates (or affidavits of loss in
lieu thereof) for the Redeemable Shares.
"Redeemable Shareholders" means the persons or entities listed on Schedule
1.1(k).
"Redeemable Shares" means the outstanding shares of Series A Redeemable
Preferred Stock, par value $.01 per share, of the Company.
"Registration Rights Agreement" means the registration rights agreement
dated the date hereof between Res-Care and the Shareholders.
"Registration Statement" means the registration statement on Form S-4 to be
filed by Res-Care with the SEC for the purpose, among other things, of
registering the Res-Care Shares which will be issued in exchange for the
Exchanged Securities upon consummation of the Merger.
"Res-Care Financial Statements" shall mean (i) the consolidated balance
sheets and related statements of income, changes in shareholders' equity, and
cash flows (including related notes and schedules, if any) of Res-Care as filed
in Res-Care's Form 10-K for the year ended December 31, 1998 and (ii) the
consolidated balance sheets of Res-Care and related statements of income,
changes in shareholders' equity, and cash flows (including related notes and
schedules, if any) included in Res-Care SEC Reports filed with respect to
periods ended subsequent to December 31, 1998.
"Res-Care SEC Reports" shall mean any current or periodic reports Res-Care
is required to file with the SEC pursuant to Section 13 of the Exchange Act.
"Res-Care Shares" means the Common Shares of Res-Care, no par value.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
"Shareholders" means all of the shareholders of the Company, which
shareholders are listed on Schedule 1.1(l).
"Shareholders Agreement" means the shareholders agreement dated the date
hereof between Res-Care and the Majority Shareholders as defined therein.
"Subsidiaries" means, with respect to the Company, any corporation,
partnership or association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company or one or more of the other Subsidiaries
of the Company or a combination thereof, or (ii) if a partnership, association
or other business entity, a majority of the partnership or other similar
ownership interest thereof is owned or controlled, directly or indirectly, by
the Company or one or more of the other Subsidiaries of the Company or a
combination thereof. For purposes hereof, the Company or any Subsidiary shall be
deemed to have a majority ownership interest in a partnership, association or
other business entity if the Company or
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<PAGE> 155
such Subsidiary shall be allocated a majority of partnership, association or
other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity. The Subsidiaries of the Company are described on Schedule 1.1(m).
"Supplies" means all of the Target Entities' right, title and interest in
and to any and all drugs, medicines, foods, linens, vocational or educational
materials and other supplies owned by any Target Entity.
"Surviving Corporation" shall mean the Company following the Effective
Time.
"Target Entities" means Company and each of the Subsidiaries.
"Warrant Certificates" means the certificates (or affidavits of loss in
lieu thereof) for the Company Warrants.
ARTICLE II
PLAN OF ACQUISITION
2.1 THE MERGER. Subject to and upon the terms and conditions contained
herein, and in accordance with the provisions of Section 251 of the DGCL,
Res-Care Sub will be merged with and into Company, with Company being the
surviving corporation, in accordance with the Certificate of Merger attached
hereto as Exhibit A (the "Certificate of Merger"), which shall be executed and
delivered by Res-Care, Res-Care Sub and Company prior to the Merger. Following
the Merger, the separate corporate existence of Res-Care Sub shall cease and
Company shall be the surviving corporation and shall succeed to and assume all
the rights and obligations of Res-Care Sub in accordance with the DGCL. The
Merger shall have the effects set forth in Section 259 of the DGCL. By virtue of
the Merger and without any further action being required by the Shareholders,
all of the Exchanged Securities outstanding immediately before the Effective
Time shall cease to exist, and each Exchanged Certificate formerly representing
any of such Exchanged Securities shall thereafter represent only the right to be
exchanged for the Res-Care Shares, subject to statutory appraisal rights and the
payment of cash for fractional share interests, with the number of Issued Shares
to be issued for the shares of each class of Exchanged Securities to be as set
forth in Section 2.2 hereof. Each share of common stock of Res-Care Sub issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger, be converted into one validly issued, fully paid and nonassessable share
of common stock, par value $.01 per share, of the Surviving Corporation as of
the Effective Time.
2.2 NUMBER OF ISSUED SHARES.
(a) Common Shares and Convertible Shares.
(i) The provisions of this Section 2.2(a)(i) shall apply if the
Closing Price is greater than or equal to $20.00 and less than or equal to
$26.00. The following amounts of Res-Care Shares shall be issuable at the
Effective Time by virtue of the Merger and without any further action on
the part of the parties hereto or the holder of any securities: 0.4523
Res-Care Shares shall be issuable in exchange for each Common Share and
Convertible Share (excluding accrued and unpaid dividends on the
Convertible Shares) issued and outstanding at the Effective Time and for
which dissenters rights have not been perfected. As a result of the
foregoing provisions, an aggregate of 4,502,149 Res-Care Shares shall be
issuable in exchange for the Common Shares and Convertible Shares
(excluding accrued and unpaid dividends on
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<PAGE> 156
the Convertible Shares and assuming full exercise of the Company Warrants
(with payment to the Company of the cash exercise price for the same) and
no exercise of the Company Options prior to the Effective Time). In the
event of any conflict between the preceding sentences, the immediately
preceding sentence shall prevail. Notwithstanding the foregoing, the
aggregate number of Res-Care Shares to be issued pursuant to this Section
2.2(a)(i) shall be reduced to reflect Common Shares and Convertible Shares
pursuant to which dissenters rights have been perfected.
(ii) The provisions of this Section 2.2(a)(ii) shall apply if the
Closing Price is greater than or equal to $18.00 and less than $20.00. The
following amounts of Res-Care Shares shall be issuable at the Effective
Time by virtue of the Merger and without any further action on the part of
the parties hereto or the holder of any securities: the number of Res-Care
Shares that shall be issuable in exchange for each Common Share and
Convertible Share (excluding accrued and unpaid dividends on the
Convertible Shares) issued and outstanding at the Effective Time and for
which dissenters rights have not been perfected, shall be equal to the
quotient of (A) $9.05 divided by (B) the Closing Price.
(iii) The provisions of this Section 2.2(a)(iii) shall apply if the
Closing Price is less than $18.00. The following amounts of Res-Care Shares
shall be issuable at the Effective Time by virtue of the Merger and without
any further action on the part of the parties hereto or the holder of any
securities: 0.5026 Res-Care Shares shall be issuable in exchange for each
Common Share and Convertible Share (excluding accrued and unpaid dividends
on the Convertible Shares) issued and outstanding at the Effective Time and
for which dissenters rights have not been perfected. As a result of the
foregoing provisions, an aggregate of 5,002,830 Res-Care Shares shall be
issuable in exchange for the Common Shares and Convertible Shares
(excluding accrued and unpaid dividends on the Convertible Shares and
assuming full exercise of the Company Warrants (with payment to the Company
of the cash exercise price for the same) and no exercise of the Company
Options prior to the Effective Time). In the event of any conflict between
the preceding sentences, the immediately preceding sentence shall prevail.
Notwithstanding the foregoing, the aggregate number of Res-Care Shares to
be issued pursuant to this Section 2.2(a)(iii) shall be reduced to reflect
Common Shares and Convertible Shares pursuant to which dissenters rights
have been perfected.
(iv) The provisions of this Section 2.2(a)(iv) shall apply if the
Closing Price is greater than $26.00 and less than or equal to $29.00. The
following amounts of Res-Care Shares shall be issuable at the Effective
Time by virtue of the Merger and without any further action on the part of
the parties hereto or the holder of any securities: the number of Res-Care
Shares that shall be issuable in exchange for each Common Share and
Convertible Share (excluding accrued and unpaid dividends on the
Convertible Shares) issued and outstanding at the Effective Time and for
which dissenters rights have not been perfected shall be equal to the
quotient of (A) $11.76 divided by (B) the Closing Price.
(v) The provisions of this Section 2.2(a)(v) shall apply if the
Closing Price is greater than $29.00. The following amounts of Res-Care
Shares shall be issuable at the Effective Time by virtue of the Merger and
without any further action on the part of the parties hereto or the holder
of any securities: 0.4055 Res-Care Shares shall be issuable in exchange for
each Common Share and Convertible Share (excluding accrued and unpaid
dividends on the Convertible Shares) issued and outstanding at
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the Effective Time and for which dissenters rights have not been perfected.
As a result of the foregoing provisions, an aggregate of 4,036,306 Res-Care
Shares shall be issuable in exchange for the Common Shares and Convertible
Shares (excluding accrued and unpaid dividends on the Convertible Shares
and assuming full exercise of the Company Warrants (with payment to the
Company of the cash exercise price for the same) and no exercise of the
Company Options prior to the Effective Time). In the event of any conflict
between the preceding sentences, the immediately preceding sentence shall
prevail. Notwithstanding the foregoing, the aggregate number of Res-Care
Shares to be issued pursuant to this Section 2.2(a)(v) shall be reduced to
reflect Common Shares and Convertible Shares pursuant to which dissenters
rights have been perfected.
(b) Redeemable Preferred Shares. The number of Res-Care Shares issuable at
the Effective Time by virtue of the Merger and without any further action on the
part of the parties hereto or the holder of any securities in exchange for each
Redeemable Share shall be equal to the quotient of (i) the liquidation value of
the Redeemable Shares plus all accrued and unpaid dividends thereon as of the
Effective Time divided by (ii) the Closing Price.
(c) Accrued Dividends on Convertible Preferred Shares. The number of
Res-Care Shares issuable at the Effective Time by virtue of the Merger and
without any further action on the part of the parties hereto or the holder of
any securities in exchange for the accrued and unpaid dividends on the
Convertible Shares shall be equal to the quotient of (i) all accrued and unpaid
dividends on the Convertible Shares as of the Effective Time divided by (ii) the
Closing Price.
(d) Company Options. At the Effective Time and in accordance with Section
8.10(b) of the Company Stock Option Plan, each Company Option shall be exchanged
for the portion of a Res-Care Share determined by the following formulas.
S(1) = (((R X CP) -- X) X T)
---------------------
CP
Where S(1) = the portion of a Res-Care Share issuable in exchange for a
Company Option to purchase one Common Share
R = the Exchange Ratio
CP = the Adjusted Closing Price
X = the exercise price of the Company Option
T = the difference between the number 1 and the applicable
minimum combined rate of withholding taxes required by any
governmental or regulatory authority in connection with the
payment of the amount contemplated hereby.
Assuming the Adjusted Closing Price is $23.00 and minimum combined federal
and state withholding of 28%, a maximum of 280,884 Res-Care Shares shall be
issuable in exchange for the Company Options at the Effective Time. (It is
understood by all parties that the minimum statutory withholding percentage may
in fact be in excess of the 28% used in this paragraph.)
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(e) Definitions: For purposes of Section 2.2(d):
"Adjusted Closing Price" and "Exchange Ratio" shall have the meaning
indicated in the following table based upon the applicable Closing Price
indicated in the first column:
<TABLE>
<CAPTION>
CLOSING PRICE ADJUSTED CLOSING PRICE EXCHANGE RATIO
- ------------- ---------------------- --------------
<S> <C> <C>
Less than $18.00 $18.00 0.5026
Greater than or equal to The Closing Price The quotient of $9.05
$18.00 but less than divided by the Closing
$20.00 Price.
Greater than or equal to $23.00 0.4523
$20.00 and less than
or equal to $26.00
Greater than $26.00 and The Closing Price The quotient of $11.76
less than or equal to divided by the Closing
$29.00 Price
Greater than $29.00 $29.00 0.4055
</TABLE>
2.3 ADJUSTMENTS.
(a) If, between the date of this Agreement and the Closing Date or the
Effective Time, as the case may be, (i) the Exchanged Securities shall be
changed into a different number of shares or a different class by reason of
any reclassification, recapitalization, reorganization, split up,
combination, exchange of securities, or readjustment, or a stock dividend,
stock split or reverse stock split thereon shall be declared with a record
date within such period or (ii) Company shall issue additional shares of
its capital stock, the number of Res-Care Shares received in exchange for
each share of the capital stock of Company shall be adjusted so that the
aggregate number of Res-Care Shares received in exchange for all Exchanged
Securities (assuming no Dissenting Shares (as defined in Section 2.6
hereof)) and to be received upon exchange of the Company Options remains
unchanged.
(b) If, between the date of this Agreement and the Closing Date or the
Effective Time, as the case may be, the outstanding Res-Care Shares shall
have been changed into a different number of shares or a different class by
reason of any reclassification, recapitalization, reorganization, split up,
combination, exchange of shares, or readjustment, with a record date within
such period, or a stock dividend, stock split or reverse stock split
thereon shall be declared with a record date within such period, the number
of Res-Care Shares received in exchange for each Exchanged Security (as
specified in Section 2.2 hereof) and in exchange for each Company Option
shall be equitably adjusted to reflect such change.
2.4 CLOSING, CLOSING DATE AND EFFECTIVE TIME. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Vorys, Sater, Seymour and Pease LLP, 52 East Gay Street,
Columbus, Ohio at 9:00 a.m., local time, on or before the second Business Day
after the last to occur of the conditions set forth in Articles VIII, IX and X
hereof (other than the delivery of officers' certificates and closing opinions),
or on such date and at such other time and place as is mutually agreed upon by
the parties hereto (the date and time of the Closing is herein called the
"Closing Date"). If any of the conditions to the obligations of the parties to
this Agreement have not been satisfied or waived by the Closing Date, then the
party to this Agreement that is unable to meet such condition or conditions
shall be entitled to postpone the Closing by written notice to the other parties
until such condition shall have been satisfied or waived (which such party shall
seek to cause to occur at the earliest practicable date), but the
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Closing shall occur not later than June 30, 1999, unless further extended (i) by
written agreement of the parties to this Agreement or (ii) automatically to a
date not later than August 31, 1999, due solely to delays caused by the review
of the Registration Statement or the Joint Proxy Statement by the SEC or in
connection with obtaining other material governmental or third party consents or
approvals. The parties shall use their best efforts to effectuate a timely
Closing on or before June 30, 1999 as provided in this Section 2.4. The date the
Certificate of Merger is filed with the Secretary of State of the State of
Delaware (the "Delaware Secretary of State") shall be the "Effective Time."
2.5 EXECUTION AND DELIVERY OF CLOSING DOCUMENTS. Before the Closing, each
party shall cause to be prepared, and at the Closing the parties shall execute
and deliver, each agreement and instrument required by this Agreement or the
Certificate of Merger to be so executed and delivered. At the Closing, the
parties shall (i) deliver the documents, certificates and opinions required to
be delivered by Articles IX and X hereof and such other appropriate and
customary documents as the other parties reasonably may request for the purpose
of consummating the transactions contemplated by this Agreement and the
Certificate of Merger in accordance with applicable federal, state and local
laws, (ii) provide proof of indication of the satisfaction or waiver, as
applicable, of each of the conditions set forth in Articles VIII, IX and X
hereof, (iii) cause the appropriate officers of Company and Res-Care Sub to
execute and deliver the Certificate of Merger and (iv) consummate the Merger by
causing to be filed the properly executed Certificate of Merger with the
Delaware Secretary of State in accordance with the provisions of the DGCL. All
actions taken at the Closing shall be deemed to have been taken simultaneously
at the time the last of any such action is taken or completed.
2.6 APPRAISAL RIGHTS. Notwithstanding any provision of this Agreement to
the contrary, any Exchanged Securities whose holder demands appraisal of such
shares under the DGCL or who has demanded and perfected the right, if any, for
appraisal of those Exchanged Securities in accordance with the provisions of the
DGCL, and as of the Effective Time has not withdrawn or lost such right to such
appraisal (collectively, the "Dissenting Shares") shall not be exchanged, or
represent a right to receive Res-Care Shares, but the holder shall only be
entitled to such rights as are granted by the DGCL. If a Shareholder who demands
appraisal of his shares under the DGCL shall effectively withdraw or lose
(through failure to perfect or otherwise) the right to appraisal, then, as of
the Effective Time or the occurrence of such event, whichever last occurs, that
Shareholder's Exchanged Securities shall be exchanged and represent only the
right to receive Res-Care Shares as provided in this Article II, upon the
surrender of the certificate or certificates representing those shares. Company
shall give Res-Care (a) prompt written notice of any written demands for
appraisal of any Exchanged Securities, attempted withdrawals of such demands and
any other instruments served pursuant to the DGCL relating to Shareholders'
rights of appraisal and (b) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under the DGCL. Company shall
not, except with the prior written consent of Res-Care, voluntarily make any
payment with respect to any demands for appraisals of Exchanged Securities,
offer to settle or settle any such demands or approve any withdrawal of any such
demands. Notwithstanding any provision of this Agreement to the contrary,
Res-Care and Res-Care Sub shall have the right to terminate this Agreement and
be released from all obligations hereunder if Res-Care and Res-Care Sub, in
their sole and absolute discretion, determine that (i) Shareholders holding in
excess of three and one-half percent (3.5%) of the Exchanged Securities entitled
to appraisal rights immediately prior to the Effective Time (giving effect to
conversion of the Convertible Shares and Redeemable Shares and the
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exercise of the Company Warrants, respectively) have demanded appraisal rights
or (ii) Shareholders have demanded appraisal rights in amounts which jeopardize
the accounting treatment specified in Section 2.11.
2.7 EXCHANGE OF CERTIFICATES FOR EXCHANGED SECURITIES.
(a) Exchange Agent. At the Closing, Res-Care shall deposit, or shall
cause to be deposited, with National City Bank, N.A., or such other
exchange agent selected by Res-Care with the Company's prior approval,
which shall not be unreasonably withheld (the "Exchange Agent"), for the
benefit of the holders of Exchanged Securities, certificates representing
the Issued Shares, and, after the Effective Time, if applicable, any cash,
dividends or other distributions with respect to the Issued Shares upon due
surrender of the Exchanged Certificates (or affidavits of loss in lieu
thereof) pursuant to the provisions of this Section 2.7 (such certificates
for Issued Shares, together with the amount of any dividends or other
distributions payable with respect to the Issued Shares, being hereinafter
referred to as the "Exchange Fund").
(b) Exchange Procedures with Respect to the Exchanged
Securities. Promptly after the Effective Time, Res-Care shall cause the
Exchange Agent to mail to each holder of record of Exchanged Securities (i)
a letter of transmittal specifying that delivery shall be effected, and
risk of loss and title to the Exchanged Certificates shall pass, only upon
delivery of the Exchanged Certificates (or affidavits of loss in lieu
thereof) to the Exchange Agent, such letter of transmittal to be in such
form and have such other provisions as Res-Care and Company may reasonably
agree (including but not limited to acknowledgments of the restrictions of
applicable securities laws), and (ii) instructions for use in effecting the
surrender of the Exchanged Certificates in exchange for (A) certificates
representing Issued Shares and (B) any unpaid dividends and other
distributions with respect to the Issued Shares and cash in lieu of
fractional shares. Upon surrender of an Exchanged Certificate for
cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, the holder of such Exchanged Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing
that number of whole Res-Care Shares that such holder is entitled to
receive pursuant to this Article II, (y) a check in the amount (after
giving effect to any required tax withholdings) of (A) any cash in lieu of
fractional shares plus (B) any unpaid non-stock dividends and any other
dividends or other distributions that such holder has the right to receive
with respect to the Issued Shares pursuant to the provisions of this
Article II, and the Exchanged Certificate so surrendered shall forthwith be
canceled. No interest will be paid or accrued on any amount payable upon
due surrender of the Exchanged Certificates. In the event of a transfer of
ownership of Exchanged Securities that is not registered in the transfer
records of the Company, a certificate representing the proper number of
Res-Care Shares, together with a check for any cash to be paid upon due
surrender of the Exchanged Certificate, may be issued and/or paid to such a
transferee if the Exchanged Certificate is presented to the Exchange Agent,
properly endorsed or otherwise in proper form for transfer and accompanied
by all documents required to evidence and effect such transfer and to
evidence that any applicable stock transfer taxes have been paid.
(c) Distributions with Respect to Unexchanged Shares; Voting.
(i) All Issued Shares shall be issued and outstanding Res-Care
Shares as of the Effective Time. If a dividend or other distribution is
declared by Res-Care in respect of the Res-Care Shares, the record date
for which is at or after the
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Effective Time, that declaration shall include dividends or other
distributions in respect of all Issued Shares. No dividends or other
distributions in respect of the Issued Shares shall be paid to any
holder of any unsurrendered Exchanged Certificate until such Exchanged
Certificate is surrendered for exchange in accordance with this Section
2.7. Subject to the effect of applicable laws, following surrender of
any such Exchanged Certificate, there shall be issued and/or paid to the
holder of the certificates representing Issued Shares issued without
interest, (A) at the time of such surrender, the dividends or other
distributions with a record date after the Effective Time theretofore
payable with respect to such Issued Shares and not paid and (B) at the
appropriate payment date, the dividends or other distributions payable
with respect to such Issued Shares with a record date after the
Effective Time but with a payment date subsequent to surrender.
(ii) Holders of unsurrendered Exchanged Certificates shall be
entitled to vote after the Effective Time at any meeting of the
shareholders of Res-Care the number of Issued Shares represented by such
Exchanged Certificates, regardless of whether such holders have
exchanged their Exchanged Certificates.
(d) Transfers. After the Effective Time, except with the prior
written consent of Res-Care, there shall be no transfers on the stock
transfer books of Company of the Exchanged Securities that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
certificates are presented to the Company or the Exchange Agent for any
reason, they shall be canceled and exchanged as provided in this Article
II.
(e) Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional Issued Shares will be issued and any holder of
Exchanged Securities entitled to receive a fractional Res-Care Share but
for this Section 2.7(e) shall be entitled to receive a cash payment in lieu
thereof equal to such fractional proportion of the Closing Price. The
fractional share interests of each Shareholder shall be aggregated, and no
Shareholder will receive cash in an amount equal to or greater than the
Closing Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Issued Shares)
that remains unclaimed by the holders of Exchanged Certificates for one
year after the Effective Time shall be paid or returned to Res-Care. Any
holders of Exchanged Certificates who have not theretofore complied with
this Section 2.7 shall thereafter look only to Res-Care for payment of
their Issued Shares and any cash, dividends and other distributions in
respect thereof payable and/or issuable pursuant to Section 2.2, Section
2.7(c) or Section 2.7(e) upon due surrender of their Exchanged Certificates
(or affidavits of loss in lieu thereof), in each case, without any interest
thereon. Notwithstanding the foregoing, none of Res-Care, the Company, the
Exchange Agent or any other individual or entity shall be liable to any
former holder of Exchanged Securities for any amount properly delivered to
a public official pursuant to applicable abandoned property, escheat or
similar laws.
(g) Lost, Stolen or Destroyed Certificates. In the event any
Exchanged Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the holder claiming such certificate
to be lost, stolen or destroyed and, if required by Res-Care, the posting
by such holder of a bond in customary amount as indemnity against any claim
that may be made against it with respect to such
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certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed certificate the Issued Shares and any cash payable and
any unpaid dividends or other distributions in respect thereof pursuant to
Section 2.7(c) or Section 2.7(e) upon due surrender of and deliverable in
respect of the Exchanged Securities represented by such certificate
pursuant to this Agreement.
2.8 COMPANY OPTIONS. At the Effective Time, each Company Option (as
defined in Section 3.5 hereof), whether vested or unvested, shall be exchanged
for Res-Care Shares as provided in Section 2.2(d) and pursuant to the authority
contained in Section 8.10(b) of the Company Stock Option Plan. Not later than
two days prior to the Effective Time, Res-Care shall file a registration
statement on Form S-8, as the case may be (or any successor or other appropriate
forms), or another appropriate form with respect to the Res-Care Shares to be
issued in exchange for the Company Options.
2.9 SHAREHOLDER MEETINGS. The Company and Res-Care will take all action
necessary to convene meetings of holders of all of the respective capital stock
of each as promptly as practicable after the effectiveness of the Registration
Statement (unless otherwise mutually agreed by Res-Care and Company) to consider
and vote upon the approval of this Agreement, the amendment of the terms of the
Redeemable Shares and the Convertible Shares, and the approval of payments to
Vincent D. Pettinelli, Timothy J. Vogel, and Scott T. Macomber, pursuant to
their respective Executive Employment Agreements and the exchange by Timothy J.
Vogel and Scott T. Macomber of their Company Options for Issued Shares in the
case of the Company and approval and issuance of the Res-Care Shares in the
Merger and in exchange for the Company Options in the case of Res-Care. The
parties shall coordinate and cooperate with respect to the timing of the
meetings and shall use commercially reasonable efforts to cause the meeting of
the Shareholders (the "Company's Shareholders' Meeting") and of Res-Care's
shareholders (the "Res-Care's Shareholders' Meeting") to be held as soon as
practicable after the date hereof, provided that the Company's Shareholders'
Meeting shall be held within thirty (30) days after the effectiveness of the
Registration Statement. Except to the extent the Board of Directors of Company
or Res-Care determines in good faith, after the receipt of an opinion of its
outside legal counsel experienced in such matters, that a change in its
recommendation is necessary under applicable law, each of Company's and Res-
Care's Board of Directors shall recommend such approval, shall not withdraw or
modify such recommendation and shall take all lawful action to solicit such
approval. In lieu of calling and convening the Company's Shareholders' Meeting,
the Company, if permitted by applicable law and the Company's Governing
Documents, may obtain approval by the Shareholders of this Agreement and the
Merger through a solicitation of written consents (the "Consent Solicitation")
through an information statement containing an effective prospectus for the
Issued Shares and in form and content satisfactory to Res-Care.
2.10 RES-CARE BOARD OF DIRECTORS. Res-Care shall cause its Board of
Directors, consistent with their fiduciary duties, to appoint (in accordance
with Kentucky law and the Governing Documents of Res-Care) Vincent D. Pettinelli
to become a member of the Res-Care Board of Directors promptly after the
Effective Time.
2.11 ACCOUNTING TREATMENT. It is the intention of the parties hereto that
the Merger will be treated for financial reporting purposes as a
pooling-of-interests and the obligations of Res-Care and the Company to
consummate the transactions contemplated herein shall be conditioned, inter
alia, on the receipt of letters from KPMG LLP and Ernst & Young LLP, in form and
substance reasonably satisfactory to Res-Care and the
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Company, to the effect that the Merger shall qualify as a pooling-of-interests
for financial reporting purposes.
2.12 THE SURVIVING CORPORATION.
(a) At the Effective Time, the Certificate of Incorporation of
Res-Care Sub as in effect immediately prior to the Effective Time shall be
the Certificate of Incorporation of the Surviving Corporation until
thereafter changed or amended as provided herein or by the DGCL.
(b) At the Effective Time, the bylaws of Res-Care Sub as in effect
immediately prior to the Effective Time shall be the bylaws of the
Surviving Corporation until thereafter changed or amended as provided
herein or by the DGCL.
(c) From and after the Effective Time, until successors are duly
elected or appointed and qualified in accordance with applicable law, the
officers of Res-Care Sub at the Effective Time shall become officers of the
Surviving Corporation. Nothing in this Section 2.12 shall be construed to
terminate or otherwise affect the status of any such officer or director as
an employee of the Surviving Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Res-Care and Res-Care Sub as follows:
3.1 ORGANIZATION AND GOOD STANDING. Each of the Target Entities is duly
organized, validly existing, and in good standing under the laws of the
respective state described on Schedule 3.1. Company has provided Res-Care with a
current certificate of existence and good standing (dated within the last 30
days), of each of the Target Entities issued by the Secretary of State (or other
state governmental body authorized to issue the same) of the respective state of
organization of such entity. Company has provided to Res-Care a true and correct
copy of the Governing Documents, together with all amendments thereto, of each
of the Target Entities, under a certificate issued by the President or other
chief executive officer of the respective entity, certifying same and also
certifying that, other than as noted, no other amendments to such instruments
have been adopted or approved.
3.2 FOREIGN QUALIFICATION. The Target Entities are duly qualified or
licensed to do business and in good standing in the respective states set forth
on Schedule 3.2 and such jurisdictions are the only jurisdictions where the
character of their respective properties owned or held under lease or the nature
of their respective business make such qualification necessary and where the
failure to so qualify would not reasonably be expected to have a Material
Adverse Effect on the Target Entities. Company has provided Res-Care with a
current certificate of existence and/or good standing (dated within the last 30
days), issued by the states under which each of the Target Entities have
qualified to do business as a foreign corporation, limited liability company or
partnership, as the case may be.
3.3 POWER, AUTHORITY, VALIDITY AND BINDING EFFECT. Subject only to the
approval of the Shareholders, Company has the corporate power and authority to
execute, deliver and perform its obligations under this Agreement and the other
agreements executed or to be executed by it in connection with this Agreement;
and the execution, delivery and performance by Company of this Agreement, the
Certificate of Merger and the other documents executed or to be executed by it
in connection with this Agreement have been
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duly authorized by all necessary corporate action on the part of Company,
subject to approval of the Shareholders. The execution, delivery and performance
by Company of this Agreement, the Certificate of Merger and any other documents
executed or to be executed by it in connection with this Agreement and the
consummation of the transactions provided for herein have been duly authorized
and approved by Company's Board of Directors, as required under the DGCL and its
Governing Documents. This Agreement, the Certificate of Merger, and the other
agreements executed or to be executed by Company in connection with this
Agreement have been or will have been duly executed and delivered by Company and
are, or will be when executed and delivered, the legal, valid and binding
obligations of Company enforceable in accordance with their terms, subject to
applicable bankruptcy, reorganization, insolvency, moratorium and other laws
affecting creditors' rights generally from time to time in effect and general
equitable remedies.
3.4 COMPLIANCE WITH OTHER INSTRUMENTS. Subject only to the Company
obtaining or making the approvals, consents and filings described in Schedule
3.4 and the expiration of the applicable waiting period under the HSR Act (or
the early termination thereof) and except as would not reasonably be expected to
have a Material Adverse Effect on the Target Entities, neither the execution and
delivery by Company of this Agreement, the Certificate of Merger, or any other
documents executed or to be executed by Company pursuant to this Agreement, nor
the consummation by it of the transactions contemplated hereby or thereby, will
violate, breach, be in conflict with, or constitute a default under, or permit
the termination or the acceleration of the maturity, or result in the imposition
of any lien, claim or encumbrance upon any property or asset of any of the
Target Entities, pursuant to the Governing Documents of any of the Target
Entities or pursuant to any note, bond, indenture, mortgage, deed of trust,
evidence of indebtedness, loan or lease agreement, guaranty, other agreement or
instrument, judgment, order, injunction or decree by which any of the Target
Entities is bound, to which any of them is a party, or to which any asset of any
of them is subject.
3.5 CAPITALIZATION OF TARGET ENTITIES. The authorized capital stock of
Company consists solely of the following (after giving effect to the
transactions described in Section 8.5 hereof): (a) 15,000,000 shares of common
stock, par value $.01 per share, of which 5,716,883 shares are issued and
outstanding; and (b) 5,000,000 shares of Preferred Stock, par value $.01 per
share, 1,000,000 of which have been designated Series A Redeemable Preferred
Stock, all of which shares are issued and outstanding, and 3,684,364 of which
have been designated Series B Convertible Preferred Stock, all of which shares
are issued and outstanding. All of the issued and outstanding shares of Company
are owned beneficially and of record by the individuals or entities and in the
amounts specified on Schedule 3.5(a). The Company has issued and outstanding
warrants to purchase 552,654 shares of common stock of the Company, which
Company Warrants are held beneficially and of record by the individuals or
entities and in the amounts specified on Schedule 3.5(b). The Company has issued
and outstanding options to purchase 1,168,568 shares of common stock of the
Company pursuant to the Company Stock Option Plan (the "Company Options"), which
Company Options are currently vested in respect of 484,162 shares of common
stock of the Company and none of which Company Options are currently
exercisable. The holders of the Company Options, the number of Company Options
issued to each of them, the number of Company Options which are currently vested
and the exercise price per share of common stock of Company covered by such
options are set forth on Schedule 3.5(c). Except as described on Schedules
3.5(a), 3.5(b) or 3.5(c), there are no other shareholders of Company and no
other person possesses any rights, warrants or options to acquire any of the
capital stock of Company. All of the
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issued and outstanding shares of capital stock of Company have been duly
authorized and validly issued and are fully paid and nonassessable and free from
any preemptive rights. There are no shares of capital stock of Company held in
its treasury. All of the issued and outstanding capital stock or equity
interests of the Subsidiaries are owned beneficially and of record by the Target
Entities. There are no other shareholders or holders of equity interests of the
Subsidiaries and no other person possesses any rights or options to acquire any
of the capital stock or equity interests of the Subsidiaries. Except as set
forth on Schedule 3.5(d), there are no voting trusts, shareholder agreements, or
other voting arrangements among the Shareholders, Company or any other parties
relating to any of the shares of capital stock or equity interest of the Target
Entities. Except as set forth on Schedules 3.5(a), 3.5(b), 3.5(c) or 3.5(d), (x)
there is no outstanding subscription, contract, convertible or exchangeable
security, option, warrant, call, conversion right, stock appreciation right,
commitment, or other right obligating any of the Target Entities to issue, sell,
exchange or otherwise dispose of, or to purchase, redeem or otherwise acquire,
shares of, or securities convertible into or exchangeable for, capital stock or
equity interests of any of the Target Entities, to distribute to holders of any
class of its capital stock any evidences of indebtedness or assets, or to make
any payment to any party based upon the fair market value or book value of any
of the Target Entities, and (y) none of the Target Entities has any obligation
(contingent or other) to purchase, redeem or otherwise acquire or register under
the Securities Act or any state securities law any shares of the capital stock
or equity interests of the Target Entities or any interest therein or to pay any
dividend or make any other distribution in respect thereof. All securities
heretofore issued or sold by the Target Entities were sold and/or issued in
compliance with all applicable federal and state securities laws, rules and
regulations. Other than the Subsidiaries, as disclosed in the Financial
Statements (as described in Section 3.6) or as set forth on Schedule 3.5(e),
Company does not own, beneficially or of record, directly or indirectly, any
shares of capital stock, partnership interest, or other form of equity interest,
or any debenture, note or other form of indebtedness in any other entity.
3.6 FINANCIAL STATEMENTS AND RECORDS. Company has previously delivered to
Res-Care the audited consolidated balance sheets of the Company as of December
31, 1996, December 31, 1997 and December 31, 1998, and the related audited
consolidated statements of income, cash flows and stockholders' equity for each
of the years then ended and the related notes (collectively, the "Financial
Statements"), prepared by the Company and audited by Ernst & Young LLP, the
independent auditors of the Company. The Financial Statements (x) were prepared
from the books and records of the Target Entities and (y) present fairly in all
material respects the assets, liabilities and consolidated financial position of
the Company as of the respective dates specified therein, and the income, cash
flows and stockholders' equity for the respective periods then ended, all in
conformity with generally accepted accounting principles applied on a consistent
basis ("GAAP"). Except as set forth on Schedule 3.6, after December 31, 1995,
there has been no material change in accounting principles or practices
applicable to, or methods of accounting utilized by, any of such entities. The
books and records of each of the Target Entities have been and are being
maintained in accordance with good business practice, reflect only valid
transactions, are correct and complete in all material respects and accurately
reflect in all material respects the basis for the financial position and
results of operations of such entities on a consolidated basis. The consolidated
stockholders' equity of the Company as of the date hereof (determined in
accordance with GAAP) is not less than the consolidated stockholders' equity of
the Company, as reflected in the balance sheet of the Company at December 31,
1998 (the "Acquisition Balance Sheet"). The total consolidated liabilities of
the Company (excluding all preferred stock, accrued dividends on
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preferred stock and warrants) as of the date hereof minus the total consolidated
current assets of the Company as of the date hereof (each determined in
accordance with GAAP) is not greater than $53 million. For purposes of making
the calculations provided for in the preceding two sentences, (1) any changes to
stockholders' equity and/or consolidated liabilities which are a result of
expenses incurred by the Company or any of the other Target Entities in
connection with the transactions provided for in this Agreement or as a result
of the Affiliate Transactions (as defined in Section 8.5 hereof) shall be
excluded and (2) any changes to stockholders' equity and/or consolidated
liabilities which are a result of transactions or purchases approved in writing
by Res-Care shall be excluded.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent (a)
reflected in the Acquisition Balance Sheet, or (b) incurred since December 31,
1998 in the ordinary course of business, or (c) set forth in Schedule 3.7, none
of the Target Entities has any liabilities or obligations of any kind or nature
for which appropriate accruals or reserves have not been maintained as reflected
on the Acquisition Balance Sheet (whether secured or unsecured, absolute,
accrued, contingent or otherwise and whether due or to become due), for any
period ending on or before the date thereof, which liabilities or obligations
could, individually or in the aggregate, have a Material Adverse Effect on the
Target Entities.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1998, except
(i) as otherwise set forth in Schedule 3.8 or (ii) as otherwise expressly
referred to in this Agreement, none of the Target Entities have:
(a) changed or amended its Governing Documents;
(b) incurred any obligation or liability (fixed or contingent), except
normal trade or business obligations incurred in the ordinary course of
business, none of which individually or in the aggregate would have a
Material Adverse Effect on the Target Entities;
(c) discharged or satisfied any lien, security interest, charge or
other encumbrance or paid any obligation or liability (fixed or
contingent), other than in the ordinary course of business, consistent with
past practices;
(d) mortgaged, pledged or subjected to any lien, security interest,
charge or other encumbrance any of its assets or properties;
(e) transferred, leased or otherwise disposed of any of its assets or
properties, except for fair consideration in the ordinary course of
business, consistent with past practices, or acquired any assets or
properties, except in the ordinary course of business, consistent with past
practices;
(f) declared, set aside or paid any distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital
stock or equity interests or redeemed or otherwise acquired any of its
capital stock or equity interests or split, combined or otherwise similarly
changed its capital stock or equity interests or authorized the creation or
issuance of or issued or sold any capital stock or equity interests or any
securities or obligations convertible into or exchangeable therefor, or
granted any person or entity any right to acquire any capital stock or
equity interests from any of the Target Entities, or agreed to take any
such action;
(g) made any investment of a capital nature, whether by purchase of
stock or securities, contributions to capital, property transfers or
otherwise, in any partnership,
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corporation or other entity, or entered into any agreement or commitment to
do the same;
(h) made or committed to any acquisition of the stock or equity
interests of any entity or the operating assets of any going business, or,
other than in the ordinary course of business, consistent with past
practices, purchased any property or assets;
(i) forgiven, released, canceled, compromised or permitted to lapse
any debt or claim other than in the ordinary course of business, consistent
with past practices;
(j) waived, released, transferred or granted any rights or permitted
any License or permit to lapse, or terminated or permitted to terminate any
Management Agreement;
(k) except for wage increases made in the ordinary course of its
business and consistent with past practices and consistent with the
documents presented to Res-Care, made or granted any wage or salary
increase applicable to any group or classification of employees generally,
entered into or modified in any respect any employment contract with, or
made any loan to, or entered into any transaction of any other nature with,
any Shareholder, any officer or employee of any of the Target Entities;
(l) amended, terminated or waived any material right under any
agreement, contract or other written commitment to which it is party or by
which it is bound;
(m) materially reduced the amount of coverage provided by existing
casualty and liability insurance policies with respect to the business or
properties of any of the Target Entities;
(n) entered into any transaction other than on an arm's length basis
or other than in the ordinary course of business;
(o) entered into any letters of intent or commitments to acquire the
business or assets of any other person or entity or consummated any such
acquisitions; or
(p) suffered any casualty loss or damage (whether or not such loss or
damage shall have been covered by insurance), which casualty loss or damage
would have a Material Adverse Effect on the Target Entities.
3.9 GOVERNMENTAL AND THIRD PARTY APPROVALS. Except as set forth on
Schedule 3.9, no order, authorization, approval or consent from, or filing with,
any Agency or any other person or entity is required for the execution, delivery
and performance of this Agreement or the Certificate of Merger by Company, is
necessary in order to ensure the legality, validity, binding effect or
enforceability of this Agreement or the Certificate of Merger, or is necessary
in order that the business of each of the Target Entities can be conducted
immediately following the Effective Time substantially in the same manner as
heretofore conducted, except where the failure to obtain such order,
authorization, approval or consent would not reasonably be expected to have a
Material Adverse Effect on the Target Entities.
3.10 TITLE TO PROPERTIES, ABSENCE OF LIENS AND ENCUMBRANCES. Except as
set forth on Schedule 3.10, each of the Target Entities has good and marketable
title to all assets and properties owned by it, in each case free and clear of
all liens, charges, security interests or other encumbrances of any nature
whatsoever, other than (i) liens for ad valorem taxes not yet due and payable,
(ii) mechanic's, materialman's, landlord's liens and similar statutory liens
arising in the ordinary course of business, or (iii) liens granted in
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connection with that certain Amended and Restated Credit and Security Agreement
dated as of October 2, 1998, and all amendments thereto, and that certain
Restructuring Agreement dated December 17, 1998, and all amendments thereto,
(collectively the "Company Loan Documents"), all of which would not have a
Material Adverse Effect on the Target Entities. True copies of all of the
Company Loan Documents have been delivered to Res-Care. Except for any
incidental repairs required in the ordinary course of business, all of the
Facilities and the Personal Property owned or used by the Target Entities are in
a good state of repair (ordinary wear and tear excepted) and operating
condition, which in all events shall be at least that condition and level of
repair necessary to properly utilize the respective asset under the Licenses and
Program Agreements and under any applicable standards of the Agencies or
requirements of the Management Agreements, except where the failure thereof
would not reasonably be expected to have a Material Adverse Effect on the Target
Entities. All of the Personal Property, and all of the Supplies are in a
sufficient quantity and adequate quality to operate the Facilities or to conduct
operations under the Licenses, the Program Agreements and/or Management
Agreements lawfully and consistent with the customary practice of the respective
Target Entity, in accordance with applicable rules and regulations and the
applicable provisions of the Licenses, the Program Agreements and/or Management
Agreements, except where the failure thereof would not reasonably be expected to
have a Material Adverse Effect on the Target Entities. All utilities, including,
without limitation, gas, electricity, telephone, sewer (or other approved
system) and water, have been installed to and in the Facilities and all such
utilities are currently in service and adequate for the operation of the
Facilities in accordance with the requirements of the Agencies, the Program
Agreements and/or Management Agreements, except where the failure thereof would
not reasonably be expected to have a Material Adverse Effect on the Target
Entities. Except for those assets acquired since the date of the Acquisition
Balance Sheet, all properties and assets owned by the Target Entities are
reflected on the Acquisition Balance Sheet. None of the Target Entities own any
real property other than as disclosed on Schedule 3.10. Schedule 1.1(b) contains
a true and complete description of all of the properties owned or leased by the
Target Entities or the Managed Providers, together with the buildings, fixtures
and improvements located thereon, (i) which serve as administrative or corporate
offices of any of the Target Entities, (ii) at which any of the Target Entities
provide MR/DD Services, or (iii) at which any of the Managed Providers conduct
the Managed Operations.
3.11 ZONING. Each of the Facilities fully conforms with all current
applicable zoning laws and building codes, statutes, rules, regulations and
restrictions, the failure to conform with which would have a Material Adverse
Effect on the respective Target Entity. The provision of MR/DD Services at the
Facilities does not violate any federal, state, local governmental building,
zoning, health, safety or other laws, ordinances or regulations, or any
applicable private restrictions, except where such violations of which would not
have a Material Adverse Effect on the Target Entities. No written notice of the
violation of any of said laws, ordinances, regulations, codes or restrictions
has been received by any of the Target Entities, the Group I Lessors, or the
Group II Lessors.
3.12 LIST OF PROPERTIES, CONTRACTS AND OTHER DATA. Annexed hereto as
Schedule 3.12 is a list setting forth the following:
(a) a description of each lease of real or personal property (other
than leases of personal property (i) requiring future annual payments of
less than $25,000, (ii) requiring future payments in the aggregate of less
than $50,000 or (iii) which is terminable by the respective Target Entity
without breach or penalty on less than sixty-one (61) days' written notice
provided that it does not require payments or
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result in obligations during such period of more than $50,000) to which any
of the Target Entities is a party, either as lessee or lessor, including a
description of the parties to each such lease, the property to which each
such lease relates, and the rental term and monthly (or other) rents
payable under each such lease;
(b) all management agreements, employment agreements, consulting
agreements, and independent contractor agreements (other than the
Management Agreements) to which any of the Target Entities is a party
(other than agreements which (i) provide for future annual payments of less
than $25,000, (ii) provide for future payments in the aggregate of less
than $50,000 or (iii) which is terminable by the respective Target Entity
without breach or penalty on less than sixty-one (61) days' written notice
provided that it does not require payments or result in obligations during
such period of more than $50,000);
(c) all guarantees, mortgages, deeds of trust, indentures and loan
agreements to which any of the Target Entities is a party (excluding
inter-company loans and guarantees); and
(d) all contracts (other than those described in clauses (a), (b) or
(c)) to which any of the Target Entities is a party, or to which any of the
Target Entities or any of its or their respective assets or properties is
subject, provided, however, that there shall be excluded from said Schedule
3.12 pursuant to this clause (d) any supply contracts with suppliers and
other such contracts incurred in the ordinary course of business and
consistent with past practice, other than any such contract which (i) is a
contract or group of related contracts which exceeds $25,000 in amount, or
(ii) cannot be performed in the normal course within six months after the
Effective Time without breach or penalty.
True and complete copies of all documents and complete descriptions of all
binding oral commitments (if any) referred to in said Schedule 3.12 and all
Management Agreements, Program Agreements and Facility Leases have been provided
or made available to Res-Care. All provisions of the contracts referred to in
such Schedule and all Management Agreements, Program Agreements and Facility
Leases are valid and enforceable obligations of the respective Target Entity, as
applicable, which is a party thereto and, to the Knowledge of the Target
Entities, the other parties thereto. None of the Target Entities nor, to the
Knowledge of the Target Entities, any other party is in default under any of the
contracts referred to in such Schedule or under any of the Management
Agreements, Program Agreements or Facility Leases. None of the Target Entities
have been notified in writing of any claim that any contract referred to in such
Schedule or that any of the Management Agreements, Program Agreements or
Facility Leases is not valid and enforceable in accordance with its terms for
the periods stated therein, or that there is under any such contract any
existing default or event of default or event by any of the Target Entities
which with notice or lapse of time or both would constitute such a default.
3.13 THIRD-PARTY PAYOR AND CUSTOMER CONTRACTS. Except as set forth in
Schedule 3.13, none of the Target Entities have lost any Program Agreement or
Management Agreement since December 31, 1998. None of the Target Entities has
been notified (whether in writing or verbally) that in the event of a sale or
change of ownership of any of the Target Entities any of the Program Agreements
or Management Agreements would be terminated or modified in any adverse respect
or the respective entity would lose or suffer diminution in the contractual
relationships under the Program Agreements or Management Agreements. Except as
set forth on Schedule 3.13, none of the Target Entities is a party to any
covenant or agreement which prohibits, limits, restricts or
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otherwise adversely affects the right of any of such entities to provide MR/DD
Services or engage in any other business.
3.14 LICENSURE/CERTIFICATION. Except as provided in Schedule 3.14, each
of the Target Entities and, to the Knowledge of the Target Entities, its
professional staff and the Managed Providers, has all Licenses necessary to
provide and receive reimbursement for MR/DD Services or Managed Services
rendered thereby. Each such License is in full force and effect and no default,
or event which with notice or the passage of time would constitute a default, by
any of the Target Entities has occurred and is continuing thereunder. The
business of each of the Target Entities is being conducted in compliance with
all applicable laws, ordinances, rules and regulations of all Agencies relating
to their respective properties or applicable to its or their respective
businesses, except where such noncompliance would not have a Material Adverse
Effect on the Target Entities. Schedule 1.1(g) contains a true and complete list
of all entities and governmental agencies for which any of the Target Entities
provide Management Services. Except as set forth on Schedule 3.14, there are no
waivers, "grandfather" provisions, or variances or exclusions under any such
Licenses. Company has delivered or made available to Res-Care true and correct
copies of the most recent annual and complaint surveys or related reports of the
Agencies applicable to the Target Entities and the Managed Providers and their
respective operations. True and complete copies of any and all plans of
correction submitted in response to said surveys and related reports have also
been provided to Res-Care. After the Closing, neither the Company, nor any of
the Target Entities nor any of the Managed Providers will have any liability,
damage, cost or expense relating to or arising out of any claim, deficiency,
vendor hold, cost or expense attributable to any audit by, adjustment of
reimbursement rates by or proceeding before any Agency relating to any period
prior to the Closing, except to the extent properly accrued or otherwise
reflected in the Financial Statements or except as would not reasonably be
expected to have a Material Adverse Effect on the Target Entities. After the
Closing, each of the Target Entities will be entitled to operate and bill under
the Licenses and its respective third-party payor agreements on a prospective
basis under the identical circumstances and conditions as applicable on the date
hereof and as reflected in the Financial Statements. The Target Entities have
dealt with and acted as a custodian for the Client Trust Accounts in full
compliance with applicable law and all applicable standards, rules and
regulations of all Agencies. Except as provided for in the Financial Statements,
there is no shortage or shortfall in any of the Client Trust Accounts.
3.15 LITIGATION, PROCEEDINGS. Schedule 3.15 sets forth a complete list
and an accurate description of all claims, actions, suits, proceedings and
investigations pending or, to the Knowledge of the Target Entities, threatened,
by or against any of (i) the Target Entities, (ii) its or their respective
properties, assets, rights or businesses or (iii) any of its or their officers,
directors or employees in connection with the business or affairs of any of the
Target Entities. There is no basis for any other such claim, action, suit,
proceeding or investigation that is not fully covered by insurance (subject to
customary deductibles) that would not, individually or in the aggregate, be
likely to have a Material Adverse Effect on the Target Entities. There are no
actions, suits, proceedings or claims pending before or by any court,
arbitrator, or Agency against or affecting any of the Target Entities that would
enjoin or prevent the consummation of the transactions contemplated by this
Agreement.
3.16 TAXES; TAX MATTERS. Each of the Target Entities has duly filed or
caused to be filed (or obtained valid, currently effective extensions for
filing) all federal, state, local and foreign income, franchise, provider,
informational, excise, payroll, sales and use, property, withholding and other
tax returns, reports, estimates and information and other
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statements or returns (collectively "Tax Returns") required to be filed by or on
behalf of it pursuant to any applicable federal, state, local or foreign tax
laws for all years and periods for which such Tax Returns have become due, the
failure of which to file would have a Material Adverse Effect on the Target
Entities. All such Tax Returns were correct in all respects as filed and reflect
in all respects the federal, state, local and foreign income, franchise,
provider, informational, excise, payroll, sales and use, property, withholding
and other taxes, duties, imposts and governmental charges (and charges in lieu
of any thereof), together with interest, any additions to tax and penalties
(collectively "Taxes") required to be paid or collected by (or allocable to)
each of the Target Entities, except to the extent that errors, deficiencies, and
the like would not have a Material Adverse Effect on the Target Entities. Each
of the Target Entities (i) has paid or caused to be paid all Taxes as shown on
Tax Returns filed by it or on any assessment received by it and (ii) has
properly and fully recorded as accrued or deferred liabilities in the Financial
Statements all Taxes for any period from the date of the last reporting period
covered by such Tax Returns. No Target Entity has any material liability for
Taxes for any period ending before or including the Closing Date other than
amounts that are properly and fully recorded as accrued or deferred liabilities
in the Financial Statements. Each deferred tax asset of a Target Entity recorded
on the Financial Statements accurately reflects the value of such asset in
accordance with generally accepted accounting principles. Since December 31,
1997, none of the Target Entities has made or changed any Tax election, settled
any Tax audit or filed any amended Tax Return. For the taxable periods described
on Schedule 3.16, the Target Entities listed on Schedule 3.16 had properly
elected and were treated as an S corporation within the meaning of section
1361(a) of the Internal Revenue Code of 1986, as amended ("Code"). Each of such
elections was validly made and is effective for all such periods. Except as set
forth on Schedule 3.16, during such periods, each of such elections were valid
and effective for purposes of all states in which such Target Entity was taxable
for income tax purposes. Except as set forth on Schedule 3.16, none of the
Target Entities has joined in the filing of a consolidated federal income Tax
Return other than consolidated federal income Tax Returns with respect to which
the Company is the common parent. Schedule 3.16 lists any entity which is not a
Target Entity, but with which the Target Entities joined in filing a
consolidated Tax Return. No consent under section 341(f) of the Code has ever
been filed by or on behalf of any Target Entity. None of the Target Entities has
received any written notice of any audit, or any dispute or claim being
threatened by any relevant taxing authority concerning any Tax Return or
liability for Taxes. Each of the Target Entities has withheld or collected from
each payment to each of its employees (or has otherwise paid or made provision
for) the amount of all Taxes (including, but not limited to, federal income
taxes, Federal Insurance Contribution Act taxes, state and local income and wage
taxes, payroll taxes, workers' compensation and unemployment compensation taxes)
required to be withheld or collected therefrom, and each of the Target Entities
has paid (or caused to be paid) the same in respect of its employees when due,
except to the extent that the failure to so withhold or collect and pay would
not have a Material Adverse Effect on the Target Entities.
3.17 LABOR MATTERS. Except as set forth on Schedule 3.17, no collective
bargaining agreement is applicable to any employees of any of the Target
Entities. Schedule 3.17 indicates: each collective bargaining agreement to which
any Target Entity is a party; the expiration date of each such agreement and the
union with which each agreement exists; the locations of each Target Entity
covered by each agreement; and the number of employees at each location and
under each agreement. The collective bargaining agreements described on Schedule
3.17 expire on the dates shown on such Schedule. To the Knowledge of the Target
Entities, except as set forth on Schedule 3.17, since the
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respective dates of execution of such collective bargaining agreements, none of
the Target Entities have had any substantive discussion with any of the unions
which are parties to the collective bargaining agreements described on Schedule
3.17 regarding the extension, renewal, modification, amendment or termination of
any of such agreements. Except as set forth on Schedule 3.17, there are not any
disputes between any of the Target Entities and any such employees that would
reasonably be expected to have a Material Adverse Effect on the Target Entities
or any unresolved labor union grievances or unfair labor practice or labor
arbitration proceedings pending or, to the Knowledge of the Target Entities,
threatened, relating to the business of any of the Target Entities. Except as
set forth on Schedule 3.17, the Target Entities have no Knowledge of any
organizational efforts presently being made or threatened involving any of such
employees that would reasonably be expected to have a Material Adverse Effect on
the Target Entities. Each strike contingency plan maintained by each Target
Entity is identified on Schedule 3.17. Schedule 3.17 accurately reflects the
number of employees of the Target Entities subject to collective bargaining
agreements for each state in which such employees are located. None of the
Target Entities have failed to comply in any material respect with any laws
relating to employment, including any provisions thereof relating to wages,
hours, collective bargaining, the payment of social security and other payroll
or similar taxes, equal employment opportunity, employment discrimination or
harassment and employment safety, and none of the Target Entities are liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. Except as set forth on Schedule 3.17, there are no proceedings
pending or, to the Knowledge of the Target Entities, threatened, before the
National Labor Relations Board with respect to any employees of any of the
Target Entities. Except as set forth on Schedule 3.17, there are no
discrimination or harassment charges (relating to sex, age, religion, race,
national origin, ethnicity, sexual orientation, handicap or veteran status)
pending or, to the Knowledge of the Target Entities, threatened, before any
federal or state agency or authority against any of the Target Entities. Each of
the Target Entities has handled and disposed of all medical wastes or
bio-hazardous materials in compliance with all applicable federal, state or
local statutes, rules or regulations and in such a manner that does not give
rise to any claim of liability by any employee, client or independent contractor
of any of the Target Entities, or any other party that would reasonably be
expected to have a Material Adverse Effect on the Target Entities.
3.18 INSURANCE. All policies of fire, liability, workers' compensation,
malpractice and professional liability and other forms of insurance providing
insurance coverage to or for any of the Target Entities are listed in Schedule
3.18 and (i) the Target Entities are named insureds under such policies, (ii)
all premiums required to be paid with respect thereto covering all periods up to
and including the Effective Time have been paid, (iii) there has been no lapse
in coverage under such policies during any period for which any Target Entity
has conducted its operations, (iv) except as disclosed on Schedule 3.18, each
such policy has been issued on an "occurrence" basis, and (v) no notice of
cancellation or termination has been received with respect to any such policy.
After the Effective Time, none of the Target Entities will have any obligation
for retrospective premiums for any period prior to the Effective Time. All such
policies are in full force and effect and will remain in full force and effect
to and including the Effective Time, unless replaced with comparable insurance
policies having comparable terms and conditions. Except for those insurance
policies identified on Schedule 3.18, all such insurance policies of the Target
Entities will continue to be in effect, unless replaced, immediately after the
Effective Time, without limit as to time, for occurrences prior to the Effective
Time.
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Except as set forth on Schedule 3.18, since December 31, 1998, there have been
no claims made with respect to such policies.
3.19 ACCOUNTS RECEIVABLE. The accounts receivable reflected in the
Financial Statements, including the Acquisition Balance Sheet, and all accounts
receivable arising after December 31, 1998, arose from bona fide transactions in
the ordinary course of business with third parties, and the MR/DD Services or
Managed Services involved have been performed to the respective clients and/or
the account obligors, and no further services are required to be rendered in
order to entitle the respective Target Entity to collect the respective accounts
receivable in full. There is no dispute as to the validity or collectability of
such accounts receivable, except for such disputes that are reflected in the
Financial Statements, including the Acquisition Balance Sheet, as a reserve for
uncollectible accounts, and neither any such account receivable nor any note
receivable of any of the Target Entities (i) has been assigned or pledged to any
other person, firm or corporation other than as set forth on Schedule 3.19 or
(ii) is subject to any right of set-off in respect of any obligations of the
Target Entities.
3.20 BOOKS AND RECORDS. Except as set forth on Schedule 3.20, the minute
books and stock or similar record books of each of the Target Entities (i) are
complete and correct in all material respects and adequately reflect all action
taken at all meetings of the shareholders or interest holders, as applicable,
and Board of Directors or other governing body of such entities, and (ii)
properly and accurately record the issuance and transfer of all shares of
capital stock of or equity interests of such entities.
3.21 EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.21(a) lists each bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership,
stock bonus, stock purchase, restricted stock, stock option, termination,
severance, change of control, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors maintained by any of the Target Entities or
to which any of the Target Entities contributes or is required to
contribute or in which any employee of the Target Entities participates
(individually, a "Plan" and collectively, the "Plans"). Each of the Plans
has been operated and administered in all material respects in accordance
with applicable laws, including but not limited to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the Code.
(b) Except as set forth in Schedule 3.21(b), there are no pending or,
to the Knowledge of the Target Entities, threatened, claims by or on behalf
of any of the Plans, by any employee or beneficiary covered under such Plan
or otherwise involving any such Plan or any of its fiduciaries (other than
for routine claims for or disputes concerning benefits).
(c) Except as set forth in Schedule 3.21(c), (i) each Plan subject to
section 401(a) of the Code qualifies thereunder and any trust forming part
of such Plan is exempt from taxation pursuant to section 501(a) of the
Code, (ii) each trust subject to section 501(c)(9) of the Code qualifies
for exemption from federal income tax thereunder, and (iii) any Plan
subject to section 125 or 129 of the Code satisfies the requirements of
that Code section.
(d) Except as set forth in Schedule 3.21(d), none of the Target
Entities has maintained, contributed to, been required to contribute to or
has any liability with respect to, nor do any employees of any Target
Entity participate in, a "multi-
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employer plan" (as defined in Section 3(37) of ERISA) or a "defined benefit
plan" (as defined in Section 3(35) of ERISA).
(e) Except as set forth in Schedule 3.21(e), none of the Target
Entities has incurred any liability as of the Effective Time with respect
to any Plan under ERISA (including, without limitation, Title I or Title IV
of ERISA), the Code or other applicable law, rules or regulations which has
not been satisfied in full to the extent then due, and, to the Knowledge of
the Target Entities, no event has occurred, and there exists no condition
or set of circumstances which could result in the imposition of any
liability or penalty under ERISA, the Code or other applicable law, rules
or regulations with respect to any of the Plans (other than the payment of
routine claims for benefits, insurance premiums or contributions required
under the terms of the Plans).
(f) Except as set forth in Schedule 3.21(f), no Plan, other than a
Plan which is an employee pension benefit plan (within the meaning of
Section 3(2)(A) of ERISA), provides benefits, including without limitation,
death, health or medical benefits (whether or not insured), with respect to
current or former employees of the Target Entities beyond their retirement
or other termination of service with the Target Entities (other than (i)
coverage mandated by applicable law, (ii) deferred compensation benefits
accrued as liabilities on the books of the Target Entities or (iii)
benefits the full cost of which is borne by the current or former employee
(or his beneficiary)).
(g) Except as set forth in Schedule 3.21(g), the consummation of the
transactions contemplated by this Agreement will not entitle any current or
former employee, officer or director of the Target Entities to severance
pay, unemployment compensation or any other payment from the Target
Entities, accelerate the time of payment or vesting, increase the amount of
compensation or benefits due any such employee, officer or director, or
result in any breach or violation of, or a default under, any of the Plans.
(h) The Target Entities have provided or made available to Res-Care,
its counsel or accountants, true and complete copies of the following for
each Plan, as applicable: (i) the Plan and all amendments thereto; (ii) the
summary plan description of the Plan; (iii) the trust agreement, insurance
policy or other instrument relating to the funding of the Plan; (iv) the
three most recent Annual Reports (Form 5500 series) and all accompanying
schedules filed with the Internal Revenue Service or United States
Department of Labor with respect to the Plan; (v) the three most recent
audited financial statements for the Plan; and (vi) the policy of fiduciary
liability insurance (and agreements related thereto) maintained in
connection with the Plan.
(i) Except as set forth on Schedule 3.21(i), all filings with the
Internal Revenue Service, Department of Labor and any other governmental
agency having authority over any Plan have been prepared in material
compliance with ERISA, the Code and all other applicable laws, rules and
regulations and have been filed by or on behalf of the Plan or the Target
Entities on a timely basis.
(j) All contributions required to be made under the terms of any of
the Plans as of the date hereof have been timely made or have been
appropriately accrued as an expense on the Acquisition Balance Sheet (or if
incurred after the date of the Acquisition Balance Sheet, have been
properly recorded in the accounting records of
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the Target Entities). None of the Target Entities have any obligations for
retiree health and life benefits under any of the Plans. Except as set
forth in Schedule 3.21(j), the Target Entities may amend or terminate each
of the Plans under its terms at any time without incurring any material
liability thereunder.
(k) Except as set forth on Schedule 3.21(k), no compensation payable
by any of the Target Entities to any of their employees under any existing
Plan (including by reason of the transactions contemplated hereby) or
agreement may be subject to disallowance of a deduction for Federal income
tax purposes under section 162(m) or section 280G of the Code.
(l) Except as set forth in Schedule 3.21(l), none of the Target
Entities has amended, modified, failed to renew or terminated any Plan
since December 31, 1998, other than changes required by applicable law, and
none of the Target Entities has made or committed to make any increase of
contributions or benefits under any Plan which would become effective after
the date hereof, other than increased contributions resulting from
application of a benefit contribution or allocation formula in effect
before December 31, 1998.
3.22 TRANSACTIONS WITH AFFILIATES. Except as set forth on Schedule 3.22,
and except for any intercompany transactions solely among the Target Entities
(i) there are no contracts for the provision of goods or services to any of the
Target Entities by any Affiliate of the Company, including but not limited to
the Group I Lessors or Group II Lessors (collectively, the "Seller Group"), and
(ii) there are no facilities occupied in whole or in part by any of the Target
Entities and no other property, assets, franchises, licenses or rights used by
any of the Target Entities that are owned, leased by or to, or occupied by any
member of the Seller Group.
3.23 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Section 3.23, the following terms shall
have the following meanings:
"Environmental Law" means any applicable federal, state or local law
(including case law), ordinance, rule or regulation of the United States
and any other jurisdiction within the United States now effective and any
order, to which any of the Target Entities is a party or is otherwise
directly bound of the United States or other jurisdiction within the United
States now effective relating to: (i) human health, (ii) the environment,
(iii) emissions, discharges or releases of pollutants, contaminants,
chemical substances or mixtures, Hazardous Substances or wastes into the
environment, or (iv) the processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, chemical
substances or mixtures, Hazardous Substances or wastes or the clean-up or
other remediation thereof or relating to the presence of asbestos or
presumed asbestos containing material in any building or other structure.
"Hazardous Substances" means any oil, used oil, polychlorinated
biphenyl, or any other substance, whether liquid, solid or gas (i) listed,
identified or designated as hazardous or toxic under any Environmental Law,
(ii) which, applying criteria specified in any Environmental Law, is
hazardous or toxic, or (iii) the use or disposal of which is regulated
under any Environmental Law.
(b) None of the Target Entities or any person or entity acting at
their direction, and no other person or entity, have discharged, released
or emitted, or have, to the
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Knowledge of the Target Entities, threatened to discharge, release or emit
Hazardous Substances into the air, water, surface water, ground water, land
surface or subsurface strata or transported to or from the property of any
of the Target Entities except in compliance with all Environmental Laws and
except for incidental releases of Hazardous Substances in amounts or
concentrations which would not reasonably be expected to give rise to any
claims or liabilities against the Target Entities under any Environmental
Law. None of the Target Entities or any other person or entity acting at
their direction has arranged for disposal, treatment or transport of
Hazardous Substances from the property of any of the Target Entities.
(c) Each of the Target Entities possesses all material licenses,
permits and other approval and authorizations that are required under, and
is, and at all times in the past has been in material compliance with all
Environmental Laws.
(d) None of the Target Entities have received any notification that
there is any violation of any Environmental Law with respect to the
business and properties of the Target Entities and none of the Target
Entities have received any notification pursuant to any provision of the
Comprehensive Environmental Response Compensation and Liability Act, as
amended ("CERCLA"), or any similar state statute. No portion of the real
property currently or previously owned or leased by any of the Target
Entities has been listed or proposed for listing on the National Priority's
List or the CERCLIS maintained by the United States Environmental
Protection Agency or any similar list maintained by any state.
(e) To the Knowledge of the Target Entities, there are no underground
storage tanks or facilities (as defined in section 101(9)(B) of CERCLA) on
any portion of the real property currently or previously owned or leased by
any of the Target Entities and any underground storage tank or facility
previously located thereon has been removed on a timely basis in compliance
with all applicable Environmental Law.
3.24 ABSENCE OF CERTAIN BUSINESS PRACTICES. None of the Target Entities
nor any officer or director of the Target Entities nor, to the Knowledge of the
Target Entities, any other person or entity acting on behalf of any of the
Target Entities, including without limitation the Managed Providers, acting
alone or together, has (i) received, directly or indirectly, any rebates,
payments, commissions, promotional allowances or any other economic benefits,
regardless of their nature or type, from or on behalf of any client,
governmental employee or other person or entity with whom any of the Target
Entities has done business directly or indirectly, or (ii) directly or
indirectly, given or agreed to give any gift or similar benefit to any client,
governmental employee or other person or entity who is or may be in a position
to help or hinder the business of any of the Target Entities (or assist any of
the Target Entities in connection with any actual or proposed transaction)
which, in the case of either clause (i) or clause (ii) above, would reasonably
be expected to subject any of the Target Entities to any damage or penalty in
any civil, criminal or governmental litigation or proceeding.
3.25 INTELLECTUAL PROPERTY RIGHTS MATTERS. None of the Target Entities
(i) owns any patents nor (ii) has filed or applied for any patents. Except as
set forth on Schedule 3.25, the Target Entities do not have any trade names or
trade marks (whether registered or unregistered). Schedule 3.25 describes all
Intellectual Property Rights of the Target Entities which are owned by any third
party. Company has furnished to Res-Care copies of all agreements, licenses and
sublicenses relating to the Target Entities' rights to use such Intellectual
Property Rights. None of the Target Entities is in default, and no event has
occurred which with notice or lapse of time would constitute a default, under
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any of such agreements, licenses or sublicenses. None of the Intellectual
Property Rights of the Target Entities is used, to the Knowledge of the Target
Entities, by the Target Entities in violation of the rights of any third party.
Schedule 3.25 describes all agreements, licenses and sublicenses by which any of
the Target Entities has granted to a third party any rights to use or possess
any Intellectual Property Rights of such Target Entity. To the Knowledge of the
Target Entities, no third party has infringed upon, misappropriated or
wrongfully used any of the Target Entities' Intellectual Property Rights.
3.26 YEAR 2000 COMPLIANCE. Except as provided on Schedule 3.26, and
except for deficiencies which would not have a Material Adverse Effect on the
Target Entities, the computer software and hardware operated by the respective
Target Entities is capable of providing uninterrupted millennium functionality
to record, store, process and present calendar dates falling on or after January
1, 2000 and date-dependent data in substantially the same manner and with the
same functionality as such software and hardware records, stores, processes and
calendar dates and date-dependent data as of the date hereof. Except as provided
on Schedule 3.26, as of the date hereof the Target Entities have identified all
mission-critical software and hardware systems operated by them or furnished to
them by third parties and have determined that all remediation and testing of
these systems necessary to make them Year 2000 compliant will be completed by
June 30, 1999. The Target Entities have surveyed, or will have surveyed prior to
Closing, third-party suppliers and vendors that provide essential services to
the Target Entities and have not been advised that any such suppliers or vendors
expect that they will experience interruptions as a result of Year 2000 issues.
3.27 FRAUD AND ABUSE. None of the Target Entities nor any officer or
director of the Target Entities nor, to the Knowledge of the Target Entities,
any other person or entity acting on behalf of any of the Target Entities,
including without limitation the Managed Providers, or, to the Knowledge of the
Target Entities, any persons who provide professional services under agreements
with any of such entities, has engaged in any activities which are prohibited
under federal Medicaid, health care fraud, false claims or false statement
statutes or the regulations promulgated pursuant to such statutes or related
state or local statutes or regulations, including consumer protection statutes,
or which are prohibited by rules of professional conduct.
3.28 VOTING REQUIREMENTS. The affirmative votes or approvals of the
holders of (i) a majority of the outstanding Common Shares and Convertible
Shares voting together as a single class, (ii) 60% of the outstanding
Convertible Shares voting as a single class, and (iii) a majority of the
outstanding Redeemable Shares voting as a single class and (iv) a majority of
the outstanding Common Shares, Convertible Shares and Redeemable Shares voting
together as a single class are the only votes or approvals of holders of any
class or series of Company's capital stock necessary under applicable law and
the Governing Agreements to approve this Agreement and the transactions
described herein. The affirmative votes or approvals of the holders of more than
75% of the outstanding Common Shares and Convertibles Shares voting together as
a single class (such percentage being computed in accordance with section 280G
of the Code) shall have approved the payments to Vincent D. Pettinelli, Timothy
J. Vogel and Scott T. Macomber under their respective Executive Employment
Agreements and the exchange of Company Options issued to Timothy J. Vogel and
Scott T. Macomber for Issued Shares.
3.29 INDEPENDENT INVESTIGATION. The Company hereby acknowledges and
affirms that it has conducted and completed its own investigation, analysis and
evaluation of Res-Care and its subsidiaries, that it has made all such reviews
and inspections of the business,
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assets, results of operations, condition (financial and otherwise) and prospects
of Res-Care and its subsidiaries as it has deemed necessary or appropriate, that
it has had the opportunity to request all information it has deemed relevant to
the foregoing from Res-Care and its subsidiaries and has received responses it
deems adequate and sufficient to all such requests for information, and that in
making its decision to enter into this Agreement and to consummate the
transactions contemplated hereby it has relied solely on (i) its own
investigation, analysis and evaluation of Res-Care and its subsidiaries and (ii)
the representations and warranties of Res-Care and Res-Care Sub in Article IV
hereof and the covenants of Res-Care and Res-Care Sub in Articles V and VII
hereof.
3.30 BROKERS' OR FINDERS' FEES. Except for the Company's engagement of
Bear Stearns & Co., Inc., all negotiations relative to this Agreement and the
transactions contemplated hereby have been conducted by Company directly with
Res-Care and Res-Care Sub, without the intervention of any person on behalf of
Company or the Shareholders in such manner as to give rise to any valid claim by
any person against any Target Entity, Res-Care or Res-Care Sub for a finder's
fee, brokerage commission or similar payment. A copy of the engagement agreement
between the Company and Bear Stearns & Co., Inc., as amended has been provided
to Res-Care.
3.31 ACCOUNTING MATTERS. Neither Company nor any Affiliate thereof has
taken or agreed to take any action that (without giving effect to any action
taken or agreed to be taken by Res-Care or any of its Affiliates) would prevent
Res-Care from accounting for the business combination to be effected by the
Merger as a pooling-of-interests.
3.32 COST REPORTS. Except as provided on Schedule 3.32, all cost reports
("Cost Reports") required to be filed by any of the Target Entities and the
Managed Providers under federal or state law or any other applicable
governmental or private provider regulations or agreements have been prepared
and filed in accordance with applicable laws, rules, regulations and agreements,
except where the failure to make any such filing would not reasonably be
expected to have a Material Adverse Effect on the Target Entities. The Target
Entities have paid or made provision to pay, or have adequate reserves for such
reflected on the Acquisition Balance Sheet, all proposed or final adjustments
received from any Agency or entity having jurisdiction over said regulations,
programs or agreements. The books and records of the Target Entities prior to
the date hereof (and on the Effective Time will contain all of such information
for the periods prior to such date) necessary to enable the Target Entities to
timely and accurately file all Cost Reports which are required to be filed after
the Effective Time so that such Cost Reports would be accurate and complete in
all material respects.
3.33 STATEMENTS ARE TRUE AND CORRECT. None of the information that has
been or will be supplied by the Company and its Affiliates for inclusion in (i)
the Registration Statement, (ii) the Joint Proxy Statement and (iii) any other
documents to be filed with the SEC or any other regulatory authority in
connection with the transactions contemplated hereby will at the respective
times such documents are filed, and, in the case of the Registration Statement,
when it becomes effective and, with respect to the Joint Proxy Statement, when
first mailed to the shareholders of Res-Care and Company, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading, or, in the case of the
Joint Proxy Statement or any amendment thereof or supplement thereto, at the
time of the Company and Res-Care shareholders' meetings or Consent Solicitation,
if applicable, be false or misleading with respect to any material fact, or omit
to state any material fact necessary to make the statements therein in the light
of the circumstances under which
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they were made not misleading. All documents that the Company is responsible for
filing with the SEC or any other regulatory authority in connection with the
transactions contemplated hereby, will comply in all material respects with the
provisions of applicable law.
3.34 DISCLOSURE.
(a) No representation or warranty by the Company in this Agreement and no
statement contained in the schedules or exhibits or in any certificate to be
delivered pursuant to this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading.
(b) Res-Care has been furnished with, or given access to, complete and
correct copies of all agreements, instruments and documents, together with any
amendments or supplements thereto, set forth on, or underlying the schedules to
this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF RES-CARE AND RES-CARE SUB
Res-Care and Res-Care Sub, jointly and severally, represent and warrant to
Company as follows:
4.1 ORGANIZATION AND GOOD STANDING, FOREIGN QUALIFICATION. Res-Care and
Res-Care Sub are corporations duly organized, validly existing and in good
standing under the laws of the Commonwealth of Kentucky and the State of
Delaware, respectively. Each of Res-Care and Res-Care Sub is duly qualified or
licensed to do business and in good standing as a foreign corporation in every
jurisdiction where the character of their respective properties owned or held
under lease or the nature of their respective business make such qualification
necessary, except where the failure to so qualify could have a Material Adverse
Effect on Res-Care and its subsidiaries. Res-Care Sub has not conducted any
business prior to the date hereof and has no assets, liabilities or obligations
of any nature other than those incident to its formation and pursuant to this
Agreement.
4.2 POWER AND AUTHORITY, VALIDITY. Subject only to the approval of the
shareholders of Res-Care, Res-Care and Res-Care Sub each has the corporate power
and authority to execute, deliver and perform its obligations under this
Agreement and the other documents executed or to be executed by Res-Care and
Res-Care Sub in connection with this Agreement, and the execution, delivery and
performance by Res-Care and Res-Care Sub of this Agreement, the Certificate of
Merger and the other documents executed or to be executed by Res-Care and
Res-Care Sub in connection with this Agreement have been duly authorized by all
necessary corporate action, subject to approval of the shareholders of Res-Care.
This Agreement, the Certificate of Merger and the other documents executed or to
be executed by Res-Care and Res-Care Sub in connection with this Agreement have
been or will have been duly executed and delivered by Res-Care and Res-Care Sub
and are or will be, when executed and delivered, the legal, valid and binding
obligations of Res-Care and Res-Care Sub, enforceable in accordance with their
terms subject to applicable bankruptcy, reorganization, insolvency, moratorium
and other laws affecting creditors' rights generally from time to time in effect
and general equitable remedies.
4.3 COMPLIANCE WITH OTHER INSTRUMENTS. Subject only to any necessary
approval by the Agencies of the transactions contemplated herein, the expiration
of the applicable
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waiting period under the HSR Act (or the early termination thereof), necessary
filings under the Securities Act and the Exchange Act, and other than a consent
required to be obtained from PNC Bank, National Association, as the
Administrative Bank (the "Administrative Bank") under the loan documents
evidencing Res-Care's principal credit facility, neither the execution and
delivery by Res-Care and Res-Care Sub of this Agreement, the Certificate of
Merger, or any other documents executed or to be executed by Res-Care or
Res-Care Sub, nor the consummation by them of the transactions contemplated
hereby and thereby will violate, breach, be in conflict with or constitute a
default under or permit the termination or the acceleration of the maturity of
or result in the imposition of any lien, claim or encumbrance upon any property
or asset of Res-Care or Res-Care Sub pursuant to, the Governing Documents of
Res-Care or Res-Care Sub or pursuant to any note, bond, indenture, mortgage,
deed of trust, evidence of indebtedness, loan or lease agreement, guaranty,
other agreement or instrument, judgment order, injunction or decree by which
Res-Care or Res-Care Sub is bound, to which either of them is a party, or to
which any asset of either of them is subject.
4.4 CAPITALIZATION OF RES-CARE. The authorized capital stock of Res-Care
consists solely of the following: (a) 40,000,000 shares of common stock, no par
value, of which 18,911,726 shares were issued and outstanding as of December 31,
1998; 6,665,999 shares were reserved for issuance at that date upon conversion
of approximately $131 million of outstanding convertible notes; and 2,981,127
shares were reserved for issuance at that date upon exercise of outstanding
employee stock options; and (b) 1,000,000 shares of preferred stock, par value
$.01 per share, of which no shares of preferred stock were issued and
outstanding as of December 31, 1998. The Issued Shares and the Res-Care Shares
issued in exchange for the Company Options shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from any
preemptive rights. Res-Care has reserved sufficient Res-Care shares for issuance
pursuant to the Merger. As of the date hereof, except as set forth herein or on
Schedule 4.4, there are no options, warrants or other rights, agreements or
commitments outstanding obligating Res-Care to issue shares of its capital
stock. All of the outstanding shares of capital stock of Res-Care Sub are owned
by Res-Care, free and clear of any lien or encumbrance, other than any security
interest granted by Res-Care to the Administrative Bank.
4.5 SEC REPORTS. Res-Care has delivered to Company true and complete
copies of (i) Res-Care's Annual Report on Form 10-K for the year ended December
31, 1998, and (ii) all periodic reports, if any, on Form 8-K and Form 10-Q filed
with the SEC after December 31, 1998. Such documents and reports did not on
their dates of filing, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Since January 1, 1998, Res-Care has timely filed all SEC
Reports. As of its respective date (or, if amended or superseded by a
later-dated filing prior to the date of this Agreement, then on the date of such
filing), each of such Res-Care SEC Reports, including the financial statements,
exhibits and schedules thereto, complied in all material respects with the
applicable requirements of the rules and regulations of the SEC. As of its
respective date, each such Res-Care SEC Report did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
4.6 FINANCIAL STATEMENTS. The financial statements of Res-Care included
in the Res-Care SEC Reports that have been filed since January 1, 1997 have been
prepared in accordance with GAAP applied on a consistent basis with prior
periods (except as may be
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indicated in the notes thereto), and present fairly the consolidated financial
position of Res-Care and its consolidated subsidiaries as of the dates thereof
and their consolidated results of operations and cash flows for the periods then
ended (subject to normal year-end adjustments in the case of any interim
financial statements).
4.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent (a)
reflected in the consolidated balance sheet of Res-Care and its consolidated
subsidiaries at December 31, 1998 (the "Res-Care Balance Sheet"), (b) incurred
since December 31, 1998 in the ordinary course of business, or (c) set forth in
Schedule 4.7, Res-Care does not have any liabilities or obligations of any kind
or nature for which appropriate accruals or reserves have not been maintained as
reflected on the Res-Care Balance Sheet (whether secured or unsecured, absolute,
accrued, contingent or otherwise and whether due or to become due), for any
period ending on or before the date thereof, which liabilities or obligations
would be required to be reflected on a consolidated balance sheet of Res-Care
and its consolidated subsidiaries prepared in accordance with GAAP.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on Schedule
4.8 or as disclosed in Res-Care SEC Reports, since December 31, 1998, no event
has occurred, which individually or collectively, has had a Material Adverse
Effect on Res-Care and its subsidiaries.
4.9 NECESSARY APPROVALS AND CONSENTS. Other than (a) in connection with
or in compliance with the DGCL with respect to effectuating the Merger, (b)
consents required by the Agencies, (c) the expiration of the applicable waiting
period under the HSR Act (or the early termination thereof), (d) filings to be
made under the Securities Act and state securities or "blue sky" laws, (e)
filings to be made under the Exchange Act, (f) shareholder approval required
under the rules and regulations of the Nasdaq National Market, or (g) the
consent of the Administrative Bank, no order, authorization, consent, permit or
license or approval of or declaration, registration or filing with, any person
or governmental or regulatory authority or agency is necessary for the execution
and delivery by Res-Care and Res-Care Sub of this Agreement, the Certificate of
Merger and the other agreements executed or to be executed by either of them in
connection with this Agreement and the consummation by Res-Care and Res-Care Sub
of the transactions contemplated by this Agreement and the Certificate of
Merger.
4.10 LITIGATION AND GOVERNMENT CLAIMS. Except as set forth in the
documents described in Section 4.5 hereof, there is no pending suit, claim,
action or litigation or administrative, arbitration or other proceeding or
governmental investigation or inquiry against Res-Care or Res-Care Sub which
would have a Material Adverse Effect on Res-Care and its subsidiaries. Except as
set forth in the documents described in Section 4.5 hereof, to the Knowledge of
Res-Care, there are no such proceedings threatened or contemplated or any
unasserted claims (whether or not the potential claimant may be aware of the
claim), which would have a Material Adverse Effect on Res-Care and its
subsidiaries.
4.11 INDEPENDENT INVESTIGATION. Res-Care hereby acknowledges and affirms
that it has conducted and completed its own investigation, analysis and
evaluation of the Target Entities, that it has made all such reviews and
inspections of the business, assets, results of operations, condition (financial
and otherwise) and prospects of the Target Entities as it has deemed necessary
or appropriate, that it has had the opportunity to request all information it
has deemed relevant to the foregoing from the Target Entities and has received
responses it deems adequate and sufficient to all such requests for information,
and that in making its decision to enter into this Agreement and to consummate
the
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transactions contemplated hereby it has relied solely on (i) its own
investigation, analysis and evaluation of the Target Entities and (ii) the
representations and warranties of the Company in Article III hereof and the
covenants of the Company in Articles V and VI hereof. Notwithstanding the
foregoing, because of the confidential nature of the discussions between the
parties, Res-Care has not been afforded the opportunity to contact, interview or
ask questions of any employees of the Target Entities other than those employees
listed on Schedule 4.11.
4.12 BROKERS' OR FINDERS' FEES. Except for Res-Care's engagement of J.C.
Bradford & Co., LLC, all negotiations relative to this Agreement and the
transactions contemplated hereby have been conducted by Res-Care and Res-Care
Sub directly with Company, without the intervention of any person on behalf of
Res-Care or Res-Care Sub in such manner as to give rise to any valid claim by
any person against Company or the Shareholders for a finder's fee, brokerage
commission or similar payment. All of the fees and expenses of J.C. Bradford &
Co. LLC with respect to such engagement shall be paid by Res-Care.
4.13 DISCLOSURE.
(a) No representation or warranty by Res-Care or Res-Care Sub in this
Agreement and no statement contained in the schedules or exhibits or in any
certificate to be delivered pursuant to this Agreement, contains or will contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary, in light of the circumstances under which it was made,
in order to make the statements herein or therein not misleading.
(b) Company has been furnished with, or given access to, complete and
correct copies of all agreements, instruments and documents, together with any
amendments or supplements thereto, set forth on, or underlying the schedules to
this Agreement.
4.14 ACCOUNTING MATTERS. Neither Res-Care nor any Affiliate thereof has
taken or agreed to take any action that (without giving effect to any action
taken or agreed to be taken by Company or any of its Affiliates) would prevent
Res-Care from accounting for the business combination to be effected by the
Merger as a pooling-of-interests.
4.15 STATEMENTS ARE TRUE AND CORRECT. None of the information that has
been or will be supplied by Res-Care and its Affiliates for inclusion in (i) the
Registration Statement, (ii) the Joint Proxy Statement and (iii) any other
documents to be filed with the SEC or any other regulatory authority in
connection with the transactions contemplated hereby will at the respective
times such documents are filed, and, in the case of the Registration Statement,
when it becomes effective and, with respect to the Joint Proxy Statement, when
first mailed to the shareholders of Res-Care and Company, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading, or, in the case of the
Joint Proxy Statement or any amendment thereof or supplement thereto, at the
time of the Company and Res-Care shareholders' meetings or Consent Solicitation,
if applicable, be false or misleading with respect to any material fact, or omit
to state any material fact necessary to make the statements therein in the light
of the circumstances under which they were made not misleading. All documents
that Res-Care is responsible for filing with the SEC or any other regulatory
authority in connection with the transactions contemplated hereby, will comply
in all material respects with the provisions of applicable law.
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4.16 VOTING REQUIREMENTS. The affirmative vote of a majority of the total
votes cast in person or by proxy, with a quorum present, by the holders of the
Res-Care Shares is the only vote of the holders of any class or series of
Res-Care's capital stock necessary to approve the issuance of the Res-Care
Shares to the Shareholders pursuant to this Agreement and to approve the
issuance of the Res-Care Shares in exchange for the Company Options.
4.17 YEAR 2000 COMPLIANCE. Except as provided on Schedule 4.17, and
except for deficiencies which would not have a Material Adverse Effect on
Res-Care and its subsidiaries, the computer software and hardware operated by
Res-Care and its subsidiaries is capable of providing uninterrupted millennium
functionality to record, store, process and present calendar dates falling on or
after January 1, 2000 and date-dependent data in substantially the same manner
and with the same functionality as such software and hardware records, stores,
processes and calendar dates and date-dependent data as of the date hereof.
Except as provided on Schedule 4.17, as of the date hereof, Res-Care and its
subsidiaries have identified all mission-critical software and hardware systems
operated by them or furnished to them by third parties and have determined that
all remediation and testing of these systems necessary to make them Year 2000
compliant will be completed by October 31, 1999. Res-Care and its subsidiaries
have surveyed, or will have surveyed prior to Closing, third-party suppliers and
vendors that provide essential services to Res-Care and its subsidiaries and
have not been advised that any such suppliers or vendors expect that they will
experience interruptions as a result of Year 2000 issues.
4.18 FRAUD AND ABUSE. None of Res-Care and its subsidiaries nor any
officer or director of Res-Care or any of its subsidiaries nor, to the Knowledge
of Res-Care, any other person or entity acting on behalf of Res-Care or any of
its subsidiaries, or, to Res-Care's Knowledge, any persons who provide
professional services under agreements with any of such entities, has engaged in
any activities which are prohibited under federal Medicaid, health care fraud,
false claims or false statement statutes or the regulations promulgated pursuant
to such statutes or related state or local statutes or regulations, including
consumer protection statutes, or which are prohibited by rules of professional
conduct.
4.19 ABSENCE OF CERTAIN BUSINESS PRACTICES. None of Res-Care or its
subsidiaries nor any officer or director of Res-Care or any of its subsidiaries
nor, to the Knowledge of Res-Care, any other person or entity acting on behalf
of Res-Care or any of its subsidiaries, acting alone or together, has (i)
received, directly or indirectly, any rebates, payments, commissions,
promotional allowances or any other economic benefits, regardless of their
nature or type, from or on behalf of any client, governmental employee or other
person or entity with whom Res-Care or any of its subsidiaries has done business
directly or indirectly, or (ii) directly or indirectly, given or agreed to give
any gift or similar benefit to any client, governmental employee or other person
or entity who is or may be in a position to help or hinder the business of
Res-Care or any of its subsidiaries (or assist Res-Care or any of its
subsidiaries in connection with any actual or proposed transaction) which, in
the case of either clause (i) or (ii) above, would reasonably be expected to
subject Res-Care or any of its subsidiaries to any damage or penalty in any
civil, criminal or governmental litigation or proceeding.
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ARTICLE V
JOINT COVENANTS OF COMPANY, RES-CARE AND RES-CARE SUB
Company, on the one hand, and Res-Care and Res-Care Sub, jointly and
severally on the other hand, covenant with each other as follows:
5.1 HSR FILING. Res-Care and Company shall cooperate in good faith and
take all actions reasonably necessary or appropriate to file within ten days of
the date hereof, and expeditiously and diligently prosecute to a favorable
conclusion, the premerger notification and report forms to be filed under the
HSR Act which are required to be filed by each of them in connection herewith
with the Federal Trade Commission (the "FTC") and the Department of Justice (the
"DOJ") pursuant to the HSR Act; provided that Res-Care shall not be required to
accept any conditions that may be imposed by the FTC or the DOJ in connection
with such filings that would require the divestiture of any assets of Res-Care,
Company or their respective subsidiaries or otherwise have a Material Adverse
Effect on such party.
5.2 REGISTRATION STATEMENT AND JOINT PROXY STATEMENT; SPECIAL MEETINGS.
(a) As promptly as practical, after the execution of this Agreement,
Res-Care and Company shall prepare and file with the SEC the Joint Proxy
Statement to be sent to the shareholders of Res-Care and Company in connection
with the Res-Care's Shareholders' Meeting and the Company's Shareholders'
Meeting to approve the issuance of the Issued Shares and consider the Merger,
respectively, and Res-Care shall prepare and file with the SEC the Registration
Statement in which the Joint Proxy Statement will be included as a prospectus.
Res-Care and Company shall use all reasonable efforts to cause the Registration
Statement to become effective as soon as practical after such filing. The Joint
Proxy Statement shall include the recommendation of the Board of Directors of
Company in favor of this Agreement and the Merger and the recommendation of the
Board of Directors of Res-Care in favor of the issuance of the Issued Shares
pursuant to the Merger and in exchange for the Company Options, provided that
the Board of Directors of Company may withdraw such recommendation, after
consultation with its outside legal counsel and compliance with any applicable
requirements of Section 6.3 hereof, if it determines in good faith that the
withdrawal of such recommendation is necessary for the Board of Directors to
comply with its fiduciary duties under applicable law. Res-Care and Company
shall make all other necessary filings with respect to the Merger under the
Securities Act and the Exchange Act.
(b) Each of the parties will cooperate in the preparation of the
Registration Statement and the Joint Proxy Statement. Each of the parties will
as promptly as practicable after the date hereof furnish all such data and
information relating to it as the other may reasonably request for the purpose
of including such data and information in the Registration Statement and Joint
Proxy Statement. Each party shall notify the other of the receipt of any
comments of the SEC with respect to the Registration Statement or the Joint
Proxy Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information and shall provide to the other promptly
copies of all correspondence to and from the SEC with respect to the
Registration Statement or the Joint Proxy Statement. Res-Care shall give Company
and its counsel the opportunity to review the Registration Statement and the
Joint Proxy Statement and all responses to requests for additional information
by and replies to comments of the SEC before their being filed with, or sent to,
the SEC. Each party agrees to use commercially reasonable efforts, after
consultation with the other parties hereto, to respond promptly to all such
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comments of and requests by the SEC and to cause (x) the Registration Statement
to be declared effective by the SEC at the earliest practicable time and to be
kept effective as long as is necessary to consummate the Merger, and (y) the
Joint Proxy Statement to be mailed to the holders of Res-Care Shares and Company
capital stock entitled to vote at the meetings of the shareholders of Res-Care
and Company at the earliest practicable time.
(c) Each of the parties shall, as soon as practicable following
effectiveness of the Registration Statement, take all action necessary under the
applicable state law of the jurisdiction of its incorporation and its respective
Governing Documents to convene a special meeting of its respective shareholders
(the "Special Meetings") for the purpose of approving the transactions
contemplated by this Agreement; provided that (i) Res-Care may incorporate the
proposal into its annual meeting of shareholders and (ii) the Company may, in
lieu of convening a Special Meeting, conduct a Consent Solicitation. The parties
shall coordinate and cooperate with respect to the timing of any such Meetings
or Consent Solicitation and shall use commercially reasonable efforts to cause
the Meetings (or Consent Solicitation) to be held as soon as practicable after
the date hereof, provided that the Company's Shareholders' Meeting (or Consent
Solicitation) shall be held within thirty (30) days after the effectiveness of
the Registration Statement.
(d) Company shall take such action as may be necessary to insure that (i)
the information to be supplied by Company for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared effective
by the SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading, and (ii) the
information supplied by Company for inclusion in the Joint Proxy Statement shall
not, on the date the Joint Proxy Statement is first mailed to shareholders of
Company or Res-Care, at the time of the Company's Shareholders' Meeting (or
Consent Solicitation) and Res-Care's Shareholders' Meeting, and at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading,
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Company's Shareholders' Meeting (or Consent Solicitation) or Res-Care's
Shareholders' Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to Company or any of its Affiliates',
officers, or directors is discovered by Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Joint Proxy
Statement, Company shall promptly so inform Res-Care.
(e) Res-Care shall take such action as may be necessary to insure that (i)
the information supplied by Res-Care for inclusion in the Registration Statement
shall not at the time the Registration Statement is declared effective by the
SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading, and (ii) the
information supplied by Res-Care for inclusion in the Joint Proxy Statement
shall not on the date the Joint Proxy Statement is first mailed to shareholders
of Res-Care or Company, at the time of the Res-Care's Shareholders' Meeting and
Company's Shareholders' Meeting (or, as the case may be, Consent Solicitation),
and at the Effective Time, contain any statement which, at such time and in
light of the circumstances under
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which it shall be made, is false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements made in the Joint Proxy Statement not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies or written consents,
as the case may be, for the Res-Care's Shareholders' Meeting or Company's
Shareholders' Meeting or the Consent Solicitation which has become false or
misleading. If at any time prior to the Effective Time any event relating to
Res-Care or any of its Affiliates', officers, or directors is discovered by
Res-Care which should be set forth in an amendment to the Registration Statement
or a supplement to the Joint Proxy Statement, Res-Care shall promptly so inform
Company.
5.3 NOTICE OF ANY MATERIAL CHANGE. Until the Effective Time, Company,
Res-Care and Res-Care Sub shall, promptly after the first notice or occurrence
thereof but prior to the Effective Time, advise the others in writing of any
event or the existence of any state of facts that:
(a) would make any of its or their representations and warranties in
this Agreement untrue in any respect; or
(b) would otherwise constitute a Material Adverse Effect on Res-Care
or Company and their respective subsidiaries, in each case taken as a
whole. No supplement or amendment to any Schedule shall have any effect for
the purpose of continuing the satisfaction of or compliance with the
conditions to the obligations of the parties to consummate the Merger set
forth elsewhere in this Agreement.
5.4 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. The Company and Res-Care
shall consult with each other before issuing any press releases or making any
public statements with respect to the Merger and the transactions contemplated
hereby and shall not issue any such press release or such public statement prior
to such consultation and without the approval of the other (which approval shall
not be unreasonably withheld or delayed, and, with respect to Res-Care, such
approval shall not be required if such disclosure is required by (i)applicable
law, rules and regulations or (ii) obligations under the rules, regulations and
listing requirements of the Nasdaq National Market).
5.5 NOTICE AND CURE. Each party will notify the other of, and will use
all commercially reasonable efforts to cure before the Closing, any event,
transaction or circumstance, as soon as practical after it becomes known to such
party, that causes or will cause any covenant or agreement of such party under
this Agreement to be breached or that renders or will render untrue any
representation or warranty of such party contained in this Agreement. Each party
also will notify the other in writing of, and will use all commercially
reasonable efforts to cure, before the Closing, any violation or breach, as soon
as practical after it becomes known to such party, of any representation,
warranty, covenant or agreement made by such party. No notice given pursuant to
this paragraph shall have any effect on the representations, warranties,
covenants or agreement contained in this Agreement for purposes of determining
satisfaction of any condition contained herein.
5.6 UPDATE SCHEDULES. Each party hereto will promptly disclose to the
other any information contained in its representations and warranties and on the
related disclosure schedules that, because of an event occurring after the date
hereof, is incomplete or no longer correct; provided however, that none of such
disclosures will be deemed to modify, amend or supplement the representations
and warranties of such party, unless the other party consents to such
modification, amendment or supplement in writing.
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5.7 ADDITIONAL AGREEMENTS.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take or cause to be
taken, all actions and to do or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement, including
using all reasonable efforts to obtain all necessary waivers, consents and
approvals (including but not limited to the any approval or expiration of
the applicable waiting period required under the HSR Act), to effect all
necessary registrations and filings and to remove any other legal
restriction to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible).
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the
proper officers and/or directors of Res-Care, Res-Care Sub and Company
shall take all such necessary reasonable action.
(c) Neither Res-Care or Res-Care Sub nor Company shall take any action
which would jeopardize the characterization of the Merger as a
reorganization within the meaning of section 368(a) of the Code or the
treatment of the Merger for financial reporting purposes as a
pooling-of-interests. Each of Res-Care and Company shall use commercially
reasonable efforts to cause its Affiliates not to take any action that
would jeopardize the characterization of the Merger as a reorganization
within the meaning of section 368(a) of the Code or preclude the ability of
Res-Care to account for the business combination to be effected by the
Merger as a pooling-of-interests.
(d) Subject to the terms and conditions of this Agreement, Res-Care
and Company will each use commercially reasonable efforts to satisfy or
cause to be satisfied all the conditions precedent that are applicable to
each of them, and to cause the transactions contemplated by this Agreement
to be consummated, and, without limiting the generality of the foregoing,
to obtain all material consents and authorizations of third parties and to
make filings with, and give notices to, third parties that may be necessary
or reasonably required on its part in order to effect the transactions
contemplated hereby.
ARTICLE VI
COVENANTS OF COMPANY
Company covenants and agrees with Res-Care and Res-Care Sub as follows:
6.1 ACCESS; CONFIDENTIALITY. During the period pending the Closing Date,
Company shall afford to Res-Care and to Res-Care's officers, employees,
accountants, counsel and other authorized representatives, full access during
regular business hours to assets, properties, books, contracts, commitments and
records of the Target Entities and will furnish or use its best efforts to cause
representatives to furnish promptly to Res-Care such additional financial and
operating data and other documents and information (certified if requested and
reasonably susceptible to certification) relating to their respective businesses
and properties as Res-Care or its duly authorized representatives may from time
to time reasonably request. Res-Care acknowledges that all of such information
shall be subject to Res-Care's obligations in the Confidentiality Letter. The
obligations and agreements of Res-Care Representatives (as such term is defined
in Confidentiality Letter) shall terminate at the Effective Time.
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6.2 CONDUCT OF BUSINESS PRIOR TO CLOSING DATE. From the date hereof to
the Closing Date, the Target Entities shall:
(a) conduct their respective business operations in the ordinary and
usual course of business consistent with past and current practices and
shall use their best efforts to maintain and preserve intact their business
organizations and goodwill, to retain the services of their key officers
and employees and to maintain satisfactory relationships with suppliers,
distributors and others having business relationships with them (including
but not limited to the Managed Providers);
(b) confer on a regular and frequent basis with one or more
representatives of Res-Care to report operational matters and the general
status of ongoing operations including profit margins, cost increases and
material adverse trends;
(c) notify Res-Care of any emergency or other change in the normal
course of the business of the Target Entities and of any governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated) not within the Knowledge of Res-Care if such
emergency, change, complaint, investigation or hearing would have a
Material Adverse Effect on the Target Entities;
(d) notify Res-Care of the status of any discussions between labor
unions and any Target Entity, permit Res-Care to consult with the Target
Entity and participate in any discussions that Res-Care determines could
adversely affect future operations; and
(e) except in connection with the transactions expressly contemplated
by this Agreement or as set forth on Schedule 6.2(e), take no action (or
fail to take any action) which would cause or permit their respective
representations and warranties contained in this Agreement to be untrue in
any respect at the Effective Time, including but not limited to the matters
described in paragraphs (a) through (o) of Section 3.8 hereof.
6.3 NO SOLICITATION.
(a) Prior to the earlier of (i) the termination of this Agreement or
(ii) the Effective Time, none of the Target Entities shall directly or
indirectly, through any officer, director, employee, representative or
agent of any of the Target Entities, solicit or encourage the initiation or
submission of any inquiries, proposals or offers regarding any acquisition,
merger, take-over bid, sale of all or substantially all of the assets or
15% or more of the outstanding shares of capital stock of Company or any
subsidiary, whether or not in writing and whether or not delivered to the
shareholders of Company generally (including without limitation by way of a
tender offer) (any of the foregoing inquiries or proposals being referred
to herein as an "Acquisition Proposal"). Nothing contained in this Section
6.3 or any other provision of this Agreement shall prevent the Board of
Directors of Company from considering an unsolicited bona fide Acquisition
Proposal. If the Board of Directors of Company, after duly considering
advice, written or otherwise, of outside counsel and financial advisors to
Company, determines in good faith that it would be inconsistent with its
fiduciary responsibilities to not approve or recommend (and in connection
therewith withdraw or modify its approval or recommendation of this
Agreement, and the transactions contemplated hereby) a Superior Proposal
(as defined below), then, notwithstanding any such approval or
recommendation (x) Company shall not enter into any agreement with respect
to the Superior Proposal and (y) any other obligation of Company under this
Agreement shall not be affected, unless this Agreement is terminated
pursuant to
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Section 11.1 hereof prior to or simultaneously with the grant of such
approval or the making of such recommendation and Company, within five
Business Days following such termination resulting from such Superior
Proposal, pays Res-Care the Termination Fee (as defined in Section
11.1(i)). As used herein the term "Superior Proposal" means an unsolicited
bona fide proposal made by a third party to acquire Company pursuant to a
tender or exchange offer, a merger, a sale of all or substantially all of
its assets or otherwise that the Company's Board of Directors determines in
its good faith judgment to be more favorable to the holders of the Company
Shares from a financial point of view than the transactions contemplated by
this Agreement (after considering the advice, written or otherwise, of
Company's professional advisors).
(b) Company shall immediately notify Res-Care after receipt of any
formal, informal, written or oral Acquisition Proposal or any request for
nonpublic information relating to any of the Target Entities in connection
with an Acquisition Proposal or for access to the properties, books or
records of any of the Target Entities that informs the Board of Directors
or any of the Target Entities that some other party is considering making,
or has made, an Acquisition Proposal. Such notice to Res-Care shall be made
orally and in writing and shall indicate in reasonable detail the identity
of the offeror and the terms and conditions of such proposal, inquiry or
contact.
(c) If Company has determined to terminate this Agreement pursuant to
Section 11.1(i) hereof, prior to the time Company gives such notice to
Res-Care of such termination, Company shall give written notice to Res-Care
of its intent to terminate and, thereafter Res-Care shall have ten (10)
Business Days in which to propose additional terms to this Agreement (the
"New Proposal"); provided, however, if Res-Care's New Proposal is equal to
the Superior Proposal, Company shall be obligated to reject the Superior
Proposal and accept Res-Care's New Proposal.
(d) If the Board of Directors of Company receives a request for
material nonpublic information by a party who makes or who states in
writing that it intends, subject to satisfactory review of such nonpublic
information, to make a bona fide Acquisition Proposal, Company may, subject
to the execution of a confidentiality agreement substantially similar to
that then in effect between Company and Res-Care, provide such party with
access to information regarding Company.
6.4 STANDSTILL. If this Agreement is terminated, none of the Target
Entities shall for a period of two (2) years following such termination (i)
acquire, offer to acquire or agree to acquire directly or indirectly by purchase
or otherwise any voting securities of Res-Care, (ii) make or in any way
participate directly or indirectly in any "solicitation" of "proxies" to vote
(as such terms are used in the proxy rules of the SEC) or seek to advise or
influence any person or entity with respect to the voting of any voting
securities of Res-Care, (iii) form, join or in any way participate in a "group"
within the meaning of Section 13(d)(3) of the Exchange Act with respect to any
voting securities of Res-Care or (iv) otherwise act alone or in concert with
others to seek control or influence the management, board of directors or
policies of Res-Care.
ARTICLE VII
COVENANTS OF RES-CARE
Res-Care covenants and agrees with the Company as follows:
7.1 CONDUCT OF BUSINESS OF RES-CARE SUB. Prior to the Effective Time,
except as may be required by applicable law and subject to the other provisions
of this Agreement,
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Res-Care shall cause Res-Care Sub to (i) perform its obligations under this
Agreement in accordance with its terms, (ii) not incur directly or indirectly
any liabilities or obligations other than those incurred in connection with the
Merger and the other transactions contemplated hereby, or (iii) not engage
directly or indirectly in any business or activities of any type or kind and not
enter into any agreements or arrangements with any person, or be subject to or
bound by any obligation or undertaking, which is not contemplated by this
Agreement.
7.2 RES-CARE SUB SHAREHOLDER APPROVAL. Res-Care, as the sole shareholder
of Res-Care Sub, shall take all action necessary to effect the necessary
shareholder approval by Res-Care Sub of this Agreement.
7.3 PUBLICATION OF FINANCIAL RESULTS. Res-Care shall use its reasonable
business efforts to publish the financial results covering at least thirty (30)
days of combined operations of Res-Care and the Target Entities subsequent to
the Effective Time within 135 days after the Effective Time.
7.4 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. For a period
of 5 years from and after the Effective Time, Res-Care shall or shall cause
(including, to the extent required, providing sufficient funding to enable the
Surviving Corporation to satisfy all of its obligations under this Section 7.4)
the Surviving Corporation to indemnify, defend and hold harmless the present and
former officers and directors of each of the Target Entities in respect of acts
or omissions occurring prior to the Effective Time to the fullest extent
permitted or provided under each such entity's Governing Documents in effect on
the date of this Agreement. Res-Care shall or shall cause the Surviving
Corporation to, for a period of 5 years, maintain for the benefit of the
officers and directors of the Target Entities the current policies of directors'
and officers' liability insurance and fiduciary liability insurance maintained
by the Company (provided that the Surviving Corporation may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are, in the aggregate, no less advantageous to the insureds in
any material respect) with respect to claims arising from facts or events that
occurred at or before the Effective Time; provided, however, that in no event
shall Res-Care or the Surviving Corporation be required to expend in any one
year an amount in excess of 150% of the annual premium currently paid by Company
for such insurance; and provided, further, that if the premiums of such
insurance coverage exceed such amount, Res-Care and the Surviving Corporation
shall be obligated to obtain a policy with the greatest coverage available for a
cost not exceeding such amount. In the event Res-Care or any of its successors
or assigns (i) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each such case, proper provision shall be made so
that the successors and assigns of Res-Care shall assume the obligations set
forth in this Section 7.4. The obligations of Res-Care and the Surviving
Corporation under this Section 7.4 shall not be terminated or modified in such a
manner as to adversely affect any director or officer to whom this Section 7.4
applies without the consent of each affected director or officer (it being
expressly agreed that the directors and officers to whom this Section 7.4
applies shall be third-party beneficiaries of this Section 7.4).
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ARTICLE VIII
JOINT CONDITIONS PRECEDENT TO CLOSING OBLIGATIONS
The obligations of Company, Res-Care and Res-Care Sub to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction, on or before the Closing Date, of each of the following
conditions:
8.1 CONSENTS TO TRANSACTION; RES-CARE SHAREHOLDER APPROVAL. The waiting
period applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated and, other than the filing as provided in the last
sentence of Section 2.4 hereof, Company, Res-Care and Res-Care Sub shall have
received all material consents or approvals and made all applications, requests,
notices and filings with, the SEC, any person, entity or other Agency required
to be obtained or made in connection with the consummation of the transactions
contemplated by this Agreement. Copies of all consents and approvals received by
any party pursuant to this Section 8.1 shall be furnished to the other party.
The shareholders of Res-Care shall have approved the issuance of the Res-Care
Shares, including the Res-Care Shares issuable in exchange for any Company
Options, in accordance with applicable law and the rules and regulations of the
Nasdaq National Market. For purposes of this Section 8.1, the consent of
Res-Care's banks under its existing credit facility shall be deemed a material
consent. Res-Care shall use its best efforts to obtain such bank consent as soon
as practicable.
8.2 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or governmental or regulatory authority will be pending, no investigation by any
governmental or regulatory authority will have been commenced and no action,
suit or proceeding by any governmental or regulatory authority will have been
threatened, against Company, Res-Care, Res-Care Sub or any of the principals,
officers or directors of either of them, seeking to restrain, prevent or change
the transactions contemplated hereby or questioning the legality or validity of
any such transactions or seeking damages in connection with any such
transactions.
8.3 REGISTRATION STATEMENTS; JOINT PROXY STATEMENT. The Registration
Statement shall have become effective with the SEC (and no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been issued by the SEC). The Joint Proxy
Statement included therein shall have been mailed to shareholders of Res-Care
and Company. The Issued Shares shall have been approved for quotation on the
Nasdaq National Market. The S-8 Registration Statement in respect of the
Res-Care Shares issuable in exchange for the Company Options shall have been
filed with the SEC and shall have become automatically effective in accordance
with SEC Rules.
8.4 COMPANY SHAREHOLDER APPROVAL. The Shareholders shall have approved
the consummation of the transactions contemplated herein (including the Merger,
the amendments to the certificate of incorporation, and the payments to Vincent
D. Pettinelli, Timothy J. Vogel and Scott Macomber under their respective
Executive Employment Agreements and the exchange of Company Options for Issued
Shares by Timothy J. Vogel and Scott T. Macomber) in accordance with applicable
law and the Governing Documents of the Company, all as set forth in Section 3.28
of this Agreement.
8.5 AFFILIATE TRANSACTIONS. Prior to the Effective Time, the transactions
described in this Section 8.5 (the "Affiliate Transactions") shall have been
consummated by the Company or one of its Subsidiaries in exchange for a total of
101,652 Common Shares
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(and the Company covenants and agrees to use its best efforts to cause the
consummation of such transactions prior to the Effective Time):
(a) Merger of VOCA Residential Services, Inc. VOCA Residential
Services, Inc., an Ohio corporation ("VRSI"), shall have become a
wholly-owned subsidiary of the Company through a merger with or purchase of
shares of VRSI;
(b) Termination of General Partner Status. VRSI shall cease to be the
general partner of Wood County Development Limited Partnership, an Ohio
limited partnership, without any cost or expense to the Company or VRSI;
(c) Acquisition of Certain Pettinelli-Controlled Properties in North
Carolina Concepts Limited Partnership. The Company or one or more of its
Subsidiaries shall acquire from North Carolina Concepts Limited Partnership
or Vincent D. Pettinelli, in exchange for Common Shares, the real estate
described in Schedule 8.5(c) and the Company shall either assume and/or
retire the financing obligations associated with such real estate as also
described in said Schedule 8.5(c), including the payment of the prepayment
penalties as described in said Schedule 8.5(c); and
(d) Acquisition of Certain Properties in Sterling Concepts of
Washington, D.C. The Company or one or more of its Subsidiaries shall
acquire from Sterling Concepts of Washington, D.C., in exchange for Common
Shares, the real estate described in Schedule 8.5(d) and the Company shall
assume and/or retire the financing obligations related to such real estate
as also described in said Schedule 8.5(d), including the payment of the
pre-payment penalties as described in said Schedule 8.5(d).
(e) Additional Consideration. In connection with the transactions
described in this Section 8.5, the Company will assume the financing
obligations related to the acquired properties or borrow funds and pay such
financing obligations and pay the prepayment penalties attributable to such
financing obligations. Immediately prior to the Effective Time, Res-Care
will transfer to Res-Care Sub sufficient funds to repay the indebtedness
related to such acquired properties and upon the Effective Time Company
shall transfer such funds to repay such indebtedness. In connection with
the transactions described in this Section 8.5, the Company will set off
against the purchase price for the acquired properties, to the extent
possible, the obligations of $250,000 owing to the Company by Vincent D.
Pettinelli and Timothy J. Vogel. Notwithstanding the foregoing, the
aggregate amount of (i) the obligations assumed or paid by the Company or
any of its Subsidiaries under this Section 8.5 (excluding the receivables
due to the Company or any of its Subsidiaries from the entities owning the
acquired properties and the Common Shares issued by the Company as
described in this Section 8.5), and (ii) the prepayment penalties paid by
the Company or any of its Subsidiaries under this Section 8.5 shall not
exceed $6.8 million.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY
The obligations of Company to consummate the transactions contemplated by
this Agreement shall be subject to the satisfaction on or before the Closing
Date of each of the following conditions (any one or more of which may be
waived, but only in a writing signed by Company):
9.1 COMPLIANCE. Res-Care and Res-Care Sub shall have, or shall have
caused to be, satisfied or complied with and performed in all material respects
all terms, covenants
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and conditions of this Agreement to be complied with or performed by Res-Care
and Res-Care Sub on or before the Closing Date and Company shall receive a
certificate to such effect signed by the Chief Executive Officer or the
President of Res-Care.
9.2 REPRESENTATION AND WARRANTIES. All of the representations and
warranties made by Res-Care and Res-Care Sub in this Agreement, and in all
certificates and other documents delivered by Res-Care and Res-Care Sub to
Company pursuant hereto or in connection with the transactions contemplated
hereby, shall be true and correct in all respects as of the date hereof and
shall be true and correct in all respects at the Closing Date with the same
force and effect as if such representations and warranties had been made at and
as of the Closing Date (except to the extent any such representation or warranty
speaks as of an earlier date or except for changes permitted or contemplated by
this Agreement); provided, however, that notwithstanding anything herein to the
contrary, this Section 9.2 shall be deemed to have been satisfied even if such
representations and warranties are not so true and correct unless the failure of
such representations or warranties to be so true and correct, individually or in
the aggregate, has had, or is reasonably likely to have, a Material Adverse
Effect on Res-Care and its subsidiaries or is reasonably likely to prevent or to
materially burden or materially impair the ability of Res-Care and Res-Care Sub
to consummate the transactions contemplated by this Agreement.
9.3 OPINION. Company shall have received the opinion of counsel for
Res-Care and Res-Care Sub, dated as of the Closing Date, in form reasonably
acceptable to the Company, as to the matters set forth in Exhibit C.
9.4 TAX OPINION. Company shall have received the opinion of its counsel,
dated the Closing Date, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of section
368(a) of the Code, and that each of Res-Care and Res-Care Sub and Company will
be a party to that reorganization within the meaning of section 368(b) of the
Code. In addressing the federal income tax consequences of exchanging Common
Shares for Issued Shares, such opinion will not encompass those Common Shares
issued in the Affiliate Transactions. Furthermore, such opinion will not address
the federal income tax consequences of exchanging the Redeemable Shares for
Issued Shares in the Merger or exchanging the Company Options for Res-Care
Shares simultaneously with the Merger. In rendering such opinion, counsel shall
require delivery of and rely upon representations and certificates provided by
Res-Care and Company as it may deem necessary.
9.5 MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there
shall have occurred no event, whether individually or collectively, which shall
have had a Material Adverse Effect on Res-Care and its subsidiaries.
9.6 CERTIFICATES. Company shall have received a certificate or
certificates, executed on behalf of Res-Care by a duly authorized officer of
Res-Care, to the effect that the conditions contained in Section 8.1 and Section
8.2 hereof with respect to matters therein relating to Res-Care and in Sections
9.1, 9.2 and 9.5 hereof, have been satisfied.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF RES-CARE AND RES-CARE SUB
Except as may be waived by Res-Care and Res-Care Sub, the obligations of
Res-Care and Res-Care Sub to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction, on or before the Closing Date,
of each of the following
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conditions (any one or more of which may be waived by Res-Care, but only in a
writing signed by Res-Care):
10.1 COMPLIANCE. Company shall have or shall have caused to be satisfied
or complied with and performed in all respects all terms, covenants and
conditions of this Agreement to be complied with or performed by any of them on
or before the Closing Date and Res-Care shall receive a certificate to such
effect signed by the Chief Executive Officer or the President of Company.
10.2 REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by Company in this Agreement, the Schedules, and in all
certificates and other documents delivered by Company pursuant hereto or in
connection with the transactions contemplated hereby, shall be true and correct
in all respects as of the date hereof and shall be true and correct in all
respects at the Closing Date with the same force and effect as if such
representations and warranties had been made at and as of the Closing Date
(except to the extent any such representation or warranty speaks as of an
earlier date or except for changes permitted or contemplated by this Agreement);
provided, however, that notwithstanding anything herein to the contrary, this
Section 10.2 shall be deemed to have been satisfied even if such representations
and warranties are not so true and correct unless the failure of such
representations or warranties to be so true and correct, individually or in the
aggregate, has had, or is reasonably likely to have, a Material Adverse Effect
on the Target Entities or is reasonably likely to prevent or to materially
burden or materially impair the ability of Company to consummate the
transactions contemplated by this Agreement.
10.3 OPINIONS. Res-Care shall have received the opinion of counsel for
Company (which in the case of Company counsel other than Vorys, Sater, Seymour
and Pease LLP shall be reasonably acceptable to Res-Care), dated as of the
Closing Date, as to the matters set forth in Exhibit D-1, in form reasonably
acceptable to Res-Care.
10.4 OPINIONS. Res-Care shall have received an opinion of counsel for
each of the respective Majority Shareholders dated as of the Closing Date, as to
the matters set forth in Exhibit D-2, in form reasonably acceptable to Res-Care.
10.5 MATERIAL ADVERSE EFFECT. Since the date of the Acquisition Balance
Sheet there shall have occurred no event, whether individually or collectively,
which shall have had a Material Adverse Effect on the Target Entities.
10.6 APPRAISAL RIGHTS. The number of shares of capital stock of Company
for which Shareholders have exercised appraisal rights under the DGCL shall be a
number which, in the sole and absolute discretion of Res-Care, does not
jeopardize the financial reporting and accounting treatment of the Merger
specified in Section 2.11 hereof.
10.7 FAIRNESS OPINION. Res-Care shall have received an opinion, dated the
date of this Agreement, and confirmed as of a date within five (5) days before
the mailing of the Joint Proxy Statement, of its financial advisors, J.C.
Bradford & Co., LLC, to the effect that the transaction contemplated herein,
including but not limited to the issuance of the Issued Shares in connection
with the Merger, is fair to the shareholders of Res-Care from a financial point
of view.
10.8 RELEASE OF GUARANTEES; INDEMNIFICATION. On or prior to the Closing
Date, all of the guarantees and obligations of the Target Entities described on
Schedule 10.8 shall have been released in full. Vincent D. Pettinelli shall have
entered into the Indemnification Agreement and Stock Pledge Agreement with the
Company, the forms of which are
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attached hereto as Exhibits E and F, respectively, pursuant to which he agrees
to indemnify the Company and its Affiliates against certain liabilities and
obligations.
10.9 TERMINATION OF EXECUTIVE EMPLOYMENT AGREEMENTS. Effective as of the
Closing, the Executive Employment Agreements with Vincent D. Pettinelli, Timothy
J. Vogel and Scott T. Macomber shall have been terminated, other than the
confidentiality and noncompetition covenants of the respective employees
therein.
10.10 POOLING. Res-Care shall have received a letter from each of Ernst &
Young LLP and KPMG LLP in form and substance reasonably satisfactory to Res-Care
and dated not more than five (5) days prior to the Closing Date, to the effect
that the Merger shall qualify as a pooling-of-interests for financial reporting
purposes.
10.11 CERTIFICATES. Res-Care shall have received a certificate or
certificates, executed on behalf of Company, by a duly authorized officer of
Company, to the effect that the conditions in Sections 8.1, 8.2, 8.4, 8.5, 8.6
and 8.7 hereof with respect to matters therein relating to Company and Sections
10.1, 10.2, 10.5, 10.6, 10.8, 10.9, 10.13, 10.15 and 10.16 hereof, have been
satisfied.
10.12. RESIGNATIONS OF DIRECTORS. Each of the directors of the Company
and the Target Entities shall have tendered their written resignations as
directors effective as of the Effective Time.
10.13 OCCUPANCY STANDARD. As of the date which is five (5) Business Days
prior to the Closing Date, the Occupancy Standard shall be satisfied.
10.14 NONCOMPETITION AGREEMENTS. On or before the Closing Date, Vincent
D. Pettinelli and Timothy J. Vogel shall have executed and delivered the
Noncompetition Agreements.
10.15 EXERCISE OF COMPANY WARRANTS. All of the Company Warrants shall
have been exercised by the holders thereof before the Effective Time pursuant to
the net exercise provision contained therein.
10.16 REPRESENTATIONS, WARRANTIES AND COVENANTS IN SHAREHOLDERS AGREEMENT
AND THE REGISTRATION RIGHTS AGREEMENT. All of the representations and
warranties by the Shareholders in the Shareholders Agreement and the
Registration Rights Agreement shall be true and correct in all material respects
as of the date hereof and shall be true and correct in all material respects as
of the Closing Date with the same force and effect as if such representations
and warranties had been made at and as of the Closing Date. Each of the
Shareholders that is a party to the Shareholders Agreement or the Registration
Rights Agreement shall have satisfied or complied with and performed in all
material respects all terms, covenants and conditions of such agreements to be
complied with or performed by any of them on or before the Closing Date.
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ARTICLE XI
MISCELLANEOUS AND GENERAL
11.1 TERMINATION. This Agreement and the transactions contemplated hereby
may be terminated at any time on or before the Closing Date (notwithstanding
approval by the Shareholders or the holders of Res-Care Shares):
(a) by mutual consent of Company and Res-Care;
(b) by Res-Care if there has been one or more misrepresentations or
breaches of warranty in the representations and warranties of Company set
forth herein (disregarding for purposes of this provision the Material
Adverse Effect or materiality qualification in any single representation or
warranty) which individually, or in the aggregate, has had, or is
reasonably likely to have a Material Adverse Effect on the Target Entities
or is reasonably likely to prevent or to materially burden or materially
impair the ability of Res-Care to consummate the transactions contemplated
by this Agreement, or if there has been any failure on the part of the
Target Entities to comply in all material respects with their obligations
hereunder;
(c) by Company if there has been one or more misrepresentations or
breaches of warranty in the representations and warranties of Res-Care or
Res-Care Sub set forth herein (disregarding for purposes of this provision
the Material Adverse Effect or materiality qualification in any single
representation or warranty) which individually, or in the aggregate, has
had, or is reasonably likely to have a Material Adverse Effect on Res-Care
and its subsidiaries or is reasonably likely to prevent or to materially
burden or materially impair the ability of Res-Care to consummate the
transactions contemplated by this Agreement, or if there has been any
failure on the part of Res-Care or Res-Care Sub to comply in all material
respects with its obligations hereunder;
(d) by either Res-Care or the Company (provided that the terminating
party is not then in material breach of any representation, warranty or
covenant or other agreement contained herein) if there shall have been a
material breach of any covenant or agreement by the other party, which
breach either (i) is not cured within 30 days following written notice to
the party committing such breach or (ii) by its nature, cannot be cured
prior to August 31, 1999;
(e) by either Res-Care or the Company, if the Closing Price equals
less than $16.00;
(f) by either Res-Care or Company if the transactions contemplated by
this Agreement have not been consummated by August 31, 1999, unless such
failure of consummation is due to the failure of the terminating party to
perform or observe the covenants, agreements and conditions hereof to be
performed or observed by it at or before the Closing Date;
(g) by either Res-Care or Company if the conditions precedent to its
obligations to close this Agreement have not been satisfied or waived by it
at or before the Closing Date unless such failure to satisfy conditions
precedent is due to the failure of the terminating party to use its best
efforts to satisfy such conditions;
(h) by either Res-Care or Company if any governmental authority shall
have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable;
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(i) by Company if it has received and accepts a Superior Proposal
pursuant to Section 6.3. If this Agreement is terminated by Company's Board
of Directors in order to accept a Superior Proposal pursuant to Section
6.3, Company shall be obligated to pay Res-Care, within five (5) Business
Days of such termination, a fee (the "Termination Fee") in cash in an
amount equal to $7.5 million, plus all reasonable expenses, including
legal, accounting, valuation and tax expenses, incurred by Res-Care in
connection with the due diligence investigation of Company and the
negotiation and preparation of this Agreement and the transactions
contemplated herein; or
(j) by Res-Care if it does not obtain shareholder approval as
contemplated by Section 8.1 hereof.
In the event this Agreement is terminated pursuant to this Section 11.1, this
Agreement shall be of no further force and effect and no party hereto shall have
any further liability to any other party hereto, except pursuant to the
provisions of this Agreement which by their terms expressly survive any
termination hereof.
11.2 EXPENSES. Company shall pay all charges and expenses, including
those of the Exchange Agent, in connection with the transactions contemplated in
Article II hereof, and Res-Care shall reimburse Company for such charges and
expenses. Except as provided in Section 11.1 hereto, whether or not the Merger
is consummated, all costs and expenses incurred in connection with this
Agreement and the Merger and other transactions contemplated by this Agreement
shall be paid by the party incurring such expense.
11.3 ENTIRE AGREEMENT. This Agreement and the Exhibits and Schedules
hereto constitute and contain the complete agreement among the parties with
respect to the transactions contemplated hereby and supersede all prior
agreements and understandings among the parties with respect to such
transactions, provided, however, that except as modified herein the terms of the
Confidentiality Letter shall remain in effect. The parties hereto have not made
any representation or warranty except as expressly set forth in this Agreement,
the Certificate of Merger or in any certificate or schedule delivered pursuant
hereto. All references in this Agreement to "Schedules" or "Exhibits" shall
refer to the schedules and exhibits attached hereto unless otherwise expressly
provided herein.
11.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants or agreements shall terminate at the Closing Date or upon
the termination of this Agreement pursuant to Section 11.1, as the case may be,
except that the agreements set forth in Article II and this Article XI and
Sections 5.4, 5.7, 6.4, 7.3, 7.4 and any other covenant or agreement which
contemplates performance after the Closing Date shall survive the Closing Date
indefinitely and those set forth in this Article XI and Sections 5.4, 6.4 and
any other covenant or agreement which contemplates performance after the
termination hereof shall survive the termination hereof indefinitely.
11.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and such counterparts together shall constitute only one original.
11.6 NOTICES. All notices, demands, requests or other communications that
may be or are required to be given, served or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be (a) mailed by
registered or certified mail, return receipt requested, postage prepaid, (b)
transmitted by hand delivery, (c) sent via a
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recognized national overnight courier service, or (d) sent via facsimile
confirmed in writing to the recipient, in each case as follows:
<TABLE>
<S> <C>
If to Company: Timothy J. Vogel
President
PeopleServe, Inc.
5555 Parkcenter Circle
Suite 200
Dublin, Ohio 43017
Telephone: (614) 789-6161
Facsimile: (614) 791-2377
with a copy to: Roger E. Lautzenhiser, Esq.
Vorys, Sater, Seymour and Pease LLP
52 East Gay Street
P.O. Box 1008
Columbus, Ohio 43216
Telephone: (614)464-6291
Facsimile: (614) 464-6350
If to Res-Care or Res-Care, Inc.
Res-Care Sub: 10140 Linn Station Road
Louisville, Kentucky 40223
ATTN: Ronald G. Geary, Chairman,
President and Chief
Executive Officer
Telephone: (502) 394-2271
Facsimile: (502) 394-2206
with a copy to: Res-Care, Inc.
10140 Linn Station Road
Louisville, Kentucky 40223
ATTN: David S. Waskey
General Counsel
Telephone: (502) 394-2264
Facsimile: (502) 394-2206
</TABLE>
Each party may designate by notice in writing a new address or facsimile number
to which any notice, demand, request or communication may thereafter be so
given, served or sent. Each notice, demand, request or communication that is
mailed, delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent and received for all purposes at such time as
it is delivered to the addressee (with the return receipt, the delivery receipt,
the affidavit of messenger or (with respect to a facsimile) the facsimile
generated confirmation being deemed conclusive evidence of such delivery) or at
such time as delivery is certified by the addressee upon presentation. In the
case of delivery by facsimile, delivery after 5:00 p.m. prevailing local time
(at point of delivery) shall be deemed given, sent and received on the following
business day.
11.7 SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement and the rights,
interests and obligations hereunder shall be binding upon and shall inure to the
benefit of the parties hereto and, except as otherwise specifically provided for
herein, their respective successors and assigns. Except as provided in Article
II and Sections 5.7, 7.3 and 7.4 hereof, nothing in this Agreement, express or
implied, is intended to confer on any party other than the parties hereto and
their respective successors and assigns any rights,
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remedies, obligations or liabilities under or by reason of this Agreement. This
Agreement may not be assigned by any party without the prior written consent of
the others, provided, however, that Res-Care shall be permitted at any time
prior to the Effective Time to cause the assignment of Res-Care Sub's rights and
obligations under this Agreement to another wholly-owned subsidiary of Res-Care
(without in any way relieving Res-Care of its obligations under this Agreement
with respect to Res-Care Sub or the Merger).
11.8 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Kentucky without giving effect
to principles of conflicts of law thereof.
11.9 AMENDMENT AND MODIFICATION. This Agreement may be amended or
modified only by written agreement of the parties hereto. This Agreement may be
amended by the parties at any time before or after any required approval of
matters presented in connection with the Merger by the shareholders of Company
and Res-Care; provided, however, that after any such approval, there shall be
made no amendment that by law requires further approval by such shareholders
without the further approval of such shareholders.
11.10 WAIVER AND OTHER ACTION. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) waive compliance with any
of the agreements or conditions contained in this Agreement except for those in
Article VIII. The failure of a party to insist upon strict adherence to any term
of this Agreement on any occasion shall not be considered a waiver or deprive
that party of the right thereafter to insist upon strict adherence to that term
or any other term of this Agreement. No waiver of any breach of this Agreement
shall be held to constitute a waiver of any other or subsequent breach. Any
waiver must be in writing.
11.11 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision were never a part hereof; the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance; and in lieu of
such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
11.12 HEADINGS. All headings and captions in this Agreement are intended
solely for the convenience of the parties and none shall be deemed to affect the
meaning or construction of any provision hereof.
11.13 CONSTRUCTION. All references herein to the masculine, neuter or
singular shall be construed to include the masculine, feminine, neuter or
plural, where applicable.
11.14 ENFORCEMENT. In the event it is necessary for any party to retain
legal counsel or institute legal proceedings to enforce the terms of this
Agreement, including, without limitation, obligations upon expiration or
termination, the prevailing party shall be entitled to receive from the
nonprevailing party, in addition to all other remedies, all costs of such
enforcement including, without limitation, attorney's fees and court costs and
including appellate proceedings.
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11.15 FURTHER ASSURANCES. Each party covenants and agrees to execute and
deliver, prior to or after the Merger such further documents as may reasonably
be requested by another party to fully effectuate the transactions provided for
herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"Res-Care"
RES-CARE, INC., a Kentucky corporation
By: /s/ RONALD G. GEARY
----------------------------------------
RONALD G. GEARY
Chairman, President and Chief Executive
Officer
"Res-Care Sub"
RES-CARE SUB, INC., a Delaware corporation
By: /s/ RONALD G. GEARY
----------------------------------------
RONALD G. GEARY
President
"Company"
PEOPLESERVE, INC., a Delaware corporation
By: /s/ TIMOTHY J. VOGEL
----------------------------------------
TIMOTHY J. VOGEL
President and CEO
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APPENDIX B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of this 2nd day of April, 1999, by and between Res-Care, Inc., a
Kentucky corporation ("Res-Care"), and the persons and entities listed on the
signature page hereto (each a "Shareholder" and collectively the
"Shareholders"), all of whom are shareholders of PeopleServe, Inc., a Delaware
corporation (the "Company").
RECITALS
Contemporaneous herewith, Res-Care and the Company are entering into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which a
wholly-owned subsidiary of Res-Care will be merged with and into the Company,
and the Company's capital stock will be converted into, or exchanged for,
Res-Care common stock. Such transaction shall be referred to herein as the
"Merger." Terms used in the Merger Agreement and not defined herein are used
herein as therein defined.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
1. Representations, Warranties and Agreements of the Shareholders. Each
of the Shareholders, severally and not jointly, hereby represents and warrants
to Res-Care that as of the date hereof, the Shareholder is the beneficial and
registered owner of the number of Common Shares, Convertible Shares, Redeemable
Shares, and Company Warrants set forth opposite such Shareholder's name on
Schedule I attached hereto. As of the date hereof, except as set forth on
Schedule I hereto, the Shareholder does not (i) beneficially own any shares of
any class or series of capital stock of any of the Target Entities or any
securities convertible into or exercisable for shares of any class or series of
capital stock or interests in any of the Target Entities or (ii) have any
options, warrants or other rights to acquire any shares of any class or series
of capital stock or interests of any of the Target Entities or any securities
convertible into or exercisable for shares of any class or series of the capital
stock or interests in any of the Target Entities.
2. Pooling Accounting Treatment. Each of the Shareholders, severally and
not jointly agrees that it or he has not taken and will not take any action that
would reasonably be expected to adversely affect the ability of Res-Care or the
Company to treat the Merger as a pooling-of-interests solely as the result of
the actions of the Shareholder. The taking of any action prohibited by the
previous sentence by any of the Shareholders, or the failure of any of the
Shareholders to take any action required by the previous sentence, shall, if the
Merger is not able to be accounted for as a pooling-of-interests, constitute a
breach of this Agreement by the Company for the purposes of Section 11.1 of the
Merger Agreement.
3. Registration Rights.
(a) Res-Care shall as promptly as reasonably practicable, but in no event
less than ten (10) days, give prior written notice to all holders of outstanding
Issued Shares if, at any time within 2 years after the Effective Time, it
proposes to register any Res-Care
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Shares pursuant to a registration statement under the Securities Act for sale to
the public for its own account or the account of any other holder of securities
of Res-Care (except with respect to registrations pursuant to a registration
statement on Form S-4, Form S-8 or another form at the time not available for
registering the Res-Care Shares for sale to the public or such other
registrations in connection with any acquisition of another person or in
connection with option or employee benefit plans of the Company or shelf
registrations of Res-Care securities (other than common shares) for selling
security holders on Form S-3 or other similar form). Upon the written request of
any holder of Issued Shares, received by Res-Care within ten (10) days after the
receipt of notice from Res-Care pursuant to this Section 3, to register Issued
Shares, Res-Care will cause the Issued Shares as to which registration shall
have been so requested to be included in the securities to be covered by the
registration statement proposed to be filed by Res-Care; provided that in no
event shall Res-Care be required to include in the firm commitment portion of
the underwriting more than the greater of (x) 1,250,000 Issued Shares or (y)
55.5% of the aggregate number of Res-Care Shares included in such offering by
all shareholders of Res-Care as of the date of this Agreement and by
Shareholders, and provided further that in all cases the holders of outstanding
Issued Shares shall have the right to provide up to one-half of the total number
of shares to be offered pursuant to any underwriters' over-allotment offering.
For example, if such other shareholders request registration of 1,500,000
Res-Care Common Shares, the Shareholders shall have the right to request
registration of 1,875,000 Issued Shares. To the extent holders of Issued Shares
seek to register a greater number of Issued Shares, the shares to be included in
the primary offering and the underwriters' overallotment option shall be subject
to pro rata reduction based upon the number of Issued Shares requested to be
included in the offering.
(b) In the event that any registration pursuant to this Section 3 shall be
an underwritten public offering, if and to the extent that the managing
underwriter of that offering shall be of the opinion that inclusion of all
Issued Shares requested to be registered by the holders and Res-Care Shares by
any shareholder would adversely affect the marketing of the Res-Care Shares to
be sold by Res-Care or such other security holders, the amount of Issued Shares
to be included in such an underwriting for the accounts of requesting holders
and any other shareholder, may be reduced by reducing the number of Issued
Shares offered by the holders and the number of Res-Care Shares of any other
shareholder pro rata, based on the number of Issued Shares to be included in the
registration statement by each holder (but for the reduction contemplated by
this Section 3(b)) and the number of Res-Care Shares to be included by any other
shareholder (but for the reduction contemplated by this Section 3(b)) (a
"Reduction"); provided however, that in the event of a Reduction, the
registration rights granted in this Section 3 shall continue for a period of 2
years after the Effective Time with respect to any Issued Shares with respect to
which a holder of Issued Shares requested inclusion in such underwritten
offering and which Issued Shares were not so included solely as a result of such
Reduction.
(c) Notwithstanding the foregoing provisions, Res-Care may withdraw or
delay any registration statement referred to in Sections 3(a) and (b) without
thereby incurring any liability to the holders of Issued Shares, other than the
obligation to provide identical registration for one additional registration by
the holders of Issued Shares during such 2 year period that would otherwise
trigger the registration rights provided for in Sections 3(a) and (b) but for
the previous filing.
(d) Res-Care shall use reasonable commercial efforts to file, and have
declared effective by March 1, 2000, a shelf registration statement on Form S-3
(or other similar
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registration form) covering under all circumstances a minimum of 300,000 Issued
Shares, and shall use reasonable commercial efforts to have such registration
statement remain effective for 90 days from the original date of effectiveness;
provided that such 90 day period shall be extended by the length of all
suspension periods under Section 4(h) hereof. In the case of a Reduction, the
shelf registration statement shall also cover the amount of Issued Shares as to
which the Shareholders have requested registration but shall have been subject
to a Reduction. In the event the underwritten offering has not occurred as of
that date, the shelf registration statement shall also cover the 1,250,000
Issued Shares as to which piggy-back registration rights have not yet been
utilized.
(e) All expenses incurred by Res-Care in complying with this Section,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel and independent public accountants
for Res-Care, fees and expenses (including counsel fees) incurred in connection
with complying with state securities or "blue sky" laws, fees of the National
Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents
and registrars, costs of insurance, and fees and expenses of a single counsel to
selling securityholders not to exceed $10,000, but excluding any Selling
Expenses (as defined below) are called "Registration Expenses." All fees and
disbursements of any additional counsel for, or any consultants to, the
participating holders and all underwriting discounts and selling commissions
applicable to the sale of the registrable Issued Shares are called "Selling
Expenses." Res-Care will pay all Registration Expenses in connection with the
registration statement under this Section, except to the extent that any such
Registration Expenses must be borne by the participating sellers in order to
permit the sale of Issued Shares in any state under the state securities or
"blue sky" laws thereof. All Selling Expenses in connection with the
registration statement under this Section, and any Registration Expenses borne
by the sellers pursuant to the preceding sentence shall be borne by the
participating sellers in proportion to the number of shares sold by each.
(f) Each holder of registrable Issued Shares, whether or not included in
the registration contemplated by this Section, shall agree with Res-Care and the
underwriters to a market holdback or lock-up on such terms as the underwriters
shall reasonably request and which shall not exceed 120 days; provided however,
that all persons entitled to registration rights with respect to Res-Care Shares
who are not parties to this Agreement but hold at least 50,000 Res-Care Shares
(other than holders of Res-Care's 6% Convertible Subordinated Notes due 2004 and
any other similar convertible security which may be issued with registration
rights), all other persons selling Res-Care Shares in such offering, all Company
employees holding in excess of 1% of the voting shares of Res-Care on a fully
diluted basis and all directors and executive officers of Res-Care shall also
have agreed to a market holdback or lock-up under similar terms and for the same
period of time, whether or not required by such underwriters.
(g) For a period of one year after the Effective Time: (1) Res-Care shall
not grant to any third party any demand or piggy-back registration rights which
permit such third parties the right to sell Res-Care Shares on a priority
(either in time or amount) basis to the holders of Issued Shares; or (2) without
the consent of the holders of a majority of the Issued Shares (which majority
shall include RFE Investment Partners V, L.P. ("RFE") and Fleet Equity Partners
VI, LP ("Fleet"), Res-Care shall not grant the right to register on a pari passu
basis more than 30% of the Res-Care Shares issued to them in the transaction
giving rise to the registration rights.
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4. Registration Procedures. If and whenever Res-Care is required by the
provisions of Section 3 hereof to effect the registration of the Issued Shares,
Res-Care shall:
(a) Prepare and file with the SEC a registration statement and to
cause such registration statement to become and remain effective subject to
the terms provided herein.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and
current and to comply with the provisions of the Securities Act with
respect to the sale of or other disposition of all Issued Shares covered by
such registration statement, including such amendments and supplements as
may be necessary to reflect the intended method of disposition of the
prospective seller or sellers of such Issued Shares but for no longer than
ninety (90) days subsequent to the effective date of such registration;
provided that such 90 day period shall be extended by the length of all
suspension periods under Section 4(h) hereof.
(c) Furnish to each prospective seller of Issued Shares such number of
copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Securities Act, and such other documents, as
such seller may reasonably request in order to facilitate the public sale
or other disposition of the Issued Shares of such seller.
(d) Notify each seller of Issued Shares covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a
result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make
the statement therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare
and furnish to such seller a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such shares, such prospectus
shall not include 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 or incomplete in the light of the
circumstances then existing.
(e) Cause all such Issued Shares registered hereunder to be listed on
each securities exchange or approved for quotation on any inter-dealer
quotation system on which similar securities issued by Res-Care are then
listed or quoted.
(f) Provide a transfer agent and registrar for all Issued Shares
registered pursuant to such registration statement and a CUSIP number of
all such Issued Shares not later than the effective date of such
registration.
(g) Otherwise use its reasonable efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, but not more than eighteen months
beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
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(h) Each seller of Issued Shares shall not (until further notice)
effect sales of shares covered by any registration statement after receipt
of telegraphic or written notice from Res-Care to suspend sales to permit
Res-Care to correct or update a registration statement or prospectus.
5. Indemnification and Contribution.
(a) Res-Care will indemnify and hold harmless, to the fullest extent
permitted by law, each Shareholder participating in any registration, and such
Shareholder's officers, directors, partners and controlling persons (within the
meaning of the Securities Act) against all losses, claims, damages, liabilities
and expenses, joint or several (or actions in respect thereof), arising out of
or caused by any untrue or alleged untrue statement of material fact contained
in any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, or any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or arise out of or are based in whole or in
part on any inaccuracy in the representations and warranties of Res-Care
contained in an underwriting agreement with the underwriters or any failure of
Res-Care to perform its obligations under such underwriting agreement; and will
reimburse each such person for any legal and other expenses as such expenses are
reasonably incurred by them in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; provided, however, that Res-Care will not be liable in any
such case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission in any registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto made in
reliance upon and in conformity with the information furnished in writing to
Res-Care by any such person specifically for use therein. In connection with an
underwritten offering, Res-Care will indemnify such underwriters, their officers
and directors and each person who controls such underwriters (within the meaning
of the Securities Act) to the same extent as provided above with respect to the
indemnification of the sellers.
(b) In connection with any registration in which a Shareholder is
participating, each such Shareholder will furnish to Res-Care in writing such
information relating to disclosure concerning the Shareholder required by the
Securities Act to be included in such registration statement for use in
connection with any such registration statement or the prospectus contained
therein and, to the fullest extent permitted by law, will indemnify and hold
harmless Res-Care and the underwriter(s), the directors and officers and each
person who controls Res-Care and the underwriter(s), as applicable, (within the
meaning of the Securities Act) and any other participating Shareholder against
any losses, claims, damages, liabilities and expenses, joint or several,
resulting from any untrue or alleged untrue statement of material fact contained
in such registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, or any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or arise out of or are based in whole or in
part on any inaccuracy in the representations and warranties of such Shareholder
contained in an underwriting agreement with the underwriters or any failure of
such Shareholder to perform its obligations under such agreement; provided,
however, that such Shareholder will be liable hereunder in any such case if and
only to the extent that such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in strict conformity with information
pertaining to such Shareholder, as such, furnished in writing to Res-Care
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by such Shareholder stated to be specifically for use in such registration
statement and prospectus; provided further however, that the liability of each
such Shareholder hereunder shall be limited to the proportion of any such loss,
claim, damage, liability or expense which is equal to the proportion that the
public offering price of the shares sold by such Shareholder under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by such Shareholder from the sale of the Issued Shares covered by such
registration statement.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing 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 such indemnified party for contribution or otherwise other than
under this Section 5 and shall only relieve it from any liability which it may
have to such indemnified party under this Section 5 if and to the extent the
indemnifying party is prejudiced by such omission. In case any such action shall
be brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in and, to the extent it may wish, jointly with
all other indemnifying parties similarly notified, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified party
and indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall have
employed such counsel in connection with the assumption of legal defenses in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel) or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall be at
the expense of the indemnifying party. If the defense is assumed by the
indemnifying party, such indemnifying party will not be subject to any liability
for any settlement made by the indemnified party without its consent (but such
consent will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any
Shareholder exercising rights under this Agreement, or any officer, director,
partner or controlling person of any such Shareholder, makes a claim for
indemnification pursuant to this Section 5 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
Shareholder or any such officer, director, partner or controlling person in
circumstances for which indemnification is
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provided under this Section 5; then, and in each such case, Res-Care and such
Shareholder will contribute to the aggregate losses, claims, damages,
liabilities to which they may be subject (after contribution from others) in
such manner as is appropriate to reflect not only the relative benefits received
by each of the contributing parties, but also the relative fault of each of the
contributing parties. For these purposes, the relative fault shall be determined
by reference to, among other things, whether the untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
Res-Care, the Shareholder, or the underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. Similarly, the relative benefit conferred shall be
apportioned in such manner so that such Shareholder is responsible for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, and Res-Care is
responsible for the remaining portion; provided, however, that, in any such
case, (A) no shareholder will be required to contribute any amount in excess of
the public offering price of all such securities offered by it pursuant to such
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
(e) The indemnification and contribution provided for under this Agreement
will remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director, or controlling
person of such indemnified party and will survive the transfer of securities.
Res-Care also agrees to make such provisions as are reasonably requested by any
indemnified party, for contribution to such party in the event Res-Care's
indemnification is unavailable for any reason.
6. Executed in Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and executed shall be deemed an
original and such counterparts together shall constitute only one original.
7. Amendments.
(a) This Agreement may not be modified, amended, altered or supplemented,
except upon the execution and delivery of a written agreement executed by a
majority of the Shareholders, which majority shall include RFE and Fleet.
(b) For purposes of this Agreement, the term "Merger Agreement" includes
the Merger Agreement, as the same may be modified or amended from time to time.
8. Additional Shares. If, after the date hereof any Shareholder acquires
beneficial ownership of any shares of the capital stock of any of the Target
Entities including, without limitation, upon exercise of any option, warrant or
right to acquire shares of capital stock or through any stock dividend or stock
split, the provisions of this Agreement shall be applicable to such additional
shares. The provisions of the immediately preceding sentence shall be effective
with respect to such additional shares without action by any person or entity
immediately upon the acquisition by a Shareholder of beneficial ownership of
such additional shares.
9. Exercise of Company Warrants. Each of the Shareholders, in its
capacity as a warrant holder, shall exercise (utilizing net exercise factors)
the number of Company Warrants held by such Majority Shareholder at or
immediately prior to the Closing Date (after satisfaction of all conditions to
closing under the Merger Agreement) and purchase Common Shares pursuant to the
terms of the Warrant to Purchase Common Stock of VOCA Holdings, Inc. dated
December 17, 1996.
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10. Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal successors and permitted assigns; provided that no Shareholder may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of Res-Care, except that the rights
and benefits of a Shareholder hereunder may be assigned to a transferee or
assignee in connection with transfer or assignment of any Issued Shares owned by
such Shareholder (A) to any person or entity which is a majority-owned
subsidiary of a Shareholder, (B) to a constituent partner of a Shareholder or
the estate of such a constituent partner or to a liquidating trust for the
benefit of such partners, (C) to a successor trustee of a Majority Shareholder
in its capacity as trustee, (D) in the case of a Shareholder who is an
individual, transfers to members of the immediately family, personal
foundations, trusts, partnerships, limited liability companies and the like
owned and/or controlled solely by such Shareholder and his immediate family for
estate planning purposes, and (E) to any other person or entity, provided that
any transfer pursuant to this Section 10 shall be permitted if (a) such transfer
may otherwise be effected in accordance with applicable securities laws, (b)
such transfer otherwise complies with this Agreement, and (c) such assignee or
transferee executes a written instrument agreeing to be bound by the terms and
provisions of this Agreement. Any such transfer or assignment permitted hereby
shall inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the parties hereto.
11. Enforcement. In the event it is necessary for any party to retain
counsel or institute legal proceedings to enforce the terms of this Agreement,
the prevailing party shall be entitled to receive from the non-prevailing party,
in addition to all other remedies, all costs of such enforcement including,
without limitation, all attorney's fees and court costs and including appellate
proceedings. The parties to this Agreement acknowledge and agree that a breach
of any of the covenants of Res-Care or the Shareholders set forth in this
Agreement may not be compensable by payment of money damages and, therefore,
that the covenants of the foregoing parties set forth in this Agreement may be
enforced in equity by a decree requiring specific performance. Without limiting
the foregoing, if any disputes arise concerning the sale or other disposition of
any of the Issued Shares, the parties to this Agreement agree that an injunction
may be issued restraining the sale or other disposition of such Issued Shares or
interest or rescinding any such sale or other disposition, pending resolution of
such controversy. Such remedies shall be cumulative and non-exclusive and shall
be in addition to any other rights and remedies the parties may have under this
Agreement. Any transfer or acquisition or Issued Shares in violation of this
Agreement shall be null and void ab initio.
12. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Kentucky without giving effect
to principles of conflicts of law thereof.
13. Further Assurances. Each party covenants and agrees to execute and
deliver, prior to or after the Merger such further documents as may reasonably
be requested by another party to fully execute the transactions provided for
herein.
14. Termination. This Agreement and the transactions contemplated hereby
shall terminate upon the termination of the Merger Agreement pursuant to Section
11.1 thereof.
15. Effectiveness. This Agreement shall become effective, only as to
those Shareholders who have executed a counterpart hereof, upon execution and
delivery of Shareholders having the right to receive 75% of the Issued Shares
issuable in the Merger (excluding for these purposes Issued Shares issuable with
respect to Company Options).
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IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
RES-CARE, INC.
a Kentucky corporation
By: /s/
-----------------------------------
SHAREHOLDERS
Fleet Venture Resources, Inc.
By: /s/
-----------------------------------
Kennedy Plaza Partners
By: /s/
-----------------------------------
Chisholm Partners III, L.P.
By: Silverado III Corp., its General
Partner
By: /s/
-----------------------------------
RFE Investment Partners V, L.P.
By: RFE Associates V, L.P.,
its General Partner
By: /s/
-----------------------------------
Fleet Equity Partners VI, L.P.
By: Fleet Growth Resources II, Inc.,
its General Partner
By: /s/
-----------------------------------
/s/
--------------------------------------
Vincent P. Pettinelli
/s/
--------------------------------------
Timothy J. Vogel
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/s/
--------------------------------------
Ray C. Anderson
/s/
--------------------------------------
Dennis C. Henegar
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APPENDIX C
MAJORITY SHAREHOLDERS' AGREEMENT
This Majority Shareholders' Agreement (this "Agreement") is made and
entered into as of this 2nd day of April, 1999, by and between Res-Care, Inc., a
Kentucky corporation ("Res-Care"), and the persons and entities listed on the
signature page hereto (each a "Majority Shareholder" and collectively the
"Majority Shareholders"), all of whom are shareholders of PeopleServe, Inc., a
Delaware corporation (the "Company").
RECITALS
A. Contemporaneous herewith, Res-Care and the Company are entering into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which a
wholly-owned subsidiary of Res-Care will be merged with and into the Company,
and the Company's capital stock will be exchanged for, Res-Care common stock.
Such transaction shall be referred to herein as the "Merger." Pursuant to the
Merger Agreement, the Merger is to be accounted for as a pooling of interests.
Terms used in the Merger Agreement and not defined herein are used herein as
therein defined.
B. APB Opinion No. 16, ASR No. 135 (as amended by SAB No. 65 and No. 76)
and SEC Rules 144 and 145 place significant restrictions on pre-closing and
post-closing trading in securities by affiliates of the Company and Res-Care.
Violation of these restrictions could, among other things, impair the use of the
pooling-of-interests accounting treatment for the Merger.
C. The Majority Shareholders desire to provide Res-Care assurances that
they will not engage in transactions involving the securities of the Company or
Res-Care which could impair the use of the pooling-of-interests accounting
treatment for the Merger or otherwise violate the provisions set forth herein.
D. Res-Care also requests, and the Majority Shareholders desire to
provide, certain other representations, warranties, covenants and agreements in
connection with the Merger and the transactions contemplated by the Merger
Agreement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
1. Representations, Warranties and Agreements of the Majority
Shareholders. Each of the Majority Shareholders, severally and not jointly,
hereby represents and warrants to Res-Care as follows:
(a) Due Organization; Power and Authority. If such Majority Shareholder is
a corporation, partnership or limited liability company, it is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Such Majority Shareholder has the necessary power and authority to
enter into this Agreement and to perform its or his obligations hereunder. The
execution and delivery of this Agreement has been duly and validly authorized by
all necessary action on the part of such Majority Shareholder.
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(b) No Conflicts, Consents or Approvals. The execution and delivery of
this Agreement by the Majority Shareholder will not (i) conflict with or result
in a violation or breach of any of the provisions of any Governing Documents of
such Majority Shareholder if such Majority Shareholder is a corporation,
partnership or limited liability company, (ii) conflict with or violate any law,
rule, regulation, ordinance, order, writ, injunction, judgment or decree
applicable to the Majority Shareholder or by which any of its or his properties
or assets are bound or (iii) conflict with, or result in any breach of or
constitute a violation of or default under (with or without notice or lapse of
time or both) any note, bond, indenture, mortgage, agreement, contract or other
instrument to which the Majority Shareholder is a party or by which the Majority
Shareholder or any of its or his properties or assets are bound. Except for
filings or approvals provided for in the Merger Agreement, no waiver, approval,
authorization, order, license, permit, franchise or consent of or registration,
declaration, qualification or filing with any Agency or any other person or
entity is required to be obtained or made by the Majority Shareholder in
connection with the execution, delivery and performance by the Majority
Shareholder of this Agreement.
(c) Litigation. There is no claim, action, suit or proceeding pending or,
to the knowledge of the Majority Shareholder, threatened against the Majority
Shareholder or any of its or his properties which seeks to prohibit, restrict or
delay consummation of the transactions contemplated hereby and there is no
judgment, decree, injunction, ruling or order of any court, Agency or arbitrator
outstanding against the Majority Shareholder having any such effect.
(d) Enforceability. This Agreement, when duly executed and delivered by
the Majority Shareholder, will constitute the valid, binding and enforceable
obligations of the Majority Shareholder, enforceable against it or him in
accordance with its terms, subject to applicable bankruptcy, reorganization,
insolvency, moratorium and other laws affecting creditors' rights generally from
time to time in effect and general equitable remedies.
(e) Title. As of the date hereof, the Majority Shareholder is the
beneficial and registered owner of the number of Common Shares, Convertible
Shares, Redeemable Shares, Company Warrants and Company Options set forth
opposite such Majority Shareholder's name on Schedule I attached hereto, free
and clear of any mortgage, pledge, assessment, security interest, lien, adverse
claim, levy, charge or other encumbrance of any kind. As of the date hereof,
except as set forth on Schedule I hereto, the Majority Shareholder does not (i)
beneficially own any shares of any class or series of capital stock of any of
the Target Entities or any securities convertible into or exercisable for shares
of any class or series of capital stock or interests in any of the Target
Entities or (ii) have any options, warrants or other rights to acquire any
shares of any class or series of capital stock or interests of any of the Target
Entities or any securities convertible into or exercisable for shares of any
class or series of the capital stock or interests in any of the Target Entities.
(f) Right to Vote and to Transfer Shares. The Majority Shareholder has the
full legal power, authority and right to vote all of the Common Shares,
Convertible Shares and Redeemable Shares, as applicable, owned by it or him in
favor of the Merger and to approve the Merger Agreement and the transactions
contemplated thereby, without the consent or approval of, or any other action on
the part of, any other person or entity. Without limiting the generality of the
foregoing, except for this Agreement and the Registration Rights Agreement dated
the date hereof between Res-Care and the Shareholders (as defined therein) (the
"Registration Rights Agreement"), the Majority Shareholder has not entered into
any voting agreement or any other agreement with any
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person or entity with respect to any of the Common Shares, Convertible Shares or
Redeemable Shares or granted any person or entity any proxy (revocable or
irrevocable) or power of attorney with respect to any of such securities,
deposited any of such securities in a voting trust or entered into any
arrangement or agreement with any person or entity limiting or affecting the
Majority Shareholder's ability to enter into this Agreement or legal power,
authority or right to vote such securities in favor of the Merger or to approve
the Merger Agreement or any of the transactions contemplated thereby.
(g) Independent Investigation. Each of the Majority Shareholders hereby
acknowledges and affirms that such Majority Shareholder has conducted and
completed its or his own investigation, analysis and evaluation of Res-Care and
its subsidiaries, that such Majority Shareholder has made all such reviews and
inspections of the business, assets, results of operations, condition (financial
and otherwise) and prospects of Res-Care and its subsidiaries as such Majority
Shareholder has deemed necessary or appropriate, that such Majority Shareholder
has had the opportunity to request all information such Majority Shareholder has
deemed relevant to the foregoing from Res-Care and has received responses it
deems adequate and sufficient to all such requests for information, and that in
making its or his decision to enter into this Agreement and to consummate the
transactions contemplated hereby it or he has relied solely on (i) its or his
own investigation, analysis and evaluation of Res-Care and its subsidiaries,
including without limitation Res-Care's Annual Report on Form 10-K for the year
ended December 31, 1998, and all periodic reports, if any, on Form 8-K and Form
10-Q filed with the SEC after December 31, 1998, and (ii) the representations
and warranties of Res-Care in Article IV of the Merger Agreement and the
covenants of Res-Care in Articles V and VII of the Merger Agreement.
(h) Shareholder Agreements. Anything contained in subsections (b), (e) and
(f) of this Section 1 to the contrary notwithstanding, the representations,
warranties and agreements set forth in those subsections shall not be applicable
to, or be deemed breached as a result of, any of the agreements described in
Schedule II attached to this Agreement to which the Majority Shareholders are
variously parties. Each of the Majority Shareholders agrees that it will take
all such action as may be necessary to terminate each of such Shareholder
Agreements to which it is a party at or prior to Closing.
2. Trading Restrictions During Restricted Period. From the date of the
Confidentiality Agreement through the later of (i) the date of publication by
Res-Care of financial results covering at least 30 days of combined operations
of Res-Care and the Target Entities (which shall be subsequent to the Effective
Time and within 135 days of the Effective Time) and (ii) the date of termination
of the Merger Agreement if the Closing does not occur (the "Restriction
Period"), each Majority Shareholder represents and agrees that it has not and
shall not purchase or sell any capital stock or other securities of either the
Target Entities or Res-Care nor has it or shall it otherwise reduce its risk
relative to its securities position in either the Target Entities or Res-Care.
3. Securities Laws Matters. Each of the Majority Shareholders, severally
and not jointly, hereby represents, warrants to and agrees with Res-Care as
follows:
(a) It shall not make any sale, transfer or other disposition of the
Res-Care Shares received in the Merger in violation of the Securities Act or the
rules and regulations of the SEC promulgated thereunder.
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(b) That, in connection with the representations and warranties made herein
and the transactions to be performed as contemplated under this Agreement, such
Majority Shareholder shall be deemed to be an "affiliate" of the Company for
purposes of Rule 145.
(c) It has been advised that the Issued Shares will be registered with the
SEC pursuant to the Registration Statement, however, it has also been advised
that the Issued Shares received by it must be held indefinitely unless (i) the
distribution of those shares has been registered under the Securities Act, (ii)
in the opinion of counsel acceptable to Res-Care and its counsel, the proposed
sale of those shares complies with the provisions of Rule 145(d) promulgated by
the SEC under the Securities Act or (iii) in the opinion of counsel acceptable
to Res-Care and its counsel, some other exemption from registration is available
with respect to the proposed sale, transfer or other disposition of those
shares.
(d) That Res-Care is under no obligation to register the sale, transfer or
other disposition of the Issued Shares to be received by such Majority
Shareholder or to take any other action necessary in order to make compliance
with an exemption from registration available to such Majority Shareholder,
except as expressly provided in this Agreement or the Registration Rights
Agreement.
(e) That stop transfer instructions will be given to the transfer agent of
Res-Care with respect to the Issued Shares received by it, and there will be
placed on the certificates representing those shares, and any certificates
delivered in substitution therefor, a legend stating in substance as follows:
"The shares evidenced by this certificate were issued in a transaction
to which Rule 145 under the Securities Act of 1933 applies and, unless the
distribution thereof has been registered under the Securities Act of 1933,
such shares may not be sold, pledged or otherwise transferred except in
accordance with an exemption from the registration requirements of the
Securities Act of 1933."
(f) That the stop transfer instructions and the legend requirement referred
to above will continue in effect until such time as Res-Care is provided with an
opinion of counsel reasonably acceptable to it and its counsel indicating that
any proposed sale, transfer or other disposition of any Issued Shares is in
compliance with the Securities Act and the rules and regulations of the SEC
promulgated thereunder.
4. Pooling Accounting Treatment. Each of the Majority Shareholders
agrees, severally and not jointly, that it or he has and will not take any
action that would reasonably be expected to adversely affect the ability of
Res-Care or the Company to treat the Merger as a pooling-of-interests solely as
the result of the actions of such Majority Shareholder. The taking of any action
prohibited by the previous sentence by any of the Majority Shareholders, or the
failure of any of the Majority Shareholders to take any action required by the
previous sentence, shall, if the Merger is not able to be accounted for as a
pooling-of-interests, constitute a breach of this Agreement by the Company, for
the purposes of Section 11.1 of the Merger Agreement.
5. Agreement to Vote by Majority Shareholders. Each of Fleet Venture
Resources, Inc., RFE Investment Partners V, L.P. and Vincent D. Pettinelli,
severally and not jointly, in it or his capacity as a shareholder of the Company
only, hereby irrevocably and unconditionally agrees to vote or to cause to be
voted all of the Common Shares, Convertible Shares and Redeemable Shares, as
applicable, at the Company's Shareholders' Meeting and at any other annual or
special meeting of shareholders of Company where such matters arise (a) in favor
of the Merger, (b) to approve the Merger Agreement and the transactions
contemplated thereby, (c) to amend the terms of the Convertible Shares
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in the manner contemplated by the Merger Agreement, to enable the holders of the
Convertible Shares to (i) receive Res-Care Shares in the Merger, and (ii)
receive all accrued and unpaid dividends on such Convertible Shares through the
date of such conversion in Res-Care Shares, (d) to amend the terms of the
Redeemable Shares in the manner contemplated by the Merger Agreement, to enable
the holders of the Redeemable Preferred Shares to receive Res-Care Shares in the
Merger, (e) to approve the severance payments to Vincent D. Pettinelli, Timothy
J. Vogel and Scott T. Macomber and the exchange of Company Options owned by
Timothy J. Vogel and Scott T. Macomber for Res-Care Shares, and (f) to take any
and all action reasonably requested by the Company's Board necessary to execute
the transactions contemplated by the Merger Agreement, and each of the other
Majority Shareholders, severally and not jointly, in it or his capacity as a
shareholder of the Company only, hereby irrevocably and unconditionally agrees
to vote or to cause to be voted all of the Common Shares, Convertible and
Redeemable Shares, as applicable, at the Company's Shareholders' Meeting and at
any other annual or special meeting of shareholders of Company where such
matters arise to approve the severance payments to Vincent D. Pettinelli,
Timothy J. Vogel and Scott T. Macomber and the exchange of Company Options owned
by Timothy J. Vogel and Scott T. Macomber for Res-Care Shares, provided however
that such Majority Shareholder has no obligation to approve any transaction in
which he would incur undue material expenses and (f) against (i) any proposal
made in opposition to or in competition with the Merger or any of the other
transactions contemplated by the Merger Agreement, (ii) any merger,
consolidation, sale of assets, business combination, share exchange,
reorganization or recapitalization of the Target Entities, with or involving any
party other than Res-Care or one of its subsidiaries, (iii) any liquidation,
dissolution or winding up of any of the Target Entities, (iv) any extraordinary
dividend by the Company, (v) any change in the capital structure of any of the
Target Entities (other than pursuant to the Merger) and (vi) any other action
that may reasonably be expected to impede, interfere with, delay, postpone or
attempt to discourage the Merger or the other transactions contemplated by the
Merger Agreement or this Agreement or result in a breach of any of the
covenants, representations, warranties or other obligations or agreements of
Company under the Merger Agreement which would materially and adversely affect
Company or its ability to consummate the transactions contemplated by the Merger
Agreement. Each of the Majority Shareholders, severally and not jointly, further
agrees not to take or commit or agree to take any action inconsistent with the
foregoing. If, in lieu of the Company's Shareholders' Meeting, shareholder
action in respect of the Merger or any of the transactions contemplated by the
Merger Agreement is taken by written consent, the provisions of this Agreement
imposing obligations in respect of or in connection with the Company's
Shareholders' Meeting shall apply MUTATIS MUTANDIS to such action by written
consent.
6. Action in Shareholder Capacity Only. Each of the Majority Shareholders
are executing this Agreement solely in their capacity as a shareholder of the
Company, and nothing herein shall prohibit, prevent or preclude any of the
Majority Shareholders from fulfilling any fiduciary duties that such Majority
Shareholder may owe in his capacity as a director of Company, including without
limitation, voting or consenting as a director in favor of an Acquisition
Proposal (as defined in the Merger Agreement) or negotiating with respect to an
Acquisition Proposal in his capacity as an officer or director of the Company.
7. No Solicitation. Each of the Majority Shareholders, severally and not
jointly, in its or his capacity as a shareholder of the Company only, agrees not
to, directly or indirectly, and to cause each entity controlled by it not to,
(i) solicit or encourage the
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initiation or submission of any inquiries, proposals or offers regarding any
acquisition, merger, take-over bid, sale of all or substantially all of the
assets or 15% or more of the outstanding shares of capital stock of any of the
Target Entities, whether or not in writing and whether or not delivered to the
shareholders of Company generally (including without limitation by way of tender
offer) or (ii) participate in any discussion or negotiations regarding, or
furnish to any other person any information with respect to, or otherwise
cooperate in any way with, or participate in, facilitate or encourage any effort
or attempt by any other person to do or seek any of the foregoing; provided
that, notwithstanding the foregoing, each of the Majority Shareholders shall not
be prohibited from taking any such actions as are required, based upon advice of
counsel, to comply with any fiduciary duties that such Majority Shareholder may
have as a director of the Company.
8. Standstill. In the event that the Merger Agreement is terminated, each
of the Majority Shareholders, severally and not jointly, agrees that it shall
not for a period of two (2) years following such termination, directly or
indirectly, and cause each entity controlled by it not to, (i) acquire, offer to
acquire or agree to acquire directly or indirectly by purchase or otherwise any
voting securities of Res-Care, other than solely for investment purposes and not
with the purpose or effect of changing or influencing control of Res-Care, or in
connection with or as a participant in any transaction having that purpose or
effect, (ii) make or in any way participate directly or indirectly in any
"solicitation" of "proxies" to vote (as such terms are used in the proxy rules
of the SEC) or seek to advise or influence any person or entity with respect to
the voting of any voting securities of Res-Care, (iii) form, join or in any way
participate in a "group" within the meaning of Section 13(d)(3) of the Exchange
Act with respect to any voting securities of Res-Care or (iv) otherwise act
alone or in concert with others to seek control or influence the management,
board or directors or policies of Res-Care.
9. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision were never a part thereof; the remaining provisions
hereof shall remain in full force and effect and shall not be effected by the
illegal, invalid or unenforceable provision or by its severance; and in lieu of
such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
10. Executed in Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed and executed shall be
deemed an original and such counterparts together shall constitute only one
original.
11. Amendments.
(a) This Agreement may not be modified, amended, altered or supplemented,
except upon the execution and delivery of a written agreement executed by all of
the parties hereto.
(b) For purposes of this Agreement, the term "Merger Agreement" includes
the Merger Agreement, as the same may be modified or amended from time to time.
12. Additional Shares. If, after the date hereof any Majority Shareholder
acquires beneficial ownership of any shares of the capital stock of any of the
Target Entities including, without limitation, upon exercise of any option,
warrant or right to acquire shares of capital stock or through any stock
dividend or stock split, the provisions of this Agreement shall be applicable to
such additional shares. The provisions of the immediately
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preceding sentence shall be effective with respect to such additional shares
without action by any person or entity immediately upon the acquisition by a
Majority Shareholder of beneficial ownership of such additional shares.
13. Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal successors and permitted assigns; provided that no Majority Shareholder
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the prior written consent of Res-Care, except that
the rights and benefits of a Majority Shareholder hereunder may be assigned to a
transferee or assignee in connection with transfer or assignment of any Issued
Shares owned by such Majority Shareholder (A) to any person or entity which is a
majority-owned subsidiary of a Majority Shareholder, (B) to a constituent
partner of a Majority Shareholder or the estate of such a constituent partner or
to a liquidating trust for the benefit of such partners, (C) to a successor
trustee of a Majority Shareholder in its capacity as trustee, and (D) to any
other person or entity, provided that any transfer pursuant to this Section 13
shall be permitted if (a) such transfer may otherwise be effected in accordance
with applicable securities laws, (b) such transfer otherwise complies with this
Agreement and the Registration Rights Agreement, and (c) such assignee or
transferee executes a written instrument agreeing to be bound by the terms and
provisions of this Agreement. Any such transfer or assignment permitted hereby
shall inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the parties hereto.
14. Enforcement. In the event is necessary for any party to retain
counsel or institute legal proceedings to enforce the terms of this Agreement,
the prevailing party shall be entitled to receive from the non-prevailing party,
in addition to all other remedies, all costs of such enforcement including,
without limitation, all attorney's fees and court costs and including appellate
proceedings.
15. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Kentucky without giving effect
to principles of conflicts of law thereof.
16. Further Assurances. Each party covenants and agrees to execute and
deliver, prior to or after the Merger such further documents as may reasonably
be requested by another party to fully execute the transactions provided for
herein.
17. Termination. This Agreement and the transactions contemplated hereby
shall terminate upon the termination of the Merger Agreement pursuant to Section
11.1 thereof; provided however that upon any such termination the agreement set
forth in Section 8 hereof shall survive such termination as provided in Section
8.
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IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
RES-CARE, INC.
a Kentucky corporation
By: /s/
-----------------------------------
MAJORITY SHAREHOLDERS
Fleet Venture Resources, Inc.
By: /s/
-----------------------------------
Kennedy Plaza Partners
By: /s/
-----------------------------------
Chisholm Partners III, L.P.
By: Silverado III Corp., its General
Partner
By: /s/
-----------------------------------
RFE Investment Partners V, L.P.
By: RFE Associates V, L.P.,
its General Partner
By: /s/
-----------------------------------
Fleet Equity Partners VI, L.P.
By: Fleet Growth Resources II, Inc.,
its General Partner
By: /s/
-----------------------------------
/s/
--------------------------------------
Vincent D. Pettinelli
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APPENDIX D
OPINION OF J.C. BRADFORD & CO., LLC
J.C. BRADFORD & CO. LOGO
The Board of Directors
Res-Care, Inc.
10140 Linn Station Road
Louisville, Kentucky 40223
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Res-Care, Inc. ("Res-Care"), of the issuance by Res-Care of the
Res-Care Shares (the aggregate number of such Res-Care Shares being referred to
herein as the "Merger Consideration") pursuant to the merger (the "Merger")
contemplated by the Agreement and Plan of Merger (the "Merger Agreement"), dated
April 2, 1999, by and among Res-Care, Res-Care Sub, and PeopleServe, Inc.
("PeopleServe"). Capitalized terms used herein, if not otherwise defined herein,
shall have the respective meanings set forth in the Merger Agreement.
In conducting our analysis and arriving at our opinion, we have reviewed
the financial terms of the Merger as set forth in the Merger Agreement in
relation to such financial and other information as we deemed appropriate
including, among other things, the following: (i) the draft of the Merger
Agreement and the related exhibits, schedules, and annexes thereto; (ii) the
historical and current financial position and results of operations of Res-Care
and PeopleServe; (iii) certain internal financial analyses and forecasts of
Res-Care for the fiscal years beginning January 1, 1999 and ending December 31,
2001, prepared by its senior management; (iv) certain internal financial
analyses and forecasts of PeopleServe for the fiscal years beginning January 1,
1999 and December 31, 2003, prepared by its senior management; (v) certain
financial and securities trading data of certain other companies, the securities
of which are publicly traded and that we believed to be comparable to
PeopleServe or relevant to the transaction; (vi) prices paid in certain other
acquisitions and transactions that we believed to be relevant; (vii) reported
price and trading activity for Res-Care Shares; and (viii) such other financial
studies, analyses and investigations as we deemed appropriate for purposes of
our opinion. We also have held discussions with members of the senior management
of Res-Care and PeopleServe regarding the past and current business operations,
financial condition, and future prospects of Res-Care and PeopleServe,
respectively.
In rendering our opinion, we have taken into account our assessment of
general economic, market, and financial and other conditions and our experience
in other transactions, as well as our experience in securities valuation and our
knowledge of the industries in which Res-Care and PeopleServe operate generally.
Our opinion is necessarily based upon the information made available to us and
conditions as they currently exist and can be evaluated as of the date hereof.
We have relied upon the accuracy and
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The Board of Directors
April 29, 1999
Page 2
completeness of all of the financial and other information reviewed by us for
purposes of our opinion and have not assumed any responsibility for, nor
undertaken an independent verification of, such information. With respect to the
internal operating data and financial analyses and forecasts supplied to us, we
have assumed that such data, analyses and forecasts, including Res-Care's
management's views of the amount and timing of cost savings that can be achieved
following consummation of the Merger, were reasonably prepared on bases
reflecting the best currently available estimates and judgments of Res-Care's or
PeopleServe's, as the case may be, senior managements as to the recent and
likely future performance of Res-Care or PeopleServe, as applicable.
Accordingly, we express no opinion with respect to such analyses or forecasts or
the assumptions on which they are based. Furthermore, our opinion is based on
the assumption that the Merger will be accounted for as a pooling of interests
and will be a tax-free reorganization under the Internal Revenue Code of 1986,
as amended.
We were not asked to consider, and our opinion does not address, the
relative merits of the Merger as compared to any alternative business strategies
that might exist for Res-Care or the effect of any other transactions in which
Res-Care might engage. Furthermore, we have not made an independent evaluation
or appraisal of the assets and liabilities of Res-Care or PeopleServe or any of
their subsidiaries or affiliates and have not been furnished with any such
evaluation or appraisal.
J.C. Bradford & Co., LLC, as part of its investment banking business,
engages in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, and valuations for estate,
corporate, and other purposes. J.C. Bradford has acted as financial advisor to
Res-Care in connection with the proposed Merger and will receive a fee for such
services, a significant portion of which is contingent upon the consummation of
the Merger. We also will receive a fee in connection with the delivery of this
opinion. We have in the past provided investment banking services to Res-Care,
for which we have received compensation. In the ordinary course of our business,
we may hold or actively trade the securities of Res-Care for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
Res-Care is entitled to reproduce this opinion, in whole but not in part,
in the Joint Proxy Statement as required by applicable law or appropriate;
provided, however, that any excerpt from or reference to this opinion (including
any summary thereof) in such document must be approved by us in advance in
writing. Notwithstanding the foregoing, this opinion does not constitute a
recommendation to any holder of Res-Care Shares to vote in favor of the Merger.
We were engaged by the Board of Directors of Res-Care to render this opinion in
connection with the Board's discharge of its fiduciary obligations. We have
advised the Board of Directors that we do not believe that any person (including
a shareholder of Res-Care) other than the Board of Directors has the legal right
to rely upon this opinion for any claim arising under state law and that, should
any such claim be brought against us, this assertion will be raised as a
defense. In the absence of governing authority, this assertion will be resolved
by the final adjudication of such issue by a court of competent jurisdiction.
Resolution of this matter under state law, however, will have no
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The Board of Directors
April 29, 1999
Page 3
effect on the rights and responsibilities of any person under the federal
securities laws or on the rights and responsibilities of Res-Care's Board of
Directors under applicable law.
Based upon and subject to the foregoing, and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof and based
on conditions as they currently exist, the issuance of the Merger Consideration
by Res-Care is fair to Res-Care from a financial point of view.
Very truly yours,
J.C. BRADFORD & CO., LLC
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APPENDIX E
AMENDMENT TO PEOPLESERVE
CERTIFICATE OF INCORPORATION
1. Section C.2(c) of Article FOURTH of the Restated Certificate of
Incorporation of the Corporation (the "Certificate") is hereby amended to read
in its entirety as follows:
"(c) For purposes of this Section C.2, (i) any acquisition of the
Corporation by means of merger of the Corporation with or into any other
corporation or other entity or person or other form of corporate
reorganization in which the Corporation shall not be the continuing or
surviving entity of such merger or reorganization (other than a mere
reincorporation transaction) or a transaction in which the Corporation is
the surviving entity but the shares of the Corporation's capital stock
outstanding immediately prior to the transaction are exchanged or converted
by virtue of the transaction into other property, whether in the form of
securities, cash or otherwise, or (ii) a sale of all or substantially all
of the assets of the Corporation (each of the transactions described in
clauses (i) and (ii) above being referred to as a "Sale Transaction") shall
be treated as a liquidation, dissolution or winding up of the Corporation
and shall entitle the holders of Series A and Series B Preferred Stock to
receive at closing, cash in amounts as specified in Section C.2(a) of this
Article FOURTH, unless the consideration payable in connection with such
Sale Transaction involves securities or other property (other than cash).
In the event that the consideration payable in connection with such Sale
Transaction involves securities or other property (other than cash), then
(x) with respect to the holders of Series A Preferred Stock, such Sale
Transaction shall be treated as a liquidation, dissolution or winding up of
the Corporation and such holders of Series A Preferred Stock shall be
entitled to receive the consideration provided in Section C.2(a) of this
Article FOURTH (payable in such securities or other property and valued as
provided in Section C.2(d) of this Article FOURTH), (y) with respect to the
holders of Series B Preferred Stock, such holders of Series B Preferred
Stock shall be entitled to receive the consideration distributable to
holders of Common Stock in such Sale Transaction as if such shares of
Series B Preferred Stock had been converted into Common Stock immediately
prior to the consummation of such Sale Transaction, and (z) with respect to
any accrued and unpaid dividends on shares of Series B Preferred Stock,
such holders of Series B Preferred Stock shall be entitled to receive
securities or other property equal in value to the amount of such accrued
and unpaid dividends (valued as provided in Section C.2(d) of this Article
FOURTH)."
2. Section C.4(d)(v) of Article FOURTH of the Certificate is hereby
amended to read in its entirety as follows:
"(v) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time, there is a capital reorganization of the
Common Stock (other than a recapitalization, subdivision, combination,
reclassification, exchange or substitution of shares provided for elsewhere
in this Section 4.d), as a part of such capital reorganization, but only to
the extent not otherwise provided for in Section C of this Article FOURTH
or by the provisions of such capital reorganization, provision shall be
made so that the holders of the Series B Preferred Stock shall thereafter
be entitled to receive upon conversion of the Series B Preferred Stock the
number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series B
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Preferred Stock, would have been entitled on such capital reorganization,
subject to adjustment in respect of such stock or securities by the terms
thereof. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4.d with respect to the
rights of the holders of Series B Preferred Stock after the Capital
reorganization to the end that the provisions of this Section 4 of this
Article FOURTH (including adjustment of the Series B Conversion Price then
in effect and the number of shares issuable upon conversion of the Series B
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable."
3. Section C.5(d) of Article FOURTH of the Certificate is hereby amended
to read in its entirety as follows:
"(d) For purposes of this Section C.5, a "Change in Control" shall
mean a transaction or series of transactions the result of which are that
the holders of Common Stock immediately preceding such transaction or
transactions (and Permitted Transferees thereof, as defined in that certain
Stockholders Agreement dated as of the Original Issue Date among the
Corporation, the Investors named therein and the Management Holders named
therein, as amended from time to time (the "Stockholders Agreement")) own
less than fifty percent (50%) of the issued and outstanding Common Stock
after giving effect to such transaction or transactions, but shall not
include any transaction that could be encompassed in the definition of Sale
Transaction as set forth in Section C.2(c) of this Article FOURTH; and a
"Bankruptcy Event" shall mean that either (a) a receiver, liquidator,
custodian or trustee of the Corporation or any subsidiary thereof is
appointed by a court, (b) an order for relief is entered in bankruptcy
court with respect to the Corporation or any material subsidiary thereof,
(c) the Corporation or any material subsidiary thereof is adjudicated a
bankrupt or insolvent, (d) all or a substantial part of the property of the
Corporation or any material subsidiary thereof is sequestered by court
order, (e) a petition is filed by or against the Corporation (and, in the
case of a filing against the Corporation or any subsidiary, which remains
undismissed for 60 days) or any material subsidiary thereof under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law or any jurisdiction, or (f) the Corporation
or any subsidiary thereof makes an assignment for the benefit of its
creditors, or admits in writing its inability, or fails, to pay its debts
generally as they become due."
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APPENDIX G
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or
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consolidation, shall, also notify such stockholders of the effective date
of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of
the effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such
G-3
<PAGE> 227
a duly verified list. The Register in Chancery, if so ordered by the Court,
shall give notice of the time and place fixed for the hearing of such petition
by registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other
G-4
<PAGE> 228
distributions on the stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
G-5
<PAGE> 229
PART II
INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS
ITEM 20. 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 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> 230
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS.
<TABLE>
<S> <C>
2.01 Agreement and Plan of Merger dated April 2, 1999 by and
among Res-Care, Inc., Res-Care Sub, Inc. and PeopleServe,
Inc. (included as Appendix A of the Proxy
Statement/Prospectus).
2.02 Registration Rights Agreement dated as of April 2, 1999, by
and among Res-Care, Inc. and certain PeopleServe
stockholders (included as Appendix B of the Proxy
Statement/Prospectus).
2.03 Majority Shareholders' Agreement dated as of April 2, 1999,
by and among Res-Care, Inc. and certain PeopleServe
stockholders (included as Appendix C of the Proxy
Statement/Prospectus).
4.01 Specimen Common Stock Certificate. Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
33-48749) is hereby incorporated by reference.
4.02 Article VI of the Amended and Restated Articles of
Incorporation of the Registrant. Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 is hereby incorporated by reference.
5.01 Opinion of Reed Weitkamp Schell & Vice PLLC as to the
legality of the securities being registered.**
8.01 Opinion of Vorys Sater Seymour and Pease LLP as to the
United States federal income tax consequences of the
merger.**
10.01 Form of Stock Pledge Agreement by and between Vincent D.
Pettinelli and PeopleServe, Inc.*
10.02 Form of Indemnity Agreement by and among Vincent D.
Pettinelli and PeopleServe, Inc. and its successors,
transferees and assigns.*
10.03 Form of Noncompetition and Nonsolicitation Agreement between
Res-Care, Inc. and Vincent D. Pettinelli.*
23.01 Consent of KPMG LLP.**
23.02 Consent of Ernst & Young LLP.**
23.03 Consent of Reed Weitkamp Schell & Vice PLLC (included in
Exhibit 5.01 hereto).**
23.04 Consent of Vorys Sater Seymour and Pease LLP (included in
Exhibit 8.01 hereto).**
24.01 Powers of Attorney (included in signature page).
99.01 Form of proxy card for Res-Care shareholders.*
99.02 Form of proxy card for PeopleServe stockholders.*
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
II-2
<PAGE> 231
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers and sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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 Section 15(d) of the
Securities Exchange Act 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.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
II-3
<PAGE> 232
The registrant undertakes that every prospectus: (1) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
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, 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.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 233
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment no. 1 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of Louisville,
Commonwealth of Kentucky, on April 29, 1999.
RES-CARE, INC.
By: /s/ RONALD G. GEARY
------------------------------------
Ronald G. Geary:
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons in
the capacities on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RONALD G. GEARY Chairman, President, Chief April 29, 1999
- --------------------------------------------------- Executive Officer and
Ronald G. Geary Director (Principal
Executive Officer)
* Senior Executive and April 29, 1999
- --------------------------------------------------- Director
E. Halsey Sandford
/s/ RALPH G. GRONEFELD, JR. Executive Vice President, April 29, 1999
- --------------------------------------------------- Finance and
Ralph G. Gronefeld, Jr. Administration and Chief
Financial Officer
(Principal Financial
Officer)
* Director April 29, 1999
- ---------------------------------------------------
James R. Fornear
* Director April 29, 1999
- ---------------------------------------------------
Seymour L. Bryson
* Director April 29, 1999
- ---------------------------------------------------
W. Bruce Lunsford
* Director April 29, 1999
- ---------------------------------------------------
Spiro B. Mitsos
* Director April 29, 1999
- ---------------------------------------------------
Olivia F. Kirtley
* By attorney-in-fact pursuant to power of attorney
filed with the registrant's registration statement on Form S-4 filed April 8, 1999.
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5
April 28, 1999
Res-Care, Inc.
10140 Linn Station Road
Louisville, Kentucky 40223
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have acted as counsel for Res-Care, Inc., a Kentucky corporation
(the "Company"), in connection with the registration by the Company on Form S-4,
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), filed with the Securities and
Exchange Commission (the "Commission"). The Registration Statement covers
5,528,000 common shares (the "Shares") of the Company, no par value per share,
issuable in connection with the consummation of the transactions contemplated by
that certain Agreement and Plan of Merger dated April 2, 1999 ("Agreement"),
among Res-Care, Inc., Res-Care Sub, Inc. and PeopleServe, Inc.
In this capacity, we have examined the Company's Amended and Restated
Articles of Incorporation and Bylaws, the Registration Statement, the
proceedings of the Board of Directors of the Company relating to the issuance of
the Shares and such other documents, instruments and matters of law as we have
deemed necessary to the rendering of this opinion.
Based on the foregoing, we are of the opinion and advise you that the
Shares described in the Registration Statement have been duly authorized and
when issued in connection with the merger contemplated by the Agreement, will be
validly issued, fully paid and nonassessable.
We hereby 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 Proxy Statement/Prospectus included in the Registration
Statement. In giving this consent, we do not admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act or the General Rules and Regulations of the Commission.
<PAGE> 2
Res-Care, Inc.
April 28, 1999
Page 2
We express no opinion as to the laws of any jurisdiction other than the
laws of the Commonwealth of Kentucky and the federal laws of the United States.
Our opinion is rendered as of the date hereof and we assume no obligation to
advise you of changes that may hereafter be brought to our attention. Except as
provided in the immediately preceding paragraph, this opinion is intended solely
for your benefit and may not be relied upon, referred to or otherwise used by
any person without our express written consent.
Very truly yours,
/s/ REED WEITKAMP SCHELL & VICE PLLC
GRW/vlw
<PAGE> 1
EXHIBIT 8.01
[VORYS, SATER, SEYMOUR AND PEASE LLP LETTERHEAD]
Writer's Direct Dial Number
(614) 464-5650
April 29, 1999
PeopleServe, Inc.
5555 Parkcenter Circle
Suite 200
Dublin, Ohio 43017
Attention: Vincent D. Pettinelli
Ladies and Gentlemen:
Pursuant to Section 9.4 of the Agreement and Plan of Merger dated April
2, 1999 (the "Agreement"), by and among PeopleServe, Inc., a Delaware
corporation ("Company"), Res-Care, Inc., a Kentucky corporation ("Res-Care"),
and Res-Care Sub, Inc., incorporated under Delaware law as a wholly owned
subsidiary of Res-Care ("Res-Care Sub") solely for the purpose of carrying out
the merger of Res-Care Sub with and into Company (the "Merger") in accordance
with the Agreement, we hereby render our opinion as to certain of the federal
income tax consequences of the Merger.
In rendering this opinion, we have examined the originals or certified,
conformed, or reproduction copies of, and have relied upon the accuracy of,
without independent verification or investigation, (i) the Agreement, (ii) the
PeopleServe, Inc. Officer's Certificate dated as of the date hereof, (iii) the
Res-Care, Inc. Officer's Certificate dated as of the date hereof, (iv) the
Registration Statement of Res-Care on Form S-4 and the proxy
statement/prospectus of Res-Care and Company included therein (the "Registration
Statement"), (v) the Shareholders Agreement (as defined in the Agreement), and
(vi) the Registration Rights Agreement (as defined in the Agreement).
In connection with our review of the Agreement, the officers'
certificates identified above (collectively, the "Officers' Certificates"), and
the other documents identified above, we have assumed the genuineness of all
signatures, the authenticity of all items submitted to us as originals, the
uniformity with authentic originals of all items submitted to us as copies, and
the conformity to final versions of all items submitted to us in draft version.
We also have assumed,
<PAGE> 2
PeopleServe, Inc.
April 29, 1999
Page 2
without independent verification or investigation, that (i) we have been
provided with true, correct, and complete copies of all such documents, (ii)
none of such documents has been amended or modified, (iii) all such documents
are in full force and effect in accordance with the terms thereof, (iv) there
are no other documents which affect the opinions hereinafter set forth, and (v)
the documents reviewed by us reflect the entire agreement of the parties thereto
with respect to the subject matter thereof. Finally, we assume that the
statements and representations made in the Officers' Certificates will be
complete and accurate as of the Effective Time (as defined in the Agreement) and
that all representations made to the knowledge of any person or entity or with
similar qualification are and will be true and correct as if made without such
qualification.
DESCRIPTION OF THE MERGER
The Agreement provides that the Merger will constitute a merger, under
the laws of the State of Delaware, of Res-Care Sub with and into Company.
Immediately after the Effective Time, Company will be the surviving corporation
(the "Surviving Corporation"), and the separate corporate existence of Res-Care
Sub will cease.
As of December 31, 1998, the authorized capital stock of Res-Care
consisted of (i) 40,000,000 shares of common stock, no par value ("Res-Care
Shares"), of which 18,911,726 shares were issued and outstanding; 6,665,999
shares were reserved for issuance at that date upon conversion of approximately
$131 million of outstanding convertible notes; and 2,981,127 shares were
reserved for issuance upon exercise of outstanding employee stock options; and
(ii) 1,000,000 shares of preferred stock, par value $.01 per share, of which no
shares were issued and outstanding.
As of December 31, 1998, the authorized capital stock of Company
consisted of (i) 15,000,000 shares of common stock, par value $.01 per share
("Common Shares"), of which 5,615,231 shares were issued and outstanding; and
(ii) 5,000,000 shares of preferred stock, par value $.01 per share, 1,000,000 of
which have been designated Series A Redeemable Preferred Stock ("Redeemable
Shares"), all of which shares were issued and outstanding, and 3,684,364 of
which have been designated Series B Convertible Preferred Stock ("Convertible
Shares"), all of which shares were issued and outstanding. Company has issued
and outstanding warrants to purchase 552,654 Common Shares ("Company Warrants").
Company also has issued and outstanding options to purchase 1,168,568 Common
Shares (the "Company Options") pursuant to the Company Stock Option Plan.
Pursuant to the Shareholders Agreement, the holders of Convertible Shares
shall have elected in writing to amend the terms of the Convertible Shares, in
accordance with Company's Governing Documents (as defined in the Agreement) and
the General Corporation
<PAGE> 3
PeopleServe, Inc.
April 29, 1999
Page 3
Law of the State of Delaware (the "DGCL"), to enable the holders of the
Convertible Shares to receive Res-Care Shares in the Merger and to receive all
accrued and unpaid dividends on such Convertible Shares through the date of such
conversion in Res-Care Shares.
Also pursuant to the Shareholders Agreement, the holders of Redeemable
Shares shall have elected in writing to amend the terms of the Redeemable
Shares, in accordance with Company's Governing Documents and the DGCL, to enable
the holders of the Redeemable Shares to receive Res-Care Shares in the Merger.
Prior to the Effective Time, all holders of Company Warrants shall have
exercised such warrants and purchased Common Shares. At the Effective Time, each
Company Option, whether vested or unvested, shall be exchanged for Res-Care
Shares as provided by the Agreement and the Company stock option plan.
By virtue of the Merger, all of the Common Shares, Convertible Shares and
Redeemable Shares (collectively, the "Exchanged Securities") outstanding
immediately before the Effective Time shall cease to exist, and each exchanged
certificate formerly representing any of such Exchanged Securities shall
thereafter represent only the right to be exchanged for Res-Care Shares, subject
to statutory appraisal rights and the payment of cash for fractional share
interests, with the number of Res-Care Shares issued to the shareholders for
each class of Exchanged Securities to be determined as provided by the
Agreement. Each Res-Care Sub common share issued and outstanding as of the
Effective Time shall be converted into one validly issued, fully paid and
nonassessable common share of the Surviving Corporation as of the Effective
Time.
Any Exchanged Securities with respect to which the holder has demanded
and perfected the right for appraisal in accordance with the provisions of the
DGCL (and as of the Effective Time has not withdrawn or lost such right to such
appraisal) shall not be exchanged, or represent a right to receive Res-Care
Shares. The holder shall be entitled to only such rights as are granted by the
DGCL. Furthermore, Res-Care and Res-Care Sub have the right to terminate the
Agreement if, in their sole discretion, they determine that shareholders holding
in excess of three and one-half percent (3.5%) of the Exchanged Securities have
demanded appraisal rights. We assume for purposes of our opinion that dissenting
Company shareholders will not hold more than three and one-half percent (3.5%)
of the Exchanged Securities.
Fractional Res-Care Shares will not be issued by Res-Care in the Merger.
In lieu thereof, each holder of Exchanged Securities entitled to receive a
fractional Res-Care Share shall receive cash in an amount equal to such
fractional proportion of the Closing Price (as defined in the Agreement).
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REPRESENTATIONS
In connection with the Merger, the Officers' Certificates set forth the
following representations:
1. The Merger is being effected for bona fide business reasons.
2. The Merger will qualify as a statutory merger under the DGCL.
3. Res-Care does not own, nor has it owned during the past five
years, any shares of stock of Company.
4. Prior to the Merger, Res-Care will be in control of Res-Care Sub
within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as
amended (the "Code").
5. The fair market value of the Res-Care Shares to be received by
each shareholder of Company will be approximately equal to the fair market value
of the Exchanged Securities exchanged therefor.
6. In the Merger, shares of Company stock representing control of
Company, as defined in Section 368(c) of the Code, will be exchanged solely for
voting stock of Res-Care.
7. There is no intercorporate indebtedness existing between Res-Care
and Company or between Res-Care Sub and Company that was issued, acquired, or
will be settled, at a discount.
8. Neither Res-Care nor Company is an investment company as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Code.
9. Company is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
10. To the best knowledge of Company, the shareholders of Company have
no plan or intention to sell, exchange, or otherwise dispose of a number of
Res-Care Shares received in the transaction to Res-Care or a person related to
Res-Care that would reduce the Company shareholders' ownership of Res-Care to a
number of shares having a value, as of the date of the transaction, of less than
fifty percent (50%) of the value of all formerly outstanding stock of Company as
of the same date. For purposes of this representation, any Exchanged Securities
surrendered by dissenters or exchanged for cash in lieu of fractional Res-Care
Shares will be treated as outstanding on the date of the transaction.
Furthermore, any redemptions or extraordinary distributions by Company, prior to
and in connection with the Merger, will be
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PeopleServe, Inc.
April 29, 1999
Page 5
considered in making this representation. Finally, any acquisitions of Exchanged
Securities by a person related to Company, prior to and in connection with the
Merger, with consideration other than stock of either Company or Res-Care, will
be considered in making this representation.
11. Company has no plan or intention to issue additional shares of its
stock that would result in Res-Care losing control of Company within the meaning
of Section 368(c) of the Code.
12. To the knowledge of the officer of Res-Care, neither Res-Care nor
a related person has any plan or intention to reacquire any Res-Care Shares
issued in the Merger.
13. Res-Care has no plan or intention to liquidate Company; to merge
Company with or into another corporation; to sell or otherwise dispose of the
stock of Company except for transfers of stock described in Section
1.368-2(k)(2) of the Treasury Regulations (the "Regulations"); or to cause
Company to sell or otherwise dispose of any of its assets or any of the assets
acquired from Res-Care Sub, except for dispositions made in the ordinary course
of business or transfers of assets described in Section 1.368-2(k)(2) of the
Regulations.
14. Res-Care, Res-Care Sub, and the shareholders of Company will pay
their respective expenses, if any, incurred in connection with the Merger.
Company will pay its expenses incurred in connection with the transaction except
for those paid or assumed by Res-Care. To the extent that Res-Care pays or
assumes expenses of Company, Res-Care will pay or assume only those expenses of
Company that are solely and directly related to the Merger in accordance with
the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
15. On the date of the Merger, the fair market value of the assets of
Company will exceed the sum of its liabilities, plus the amount of liabilities,
if any, to which the assets are subject.
16. On the date of the Merger, Company will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in Company that, if exercised or
converted, would affect Res-Care's acquisition or retention of control of
Company, as defined in Section 368(c) of the Code.
17. Res-Care Sub will have no liabilities assumed by Company, and will
not transfer to Company any assets subject to liabilities, in the Merger.
18. None of the compensation received by any shareholder-employee of
Company will be separate consideration for, or allocable to, any of their
Exchanged Securities; none of the Res-Care Shares received by any
shareholder-employees in connection with the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
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PeopleServe, Inc.
April 29, 1999
Page 6
compensation paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
19. The payment of cash in lieu of fractional Res-Care Shares is
solely for the purpose of avoiding the expense and the inconvenience to Res-Care
of issuing fractional shares and does not represent separately bargained for
consideration. The total cash that will be paid in the Merger to the
shareholders of Company instead of issuing fractional Res-Care Shares will not
exceed one percent (1%) of the total consideration that will be issued in the
Merger to the Company shareholders in exchange for their Exchanged Securities.
The fractional share interests of each Company shareholder will be aggregated,
and no shareholder will receive cash in an amount equal to or greater than the
Closing Price.
20. Following the Merger, Res-Care or a related person will continue
the historic business of Company or use a significant portion of Company's
historic assets in a business.
21. Following the Merger, Company will hold at least 90 percent of the
fair market value of its net assets and at least 70 percent of the fair market
value of its gross assets and at least 90 percent of the fair market value of
Res-Care Sub's net assets and at least 70 percent of the fair market value of
Res-Care Sub's gross assets held immediately prior to the Merger. For purposes
of this representation, amounts paid by Company or Res-Care Sub to dissenters,
amounts paid by Company or Res-Care Sub to shareholders who receive cash or
other property, amounts used by Company or Res-Care Sub to pay reorganization
expenses or other expenses incurred in connection with the Merger, amounts used
by Company to make payments to employees for severance and termination of
employment contracts, and all redemptions and distributions (except for regular,
normal dividends) made by Company will be included as assets of Company or
Res-Care Sub, respectively, immediately prior to the Merger.
DISCUSSION
Section 368(a)(1)(A) of the Code defines a tax-free reorganization to
include a statutory merger. Section 368(a)(2)(E) of the Code provides that a
transaction otherwise qualifying under paragraph (1)(A) shall not be
disqualified by reason of the fact that stock of a corporation (referred to as
the "controlling corporation"), which before the Merger was in control of the
merged corporation, is used in the transaction, if (i) after the transaction,
the corporation surviving the merger holds substantially all of its properties
and substantially all of the properties of the merged corporation; and (ii) in
the transaction, former shareholders of the surviving corporation exchange,
solely for voting stock of the controlling corporation, an amount of stock in
the surviving corporation which constitutes control of such corporation. For
this purpose, (a) "substantially all" means at least ninety percent (90%) of the
fair market value of the net assets
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PeopleServe, Inc.
April 29, 1999
Page 7
and at least seventy percent (70%) of the fair market value of the gross assets
of the surviving corporation and of the merged corporation; and (b)
"controlling" or "control" means the ownership of stock possessing at least
eighty percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of shares
of each class of non-voting stock of the corporation.
Pursuant to the representations in the Officers' Certificates, the Merger
will be a statutory merger under the laws of the State of Delaware; Res-Care
will be in control of Res-Care Sub prior to the Merger; Company will hold
substantially all of its properties and substantially all of the properties of
Res-Care Sub after the Merger; and Company shareholders will exchange an amount
of Exchanged Securities constituting control of Company solely for Res-Care
Shares.
The federal income tax treatment of the exchange of Redeemable Shares for
Res-Care Shares is unclear. This exchange either will be treated (i) identically
to the exchange of Convertible Shares for Res-Care Shares or (ii) as if Company
redeemed the Redeemable Shares and the former holders of Redeemable Shares then
used the proceeds to purchase Res-Care Shares. Although we express no view as to
the correct interpretation of such exchange, it is clear that such exchange will
not preclude the Merger from qualifying as a reorganization.
The exchange of Redeemable Shares for Res-Care Shares will not preclude
Res-Care from acquiring "control" of Company solely for Res-Care Shares. If, as
in clause (i) of the immediately preceding paragraph, such exchange is treated
identically to the exchange of Convertible Shares for Res-Care Shares, Res-Care
will be viewed as acquiring the Redeemable Shares in exchange for Res-Care
Shares. On the other hand, if, as in clause (ii) of the immediately preceding
paragraph, a constructive redemption is deemed to take place, the redeeming
party will be Company and not Res-Care. Pursuant to Section 1.368-2(j)(3)(i) of
the Regulations, stock in the target corporation that is surrendered in the
transaction in exchange for consideration furnished by the target corporation is
considered not to be outstanding immediately before the transaction.
In addition, the exchange of Redeemable Shares for Res-Care Shares will
not preclude Company from meeting the "substantially all" test. Under the
interpretation of the exchange as a constructive redemption, we have been
advised by Company, and thus have assumed, that the cash deemed to be paid by
Company to the holders of Redeemable Shares would represent approximately four
and one-half percent (4.5%) to six and seven-tenths percent (6.7%) (depending
upon the Closing Price) of the aggregate fair market value of the consideration
being transferred to Company shareholders in the Merger. Moreover, the aggregate
amount of cash needed to pay Company shareholders for appraisal rights or in
lieu of fractional shares will not exceed three and one-half percent (3.5%) and
one percent (1%), respectively, of the aggregate fair market value of such
consideration. See Smith v. Commissioner, 34 B.T.A. 702, 705 (1936) ("Whether
the properties transferred constitute 'substantially all' is a matter to be
<PAGE> 8
PeopleServe, Inc.
April 29, 1999
Page 8
determined from the facts and circumstances in each case rather than by the
application of any particular percentage"). Accord James Armour, Inc. v.
Commissioner, 43 T.C. 295, 308 (1964); Moffatt v. Commissioner, 42 T.C. 558, 578
(1964), aff'd, 363 F.2d 262 (9th Cir. 1966); National Bank of Commerce v. United
States, 158 F. Supp. 887, 895 (E.D. Va. 1958); Commissioner v. First Nat'l Bank,
104 F.2d 865, 870 (3d Cir. 1939), cert. dismissed, 309 U.S. 691 (1940); Rev.
Rul. 57-518, 1957-2 C.B. 253.
Section 368(b) of the Code defines "a party to the reorganization" to
include both corporations, in the case of a reorganization resulting from the
acquisition by one corporation of stock or properties of another. Section 368(b)
also includes the controlling corporation as "a party to the reorganization" for
purposes of Section 368(a)(2)(E). Accordingly, Company, Res-Care, and Res-Care
Sub each will be a "party to the reorganization" within the meaning of Section
368(b) of the Code.
Certain non-statutory requirements have been imposed by the courts and by
the Treasury Department in determining whether reorganizations are in compliance
with Section 368 of the Code. These include requirements that there be a
business purpose for the reorganization, that there be a continuity of the
business enterprise of the target corporation, and that the shareholders of the
target corporation emerge with some continuing proprietary interest in the
entity resulting from the reorganization.
Section 1.368-2(g) of the Regulations provides that a reorganization must
be undertaken for reasons germane to the continuance of the business of a
corporation which is a party to the reorganization. As indicated in the
Officers' Certificates, the Merger is being effected for bona fide business
reasons. Accordingly, the Merger satisfies the business purpose requirement as
set forth in the Regulations.
Section 1.368-1(b) of the Regulations provides that a continuity of
business enterprise is a prerequisite to a reorganization. Section 1.368-1(d) of
the Regulations provides that continuity of business enterprise requires that
the issuing corporation or a related person either continue the target
corporation's historic business or use a significant portion of the target
corporation's historic assets in a business. Res-Care's representations confirm
that Res-Care or a related person will continue the historic business of Company
or use a significant portion of Company's historic assets in a business after
the Merger. Accordingly, the continuity of business enterprise requirement is
met with regard to the Merger.
The Treasury Department has issued final and temporary regulations
providing rules for satisfying the continuity of interest requirement. These
regulations substantially liberalize the historic rules, generally providing
that continuity of interest is satisfied if a substantial part of the value of
the proprietary interest in the target corporation is preserved in the
reorganization. In
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PeopleServe, Inc.
April 29, 1999
Page 9
determining whether a substantial part of the value of the proprietary interest
is preserved, the following transactions, in connection with the reorganization,
are considered:
(i) Under Section 1.368-1 of the Regulations, any acquisition by
the issuing corporation of target corporation stock for consideration other than
stock, or, in connection with the reorganization, the redemption of issuing
corporation stock received by the shareholders of the target corporation (or the
purchase of such issuing corporation stock by a person related to the issuing
corporation), will be considered in determining whether a substantial
proprietary interest is preserved;
(ii) Under Section 1.368-1T of the Regulations, the acquisition by
the target corporation, prior to and in connection with the plan of
reorganization, of the stock of the target corporation with consideration other
than stock of the target corporation or an extraordinary distribution made by
the target corporation with respect to its stock, will be considered in
determining whether a substantial proprietary interest is preserved; and
(iii) Under Section 1.368-1T of the Regulations, the acquisition
by a person related to the target corporation, prior to and in connection with
the plan of reorganization, of the stock of the target corporation with
consideration other than stock of the target corporation or stock of the issuing
corporation, will be considered in determining whether a substantial proprietary
interest is preserved.
Generally, two corporations are related persons either if the corporations are
members of the same affiliated group (without regard to the exceptions in
Section 1504(b) of the Code) or the purchase of stock of one corporation by
another corporation would result in the purchase being treated as a redemption
of stock of the first corporation under Section 304(a)(2) of the Code
(determined without regard to Section 1.1502-80(b) of the Regulations). Sales by
the shareholders of the target corporation of stock of the issuing corporation
received in the transaction to unrelated persons occurring before or after a
reorganization are disregarded.
The Merger will satisfy the continuity of interest requirement. All
Exchanged Securities outstanding immediately prior to the Merger will be
exchanged solely for Res-Care Shares, except for cash paid to dissenters or in
lieu of fractional shares. As indicated above, we have assumed that dissenting
Company shareholders will not hold more than three and one-half percent (3.5%)
of the Exchanged Securities. Res-Care and Company have represented that cash
paid in lieu of fractional shares will not exceed, in the aggregate, one percent
(1%) of the total consideration that will be issued in the Merger to the Company
shareholders in exchange for their Exchanged Securities. To the knowledge of the
officer of Res-Care who is signing the Res-Care officer's certificate, neither
Res-Care nor a related person has any plan or intention, in connection with the
plan of reorganization, to reacquire any Res-Care Shares issued in the Merger.
Company has represented that, to its best knowledge, the shareholders of Company
have no plan or
<PAGE> 10
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April 29, 1999
Page 10
intention to sell, exchange or otherwise dispose of Res-Care Shares to Res-Care
or a related person. In addition, Company has represented that neither Company
nor a related person has any plan or intention, prior to and in connection with
the plan of reorganization, to redeem, acquire, or make an extraordinary
distribution with respect to Company's stock for consideration other than stock
of Company (or in the case of a related person, for consideration other than
stock of Company or stock of Res-Care), that would cause a substantial part of
the value of the proprietary interest in Company not to be preserved.
Even though the Merger qualifies as a tax-free reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, Company shareholders receive
Res-Care Shares tax free only to the extent provided by Section 354 of the Code.
Because Company shareholders will be exchanging Common Shares and Convertible
Shares for Res-Care Shares, both of which corporations are parties to the
reorganization, no gain or loss will be recognized under Section 354(a) of the
Code, provided, however, that a holder of Convertible Shares could recognize
income to the extent that Res-Care Shares are considered to be received in
exchange for consideration other than Convertible Shares, such as dividends
accrued on such Convertible Shares.
Under the Agreement, Company shareholders also will be exchanging
Redeemable Shares for Res-Care Shares. As indicated above, these exchanges
either will be treated (i) identically to the exchange of Convertible Shares for
Res-Care Shares or (ii) as if Company redeemed the Redeemable Shares and the
former holders of Redeemable Shares then used the proceeds to purchase Res-Care
Shares. However, we express no view as to the correct interpretation of such
exchange for federal income tax purposes.
If a Company shareholder holding Common Shares or Convertible Shares
dissents to the Merger and receives solely cash in exchange for such
shareholder's Common Shares or Convertible Shares, such cash will be treated as
having been received by such shareholder as a distribution in redemption of such
shareholder's Common Shares or Convertible Shares, subject to the provisions and
limitations of Section 302 of the Code. Unless the redemption is treated as a
dividend under Section 302(d) of the Code, such shareholder will recognize gain
or loss measured by the difference between the amount of cash received and the
tax basis of the Common Shares or Convertible Shares so redeemed. This gain or
loss will be capital gain or loss if the Common Shares or Convertible Shares
were held by such shareholder as a capital asset at the time of the Merger. If,
on the other hand, the redemption is treated as a dividend under Section 302(d)
of the Code, the full amount of cash received by such shareholder will be
treated as ordinary income to the extent of Company's current or accumulated
earnings and profits.
Under the tests of Section 302 of the Code, the redemption of a
dissenting Company shareholder's Common Shares or Convertible Shares generally
will be treated as a dividend unless the redemption (i) results in a "complete
termination" of such shareholder's direct
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PeopleServe, Inc.
April 29, 1999
Page 11
or indirect stock interest in Res-Care under Section 302(b)(3) of the Code, (ii)
is "substantially disproportionate" with respect to such shareholder under
Section 302(b)(2) of the Code or (iii) is "not essentially equivalent to a
dividend" with respect to such shareholder under Section 302(b)(1) of the Code.
In order to determine whether there has been a complete termination, a
substantially disproportionate redemption or a redemption not essentially
equivalent to a dividend with respect to a dissenting Company shareholder, it is
necessary to consider the Res-Care Shares owned by persons from whom ownership
is attributed to such shareholder under the rules of Section 318 of the Code.
Under Section 318 of the Code, a shareholder is considered to own shares that
are directly or indirectly owned by certain members of such shareholder's family
or by certain trusts, partnerships or corporations in which such shareholder has
an ownership or beneficial interest. Such shareholder is also considered to own
any shares with respect to which he holds exercisable options. In certain cases,
a dissenting Company shareholder may be deemed to own constructively the
Res-Care Shares held by persons who do not exercise dissenters' rights.
Notwithstanding the foregoing, if Company is legally obligated to pay a
dividend that has accrued at the time of the redemption, the proceeds first will
be applied to discharge the dividend and will be taxed accordingly.
Payment of cash to a Company shareholder in lieu of a fractional Res-Care
Share will be treated as if such fractional share were distributed as part of
the exchange and then redeemed by Res-Care. The payment received by a Company
shareholder will be treated as having been received as a distribution in full
payment and exchange for the fractional share redeemed as provided in Section
302(a) of the Code, unless such distribution is essentially equivalent to a
dividend within the meaning of Section 302(b)(1) of the Code.
OPINIONS
Therefore, based on the description of the Merger in the Agreement, the
representations set forth in the Officers' Certificates, the Shareholders
Agreement, the Registration Rights Agreement, the foregoing legal authorities,
and the assumptions stated above, our opinion of the federal income tax
consequences of the Merger is as follows:
1. The Merger of Res-Care Sub with and into Company will constitute a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code. Company, Res-Care Sub and Res-Care each will be a "party to the
reorganization" within the meaning of Section 368(b) of the Code.
<PAGE> 12
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April 29, 1999
Page 12
2. No gain or loss will be recognized by Company upon the receipt of
the assets of Res-Care Sub in exchange for Exchanged Securities.
3. No gain or loss will be recognized by Res-Care Sub upon the
transfer of its assets to Company in exchange for Exchanged Securities.
4. No gain or loss will be recognized by Res-Care upon the receipt of
Common Shares solely in exchange for Res-Care Sub common shares.
5. No gain or loss will be recognized by shareholders of Company
holding Common Shares or Convertible Shares upon the exchange of Common Shares
or Convertible Shares solely for Res-Care Shares (including fractional share
interests); provided, however, that a holder of Convertible Shares could
recognize income to the extent that Res-Care Shares are considered to be
received in exchange for consideration other than Convertible Shares, such as
dividends accrued on such Convertible Shares.
6. The basis of the Res-Care Shares (including fractional share
interests) to be received by Company shareholders holding Common Shares or
Convertible Shares will be the same as the basis of the Common Shares or
Convertible Shares surrendered in exchange therefor.
7. The holding period of the Res-Care Shares (including fractional
share interests) to be received by Company shareholders holding Common Shares or
Convertible Shares will include the holding period of the Common Shares or
Convertible Shares surrendered in exchange therefor, provided that such Common
Shares or Convertible Shares are held as a capital asset at the time of the
exchange.
8. Where a cash payment is received by a Company shareholder holding
Common Shares or Convertible Shares in lieu of a fractional share interest of
Res-Care, the cash payment will be treated as received by the Company
shareholder as a distribution in full payment and exchange for the fractional
share redeemed as provided in Section 302(a) of the Code, unless such
distribution is essentially equivalent to a dividend within the meaning of
Section 302(b)(1) of the Code.
9. Where cash is received by a dissenting Company shareholder holding
Common Shares who perfects his dissenter's rights, the cash will be treated as
having been received by the shareholder in redemption of his Common Shares,
subject to the provisions and limitations of Section 302 of the Code. Where,
after the receipt of such cash, such a dissenting Company shareholder is not
deemed to own any Res-Care Shares under the constructive ownership rules of
Section 318(a) of the Code, the redemption will be a complete termination of
such shareholder's interest in Company within the meaning of Section 302(b)(3)
of the Code and will be treated as a distribution in full payment in exchange
for the Common Shares.
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* * *
Our opinion is limited to the foregoing federal income tax consequences
of the Merger, which are the only matters as to which you have requested our
opinion. In rendering our opinion as to the federal income consequences of
exchanging Common Shares for Res-Care Shares, our opinion does not encompass
those Common Shares issued in the Affiliate Transactions (as defined in the
Agreement). Furthermore, our opinion does not address the federal income tax
consequences of exchanging the Redeemable Shares for Res-Care Shares in the
Merger or exchanging the Company Options for Res-Care Shares simultaneous with
the Merger. Finally, our opinion does not address any federal income tax
consequences of the Merger that may be relevant to a Company shareholder in
light of that shareholder's particular status or circumstances, including,
without limitation, Company shareholders who are (i) foreign persons, (ii)
insurance companies, (iii) financial institutions, (iv) tax-exempt entities, (v)
retirement plans, (vi) dealers in securities, (vii) persons subject to the
alternative minimum tax, (viii) persons whose shares of Company stock were
acquired pursuant to the exercise of employee stock options or otherwise as
compensation, (ix) persons who receive Res-Care Shares other than in exchange
for Company stock or employee stock options, or (x) persons who hold shares of
Company stock as part of a hedge, straddle or conversion transaction.
We do not address other matters of federal law and have not considered
matters (including state or local tax consequences) arising under the laws of
any jurisdiction other than matters of federal law arising under the laws of the
United States.
Our opinion is based on the understanding that the relevant facts are,
and will be on the Effective Time, as set forth in this letter. If this
understanding is incorrect or incomplete in any respect, our opinion could be
affected. Our opinion is also based on the Code, Regulations, case law, and
rulings of the Internal Revenue Service (the "Service") as they now exist. These
authorities are all subject to change and such change may be made with
retroactive effect. We can give no assurance that after any such change, our
opinion would not be different. Our opinion is not binding on the Service, and
no ruling has been, or will be, requested from the Service as to any federal
income tax consequence described above. We undertake no responsibility to update
or supplement this opinion.
The opinion expressed herein is furnished specifically for you and your
respective shareholders, and may not be relied upon, assigned, quoted, or
otherwise used in any manner or for any purpose by any other person or entity
without our specific prior written consent. Notwithstanding the preceding
sentence, we hereby consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the Registration Statement, and to the
references to us under the captions "The Merger -- Material Federal Income Tax
Considerations"
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PeopleServe, Inc.
April 29, 1999
Page 14
and "Legal Matters." In giving such consent, we do not thereby admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Respectfully,
/s/ Vorys, Sater, Seymour and Pease LLP
<PAGE> 1
[KPMG LOGO] Exhibit 23.01
Consent of Independent Auditors
The Board of Directors
Res-Care, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading of "Experts" in the prospectus.
/s/ KPMG LLP
Louisville, Kentucky
April 30, 1999
<PAGE> 1
Exhibit 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 31, 1999, with respect to the financial
statements of PeopleServe, Inc. included in the Registration Statement on Form
S-4/A Amendment No. 1 and related Prospectus of Res-Care, Inc. for the
registration of its common shares.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
April 30, 1999
