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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) for transition period from to
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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 (I.R.S. Employer Identification No.)
incorporation or organization)
10140 Linn Station Road 40223
Louisville, KY (Zip Code)
(Address of principal executive offices)
(502) 394-2100
(Registrant's telephone number, including area code)
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TITLE OF EACH CLASS
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Securities registered pursuant to None
Section 12(b) of the Act:
Securities registered pursuant to Common Stock, no par value
Section 12(g) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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 to this
Form 10-K. [ ]
As of February 28, 1997, there were 10,056,183 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, 1997, was
approximately $114,221,222. 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 the Annual Meeting of Stockholders to be held on May 13, 1997.
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TABLE OF CONTENTS
PAGE
NUMBER
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 12
Item 3 Legal Proceedings........................................... 12
Item 4 Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6 Selected Financial Data..................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 8 Financial Statements and Supplementary Data................. 24
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 43
Item 11 Executive Compensation...................................... 43
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13 Certain Relationships and Related Transactions.............. 43
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 44
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PART I
ITEM 1. BUSINESS
OVERVIEW
Res-Care is a leading provider of residential, training, educational and
support services to populations with special needs, including persons with
developmental and other disabilities and at-risk and troubled youths. The
services provided by the Company have historically been provided by state and
local government agencies and not-for-profit organizations. The Company's
programs include an array of services provided in both residential and
non-residential settings for adults and youths with mental retardation or other
developmental disabilities ("MR/DD") and disabilities caused by acquired brain
injury ("ABI"), and for youths who have severe behavioral disorders, who are
from disadvantaged backgrounds or who have entered the juvenile justice system.
At February 28, 1997, Res-Care was providing services to approximately
7,600 persons with special needs compared to approximately 3,300 persons at
September 30, 1992. Res-Care currently provides services to approximately 5,000
persons with disabilities in larger facilities, group homes, personal residences
or other community-based programs in 17 states and to approximately 2,600
at-risk and troubled youths in federally-funded vocational training programs and
juvenile treatment programs operated for state and local agencies in seven
states and Puerto Rico.
Res-Care's growth strategy is to (i) pursue acquisitions, (ii) add programs
and expand its existing programs in markets in which it currently operates and
(iii) expand into additional geographic areas in the United States. The markets
for the Company's services are highly fragmented, and the Company believes that
there are significant opportunities to enhance its market positions through an
active acquisition program in the disabilities and at-risk and troubled youth
sectors that will enable the Company to expand its operations into new
geographic areas, add program offerings and establish new relationships with
governmental entities. The Company intends to build upon its established
relationships with governmental entities to expand its current programs and
obtain contracts for additional programs in existing markets, and to develop new
programs in response to societal trends and the needs of governmental agencies.
The Company also intends to expand its programs to additional geographic areas
which management identifies as having favorable reimbursement and operating
environments. Since September 1, 1996, the Company has obtained contracts for or
acquired operations of 36 facilities and programs serving approximately 800
persons with developmental and other disabilities and 20 facilities and programs
serving approximately 500 at-risk and troubled youths.
SERVICES
Disabilities Services
Since 1978, Res-Care has provided services to persons with developmental
disabilities primarily through the operation and management of group homes
(generally serving six to eight individuals) and larger facilities (generally
serving 40 or more individuals) that provide alternatives to placement in state
institutions or traditional nursing homes or other long-term care facilities not
capable of providing specialized active treatment required by these individuals.
Some of Res-Care's clients have acquired brain injury, and service patterns to
these individuals are similar to those for individuals with mental retardation
or other developmental disabilities. Since 1992, the Company has also operated
supported living programs, in which persons with disabilities reside in their
own residences or apartments with outside support provided as needed. Some
individuals require 24-hour staffing, while others need only drop-in services,
day programs, supported employment or transportation services. Community-based
settings enable persons with developmental or other disabilities to live and
develop in an environment that encourages each person to achieve maximum
independence and self-respect.
The Company's programs are based predominately on individual habilitation
plans designed to encourage greater independence and development of daily living
skills through individualized support and training. Management believes that the
breadth and quality of the Company's services and support and training
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programs makes the Company attractive to state and local governmental agencies
and not-for-profit providers who may wish to contract with it. As of February
28, 1997, the Company was providing services to approximately 5,000 individuals
in facilities and programs in 17 states. The Company's programs are designed to
offer specialized support to these individuals not generally available in larger
state institutions and traditional long-term care facilities. In each of the
Company's programs, services are administered by Res-Care employees and
contractors, such as qualified mental retardation professionals ("QMRPs"),
physicians, psychologists, therapists, social workers and other direct service
staff. These services include social, functional and vocational skills training,
and emotional and psychological counseling and therapy as needed for each
individual.
Social Skills Training. The Company's social skills training focuses
on problem solving, anger management and adaptive skills to allow
individuals with disabilities to interact with others in the residential
setting and in the community. Emphasis is placed on contact with the
community at large as appropriate for each individual. The desired outcome
is to enable each to participate in home, family and community life as
fully as possible.
Many individuals with developmental and other disabilities require
behavioral intervention services. The Company provides these services
through psychiatrists, psychologists and behavioral specialists, some of
whom serve as consultants on a contract basis. All operations utilize a
non-aversive approach to behavior management which has been pioneered by
the Company and which is designed to avoid consequences involving
punishment or extreme restrictions on individual rights. Behavior
management techniques are employed by the interdisciplinary team and direct
service staff rather than psychotropic medications to modify behavior, the
goal being to minimize the use of medications whenever possible. When
necessary, medications are handled in strict compliance with federal
regulations.
Functional Skills Training. The Company's functional skills training
program encourages mastery of personal skills and the achievement of
greater independence. As needed, individual habilitation plans may focus on
basic skills training in such areas as personal hygiene and dressing, as
well as more complex activities such as shopping and use of public
transportation. Individuals are encouraged to participate in daily
activities such as housekeeping and meal preparation as appropriate.
Vocational Skills Training and Day Programs. The Company provides
extensive vocational training or specialized day programs for all
individuals served. Some individuals are able to be placed in
community-based jobs, either independently or with job coaches, or may
participate as part of a work team contracted for a specific service such
as cleaning, sorting or maintenance. Clients not working in the community
may be served through vocational workshops or day programs appropriate for
their needs. The Company operates such programs and also contracts for this
service with outside providers. The Company's philosophy is to enable all
persons served to perform productive work in the community or otherwise
develop vocational skills based on their individual abilities. Clients
served by specialized day programs may be older or have physical or health
restrictions which prevent them from being employed or participating in
vocational programs. Specialized day programs may include further training
in daily living skills, community integration or specialized recreation
activities.
Counseling and Therapy Programs. The Company's counseling and therapy
programs address the physical, emotional and behavioral challenges of
individuals with MR/DD or ABI. Goals of the programs include the
development of enhanced physical agility and ambulation, acquisition of
adaptive skills for both personal care and work, as well as the development
of coping skills and the use of alternative, responsible, and socially
acceptable interpersonal behaviors. Individualized counseling programs may
include group and individual therapies. Occupational and physical therapies
and therapeutic recreation are provided based on the assessed needs of the
individual.
At each of its operations, the Company provides comprehensive
individualized support and training programs that encourage greater independence
and the development of personal and vocational skills commensurate with the
particular individual's capabilities. As the individual progresses, new programs
are
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created to encourage greater independence and self-respect, and the development
of additional personal or vocational skills.
Youth Services
Since 1976, the Company has been operating programs for disadvantaged
youths through the federal Job Corps program administered by the United States
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. In December
1995, the Company began a strategic initiative to expand its Division for Youth
Services and develop services that is designed to address the specific needs of
at-risk and troubled youths to enable each youth to be transitioned back into
the community. The youths targeted to be served through the strategic initiative
range from pre-adjudicated and adjudicated youths who have entered the juvenile
justice system to youths who exhibit a variety of behavioral and emotional
disorders and in some instances have been diagnosed with mental retardation or
another developmental disability. Programs offered for troubled youths include
secure and staff-secure detention programs, boot camps, long-term treatment
programs, secure transportation, tracker/mentor programs, AWOL apprehension,
proctor parent programs, day treatment programs and monitoring, transition and
after-care programs. At-risk youth programs include therapeutic residential
programs, non-residential educational programs and the operation of an
alternative school. Over time, the Company expects to continue to expand the
services provided by the Company to these youths.
The Company's programs include a variety of educational and vocational
training programs and comprehensive programs for behavior change, including
individual, group and family counseling and training in social and independent
living skills. These programs emphasize self-esteem, academic enhancement,
empathy development, critical thinking and problem solving, anger management and
coping strategies, substance abuse treatment and relapse prevention. Programs
are designed to increase self-control and effective problem-solving; to teach
youths how to understand and consider other people's values, behaviors and
feelings; to show youths how to recognize how their behavior affects other
people and why others respond to them as they do; and to enable them to develop
alternative, responsible, interpersonal behaviors. Although certain youths in
the Company's programs require both drug therapy and treatment for use or abuse
of drugs, the Company's goal is to minimize or eliminate the use of medication
whenever possible. When appropriate, medication is prescribed by independent
physicians and may be administered by Company personnel. Management believes
that the breadth of the Company's services and its history of working with
youths make the Company attractive to local, state and federal governmental
agencies.
As an integral part of its youth services program, Res-Care operates seven
Job Corps centers with a contracted capacity of 2,095 persons. The Job Corps
program is designed to address the severe unemployment problem faced by
disadvantaged youths throughout the country. The typical Job Corps student is a
16- to 24-year old high school dropout who reads at the seventh grade level,
comes from a disadvantaged background, has not held a regular job, and was
living in an environment characterized by a troubled home life or other
disruptive conditions. Each center offers training in several vocational areas
depending upon the particular needs and job market opportunities in the region.
Students are required to participate in basic education classes to improve their
academic skills and to complement their vocational training. High school
equivalency classes are available to obtain GED certificates. Upon graduation or
other departure from the program, each student is referred to the nearest Job
Corps placement agency for assistance in finding a job or enrolling in a school
or training program. Approximately 70% of the students completing the program
have obtained jobs or continued their education elsewhere.
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OPERATIONS
Disabilities Services
Division for Persons with Disabilities ("DPD") operations are under the
direct supervision of the Company's Executive Vice President, Operations,
Division for Persons with Disabilities, who is responsible for six geographic
regions, each headed by a Vice President, and two Vice Presidents responsible
for ABI operations nationally. Each Vice President supervises the senior
administrators and/or administrators responsible for the various MR/DD or ABI
facilities and programs under his or her control. In general, each cluster of
group homes, supported living program and larger facility is overseen by an
administrator. In addition, a program manager supervises a comprehensive team of
professionals and community-based consultants who participate in the design and
implementation of individualized programs for each individual served. QMRPs work
with direct service staff and professionals involved in the programs to ensure
that quality standards are met and that progress towards each individual's goals
and objectives is monitored and outcomes are achieved. Individual habilitation
plans are reviewed and modified by the team as needed. The operations utilize
community advisory boards and consumer satisfaction surveys to solicit input
from professionals, family members and advocates, as well as from the
neighboring community, on how to continue to improve service delivery and
increase involvement with the neighborhood or community.
The Company's direct service staff have the most frequent contact with, and
generally are recruited from, the community in which the facility or program is
located. These staff members are screened to meet certain qualification
requirements and receive orientation, training, and continuing education.
The provision of disabilities services is subject to complex and
substantial state and federal regulation and the Company strives to ensure that
its internal controls and reporting systems comply with Medicaid reimbursement
and other program requirements, policies and guidelines. The Company designs and
implements programs, often in coordination with appropriate state agencies, in
order to assist the state in meeting its objectives and to facilitate the
efficient delivery of quality services. Management and personnel resources are
devoted to keeping abreast of new laws, regulations and policy directives
affecting the quality of or reimbursement for such services. In addition, the
Company believes it has developed expertise in accurately predicting eligibility
for Medicaid and other benefits and in processing reimbursement claims. The
Company's billing system is centralized and able to take advantage of expedited
payment procedures, such as electronic billing, that may be available.
The Company has developed a model of ongoing program evaluation and quality
management which the Company believes provides critical feedback to measure the
quality of its various operations. Each operation conducts its own quality
assurance program, the Periodic Service Review ("PSR"), which is reviewed by the
responsible Vice President, Operations. Results from the PSRs are reviewed on a
quarterly basis with the Executive Vice President, Operations, Division for
Persons with Disabilities. Management and operational goals and objectives are
established for each facility and program, as part of an annual budget and
strategic planning process. A weekly statistical reporting system and quarterly
statement of progress provides management with relevant and timely information
on the operations of each facility. Survey results from government agencies for
each operation are recorded in a database and quarterly summary reports are
reviewed by senior management. The Company believes the PSR system is a vital
management tool to evaluate the quality of its programs, and has been useful as
a marketing tool to promote the Company's programs, since it provides more
meaningful and significant data than is usually provided by routine monitoring
by government agencies.
Youth Services
At-Risk and Troubled Youths. The Company's programs are designed to
provide consistent, high quality and cost-effective education and treatment to
address the needs of the various segments of the at-risk and troubled youths
population. The Company generally is responsible for the overall operation of
its facilities and programs, including management, general administration, staff
recruitment and security and supervision of the youth in their programs.
Youthtrack Inc. ("Youthtrack") operations are under the direct supervision of
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its President, and Alternative Youth Services, Inc. ("AYS") operations are
under the direct supervision of the Company's Vice President, Alternative Youth
Services.
The Company has assembled an experienced team of managers, counselors and
staff that blends program expertise with business and financial experience. The
Company believes that its recruitment, selection and training programs generate
sufficient personnel capable of implementing the Company's systems and
procedures as it expands this segment of its business. The Company's staff
includes teachers, counselors, mental health professionals, juvenile justice
administrators and licensed clinicians.
The Company's internal training policies require its teachers, counselors,
security and other direct service staff to complete extensive training. Core
training includes courses in the major Company program components such as
behavior change education, positive peer culture, nonviolent crisis
intervention, discipline and limit-setting, anger management and social skills
training. Continuing education also is required for all staff. The Company
demonstrates its commitment to its employees' professional development by
offering classes and training programs, as well as tuition reimbursement
benefits.
The Company has also implemented its PSR system at the majority of its
youth services programs and expects to complete implementation at the Company's
remaining programs during fiscal 1997.
The Company recognizes that, in the operation of programs for at-risk and
troubled youths, a primary mission is to protect the safety of the community
within a facility, as well as the neighboring community. Thus, the Company's
programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
Job Corps Centers. The Company's Job Corps centers are operated under
contract with the DOL which provides the physical plant and equipment. The
Company is directly responsible for the management, staffing and administration
of Job Corps centers. Each center is managed by a center director, who reports
to the Vice President, Job Corps, who in turn reports to the Company's Chief
Executive Officer.
A typical Res-Care Job Corps operation consists of a three tier management
staff structure. The center director has the overall responsibility for
day-to-day management at each facility and is assisted by several senior staff
managers who typically are responsible for academics, vocational training,
social skills, safety and security, health services and behavior management.
Managers are assisted by front line supervisors who have specific
responsibilities for such areas as counseling, food services, maintenance,
finance, residential life, recreation, property, purchasing, human resources and
transportation.
A performance standards report for each center, issued by the DOL monthly,
measures and assigns ratings to three primary categories of performance: (i)
placement of graduates, (ii) education results, as measured by GED achievement
and reading and math gains and (iii) the number of students completing a
prescribed vocational curriculum to make a student job-ready. These are then
combined into an overall performance rating. The ratings are derived from a
comparison of the operator's performance results against predetermined standards
in each category. All 110 centers are ranked against each other in these
categories. Performance standards reports are reviewed by center directors and
the Vice President, Job Corps, and acted upon as appropriate to address areas
where improvement is needed. At February 28, 1997, the ratings of all of the
centers operated by the Company exceeded the national standard established by
the DOL for Job Corps centers and only one of the centers operated by the
Company was ranked in the bottom quartile in the ranking of all Job Corps
centers.
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FACILITIES AND PROGRAMS
The tables below set forth information as of February 28, 1997 regarding
the Company's disabilities services and youth services, respectively:
DIVISION FOR PERSONS WITH DISABILITIES
INITIAL
CONTRACT OPERATING OPERATION
STATE TYPES OF PROGRAMS CAPACITY(1) ARRANGEMENTS IN STATE
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California...... Larger Facilities, Group 639 Provider of Record 1995
Homes, Day Programs
Colorado........ Larger Facility, Supported 164 Provider of Record 1992
Living
Florida......... Larger Facilities, Group 350 Provider of Record, 1983
Homes, ABI Management Contract
Illinois........ Larger Facilities, ABI 133 Provider of Record 1995
Indiana......... Larger Facilities, Group 840 Provider of Record 1983
Homes, Child Care Facility,
Supported Living
Kansas.......... Larger Facilities, Supported 274 Provider of Record 1995
Living
Kentucky........ Larger Facilities, Group 570 Provider of Record, 1978
Home, Supported Living, Day Management Contract
Program
Louisiana....... Group Homes 132 Provider of Record 1984
Missouri........ ABI 39 Provider of Record 1997
Nebraska........ Group Homes, Supported 348 Provider of Record 1992
Living, Day Program
New Mexico...... Supported Living 173 Provider of Record 1994
Ohio............ Larger Facility, Group Homes, 133 Provider of Record 1995
Supported Living, Respite
Program
Oklahoma........ Supported Living 145 Provider of Record 1995
Tennessee....... Group Homes, Supported Living 281 Provider of Record, 1993
Management Contract
Texas........... Larger Facilities, Group 708 Provider of Record 1993
Homes, Day Program
West Virginia... Larger Facility, Group Homes 303 Management Contract 1987
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Total...... 5,232
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(1) Contract capacity includes, in the case of licensed facilities, the number
of persons covered by the applicable license or permit, and in all other
cases, the number of persons covered by the applicable contract. Contract
capacity does not include capacity for day or respite programs.
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DIVISION FOR YOUTH SERVICES
INITIAL
CONTRACT OPERATION
STATE TYPES OF PROGRAMS CAPACITY(1) IN STATE
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Colorado................. Residential, Non-Residential, Secure, 467 1996
Medium Secure, Proctor Parent, Day
Treatment, Apartment Living
Florida.................. Job Corps 300 1983
Georgia.................. Residential, Alternative School 60 1997
Kentucky................. Residential 48 1997
Mississippi.............. Job Corps 280 1978
New Jersey............... Job Corps 530 1995
New York................. Job Corps 250 1986
Puerto Rico.............. Job Corps 735 1990
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Total............... 2,670
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(1) Contract capacity includes, in the case of licensed facilities, the number
of persons covered by the applicable license or permit, and in all other
cases, the number of persons covered by the applicable contract.
CONTRACTS
State Contracts. Contracts for participation as a provider of services in
the Medicaid programs are regulated by federal and state agencies. Although the
contracts have a stated term of one year and generally may be terminated without
cause on 60 days notice, the contracts are typically renewed annually if the
Company has complied with licensing, certification, program standards and other
regulatory requirements. Serious deficiencies can result in delicensure or
decertification actions by these agencies. As provider of record, the Company
contractually obligates itself to adhere to the applicable federal and state
regulations regarding the provision of services, the maintenance of records and
submission of claims for reimbursement under the Medicaid Assistance Program,
Title XIX of the Social Security Act and pertinent state medical assistance
programs. Pursuant to provider agreements, the Company agrees to accept the
payment received from the government entity as payment in full for the services
administered to the individuals and to provide the government entity with
information regarding the owners and managers of the Company, as well as comply
with requests and audits of information pertaining to the services rendered.
Provider agreements can be terminated at any time for non-compliance with the
federal, state or local regulations. Reimbursement methods vary by state and are
typically based on a flat-rate or cost-based reimbursement system on a per
person, per diem basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Contracts for the Company's youth services programs, excluding Job Corps,
are regulated by state and local governmental entities. Contracts generally have
one year terms, subject to annual renewal, or cover individuals for specific
terms. The contract rate is also accepted as payment in full for services
rendered.
Management Contracts. Management contracts with states, local agencies or
other providers of record typically call for the Company to manage the
day-to-day operations of facilities or programs. Many of these contracts are
short-term (generally a year in duration) and are subject to renewal or
renegotiation provided that program standards and regulatory requirements are
met. Depending upon the state's reimbursement policies and practices, management
contracts provide fees to the Company computed on the basis of a fixed fee per
individual (which may include some form of incentive payment), a percentage of
operating expenses (so-called cost-plus contracts), a percentage of revenue or
an overall fixed fee paid regardless of occupancy. The provider of record is
generally paid a net operating income (facility gross revenues minus lease
payment, facility operating expenses and the Company's management fee), some
specified minimum amount or a fixed amount. Historically, the Company's Medicaid
provider contracts and management contracts have been renewed or satisfactorily
renegotiated. The Company believes its experience in this regard is consistent
with the overall experience of other operators in the disabilities services
business.
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Job Corps Contracts. Contracts for Job Corps centers are awarded pursuant
to a rigorous bid process. After successfully bidding, the Company operates the
Job Corps centers under comprehensive contracts negotiated with the DOL. Under
Job Corps contracts, the Company is reimbursed for all facility and program
costs related to Job Corps center operations and allowable indirect costs for
general and administrative expenses, plus a predetermined management fee,
normally a fixed percentage of facility and program expense.
The contracts cover a five-year period, consisting of an initial two-year
term with three one-year renewal terms exercisable at the option of the DOL. The
contracts specify that the decision to exercise an option is based on an
assessment of (i) the performance of the center as compared to its budget, (ii)
compliance with federal, state and local regulations, (iii) qualitative
assessments of center life, education, outreach efforts and placement record and
(iv) the overall rating received by the center. Shortly prior to the expiration
of the five-year contract period (or earlier if the DOL elects not to exercise a
renewal term), the contract is rebid, regardless of the operator's performance.
The current operator may participate in the rebid process. In situations where
the DOL elects not to exercise a renewal term, however, it is unlikely that the
current operator will be successful in the rebidding process. It is the
Company's experience that there is usually an inverse correlation between the
performance ratings of the current operator and the number of competitors who
will participate in the rebidding process, with relatively fewer competitors
expected where such performance ratings are high.
The Company is currently operating seven Job Corps Centers in Gulfport,
Mississippi; South Bronx, New York; Miami, Florida; Edison, New Jersey; and
Puerto Rico(3). The five-year period covered by the Company's Job Corps
contracts generally expire in 2000, although the Gulfport and the South Bronx
contracts expire in 1997 and 2001, respectively. The Company intends to
selectively pursue additional centers through the Request for Proposals ("RFP")
process.
MARKETING AND DEVELOPMENT
The primary focus of the Company's marketing activities is on identifying
other providers who may consider an acquisition or a management contract
arrangement, and on contacting state and local governments and governmental
agencies responsible for the provision of the types of disabilities services and
youth services offered by the Company.
The Executive Vice President is responsible for the Company's development
department which directs the Company's marketing efforts for disabilities
services and provides support as needed for the youth services marketing
efforts. Responsibility for marketing activities related to youth services are
divided among the following officers of the Company and its subsidiaries: the
Vice President, Job Corps; the Vice President, Alternative Youth Services; and
the President and Vice President, Development, of Youthtrack. Marketing
activities are reviewed on a regular basis by senior management.
In its pursuit of government contracts, the Company contacts governments
and governmental agencies in geographical areas in which it operates and in
others in which it has identified expansion potential. Contacts are made and
maintained by both regional operations personnel and corporate development
personnel, augmented as appropriate by other senior management. The Company
targets new areas based largely on its assessment of the needs for its services,
the system of reimbursement, the receptivity to out-of-state and proprietary
operators, expected changes in the service delivery system (i.e., privatization
or downsizing), the labor climate and existing competition.
The Company also seeks to identify service needs or possible changes in the
service delivery or reimbursement system of governmental entities that may be
driven by changes in administrative philosophy, budgetary considerations, or
pressure or legal actions brought by advocacy groups. As needs or possible
changes are identified, the Company attempts to work with and provide input to
the responsible governmental personnel and to work with provider associations
and consumer advocacy groups to this end. If an RFP results from this process,
the Company then determines whether and on what terms it will respond and
participate in the competitive process.
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With regard to identifying other providers who may be acquisition or
management contract candidates, the Company attempts to establish relationships
with providers through presentations at national and local conferences,
membership in national and local provider associations, direct contact via mail,
telephone or personal visit and follow up with information packets including
video presentation.
In some cases, the Company may be contacted directly and requested to
submit proposals or become a provider in order to provide services to address
specific problems. These may include an emergency takeover of a troubled
operation or the need to develop a large number of community placements within a
certain time period.
REFERRAL SOURCES
The Company receives substantially all of its new MR/DD clients from
referrals from third parties. Generally, family members of persons with MR/DD
are first made aware of available residential or alternative living arrangements
through a state or local case management system. Case management systems are
operated by governmental or private agencies. The Company's ABI services receive
referrals from doctors, hospitals, private and workers' compensation insurers
and attorneys. In either case, where it is determined that some form of MR/DD or
ABI service is appropriate, a referral of one or more providers of such services
is then made to family members or other interested persons. The Company
generally receives referrals or placements of individuals to its AYS and
Youthtrack programs through state or local agencies or entities responsible for
such services, and individuals are recruited to its Job Corps programs largely
through private contractors. The Company's reputation and prior experience with
agency staff, case workers and others in positions to make referrals to the
Company are important for building and maintaining census in the Company's
operations.
COMPETITION
The provision of disabilities services and youth services is subject to a
number of competitive factors, including range and quality of services provided,
cost-effectiveness, reporting and regulatory expertise, reputation in the
community, and the location and appearance of facilities and programs. These
markets are highly fragmented, with no single company or entity holding a
dominant market share. The Company competes with other for-profit companies,
not-for-profit entities and governmental agencies.
With regard to disabilities services, individual states remain a major
provider of MR/DD services, primarily through the operation of large
institutions, and not-for-profit organizations are active in all states and
range from small agencies serving a limited area with specific programs to
multi-state organizations. Many of these organizations are affiliated with
advocacy and sponsoring groups, such as community mental health and mental
retardation centers and religious organizations.
The youth services business in which the Company engages is one that other
entities may easily enter without substantial capital investment or experience
in management of education or treatment facilities. In addition, certain
not-for-profit entities may offer education and treatment programs at a lower
cost than the Company due in part to government subsidies, foundation grants,
tax deductible contributions or other financial resources not available to
for-profit companies.
Currently, only a limited number of companies actively seek Job Corps
contracts because the bidding process is highly specialized and technical and
requires a significant investment of personnel and other expenses over a period
of several months. Approximately one-half of the privately-operated centers are
operated by the three largest operators. Competition for Job Corps contracts has
increased as the DOL has made efforts to encourage new participants in the
program, particularly minority-owned businesses, and as several companies with
government defense contracting experience have entered the Job Corps market.
Certain proprietary competitors operate in multiple jurisdictions and may
be well capitalized. The Company also competes in some markets with smaller
local companies that may have a better understanding of the local conditions and
may be better able to gain political and public acceptance. Such competition may
adversely affect the Company's ability to obtain new contracts and complete
acquisitions on favorable terms.
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The Company faces significant competition from all of these providers in the
states in which it now operates and expects to face similar competition in any
state that it may enter in the future.
Professional staff retention and development is a critical factor in the
successful operation of the Company's business. The competition for talented
professional personnel, such as therapists and QMRPs, is intense. The Company
utilizes a standard professional service agreement for provison of services by
certain professional personnel, which is generally terminable on 30 or 60 day
notice. The demands of providing the requisite quality of service to persons
with special needs contribute to a high turnover rate of direct service staff.
Consequently, a high priority is placed on recruiting, training and retaining
competent and caring personnel.
GOVERNMENT REGULATION AND REIMBURSEMENT
The operations of the Company are subject to compliance with various
federal, state and local statutes and regulations. Compliance with state
licensing requirements is a prerequisite for participation in
government-sponsored health care assistance programs, such as Medicaid. The
following sets forth in greater detail certain regulatory considerations
applicable to the Company:
Funding Levels. Federal and state funding for the Company's disabilities
services business is subject to statutory and regulatory changes, administrative
rulings, interpretations of policy, intermediary determinations and governmental
funding restrictions, all of which may materially increase or decrease program
reimbursement. Congress has historically attempted to curb the growth of federal
funding of such programs, including limitations on payments to facilities under
the Medicaid program. These efforts have intensified recently. Federal law
requires Medicaid programs to pay rates that are reasonable and adequate to meet
the costs which must be incurred by an efficient provider in order to provide
services conforming with applicable laws, regulations and quality and safety
standards. Although states in general have historically increased rates to
compensate for inflationary factors, some have curtailed funding due to state
budget deficiencies or for other reasons. In several such instances providers,
acting through their state health care trade associations, have been able to
negotiate or employ legal action in order to reach a compromise settlement.
Revenues in the future may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed or under
consideration in states where the Company operates.
Reimbursement Requirements. To qualify for reimbursement under Medicaid
programs, facilities and programs are subject to various requirements of
participation and other requirements imposed by federal and state authorities.
In order to maintain a Medicaid or state contract, certain statutory and
regulatory requirements must be met. These participation requirements relate to
client rights, quality of services, physical plant and administration. Long-term
providers, like the Company, are subject to periodic unannounced inspection by
state authorities, often under contract with the appropriate federal agency, to
assure compliance with the requirements of participation in the Medicaid or
state program.
Licensure. In addition to the requirements to be met by the Company for
participation in the Medicaid program, the Company's facilities and programs are
usually subject to annual licensing and other regulatory requirements of state
and local authorities. These requirements relate to the condition of the
facilities, the quality and adequacy of personnel and the quality of services.
State licensing and other regulatory requirements vary from jurisdiction to
jurisdiction and are subject to change.
Regulatory Enforcement. From time to time, the Company receives notices
from regulatory inspectors that in their opinion there are deficiencies for
failure to comply with various regulatory requirements. The Company reviews such
notices and takes corrective action as appropriate. In most cases, the Company
and the reviewing agency agree upon the steps to be taken to bring the facility
or program into compliance with regulatory requirements. Serious deficiencies
can result in decertification or delicensure actions by the Health Care
Financing Administration or state regulatory agencies.
Restrictions on Acquisitions and Additions. All states in which the
Company currently operates have adopted laws or regulations which generally
require that a state agency approve the Company as a provider and many require a
determination that a need exists prior to the addition of beds or services.
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13
Cross Disqualifications and Delicensure. In certain circumstances,
conviction of abusive or fraudulent behavior with respect to one facility or
program may subject other facilities and programs under common control or
ownership to disqualification from participation in the Medicaid program.
Executive Order 12549 prohibits any corporation or facility from participating
in federal contracts if it or its principals (including but not limited to
officers, directors, owners and key employees) have been debarred, suspended or
declared ineligible, or have been voluntarily excluded from participating in
federal contracts. In addition, some state regulations provide that all
facilities licensed with a state under common ownership or control are subject
to delicensure if any one or more of such facilities are delicensed.
Regulation of Certain Transactions. The Social Security Act, as amended by
the Health Insurance Portability and Accountability Act of 1996 (the "Health
Insurance Act"), provides for the mandatory exclusion of providers and related
persons from participation in the Medicaid program if the individual or entity
has been convicted of a criminal offense related to the delivery of an item or
service under the Medicaid program or relating to neglect or abuse of residents.
Further, individuals or entities may be, but are not required to be, excluded
from the Medicaid program under certain circumstances including, but not limited
to, the following: convictions relating to fraud; obstruction of an
investigation of a controlled substance; license revocation or suspension;
exclusion or suspension from a state or federal health care program; filing
claims for excessive charges or unnecessary services or failure to furnish
medically necessary services; or ownership or control by an individual who has
been excluded from the Medicaid program, against whom a civil monetary penalty
related to the Medicaid program has been assessed, or who has been convicted of
a crime described in this paragraph. The illegal remuneration provisions of the
Social Security Act make it a felony to solicit, receive, offer to pay or pay
any kickback, bribe or rebate in return for referring a resident for any item or
service, or in return for purchasing, leasing or ordering any good, service or
item, for which payment may be made under the Medicaid program. Other provisions
in the Health Insurance Act proscribe false statements in billing and in meeting
reporting requirements and in representations made with respect to the
conditions or operations of facilities. A violation of the illegal remuneration
statute is a felony and may result in the imposition of criminal penalties,
including imprisonment for up to five years and/or a fine of up to $25,000.
Further, a civil action to exclude a provider from the Medicaid program could
occur. There are also other civil and criminal statutes applicable to the
industry, such as those governing false billings and anti-supplementation
restrictions and the new health care offenses contained in the Health Insurance
Act, such as health care fraud, theft or embezzlement, false statements and
obstruction of criminal investigation of health care offenses. Criminal
sanctions for these new health care criminal offenses can be severe. Sanctions
for the newly-enacted health care fraud offense, for example, include
imprisonment for up to 20 years. The agencies administering the Medicaid program
have increased their criminal and civil enforcement activity in the prevention
of program fraud and abuse, including the payment of illegal remuneration.
Environmental Laws. Certain federal and state laws govern the handling and
disposal of medical, infectious and hazardous waste. Failure to comply with
those laws or the regulations promulgated thereunder could subject an entity
covered by these laws to fines, criminal penalties and other enforcement
actions.
OSHA. Federal regulations promulgated by the Occupational Safety and
Health Administration impose additional requirements on the Company including
those protecting employees from exposure to elements such as bloodborne
pathogens. The Company cannot predict the frequency of compliance, monitoring or
enforcement actions to which it may be subject as regulations are implemented
and there can be no assurance that such regulations will not adversely affect
the operations of the Company.
INSURANCE
The Company maintains professional malpractice and general liability
insurance on professionals and other staff employed in each of its locations in
addition to coverage for the customary risks inherent in the operation of
business in general. While the Company believes its insurance policies to be
adequate in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or at
a reasonable cost.
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EMPLOYEES
As of February 28, 1997, the Company employed 8,218 employees, including
7,308 in its Division for Persons with Disabilities, 762 in its Division for
Youth Services, and 148 in its corporate offices. As of that date, the Company
was not subject to collective bargaining agreements with any of its employees.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company owned 153 properties and operated
facilities and programs at 268 leased properties. All other facilities and
programs are operated under management contracts. See "Business -- Facilities
and Programs."
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal and/or administrative proceedings involving
state program administrators and others, that, in the event of unfavorable
outcomes, may affect revenues and period-to-period comparisons. In Indiana, in
July 1995, the Company and other providers were notified of reimbursement rates
issued retroactive to July 1, 1994 which were lower than the Company and certain
other providers projected based on a settlement that had been reached with the
State concerning the rate-setting methodology for larger facilities. The Company
and another provider filed a lawsuit and an agreement was reached with the State
under which the implementation of the new rate structure was delayed until March
1, 1996, at which time the State prospectively implemented the new rates. A
preliminary injunction was denied and testimony in the trial on the merits was
concluded in August 1996. There has been no decision in the case. If the State
is ultimately successful on all issues it could result in a reduction of net
revenues to the Company of approximately $1.3 million for the thirty months
ended December 31, 1996. Any reduction would be recorded against the Company's
allowance for contractual adjustments and/or net revenues, as appropriate, in
the period in which the issues are resolved. Based on the outcome of the
preliminary injunction proceedings, the Company is unable to predict whether it
will prevail on the merits of all issues in the litigation but the opinion of
its legal counsel in the case is that there is a significant likelihood that the
Company will ultimately prevail on the merits of the principal issues involved,
in which case the Company believes that the ultimate net effect on the results
of its operations, cash flow or financial condition will not be material.
In January 1995, the Company filed an action for declaratory judgment
against the landlord of four of the Company's large facilities in Indiana to
enforce a provision in the leases for such facilities to the effect that the
parties would renegotiate the terms of the leases if any change in the Medicaid
program becomes effective or is implemented such that reimbursement is reduced
to the extent that the economic feasibility of the lease is materially and
adversely affected. The parties have agreed to suspend the litigation pending
the outcome of the Indiana rate litigation, and the Company is unable at this
time to determine whether it will ultimately prevail in the matter. The Company
subleased three other large facilities in Indiana from the same landlord. The
sublease, which did not include a renegotiation provision, expired on July 31,
1996, and the parties have entered into a new nine-month lease, on essentially
the same terms and conditions as the previous sublease, which will expire on
April 30, 1997 and are currently in discussions regarding further extension of
the lease. These three facilities account for approximately $6.0 million in
annual revenues. As a result of these matters, the Company may be compelled or
may elect ultimately to reduce certain of its facility-based operations in
Indiana.
The Kentucky Department of Medicaid Services ("Kentucky") has notified the
provider of record of a larger facility managed by the Company of certain
adjustments to the facility cost report for the 1991 fiscal year as a result of
the completion of its audit for that year. Kentucky has also audited the
facility for fiscal years 1992 through 1995, but has not yet issued its audit
report with respect to these years. The Company and the provider believe that
Kentucky does not have the legal and factual basis for these adjustments and
thus, since receipt of the notification in August 1995, have engaged in various
administrative and other efforts with Kentucky to have the proposed adjustments
withdrawn. To date, the parties have been unable to resolve the matter. The
provider has filed an action for declaratory judgment and injunctive relief
against Kentucky in which it seeks a judicial determination concerning the
adjustments. The provider and the Company, in the
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opinion of their respective counsel for this matter, believe that there is a
significant likelihood that the provider will ultimately prevail on the merits
of its argument that the improper legal standards have been applied in the
adjustments. The Company believes that upon application of the appropriate legal
standards, the ultimate net effect of the adjustments on the results of its
operations, cash flow or financial condition will not be material. However, if
Kentucky ultimately prevails in the litigation and requires similar adjustments
for the subsequent years under audit (fiscal years 1992 through 1995), up to
$3.4 million of the provider's costs in the aggregate could be disallowed. The
Company is unable at this time to determine the effect on the Company if
Kentucky should prevail.
In May 1996, legislation was passed in Florida that would significantly
reduce rates effective September 1, 1996 for the operations that the Company
manages in that state. Both individual consumers and a trade association filed
motions in pre-existing lawsuits to stop implementation of the new rates. A
preliminary injunction has been granted in one of the actions which requires the
State to continue full funding of Intermediate Care Facilities/Developmental
Disabilities services pending approval of an alternate plan by the Health Care
Financing Administration. In Tennessee, new regulations were scheduled to take
effect October 1, 1996, which would reduce certain allowable costs to providers
which could affect the management fees of the Company under its management
contracts with not-for-profit providers for group homes. These regulations have
been withdrawn and regulations have been proposed, but not yet enacted, that are
acceptable to the providers and managers. The Company is unable, at this time,
to determine the extent of the effect any such regulations will have on revenues
and profit contributions.
In addition, the Company is a party to various other legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such lawsuits are without merit. Further, such claims are generally covered
by insurance. The Company does not believe the results of such litigation will
have a material adverse effect on its consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Res-Care common stock began trading on the Nasdaq Stock Market's National
Market on December 15, 1992, under the symbol "RSCR." As of February 28, 1997,
the Company had approximately 3,800 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 June 4, 1996.
1995 HIGH LOW
---- ----- -----
First Quarter............................................. 12.17 10.50
Second Quarter............................................ 12.17 10.83
Third Quarter............................................. 12.00 10.33
Fourth Quarter............................................ 11.67 10.33
1996 HIGH LOW
---- ----- -----
First Quarter............................................. 14.50 10.00
Second Quarter............................................ 26.50 12.67
Third Quarter............................................. 25.00 15.75
Fourth Quarter............................................ 18.50 14.75
The Company currently does not pay dividends and does not anticipate doing
so in the foreseeable future. Payment of dividends is limited under the
Company's revolving credit facility.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE 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 appearing elsewhere herein. The selected consolidated financial data
presented below under the captions "Statement of Income Data" and "Balance Sheet
Data" for, and as of the end of, each of the years in the five-year period ended
December 31, 1996, are derived from the consolidated financial statements of the
Company, which have been audited by KPMG Peat Marwick LLP, independent certified
public accountants.
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
Net revenues:
Disabilities services................. $61,862 $ 83,697 $109,254 $140,302 $175,361
Youth services........................ 25,065 27,534 28,600 31,366 42,985
------- -------- -------- -------- --------
Total net revenues............ 86,927 111,231 137,854 171,668 218,346
Facility and program expenses:
Disabilities services................. 54,539 73,155 96,889 124,220 152,243
Youth services........................ 22,220 24,507 25,544 27,529 38,221
------- -------- -------- -------- --------
Total facility and program
expenses.................... 76,759 97,662 122,433 151,749 190,464
------- -------- -------- -------- --------
Facility and program contribution....... 10,168 13,569 15,421 19,919 27,882
------- -------- -------- -------- --------
Operating expenses:
Corporate general and
administrative..................... 4,689 5,170 5,820 6,832 9,280
Depreciation and amortization......... 1,022 953 1,355 2,100 3,596
------- -------- -------- -------- --------
Total operating expenses...... 5,711 6,123 7,175 8,932 12,876
------- -------- -------- -------- --------
Operating income........................ 4,457 7,446 8,246 10,987 15,006
Other (income) expense, net............. 99 (399) (700) (881) 797
------- -------- -------- -------- --------
Income from continuing operations before
income taxes.......................... 4,358 7,845 8,946 11,868 14,209
Income taxes............................ 416 3,510 3,862 4,699 5,518
------- -------- -------- -------- --------
Income from continuing operations....... 3,942 4,335 5,084 7,169 8,691
Net income(1)........................... 4,442 5,080 6,138 16,416 8,691
Income per share data:
Income from continuing operations
per share.......................... $ 0.56 $ 0.45 $ 0.52 $ 0.74 $ 0.87
Net income per share(1)............... $ 0.63 $ 0.53 $ 0.63 $ 1.69 $ 0.87
Pro forma net income per share(2)..... $ 0.41 $ -- $ -- $ -- $ --
Weighted average shares used in per
share calculations.................... 7,052 9,627 9,675 9,684 10,023
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AS OF DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
BALANCE SHEET DATA:
Working capital......................... $12,052 $15,222 $16,370 $16,542 $ 22,520
Total assets............................ 30,249 41,707 47,623 84,493 112,095
Long-term debt, less current portion.... 827 3,684 4,682 17,594 29,612
Shareholders' equity.................... 17,894 23,010 29,209 45,861 56,511
- ---------------
(1) Net income includes income from operation of unconsolidated affiliate sold,
accounted for as a discontinued operation, of $500, $745, $1,054 and $428 in
1992, 1993, 1994 and 1995, respectively, and includes an $8,819 gain from
sale of this discontinued operation in 1995, net of applicable income taxes
of $6,270. The aggregate net income per share effect of the discontinued
operation was $0.07, $0.08, $0.11 and $0.95 in 1992, 1993, 1994 and 1995,
respectively.
(2) Pro forma net income reflects an adjustment to provision for income taxes as
if the Company had been taxed as a C Corporation during 1992 rather than as
an S Corporation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Res-Care receives revenues primarily from the delivery of residential,
training, educational and support services to populations with special needs,
including persons with developmental and other disabilities ("disabilities
services") and at-risk and troubled youths ("youth services"). Revenues for the
Company's disabilities services operations are derived primarily from state
government agencies under the Medicaid reimbursement system and from management
contracts with private operators, generally not-for-profit providers, who
contract with state government agencies and are also reimbursed under the
Medicaid system. Reimbursement methods vary by state and are typically based on
a flat rate or cost-based reimbursement system on a per person, per diem basis.
Generally, rates are adjusted annually based primarily upon historical costs
experienced by the Company and by other service providers, and inflation. At
facilities and programs where it is the provider of record, the Company is
directly reimbursed under state Medicaid programs for services it provides and
such reimbursement is affected by occupancy levels. At most facilities and
programs that the Company operates pursuant to management contracts, the
management fee is negotiated based upon the reimbursement amount expected to be
earned by the provider of record, which is affected by occupancy levels. Under
certain management contracts, the Company is paid a fixed fee regardless of
occupancy levels. See Note 1 of Notes to Consolidated Financial Statements for a
further discussion of the Company's revenue recognition policies with respect to
Medicaid contracts.
The Company's youth services operations include seven vocational training
programs under the federal Job Corps program administered by the DOL. Under the
Job Corps program, the Company is reimbursed for direct costs related to Job
Corps center operations and allowable indirect costs for general and
administrative expenses, plus a predetermined management fee, normally a fixed
percentage of facility and program expenses. All of such amounts are reflected
as revenue, and all such direct costs are reflected as facility and program
expenses. Final determination of amounts due under Job Corps contracts is
subject to audit and review by the DOL, and renewals and extension of Job Corps
contracts are based in part on performance reviews. In July 1996, the Company
began operating various programs for at-risk and troubled youths through its
Youthtrack subsidiary, 20% of which is owned by Youthtrack's management, and the
Company's wholly-owned Alternative Youth Services subsidiary. Most of the youth
services programs are funded directly by federal, state and local government
agencies. Under these contracts, the Company is typically reimbursed based on
fixed contract amounts, flat rates or cost-based rates. The effect of Youthtrack
management's ownership interest is reflected in the Company's consolidated
statement of income as a minority interest.
Expenses incurred under federal, state and local government agency
contracts for disabilities services and youth services, as well as management
contracts with providers of record for such agencies, are subject to examination
by agencies administering the contracts and services. Any resulting adjustments
would be recorded as contractual adjustments to revenues in the period in which
the adjustment is made. See Note 1 of Notes to Consolidated Financial
Statements.
The Company's revenues and net income fluctuate from quarter to quarter, in
part because annual Medicaid rate adjustments have been announced inconsistently
and are usually retroactive to the beginning of the particular state's fiscal
reporting period. The Company expects that future adjustments in reimbursement
rates in most states will consist primarily of cost-of-living adjustments.
However, in some cases states have revised their rate-setting methodologies
which has resulted in rate decreases as well as rate increases. Current
initiatives at the federal or state level may materially change the Medicaid
system as it now exists. Retroactively calculated contractual adjustments are
accrued on an estimated basis in the periods the related services are rendered
and recorded as adjustments to revenues in future periods as final settlements
are determined. Because the cumulative effect of rate adjustments may differ
from previously estimated amounts, net income as a percentage of net revenues
for a period in which an adjustment occurs may not be indicative of expected
results in succeeding periods. Revenues in the future may be affected by changes
in rate-setting structures, methodologies or interpretations that may be
proposed or are under consideration in states where the Company operates. Also,
some states have considered initiating managed care plans for persons currently
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in Medicaid programs. At this time, the Company cannot determine the impact of
such changes, or the effect of various federal initiatives that have been
proposed.
The Company is currently engaged in litigation or administrative
proceedings with several state Medicaid programs regarding rate-setting and
reimbursement methodologies which, if adversely determined, could adversely
affect the Company's business, financial condition and results of operations,
especially in any period in which such adjustments exceed amounts previously
estimated. See "Business -- Legal Proceedings."
The loss of one or more contracts to operate the Company's programs or
facilities could have a material adverse effect on the Company's current or
future results of operations. In 1996, the Company's contract to operate the
Crystal Springs, Mississippi Job Corps center was not renewed. The Company
estimates that the loss of this contract represents approximately $5.7 million
in annualized revenues.
In January 1997, the Company acquired the partnership interests in Premier
Rehabilitation Centers ("Premier") in a transaction accounted for as a
pooling-of-interests. Premier provides disabilities services to clients with
acquired brain injuries. In the future, the Company's consolidated financial
statements will give retroactive effect to the Premier acquisition.
In May 1995, the Company sold to a third party all of its interest in an
unconsolidated affiliate engaged in providing home health care services and
reported a gain on this transaction of $8.8 million after applicable income
taxes. The effect of the sale has been recorded in the Company's financial
statements as a discontinued operation.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from
the Company's consolidated statements of income expressed as a percentage of the
Company's total net revenues and in the case of facility and program expenses
and facility and program contribution, as a percentage of related net revenues,
and the percentage change in the amounts of such items from the prior year:
YEAR TO YEAR
INCREASE
(DECREASE)
--------------
YEARS ENDED DECEMBER 31, 1994 1995
------------------------ TO TO
1994 1995 1996 1995 1996
------ ------ ------ ----- ------
Net revenues:
Disabilities services................................ 79.3% 81.7% 80.3% 28.4% 25.0%
Youth services....................................... 20.7 18.3 19.7 9.7 37.0
----- ----- -----
Total net revenues........................... 100.0 100.0 100.0 24.5 27.2
Facility and program expenses:
Disabilities services................................ 88.7 88.5 86.8 28.2 22.6
Youth services....................................... 89.3 87.8 88.9 7.8 38.8
Total facility and program expenses.......... 88.8 88.4 87.2 23.9 25.5
Facility and program contribution:
Disabilities services................................ 11.3 11.5 13.2 30.1 43.8
Youth services....................................... 10.7 12.2 11.1 25.6 24.2
Total facility and program contribution...... 11.2 11.6 12.8 29.2 40.0
Operating expenses:
Corporate general and administrative................. 4.2 4.0 4.2 17.4 35.8
Depreciation and amortization........................ 1.0 1.2 1.7 55.0 71.2
----- ----- -----
Operating income....................................... 6.0 6.4 6.9 33.2 36.6
Other (income) expense, net............................ (0.5) (0.5) 0.4 25.9 NM
Income from continuing operations before income
taxes................................................ 6.5 6.9 6.5 32.7 19.7
Income taxes........................................... 2.8 2.7 2.5 21.7 17.4
----- ----- -----
Income from continuing operations...................... 3.7% 4.2% 4.0% 41.0% 21.2%
===== ===== =====
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total net revenues increased by 27.2%, or $46.7 million, to $218.3 million
in 1996 compared to 1995. Of this increase, 75.2% resulted from increased
disabilities services revenues. Disabilities services net revenues increased by
25.0%, or $35.1 million, to $175.4 million in 1996 compared to 1995. Revenues
increased primarily from the acquisition of 12 facilities and four supported
living operations in 1996, the opening of nine new facilities in 1996 and the
effect of a full year of operations of 21 new facilities and programs added in
1995. Revenues also increased due to certain cost-of-living and other rate
adjustments providing reimbursement for payroll and other expenses incurred in
prior periods. Average revenue per census day increased to $112.21 in 1996
compared to $110.45 in 1995. Average disabilities services facility and program
occupancy rates for 1996 increased 0.5% to 96.1% compared to 95.6% in 1995.
Youth services net revenues increased by 37.0%, or $11.6 million, to $43.0
million in 1996 compared to 1995, resulting primarily from the first full year
of operations of the Edison Job Corps Center and the Company's first year of
operations of Youthtrack. During 1996, the Company began providing services to
over 350 youths through an acquisition by and a new contract awarded to
Youthtrack. Revenues were also impacted by inflationary increases. In addition,
during 1996, the Company was awarded a contract by the U.S. Department of Labor
to continue operating the South Bronx Job Corps Center. In December 1996, the
Company was awarded a 10-month basic education contract to provide support
services at the Great Onyx Job Corps Center in Mammoth Cave, Kentucky.
Facility and Program Expenses
Facility and program expenses increased 25.5%, or $38.7 million, to $190.5
million in 1996 compared to 1995. Of this increase, $27.2 million, or 70.3%, was
due to payroll and payroll-related expenses. These expenses reflected additional
personnel, primarily for the facilities and programs added during the year, as
well as annual pay increases. Facility and program expenses decreased as a
percentage of total net revenues to 87.2% in 1996 from 88.4% in 1995 due to
improved operating efficiencies, higher occupancy levels and the effect of the
rate increases described above.
Disabilities services facility and program expenses increased 22.6%, or
$28.0 million, to $152.2 million in 1996 compared to 1995. Payroll and
payroll-related expenses represented 77.1% of this increase due primarily to the
additional facilities and programs that were operational during 1996 compared to
1995. As a percentage of disabilities services net revenues, disabilities
services facility and program expenses decreased to 86.8% in 1996 from 88.5% in
1995. This decrease was due to improved operating efficiencies, higher occupancy
levels and the effect of the rate increases described above.
Youth services facility and program expenses increased 38.8%, or $10.7
million, to $38.2 million in 1996 compared to 1995. The increase related
primarily to the first full year of the operation of the Edison Job Corps Center
and the initial costs of the Youthtrack operation. As a percentage of youth
services net revenues, youth services facility and program expenses increased to
88.9% in 1996 from 87.8% in 1995. The increase in facility and program expenses
as a percentage of net revenues was due primarily to the costs of the Youthtrack
operation incurred prior to the commencement of revenues.
Operating Expenses
Corporate general and administrative expenses increased 35.8%, or $2.4
million, to $9.3 million in 1996 compared to 1995. The increase primarily
reflected additional personnel to support the growth of the Company's
operations, as well as increased use of professional services. As a percentage
of total net revenues, such expenses increased to 4.2% in 1996 compared to 4.0%
in 1995.
Depreciation and amortization expense increased 71.2%, or $1.5 million, to
$3.6 million in 1996 compared to 1995. The increase reflects primarily the
purchase of real property and intangible assets in disabilities services during
1995 and 1996. Amortization expense also includes amortization of deferred
start-up costs relating to the development of new facilities and programs.
Deferred start-up costs include
19
22
administrative and staff salaries, rent, professional fees, insurance and other
costs incurred during the period prior to operation of the facilities and
programs. Such costs are amortized using the straight-line method over periods
ranging from five to seven years, consistent with applicable state reimbursement
regulations. At December 31, 1996, unamortized start-up costs totaled $3.5
million. See Notes 1 and 4 of Notes to Consolidated Financial Statements.
Other (Income) Expense, Net
Net interest expense increased $1.1 million to $767,000 in 1996 compared to
net interest income of $363,000 in 1995. The difference resulted primarily from
increased borrowings for acquisitions and for working capital. In 1995, funds
held in escrow from a 1988 transaction for the sale of the assets of a facility
were returned, and the Company recognized a one-time credit of $507,000, net of
expenses. See Note 2 of Notes to Consolidated Financial Statements.
Income Taxes
Income taxes increased 17.4%, or $819,000, to $5.5 million in 1996 compared
to 1995, and reflect effective tax rates of 38.8% and 39.6% in 1996 and 1995,
respectively. The increase in income tax expense is attributable to the higher
level of operating income as discussed above.
Income From Continuing Operations and Net Income
Income from continuing operations increased 21.2%, or 1.5 million, to $8.7
million in 1996 compared to 1995 resulting primarily from the revenue
contribution of acquired and new programs and facilities as well as improved
occupancy and per diem rates. Included in 1995 net income is $9.2 million, or
$0.95 per share, attributable to income from and gain on the sale of the
Company's discontinued home health care operations. This operation was sold
during 1995, resulting in an after tax gain of $8.8 million. Due to the effect
of the sale of the discontinued operation, net income decreased 7.7 million to
$8.7 million, or $0.87 per share, in 1996 versus $16.4 million or $1.69 per
share in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Total net revenues increased 24.5%, or $33.8 million, to $171.7 million in
1995 compared to 1994. Of this increase, 91.8% resulted from increased
disabilities services revenues. Disabilities services net revenues increased by
28.4%, or $31.0 million, to $140.3 million in 1995 compared to 1994. Revenues
increased primarily from the acquisition of 21 facilities and programs in 1995
and ten facilities and programs in 1994. Disabilities services revenues also
increased due to reimbursement for general cost-of-living increases in staff and
other expenses in prior periods. Average disabilities services revenue per
census day decreased to $110.45 in 1995 compared to $111.13 in 1994 as a result
of lower reimbursement rates on certain acquired facilities. Average
disabilities services facility and program occupancy rates for 1995 increased
1.1% to 95.6% in 1995 compared to 94.5% in 1994.
Youth services net revenues increased by 9.7%, or $2.8 million, to $31.4
million in 1995 compared to 1994, due principally to a new contract to operate
the Edison Job Corps Center in New Jersey and a one-year basic education
contract to provide support services at the Gateway Job Corps Center in
Brooklyn, New York. Revenues were also impacted by inflationary increases.
Facility and Program Expenses
Facility and program expenses increased 23.9%, or $29.3 million, to $151.7
million in 1995 compared to 1994. Of this increase, $21.6 million, or 73.7%, was
due to payroll and payroll-related expenses. These expenses reflected additional
personnel, primarily for the additional facilities and programs in disabilities
services, as well as annual pay increases. Facility and program expenses
decreased as a percentage of total net revenues to 88.4% in 1995 from 88.8% in
1994.
20
23
Disabilities services facility and program expenses increased 28.2%, or
$27.3 million, to $124.2 million in 1995 compared to 1994. Payroll and
payroll-related expenses represented 73.4% of the increase due primarily to the
additional disabilities services facilities and programs that were operational
during 1995 compared to 1994. As a percentage of disabilities services net
revenues, disabilities services facility and program expenses decreased to 88.5%
in 1995 from 88.7% in 1994.
Youth services facility and program expenses increased 7.8%, or $2.0
million, to $27.5 million in 1995 compared to 1994. As a percentage of youth
services net revenues, youth services facility and program expenses decreased to
87.8% in 1995 from 89.3% in 1994. This decrease was due primarily to increased
recruitment and placement revenues in the Puerto Rico and South Bronx Job Corps
centers and to the new Job Corps contracts discussed above.
Operating Expenses
Corporate general and administrative expenses increased 17.4%, or $1.0
million, to $6.8 million in 1995 compared to 1994. The increase reflected
additional personnel to support the growth of the Company as well as normal pay
increases, increased travel and increased use of professional services. As a
percentage of total net revenues, such expenses decreased to 4.0% in 1995
compared to 4.2% in 1994.
Depreciation and amortization expenses increased 55.0%, or $745,000, to
$2.1 million in 1995 compared to 1994. The increase reflects primarily the
effect of the real property and intangible assets added in disabilities services
in 1995.
Other (Income) Expense, Net
Net interest income decreased 49.2%, or $351,000, to $363,000 in 1995
compared to 1994. The decrease resulted primarily from increased borrowings for
acquisitions.
In 1995, funds held in escrow from a 1988 transaction for the sale of the
assets of a facility were returned and the Company recognized a one-time credit
of $507,000, net of expenses. See Note 2 of Notes to Consolidated Financial
Statements.
Income Taxes
Income taxes increased 21.7%, or $837,000, to $4.7 million in 1995 compared
to 1994, and reflect effective tax rates of 39.6% and 43.2% in 1995 and 1994,
respectively. The increase in income tax expense is attributable to the higher
level of operating income as discussed above.
Income From Continuing Operations and Net Income
For the reasons described above, income from continuing operations
increased 41.0%, or $2.1 million to $7.2 million in 1995 compared to 1994. Due
to the effect of the sale of the discontinued home health care operations,
described above, net income was $16.4 million or $1.69 per share in 1995
compared to $6.1 million or $0.63 per share in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's needs for capital are attributable primarily to the Company's
plans to expand through acquisitions and the development of new facilities and
programs, and to have sufficient working capital for general corporate purposes.
Since most of the Company's facilities and programs are operating at or near
capacity, and budgetary pressures and other forces are expected to limit
increases in reimbursement rates received by the Company, the Company's ability
to continue to grow at its current rate is directly dependent upon such
acquisitions and development.
For 1996, net cash provided by operating activities was $7.4 million
compared to $3.8 million for 1995 and $4.3 million for 1994. The increase in
1996 was due primarily to an increase in income from continuing operations,
offset by an increase in accounts receivable.
21
24
For 1996, net cash used in investing activities was $20.4 million, related
primarily to acquisitions and the purchase of property and equipment. For 1995,
net cash used in investing activities was $17.2 million, related primarily to
acquisitions and the purchase of property and equipment, offset by dividends
from the unconsolidated affiliate sold and proceeds from the sale of the
unconsolidated affiliate net of income taxes. For 1994, net cash used in
investing activities was $4.2 million relating primarily to the purchase of
property and equipment.
Net cash provided by financing activities was $13.5 million for 1996 and
$10.3 million for 1995, both consisting primarily of borrowings against the
available line of credit. For 1994, net cash provided by financing activities
was $367,000, consisting primarily of borrowing against the line of credit
offset by repayment of notes payable.
On December 23, 1996, the Company entered into a new revolving credit
facility, expiring December 31, 2001 which allows for maximum borrowings of $65
million, including up to $10 million in letters of credit (the "Revolving Credit
Facility"). The Revolving Credit Facility bears interest at the Company's option
at either (i) LIBOR plus a range of 0.75% to 1.75% depending upon certain
financial ratios or (ii) the lead lender's prime rate. At December 31, 1996, the
Company had approximately $29.7 million in outstanding indebtedness, consisting
of a $26.2 million outstanding balance under its Revolving Credit Facility and
$3.5 million of notes payable. An additional $3.5 million in letters of credit
were also outstanding under the Revolving Credit Facility. See Note 5 of Notes
to Consolidated Financial Statements.
Net days revenue in accounts receivable for disabilities services was 50
days at December 31, 1996, compared to 47 days at December 31, 1995, and 46 days
at December 31, 1994. Accounts receivable for disabilities services at December
31, 1996, increased to $30.1 million, compared to $21.8 million at December 31,
1995, and $14.1 million at December 31, 1994. In youth services, payment is
generally received within 15 to 45 days of billings.
The Company generally prefers to provide its services under management
contracts or in facilities that are leased, which minimizes the amount of
capital expenditures required. However, in states that utilize flat-rate
reimbursement structures, purchases may be made to maximize returns. Also,
acquisitions may involve significant capital expenditures. The Company has no
material commitments for capital expenditures for its current facilities,
although the Company maintains an ongoing capital improvements program.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including the following
cautionary statements that are intended to identify certain important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements concerning the Company made by or on
behalf of the Company, whether contained herein or elsewhere.
The Company's growth in revenues and earnings per share has been directly
related to a considerable increase in the number of individuals served in its
Division for Persons with Disabilities and its Division for Youth Services. This
growth is largely dependent upon development-driven activities, including the
acquisitions of other businesses or facilities or of management contract rights
to operate facilities, the award of contracts to open new facilities or start
new operations or to assume management of facilities previously operated by
governmental agencies or not-for-profit organizations and the extension or
renewal of contracts previously awarded to the Company. The Company often makes
forward-looking statements regarding its development activities.
Changes in the Company's future revenues depend significantly upon the
success of these development activities, and in particular on the Company's
ability to obtain additional contracts to provide services to the consumer bases
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
22
25
other assets as a means of increasing the number of consumers served, and
changes in the market for such acquisition prospects, including increasing
competition for and increasing pricing of such acquisition prospects, could also
adversely affect the timing and/or viability of future development activities.
Revenues of the Company's Division for Persons with Disabilities are highly
dependent on reimbursement under federal and state Medicaid programs. Generally,
each state has its own Medicaid reimbursement regulations and formula. The
Company's revenues and operating profitability are dependent upon the Company's
ability to maintain its existing reimbursement levels and to obtain periodic
increases in reimbursement rates. Changes in the manner in which Medicaid
reimbursement rates are established in one or more of the states in which the
Company conducts its operations, such as those recently encountered by the
Company, could adversely affect revenues and profitability. Other changes in the
manner in which federal and state reimbursement programs are operated, and in
the manner in which billings/costs are reviewed and audited, could also affect
revenues and operating profitability.
The Company's cost structure and ultimate operating profitability are
significantly dependent on its labor costs and the availability and utilization
of its labor force and thus may be affected by a variety of factors, including
local competitive forces, changes in minimum wages or other direct personnel
costs, the Company's effectiveness in managing its direct service staff, and
changes in consumer services models, such as the trends toward supported living
and managed care.
Additionally, the Company's continued expansion of its existing operations,
and its ability to expand into providing services to other populations utilizing
the Company's core competencies are dependent upon continuation of trends toward
downsizing, privatization and consolidation, the Company's ability to tailor its
services to meet the specific needs of these different populations, and its
success in operating in a changing reimbursement environment. The continuation
of such trends and the nature of its operating environment are subject to a
variety of political, economic, social and legal pressures, including desires of
governmental agencies to reduce costs and increase levels of services, federal,
state and local budgetary constraints and actions brought by advocacy groups and
the courts to change existing service delivery systems. Material changes
resulting from these trends and pressures could adversely affect the demand for
and reimbursement of the Company's services and its operating flexibility, and
ultimately its revenues and profitability.
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26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Res-Care, Inc.:
We have audited the accompanying consolidated balance sheets of Res-Care,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. 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 and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Res-Care,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 26, 1997
24
27
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------------------
1995 1996
----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,253 $ 7,638
Accounts and notes receivable, less allowance for
contractual
adjustments of $1,911 in 1995 and $1,945 in 1996 (note
5)..................................................... 25,281 32,934
Inventories............................................... 468 656
Deferred income taxes (note 7)............................ 2,313 2,498
Prepaid expenses.......................................... 1,162 1,911
------- --------
Total current assets.............................. 36,477 45,637
------- --------
Property and equipment, at cost (note 10):
Land and land improvements................................ 1,146 4,025
Leasehold improvements.................................... 2,444 2,932
Buildings................................................. 28,898 34,711
Furniture and equipment................................... 5,178 7,378
------- --------
37,666 49,046
Less accumulated depreciation and amortization............ 4,851 7,178
------- --------
Net property and equipment........................ 32,815 41,868
------- --------
Excess of acquisition cost over net assets acquired, less
accumulated
amortization of $216 in 1995 and $632 in 1996 (note 10)... 8,521 14,478
Other assets (note 4)....................................... 6,680 10,112
------- --------
$84,493 $112,095
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5)................ $ 123 $ 111
Trade accounts payable.................................... 4,424 5,075
Accrued expenses (note 6)................................. 13,356 15,910
Accrued income taxes (note 7)............................. 2,032 2,021
------- --------
Total current liabilities......................... 19,935 23,117
------- --------
Long-term liabilities....................................... 429 1,421
Long-term debt (note 5)..................................... 17,594 29,612
Deferred income taxes (note 7).............................. 637 1,361
------- --------
Total liabilities................................. 38,595 55,511
------- --------
Commitments and contingencies (note 11)
Minority interest in equity of consolidated subsidiary...... 37 73
Shareholders' equity (notes 1 and 9):
Preferred stock, no par value, authorized 1,000,000
shares, no shares issued or outstanding................ -- --
Common stock, no par value, authorized 20,000,000 shares,
issued
13,837,500 shares...................................... 15,535 15,535
Additional paid-in capital................................ 2,316 4,054
Retained earnings......................................... 32,427 41,118
------- --------
50,278 60,707
Less cost of common shares in treasury (4,435,772 shares
in 1995
and 4,213,072 shares in 1996).......................... (4,417) (4,196)
------- --------
Total shareholders' equity........................ 45,861 56,511
------- --------
$84,493 $112,095
======= ========
See accompanying notes to consolidated financial statements.
25
28
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues (note 8)...................................... $137,854 $171,668 $218,346
Facility and program expenses:
Wages, salaries and benefits............................. 73,703 95,316 122,499
Purchased services....................................... 7,025 7,822 8,963
Supplies and other expenses.............................. 41,705 48,611 59,002
-------- -------- --------
122,433 151,749 190,464
Operating expenses:
Corporate general and administrative..................... 5,793 6,805 9,276
Depreciation and amortization............................ 1,355 2,100 3,596
Compensation -- stock options (note 9)................... 27 27 4
-------- -------- --------
Total operating expenses......................... 7,175 8,932 12,876
-------- -------- --------
Total facility, program and operating expenses... 129,608 160,681 203,340
-------- -------- --------
Operating income......................................... 8,246 10,987 15,006
Other expenses (income):
Interest expense (note 5)................................ 38 488 1,225
Interest income.......................................... (752) (851) (458)
Loss (gain) from sale of assets (note 2)................. 14 (515) (7)
-------- -------- --------
Total other expenses (income), net............... (700) (878) 760
-------- -------- --------
Minority interest in (income) loss of consolidated
subsidiary............................................... -- 3 (37)
Income from continuing operations before income taxes...... 8,946 11,868 14,209
Income tax expense (note 7)................................ 3,862 4,699 5,518
-------- -------- --------
Income from continuing operations.......................... 5,084 7,169 8,691
Discontinued operations (note 3):
Income from operation of unconsolidated affiliate sold,
net of applicable income taxes of $92 in 1994 and $37
in 1995............................................... 1,054 428 --
Gain from sale of unconsolidated affiliate, net of
applicable income taxes of $6,270..................... -- 8,819 --
-------- -------- --------
Net income............................................... $ 6,138 $ 16,416 $ 8,691
======== ======== ========
Income per share data:
Income from continuing operations per share.............. $ 0.52 $ 0.74 $ 0.87
Income from discontinued operations per share............ 0.11 0.04 --
Gain from sale of discontinued operations per share...... -- 0.91 --
-------- -------- --------
Net income per share....................................... $ 0.63 $ 1.69 $ 0.87
======== ======== ========
Weighted average shares used in per share calculation.... 9,675 9,684 10,023
See accompanying notes to consolidated financial statements.
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29
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
---------------------------------------------------------------------
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------- PAID-IN RETAINED ----------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------- ---------- -------- ------ ------- -------
(IN THOUSANDS)
Balance at December 31, 1993... 13,838 $15,535 $2,052 $ 9,873 4,469 $(4,450) $23,010
Net income..................... -- -- -- 6,138 -- -- 6,138
Exercise of stock options...... -- -- 56 -- (4) 5 61
------ ------- ------ ------- ----- ------- -------
Balance at December 31, 1994... 13,838 15,535 2,108 16,011 4,465 (4,445) 29,209
Net income..................... -- -- -- 16,416 -- -- 16,416
Exercise of stock options...... -- -- 208 -- (29) 28 236
------ ------- ------ ------- ----- ------- -------
Balance at December 31, 1995... 13,838 15,535 2,316 32,427 4,436 (4,417) 45,861
Net income..................... -- -- -- 8,691 -- -- 8,691
Exercise of stock options...... -- -- 1,738 -- (223) 221 1,959
------ ------- ------ ------- ----- ------- -------
Balance at December 31, 1996... 13,838 $15,535 $4,054 $41,118 4,213 $(4,196) $56,511
====== ======= ====== ======= ===== ======= =======
See accompanying notes to consolidated financial statements.
27
30
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 6,138 $16,416 $ 8,691
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,355 2,100 3,596
Provision for contractual adjustments................... 738 575 800
Deferred income taxes -- net............................ (814) (672) 539
Provision for compensation -- stock options............. 27 27 4
Income from operation of unconsolidated affiliate sold,
net of applicable income tax expense.................. (1,054) (428) --
Gain from sale of unconsolidated affiliate, net of
applicable income tax expense of $6,270............... -- (8,819) --
Loss (gain) from sale of assets......................... 14 (515) (7)
Income (loss) applicable to minority interest of
consolidated subsidiary............................... -- (3) 37
Change in operating assets and liabilities:
Increase in accounts and notes receivable............... (1,236) (9,808) (8,364)
(Increase) decrease in inventories...................... (40) 6 (157)
(Increase) decrease in prepaid expenses................. 12 (338) (650)
Increase in other assets................................ (127) (537) (102)
Increase (decrease) in trade accounts payable........... (658) 882 629
Increase in accrued expenses............................ 15 3,248 2,182
Increase (decrease) in accrued income taxes............. (58) 1,736 488
Decrease in long-term liabilities....................... -- (87) (325)
------- ------- -------
Net cash provided by operating activities............. 4,312 3,783 7,361
------- ------- -------
Cash flows from investing activities:
Decrease in advances to unconsolidated affiliate sold... 136 586 --
Dividend from unconsolidated affiliate sold............. -- 3,024 --
Proceeds from sale of unconsolidated affiliate, net of
costs................................................. -- 16,425 --
Payment of income taxes associated with the gain from
sale of
unconsolidated affiliate.............................. -- (6,270) --
Redemption of short-term investment..................... 1,545 -- --
Proceeds from sale of assets............................ 770 541 7
Purchase of property and equipment...................... (3,673) (12,445) (5,643)
Acquisitions of businesses.............................. (2,475) (17,773) (12,574)
Purchase of mortgages................................... (340) -- --
Payments received on notes from sale of assets.......... 39 39 39
Deferred start-up costs................................. (212) (1,287) (2,268)
------- ------- -------
Net cash used in investing activities................. (4,210) (17,160) (20,439)
------- ------- -------
Cash flows from financing activities:
Net borrowings under notes payable to bank.............. 1,038 10,172 12,006
Repayment of notes payable.............................. (705) (78) --
Proceeds received from exercise of stock options........ 34 209 1,457
Contribution from minority interest of consolidated
subsidiary............................................ -- 40 --
------- ------- -------
Net cash provided by financing activities............. 367 10,343 13,463
------- ------- -------
Increase (decrease) in cash and cash equivalents............ 469 (3,034) 385
Cash and cash equivalents at beginning of year.............. 9,818 10,287 7,253
------- ------- -------
Cash and cash equivalents at end of year.................... $10,287 $ 7,253 $ 7,638
======= ======= =======
See accompanying notes to consolidated financial statements.
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31
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 wholly-owned and majority-owned 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, including persons with mental retardation and other developmental
disabilities and at-risk and troubled youths that have typically been provided
by state and local government agencies and not-for-profit organizations.
Net Revenues
Disabilities Services: Client services are provided at rates established
at the time services are rendered. Payments for services rendered to clients
covered by Medicaid are generally less than the Company's established rates.
Contractual allowances and adjustments are recorded to reflect the difference
between established rates and expected reimbursement. Retroactively calculated
contractual adjustments are accrued on an estimated basis in the periods the
related services are rendered and recorded as adjustments to revenues in future
periods when final settlements are determined.
Revenues are derived primarily from state government agencies under the
Medicaid reimbursement system and from management contracts with private
operators, generally not-for-profit providers, who contract with state
government agencies and are also reimbursed under the Medicaid system.
Revenues in the future may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed in states
where the Company operates. Some states are considering initiating managed care
plans for persons served in the Medicaid programs. At this time, the Company
cannot determine the impact of such changes, or the effect of any possible
Congressional actions.
Youth Services: Revenues include amounts reimbursable under cost
reimbursement contracts with the U.S. Department of Labor for operating Job
Corps centers. The contracts provide for payments based on per diem rates or
cost reimbursement formulas. Under government regulations, the Company is
reimbursed its allowable indirect costs for general and administrative expenses,
plus a predetermined fee. Final determination of amounts due under the contracts
is subject to audit and review by the U.S. Department of Labor.
Juvenile treatment revenues are derived primarily from state awarded
contracts and from state agencies under various reimbursement systems.
Reimbursement from state or locally awarded contracts varies per facility or
program, and is typically paid via fixed contract amounts, flat rates, or
cost-based rates.
For both disabilities services and youth services, expenses are subject to
examination by agencies administering the contracts and services. Management
believes that adequate provisions have been made for potential adjustments
arising from such examinations. Revenues and accounts receivable are recorded
net of estimated allowances and adjustments. Provision for bad debt expense, if
any, is provided for in the period the expense is determined by management.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
29
32
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives
of the assets, principally by the straight-line method. Estimated useful lives
for buildings are 20 - 40 years. Leasehold improvements are generally amortized
over the life of the respective leases. The useful lives of furniture and
equipment vary from three to seven years. The Company acts as custodian of
assets where the Company has contracts to operate facilities or programs owned
or leased by the U.S. Department of Labor, various states and private providers.
The excess of acquisition cost over net assets acquired and the cost of
licenses are amortized over 20 - 30 years using the straight-line method. The
Company assesses the recoverability of goodwill and other intangibles as events
or circumstances indicate a possible inability to recover their carrying amount.
Such evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company businesses. The analyses necessarily involve significant
management judgment to evaluate the capacity of an acquired business to perform
within projections.
Inventories
Inventories consist principally of supplies, food and linens and are stated
at the lower of cost (first-in, first-out method) or market.
Deferred Start-Up Costs
Deferred start-up costs are reimbursable under applicable state regulations
and include administrative and staff salaries, rent, professional fees,
insurance and other costs incurred during the period prior to operation of the
various facilities. These costs are amortized on a straight-line method over
periods ranging from five to seven years, consistent with applicable state
reimbursement regulations.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under such method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
Per Share Data
The Company's Board of Directors authorized a three-for-two stock split to
be distributed on June 4, 1996, to shareholders of record on May 24, 1996. All
share and per share data included in this annual report have been restated to
reflect the stock split. Per share data is based on the weighted average number
of common shares and common share equivalents outstanding during the period.
Insurance
The Company maintains insurance in the form of commercial general liability
and commercial umbrella liability policies, which include malpractice insurance.
Management intends to maintain such coverages in the future and is of the
opinion that insurance coverages are adequate to cover any potential losses on
asserted claims. Management is unaware of any incidents which would ultimately
result in a loss in excess of the Company's insurance coverages. In addition,
the Company self-insures group health insurance for its employees. Such
self-insurance costs are accrued based upon the aggregate of the liability for
reported claims
30
33
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and an estimated liability for claims incurred but not reported. The Company has
an annual stop-loss limit of $125,000 for each covered individual.
Workers' compensation policies covering all operations except for New York,
West Virginia, Ohio and Puerto Rico are covered under large deductible or
retrospective policies. The Company is responsible for paying the first $250,000
of each claim until the total of all claims exceeds the aggregate stop loss. The
insurance company is responsible for the claim in excess of the deductible and
for all claims in excess of the aggregate stop loss. At this time, no claim is
likely to exceed the deductible and all claims are not likely to exceed the
aggregate stop loss. Estimated future payments have been expensed.
Financial Instruments
Various methods and assumptions were used by the Company in estimating its
fair value disclosures for significant financial instruments. Fair values of
cash and cash equivalents, short-term investments, accounts and notes receivable
and trade accounts payable approximate their carrying amount because of the
short maturity of those investments. The fair value of short-term debt
approximates its carrying amount. The fair value of long-term debt is based on
the present value of the underlying cash flows discounted at the current
estimated borrowing rates available to the Company, and approximates its
carrying value as interest rates are variable.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain amounts in 1994 and 1995 have been reclassified to conform with the
1996 presentation.
2. CASH HELD IN ESCROW
On May 31, 1988, the Company sold the assets of a facility. In conjunction
with the sale, $541,000 of the sale proceeds were deferred to provide for
certain contingencies relating to periods prior to sale. In the fourth quarter
of 1995, funds held in escrow were returned and the Company recognized a
one-time credit of $507,000, net of expenses.
3. DISCONTINUED OPERATIONS
On May 31, 1995, the Company sold all of its stock in its unconsolidated
affiliate, Home Care Affiliates, Inc. ("HCAI"), to Housecall Medical Resources,
Inc. of Atlanta, Georgia, for $17.5 million in cash before accounting for other
costs of $2.0 million. The Company owned 68% of the stock of HCAI, a provider of
home nursing and related home health services, a business separate from that of
the Company. Due to certain provisions of the shareholder agreement, HCAI was
accounted for as an unconsolidated affiliate. The effect of the sale of the
Company's interest in HCAI has been reported in the accompanying financial
statements as a discontinued operation.
The Company provided managerial and administrative services to a division
of HCAI under an administrative management agreement. Administrative expenses
include personnel, management, accounting, risk management, benefits management,
purchasing and various other services, and amounted to approximately $838,000
for the year ended December 31, 1994. For the five months ended May 31, 1995,
the
31
34
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximate amount was $433,000. The Company will continue to provide these
services under a separate administrative services agreement that expires May 31,
1999.
4. OTHER ASSETS
Other assets are as follows:
DECEMBER 31
-----------------
1995 1996
------ -------
(IN THOUSANDS)
Long-term receivables and advances to managed facilities.... $ 963 $ 1,102
Deferred start-up costs, net of accumulated amortization.... 1,605 3,454
Licenses, net of accumulated amortization................... 3,104 3,013
Other assets................................................ 1,008 2,543
------ -------
$6,680 $10,112
====== =======
5. DEBT
Long-term debt consists of the following:
DECEMBER 31
------------------
1995 1996
------- -------
(IN THOUSANDS)
Revolving credit facility with banks........................ $10,563 $26,196
Variable rate term loan payable to a bank with interest set
at "prime rate" or "Euro-rate" as of December 31, 1995.
Interest payments are due monthly in arrears with unpaid
principal due April 30, 1999. The rate was 7.1% as of
December 31, 1995. The note was paid in full during
1996...................................................... 3,500 --
Notes payable to Beverly Health and Rehabilitation Services,
with interest rates of 9.0% on the original $600 and 7.5%
on the remaining $3,000. These notes are secured by a deed
of trust for real estate. The $600 note is payable in
annual installments of $100, with final payment due April
30, 2001. The remaining notes are due at maturity on April
30, 2001.................................................. 3,600 3,500
Other....................................................... 54 27
------- -------
17,717 29,723
Less current portion...................................... 123 111
------- -------
$17,594 $29,612
======= =======
On December 23, 1996, the Company entered into a new revolving credit
facility with its banks: PNC Bank, Kentucky, Inc.; National City Bank of
Kentucky; SunTrust Bank, Nashville, N.A.; and Bank One, Kentucky, N.A. The
facility provides for maximum borrowings of $65 million, including up to $10
million in letters of credit. It expires and is due at maturity in December
2001, subject to extension. The credit facility is secured by all accounts
receivable and general intangibles of the Company. As of December 31, 1996,
letters of credit in the amount of $3.5 million were outstanding. Under the
facility, the Company is provided a cash management system in which accounts are
replenished daily for checks clearing the previous day. Account replenishments
are applied against the outstanding borrowing.
As of December 31, 1996, uncleared checks in the amount of $3.1 million
were outstanding and are reflected in long-term debt. The agreement contains
certain covenants pertaining to net worth, current ratio, debt service coverage
ratios and ratio of total indebtedness to cash flow from operations. The Company
was in
32
35
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compliance with all covenants as of December 31, 1996. The interest rate was
6.9% and 6.4% as of December 31, 1995, and 1996, respectively.
Interest expense was $38, $488 and $1,225 in the years 1994, 1995 and 1996,
respectively. During 1995, $136 of interest paid was capitalized as part of the
purchase and renovation of a corporate office building.
Maturities of long-term debt are as follows:
YEARS ENDED
DECEMBER 31
--------------
(IN THOUSANDS)
1997........................................................ $ 111
1998........................................................ 107
1999........................................................ 108
2000........................................................ 101
2001........................................................ 29,296
-------
$29,723
=======
6. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31
------------------
1995 1996
------- -------
(IN THOUSANDS)
Accrued trade payables...................................... $ 1,493 $ 1,963
Accrued wages and payroll taxes............................. 4,512 5,572
Accrued vacation............................................ 1,357 1,710
Accrued workers' compensation............................... 1,591 1,395
Other....................................................... 4,403 5,270
------- -------
$13,356 $15,910
======= =======
7. INCOME TAXES
Total income tax expense (benefit) is summarized as follows:
YEARS ENDED DECEMBER 31
---------------------------
1994 1995 1996
------ ------- ------
(IN THOUSANDS)
Income from continuing operations....................... $3,862 $ 4,699 $5,518
Discontinued operations................................. 92 6,307 --
Shareholders' equity, for tax benefits related to stock
options............................................... -- -- (498)
------ ------- ------
$3,954 $11,006 $5,020
====== ======= ======
33
36
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) attributable to income from continuing
operations is summarized as follows:
YEARS ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
Federal:
Current................................................ $3,495 $4,017 $3,937
Deferred............................................... (619) (492) 317
------ ------ ------
Total federal.................................. 2,876 3,525 4,254
------ ------ ------
State and local:
Current................................................ 1,164 1,317 1,042
Deferred............................................... (178) (143) 222
------ ------ ------
Total state and local.......................... 986 1,174 1,264
------ ------ ------
Total income tax expense....................... $3,862 $4,699 $5,518
====== ====== ======
A reconciliation of income tax expense in relation to the amounts computed
by application of the U.S. Federal income tax rate of 34% to pretax income
follows:
YEARS ENDED DECEMBER 31
--------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
Federal income tax at the statutory rate................. $3,042 $4,035 $4,831
Increase (decrease) in income taxes:
Additional federal income tax............................ 184 -- --
State taxes, net of federal benefit...................... 636 732 857
Other.................................................... -- (68) (170)
------ ------ ------
$3,862 $4,699 $5,518
====== ====== ======
34
37
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996, are presented below:
DECEMBER 31
----------------
1995 1996
------ ------
(IN THOUSANDS)
Deferred tax assets:
Accounts receivable, principally due to allowance for
contractual adjustments................................ $ 765 $ 774
Workers' compensation costs, principally due to accrual
for financial reporting purposes....................... 636 558
Health insurance costs, principally due to accrual for
financial reporting purposes........................... 157 --
Compensated absences, due to accrual for financial
reporting purposes..................................... 249 371
Other liabilities and reserves, deductible in different
periods for financial reporting and tax purposes....... 503 911
Other.................................................. 96 40
------ ------
Total gross deferred tax assets................... 2,406 2,654
------ ------
Deferred tax liabilities:
Accounts receivable, principally due to experience rated
revenue recognition for income tax reporting
purposes............................................... 64 74
Property and equipment, due to differences in
depreciation........................................... 115 104
Deferred start-up costs, due to capitalization for
financial reporting purposes........................... 384 969
Amortization of goodwill and licenses..................... 167 337
Other..................................................... -- 33
------ ------
Total gross deferred tax liabilities.............. 730 1,517
------ ------
Net deferred tax asset.................................... $1,676 $1,137
====== ======
Classified as follows:
Deferred income tax asset................................. $2,313 $2,498
Deferred income tax liability............................. 637 1,361
------ ------
Net deferred tax asset.................................... $1,676 $1,137
====== ======
No valuation allowance for deferred tax assets was required as of December
31, 1994, 1995 or 1996, nor was there any change in the total valuation
allowance for the years ended December 31, 1995 and 1996. The realization of
deferred tax assets is dependent upon the Company generating future taxable
income when temporary differences become deductible. Based upon the historical
and projected levels of taxable income, management believes it is more likely
than not the Company will realize the benefits of the deductible differences.
8. SEGMENT INFORMATION
The Company's continuing operations, all of which are in the United States
and Puerto Rico, are broken into two business segments as described in note 1.
Operating income is defined as net revenues less facility, program and
operating expenses. Identifiable assets are those assets used in the operations
of each business segment. The following table shows net revenues, operating
income and other financial information by business segment.
35
38
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FACILITY AND DEPRECIATION
NET PROGRAM OPERATING AND IDENTIFIABLE CAPITAL
AS OF AND FOR THE YEARS ENDED DECEMBER 31: REVENUES EXPENSES INCOME AMORTIZATION ASSETS EXPENDITURES
- ------------------------------------------ -------- ------------- --------- ------------ ------------ ------------
(IN THOUSANDS)
1994
Disabilities services..................... $109,254 96,889 6,723 1,088 24,554 2,589
Youth services............................ 28,600 25,544 1,523 -- 4,004 --
Corporate and other....................... -- -- -- 267 19,065 1,084
-------- ------- ------ ----- ------- ------
Total........................... 137,854 122,433 8,246 1,355 47,623 3,673
======== ======= ====== ===== ======= ======
1995
Disabilities services..................... $140,302 124,220 8,853 1,434 56,040 4,259
Youth services............................ 31,366 27,529 2,134 -- 5,250 --
Corporate and other....................... -- -- -- 666 23,203 8,186
-------- ------- ------ ----- ------- ------
Total........................... 171,668 151,749 10,987 2,100 84,493 12,445
======== ======= ====== ===== ======= ======
1996
Disabilities services..................... $175,361 152,243 12,665 2,486 78,601 4,764
Youth services............................ 42,985 38,221 2,341 104 8,843 170
Corporate and other....................... -- -- -- 1,006 24,651 709
-------- ------- ------ ----- ------- ------
Total........................... $218,346 190,464 15,006 3,596 112,095 5,643
======== ======= ====== ===== ======= ======
The Company accounts for contractual adjustments by charging them against
revenues, as follows:
YEARS ENDED DECEMBER 31
-----------------------
1994 1995 1996
----- ----- -----
Disabilities services....................................... $575 $575 $800
Youth services.............................................. 163 -- --
---- ---- ----
$738 $575 $800
==== ==== ====
9. BENEFIT PLANS
(In thousands, except share and per share data)
On January 1, 1995, the Company amended and restated its Money Purchase
Pension Plan in its entirety as the Res-Care, Inc. Retirement Savings Plan. In
connection with this plan, the Company contributed an amount equal to 3% of
eligible employee salary and an additional 3% of employee salary in excess of
$40. Total expenses relating to this plan for the years ended December 31, 1994,
1995 and 1996, were $1,360, $1,357 and $1,883, respectively.
On January 1, 1995, as part of the Retirement Savings Plan, the Company
established a 401(k) plan in which eligible employees may participate. In
connection with the plan, the Company matches one-half of the employee's
contribution up to a maximum of 2%. The total expense relating to this plan for
the years ended December 31, 1995 and 1996 was $344 and $354 respectively.
The Company has stock-based compensation plans, which are described below.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with Statement of Financial
Accounting Standards
36
39
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, the Company's net income and income per share amounts would have been
reduced to the pro forma amounts indicated below.
YEARS ENDED DECEMBER 31
---------------------------
1995 1996
---------- ---------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
INCOME DATA:
As Reported
Income from continuing operations......................... $ 7,169 $8,691
Income from operation of unconsolidated affiliate sold.... 428 --
Gain from sale of unconsolidated affiliate................ 8,819 --
------- ------
Net income................................................ $16,416 $8,691
======= ======
Pro Forma
Income from continuing operations......................... 7,012 8,280
Income from operation of unconsolidated affiliate sold.... 428 --
Gain from sale of unconsolidated affiliate................ 8,819 --
------- ------
Net income................................................ $16,259 $8,280
======= ======
INCOME PER SHARE DATA:
As Reported
Income from continuing operations per share............... 0.74 0.87
Income from discontinued operations per share............. 0.04 --
Gain from sale of discontinued operations per share....... 0.91 --
------- ------
Net income per share...................................... $ 1.69 $ 0.87
======= ======
Pro Forma
Income from continuing operations per share............... 0.72 0.83
Income from discontinued operations per share............. 0.04 --
Gain from sale of discontinued operations per share....... 0.91 --
------- ------
Net income per share...................................... $ 1.67 $ 0.83
======= ======
The Company's stock-based compensation plans are fixed stock option plans.
Under the 1991 Incentive Stock Option Plan, the Company may grant options to its
salaried officers and employees for up to 2,534,062 shares of common stock.
Under the plan, the exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is normally
five years. All options, except those granted to its president and chief
executive officer, vest 20 percent per year over five years. Options for 97,500
shares granted to the president and chief executive officer on October 26, 1995
vested immediately, and options for 112,797 shares granted to the president and
chief executive officer on November 5, 1996 vest 100% on March 15, 1997.
Under a stock option plan adopted October 28, 1993, 60,000 shares are
available for issuance to nonemployee members of the Board of Directors at an
exercise price which cannot be less than the fair market value on the date of
grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: no dividends paid, as it has been
the Company's policy not to declare or pay dividends since its initial public
offering in 1992
37
40
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the Company does not anticipate paying dividends in the foreseeable future;
expected volatility, 49%; risk-free interest rate, 6.368%; and expected lives,
five to six years.
Stock option activity is shown below:
1995 1996
-------------------- ---------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE
------------- ------- --------- -------- ---------
Outstanding at beginning of year................. 635,175 $ 6.06 849,210 $ 7.59
Granted.......................................... 295,050 11.44 397,647 11.82
Exercised........................................ (27,900) 7.50 (222,725) 6.54
Canceled......................................... (53,115) 10.89 (40,935) 11.24
------- --------
Outstanding at end of year....................... 849,210 7.59 983,197 9.39
======= ========
Exercisable at end of year....................... 400,814 $ 4.57 490,780 $ 6.79
======= ========
Weighted-average fair value of options granted
during the year................................ $3.93 $4.08
======= ========
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------- ------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
-------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 1 to 8 256,050 0.4 years $ 2.84 256,050 $ 2.84
10 to 12 608,350 4.0 10.90 233,230 11.02
15 to 19 112,797 5.8 15.25 -- --
20 to 25 6,000 4.4 24.50 1,500 24.50
------- -------
$ 1 to 25 983,197 3.3 $ 9.39 490,780 $ 6.79
======= =======
10. ACQUISITIONS
During the three years ended December 31, 1996, the Company has made
various acquisitions as set forth below, all of which have been accounted for as
purchases (also see note 13). The consolidated financial statements include the
operating results of each business acquired from the date of its acquisition.
Except for the acquisitions of the 12 Beverly facilities and the 44 group homes
in Texas, pro forma results of operations have not been presented because the
effects of these acquisitions were not significant.
On August 31, 1993, the Company entered into an agreement with several
companies controlled by a single shareholder to acquire up to 59 group homes in
Texas under leasing arrangements with certain obligations and options to
purchase over a three-year period. In 1995, the Company completed the purchase
under the agreement acquiring 44 group homes. The purchase price of the 44 group
homes and other assets was $5.7 million, of which $3.5 million was paid in cash
and the balance by mortgages previously acquired and
38
41
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other accrued expenses. The Company has been operating 57 of the group homes
since September 1, 1993. The allocation of the purchase price for the 44 group
homes was as follows:
(IN THOUSANDS)
Buildings, land and equipment.............................. $3,314
Licenses, at cost.......................................... 1,572
Excess of acquisition cost over net assets acquired........ 845
-------
$5,731
=======
On May 1, 1995, the Company acquired the assets of 12 intermediate care
facilities for persons with mental retardation from Beverly Enterprises. The
purchase price was $16.7 million. The purchase price was paid with $12.6 million
in cash and three promissory notes to Beverly in the amount of $3.6 million. The
purchase price also included $.5 million of other costs associated with the
acquisition. The allocation of the purchase price was as follows:
(IN THOUSANDS)
Buildings, land and equipment.............................. $11,027
Excess of acquisition cost over net assets acquired........ 5,417
Inventory.................................................. 199
Other...................................................... 11
-------
$16,654
=======
The following summary of results of operations on a pro forma basis gives
effect to the acquisition of the 12 Beverly facilities and the acquisition of
the 44 group homes in Texas as though both acquisitions had taken place as of
January 1, 1994:
YEARS ENDED
---------------------
1994 1995
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net revenues............................................. $169,312 $182,081
Income from continuing operations........................ 6,160 7,612
Net income............................................... 7,214 16,859
Income from continuing operations per share.............. 0.64 0.79
Net income per share..................................... $ 0.75 $ 1.74
During the year ended December 31, 1996, the Company made eight
acquisitions. Seven of the acquisitions were businesses providing disabilities
services. The other acquisition was a provider of youth services. The total
purchase price of these acquisitions was $12.6 million in cash, allocated as
follows:
(IN THOUSANDS)
Buildings, land and equipment.............................. $ 5,950
Excess of acquisition cost over net assets acquired........ 6,361
Other...................................................... 263
-------
$12,574
=======
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain operating facilities, office space, vehicles and
equipment under operating leases which expire at various dates from 1997 through
2002. Total rent expense was approximately $7,558,
39
42
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$8,446 and $9,166 for the years ended December 31, 1994, 1995 and 1996,
respectively. Approximate future minimum lease payments under all
non-cancellable operating leases are as follows:
YEARS ENDED
DECEMBER 31
--------------
(IN THOUSANDS)
1997........................................................ $7,933
1998........................................................ 6,364
1999........................................................ 4,539
2000........................................................ 1,758
2001........................................................ 1,281
Thereafter.................................................. $2,237
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The Company is a party to litigation in Indiana in
which the state's methodology for calculating reimbursement is being contested.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial condition
or results of operations.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
YEARS ENDED DECEMBER 31
------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
Cash paid for:
Interest.................................................... $ 27 $ 439 $1,226
Income taxes................................................ 4,692 9,909 4,362
Supplemental schedule of noncash investing and financing
activities:
Notes payable resulting from purchase of property and
equipment................................................. $ 78 $3,600 --
13. SUBSEQUENT EVENT
Effective January 1, 1997, the Company acquired all of the partnership
interests in Premier Rehabilitation Centers in exchange for 409,250 shares of
the Company's common stock in a business combination to be accounted for as a
pooling of interests. Historical financial information presented in future
financial statements will be restated to include Premier Rehabilitation Centers.
The following summarized operating data gives effect to the acquisition as if it
occurred on January 1, 1994, and includes the impact of income taxes as if the
partnership's operations had been taxed as a corporation.
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma:
Income data:
Net revenues..................................... $142,958 $177,428 $224,265
Income from continuing operations................ 5,107 7,255 9,151
Net income....................................... 6,161 16,502 9,151
Income per share data:
Income from continuing operations per share...... 0.51 0.72 0.88
Net income per share............................. 0.61 1.63 0.88
Weighted average shares used in per share
calculation................................... 10,084 10,093 10,432
40
43
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
- ----------------------------------------
Net revenues............................ $35,670 $41,003 $46,096 $48,899 $171,668
Facility and program contribution....... 3,931 4,824 5,534 5,630 19,919
Income from continuing operations....... 1,296 1,673 1,983 2,217 7,169
Net income.............................. 1,543 10,758 1,983 2,132 16,416
Income from continuing operations per
share................................. 0.14 0.17 0.20 0.23 0.74
Discontinued operations:
Income from operation of
unconsolidated affiliate sold, net
of applicable income taxes, per
share.............................. 0.02 0.02 -- -- 0.04
Gain from sale of unconsolidated
affiliate, net of applicable income
taxes, per share................... -- 0.92 -- (0.01) 0.91
Net income per share.................... 0.16 1.11 0.20 0.22 1.69
1996
- ----------------------------------------
Net revenues............................ $52,688 $52,685 $54,919 $58,054 $218,346
Facility and program contribution....... 6,102 6,429 7,324 8,027 27,882
Net income.............................. 1,817 2,004 2,299 2,571 8,691
Net income per share.................... 0.18 0.20 0.23 0.26 0.87
41
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
45
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.
43
46
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
REFERENCE
FORM 10-K
ANNUAL
REPORT
PAGE
---------
(a)(1) Index to Consolidated Financial Statements-Res-Care, Inc.
and Subsidiaries:
Independent Auditors' Report................................ 24
Consolidated Balance Sheets as of December 31, 1995 and
1996...................................................... 25
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996.......................... 26
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996.............. 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996.......................... 28
Notes to Consolidated Financial Statements.................. 29
(a)(2) Index to Consolidated Financial Statement Schedule-Res-Care,
Inc. and Subsidiaries:
Schedule as of and for the years ended December 31, 1994,
1995 and 1996:
Independent Auditors' Report................................ S-1
Schedule II-Valuation and Qualifying Accounts............... S-2
All other schedules have been omitted, as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
44
47
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 18, 1997 By: /s/ RONALD G. GEARY
----------------------------------------------
Ronald G. Geary
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES R. FORNEAR Chairman of the Board and Director March 18, 1997
- -------------------------------------
James R. Fornear
/s/ RONALD G. GEARY President, Chief Executive Officer March 18, 1997
- ------------------------------------- (Principal Executive Officer) and
Ronald G. Geary Director
/s/ E. HALSEY SANDFORD Executive Vice President-Development March 18, 1997
- ------------------------------------- and Director
E. Halsey Sandford
/s/ R. DAN BRICE Acting Executive Vice President, March 18, 1997
- ------------------------------------- Finance/Administration (Principal
R. Dan Brice Financial Officer and Principal
Accounting Officer)
/s/ SEYMOUR L. BRYSON Director March 18, 1997
- -------------------------------------
Seymour L. Bryson
/s/ W. BRUCE LUNSFORD Director March 18, 1997
- -------------------------------------
W. Bruce Lunsford
/s/ SPIRO B. MITSOS Director March 18, 1997
- -------------------------------------
Spiro B. Mitsos
45
48
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Res-Care, Inc.:
Under date of February 26, 1997, we reported on the consolidated balance
sheets of Res-Care, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 annual report to shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1996. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 26, 1997
S-1
49
RES-CARE, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D
------------------------- ---------- ---------------------------------- ---------------------------------
ADDITIONS
BALANCE CHARGED TO CHARGED TO
@ COST OTHER DEDUCTION
YEAR DESCRIPTION JANUARY 1 AND EXPENSES ACCOUNTS DEDUCTIONS DESCRIPTION
- ---- ------------------------- ---------- --------------- ---------------- ---------- --------------------
Allowance for Contractual Accounts Receivables
1994 Adjustments $1,733,218 $738,522** $488,891 Written-off
Allowance for Contractual Accounts Receivables
1995 Adjustments $1,982,849 $575,076** $646,600 Written-off
Allowance for Contractual Accounts Receivables
1996 Adjustments $1,911,325 $800,000** $765,893 Written-off
COL. E
-----------
BALANCE @
YEAR DECEMBER 31
- ---- -----------
1994 $1,982,849
1995 $1,911,325
1996 $1,945,432
** Charged to Revenue
S-2
50
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
- ------- -------
2.1 Agreement by and among Res-Care, Inc., RSCR California,
Inc., Res-Care Illinois, Inc., Res-Care Kansas, Inc., and
RSCR Texas, Inc. and Beverly Health and Rehabilitation
Services, Inc., Beverly Enterprises-California, Inc.,
Beverly Enterprises-Illinois, Inc., Beverly
Enterprises-Kansas, Inc. and Beverly Enterprises-Texas, Inc.
dated April 5, 1995 (excluding Exhibits and Schedules).
Exhibit 2-1 to the Company's Report on Form 8-K dated May 1,
1995 filed on May 12, 1995 is hereby incorporated by
reference.
2.2 Stock Purchase Agreement by and among Housecall Medical
Resources Inc. and Res-Care, Inc., Blair S. Gordon and J.
Paul Gordon dated as of May 31, 1995 (excluding Exhibits and
Schedules). Exhibit 2-1 to the Company's Report on Form 8-K
dated May 31, 1995 filed on June 15, 1995 is hereby
incorporated by reference.
3.1 Amended and Restated Articles of Incorporation of the
Company as amended. Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
3.2 Bylaws of the Company. Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference.
4.1 Specimen Common Stock Certificate. Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-48749) is hereby incorporated by reference.
4.2 Article VI of the Amended and Restated Articles of
Incorporation of the Company included in Exhibit 3.1.
10.1* 1991 Incentive Stock Option Plan of the Company (adopted
April 24, 1991, amended and restated as of February 23,
1995). Exhibit 4 to the Company's Registration Statement on
Form S-8 (Reg. No. 33-80331) is hereby incorporated by
reference.
10.2* Amended and Restated Employment Agreement, dated April 27,
1992, between the Company and E. Halsey Sandford. Exhibit
10.14 to the Company's Registration Statement on Form S-1
(Reg. No. 33-48749) is hereby incorporated by reference.
10.3* 1991 Compensation/Evaluation Bonus Plan. Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (Reg. No.
33-48749) is hereby incorporated by reference.
10.4 1993 Nonemployee Directors Stock Ownership Incentive Plan of
the Company (adopted October 28, 1993). Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Reg. No.
33-76612) is hereby incorporated by reference.
10.5 Amended and Restated Loan Agreement dated as of April 26,
1995 by and among Res-Care, Inc., and PNC Bank, Kentucky,
Inc. and National City Bank, Kentucky. Exhibit 10.7 to the
Company's Report on Form 10-K for the year ending December
31, 1995, is hereby incorporated by reference.
10.6* 1994 Employee Stock Purchase Plan effective July 1, 1995.
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (Reg. No. 33-85964) is hereby incorporated by reference.
51
10.7* Employment Agreement dated as of October 26, 1995 between the Company and Ronald G. Geary.
Exhibit 10-1 to the Company's Report on Form 10-Q for the quarter ending September 30,
1995 is hereby incorporated by reference.
10.8* Res-Care, Inc. 401(K) Restoration Plan effective December 1, 1995. Exhibit 10.11 to the
Company's Report on Form 10-K for the year ending December 31, 1995, is hereby
incorporated by reference.
10.9 Second Amendment to Loan Instruments dated as of February 16, 1996 by and among Res-Care,
Inc., and PNC Bank, Kentucky, Inc. National City Bank, Kentucky and Sun Trust Bank,
Nashville, N.A. Exhibit 10.12 to the Company's Report on Form 10-K for the year ending
December 31, 1995, is hereby incorporated by reference.
10.10* Second Amended and Restated Employment Agreement dated March 17, 1996, between the Company
and E. Halsey Sandford. Exhibit 10.13 to the Company's Report on Form 10-K for the year
ending December 31, 1995, is hereby incorporated by reference.
10.11*+ Amended and Restated Employment Agreement dated as of October 26, 1995, and amended
November 5, 1996, between the Company and Ronald G. Geary.
10.12+ Loan Agreement dated December 23, 1996, by and among Res-Care, Inc. and all of its
subsidiaries and PNC Bank, Kentucky, Inc., National City Bank of Kentucky, SunTrust Bank,
Nashville, N.A. and Bank One, Kentucky, N.A.
10.13*+ Employment Agreement dated January 1, 1997, between the Company and Jeffrey M. Cross.
21.1+ Subsidiaries of the Company.
23.1+ Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule (for SEC use only)
- ---------------
* Management contracts or compensatory plan or arrangements.
+ Filed herewith.