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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from ___________________
to ___________________
Commission File Number: 0-20372
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RES-CARE, INC.
(Exact name of Registrant as specified in its charter)
KENTUCKY 61-0875371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10140 LINN STATION ROAD 40223
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 394-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
Common Stock, no par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
As of February 28, 1999, there were 18,929,856 shares of the Registrant's Common
Stock, no par value, outstanding. The aggregate market value of the shares of
Registrant held by non-affiliates of the Registrant, based on the closing price
of such on the NASDAQ National Market System on February 28, 1999, was
approximately $331,658,609. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the Registrant's Proxy Statement for
its 1999 Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
GENERAL
Res-Care, Inc. (the Company) is a leading provider of residential,
training, educational and support services to populations with special needs,
including persons with developmental and other disabilities and at-risk and
troubled youths. The services provided by the Company have historically been
provided by state and local government agencies and not-for-profit
organizations. In recent years, service delivery has shifted from government
agencies toward private organizations, both not-for-profit and for-profit. The
Company's programs include an array of services provided in both residential and
non-residential settings for adults and youths with mental retardation or other
developmental disabilities (MR/DD) and disabilities caused by acquired brain
injury (ABI), and youths who have special educational or support needs, are from
disadvantaged backgrounds, or have severe emotional disorders. Some have entered
the juvenile justice system. Because most of the Company's MR/DD consumers
require services over their entire lives and many states have extensive waiting
lists for services, the Company has experienced high occupancy rates in its
MR/DD operations. Occupancy rates in ABI and youth services operations, although
generally high, are affected by shorter lengths of stay.
The Company has experienced significant growth since 1993 in numbers of
persons served, revenues and operating income. As a result of a combination of
strategic acquisitions and internal growth, the Company 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%. As of
December 31, 1998, the Company provided services to approximately 12,000 persons
with disabilities in larger facilities, group homes, personal residences and
other community-based programs, and to approximately 8,400 at-risk and troubled
youths in federally-funded Job Corps centers and juvenile treatment programs and
facilities operated for state and local agencies. Effective February 1, 1999,
the Company was awarded the contract to operate the Treasure Island Job Corps
center in California serving approximately 850 students.
There is a growing trend throughout the United States toward
privatization of service delivery functions for special needs populations as
governments at all levels face continuing pressure to control costs and improve
the quality of programs. The markets for services for special needs populations
in the United States are large, growing and highly fragmented as evidenced by
the following industry estimates:
- Recent studies indicate that more than three million persons in
the United States have some level of developmental disability to
the extent that professional services are required throughout
their lives;
- Funding for MR/DD services approximates $24 billion annually;
- Over 4,000 providers operate MR/DD facilities and programs;
- The $60 billion domestic youth services industry is growing at an
annual rate of 9%;
- The juvenile population is expected to grow 20% from 14 million in
1994 to 17 million in 2005 and 31% by the year 2010;
- The number of juvenile arrests increased 100% between 1985 and
1994 and the number of juvenile male offenders tripled during the
same period;
- From 1985 to 1996, the number of persons arrested for violent
crimes increased 57%, while the number of persons under the age of
18 arrested for violent crimes rose 75%;
- 19% of all persons arrested are juveniles. In 1996, more than
three million child abuse reports were made according to state
child protection agencies; and
- Most of the estimated 6,000 residential youth services providers
are small and operate in limited geographic areas.
The Company believes it has significant opportunities to participate in
the growth and consolidation of these markets because of its proven programs and
operating systems, its financial strength, the economies of scale it can achieve
and its experience working with special needs populations and governmental
agencies.
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The Company strives to provide quality and caring services through the
operation of efficient and flexible programs. To achieve this goal, the
Company's business strategy is based upon the following key elements; (i)
continuing to expand upon the Company's leadership position as a provider of
disabilities services; (ii) leveraging the Company's experience of over 20 years
in providing training and support services for disadvantaged youths and other
special needs populations to become a leading provider of services to at-risk
and troubled youths; (iii) focusing on quality management of existing programs
through models of ongoing program evaluation developed by the Company; and (iv)
implementing and maintaining high quality, cost-effective alternatives to
programs operated directly by governmental entities and private agencies by
providing proven management systems and procedures that assure efficient
application of financial and human resources.
The Company's growth strategy is to: (i) pursue acquisitions; (ii) add
programs and expand its existing programs in markets in which it currently
operates; and (iii) expand into additional geographic areas in the United
States. The markets for the Company's services are highly fragmented, and the
Company believes that there are significant opportunities to enhance its market
positions through steady internal growth and an active acquisition program in
the disabilities and at-risk and troubled youth sectors that will enable the
Company to expand its operations into new geographic areas, add program
offerings and establish new relationships with governmental entities. The
Company believes it has developed a disciplined approach to acquisitions which
focuses on acquiring generally profitable operations in favorable reimbursement
environments which: (i) expand service offerings; (ii) increase market share in
existing markets; or (iii) help attain critical mass in new markets. As part of
its internal growth strategy, the Company strives to build upon its established
relationships with governmental entities to expand its current programs and
obtain contracts for additional programs in new and existing markets, and to
develop new programs in response to societal trends and the needs of
governmental agencies. The Company also intends to expand its programs to
additional geographic areas which management identifies as having favorable
reimbursement and operating environments.
DESCRIPTION OF SERVICES BY SEGMENT
The Company has three reportable operating segments: (i) disabilities
services; (ii) Job Corps program; and (iii) other youth services programs. A
description of services provided by each segment follows. Further information
regarding each of these segments, including the required disclosure of certain
financial information, is included in Note 9 of the Notes to Consolidated
Financial Statements of the Company. Such disclosures are incorporated herein by
reference and should be read in conjunction with this Item.
Disabilities Services
The Company began providing service to persons with disabilities in
1978 through the operation and management of larger facilities (generally
serving 40 or more individuals) that offered alternatives to placement in state
institutions or traditional nursing homes or other long-term care facilities not
capable of providing specialized active treatment required by these individuals.
In 1983, the Company began offering services through community-based group homes
(generally serving up to eight individuals) and, in 1992, through supported
living programs in which persons with disabilities reside in their own
residences or apartments 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. Nearly 90% of the Company's clients with developmental
disabilities are being served in community-based settings. The Company's service
patterns to clients with ABI are similar to those with developmental
disabilities.
The Company's programs are based 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 the Company's services and support and
training programs makes the Company attractive to state and local governmental
agencies and not-for-profit providers who may wish to contract with it. The
Company's programs are designed to offer specialized support to these
individuals not generally available in larger state institutions and traditional
long-term care facilities. In each of the Company's programs, services are
administered by Company employees and contractors, such as qualified mental
retardation professionals (QMRPs) or service coordinators, physicians,
psychologists, therapists, social workers and other
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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.
Social Skills Training. The Company's social skills training
focuses on problem solving, anger management and adaptive skills to
allow individuals with disabilities to interact with others in the
residential setting and in the community. Emphasis is placed on contact
with the community at large as appropriate for each individual. The
desired outcome is to enable each individual to participate in home,
family and community life as fully as possible.
Many individuals with developmental and other disabilities
require behavioral intervention services. The Company provides these
services through psychiatrists, psychologists and behavioral
specialists, some of whom serve as consultants on a contract basis. All
operations utilize a non-aversive approach to behavior management which
has been pioneered by the Company and which is designed to avoid
consequences involving punishment or extreme restrictions on individual
rights. Behavior management techniques are employed by the
interdisciplinary team and direct service staff rather than
psychotropic medications to modify behavior, the goal being to minimize
the use of medications whenever possible. When necessary, medications
are handled in strict compliance with federal regulations.
Functional Skills Training. The Company's functional skills
training program encourages mastery of personal skills and the
achievement of greater independence. As needed, individual habilitation
plans may focus on basic skills training in such areas as personal
hygiene and dressing, as well as more complex activities such as
shopping and use of public transportation. Individuals are encouraged
to participate in daily activities such as housekeeping and meal
preparation as appropriate.
Vocational Skills Training and Day Programs. The Company
provides extensive vocational training or specialized day programs for
all individuals served. Some individuals are able to be placed in
community-based jobs, either independently or with job coaches, or may
participate as part of a work team contracted for a specific service
such as cleaning, sorting or maintenance. Clients not working in the
community may be served through vocational workshops or day programs
appropriate for their needs. The Company operates such programs and
also contracts for this service with outside providers. The Company's
philosophy is to enable all persons served to perform productive work
in the community or otherwise develop vocational skills based on their
individual abilities. Clients participating in specialized day programs
may be older or have physical or health restrictions which prevent them
from being employed or participating in vocational programs.
Specialized day programs may include further training in daily living
skills, community integration or specialized recreation activities.
Counseling and Therapy Programs. The Company's counseling and
therapy programs address the physical, emotional and behavioral
challenges of individuals with MR/DD or ABI. Goals of the programs
include the development of enhanced physical agility and ambulation,
acquisition of adaptive skills for both personal care and work, as well
as the development of coping skills and the use of alternative,
responsible, and socially acceptable interpersonal behaviors.
Individualized counseling programs may include group and individual
therapies. Occupational and physical therapies and therapeutic
recreation are provided based on the assessed needs of the individual.
At each of its operations, the Company provides comprehensive
individualized support and training programs that encourage greater independence
and the development of personal and vocational skills commensurate with the
particular individual's capabilities. As the individual progresses, new programs
are created to encourage greater independence, self-respect and the development
of additional personal or vocational skills.
Job Corps Program
Since 1976, the Company has been operating programs for disadvantaged
youths through the federal Job Corps program administered by the U.S. Department
of Labor (DOL), which provides for the educational and vocational skills
training, health care, employment counseling and other support necessary to
enable disadvantaged youths to become responsible working adults.
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As of February 28, 1999, the Company operated 14 Job Corps centers with
a contracted capacity of approximately 7,600 persons. The Job Corps program is
designed to address the severe unemployment problem faced by disadvantaged
youths throughout the country. The typical Job Corps student is a 16- to 24-year
old high school dropout who reads at the seventh grade level, comes from a
disadvantaged background, has not held a regular job, and was living in an
environment characterized by a troubled home life or other disruptive
conditions. Each center offers training in several vocational areas depending
upon the particular needs and job market opportunities in the region. Students
are required to participate in basic education classes to improve their academic
skills and to complement their vocational training. High school equivalency
classes are available to obtain GED certificates. Upon graduation or other
departure from the program, each student is referred to the nearest Job Corps
placement agency for assistance in finding a job or enrolling in a school or
training program. Approximately 70% of the students completing the program have
obtained jobs or continued their education elsewhere.
The Company also provides certain administrative, counseling,
education, vocational and other support services for two Job Corps centers
located in Kentucky and West Virginia under a five-year contract with the
Department of Interior expiring in 2003.
Other Youth Services Programs
In December 1995, the Company began a strategic initiative to expand
its Division for Youth Services beyond the Job Corps program and develop
services that are designed to address the specific needs of at-risk and troubled
youths to enable each youth to be a more productive member of the community. The
youths targeted to be served through the strategic initiative range from youths
who have special educational or support needs, to youths who exhibit a variety
of behavioral and emotional disorders and in some instances have been diagnosed
with mental retardation or other developmental disability, to pre-adjudicated
and adjudicated youths who have entered the juvenile justice system. Special
needs and at-risk youth programs operated through the Company's Alternative
Youth Services (AYS) subsidiary include residential treatment programs, the
operation of alternative schools, foster care programs and emergency shelters.
The Company plans to continue to expand the services provided to these youths.
Programs offered for troubled youths through the Company's Youthtrack, Inc.
(Youthtrack) subsidiary include secure and staff-secure detention programs, boot
camps, long-term treatment programs, secure transportation, day treatment
programs and monitoring, and transition and after-care programs.
The Company's programs include a variety of educational and vocational
training programs and comprehensive programs for behavior change, including
individual, group and family counseling and training in social and independent
living skills. These programs emphasize self-esteem, academic enhancement,
empathy development, critical thinking and problem solving, anger management and
coping strategies, substance abuse treatment and relapse prevention. Programs
are designed to: (i) increase self-control and effective problem-solving; (ii)
teach youths how to understand and consider other people's values, behaviors and
feelings; (iii) show youths how to recognize the effects of their behavior on
other people and why others respond to them as they do; and (iv) enable youths
to develop alternative, responsible, interpersonal behaviors. Although certain
youths in the Company's programs require both drug therapy and treatment for use
or abuse of drugs, the Company's goal is to minimize or eliminate the use of
medication whenever possible. When appropriate, medication is prescribed by
independent physicians and may be administered by Company personnel. Management
believes that the breadth of the Company's services and its history of working
with youths make the Company attractive to local, state and federal governmental
agencies.
OPERATIONS
Disabilities Services
Disabilities services operations are under the direct supervision of
the Company's Executive Vice President, Operations, Division for Persons with
Disabilities, who is responsible for five geographic regions, each headed by a
Regional Vice President, and for ABI operations nationally, headed by a Senior
Vice President . Each Vice President supervises the regional directors and/or
administrators responsible for the various MR/DD or ABI facilities and programs
under his or her control. In general, each cluster of group homes, supported
living program or larger facility is overseen by an administrator. In addition,
a program manager supervises a comprehensive team
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of professionals and community-based consultants who participate in the design
and implementation of individualized programs for each individual served. QMRPs
work with direct service staff and professionals involved in the programs to
ensure that quality standards are met and that progress towards each
individual's goals and objectives is monitored and outcomes are achieved.
Individual habilitation plans are reviewed and modified by the team as needed.
The operations utilize community advisory boards and consumer satisfaction
surveys to solicit input from professionals, family members and advocates, as
well as from the neighboring community, on how to continue to improve service
delivery and increase involvement with the neighborhood or community.
The Company's direct service staff have the most frequent contact with,
and generally are recruited from, the community in which the facility or program
is located. These staff members are screened to meet certain qualification
requirements and receive orientation, training and continuing education.
The provision of disabilities services is subject to complex and
substantial state and federal regulation and the Company strives to ensure that
its internal controls and reporting systems comply with Medicaid reimbursement
and other program requirements, policies and guidelines. The Company designs and
implements programs, often in coordination with appropriate state agencies, in
order to assist the state in meeting its objectives and to facilitate the
efficient delivery of quality services. Management and personnel resources are
devoted to keeping abreast of new laws, regulations and policy directives
affecting the quality and reimbursement of the services provided. In addition,
the Company believes it has developed expertise in accurately monitoring
eligibility for Medicaid and other benefits and in processing reimbursement
claims.
The Company has developed a model of ongoing program evaluation and
quality management which the Company believes provides critical feedback to
measure the quality of its various operations. Each operation conducts its own
quality assurance program, the Best in Class (BIC) performance benchmarking
system, which is reviewed by the responsible Regional Vice President. BIC
performance results are reviewed on a quarterly basis with the Executive Vice
President, Operations, Division for Persons with Disabilities. Management and
operational goals and objectives are established for each facility and program
as part of an annual budget and strategic planning process. A weekly statistical
reporting system and quarterly statement of progress provide management with
relevant and timely information on the operations of each facility. Survey
results from governmental agencies for each operation are recorded in a database
and quarterly summary reports are reviewed by senior management. The Company
believes the BIC system is a vital management tool to evaluate the quality of
its programs and has been useful as a marketing tool to promote the Company's
programs, since it provides more meaningful and significant data than is usually
provided by routine monitoring by governmental agencies. Beginning in 1999, all
disabilities services senior staff will convert to a performance-based
management system which evaluates individual performance based on critical job
function outcomes.
Job Corps Program
Job Corps centers are under the direct supervision of the President,
Job Corps Operations, who supervises the center directors responsible for the
various centers. The Company's Job Corps centers are operated under contract
with the DOL which provides the physical plant and equipment. The Company is
directly responsible for the management, staffing and administration of Job
Corps centers. A typical Res-Care Job Corps operation consists of a three-tier
management staff structure. The center director has the overall responsibility
for day-to-day management at each facility and is assisted by several senior
staff managers who typically are responsible for academics, vocational training,
social skills, safety and security, health services and behavior management.
Managers are assisted by front line supervisors who have specific
responsibilities for such areas as counseling, food services, maintenance,
finance, residential life, recreation, property, purchasing, human resources and
transportation.
An outcome performance measurement report for each center, issued by
the DOL monthly, measures three primary categories of performance: (i) placement
of graduates; (ii) education results, as measured by GED achievement and reading
and math gains; and (iii) the number of students completing a prescribed
vocational curriculum to make a student job-ready. These are then combined into
an overall performance rating. Centers are ranked as either "Not Meeting
Expectations," "Meeting Expectations" or "Outstanding." Performance standards
reports are reviewed by center directors and the President, Job Corps
Operations, and acted upon as appropriate to
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address areas where improvement is needed. At December 31, 1998, all centers
operated by the Company received evaluations of either "Meeting Expectations" or
"Outstanding".
Other Youth Services Programs
Other youth services operations are under the direct supervision of the
Company's Executive Vice President Operations for Youthtrack and AYS, who
supervises the Vice Presidents of Youthtrack and AYS. They in turn supervise the
Executive Directors and Administrators responsible for the various facilities or
programs.
The Company's youth programs are designed to provide consistent, high
quality and cost-effective education and treatment to address the needs of the
various segments of the special needs, at-risk and troubled youth populations.
The Company generally is responsible for the overall operation of its facilities
and programs, including management, general administration, staff recruitment,
security and supervision of the youth in their programs.
The Company has assembled an experienced team of managers, counselors
and staff that blends program expertise with business and financial experience.
The Company believes that its recruitment, selection and training programs
generate sufficient personnel capable of implementing the Company's systems and
procedures as it expands this segment of its business. The Company's staff
includes teachers, counselors, mental health professionals, juvenile justice
administrators and licensed clinicians.
The Company's internal policies require its teachers, counselors,
security and other direct service staff to complete extensive training. Core
training includes courses in the major Company program components, such as
behavior change education, positive peer culture, nonviolent crisis
intervention, discipline and limit-setting, anger management and social skills
training. Continuing education also is required for all staff. The Company
demonstrates its commitment to its employees' professional development by
offering classes and training programs, as well as tuition reimbursement
benefits.
The Company has also implemented its BIC system at the majority of its
youth services programs and expects to complete implementation of the Company's
remaining programs during 1999.
The Company recognizes that, in the operation of programs for at-risk
and troubled youths, a primary mission is to protect the safety of the community
within a facility, as well as the neighboring community. Thus, the Company's
programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
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FACILITIES AND PROGRAMS
The following tables set forth information as of December 31, 1998
regarding the Company's disabilities services and youth services operations,
respectively:
<TABLE>
<CAPTION>
DIVISION FOR PERSONS WITH DISABILITIES
Initial
Contract Operation
State Types of Programs Capacity (1) in State
----- ------------------ ------------ ---------
<S> <C> <C> <C>
Alabama............................. Supported Living 47 1998
Arizona............................. Periodic Services 902 1998
California.......................... Larger Facilities, Group Homes, Day Programs 1,016 1995
Colorado............................ Supported Living 182 1992
Florida............................. Larger Facilities, Group Homes, ABI 207 1983
Georgia............................. Supported Living, Periodic Services 1,532 1997
Illinois............................ Larger Facilities, ABI 141 1995
Indiana............................. Larger Facilities, Group Homes, 1,082 1983
Supported Living
Iowa................................ ABI 11 1998
Kansas.............................. Large Facility, Supported Living 356 1995
Kentucky............................ Larger Facilities, Group Home, Supported 698 1978
Living, Day Program
Louisiana........................... Group Homes, Supported Living 476 1984
Missouri............................ Supported Living, ABI 561 1997
Nebraska............................ Group Homes, Supported Living, Day Program 314 1992
New Jersey.......................... Supported Living 56 1997
New Mexico.......................... Supported Living 280 1994
North Carolina...................... Periodic Services, Supported Living 1,519 1997
Ohio................................ Larger Facility, Group Homes, Supported Living, 176 1995
Respite Program
Oklahoma............................ Supported Living 222 1995
Pennsylvania........................ Supported Living 23 1997
South Carolina...................... Periodic Services 39 1998
Tennessee........................... Group Homes, Supported Living 428 1993
Texas............................... Larger Facilities, Group Homes, Supported 1,696 1993
Living, Day Programs
Washington.......................... Periodic Services 65 1998
West Virginia....................... Group Homes, Supported Living, 242 1987
------
Day Program
Total.......................... 12,271
=======
<FN>
- ---------------
(1) Contract capacity includes, in the case of licensed facilities, the
number of persons covered by the applicable license or permit, and
generally in other cases, the number of persons covered by the
applicable contract. Contract capacity does not include capacity for day
or respite programs.
</TABLE>
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DIVISION FOR YOUTH SERVICES
<TABLE>
<CAPTION>
Initial
Contract Operation
State Types of Programs Capacity (1) in State
----- ----------------- ------------ --------
<S> <C> <C> <C>
Arizona....................... Job Corps (2 centers) 1,072 1997
Residential, Alternative School
Colorado...................... Residential, Non-Residential, Secure, 440 1996
Day Treatment, Apartment Living
Florida....................... Job Corps, Residential 566 1983
Georgia....................... Residential, Alternative School 74 1997
Indiana....................... Foster Care, Residential 68 1997
Kentucky...................... Residential, Alternative School, 2,532 1996
Foster Care, Job Corps
Maryland...................... Residential 35 1997
Mississippi................... Alternative School 60 1998
New Jersey.................... Job Corps 530 1995
New York...................... Job Corps 305 1986
Ohio.......................... Foster Care 100 1997
Oklahoma...................... Job Corps 550 1997
Pennsylvania.................. Job Corps 800 1997
Puerto Rico................... Job Corps (3 centers) 795 1990
Tennessee..................... Alternative School, Shelter, 104 1997
Wilderness Program
Utah.......................... Residential 41 1998
Virginia...................... Job Corps (2 centers) 500 1997
------
Total.................... 8,572
<FN>
======
- ---------------
(1) Contract capacity includes, in the case of licensed facilities, the
number of persons covered by the applicable license or permit, and
generally in other cases, the number of persons covered by the
applicable contract.
</TABLE>
CONTRACTS
State Contracts. Contracts for participation as a provider of services
in the Medicaid programs are regulated by federal and state agencies. Although
the contracts have a stated term of one year and generally may be terminated
without cause on 60 days notice, the contracts are typically renewed annually if
the Company has complied with licensing, certification, program standards and
other regulatory requirements. Serious deficiencies can result in delicensure or
decertification actions by these agencies. As provider of record, the Company
contractually obligates itself to adhere to the applicable federal and state
regulations regarding the provision of services, the maintenance of records and
submission of claims for reimbursement under the Medicaid Assistance Program,
Title XIX of the Social Security Act and pertinent state medical assistance
programs. Pursuant to provider agreements, the Company agrees to accept the
payment received from the government entity as payment in full for the services
administered to the individuals and to provide the government entity with
information regarding the owners and managers of the Company, as well as to
comply with requests and audits of information pertaining to the services
rendered. Provider agreements can be terminated at any time for non-compliance
with the federal, state or local regulations. Reimbursement methods vary by
state and are typically based on a flat-rate or cost-based reimbursement system
on a per person, per diem basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements."
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Contracts for the Company's youth services programs, excluding Job
Corps, are regulated by state and local governmental entities. Contracts
generally have one-year terms, subject to annual renewal, or cover individuals
for specific terms. The contract rate is also accepted as payment in full for
services rendered.
Management Contracts. Management contracts with states, local agencies
or other providers of record typically call for the Company to manage the
day-to-day operations of facilities or programs. Many of these contracts are
short-term (generally one year in duration) and are subject to renewal or
re-negotiation provided that program standards and regulatory requirements are
met. Depending upon the state's reimbursement policies and practices, management
contracts provide fees to the Company computed on the basis of a fixed fee per
individual (which may include some form of incentive payment), a percentage of
operating expenses (cost-plus contracts), a percentage of revenue or an overall
fixed fee paid regardless of occupancy. Historically, the Company's Medicaid
provider contracts and management contracts have been renewed or satisfactorily
renegotiated. The Company believes its experience in this regard is consistent
with the overall experience of other operators in the disabilities services
business.
Job Corps Contracts. Contracts for Job Corps centers are awarded
pursuant to a rigorous bid process. After successfully bidding, the Company
operates the Job Corps centers under comprehensive contracts negotiated with the
DOL. Under Job Corps contracts, the Company is reimbursed for all facility and
program costs related to Job Corps center operations and allowable indirect
costs for general and administrative expenses, plus a predetermined management
fee, normally a fixed percentage of facility and program expense.
The contracts cover a five-year period, consisting of an initial
two-year term with three one-year renewal terms exercisable at the option of the
DOL. The contracts specify that the decision to exercise an option is based on
an assessment of: (i) the performance of the center as compared to its budget;
(ii) compliance with federal, state and local regulations; (iii) qualitative
assessments of center life, education, outreach efforts and placement record;
and (iv) the overall rating received by the center. Shortly prior to the
expiration of the five-year contract period (or earlier if the DOL elects not to
exercise a renewal term), the contract is re-bid, regardless of the operator's
performance. The current operator may participate in the re-bidding process. In
situations where the DOL elects not to exercise a renewal term, however, it is
unlikely that the current operator will be successful in the re-bidding process.
It is the Company's experience that there is usually an inverse correlation
between the performance ratings of the current operator and the number of
competitors who will participate in the re-bidding process, with relatively
fewer competitors expected where such performance ratings are high.
As of February 28, 1999, the Company operated 14 Job Corps centers
under contract with the DOL in South Bronx, New York, New York; Miami, Florida;
Edison, New Jersey; Puerto Rico (3); Pittsburgh, Pennsylvania; Monroe, Virginia;
Guthrie, Oklahoma; Phoenix and Tucson, Arizona; Marion, Virginia; Morganfield,
Kentucky and San Francisco, California. Of the five-year periods covered by the
Company's Job Corps contracts, two expire in 1999, seven in 2000, one in 2001,
one in 2002, one in 2003 and two in 2004. The Company intends to selectively
pursue additional centers through the Request for Proposals (RFP) process.
The Company also provides certain administrative, counseling,
education, vocational and other support services for two Job Corps centers
located in Kentucky and West Virginia under a five-year contract with the
Department of Interior expiring in 2003.
MARKETING AND DEVELOPMENT
The primary focus of the Company's marketing activities is identifying
other providers who may consider an acquisition or a management contract
arrangement, and contacting state and local governments and governmental
agencies responsible for the provision of the types of disabilities services and
youth services offered by the Company.
The Executive Vice President responsible for the Company's development
department directs the Company's marketing efforts for disabilities services and
youth services, excepting Job Corps. Responsibility for marketing activities
also extend to other officers of the Company and its subsidiaries including the
Executive Vice President, Operations, Division for Persons with Disabilities,
the Executive Vice President, Operations for
9
<PAGE> 11
Youthtrack and AYS, the President, Job Corps Operations, and the various
regional or unit operational personnel. Marketing activities are reviewed on a
regular basis by senior management.
In its pursuit of government contracts, the Company contacts
governments and governmental agencies in geographical areas in which it operates
and in others in which it has identified expansion potential. Contacts are made
and maintained by both regional operations personnel and corporate development
personnel, augmented as appropriate by other senior management. The Company
targets new areas based largely on its assessment of the need for its services,
the system of reimbursement, the receptivity to out-of-state and proprietary
operators, expected changes in the service delivery system (i.e., privatization
or downsizing), the labor climate and existing competition.
The Company also seeks to identify service needs or possible changes in
the service delivery or reimbursement system of governmental entities that may
be driven by changes in administrative philosophy, budgetary considerations,
pressure or legal actions brought by advocacy groups. As needs or possible
changes are identified, the Company attempts to work with and provide input to
the responsible governmental personnel and to work with provider associations
and consumer advocacy groups to this end. If an RFP results from this process,
the Company then determines whether and on what terms it will respond and
participate in the competitive process.
With regard to identifying other providers who may be acquisition or
management contract candidates, the Company attempts to establish relationships
with providers through presentations at national and local conferences,
membership in national and local provider associations, direct contact by mail,
telephone or personal visits and follow up with information packets including
video presentations.
In some cases, the Company may be contacted directly and requested to
submit proposals or become a provider in order to provide services to address
specific problems. These may include an emergency takeover of a troubled
operation or the need to develop a large number of community placements within a
certain time period.
REFERRAL SOURCES
The Company receives substantially all of its MR/DD clients from third
party referrals. Generally, family members of persons with MR/DD are made aware
of available residential or alternative living arrangements through a state or
local case management system. Case management systems are operated by
governmental or private agencies. The Company's ABI services receive referrals
from doctors, hospitals, private and workers' compensation insurers and
attorneys. In either case, where it is determined that some form of MR/DD or ABI
service is appropriate, a referral of one or more providers of such services is
then made to family members or other interested parties. The Company generally
receives referrals or placements of individuals to its AYS and Youthtrack
programs through state or local agencies or entities responsible for such
services. Individuals are recruited to the Company's Job Corps programs largely
through private contractors. The Company also has contracts directly with the
DOL to recruit students to its own centers. The Company's reputation and prior
experience with agency staff, case workers and others in positions to make
referrals to the Company are important for building and maintaining census in
the Company's operations.
COMPETITION
The provision of disabilities services and youth services is subject to
a number of competitive factors, including range and quality of services
provided, cost-effectiveness, reporting and regulatory expertise, reputation in
the community, and the location and appearance of facilities and programs. These
markets are highly fragmented, with no single company or entity holding a
dominant market share. The Company competes with other for-profit companies,
not-for-profit entities and governmental agencies.
With regard to disabilities services, individual states remain a major
provider of MR/DD services, primarily through the operation of large
institutions. Not-for-profit organizations are also active in all states and
range from small agencies serving a limited area with specific programs to
multi-state organizations. Many of these organizations are affiliated with
advocacy and sponsoring groups such as community mental health and mental
retardation centers and religious organizations.
10
<PAGE> 12
The other youth services business in which the Company engages is one
that other entities may easily enter without substantial capital investment or
experience in management of education or treatment facilities. In addition,
certain not-for-profit entities may offer education and treatment programs at a
lower cost than the Company due in part to government subsidies, foundation
grants, tax deductible contributions or other financial resources not available
to for-profit companies.
Currently, only a limited number of companies actively seek Job Crops
contracts because the bidding process is highly specialized and technical and
requires a significant investment of personnel and other resources over a period
of several months. Approximately one-half of the privately-operated centers are
operated by the three largest operators. Competition for Job Corps contracts has
increased as the DOL has made efforts to encourage new participants in the
program, particularly minority-owned businesses.
Certain proprietary competitors operate in multiple jurisdictions and
may be well capitalized. The Company also competes in some markets with smaller
local companies that may have a better understanding of the local conditions and
may be better able to gain political and public acceptance. Such competition may
adversely affect the Company's ability to obtain new contracts and complete
acquisitions on favorable terms. The Company faces significant competition from
all of these providers in the states in which it now operates and expects to
face similar competition in any state that it may enter in the future.
Professional staff retention and development is a critical factor in
the successful operation of the Company's business. The competition for talented
professional personnel, such as therapists and QMRPs, is intense. The Company
typically utilizes a standard professional service agreement for provision of
services by certain professional personnel, which is generally terminable on 30
or 60-day notice. The demands of providing the requisite quality of service to
persons with special needs contribute to a high turnover rate of direct service
staff. Consequently, a high priority is placed on recruiting, training and
retaining competent and caring personnel.
GOVERNMENT REGULATION AND REIMBURSEMENT
The operations of the Company are subject to compliance with various
federal, state and local statutes and regulations. Compliance with state
licensing requirements is a prerequisite for participation in
government-sponsored health care assistance programs, such as Medicaid. The
following sets forth in greater detail certain regulatory considerations
applicable to the Company:
Funding Levels. Federal and state funding for the Company's
disabilities services business is subject to statutory and regulatory changes,
administrative rulings, interpretations of policy, intermediary determinations
and governmental funding restrictions, all of which may materially increase or
decrease program reimbursement. Congress has historically attempted to curb the
growth of federal funding of such programs, including limitations on payments to
facilities under the Medicaid program. Although states in general have
historically increased rates to compensate for inflationary factors, some have
curtailed funding due to state budget deficiencies or for other reasons. In
several such instances providers, acting through their state health care trade
associations, have been able to negotiate or employ legal action in order to
reach a compromise settlement. Revenues in the future may be affected by changes
in rate-setting structures, methodologies or interpretations that may be
proposed or under consideration in states where the Company operates.
Reimbursement Requirements. To qualify for reimbursement under Medicaid
programs, facilities and programs are subject to various requirements of
participation and other requirements imposed by federal and state authorities.
In order to maintain a Medicaid or state contract, certain statutory and
regulatory requirements must be met. These participation requirements relate to
client rights, quality of services, physical plant and administration. Long-term
providers, like the Company, are subject to periodic unannounced inspection by
state authorities, often under contract with the appropriate federal agency, to
ensure compliance with the requirements of participation in the Medicaid or
state program.
Licensure. In addition to the requirements to be met by the Company for
participation in the Medicaid program, the Company's facilities and programs are
usually subject to annual licensing and other regulatory requirements of state
and local authorities. These requirements relate to the condition of the
facilities, the quality
11
<PAGE> 13
and adequacy of personnel and the quality of services. State licensing and other
regulatory requirements vary from jurisdiction to jurisdiction and are subject
to change.
Regulatory Enforcement. From time to time, the Company receives notices
from regulatory inspectors that in their opinion there are deficiencies for
failure to comply with various regulatory requirements. The Company reviews such
notices and takes corrective action as appropriate. In most cases, the Company
and the reviewing agency agree upon the steps to be taken to bring the facility
or program into compliance with regulatory requirements, and from time to time,
the Company or one or more of its subsidiaries may enter into agreements with
regulatory agencies requiring the Company to take certain corrective action in
order to maintain licensure. Serious deficiencies, or failure to comply with any
regulatory agreement, may result in decertification or delicensure actions by
the Health Care Financing Administration or state regulatory agencies, as
appropriate.
Restrictions on Acquisitions and Additions. All states in which the
Company currently operates have adopted laws or regulations which generally
require that a state agency approve the Company as provider, and many require a
determination that a need exists prior to the addition of beds or services.
Cross Disqualifications and Delicensure. In certain circumstances,
conviction of abusive or fraudulent behavior with respect to one facility or
program may subject other facilities and programs under common control or
ownership to disqualification from participation in the Medicaid program.
Executive Order 12549 prohibits any corporation or facility from participating
in federal contracts if it or its principals (including but not limited to
officers, directors, owners and key employees) have been debarred, suspended, or
declared ineligible, or have been voluntarily excluded from participating in
federal contracts. In addition, some state regulators provide that all
facilities licensed with a state under common ownership or control are subject
to delicensure if any one or more of such facilities are delicensed.
Regulation of Certain Transactions. The Social Security Act, as amended
by the Health Insurance Portability and Accountability Act of 1996 (the "Health
Insurance Act"), provides for the mandatory exclusion of providers and related
persons from participation in the Medicaid program if the individual or entity
has been convicted of a criminal offense related to the delivery of an item or
service under the Medicaid program or relating to neglect or abuse of residents.
Further, individuals or entities may be, but are not required to be, excluded
from the Medicaid program under certain circumstances including, but not limited
to, the following: convictions relating to fraud; obstruction of an
investigation of a controlled substance; license revocation or suspension;
exclusion or suspension from a state or federal health care program; filing
claims for excessive charges or unnecessary services or failure to furnish
medically necessary services; or ownership or control by an individual who has
been excluded from the Medicaid program, against whom a civil monetary penalty
related to the Medicaid program has been assessed, or who has been convicted of
a crime described in this paragraph. The illegal remuneration provisions of the
Social Security Act make it a felony to solicit, receive, offer to pay, or pay
any kickback, bribe, or rebate in return for referring a resident for any item
or service, or in return for purchasing, leasing or ordering any good, service
or item, for which payment may be made under the Medicaid program. Other
provisions in the Health Insurance Act proscribe false statements in billing and
in meeting reporting requirements and in representations made with respect to
the conditions or operations of facilities. A violation of the illegal
remuneration statute is a felony and may result in the imposition of criminal
penalties, including imprisonment for up to five years and/or a fine of up to
$25,000. Further, a civil action to exclude a provider from the Medicaid program
could occur. There are also other civil and criminal statutes applicable to the
industry, such as those governing false billings and anti-supplementation
restrictions and the new health care offenses contained in the Health Insurance
Act, such as health care fraud, theft or embezzlement, false statements and
obstruction of criminal investigation of health care offenses. Criminal
sanctions for these new health care criminal offenses can be severe. Sanctions
for health care fraud offense, for example, include imprisonment for up to 20
years. The agencies administering the Medicaid program have increased their
criminal and civil enforcement activity in the prevention of program fraud and
abuse, including the payment of illegal remuneration.
Environmental Laws. Certain federal and state laws govern the handling
and disposal of medical, infectious, and hazardous waste. Failure to comply with
those laws or the regulations promulgated under them could subject an entity
covered by these laws to fines, criminal penalties, and other enforcement
actions.
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<PAGE> 14
OSHA. Federal regulations promulgated by the Occupational Safety and
Health Administration impose additional requirements on the Company including
those protecting employees from exposure to elements such as bloodborne
pathogens. The Company cannot predict the frequency of compliance, monitoring,
or enforcement actions to which it may be subject as regulations are implemented
and there can be no assurance that such regulations will not adversely affect
the operations of the Company.
INSURANCE
The Company maintains professional malpractice and general liability
insurance on professionals and other staff employed in each of its locations in
addition to coverage for the customary risks inherent in the operation of
business in general. While the Company believes its insurance policies to be
adequate in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or at
a reasonable cost.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 18,500
employees. As of that date, the Company was subject to collective bargaining
agreements with approximately 250 of its employees. The Company has not
experienced any work stoppages and believes it has good relations with its
employees.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company owned 268 properties and operated
facilities and programs at 1,111 leased properties. All other facilities and
programs are operated under management contracts. The Company owns its corporate
office building which is located in Louisville, Kentucky, and has an aggregate
of 45,000 square feet of office space. See "Business - Facilities and Programs."
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company (or a provider with which the Company
has a management agreement) is a party to legal and/or administrative
proceedings involving state program administrators and others that, in the event
of unfavorable outcomes, may adversely affect revenues and period-to-period
comparisons. In addition, the Company is a party to various legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such legal proceedings are without merit. Further, such claims may be covered
by insurance. The Company does not believe the results of such proceedings or
litigation will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
Defaults Upon Senior Securities
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the NASDAQ National Market on
December 15, 1992, under the symbol "RSCR". As of February 28, 1999, the Company
had approximately 6,800 shareholders based on the number of holders of record
and an estimate of the number of individual participants represented by security
position listings.
The following table sets forth the reported high and low sale prices for
Res-Care's common stock as reported by NASDAQ. The prices have been adjusted to
reflect the 3-for-2 stock split effective May 22, 1998.
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 25 11/16 17 1/2 13 7/8 11
June 30 26 1/2 18 1/4 13 7/16 9 7/8
September 30 20 3/16 13 1/4 16 11/16 12 1/2
December 31 25 1/4 15 1/2 19 7/8 13 11/16
</TABLE>
The Company currently does not pay dividends and does not anticipate doing
so in the foreseeable future.
Sales of Unregistered Securities
Effective January 1, 1998, the Company acquired through a merger in
which it issued 26,064 shares of common stock, the twenty-percent minority
interest in its Youthtrack, Inc. subsidiary held by members of its founding
management and is operating it as a wholly-owned subsidiary under its present
management.
In November 1997, the Company completed a Rule 144A private placement
of $109.4 million (including an over allotment of $9.4 million) principal amount
of 6% convertible subordinated notes due in 2004. The notes are initially
convertible into Res-Care common stock at a conversion price of $18.8083, which
represents approximately 5,814,000 shares of common stock. The notes were
initially sold within the United States to qualified institutional accredited
investors and qualified institutional buyers and outside the United States to
non-U.S. investors.
In March 1998, the Company completed a Rule 144A private placement of
$22.0 million principal amount of 5.9% convertible subordinated notes due in
2005. The notes are initially convertible into Res-Care common stock at a
conversion price of $25.8353, which represents approximately 851,545 shares of
common stock.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes. Certain amounts for 1994 through 1997 have been reclassified to conform
with the 1998 presentation.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
FINANCIAL DATA (1): (In thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
Net revenues ............................................ $ 522,682 $306,054 $224,265 $177,428 $142,958
Facility and program contribution......................... 73,880 41,013 29,383 20,654 15,941
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
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, less current portion...................... 193,282 108,470 30,672 18,644 5,742
Shareholders' equity...................................... 129,445 104,609 58,095 47,069 30,279
OPERATING DATA (1):
Disabilities Services:
Number of facilities and programs ................... 584 407 286 264 237
Contract capacity (3)................................ 12,271 6,831 5,031 4,286 3,040
Persons served....................................... 11,952 6,628 4,899 4,099 2,876
Capacity utilized.................................... 97.4% 97.0% 97.4% 95.6% 94.6%
Job Corps and Other Youth Services:
Number of facilities and programs ................... 60 44 28 8 7
Contract capacity (3)................................ 8,572 5,455 2,670 2,500 1,970
Persons served....................................... 8,395 5,323 2,605 2,562 2,000
Capacity utilized.................................... 97.9% 97.6% 97.6% 102.5% 101.5%
<FN>
- ----------------------
(1) In January 1997, the Company acquired the partnership interests in
Premier Rehabilitation Centers in a transaction accounted for as a
pooling-of-interests. Accordingly, the Company's financial statements
have been restated for all periods presented to include the financial
condition and results of operations of Premier. Pro forma amounts have
been presented to reflect the tax effect of the Premier partnership
interests in prior years. Operating data has not been restated to
reflect the operations of Premier. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
(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, and includes an $8,819 gain from
sale of this discontinued operation in 1995, net of applicable income
taxes of $6,270. The aggregate net income per share is as follows:
basic $0.63 and $0.07, diluted $0.61 and $0.07 in 1995 and 1994
respectively.
(3) Contract capacity includes, in the case of licensed facilities, the
number of persons covered by the applicable license or permit and, in
all other cases, the number of persons covered by the applicable
contract. Contract capacity does not include capacity for day or
respite programs.
</TABLE>
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Res-Care, Inc. (the Company) receives revenues primarily from the
delivery of residential, training, education and support services to populations
with special needs. The Company has three reportable operating segments: (i)
disabilities services; (ii) Job Corps program; and (iii) other youth services
programs. Management's discussion and analysis of each segment follows. Further
information regarding each of these segments, including the required disclosure
of certain segment financial information, is included in Note 9 of Notes to
Consolidated Financial Statements of the Company. Such disclosures are
incorporated herein by reference and should be read in conjunction with this
Item.
Revenues for the Company's disabilities services operations are derived
primarily from state government agencies under the Medicaid reimbursement system
and from management contracts with private operators, generally not-for-profit
providers, who contract with state government agencies and are also reimbursed
under the Medicaid system. Reimbursement methods vary by state and are typically
based on a flat rate or cost-based reimbursement system on a per person, per
diem basis. Generally, rates are adjusted annually based primarily upon
historical costs experienced by the Company and by other service providers, and
on inflation. At facilities and programs where it is the provider of record, the
Company is directly reimbursed under state Medicaid programs for services it
provides and such reimbursement is affected by occupancy levels. At most
facilities and programs that the Company operates pursuant to management
contracts, the management fee is negotiated based upon the reimbursement amount
expected to be earned by the provider of record, which is affected by occupancy
levels. Under certain management contracts, the Company is paid a fixed fee
regardless of occupancy levels. See Note 1 of Notes to Consolidated Financial
Statements for a further discussion of the Company's revenue recognition
policies with respect to Medicaid contracts.
As of February 28, 1999, the Company operated 14 vocational training
programs under the federal Job Corps program administered by the United States
Department of Labor (DOL). Under the Job Corps program, the Company is
reimbursed for direct costs related to Job Corps center operations and allowable
indirect costs for general and administrative expenses, plus a predetermined
management fee, normally a fixed percentage of facility and program expenses.
All of such amounts are reflected as revenue, and all such direct costs are
reflected as facility and program expenses. Final determination of amounts due
under Job Corps contracts is subject to audit and review by the DOL, and
renewals and extension of Job Corps contracts are based in part on performance
reviews.
In 1996, the Company began operating other programs for at-risk and
troubled youths through its Youthtrack, Inc. (Youthtrack) and Alternative Youth
Services (AYS) subsidiaries. Most of the youth services programs are funded
directly by federal, state and local government agencies including school
systems. Under these contracts, the Company is typically reimbursed based on
fixed contract amounts, flat rates or cost-based rates. In 1997 and 1996, the
effect of Youthtrack management's ownership interest is reflected in the
Company's consolidated statements of income as a minority interest. On January
1, 1998, the Company acquired through merger, the twenty-percent minority
interest in Youthtrack formerly held by members of its founding management.
Expenses incurred under federal, state and local government agency
contracts for disabilities services, Job Corps and other youth services, as well
as management contracts with providers of record for such agencies, are subject
to examination by agencies administering the contracts and services. Any
resulting adjustments would be recorded as contractual adjustments to revenues
in the period in which the adjustment is made. See Note 1 of Notes to
Consolidated Financial Statements.
The Company's revenues and net income may fluctuate from quarter to
quarter, in part because annual Medicaid rate adjustments may be announced by
the various states inconsistently and are usually retroactive to the beginning
of the particular state's fiscal reporting period. The Company expects that
future adjustments in reimbursement rates in most states will consist primarily
of cost-of-living adjustments. However, in some cases states have revised their
rate-setting methodologies, which has resulted in rate decreases as well as rate
increases. Current initiatives at the federal or state level may materially
change the Medicaid system as it now exists. Retroactively calculated
contractual adjustments are estimated and accrued in the periods the related
services are rendered and recorded as adjustments in future periods as final
adjustments are received. Because the cumulative
16
<PAGE> 18
effect of rate adjustments may differ from previously estimated amounts, net
income as a percentage of net revenues for a period in which an adjustment
occurs may not be indicative of expected results in succeeding periods. Revenues
in the future may be affected by changes in rate-setting structures,
methodologies or interpretations that may be proposed or are under consideration
in states where the Company operates. Also, some states have considered
initiating managed care plans for persons currently in Medicaid programs. At
this time, the Company cannot determine the impact of such changes, or the
effect of various federal initiatives that have been proposed.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During 1998, the Company completed 20 acquisitions and added seven new
contracts representing programs and facilities serving approximately 8,100
individuals with special needs. In these transactions, the Company paid total
consideration of approximately $133 million (generally funded with advances
under the Company's credit facility) and issued $22.0 million principal amount
of 5.9% convertible subordinated notes in the acquisition of Normal Life, Inc.
(Normal Life).
As a result of these transactions and a full year of operations for
1997 acquisitions, the Company achieved record revenues and net income in 1998.
Total net revenues in 1998 increased 71%, or $216.6 million, to $522.7 million
compared to $306.1 million in 1997. Net income increased 50% over 1997. These
increases represent continued progress in the Company's efforts to improve
results by expanding operations and improving quality. The contribution each
segment made to this growth is discussed below.
Disabilities Services
Disabilities services net revenues increased 58%, or $142.1 million, to
$385.1 million in 1998 compared to $243.0 million in 1997. Revenues increased
primarily as a result of the acquisition of Normal Life in March 1998, in
addition to the other 1998 disabilities services acquisitions, as well as the
effects of a full year of operating results from programs added during 1997.
Disabilities services facility and program expenses in 1998 increased 57%, or
$118.5 million, to $327.5 million compared to $209.0 million in 1997. Of the
increase, $86.5 million, or 73%, was due to payroll and payroll-related expenses
associated primarily with the new facilities and programs that were operational
in 1998 compared to 1997. As a percentage of net revenues, disabilities services
facility and program expenses decreased from 86.0% in 1997 to 85.0% in 1998.
Overall segment profit increased 60% over 1997 due principally to the volume and
efficiencies achieved through the 1998 acquisitions. The increased profitability
was offset by an increase in depreciation and amortization expense of 126%, or
$6.1 million, due to the acquisition of property, equipment and intangible
assets during the year.
Job Corps Program
Job Corps net revenues in 1998 increased 114%, or $53.1 million, to
$99.5 million compared to $46.4 million in 1997. Additionally, segment profit
increased 123%, or $5.9 million, from 1997 to 1998. The increases in both
revenues and profitability resulted primarily from the acquisition of five Job
Corps centers from Teledyne Economic Development in October 1997 and the
addition of the contract to manage the Earle C. Clements Job Corps Center
commencing in the second quarter of 1998. The annualized revenues from the Earle
C. Clements Job Corps Center are expected to approximate $30 million.
Other Youth Services Programs (Youthtrack and AYS)
Other youth services net revenues in 1998 increased 130%, or $21.5
million, to $38.1 million compared to $16.6 million in 1997. Revenues increased
primarily as a result of the effects of a full year of operating results from
programs added during 1997, as well as acquisitions during 1998. Segment profit
increased 147% from $1.6 million in 1997 to $4.0 million in 1998 also as a
result of the acquisitions and improvements realized in operations started
17
<PAGE> 19
in 1997. The increased profitability was offset by an increase in depreciation
and amortization expense of 166%, or $800,000, due to the acquisition of
property, equipment and intangible assets during the year.
Corporate Expenses
Corporate general and administrative expenses increased 61%, or $6.8
million, in 1998 compared to 1997. Payroll and payroll-related expenses
represented the majority of the increase due primarily to the addition of
support staff and increases in staff salaries. Corporate general and
administrative expenses in 1998 decreased as a percentage of total net revenues
to 3.4% from 3.7% in 1997.
Interest expense in 1998 increased $8.8 million to $11.3 million
compared to $2.5 million for 1997. The increase resulted primarily from interest
on the convertible subordinated notes issued in November and December 1997 (in a
financing) and March 1998 (in an acquisition) as well as borrowings under the
Company's credit facility. Interest income in 1998 increased $600,000 to $1.4
million from $800,000 for 1997. This increase was due primarily to interest
earned on the investment of proceeds from the issuance of the convertible
subordinated notes in November and December 1997.
Income taxes increased to $12.8 million in 1998 compared to $8.7
million in 1997, and reflect effective tax rates of 39.6% and 40.2%,
respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total net revenues increased by 36%, or $81.8 million, to $306.1
million in 1997 compared to $224.3 million in 1996. Of the increase, 76%
resulted from increased disabilities services revenues. Facility and program
expenses increased 36%, or $70.2 million, to $265.0 million in 1997 compared to
1996. Of this increase, $51.7 million, or 74% was due to payroll and
payroll-related expenses. These expenses reflected additional personnel, and
other costs associated with new facilities and programs during the year, as well
as payroll and other cost increases. Facility and program expenses decreased as
a percentage of total revenues to 86.6% from 86.9% in 1996. This decrease was
due to the effect of the rate increases which are further described below and
improved operating efficiencies.
Disabilities Services
Disabilities services net revenues increased by 34%, or $61.8 million,
to $243.0 million in 1997 compared to 1996. Revenues increased primarily from
the acquisition of 11 operations and one management contract in 1997, the
opening of 39 new operations and supported living programs in 1997 and the
effects of a full year of operating results from programs added in 1996.
Revenues also increased due to certain cost-of-living and other rate
adjustments. Disabilities services facility and program expenses increased 33%,
or $52.2 million, to $209.0 million in 1997 compared to 1996. Payroll and
payroll-related expenses represented 78% of this increase due primarily to the
new facilities in 1997 and the effects of a full year of operating results from
programs added in 1996. As a percentage of disabilities services net revenues,
disabilities services facility and program expenses decreased to 86.0% in 1997
from 86.4% in 1996. This decrease was due to the effect of the rate increases
described above and improved operating efficiencies. Depreciation and
amortization expense in 1997 increased 87%, or $2.2 million, over 1996 due to
the acquisition of property, equipment and intangible assets during the year.
Job Corps Program
Job Corps net revenues increased by 18%, or $7.0 million, to $46.4
million in 1997 compared to 1996, resulting primarily from the acquisition of
five Job Corps centers from Teledyne Economic Development in October 1997.
Segment profit as a percentage of net revenues decreased from 11.6% in 1996 to
10.4% in 1997 due principally to increased costs associated with transitioning
the Teledyne Job Corps centers.
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<PAGE> 20
Other Youth Services Programs (Youthtrack and AYS)
Other youth services net revenues increased by 356%, or $13.0 million,
to $16.6 million in 1997 compared to 1996, resulting primarily from three
acquisitions and two management contracts by AYS during 1997. These
acquisitions, as well as expansion of the Youthtrack operations, contributed to
the increase in segment profit as a percentage of net revenues from 2.2% in 1996
to 9.6% to 1997.
Corporate Expenses
Corporate general and administrative expenses increased 14.4%, or $1.4
million, to $11.2 million in 1997 compared to 1996. The increase primarily
reflected additional personnel to support the growth of the Company's
operations, as well as increased use of professional services. As a percentage
of total net revenues, such expenses decreased to 3.7% in 1997 compared to 4.4%
in 1996.
Interest expense increased $1.2 million to $2.5 million in 1997
compared to 1996. The increase resulted from increased utilization of the credit
facility for acquisitions, development and working capital prior to the
convertible debt offering.
Income taxes increased 58.3%, or $3.2 million, to $8.7 million in 1997
compared to 1996, and reflect effective tax rates of 40.2% and 36.9% in 1997 and
1996, respectively. The change in the effective tax rate is due primarily to
Premier being taxed as a partnership prior to 1997. The increase in income tax
expense is attributable to a higher level of operating income as described above
and the restatement of 1996 financial statements for the Premier
pooling-of-interests completed January 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for capital is attributable primarily to the
Company's plans to expand through acquisitions and the development of new
facilities and programs, and to have sufficient working capital for general
corporate purposes. Since most of the Company's facilities and programs are
operating at or near capacity, and budgetary pressures and other forces are
expected to limit increases in reimbursement rates received by the Company, the
Company's ability to continue to grow at its current rate is directly dependent
upon such acquisitions and development.
During the year ended December 31, 1998, cash provided by operating
activities was $10.2 million compared to $15.6 million for 1997, and $8.2
million for 1996. The decrease in 1998 from 1997 was due primarily to a growth
in accounts receivable as well as declines in the growth of current liabilities.
The increase in accounts receivable is primarily related to the increased number
of acquisitions made during 1998. The increase in 1997 from 1996 was due
primarily to an increase in income from continuing operations, trade payables
and accrued expenses, offset by an increase in accounts receivable. The increase
in accounts receivable, accounts payable and accrued expenses is primarily
related to the increased number of acquisitions made during 1997.
During the years ended December 31, 1998, 1997 and 1996, cash used in
investing activities was $117.0 million, $60.0 million and $20.7 million,
respectively, relating primarily to acquisitions and purchases of property and
equipment.
Cash provided by financing activities was $59.2 million for 1998,
related primarily to borrowings under the revolving line-of-credit. Cash
provided by financing activities in 1997 was $103.1 million, related primarily
to the secondary stock offering and the issuance of convertible subordinated
notes, offset by repayment of the line-of-credit. Cash provided by financing
activities was $13.0 million for 1996 consisting primarily of borrowings against
the line-of-credit. On June 30, 1998, the Company amended and restated its
credit agreement with a group of banks to provide for maximum borrowings of $200
million, increase the letter of credit facility from $10 million to $20 million,
amend certain financial covenants and add new subsidiaries and banks as parties
to the loan agreement. As of December 31, 1998, the Company had $138.0 million
available on its line-of-credit and $18.9 million in cash and cash equivalents.
Outstanding at that date were irrevocable standby letters of credit in the
principal amount of $3.0 million issued in connection with workers' compensation
insurance and certain facility leases.
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<PAGE> 21
Net days revenue in accounts receivable for the Company was 63 days at
December 31, 1998, compared to 56 days at December 31, 1997 and 52 days at
December 31, 1996. Accounts receivable at December 31, 1998, increased to $99.5
million, compared to $57.2 million at December 31, 1997, and $34.0 million at
December 31, 1996. Growth in these amounts has been primarily related to delays
in payment from certain state Medicaid programs and the integration of acquired
operations.
The Company has historically sought to provide its services in leased
premises, especially in the case of larger facilities. However, in response to
changes in certain reimbursement methodologies primarily related to its
expansion of services provided to consumers in community-based settings; the
Company has increased its real estate purchases, particularity residential
homes. Also, acquisitions may involve the purchase of real estate.
The Company has historically satisfied its working capital
requirements, capital expenditures and scheduled debt payments from its
operating cash flow and utilization of its credit facility. Cash requirements
for the acquisition of new business operations have generally been funded
through a combination of cash generated from operating activities, utilization
of the Company's revolving credit facility and the issuance of long-term
obligations and common stock. The Company believes that cash generated from
operations and availability under its expanded 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
Assessment and Remediation Plans
In response to the Year 2000 issue, the Company established a task
force to address Year 2000 issues in the following specific areas: (i)
information systems; (ii) medical equipment and physical facilities; and (iii)
third party relationships.
Information Systems: The Company has completed its initial assessment
of the capability of its information systems to meet Year 2000 processing
requirements. Based on this assessment, the Company has determined that it will
be required to modify or replace certain portions of its information systems.
The Company will be focusing a significant portion of its internal remediation
efforts on the aspects of information systems that affect revenue generation.
Currently, the Company utilizes certain purchased software to monitor accounts
receivable and generate a portion of its billings to third party payors. The
Company also utilizes software supplied by certain states or their contracted
third party vendors to electronically generate its billings to third party
payors. It is the intention of management to upgrade its accounts receivable and
billing system beginning in the second quarter of 1999 with an estimated
completion date in the third quarter of 1999. In addition to this upgrade,
management is in the process of acquiring a Year 2000 compliant software program
which will be utilized to generate substantially all invoices electronically and
monitor accounts receivable. The estimated completion date for installation and
testing of this billing system is October 31, 1999. During 1998, the Company
completed the requisite upgrades to its general ledger and payroll systems in
order for those systems to be compliant. Substantially all desktop computers,
network devices and related software have been tested and those found to be
noncompliant have been replaced. The Company plans to rely principally on its
own staff resources for Year 2000 remediation of its information systems
Medical Equipment and Physical Facilities: The effort to identify
potential Year 2000 problems within the Company's medical equipment and physical
facilities is ongoing. When complete, vendors, manufacturers and others with
whom the Company conducts business, and where the interruption of such business
could have a material adverse effect on the Company, will be contacted, and cost
effective efforts made to remediate or minimize possible problems. Upon
completion of this assessment, remediation plans will be developed. The Company
believes that it will be able to complete its assessment of material adverse
risk associated with Year 2000 problems in its medical equipment and physical
facilities sufficiently in advance of January 1, 2000, to effect remedial
measures where such measures are possible and cost effective. The current target
date for completing the assessment is June 30, 1999 and the target date for
completing any remedial measures is September 30, 1999. The Company presently
believes that with appropriate and timely modifications and replacements, the
Year 2000 issue will not pose significant operational problems for the Company.
The Company plans to rely principally on its own staff resources for Year 2000
remediation of medical equipment and physical facilities.
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<PAGE> 22
Third Party Relationships: The Company continues to assess the Year
2000 compliance capability of its significant third party payors and vendors.
Because a substantial portion of the Company's revenues are derived from
Medicaid programs, to the extent that certain federal and state governmental
agencies are noncompliant, the Company's cash flows, liquidity and financial
condition could be adversely affected. The Health Care Financing Administration
has issued guidance requiring state Medicaid agencies to certify that the
state's Medicaid Management Information Systems, and mission-critical
interfaces, are Year 2000 compliant by March 30, 1999. The Company has received
representations from its third party payroll processor, as well as its
significant relationship banks, that their systems will be Year 2000 compliant.
There can be no assurance that the systems of these third parties will be
compliant and will not have an adverse effect on the Company's operations. An
inventory of significant third party payors and vendors is in process, and
questionnaires are being mailed during March 1999 requesting representations
regarding their Year 2000 readiness. The Company anticipates completing its
assessment and any necessary actions by the end of the third quarter of 1999.
Contingency Plans
The Company has not established a formal contingency plan to address
failures in the Company's Year 2000 assessment and remediation plan. The task
force has been directed to complete plans for the three areas described in this
section, as well as other less significant areas within the Company, and to
submit the plans to the executive management team by June 30, 1999. Contingency
plans will be developed for any area of the Year 2000 remediation effort where
such effort is incomplete, the consequence of a possible Year 2000 problem is
materially adverse and a viable contingency plan is possible and economically
reasonable. Substantially all critical financial information systems currently
in place, including the internal accounts receivable and billing system
described above, are being remediated to be Year 2000 compliant in the event of
an unanticipated delay in the implementation of the Company's new systems. As
the Company contacts third party reimbursement sources, it is developing
contingency plans to receive temporary reimbursement in the event of system
failures by these entities. The Company's contingency plans will also cover
failures by suppliers and vendors. Further, each of the Company's operating
units has plans to handle emergency situations such as a loss of utility
services or supplies.
Year 2000 Risk
The Company believes the greatest risk posed by the Year 2000 issue is
the timely reimbursement by third party governmental payors. Management believes
that delays in the collection of accounts receivable potentially represent
significant operational risk with respect to the Year 2000 issue. Should cash
collections on accounts receivable from third party payors be significantly
delayed, the Company's working capital could be adversely affected. Management
continues to evaluate its financing needs, including needs arising from Year
2000 problems. While the Company could utilize its existing revolving credit
facility to fund working capital needs, the Company could also be forced to seek
additional external financing. Use of funding sources for working capital could
also adversely affect plans to expand the Company's business through
internally-generated growth or acquisitions. No assurance can be given that
additional financing to support working capital, growth or acquisitions would be
available to the Company.
Cost of Plan
The total cost of modifying and replacing information systems is
currently expected to range from $3 million to $4 million. Certain of these
costs (generally attributable to replacement equipment) will be capitalized and
amortized over a three to five year period. Other costs to remediate the Year
2000 issue will be expensed as incurred. At December 31, 1998, the Company had
incurred approximately $1.6 million of these costs. The total cost of modifying
and replacing medical equipment and physical facility components is not expected
to be material. The Company believes that the total costs associated with
replacing and modifying its current systems will not have a material adverse
effect on its results of operations or liquidity. The costs of the project and
the date on which the Company believes that it will substantially complete the
Year 2000 modifications are based on management's best estimates using
information currently available. Actual results could differ from those
estimates.
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EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-05, 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 the
Company's year ending December 31, 1999. Initial application of the SOP will
result in 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 principle. It is the intention of management of the Company to adopt
the provisions of the SOP 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 in the Company's
consolidated balance sheet.
CERTAIN RISK FACTORS
The Company's growth in revenues and earnings per share has been
directly related to a considerable increase in the number of individuals served
in each of its operating segments. This growth is largely dependent upon
development-driven activities, including the acquisitions of other businesses or
facilities or of management contract rights to operate facilities, the award of
contracts to open new facilities or start new operations or to assume management
of facilities previously operated by governmental agencies or not-for-profit
organizations and the extension or renewal of contracts previously awarded to
the Company. The Company often makes forward-looking statements regarding its
development activities.
Changes in the Company's future revenues depend significantly upon the
success of these development activities, and in particular on the Company's
ability to obtain additional contracts to provide services to the special needs
populations it serves, whether through acquisitions, awards in response to
requests for proposals for new facilities or programs or for facilities being
privatized by governmental agencies, or other development activities. Future
revenues also depend on the Company's ability to maintain and renew its existing
services contracts and its existing leases. The Company actively seeks
acquisitions of other companies, facilities and assets as a means of increasing
the number of consumers served. Changes in the market for such acquisition
prospects, including increasing competition for and increasing pricing of such
acquisition prospects, could also adversely affect the timing and/or viability
of future development activities.
Revenues of the Company's 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
Company's revenues and operating profitability are dependent upon 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 in which the Company
conducts its operations could adversely affect revenues and profitability. Other
changes in the manner in which federal and state reimbursement programs are
operated, and in the manner in which billings/costs are reviewed and audited,
could also affect revenues and operating profitability.
The Company's cost structure and ultimate operating profitability are
significantly dependent on its labor costs and the availability and utilization
of its labor force and thus may be affected by a variety of factors, including
local competitive forces, changes in minimum wages or other direct personnel
costs, the Company's effectiveness in managing its direct service staff, and
changes in consumer services models, such as the trends toward supported living
and managed care.
Additionally, the Company's continued expansion of its existing
operations, and its ability to expand its provision of services to other
populations utilizing the Company's core competencies are dependent upon
continuation of trends toward downsizing, privatization and consolidation and
the Company's ability to tailor its services to meet the specific needs of these
different populations. The success in operating in a changing environment is
subject to a variety of political, economic, social and legal pressures,
including desires of governmental agencies to reduce costs and increase levels
of services, federal, state and local budgetary constraints and actions brought
by advocacy groups and the courts to change existing service delivery systems.
Material changes resulting from these trends and pressures could adversely
affect the demand for and reimbursement of the Company's services and its
operating flexibility, and ultimately its revenues and profitability.
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<PAGE> 24
From time to time, the Company (or a provider with which the Company
has a management agreement), is a party to legal and/or administrative
proceedings involving state program administrators and others that, in the event
of unfavorable outcomes, may adversely affect revenues and period-to-period
comparisons. In addition, the Company is a party to various legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such legal proceedings are without merit. Further, such claims may be covered
by insurance. The Company does not believe the results of such proceedings or
litigation will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements and include, but are not limited to: (1)
projections of revenues, income or loss, earnings or loss per share, capital
structure and other financial items; (2) statements of plans and objectives of
the Company or its management or Board of Directors; (3) statements of future
actions or economic performance; and (4) statements of assumptions underlying
such statements. Words such as "believes," "anticipates," "expects," "intends,"
"plans," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements. Some of
the events or circumstances that could cause actual results to differ from those
discussed in the forward-looking statements are discussed in the "Certain Risk
Factors" and "Year 2000 Issue" sections above. Such forward-looking statements
speak only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made to
reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result
of its outstanding variable rate debt, the Company does not currently utilize
any derivative financial instruments related to its interest rate exposure. The
Company believes that its exposure to market risk will not result in a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements - Res-Care, Inc. and Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Refer to pages F-1 through F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company
is filing a definitive proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this report which includes
the required information. The required information contained in the Company's
proxy statement is incorporated herein by reference.
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<PAGE> 26
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Report
(1) Consolidated Financial Statements - Res-Care, Inc. and Subsidiaries
(refer to "F" pages):
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) All financial statement schedules have been omitted, as the required
information is inapplicable or the information is presented in the
financial statements or related notes.
(3) Listing of Exhibits:
2.1 Agreement by and among Res-Care, Inc., RSCR California, Inc.,
Res-Care Illinois, Inc., Res-Care Kansas, Inc., and RSCR
Texas, Inc. and Beverly Health and Rehabilitation Services,
Inc., Beverly Enterprises-California, Inc., Beverly
Enterprises-Illinois, Inc., Beverly Enterprises-Kansas, Inc.
and Beverly Enterprises-Texas, Inc., dated April 5, 1995
(excluding Exhibits and Schedules). Exhibit 2.1 to the
Company's Report on Form 8-K dated May 1, 1995 filed on May
12, 1995 is hereby incorporated by reference.
2.2 Stock Purchase Agreement by and among Housecall Medical Resources
Inc. and Res-Care, Inc., Blair S. Gordon and J. Paul Gordon
dated as of May 31, 1995 (excluding Exhibits and Schedules).
Exhibit 2.1 to the Company's Report on Form 8-K dated May 31,
1995 filed on June 15, 1995 is hereby incorporated by
reference.
2.3 Stock Purchase Agreement by and between the Company and Richard
Greer, Robert Greer and Alicia Greer Austin dated July 31,
1997. Exhibit 2.1 to the Company's Report on Form 8-K dated
July 31, 1997 filed on August 14, 1997 is hereby incorporated
by reference.
2.4 Stock Purchase Agreement by and among the Company and (i) Normal
Life, Inc., (ii) J. Robert Shaver, Kathryn S. Graham, and
Frederic H. Davis, and (iii) minority shareholders, dated
February 4, 1998. Exhibit 2.1 to the Company's Report on Form
8-K dated March 12, 1998 filed on March 27, 1998 is hereby
incorporated by reference.
2.5 Amendment to the Stock Purchase Agreement by and among the Company
and Richard Greer, Robert Greer and Alicia Greer Austin dated
January 15, 1999. (filed herewith)
3.1 Amended and Restated Articles of Incorporation of the Company dated
December 18, 1992 incorporating the Amendment to Amended and
Restated Articles of Incorporation dated May 29, 1997.
(filed herewith)**
3.2 Bylaws of the Company. Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-48749) is hereby
incorporated by reference.
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<PAGE> 27
4.1 Specimen Common Stock Certificate. Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
4.2 Article VI of the Amended and Restated Articles of Incorporation of
the Company included in Exhibit 3.1.
4.3 Indenture, dated as of November 21, 1997, between the Company and PNC
Bank, Kentucky, Inc. Exhibit 4.3 to the Company's Registration
Statement on Form S-3, (Reg. No. 333-44029) is hereby
incorporated by reference.
4.4 Registration Rights Agreement, dated as of November 21, 1997, by and
between the Company, NationsBanc Montgomery Securities, Inc.,
J.C. Bradford & Co., L.L.C. and Equitable Securities
Corporation. Exhibit 4.4 to the Company's Registration
Statement on Form S-3 (Reg. No. 333-44029) is hereby
incorporated by reference.
4.5 Statement of Additional Terms and Conditions dated as of March 15,
1998 relating to $22,000,000 of 5.9% Convertible Subordinated
Notes due 2005. Exhibit 2.2 of the Company's Report on Form
8-K dated March 12, 1998 and filed on March 27, 1998 is hereby
incorporated by reference.
10.1 1991 Incentive Stock Option Plan of the Company (adopted April 24,
1991, amended and restated as of February 23, 1995). Exhibit 4
to the Company's Registration Statement on Form S-8 (Reg. No.
33-80331) is hereby incorporated by reference.
10.2 Amendment to Amended and Restated 1991 Incentive Stock Option
Plan of the Company. Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 is
hereby incorporated by reference. *
10.3 1991 Compensation/Evaluation Bonus Plan. Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-48749) is hereby incorporated by reference. *
10.4 1993 Non-Employee Directors Stock Ownership Incentive Plan of the
Company (adopted October 28, 1993). Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Reg. No.
33-76612) is hereby incorporated by reference.
10.5 Res-Care, Inc. 1998 Omnibus Stock Plan effective June 18, 1998.
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (No. 333-57167) is hereby incorporated by reference.
10.6 1994 Employee Stock Purchase Plan effective July 1, 1995.
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (Reg. No. 33-85964) is hereby incorporated by reference.
10.7 Res-Care, Inc. 401(K) Restoration Plan effective December 1, 1995.
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ending December 31, 1995, is hereby incorporated by
reference.
10.8 Amended and Restated Employment Agreement dated as of October 26,
1995, and amended November 5, 1996, between the Company and
Ronald G. Geary. Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the year ending December 31, 1996 is hereby
incorporated by reference. *
10.9 Employment Agreement dated January 1, 1997 between the Company and
Jeffrey M. Cross. Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the year ending December 31, 1996 is hereby
incorporated by reference. *
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<PAGE> 28
10.10 Employment Agreement dated April 13, 1997 between the Company and
Paul G. Dunn. Exhibit 10.2 to the company's Report on Form
10-Q for the quarter ending March 31, 1997 is hereby
incorporated by reference. *
10.11 Amendment to the Employment Agreement between the Company and
Jeffrey M. Cross dated August 4, 1997. Exhibit 10.3 to the
Company's Report on Form 10-Q for the quarter ending June 30,
1997 is hereby incorporated by reference. *
10.12 Amendment to the Employment Agreement between the Company and Paul
G. Dunn dated August 4, 1997. Exhibit 10.4 to the Company's
Report on Form 10-Q for the quarter ending June 30, 1997 is
hereby incorporated by reference. *
10.13 Employment Agreement between the Company and Pamela M. Spaniac
dated July 10, 1997. Exhibit 10.5 to the Company's Report on
Form 10-Q for the quarter ending June 30, 1997 is hereby
incorporated by reference. *
10.14 Employment Agreement between the Company and E. Halsey Sandford,
dated January 26, 1998 Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ending December 31, 1997 is
hereby incorporated by reference. *
10.15 1998 Amended and Restated Loan Agreement by and among PNC Bank,
National Association as Administrative Agent, and the banks
listed on Schedule 1 thereto and Res-Care, Inc., dated June
30, 1998. Exhibit 10.1 to the Company's Report on Form 10-Q
for the quarter ended June 30, 1998 is hereby incorporated by
reference.
10.16 Amendment to the Employment Agreement between the Company and
Ralph G. Gronefeld, Jr., dated August 15, 1998. Exhibit 10.1
to the Company's Report on Form 10-Q for the quarter ended
September 30, 1998 is hereby incorporated by reference. *
10.17 Employment Agreement between the Company and Ralph G. Gronefeld,
Jr., dated January 1, 1998. (filed herewith) *
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
24.1 Power of Attorney (included on signature page)
27.2 Financial Data Schedule - December 31, 1997 (Restated)
27.3 Financial Data Schedule - December 31, 1996 (Restated)
* Management contracts or compensatory plan or arrangements.
** The Amended and Restated Articles of Incorporation of the Company were
previously filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-48749). The Amendment to Amended and Restated
Articles of Incorporation was previously filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-3 (Reg. No. 333-32513).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RES-CARE, INC
Date: March 23, 1999 By: /s/ Ronald G. Geary
-----------------------------------------
Ronald G. Geary
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ronald G. Geary Chairman of the Board, President, Chief March 23, 1999
- --------------------------- Executive Officer and Director
Ronald G. Geary (Principal Executive Officer)
/s/ E. Halsey Sandford Senior Executive and Director March 23, 1999
- ---------------------------
E. Halsey Sandford
/s/ Ralph G. Gronefeld, Jr. Executive Vice President, March 23, 1999
- --------------------------- Finance and Administration and
Ralph G. Gronefeld, Jr. Chief Financial Officer
(Principal Financial Officer)
/s/ James R. Fornear Director March 23, 1999
- ---------------------------
James R. Fornear
/s/ Seymour L. Bryson Director March 23, 1999
- ---------------------------
Seymour L. Bryson
/s/ W. Bruce Lunsford Director March 23, 1999
- ---------------------------
W. Bruce Lunsford
/s/ Spiro B. Mitsos Director March 23, 1999
- ---------------------------
Spiro B. Mitsos
/s/ Olivia F. Kirtley Director March 23, 1999
- ---------------------------
Olivia F. Kirtley
</TABLE>
28
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets - As of December 31, 1998 and 1997............ F-3
Consolidated Statements of Income - Years Ended December 31, 1998,
1997 and 1996......................................................... F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996...................................... F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997 and 1996......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Res-Care, Inc.:
We have audited the accompanying consolidated balance sheets of
Res-Care, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Res-Care,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Louisville, Kentucky
February 24, 1999
F-2
<PAGE> 32
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
---- ----
(In thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 18,939 $ 66,584
Accounts and notes receivable, net............................................. 99,454 57,240
Inventories.................................................................... 683 634
Deferred income taxes.......................................................... 6,997 3,483
Prepaid expenses and other current assets...................................... 3,409 2,259
----------- -----------
Total current assets................................................ 129,482 130,200
----------- -----------
Property and equipment, net......................................................... 64,129 54,403
Excess of acquisition cost over net assets acquired, less accumulated
amortization of $6,757 in 1998 and $1,751 in 1997.............................. 173,949 51,751
Other assets........................................................................ 29,054 18,790
----------- -----------
$ 396,614 $ 255,144
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Trade accounts payable......................................................... $ 22,924 $ 13,888
Accrued expenses............................................................... 33,349 22,907
Accrued income taxes........................................................... 5,597 1,564
Current portion of long-term debt.............................................. 4,019 1,759
----------- -----------
Total current liabilities........................................... 65,889 40,118
----------- -----------
Long-term liabilities............................................................... 6,340 1,714
Long-term debt .................................................................... 193,282 108,470
Deferred income taxes............................................................... 1,658 14
----------- -----------
Total liabilities................................................... 267,169 150,316
----------- -----------
Commitments and contingencies
Minority interest................................................................... -- 219
Shareholders' equity:
Preferred shares, no par value, authorized 1,000,000 shares, no shares
issued or outstanding...................................................... -- --
Common stock, no par value, authorized 40,000,000 shares, issued
23,582,475 shares in 1998 and 1997......................................... 41,678 41,678
Additional paid-in capital..................................................... 16,348 11,215
Retained earnings.............................................................. 74,523 55,057
----------- -----------
132,549 107,950
Less cost of common shares in treasury (4,670,749 shares in 1998
and 5,033,952 shares in 1997).............................................. (3,104) (3,341)
----------- -----------
Total shareholders' equity.......................................... 129,445 104,609
----------- -----------
$ 396,614 $ 255,144
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 33
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenues........................................................................ $ 522,682 $ 306,054 $ 224,265
Facility and program expenses....................................................... 448,802 265,041 194,882
Operating expenses:
Corporate general and administrative........................................... 18,031 11,222 9,813
Depreciation and amortization.................................................. 14,046 6,298 3,683
Gain from sale of assets....................................................... (307) (100) (4)
----------- ----------- -----------
Total operating expenses, net....................................... 31,770 17,420 13,492
----------- ----------- -----------
Total facility, program and operating expenses...................... 480,572 282,461 208,374
----------- ----------- -----------
Operating income............................................................... 42,110 23,593 15,891
Other expenses (income):
Interest expense............................................................... 11,295 2,544 1,351
Interest income................................................................ (1,435) (811) (458)
----------- ----------- -----------
Total other expenses, net........................................... 9,860 1,733 893
----------- ----------- -----------
Minority interest in income of consolidated subsidiary.............................. -- (146) (37)
----------- ----------- -----------
Income before income taxes.......................................................... 32,250 21,714 14,961
Income tax expense.................................................................. 12,784 8,737 5,518
----------- ----------- -----------
Net income .................................................................... $ 19,466 $ 12,977 $ 9,443
======== =========== ===========
Basic earnings per share............................................................ $ 1.04 $ 0.75 $ 0.64
Diluted earnings per share.......................................................... $ 0.94 $ 0.72 $ 0.60
Pro forma income data (unaudited):
Net income as reported......................................................... $ 19,466 $ 12,977 $ 9,443
Pro forma adjustment to provision for income taxes............................. -- -- (292)
----------- ----------- -----------
Pro forma net income........................................................... $ 19,466 $ 12,977 $ 9,151
=========== =========== ===========
Pro forma net income per share:
Basic...................................................................... $ 1.04 $ 0.75 $ 0.62
Diluted.................................................................... 0.94 0.72 0.59
Weighted average shares used in per share calculations:
For basic earnings per share................................................... 18,753 17,409 14,851
For diluted earnings per share................................................. 26,080 18,569 15,614
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
------ ------ ------- -------- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ............. 20,756 $ 15,535 $ 2,297 $ 33,247 6,041 $ (4,010) $ 47,069
Net income ............................. -- -- -- 9,443 -- -- 9,443
Exercise of stock options,
including related tax benefit ..... -- -- 1,738 -- (335) 221 1,959
Distributions by Premier, net .......... -- -- -- (376) -- -- (376)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 ........... 20,756 15,535 4,035 42,314 5,706 (3,789) 58,095
Net income ............................. -- -- -- 12,977 -- -- 12,977
Exercise of stock options,
including related tax benefit ..... -- -- 3,331 -- (537) 359 3,690
Income tax benefit related to
Premier pooling-of-interests ...... -- -- 2,320 -- -- -- 2,320
Sale of common stock, net of
expenses .......................... 2,826 26,143 -- -- -- -- 26,143
Issuance of shares in
connection with an acquisition .... -- -- 1,529 -- (135) 89 1,618
Partnership distributions .............. -- -- -- (234) -- -- (234)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ........... 23,582 41,678 11,215 55,057 5,034 (3,341) 104,609
Net income ............................. -- -- -- 19,466 -- -- 19,466
Exercise of stock options,
including related tax benefit ..... -- -- 4,670 -- (337) 220 4,890
Issuance of shares in connection
with an acquisition ............... -- -- 463 -- (26) 17 480
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 ........... 23,582 $ 41,678 $ 16,348 $ 74,523 4,671 $ (3,104) $ 129,445
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 35
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................ $ 19,466 $ 12,977 $ 9,443
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ......................................... 14,046 6,298 3,683
Amortization of discount on convertible subordinated notes ............ 467 49 --
Deferred income taxes ................................................. 116 278 539
Gain from sale of assets .............................................. (307) (100) (4)
Income applicable to minority interest of consolidated
subsidiary ....................................................... -- 146 37
Changes in operating assets and liabilities:
Accounts and notes receivable ......................................... (28,260) (17,634) (7,580)
Inventories ........................................................... (9) 19 (157)
Prepaid expenses and other current assets ............................. (787) 68 (645)
Other assets .......................................................... (1,109) (259) (102)
Accounts payable ...................................................... 4,182 8,524 660
Accrued expenses ...................................................... 1,763 4,678 2,110
Accrued income taxes .................................................. 1,865 1,112 492
Long-term liabilities ................................................. (1,254) (593) (325)
--------- --------- ---------
Cash provided by operating activities ............................ 10,179 15,563 8,151
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment .................................... (9,507) (8,536) (5,714)
Acquisitions of businesses, net of cash acquired ...................... (106,381) (49,469) (12,718)
Deferred start-up costs ............................................... (1,115) (2,002) (2,269)
--------- --------- ---------
Cash used in investing activities ................................ (117,003) (60,007) (20,701)
--------- --------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) under notes payable to bank ............... 59,000 (26,196) 12,006
Repayment of notes payable ............................................ (3,301) (4,814) (66)
Proceeds from issuance of convertible subordinated notes .............. -- 106,079 --
Proceeds from sale of common stock, net of expenses of $614 ........... -- 26,143 --
Proceeds received from exercise of stock options ...................... 3,480 2,118 1,457
Partnership distributions ............................................. -- (234) (376)
--------- --------- ---------
Cash provided by financing activities ............................ 59,179 103,096 13,021
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ............................... (47,645) 58,652 471
Cash and cash equivalents at beginning of year ................................. 66,584 7,932 7,461
--------- --------- ---------
Cash and cash equivalents at end of year ....................................... $ 18,939 $ 66,584 $ 7,932
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized in 1996) .......................... $ 9,670 $ 1,894 $ 1,352
Income taxes .......................................................... 11,704 7,469 4,362
Supplemental Schedule of Non-cash Investing and Financing Activities:
Issuance of common stock in connection with acquisitions .................. $ 480 $ 1,618 --
Issuance of notes in connection with acquisitions ......................... 30,289 4,070 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 36
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business
The consolidated financial statements include the accounts of Res-Care,
Inc. and its subsidiaries (the Company). Intercompany transactions and balances
are eliminated in consolidation.
The Company receives revenues primarily from the delivery of
residential, training, educational and support services to various populations
with special needs. As more fully described in Note 9, the Company has three
reportable operating segments: (i) disabilities services; (ii) Job Corps
program; and (iii) other youth services programs.
Revenue Recognition
Disabilities Services: Client services are provided at rates
established at the time services are rendered. Payments for services rendered to
clients covered by Medicaid are generally less than the Company's established
rates. Contractual allowances and adjustments are recorded to reflect the
difference between established rates and expected reimbursement. Retroactively
calculated contractual adjustments are accrued on an estimated basis in the
periods the related services are rendered. Final settlements are recorded as
adjustments in future periods when they are determined.
Revenues are derived primarily from state government agencies under the
Medicaid reimbursement system and from management contracts with private
operators, generally not-for-profit providers, who contract with state
government agencies and are also reimbursed under the Medicaid system.
Revenues in the future may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed in states
where the Company operates. Some states are considering initiating managed care
plans for persons served in the Medicaid programs and expanding Medicaid waiver
funding for community residential services. At this time, the Company cannot
determine the impact of such changes, or the effect of any possible governmental
actions.
Job Corps Program: Revenues include amounts reimbursable under cost
reimbursement contracts with the U.S. Department of Labor for operating Job
Corps centers. The contracts provide reimbursement for all facility and program
costs related to Job Corps center operations and allowable indirect costs for
general and administrative expenses, plus a predetermined management fee,
normally a fixed percentage of facility and program expenses. Final
determination of amounts due under the contracts is subject to audit and review
by the U.S. Department of Labor.
Other Youth Services Programs: Juvenile treatment revenues are derived
primarily from state-awarded contracts from state agencies under various
reimbursement systems. Reimbursement from state or locally awarded contracts
varies per facility or program, and is typically paid under fixed contract
amounts, flat rates, or cost-based rates.
For each operating segment, expenses are subject to examination by
agencies administering the contracts and services. Management believes that
adequate provisions have been made for potential adjustments arising from such
examinations. Revenues and accounts receivable are recorded net of estimated
allowances and adjustments. Provision for bad debt expense, if any, is provided
for in the period the expense is determined by management.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-7
<PAGE> 37
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful
lives of the assets, by the straight-line method. Estimated useful lives for
buildings are 20 - 40 years. Leasehold improvements are generally amortized over
the life of the respective lease. The useful lives of furniture and equipment
vary from three to seven years. The Company acts as custodian of assets where it
has contracts to operate facilities or programs owned or leased by the U.S.
Department of Labor, various states and private providers.
The excess of acquisition cost over net assets acquired and the cost of
licenses are amortized over 20-30 years using the straight-line method.
Covenants not to compete are amortized over the terms of the respective
agreements which are generally five to ten years. The Company assesses the
recoverability of goodwill and other intangibles as events or circumstances
indicate a possible inability to recover their carrying amount. Such evaluation
is based on cash flow, profitability and projections that incorporate current
operating results. This analysis involves significant management judgment.
Inventories
Inventories consist principally of supplies, food and linens, and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
Deferred Start-Up Costs
Deferred start-up costs are reimbursable under applicable state
regulations and include administrative and staff salaries, rent, professional
fees, insurance and other costs incurred during the period prior to operation of
the various facilities. These costs are amortized on a straight-line method over
periods ranging from five to seven years consistent with applicable state
reimbursement regulations.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-05, 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 the
Company's year ending December 31, 1999. Initial application of the SOP will
result in 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 principle. It is the intention of management of the Company to adopt
the provisions of the SOP 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 in the Company's
consolidated balance sheet.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
Per Share Data
The Company's Board of Directors authorized a three-for-two stock split
which was distributed on June 4, 1998, to shareholders of record on May 22,
1998. All share and per share data included in this annual report have been
restated to reflect the stock split. Per share amounts have also been restated
to reflect the issuance of 613,875 shares of common stock in the acquisition of
Premier Rehabilitation Centers (Premier) on January 1, 1997.
F-8
<PAGE> 38
Insurance
The Company maintains insurance in the form of commercial general
liability and commercial umbrella liability policies, which include professional
liability insurance. Management intends to maintain such coverages in the future
and is of the opinion that insurance coverages are adequate to cover any
potential losses on asserted claims. Management is unaware of any incidents that
would ultimately result in a loss in excess of the Company's insurance
coverages. In addition, the Company self-insures group health insurance for its
employees. Such self-insurance costs are accrued based upon the aggregate of the
liability for reported claims and an estimated liability for claims incurred but
not reported. The Company has an annual stop-loss limit of $150,000 for each
covered individual. Workers' compensation claims are covered either under large
deductible or retrospective policies or through sponsored insurance funds.
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 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.
Segment Information
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also established
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information. Information regarding the Company's reportable operating segments
is set forth in Note 9.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in 1996 and 1997 have been reclassified to conform with
the 1998 presentation. The effect of any reclassifications was not material.
2. ACQUISITIONS
During the two years ended December 31, 1998, the Company has made
various acquisitions as set forth below. Except for the Premier acquisition
which was accounted for as a pooling-of-interests, all have been accounted for
as purchases. The consolidated financial statements include the operating
results of each business acquired for as a purchase from the date of its
acquisition. Except for the acquisitions of Normal Life, Inc. (Normal Life),
Communications Network Consultants, Inc. (CNC) and Teledyne Economic
Development, pro forma results of operations have not been presented because the
effects of these acquisitions were not significant.
F-9
<PAGE> 39
On March 12, 1998, the Company acquired all of the outstanding common
stock of Normal Life, a Kentucky corporation, which provides services to persons
with mental retardation and other developmental disabilities in Indiana,
Kentucky, California, Louisiana, Texas, Georgia and Florida. The aggregate stock
purchase price of $73 million was paid with $51 million in cash and $22 million
in principal amount of the Company's 5.9% convertible subordinated notes due
2005. The notes are convertible into common stock of the Company at a conversion
price of $25.8354, or approximately 851,545 shares, commencing one year from the
closing date of the transaction. The funds for the acquisition came from the
Company's existing cash and revolving credit facility.
The following table sets forth information regarding acquisitions
during 1998 and 1997 which were accounted for as purchases:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997
---- ----
<S> <C> <C>
Number of acquisitions:
Disabilities services ........................................... 14 10
Job Corps program ............................................... -- 1
Other youth services programs ................................... 6 2
-------- --------
20 13
======== ========
Allocation of purchase price:
Buildings, land and equipment ................................... $ 5,626 $ 4,657
Excess of acquisition cost over net assets acquired ............. 122,066 38,198
Other intangible assets ......................................... 4,574 4,310
Other ........................................................... 334 1,980
-------- --------
$132,600 $ 49,145
======== ========
</TABLE>
The following summary of results of operations on a pro forma basis
gives effect to the acquisitions of Normal Life, CNC and Teledyne Economic
Development as though the acquisitions had taken place as of January 1, 1997:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997
---- ----
<S> <C> <C>
Net revenues ......................................................... $ 533,625 $ 396,207
Net income ........................................................... 19,117 12,314
Basic earnings per share ............................................. 1.02 0.70
Diluted earnings per share ........................................... 0.93 0.68
</TABLE>
These unaudited pro forma results of operations do not reflect the
total cost savings or other synergies that may result from the acquisitions. In
the opinion of management of the Company, all adjustments necessary to present
pro forma results of operations have been made. The unaudited pro forma results
of operations do not purport to be indicative of the results that would have
occurred had the acquisitions occurred at the beginning of these periods or
results of operations that may be achieved in the future.
In connection with the Normal Life acquisition, the Company recognized
a liability of approximately $2.4 million associated with termination benefits
and the closing of duplicate facilities. The termination benefits relate
principally to corporate employees. During 1998, the Company paid approximately
$1.2 million against the liability established for such purposes.
The stock purchase agreement associated with the acquisition of CNC
provided for the payment of additional consideration upon CNC meeting certain
earnings levels through 1999. In January 1999, the stock purchase agreement was
amended to provide for the acceleration of the contingent consideration
resulting in the payment of approximately $868 to CNC. Additionally under the
amendment, the Company paid the outstanding principal balance plus accrued
interest under a promissory note to CNC totaling approximately $1.3 million.
F-10
<PAGE> 40
Effective January 1, 1997, the Company acquired all of the partnership
interests in Premier in exchange for 613,875 shares of the Company's common
stock in a business combination accounted for as a pooling-of-interests. Premier
provides disabilities services to clients with acquired brain injuries and is
included in the operations of the disabilities services segment. Premier
revenues and net income included in the Company's consolidated statements of
income for the year ended December 31, 1996 were $5,919 and $752, respectively.
3. OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Long-term receivables and advances to managed facilities............................ $ 5,052 $ 2,994
Deferred start-up costs, net of accumulated amortization............................ 6,205 4,487
Licenses, net of accumulated amortization........................................... 2,869 2,958
Covenants not to compete, net of accumulated amortization........................... 11,878 6,585
Deposits ........................................................................... 2,127 1,510
Other assets........................................................................ 923 256
----------- -----------
$ 29,054 $ 18,790
=========== ===========
<CAPTION>
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31
-----------
1998 1997
---- ----
Property and Equipment:
<S> <C> <C>
Land and land improvements..................................................... $ 8,234 $ 6,863
Leasehold improvements......................................................... 4,595 2,521
Buildings...................................................................... 48,972 42,686
Furniture and equipment........................................................ 19,046 13,151
----------- -----------
80,847 65,221
Less accumulated depreciation and amortization...................................... 16,718 10,818
----------- -----------
Net property and equipment $ 64,129 $ 54,403
=========== ===========
<CAPTION>
5. DEBT
Long-term debt consists of the following:
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Revolving credit facility with banks................................................ $ 59,000 $ --
6% convertible subordinated notes due 2004, net of unamortized discount
of $2,765 in 1998 and $3,232 in 1997........................................... 106,595 106,128
5.9% convertible subordinated notes due 2005........................................ 22,000 --
Notes payable....................................................................... 9,680 2,500
Other............................................................................... 26 1,601
----------- -----------
197,301 110,229
Less current portion........................................................... 4,019 1,759
----------- -----------
$ 193,282 $ 108,470
=========== ===========
</TABLE>
On June 30, 1998, the Company amended and restated its credit agreement
with a group of banks (the Revolving Credit Facility) to provide for maximum
borrowings of $200 million, increase the letter of credit facility from $10
million to $20 million, amend certain financial covenants and add new
subsidiaries and banks as parties to the loan agreement. As of December 31,
1998, the Company had $138.0 million available on its line-of-credit and $18.9
million in cash and cash equivalents. Outstanding at that date were irrevocable
standby letters of credit in the principal amount of $3.0 million issued in
connection with workers' compensation insurance and certain facility
F-11
<PAGE> 41
leases. Interest is based on margins over LIBOR. The six-month LIBOR rate at
December 31, 1998 was 6.32%. The Revolving Credit Facility is secured by the
common stock of all of the Company's subsidiaries. The Revolving Credit Facility
contains financial covenants related to net worth, debt service coverage,
indebtedness to cash flow from operations and debt to capitalization.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31
- -----------
<C> <C>
1999 ................................................................... $ 4,019
2000 ................................................................... 3,863
2001 ................................................................... 1,362
2002 ................................................................... 426
2003 ................................................................... 59,003
Thereafter.............................................................. 128,628
-----------
$ 197,301
===========
<CAPTION>
6. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Trade payables............................................. $ 2,471 $ 2,890
Wages and payroll taxes.................................... 9,676 9,915
Vacation .................................................. 4,518 2,794
Workers' compensation...................................... 4,335 1,323
Taxes other than income taxes.............................. 3,991 2,227
Interest................................................... 1,933 774
Employee benefits.......................................... 1,527 448
Other...................................................... 4,898 2,536
----------- -----------
$ 33,349 $ 22,907
=========== ===========
<CAPTION>
7. INCOME TAXES
Income tax expense is summarized as follows:
Years Ended December 31
1998 1997 1996
Federal:
Current............................................... $ 10,051 $ 6,543 $ 3,937
Deferred.............................................. 75 204 317
----------- ----------- -----------
Total federal..................................... 10,126 6,747 4,254
State and local:
Current............................................... 2,617 1,916 1,042
Deferred.............................................. 41 74 222
----------- ----------- -----------
Total state and local............................. 2,658 1,990 1,264
----------- ----------- -----------
Total income tax expense..................... $ 12,784 $ 8,737 $ 5,518
=========== =========== ===========
</TABLE>
F-12
<PAGE> 42
A reconciliation of the U.S. Federal income tax rate of 35% to income
tax expense expressed as a percent of pretax income follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax at the statutory rate ......................................... 35.0% 35.0% 35.0%
Increase (decrease) in income taxes:
State taxes, net of federal benefit ......................................... 4.8 5.7 5.9
Surtax exemption ............................................................ -- (0.5) (0.7)
Income taxes on income taxed directly to partners ........................... -- -- (2.0)
Nondeductible amortization of goodwill ...................................... 2.4 0.2 0.1
Other ....................................................................... (2.6) (0.2) (1.4)
------- ------- --------
39.6% 40.2% 36.9%
======= ======= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for contractual
adjustments ............................................................. $ 2,474 $ 1,189
Goodwill and other intangible assets, principally due to purchase
accounting basis differences and differences in amortization ............ 517 1,551
Workers' compensation costs, principally due to accrual for financial
reporting purposes ...................................................... 1,292 612
Compensated absences, due to accrual for financial reporting purposes ....... 1,311 737
Other liabilities and reserves, deductible in different periods for
financial reporting and tax purposes .................................... 1,764 962
Deferred gains and revenues, taxable in different periods for financial
reporting and tax purposes .............................................. 523 129
Other ....................................................................... -- 41
------- -------
Total deferred tax assets ........................................ 7,881 5,221
------- -------
Deferred tax liabilities:
Accounts receivable, principally due to experience rated revenue
recognition for income tax reporting purposes ........................... 100 66
Property and equipment, due to differences in depreciation .................. 162 61
Deferred start-up costs, due to capitalization for financial reporting
purposes ................................................................ 1,929 1,470
Amortization of goodwill and licenses ....................................... 267 --
Other ....................................................................... 84 155
------- -------
Total deferred tax liabilities ................................... 2,542 1,752
------- -------
Net deferred tax asset .................................................. $ 5,339 $ 3,469
======= =======
Classified as follows:
Current deferred income tax asset ........................................... $ 6,997 $ 3,483
Noncurrent deferred income tax liability .................................... (1,658) (14)
------- -------
Net deferred tax asset .................................................. $ 5,339 $ 3,469
======= =======
</TABLE>
No valuation allowance for deferred tax assets was required as of
December 31, 1998 or 1997, nor was there any change in the total valuation
allowance for the years ended December 31, 1998, 1997 and 1996. The realization
of deferred tax assets is dependent upon the Company generating future taxable
income when temporary differences become deductible. Based upon the historical
and projected levels of taxable income, management believes it is more likely
than not the Company will realize the benefits of the deductible differences.
F-13
<PAGE> 43
8. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations and income available to
shareholders for basic earnings per share...................................... $ 19,466 $ 12,977 $ 9,443
Interest expense, net of income tax effect, on convertible..........................
subordinated notes............................................................. 5,041 446 --
----------- ----------- -----------
Income available to shareholders after assumed conversion
of convertible subordinated notes.............................................. $ 24,507 $ 13,423 $ 9,443
=========== =========== ===========
Weighted average number of common shares used in basic
earnings per share............................................................. 18,753 17,409 14,851
Effect of dilutive securities:
Stock options ................................................................ 825 544 763
Convertible subordinated notes................................................. 6,502 616 --
----------- ----------- -----------
Weighted number of common shares and dilutive potential
common shares used in diluted earnings per share............................... 26,080 18,569 15,614
=========== =========== ===========
</TABLE>
9. SEGMENT INFORMATION
The Company has three reportable operating segments: disabilities
services, Job Corps program and other youth services programs. The Company's
disabilities services division offers services for individuals with
developmental and other disabilities, including acquired brain injury. These
services are provided through supported living and supported employment
programs, community group homes, and facility-based operations. The Job Corps
segment operates various centers under the federal Job Corps program
administered by the U.S. Department of Labor which provides for the educational
and vocational training and other support necessary to enable disadvantaged
youths to become responsible working adults. The other youth services segment
provides services to address the specific needs of at-risk and troubled youths
to enable each youth to be a more productive member of the community. The
Company's reportable segments are business units that offer distinct services to
different special needs populations and are managed separately.
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest, income taxes, accounting changes
and non-recurring items. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are not significant.
F-14
<PAGE> 44
The following table sets forth information about reportable segment
profit or loss and segment assets:
<TABLE>
<CAPTION>
Other
Disabilities Job Youth All Consolidated
As of and for the year ended December 31: Services Corps Services Other (1) Totals
- ----------------------------------------- -------- ----- -------- --------- ------
1998
<S> <C> <C> <C> <C> <C>
Net revenues......................................... $ 385,114 $ 99,477 $ 38,091 $ -- $ 522,682
Segment profit (loss)................................ 46,959 10,753 3,964 (19,566) 42,110
Total assets......................................... 314,954 21,055 26,269 34,336 396,614
Capital expenditures................................. 5,769 -- 1,191 2,547 9,507
Depreciation and amortization........................ 10,856 296 1,282 1,612 14,046
1997
Net revenues......................................... $ 243,045 $ 46,366 $ 16,643 $ -- $ 306,054
Segment profit (loss)................................ 29,365 4,828 1,605 (12,205) 23,593
Total assets......................................... 140,243 18,470 13,246 83,185 255,144
Capital expenditures................................. 6,302 -- 615 1,620 8,537
Depreciation and amortization........................ 4,801 49 482 966 6,298
1996
Net revenues......................................... $ 181,280 $ 39,339 $ 3,646 $ -- $ 224,265
Segment profit (loss)................................ 22,040 4,580 80 (10,809) 15,891
Total assets......................................... 81,818 4,223 4,620 24,651 115,312
Capital expenditures................................. 4,842 -- 170 709 5,721
Depreciation and amortization........................ 2,573 -- 104 1,006 3,683
<FN>
(1) All Other is comprised of Corporate general and administrative expenses and
Corporate depreciation and amortization.
</TABLE>
10. BENEFIT PLANS
The Company sponsors savings plans which were established to assist
eligible employees in providing for their future retirement needs. The Company's
contributions to the plans were $2,463, $1,305, and $2,237 in 1998, 1997 and
1996, respectively.
The Company's stock-based compensation plans are fixed stock option
plans. Under the 1998 Omnibus Stock Plan and the 1991 Incentive Stock Option
Plan, the Company may grant options to its salaried officers and employees for
up to 1,125,000 and 3,801,093 shares of common stock, respectively. Under both
plans, the exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is normally
five years. Generally all options, except those granted to certain key
executives which have varied vesting schedules, vest 20 percent at date of grant
and 20% per year over four years.
Under a stock option plan adopted October 28, 1993, 90,000 shares are
available for issuance to non-employee members of the Board of Directors at an
exercise price which cannot be less than the fair market value on the date of
grant.
F-15
<PAGE> 45
Stock option activity is shown below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ------------------------ -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............... 1,590,840 $ 10.25 1,474,796 $ 6.26 1,273,815 $ 5.06
Granted........................................ 1,805,754 17.26 794,025 13.07 596,470 7.88
Exercised...................................... (337,211) 10.37 (537,506) 3.91 (334,087) 4.36
Canceled....................................... (78,256) 15.35 (140,475) 8.71 (61,402) 7.49
----------- ----------- -----------
Outstanding at end of year..................... 2,981,127 14.34 1,590,840 10.25 1,474,796 6.26
=========== =========== ===========
Exercisable at end of year..................... 1,379,802 $ 12.92 880,680 $ 9.89 736,170 $ 4.53
=========== =========== ===========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- ---------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
------------------- ----------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 6.78 to 8.68 504,037 1.9 years $ 7.22 365,050 $ 7.30
10.17 to 14.13 1,638,437 4.3 years 13.35 784,627 12.81
15.25 to 18.25 279,750 4.5 years 16.06 27,150 17.29
19.50 to 23.50 558,903 4.2 years 22.84 202,975 22.88
----------- -----------
$ 6.78 to 23.50 2,981,127 3.9 years $ 14.34 1,379,802 $ 12.92
=========== ===========
</TABLE>
For financial statement reporting purposes, the Company continues to
use the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share amounts would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income ........................................................ $ 14,133 $ 12,049 $ 9,032
Basic earnings per share........................................... 0.75 0.69 0.61
Diluted earnings per share......................................... 0.74 0.67 0.59
</TABLE>
F-16
<PAGE> 46
The following table sets forth the fair value of each option grant
using the Black-Scholes option-pricing model and the applicable weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fair value per option...................................... $ 7.83 $ 3.95 $ 2.72
Risk-free interest rate.................................... 4.66% 5.51% 6.36%
Dividend yield ........................................... 0% 0% 0%
Expected volatility........................................ 0.48 0.48 0.49
Expected life (in years)................................... 4-5 5-6 5-6
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain operating facilities, office space, vehicles
and equipment under operating leases which expire at various dates. Total rent
expense was approximately $23,745, $13,456 and $9,361 for the years ended
December 31, 1998, 1997 and 1996, respectively. Approximate future minimum lease
payments under all non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31
<S> <C>
1999 ....................................................................$ 12,017
2000 .................................................................... 9,196
2001 .................................................................... 7,825
2002 .................................................................... 6,363
2003 .................................................................... 3,056
Thereafter............................................................... 7,707
</TABLE>
The Company leases certain of its operating facilities from a real estate
investment trust in which the Company's chairman and another director are
members of the trust's board of directors. The lease commenced in October 1998
and extends through 2009. Lease payments to the trust approximated $183 in 1998.
Annual rentals, included in the future minimum rental amounts above, are
estimated to be approximately $750, subject to annual increases based on the
consumer price index.
12. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1998
Net revenues................................... $ 105,938 $ 129,595 $ 141,066 $ 146,083 $ 522,682
Facility and program contribution.............. 14,060 17,986 20,428 21,406 73,880
Net income..................................... 3,837 4,256 5,605 5,768 19,466
Basic earnings per share....................... 0.21 0.23 0.30 0.30 1.04
Diluted earnings per share..................... 0.19 0.21 0.27 0.27 0.94
1997
Net revenues................................... $ 64,867 $ 69,990 $ 76,945 $ 94,252 $ 306,054
Facility and program contribution.............. 8,596 8,681 10,939 12,797 41,013
Net income..................................... 2,607 2,887 3,662 3,821 12,977
Basic earnings per share....................... 0.17 0.17 0.20 0.21 0.75
Diluted earnings per share..................... 0.17 0.16 0.19 0.20 0.72
</TABLE>
F-17
<PAGE> 1
EXHIBIT 2.5
D. RICHARD GREER
390 WONDERLAND
BLOWING ROCK, NORTH CAROLINA 28650
January 15, 1999
Paul G. Dunn
Todd Graybill
Res-Care, Inc.
10140 Linn Station Road
Louisville, Kentucky 40202
RE: COMMUNICATIONS NETWORK CONSULTANTS, INC. - AMENDMENTS
Gentlemen:
Reference is hereby made to the Stock Purchase Agreement dated as of
July 31, 1997 between (i) Res-Care, Inc., and (ii) D. Richard Greer, Robert V.
Greer and Alicia Greer Austin, as amended by letter agreements dated July 31,
1997 and July 30, 1998 (the "Agreement"). Except as otherwise provided herein,
all capitalized terms in this letter agreement shall have the meanings given to
them in the Agreement.
The purpose of this letter agreement is to amend the Agreement in
certain respects, including to provide for (i) acceleration of certain payments
under the First Note, (ii) the termination of Buyer's obligations under Section
1.3(b)(iii) of the Agreement and the Second Note in consideration for certain
payments and other agreements as provided herein, and (iii) the transfer of
certain assets from the Company to Sellers and to provide for the termination of
the Sellers' Employment Agreements.
Each of Buyer, the Company and the Sellers hereby agree as follows:
1. The closing of the transactions contemplated herein (the "1999
Closing") shall take place at the offices of the Company at 839 Wilkesboro
Boulevard, Lenoir, North Carolina 28645 on or before January 31, 1999, at 9:00
a.m., EST (the "1999 Closing Date").
2. At the 1999 Closing, Buyer shall pay an aggregate amount of $867,568
to the Sellers as consideration for the termination and full satisfaction of all
of the obligations of Buyer and the Company under and pursuant to Section
1.3(b)(iii) of the Agreement and the Second Note. It is acknowledged that
$46,265 of such payment represents the additional balance due and payable to
<PAGE> 2
Paul G. Dunn
Todd Graybill
Res-Care, Inc.
January 15, 1999
Page 2
Sellers with respect to the installment for the First Measurement Period and
that $821,303 of such payment represents a payment in termination of Sellers'
rights under Section 1.3(b)(iii) of the Agreement and the Second Note. At the
1999 Closing, Sellers shall deliver to Buyer the original of the Second Note
marked "paid in full." Upon the payments described in this paragraph 2, neither
Buyer nor Company shall have any further obligation under Section 1.3(b)(iii) of
the Agreement or the Second Note.
3. At the 1999 Closing, Buyer shall also pay to Sellers an aggregate
amount equal to (i) $1,250,000 (representing the second annual installment of
principal due under the First Note), plus (ii) accrued interest on such
installment from July 31, 1998 to the 1999 Closing Date. At the 1999 Closing,
Sellers will deliver to Buyer the original of the First Note, marked "paid in
full." Upon the payments described in this paragraph 3, neither Buyer nor
Company shall have any further obligation under the First Note.
4. The payments described in paragraphs 2 and 3 hereof shall be made by
Buyer by wire transfer of immediately available federal funds to an account or
accounts designated by Sellers.
5. At the 1999 Closing, the Company shall by appropriate transfer
documents transfer and assign to D. Richard Greer the 1997 Mercedes Benz S320
automobile owned by the Company and used by him in connection with his
employment by the Company, in consideration for the sum of $25,000, payable at
the 1999 Closing by D. Richard Greer to the Company by personal check. After the
1999 Closing, the Company shall have no further obligation with respect to such
automobile, including but not limited to any obligation to maintain any
insurance coverage thereon.
6. At the 1999 Closing, the Company shall by appropriate transfer
documents transfer and assign to Camelot Golf Center, LLC that certain 1995
Dodge dump truck owned by the Company, having a current book value of $7,119.36.
After the 1999 Closing, the Company shall have no further obligation with
respect to such dump truck, including but not limited to any obligation to
maintain any insurance coverage thereon.
7. At the 1999 Closing, the Company shall transfer and assign, by Bill
of Sale, all of the office furniture in each of the Seller's personal offices at
the Company's 839 Wilkesboro Boulevard site to the respective Seller, which in
the case of D. Richard Greer shall also include the obsolete fax machine located
in his office at such site.
8. All of the Sellers' Employment Agreements shall be terminated,
effective at the 1999 Closing. At the 1999 Closing, the Company shall pay to
each of the Sellers his or her accrued and
<PAGE> 3
Paul G. Dunn
Todd Graybill
Res-Care, Inc.
January 15, 1999
Page 5
unpaid Base Salary (as defined in the respective Sellers' Employment Agreement)
through the 1999 Closing Date. The parties hereto acknowledge that pursuant to
Section 4(c) of the Sellers' Employment Agreements, each of the Sellers were
granted options to purchase certain shares of Res-Care common stock on September
24, 1998. Under the terms of such Section 4(c) of the Sellers' Employment
Agreements, the following number of such Res-Care common stock options have
vested:
D. Richard Greer 3,600
Robert V. Greer 3,000
Alicia Greer Austin 3,000
The unvested portion of such options granted on September 24, 1998 shall expire
and be forfeited as of the 1999 Closing. Except as provided in this paragraph 8
and except for the Sellers' obligations under Section 7 of the Sellers'
Employment Agreements, neither the Company nor any of the Sellers shall have any
further obligation under the Sellers' Employment Agreements.
9. For one year after the 1999 Closing Date, the Sellers will provide
consulting and advisory services to the Company, consisting of, as requested,
one or more of the Sellers attending regularly scheduled management team and
board meetings of the Company and providing other reasonable consultation
services on an as needed basis. In consideration for such consulting and
advisory services, the Company shall pay to each of the Sellers an annual
consulting and advisory fee of $2,500, which shall be payable by Company check
quarterly in arrears. Upon the mutual written consent of the Company and each of
the Sellers, the respective Seller's consulting arrangement with the Company may
be renewed annually thereafter. The parties hereto acknowledge that the Sellers
shall not be considered to be employees of the Company in connection with the
rendering of any of such consulting and advisory services for any purpose and
the Company shall have no obligation to withhold taxes of any kind with respect
to such consulting and advisory payments. Any final decision with regard to any
matter in connection with the business of the Company, Buyer or its affiliates,
irrespective of whether the advice of any of the Sellers has been solicited or
received, shall rest with the Buyer.
10. Effective as of the 1999 Closing, each of D. Richard Greer and
Robert V. Greer shall resign their positions as directors of the Company and
thereafter neither Buyer nor the Company shall have any further obligation under
Section 1.4(h) of the Agreement.
11. The respective obligations of the parties under each of the
Noncompetition Agreements and the Company Leases shall continue in full force
and effect in accordance with their
<PAGE> 4
Paul G. Dunn
Todd Graybill
Res-Care, Inc.
January 15, 1999
Page 4
respective terms, unmodified in any respect by the execution of this letter
agreement. Buyer and the Sellers agree to discuss from time to time the
possibility of one or more of the Sellers acting as lessor to Buyer or one or
more of its subsidiaries or affiliates with respect to real property used in
connection with the business of Buyer or such subsidiaries and affiliates. Any
such lease shall be on such terms and conditions as the parties mutually agree.
Except as otherwise specifically provided herein, the Agreement shall
remain in full force and effect in accordance with its terms.
Please indicate your acceptance of the terms of this letter agreement
by signing a facsimile copy thereof in the space provided below and returning by
facsimile a copy to the undersigned. Two executed originals of this letter
agreement will follow via overnight courier, one of which should be fully
executed and returned to the undersigned via overnight courier. This letter
agreement may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
document.
Very truly yours,
--------------------------------
D. Richard Greer
--------------------------------
Robert V. Greer
--------------------------------
Alicia Greer Austin
Accepted this ___ day of January, 1999:
RES-CARE, INC.
By: --------------------------------
Todd Graybill
Vice President-Operations
<PAGE> 5
Paul G. Dunn
Todd Graybill
Res-Care, Inc.
January 15, 1999
Page 5
Central Region
COMMUNICATIONS NETWORK
CONSULTANTS, INC.
By: -----------------------
Todd Graybill
Vice President
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT AND RESTATEMENT
TO THE ARTICLES OF INCORPORATION
OF
RES-CARE, INC.
1. The name of the Corporation is Res-Care, Inc.
2. The amendment adopted amends and restates the Corporation's Articles
of Incorporation in their entirety to read as set forth on Exhibit A attached
hereto and incorporated herein (the Amendment).
3. The foregoing Amendment required shareholder approval, which
approval was given by a written statement of action dated as of June 17, 1992,
signed by holders of 489,027 Common Shares (or 81%) of the Corporations shares
outstanding and entitled to vote on the Amendment, which constitutes sufficient
approval of the Amendment under the Corporation's Articles of Incorporation..
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment and Restatement on behalf of the Corporation this 18th day of
December, 1992.
RES-CARE, INC.
By: /S/ Ronald G. Geary
-----------------------------
Ronald G. Geary, President
Chief Operating Officer
<PAGE> 2
EXHIBIT A
---------
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
RES-CARE, INC.
ARTICLE I
---------
NAME
----
The Corporation's name shall be Res-Care, Inc.
ARTICLE II
----------
DURATION
--------
The Corporation's duration shall be perpetual.
ARTICLE III
-----------
PURPOSES
--------
The Corporation's purposes shall be to transact any and all lawful
business for which corporations may be incorporated under the Kentucky Business
Corporation Act ("KBCA").
ARTICLE IV
----------
PRINCIPAL OFFICE
----------------
The mailing address of the principal office of the Corporation is 10140
Linn Station Road, Louisville, Kentucky 40223.
ARTICLE V
---------
REGISTERED OFFICE; REGISTERED AGENT
-----------------------------------
The street address of the registered office of the Corporation is 10140
Linn Station Road, Louisville (Jefferson County), Kentucky 40223, and the name
of the registered agent at such office is Ronald G. Geary.
<PAGE> 3
ARTICLE VI
----------
AUTHORIZED SHARES
-----------------
The total number of shares which the Corporation shall have the
authority to issue is 41,000,000 shares ("Shares"), which shall be divided into
two classes as follows:
40,000,000 Common Shares; and
1,000,000 Preferred Shares.
The designations, voting powers and relative rights and preferences of
the shares shall be as follows:
A. COMMON SHARES.
--------------
1. POWERS, RIGHTS AND PREFERENCES. The Common Shares shall
be without distinction as to powers, rights and preferences. Except as may be
provided by the Board of Directors in a designation of any series of Preferred
Shares (in accordance with the provisions of Paragraph B of Article VI) or as
otherwise declared by law, the Common Shares shall have the exclusive right to
vote for the election of directors and on all other matters in which
shareholders are generally entitled to vote. Except with respect to the election
of directors (where cumulative voting is required), each of the Common Shares
shall have one vote per share (which vote may not be split into fractional
votes) on matters on which holders of Common Shares are entitled to vote.
2. DIVIDENDS. After the requirements with respect to
preferential dividends on Preferred Shares (fixed in accordance with the
provisions of Paragraph B of Article VI), if any, have been met and after the
Corporation has complied with any requirements for setting aside sums as sinking
funds or redemption or purchase accounts and subject further to any other
conditions which may be established in accordance with the provisions of
Paragraph B of Article VI, the holders of Common Shares shall be entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors.
3. DISTRIBUTIONS ON COMMON SHARES. After distribution in
full of any preferential amount (as may be fixed in accordance with the
provisions of Paragraph B of Article VI) to be distributed to the holders of
Preferred Shares, and subject to any further rights of the holders of Preferred
Shares to further participate in a liquidation, distribution or sale of assets,
dissolution or winding-up of the Corporation, the holders of Common Shares shall
be entitled to receive, upon the voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding-up of the Corporation,
all of its remaining assets, tangible and intangible, of whatever kind available
for distribution to the shareholders, ratably in proportion to the number of
Common Shares held by each.
4. ISSUANCE OF COMMON SHARES. Common Shares may be issued
from time to time as the Board of Directors shall determine and on such terms
and for such consideration as shall be fixed by the Board of Directors.
2
<PAGE> 4
B. PREFERRED SHARES.
-----------------
1. ISSUANCE BY BOARD RESOLUTIONS; SERIES. The Board of
Directors of the Corporation shall have authority by resolution to issue from
time to time Preferred Shares in one or more series. Each series shall be
distinctly designated by number, letter or title. All shares of any one series
of Preferred Shares shall be alike in every particular. The powers, preferences
and voting, relative, participating, optional and other rights of each such
series, and the qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding.
2. PREFERENCES AND RIGHTS. Subject to the provisions of
subparagraph 3 of this Paragraph B of Article VI, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by resolution or
resolutions adopted prior to the issuance of any shares of each particular
series of Preferred Shares, the designation, powers, preferences and voting,
relative, participating, optional and other rights, and the qualifications,
limitations and restrictions thereof, if any, of such series, including, but
without limiting the generality of the foregoing, the following:
(a) The distinctive designation of, and the number of
Preferred Shares which shall constitute the series, which number from
time to time may be increased (except as otherwise fixed by the Board
of Directors) or decreased (but not below the number of shares
thereof then outstanding) from time to time by action of the Board of
Directors;
(b) The rate and times at which, and the terms and
conditions upon which, dividends on the shares of the series shall be
paid, whether the dividends shall be cumulative or non-cumulative,
and if cumulative, from what date or dates, and the preferences or
relation, if any, of such dividends to the dividends payable on any
shares of any other series or class of stock of the Corporation;
(c) Whether shares of the series shall be subject to
redemption, and if so subject, whether they shall be subject to
redemption (i) at the option of the Corporation, the shareholder,
another person and/or upon the occurrence of a designated event, (ii)
for cash, indebtedness, securities (including, without limitation,
Common Shares) or other property, or any combination thereof, and
(iii) for a designated amount or for an amount determined in
accordance with a designated formula or by reference to extrinsic
data or events; and, as to any shares of a series subject to
redemption, such other terms and conditions on which the shares of
the series may be redeemed;
(d) Whether the holders of the shares of the series
shall be entitled to the benefit of a sinking fund or redemption or
purchase account to be applied to the purchase or redemption of the
shares of the series and, if so entitled, the amount of such fund and
the terms and conditions relative to the operation thereof;
(e) Whether the shares of the series shall be
convertible into, or exchangeable for, any Common or other Preferred
Shares of the Corporation or any other securities and, if so
convertible or exchangeable, whether the conversion or exchange (i)
is
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<PAGE> 5
at the option of the Corporation, the shareholder, another person
and/or upon the occurrence of a designated event, (ii) shall be for
cash, indebtedness, securities (including, without limitation, Common
Shares) or other property, or any combination thereof, and (iii)
shall be for a designated amount or at a designated ratio, or for an
amount or at a ratio determined in accordance with a designated
formula or by reference to extrinsic data or events; and, as to any
shares of a series so convertible or exchangeable, such other terms
and conditions on which the shares of the series may be converted or
exchanged;
(f) The rights, if any, of the holders of the shares
of the series upon voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or
winding-up of the Corporation;
(g) Whether the shares of the series shall have
priority over or parity with or be junior to the shares of any other
class or series, or shall be entitled to the benefit of limitations
restricting (i) the creation of indebtedness of the Corporation, (ii)
the issuance of shares of any other class or series having priority
over or being on a parity with the shares of such series, or (iii)
the payment of dividends on, the making of other distributions with
respect to, or the purchase or redemption of shares of any other
class or series on parity with or ranking junior to the shares of any
such series as to dividends or other distributions, and the terms of
any such restrictions, or any other restrictions with respect to
shares of any class or series on parity with or ranking junior to the
shares of such series in any respect;
(h) Whether and in what circumstances shares of a
series shall have voting rights, which voting rights, if any, may be
general, special, conditional or limited (and, in the case of
special, conditional or limited voting rights, may confer upon
holders of such series in certain circumstances the exclusive right
to elect a majority of the members of the Board of Directors); and,
as to any shares of a series having voting rights, the number of
votes each holder shall be entitled to cast per each share of the
series and whether holders of the series are entitled to vote
separately or together with the holders of one or more other series
of Preferred Shares on all or some matters as a separate voting
group; and
(i) Any other powers, preferences, privileges and
relative, participating, optional, or other special rights of such
series, and the qualifications, limitations or restrictions thereof,
to the fullest extent now and hereafter permitted by law.
3. ISSUANCE OF PREFERRED SHARES. Subject to the following
provisions of this subparagraph 3, shares of any series of Preferred Shares may
be issued from time to time as the Board of Directors shall determine and on
such terms and for such consideration as shall be fixed by the Board of
Directors. The relative powers, preferences and rights of each series of
Preferred Shares in relation to the powers, preferences and rights of each other
series of Preferred Shares shall be as fixed from time to time by the Board of
Directors in the resolution or resolutions adopted pursuant to authority granted
in this Paragraph B of Article VI. Except as otherwise declared by law, the
consent by class or series vote or otherwise of the holders of such of the
series of the Preferred Shares as are from time to time outstanding shall not be
required for the issuance by the
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<PAGE> 6
Board of Directors of any other series of Preferred Shares, whether the powers,
preferences and rights of such other series shall be fixed by the Board of
Directors as senior to, or on a parity with, the powers, preferences and rights
of such outstanding series, or any of them; provided, however, that the Board of
Directors may provide in such resolution or resolutions adopted with respect to
any series of Preferred Shares that the consent of the holders of a majority (or
such greater proportion as shall be therein fixed) of the outstanding shares of
such series voting thereon shall be required for the issuance of any or all
other series of Preferred Shares.
ARTICLE VII
-----------
SHARE DISTRIBUTIONS
-------------------
Except as may be provided by the Corporation's Board of Directors in
a designation of any series of Preferred Shares issued pursuant to Article VI,
shares of one class or series may be issued as a share dividend in respect of
shares of another class or series.
ARTICLE VIII
------------
BOARD OF DIRECTORS
------------------
A. NUMBER. The affairs of the Corporation shall be managed and
conducted by its Board of Directors. The number of directors of the Corporation
shall be such number as shall be from time to time specified in or fixed in
accordance with the Bylaws.
B. CLASSES OF DIRECTORS. If the number of directors of the
Corporation shall at any time equal or exceed nine, then at such time the Board
of Directors shall be divided into three classes, Class I, Class II and Class
III, that shall be as nearly equal in number as possible; provided, however,
that the number of directors in any one class may not exceed the number of
directors in any other class by more than one. The initial allocation of
directors among classes shall be established by resolution adopted by a majority
of the Board of Directors.
C. TERMS OF OFFICE. Each director shall serve for a term ending on
the date of the first Annual Meeting following the Annual Meeting at which such
director was elected, unless the Board of Directors has been classified as
provided in Paragraph B of Article VIII. If the Board of Directors has been
classified as provided in Paragraph B of Article VIII, then each initial
director in Class I shall serve for a term ending on the first Annual Meeting
following the Annual Meeting at which such director was elected; each initial
director in Class II shall serve for a term ending on the second Annual Meeting
following the Annual Meeting at which such director was elected; and each
initial director in Class III shall serve for a term ending on 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
identified as being of the same class of directors they succeed and shall be
elected to serve for a term ending on the third Annual Meeting following the
Annual Meeting at which they were elected. In all cases, each director shall
serve until his successor is duly elected and qualified
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or until his death, resignation or removal.
D. REMOVAL. Any director or directors or the entire Board of
Directors 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 of the Corporation
outstanding and then entitled to vote generally in an election of directors,
voting together as a single class. Notwithstanding the immediately preceding
sentence, if less than the entire Board of Directors is to be removed, no one of
the directors may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
Board of Directors, or, if there be classes of directors, at an election of the
class of directors of which he is a part.
E. RIGHTS OF HOLDERS OF PREFERRED SHARES. Notwithstanding the
foregoing, whenever the holders of any one or more series of Preferred Shares
issued by the Corporation pursuant to Article VI shall have the right, voting
separately as a class or by series, to elect directors at an Annual or Special
Meeting of Shareholders, the election, term of office, removal, filling of
vacancies and other features of such directorships shall be governed by the
terms of the series of Preferred Shares applicable thereto, and such directors
so elected shall not be divided into classes pursuant to this Article VIII
unless expressly provided by the terms of the applicable series.
ARTICLE IX
----------
LIMITATION ON DIRECTOR LIABILITY
--------------------------------
A. SCOPE OF LIMITATION. A director of the Corporation shall not be
personally liable to the Corporation or its shareholders for monetary damages
for any act or omission constituting a breach of his or her duty as a director,
unless such act or omission (i) relates to a transaction in which the director
has a personal financial interest which is in conflict with the financial
interests of the Corporation or its shareholders; (ii) is not in good faith or
involves intentional misconduct or is known to the director to be a violation of
law; (iii) is a vote for or assent to an unlawful distribution to shareholders
as prohibited under KRS 271B.8-330; or (iv) relates to a transaction from which
the director derives an improper personal benefit.
B. AMENDMENT OF KBCA. If the KBCA is amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the KBCA, as so amended, and without the
necessity for further shareholder action in respect thereof.
C. REPEAL OR MODIFICATION. Any repeal or modification of this Article
IX by the shareholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation hereunder in respect of any act
or omission occurring prior to the time of such repeal or modification.
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ARTICLE X
---------
INDEMNIFICATION AND INSURANCE
-----------------------------
A. RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal, (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or was a
director or officer 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 of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the KBCA, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorney's fees, judgements, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
paragraph B hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to indemnification conferred in
this paragraph A of Article X shall be a contract right and shall include the
right to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
KBCA requires, the payment of such expenses incurred by a director or officer in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this section or
otherwise. The Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
B. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph A of
this Article X is not paid in full by the Corporation within 30 days after a
written claim has been received by the Corporation, the claimant may, at any
time thereafter, bring suit against the Corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standard of
conduct which makes it
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<PAGE> 9
permissible under the KBCA for the Corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the KBCA, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel or its shareholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
C. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article X shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation, Bylaw, agreement, vote of
shareholders or disinterested directors or otherwise.
D. INSURANCE. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the KBCA.
ARTICLE XI
----------
CONSIDERATION OF CERTAIN FACTORS
--------------------------------
The Board of Directors may base its response to any offer of another
party to: (a) make a tender or exchange offer for any equity security of the
Corporation (b) merge or consolidate the Corporation with another corporation,
or (c) purchase or otherwise acquire all or substantially all of the properties
and assets of the Corporation (collectively, "Acquisition Proposals") upon an
evaluation of the best interests of the Corporation and its shareholders and
such other factors as it deems relevant in considering the Acquisition Proposal,
including, without limitation, the following:
(a) The consideration being offered in the Acquisition
Proposal, not only in relation to the then current market value of
the Corporation's stock but also in relation to (i) the Board of
Directors' then current estimate of the current or future value of
the Corporation in a freely negotiated transaction, (ii) the Board of
Directors' then current estimate of the future value of the
Corporation as an independent entity;
(b) The social, legal and economic effects upon the
Corporation and its subsidiaries and the employees, suppliers,
clients and others having similar relationships with the Corporation
and its subsidiaries, and other elements of the communities in which
the Corporation and its subsidiaries operate or are located; and
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(c) The competence, experience and integrity of the
acquiring party or parties and its or their management.
ARTICLE XII
-----------
AMENDMENT, REPEAL, ETC.
-----------------------
Any provision in these Articles of Incorporation or in the Bylaws of
the Corporation to the contrary notwithstanding, the affirmative vote of the
holders of at least 80% of all shares of the Corporation outstanding and then
entitled to vote generally in an election of directors, voting together as a
single class, shall be required to alter, amend, supplement or repeal Articles
VIII or XII hereof or to adopt any provision inconsistent therewith.
9
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Employment Agreement") is made as of the 1st
day of January, 1998, between RES-CARE, INC., a Kentucky corporation (the
"Company"), and RALPH G. GRONEFELD, JR. (the "Employee").
RECITALS:
WHEREAS, the Company and the Employee entered into an Employment Agreement
dated as of January 1, 1997 (the "Original Agreement"), providing for an initial
term of one (1) year;
WHEREAS, the Original Agreement provided for automatic extensions of
successive periods of one (1) year each on the same terms and conditions,
subject to either party's written notice of its intention not to renew the same;
and
WHEREAS, the Company and Employee desire that Employee's employment with
the Company continue and they further desire to supersede the Original
Agreement, effective January 1, 1998, by executing this Employment Agreement and
agreeing to be bound by the terms thereof.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth herein, the parties agree as follows:
1. EMPLOYMENT AND TERM. The Company hereby employs the Employee, and the
Employee accepts such employment, upon the terms and conditions herein set forth
for an initial term commencing on January 1, 1998, and ending on December 31,
2000, subject to earlier termination only in accordance with the express
provisions of this Employment Agreement ("Initial Term"). This Employment
Agreement shall be automatically extended on a year-to-year basis (January 1
through December 31 of each successive year), unless sooner terminated in
accordance with the express provisions of this Employment Agreement ("Additional
Terms"), upon the expiration of the Initial Term or any Additional Term, unless
prior to the commencement of a sixty (60) day period expiring at the end of such
Initial Term or any Additional Term, the Company or the Employee shall have
given written notice to the other stating that the term of this Employment
Agreement shall not be extended. For purposes of this Employment Agreement, the
term "Term" shall mean the Initial Term plus all Additional Terms.
<PAGE> 2
2. DUTIES.
-------
(1) EMPLOYMENT AS EXECUTIVE VICE PRESIDENT OF OPERATIONS FOR
THE DIVISION OF YOUTH SERVICES. During the Term, the Employee shall
serve as the Executive Vice President of Operations for the Division
for Youth Services of the Company. The Employee shall, subject to the
supervision and control of the President and Chief Executive Officer of
the Company (the "President") and the Board of Directors of the Company
(the "Board"), perform such duties and exercise such powers over and
with regard to the business of the Company's Division for Youth
Services as are presently being performed and exercised by him and such
additional duties which are similar in nature and responsibility to
those presently being performed by the Employee as may be prescribed
from time to time by the President or the Board, including, without
limitation, serving as an officer or director of one or more
subsidiaries or affiliates of the Company, if elected to such
positions, without any further salary or other compensation.
(2) TIME AND EFFORT. The Employee shall devote all of his
business time, energies and talents exclusively to the business of the
Company and to no other business during the Term of this Employment
Agreement; provided, however, that subject to the restrictions in
Section 7 hereof, the Employee may (i) invest his personal assets in
such form or manner as will not require his services in the operation
of the affairs of the entities in which such investments are made and
(ii) subject to satisfactory performance of the duties described in
Section 2(a) hereof, devote such time as may be reasonably required for
him to continue to maintain his current level of participation in
various civic and charitable activities.
3. COMPENSATION.
-------------
(1) BASE SALARY. The Company shall pay to the Employee during
the first year of the Term a fixed, annual salary (the "Initial Base
Salary") of $127,500. Provided that this Employment Agreement or
Employee's employment hereunder shall not have been terminated for any
reason, commencing on January 1, 1999, the Company shall pay to the
Employee a fixed, annual salary (the "Revised Base Salary") of
$155,000. The Initial Base Salary and the Revised Base Salary shall
sometimes be collectively referred to as the "Base Salary". The Base
Salary shall be due and payable in substantially equal bi-weekly
installments or in such other installments as may be necessary to
comport with the Company's normal pay periods for all employees.
Provided that this Employment Agreement or Employee's
employment hereunder shall not have been terminated for any reason,
commencing on January 1, 2000, the Revised Base Salary shall be
increased, effective as of the first day of each year of the Term, in
proportion to the increase in the Consumer Price Index "All-Items"
category, as published by the Bureau of Labor Statistics (the "CPI")
established for the month of December immediately preceding the date on
which the adjustment is to be made over that
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<PAGE> 3
established for the month of December 1998. If the Bureau of Labor Statistics
suspends or terminates its publication of the CPI, the parties agree that a
reasonably comparable price index shall be substituted for the CPI.
(2) ANNUAL BONUS PLAN. The Employee shall participate with
the other executive officers of the Company in the Annual Bonus Plan
established by the Board, and in connection therewith shall be eligible
for an annual bonus of up to twenty-five percent (25%) of his Base
Salary (as adjusted by the CPI for the calendar year for which the
bonus is determined, to the extent the CPI adjustment is applicable for
such year), in accordance with and based upon the mutually agreeable
performance goals established for the Employee by the President and the
Employee and as such Annual Bonus Plan shall be modified by the Board
from time to time.
(3) PARTICIPATION IN BENEFIT, INSURANCE, VACATION AND SICK
LEAVE PLANS. Employee shall be entitled to participate in the standard
Company benefit package which is to be implemented generally as
reflected in Company's Flex-Care Employee guide currently in effect, as
modified by the Company from time to time. Employee acknowledges that
the Company is in the process of modifying its Flex-Care Plan. During
the Initial Term and each Additional Term, Employee will be entitled to
three (3) weeks of vacation, which vacation may be utilized as earned.
Employee will accrue ten (10) days of sick leave for each year of
employment. The Employer reserves the right to amend or modify in their
entirety or any of the above-mentioned fringe benefit programs.
(4) PARTICIPATION IN STOCK OPTION PLAN. Employee shall be
entitled to participate in the Company stock option plan which is
applicable to its managerial employees. Provided Employee continues to
be employed hereunder, on August 15, 1998, Employee shall be granted
options to purchase 25,000 shares of Company common stock, which
options shall vest and be exercisable on August 15, 1999 if Employee is
then employed hereunder. Provided Employee continues to be employed
hereunder, on August 15, 1999, Employee shall be granted options to
purchase 50,000 shares of Company common stock, and provided Employee
continues to be employed hereunder, 25,000 of such options shall vest
and be exercisable on August 15, 2000 and the remaining 25,000 of such
options shall vest and be exercisable on August 15, 2001. Any stock
options granted to Employee pursuant to this paragraph (d) shall have
an exercise price based upon the closing sale price of Company common
stock as reported on the NASDAQ National Market System on the
respective date of grant and the number of shares which are subject to
such option shall be equitably adjusted for stock splits, stock
dividends, recapitalizations and the like occurring after the date
hereof.
(5) PARTICIPATION IN RETIREMENT AND PROFIT SHARING PLANS.
Employee shall continue to be eligible to participate in any retirement
and/or profit sharing plans applicable to the Company's managerial
employees, as modified by the Company from time to time.
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<PAGE> 4
(6) OUT-OF-POCKET EXPENSES. The Company shall promptly pay
the ordinary, necessary and reasonable expenses incurred by Employee in
the performance of Employee's duties hereunder (or if such expenses are
paid directly by Employee shall promptly reimburse him for such
payment), consistent with the reimbursement policies adopted by the
Board from time-to-time. Provided, however, such payment or
reimbursement shall be subject to prior written approval by the
President.
(7) WITHHOLDING OF TAXES; INCOME TAX TREATMENT. If, upon the
payment of any compensation or benefit to the Employee under this
Employment Agreement (including, without limitation, in connection with
the exercise of any option), the Company determines in its discretion
that it is required to withhold or provide for the payment in any
manner of taxes, including but not limited to, federal income or social
security taxes, state income taxes or local income taxes, the Employee
agrees that the Company may satisfy such requirement by:
(1) withholding an amount necessary to satisfy such
withholding requirement from the Employee's compensation or
benefit; or
(2) conditioning the payment or transfer of such
compensation or benefit upon the Employee's payment to the
Company of an amount sufficient to satisfy such withholding
requirement.
The Employee agrees that he will treat all of the amounts payable
pursuant to this Employment Agreement as compensation for income tax
purposes.
4. TERMINATION. The Employee's employment hereunder may be terminated under
this Employment Agreement as follows, subject to the Employee's rights pursuant
to Section 5 hereof:
(1) DEATH. The Employee's employment hereunder shall terminate
upon his death.
(2) DISABILITY. If, as a result of the Employee's incapacity due
to physical or mental illness, the Employee shall have been absent
from his duties hereunder on a full-time basis for 180 consecutive
calendar days, and within thirty (30) days after written Notice of
Termination is given (which may occur no earlier than thirty (30) days
before, but at any time after, the end of such 180-day period), the
Employee shall not have returned to the performance of his duties
hereunder on a full-time basis, the Company may terminate the
Employee's employment hereunder.
(3) CAUSE. The Company may terminate the Employee's
employment hereunder for Cause. For purposes of this Employment
Agreement, the Company shall
4
<PAGE> 5
have "Cause" to terminate the Employee's employment because of the
Employee's personal dishonesty, intentional misconduct, breach of
fiduciary duty involving personal profit, failure to perform his duties
hereunder, conviction of, or plea of nolo contendere to, any law, rule
or regulation (other than traffic violations or similar offenses) or
breach of any provision of this Employment Agreement.
(4) WITHOUT CAUSE. By appropriate action of the Board, the
Company shall have the right to terminate the Employee's employment
under this Employment Agreement at any time without Cause (as defined
in Subsection 4(c)).
(5) VOLUNTARY TERMINATION. By not less than thirty (30) days
prior written notice to the President, Employee may voluntarily
terminate his employment hereunder.
(6) NOTICE OF TERMINATION. Any termination during the term of
this Employment Agreement of the Employee's employment hereunder (other
than termination pursuant to Section 4(a) above) shall be communicated
by written Notice of Termination to the Employee hereto (except in the
case of termination as described in Section 4(e) above written Notice
of Termination shall be delivered by the Employee). For purposes of
this Employment Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this
Employment Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so
indicated.
(7) DATE OF TERMINATION. The "Date of Termination" shall, for
purposes of this Employment Agreement, mean: (i) if the Employee's
employment is terminated by his death, the date of his death; (ii) if
the Employee's employment is terminated on account of disability
pursuant to Section 4(b) above, thirty (30) days after Notice of
Termination is given (provided that the Employee shall not, during such
30-day period, have returned to the performance of his duties on a
full-time basis), (iii) if the Employee's employment is terminated by
the Company for Cause pursuant to Section 4(c) above, the date
specified in the Notice of Termination, (iv) if the Employee's
employment is terminated by the Employer without Cause, pursuant to
Section 4(d) above, thirty (30) days after Notice of Termination is
given, (v) if the Employee's employment is terminated voluntarily
pursuant to Section 4(e) above, the date specified in the Notice of
Termination, and (vi) if the Employee's employment is terminated by
reason of an election by either party not to extend the Term, the last
day of the then effective Term.
5. COMPENSATION UPON TERMINATION OR DURING DISABILITY.
--------------------------------------------------
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<PAGE> 6
(1) DEATH. If the Employee's employment shall be terminated
by reason of his death, the Employee shall continue to receive his full
Base Salary until the date of his death and a Cash Bonus, prorated
based upon the number of full months that have elapsed from the
immediately preceding January 1 until the date of his death (plus any
earned but unpaid Cash Bonus for a prior period).
(2) DISABILITY. During any period that the Employee fails to
perform his duties hereunder as a result of incapacity due to physical
or mental illness, the Employee shall continue to receive his full Base
Salary until the Date of Termination and shall be entitled to receive a
Cash Bonus, prorated based upon the number of full months that have
elapsed from the immediately preceding January 1 until the Date of
Termination (plus any earned but unpaid Cash Bonus for a prior period).
Upon termination due to death prior to a termination as specified in
the preceding sentence, Section 5(a) above shall apply.
(3) CAUSE. If the Employee's employment shall be terminated
for Cause, the Company shall, through the Date of Termination, continue
to pay the Employee his full Base Salary but the Employee shall not be
entitled to receive a Cash Bonus (other than any earned but unpaid Cash
Bonus for a prior period), and shall not be eligible for any severance
payment of any nature.
(4) WITHOUT CAUSE. If the Employee's employment shall be
terminated without Cause, and such Notice of Termination shall have
been given after a Change of Control (as defined below) shall be
applicable to the Company, the Employee shall continue to receive his
full Base Salary until the Date of Termination and for one (1) year
after the Date of Termination. In all other cases in which the
Employee's employment shall be terminated without Cause, the Employee
shall continue to receive his full Base Salary until the Date of
Termination and for six (6) months after the Date of Termination. In
all cases in which Employee's employment shall be terminated without
Cause, the Employee shall also be entitled to receive a Cash Bonus,
prorated based upon the number of full months that have elapsed from
the immediately preceding January 1 until the Date of Termination (plus
any earned but unpaid Cash Bonus for a prior period). A "Change of
Control" shall be applicable to the Company --
(1) if any person shall acquire more than fifty
percent (50%) of the common capital stock of the Company
through a tender offer, exchange offer or otherwise;
(2) if the Company shall be a party to a binding
agreement to any merger, consolidation or reorganization in
which any person who on the date hereof does not own more than
ten percent (10%) of the issued and outstanding common capital
stock of the Company acquires, beneficially or of record, more
than fifty percent (50%) of such stock; or
6
<PAGE> 7
(3) there shall be a sale of all or substantially all
of the assets of the Company.
(5) EXPIRATION OF TERM. If the Employee's employment shall be
terminated by reason of expiration of the Term (irrespective of which
party elected not to extend the Term), the Company shall, through the
Date of Termination, continue to pay the Employee his full Base Salary
and the Company shall pay the Employee his Cash Bonus for the last
calendar year of the Term.
(6) VOLUNTARY TERMINATION. If the Employee's employment shall
be terminated pursuant to Section 4(e) hereof, the Company shall,
through the Date of Termination, continue to pay the Employee his full
Base Salary but the Employee shall not be entitled to receive a Cash
Bonus (other than any earned but unpaid Cash Bonus for a period), and
the Employee shall not be entitled to any severance payment of any
nature.
(7) NO FURTHER OBLIGATIONS AFTER PAYMENT. After all payments,
if any, have been made to the Employee pursuant to any of paragraphs
(a) through (f) of this Section 5, the Company shall have no further
obligations to the Employee under this Employment Agreement other than
the provision of any employee benefits required to be continued under
applicable law.
6. DUTIES UPON TERMINATION. Upon the termination of Employee's
employment hereunder for any reason whatsoever (including but not limited to the
failure of the parties hereto to agree to the extension of this Employment
Agreement pursuant to Section 2 hereof), Employee shall promptly return to the
Company any Confidential Information (as defined in Section 7(d)(iii) hereof)
and whether or not constituting Confidential Information, any technical data,
performance information and reports, sales or marketing plans, documents or
other records, rolodexes, and any manuals, drawings, tape recordings, computer
programs, discs, and any other physical representations of any other information
relating to the Company, its subsidiaries or affiliates or to the Business (as
defined in Section 7(d)(iv) hereof) of the Company. Employee hereby acknowledges
that any and all of such documents, items, physical representations and
information area and shall remain at all times the exclusive property of the
Company.
7. RESTRICTIVE COVENANTS.
----------------------
(1) ACKNOWLEDGMENTS. Employee acknowledges that (i) his
services hereunder are of a special, unique and extraordinary character
and that his position with the Company places him in a position of
confidence and trust with the operations of the Company, its
subsidiaries and affiliates (collectively, the "Res-Care Companies")
and allows him access to Confidential Information, (ii) the Company has
provided Employee with a unique opportunity as its Executive Vice
President of Operations for the Division for Youth Services, (iii) the
nature and periods of the restrictions imposed by the covenants
contained in this Section 7 are fair, reasonable and necessary to
protect and preserve for the
7
<PAGE> 8
Company the benefits of Employee's employment hereunder, (iv) the
Res-Care Companies would sustain great and irreparable loss and damage
if Employee were to breach any of such covenants, (v) the Res-Care
Companies conduct and are aggressively pursuing the conduct of their
business actively in and throughout the entire Territory (as defined
in paragraph (d)(ii) of this Section 7), and (vi) the Territory is
reasonably sized because the current Business of the Res-Care
Companies is conducted throughout such geographical area, the Res-Care
Companies are aggressively pursuing expansion and new operations
throughout such geographic area and the Res-Care Companies require the
entire Territory for profitable operations.
(2) CONFIDENTIALITY COVENANT. Having acknowledged the
foregoing, Employee covenants that without limitation as to time, he
will not directly or indirectly disclose or use or otherwise exploit
for his own benefit, or the benefit of any other person, except as may
be necessary in the performance of his duties hereunder, any
Confidential Information.
(3) COVENANTS. Having acknowledged the statements in Section
7(a) hereof, Employee covenants and agrees with the Res-Care Companies
that he will not, directly or indirectly, from the date hereof until
the Date of Termination of Employee's employment hereunder, and for a
period of one (1) year thereafter, directly or indirectly (i) solicit,
divert or appropriate to himself or any other person, any business or
services (similar in nature to the Business) of any person who was an
employee or an agent of any of the Res-Care Companies at any time
during the last twelve (12) months of Employee's employment hereunder;
or (ii) own, manage, operate, join, control, assist, participate in or
be connected with, directly or indirectly, as an officer, director,
shareholder, partner, proprietor, employee, agent, consultant,
independent contractor or otherwise, any person which is, at the time,
directly or indirectly, in competition within the Territory with the
Business of the Res-Care Companies.
(4) DEFINITIONS. For purposes of this Employment Agreement:
(1) For purposes of this Section 7, "termination of
Employee's employment" shall include any termination pursuant
to paragraphs (b), (c), (d) and (e) of Section 5 hereof, the
termination of such Employee's employment by reason of the
failure of the parties hereto to agree to the extension of
this Agreement pursuant to Section 1 hereof or the voluntary
termination of Employee's employment hereunder.
(2) The "Territory" shall mean the forty-eight (48)
contiguous states of the United States, the United States
Virgin Islands and Puerto Rico.
(3) "Confidential Information" shall mean any
business information relating to the Res-Care Companies or to
the Business (whether or not constituting
8
<PAGE> 9
a trade secret), which has been or is treated by any of the
Res-Care Companies as proprietary and confidential and which
is not generally known or ascertainable through proper
means. Without limiting the generality of the foregoing, so
long as such information is not generally known or
ascertainable by proper means and is treated by the Res-Care
Companies as proprietary and confidential, Confidential
Information shall include the following information
regarding any of the Res-Care Companies:
(1) any patent, patent application,
copyright, trademark, trade name,
service mark, service name,
"know-how" or trade secrets;
(2) customer lists and information
relating to (i) any client of any of
the Res-Care Companies or (ii) any
client of the operations of any
other person or entity for which
operations any of the Res-Care
Companies provides management
services;
(3) supplier lists, pricing policies,
consulting contracts and competitive
bid information;
(4) records, operational methods and
Company policies and procedures,
including manuals and forms;
(5) marketing data, plans and strategies;
(6) business acquisition, development,
expansion or capital investment plan
or activities;
(7) software and any other confidential
technical programs;
(8) personnel information, employee
payroll and benefits data;
(9) accounts receivable and accounts
payable;
(10) other financial information,
including financial statements,
budgets, projections, earnings and
any unpublished financial
information; and
(11) correspondence and communications
with outside parties.
(4) The "Business" of the Res-Care Companies shall
mean the business of providing juvenile treatment or services,
services to persons with mental
9
<PAGE> 10
retardation and other developmental disabilities, including
but not limited to persons who have been dually diagnosed,
services to persons with acquired brain injuries, training
services, or providing management and/or consulting services
to third parties relating to the foregoing.
(5) The term "person" shall mean an individual, a
partnership, an association, a corporation, a trust, an
unincorporated organization, or any other business entity or
enterprise.
(5) INJUNCTIVE RELIEF, INVALIDITY OF ANY PROVISION. Employee
acknowledges that his breach of any covenant contained in this Section
7 will result in irreparable injury to the Res-Care Companies and that
the remedy at law of such parties for such a breach will be inadequate.
Accordingly, Employee agrees and consents that each of the Res-Care
Companies in addition to all other remedies available to them at law
and in equity, shall be entitled to seek both preliminary and permanent
injunctions to prevent and/or halt a breach or threatened breach by
Employee of any covenant contained in this Section 7. If any provision
of this Section 7 is invalid in part or in whole, it shall be deemed to
have been amended, whether as to time, area covered, or otherwise, as
and to the extent required for its validity under applicable law and,
as so amended, shall be enforceable. The parties further agree to
execute all documents necessary to evidence such amendment.
8. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Employment Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained in it and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties, including but not limited to
the Original Agreement. No supplement, modification, or amendment of this
Employment Agreement shall be binding unless executed in writing by all parties
hereto (other than as provided in the next to last sentence of Section 7(e)
hereof). No waiver of any of the provisions of this Employment Agreement will be
deemed, or will constitute, a waiver of any other provision, whether or not
similar, nor will any waiver constitute a continuing waiver. No waiver will be
binding unless executed in writing by the party making the waiver.
9. SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Employment Agreement shall
be binding on, and inure to the benefit of, the parties hereto and their
respective heirs, executors, legal representatives, successors and assigns;
PROVIDED, HOWEVER, that this Employment Agreement is intended to be personal to
the Employee and the rights and obligations of the Employee hereunder may not be
assigned or transferred by him.
10. NOTICES. All notices, requests, demands and other communications
required or permitted to be given or made under this Employment Agreement, or
any other agreement executed in connection therewith, shall be in writing and
shall be deemed to have been given on the date of delivery personally or upon
deposit in the United States mail postage prepaid by registered or certified
mail, return receipt requested, to the appropriate party or parties at the
10
<PAGE> 11
following addresses (or at such other address as shall hereafter be designated
by any party to the other parties by notice given in accordance with this
Section):
To the Company:
---------------
Res-Care, Inc.
10140 Linn Station Road
Louisville, Kentucky 40223
Attn: Ronald G. Geary,
President and Chief Executive Officer
To the Employee:
----------------
Ralph G. Gronefeld, Jr.
5903 Mount Everest Drive
Louisville, Kentucky 40216
11. EXECUTION IN COUNTERPARTS. This Employment Agreement may be
executed in multiple counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same document.
12. FURTHER ASSURANCES. The parties each hereby agree to execute and
deliver all of the agreements, documents and instruments required to be executed
and delivered by them in this Employment Agreement and to execute and deliver
such additional instruments and documents and to take such additional actions as
may reasonably be required from time to time in order to effectuate the
transactions contemplated by this Employment Agreement.
13. SEVERABILITY OF PROVISIONS. The invalidity or unenforceability of
any particular provision of this Employment Agreement shall not affect the other
provisions hereof and this Employment Agreement shall be construed in all
respects as if such invalid or unenforceable provisions were omitted.
14. GOVERNING LAW. This Employment Agreement is executed and delivered
in, and shall be governed by, enforced and interpreted in accordance with the
laws of, the Commonwealth of Kentucky.
15. TENSE; CAPTIONS. In construing this Employment Agreement, whenever
appropriate, the singular tense shall also be deemed to mean the plural, and
vice versa, and the captions contained in this Employment Agreement shall be
ignored.
16. SURVIVAL. The provisions of Sections 5, 6 and 7 hereof shall
survive the termination, for any reason, of this Employment Agreement, in
accordance with their terms.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on the day and year set forth above.
RES-CARE, INC.
By: __________________________________________
Ronald G. Geary
President and Chief Executive Officer
----------------------------------------------
Ralph G. Gronefeld, Jr.
12
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
STATE OF
SUBSIDIARY INCORPORATION
- --------------------------------------------------------------------------------
Community Alternatives Indiana, Inc. Delaware
Community Alternatives Nebraska, Inc. Delaware
Community Advantage, Inc. Delaware
Texas Home Management, Inc. Delaware
Capital TX Investments, Inc. Delaware
THM Homes, Inc. Delaware
RSCR Texas, Inc. Delaware
Res-Care New Mexico, Inc. Delaware
Res-Care Ohio, Inc. Delaware
Community Alternatives of Texas, Inc. Delaware
CATX Properties, Inc. Delaware
Res-Care California, Inc. d/b/a RCCA Services Delaware
RSCR California, Inc. Delaware
Res-Care Kansas, Inc. Delaware
Res-Care Illinois, Inc. Delaware
Res-Care Oklahoma, Inc. Delaware
Youthtrack, Inc. Delaware
Res-Care Tennessee, Inc. Delaware
Res-Care Training Technologies, Inc. Delaware
RSCR West Virginia, Inc. Delaware
Community Alternatives Virginia, Inc. Delaware
Community Alternatives Kentucky, Inc. Delaware
Alternative Youth Services, Inc. Delaware
Res-Care Aviation, Inc. Kentucky
Res-Care Premier, Inc. Delaware
Community Alternatives Illinois, Inc. Delaware
Community Alternatives Missouri, Inc. Missouri
Communications Network Consultants, Inc. Rhode Island
The Academy for Individual Excellence, Inc. Delaware
Res-Care Other Options, Inc. Delaware
Creative Networks, L.L.C. Arizona
Res-Care New Jersey, Inc. Delaware
Community Alternatives Texas Partner, Inc. Delaware
General Health Corporation d/b/a Arizona Youth Associates, Inc. Arizona
Normal Life, Inc. Kentucky
Res-Care Alabama, Inc. Delaware
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT
STATE OF
SUBSIDIARY INCORPORATION
- --------------------------------------------------------------------------------
Res-Care Washington, Inc. Delaware
Southern Home Care Services, Inc. Georgia
Tangram Rehabilitation Network, Inc. Texas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Res-Care, Inc.
We consent to incorporation by reference in the registration statements
(No. 33-61878), (No. 33-76612), (No. 33-85964), (No. 33-80331) and
(No. 333-57167) on Form S-8 and (No. 333-23599), (No. 333-32513), and (No.
333-44029) on Form S-3 of Res-Care, Inc. of our report dated February 24, 1999,
relating to the consolidated balance sheets of Res-Care, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 annual report on Form 10-K of Res-Care, Inc.
/s/ KPMG LLP
Louisville, Kentucky
March 22, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,939
<SECURITIES> 0
<RECEIVABLES> 99,454
<ALLOWANCES> 0
<INVENTORY> 683
<CURRENT-ASSETS> 129,482
<PP&E> 80,847
<DEPRECIATION> 16,718
<TOTAL-ASSETS> 396,614
<CURRENT-LIABILITIES> 65,889
<BONDS> 0
0
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<COMMON> 41,678
<OTHER-SE> 87,767
<TOTAL-LIABILITY-AND-EQUITY> 396,614
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<TOTAL-REVENUES> 522,682
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<TOTAL-COSTS> 448,802
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<INCOME-TAX> 12,784
<INCOME-CONTINUING> 19,466
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<NET-INCOME> 19,466
<EPS-PRIMARY> 1.04
<EPS-DILUTED> .94
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 66,584
<SECURITIES> 0
<RECEIVABLES> 57,240
<ALLOWANCES> 0
<INVENTORY> 634
<CURRENT-ASSETS> 130,200
<PP&E> 65,221
<DEPRECIATION> 10,818
<TOTAL-ASSETS> 255,144
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<TOTAL-LIABILITY-AND-EQUITY> 255,144
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<TOTAL-COSTS> 265,041
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,544
<INCOME-PRETAX> 21,714
<INCOME-TAX> 8,737
<INCOME-CONTINUING> 12,977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 12,977
<EPS-PRIMARY> .75
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,932
<SECURITIES> 0
<RECEIVABLES> 33,996
<ALLOWANCES> 0
<INVENTORY> 656
<CURRENT-ASSETS> 47,043
<PP&E> 51,149
<DEPRECIATION> 7,568
<TOTAL-ASSETS> 115,312
<CURRENT-LIABILITIES> 23,690
<BONDS> 0
0
0
<COMMON> 15,535
<OTHER-SE> 42,560
<TOTAL-LIABILITY-AND-EQUITY> 115,312
<SALES> 0
<TOTAL-REVENUES> 224,265
<CGS> 0
<TOTAL-COSTS> 194,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,351
<INCOME-PRETAX> 14,961
<INCOME-TAX> 5,518
<INCOME-CONTINUING> 9,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,443
<EPS-PRIMARY> .64
<EPS-DILUTED> .60
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