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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from ____________________ to
___________________
Commission File Number: 0-20372
RES-CARE, INC.
(Exact name of Registrant as specified in its charter)
KENTUCKY 61-0875371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10140 LINN STATION ROAD 40223
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 394-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, no par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No .
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
As of February 29, 2000, there were 24,267,644 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 29, 2000, was
approximately $241,160,000. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the Registrant's Proxy
Statement for its 2000 Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
GENERAL
Res-Care, Inc. (the Company) is a leading provider of residential,
training, educational and support services to populations with special needs,
including persons with developmental and other disabilities and at-risk and
troubled youths. The services provided by the Company have historically been
provided by state and local government agencies and not-for-profit
organizations. In recent years, service delivery has shifted from government
agencies toward private organizations, both not-for-profit and for-profit. The
Company's programs include an array of services provided in both residential and
non-residential settings for adults and youths with mental retardation or other
developmental disabilities (MR/DD) and disabilities caused by acquired brain
injury (ABI), and youths who have special educational or support needs, are from
disadvantaged backgrounds, or have severe emotional disorders. Some have entered
the juvenile justice system. Because most of the Company's MR/DD consumers
require services over their entire lives and many states have extensive waiting
lists for services, the Company has experienced high occupancy rates in its
MR/DD operations. Occupancy rates in ABI and youth services operations, although
generally high, are affected by shorter lengths of stay.
The Company experienced significant growth in 1999 in numbers of
persons served and revenues primarily as a result of its merger with
PeopleServe, Inc., the nation's second largest provider of MR/DD services. At
December 31, 1999, the Company provided services to approximately 24,500 persons
with special needs in 32 states, Washington, D.C., Canada and Puerto Rico,
compared to approximately 20,400 persons at December 31, 1998. At December 31,
1999, the Company provided services to approximately 16,000 persons with
disabilities in community group homes, personal residences and other
community-based programs and in larger facilities, and to approximately 8,500
at-risk and troubled youths in federally-funded Job Corps centers and juvenile
treatment programs and facilities operated for state and local agencies.
There is a growing trend throughout the United States toward
privatization of service delivery functions for special needs populations as
governments at all levels face continuing pressure to control costs and improve
the quality of programs. The markets for services for special needs populations
in the United States are large, growing and highly fragmented as evidenced by
the following industry estimates:
- Recent studies indicate that more than three million persons in the
United States have some level of developmental disability to the
extent that professional services are required throughout their lives;
- Funding for MR/DD services approximates $24 billion annually;
- An estimated 4,000 providers operate MR/DD facilities and programs;
- The $60 billion level of spending in the domestic youth services
industry is growing at an annual rate of 9%;
- The juvenile population is expected to grow 20% from 14 million in
1994 to 17 million in 2005, and 31% to 18 million by the year 2010;
- The number of juvenile arrests increased 100% between 1985 and 1994,
and the number of juvenile male offenders tripled during the same
period;
- From 1985 to 1996, the number of persons arrested for violent crimes
increased 57%, while the number of persons under the age of 18
arrested for violent crimes rose 75%; 19% of all persons arrested are
juveniles;
- In 1996, more than three million child abuse reports were made
according to state child protection agencies; and
- Most of the estimated 6,000 residential youth services providers are
small and operate in limited geographic areas.
The Company believes it has significant opportunities to participate in the
growth and trend toward privatization of these services because of its proven
programs and operating systems, its financial resources, the economies of scale
it can achieve and its experience working with special needs populations and
governmental agencies.
The Company strives to provide quality and caring services through the
operation of efficient and flexible programs. The Company's business strategy is
based upon the following key elements; (i) continuing to expand
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upon the Company's leadership position as a provider of disabilities services
and of training and support services for disadvantaged youths and other special
needs populations; (ii) focusing on quality management of existing programs
through models of ongoing program evaluation developed by the Company; and (iii)
implementing and maintaining high quality, cost-effective alternatives to
programs operated directly by governmental entities and others by providing
proven management systems and procedures that assure efficient application of
financial and human resources.
The Company's growth strategy is to: (i) add programs and expand its
existing programs in markets in which it currently operates; (ii) expand into
additional geographic areas in the United States; and (iii) pursue selective
acquisitions. 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 increased focus on internal growth in the
disabilities and 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's acquisition strategy
focuses on acquiring profitable operations in favorable reimbursement
environments which: (i) expand service offerings; (ii) increase market share in
existing markets; or (iii) help attain critical mass in new markets. As part of
its internal growth strategy, the Company strives to build upon its established
relationships with governmental entities to expand its current programs and
obtain contracts for additional programs in new and existing markets, and to
develop new programs in response to societal trends and the needs of
governmental agencies. The Company is currently focusing on addressing the needs
of the over 200,000 individuals who are on state-compiled waiting lists for
various community-based MR/DD services, working with advocates and others to
develop funding and find placements for these consumers. The Company also
intends to expand its programs to additional geographic areas which management
identifies as having favorable reimbursement and operating environments.
DESCRIPTION OF SERVICES BY SEGMENT
The Company has three reportable operating segments: (i) disabilities
services; (ii) Job Corps program; and (iii) other youth services programs. A
description of services provided by each segment follows. Further information
regarding each of these segments, including the required disclosure of certain
financial information, is included in Note 9 of the Notes to Consolidated
Financial Statements of the Company. Such disclosures are incorporated herein by
reference and should be read in conjunction with this section.
Disabilities Services
The Company began providing services to persons with disabilities in
1978 through the operation and management of larger facilities (generally
serving 40 or more individuals) that offered alternatives to placement in state
institutions or traditional nursing homes or other long-term care facilities not
capable of providing specialized active treatment required by these individuals.
The Company began offering services in 1983 through community-based group homes
(generally serving six individuals) and in 1992 through supported living
programs in which persons with disabilities reside in their own residences or
apartments with outside support provided as needed. Some of these individuals
require 24-hour staffing while others need only drop-in services, day programs,
supported employment or transportation. Community-based settings enable persons
with developmental or other disabilities to live and develop in an environment
that encourages each person to achieve maximum independence and self-respect.
Nearly 90% of the Company's clients with developmental disabilities are being
served in community-based settings. The Company's service patterns to clients
with ABI are similar to those with developmental disabilities.
The Company's programs are based predominantly on individual
habilitation plans designed to encourage greater independence and development of
daily living skills through individualized support and training. Management
believes that the breadth and quality of the Company's services and support and
training programs makes the Company attractive to state and local governmental
agencies and not-for-profit providers who may wish to contract with it. The
Company's programs are designed to offer specialized support to these
individuals not generally available in larger state institutions and traditional
long-term care facilities. In each of the Company's programs, services are
administered by Company employees and contractors, such as qualified mental
retardation professionals (QMRPs) or service coordinators, physicians,
psychologists, therapists, social workers and other direct service staff. These
services include social, functional and vocational skills training, supported
employment and emotional and psychological counseling or therapy as needed for
each individual.
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Social Skills Training. The Company's social skills training
focuses on problem solving, anger management and adaptive skills to
allow individuals with disabilities to interact with others in the
residential setting and in the community. Emphasis is placed on contact
with the community at large as appropriate for each individual. The
desired outcome is to enable each individual to participate in home,
family and community life as fully as possible.
Many individuals with developmental and other disabilities
require behavioral intervention services. The Company provides these
services through psychiatrists, psychologists and behavioral
specialists, some of whom serve as consultants on a contract basis. All
operations utilize a non-aversive approach to behavior management which
has been pioneered by the Company and which is designed to avoid
consequences involving punishment or extreme restrictions on individual
rights. Behavior management techniques are employed by the
interdisciplinary team and direct service staff rather than
psychotropic medications to modify behavior, the goal being to minimize
the use of medications whenever possible. When necessary, medications
are handled in strict compliance with federal regulations.
Functional Skills Training. The Company's functional skills
training program encourages mastery of personal skills and the
achievement of greater independence. As needed, individual habilitation
plans may focus on basic skills training in such areas as personal
hygiene and dressing, as well as more complex activities such as
shopping and use of public transportation. Individuals are encouraged
to participate in daily activities such as housekeeping and meal
preparation as appropriate.
Vocational Skills Training and Day Programs. The Company
provides extensive vocational training or specialized day programs for
all individuals served. Some individuals are able to be placed in
community-based jobs, either independently or with job coaches, or may
participate as part of a work team contracted for a specific service
such as cleaning, sorting or maintenance. Clients not working in the
community may be served through vocational workshops or day programs
appropriate for their needs. The Company operates such programs and
also contracts for this service with outside providers. The Company's
philosophy is to enable all persons served to perform productive work
in the community or otherwise develop vocational skills based on their
individual abilities. Clients participating in specialized day programs
may be older or have physical or health restrictions which prevent them
from being employed or participating in vocational programs.
Specialized day programs may include further training in daily living
skills, community integration or specialized recreation activities.
Counseling and Therapy Programs. The Company's counseling and
therapy programs address the physical, emotional and behavioral
challenges of individuals with MR/DD or ABI. Goals of the programs
include the development of enhanced physical agility and ambulation,
acquisition of adaptive skills for both personal care and work, as well
as the development of coping skills and the use of alternative,
responsible, and socially acceptable interpersonal behaviors.
Individualized counseling programs may include group and individual
therapies. Occupational and physical therapies and therapeutic
recreation are provided based on the assessed needs of the individual.
At each of its operations, the Company provides comprehensive
individualized support and training programs that encourage greater independence
and the development of personal and vocational skills commensurate with the
particular individual's capabilities. As the individual progresses, new programs
are created to encourage greater independence, self-respect and the development
of additional personal or vocational skills.
Job Corps Program
Since 1976, the Company has been operating programs for disadvantaged
youths through the federal Job Corps program administered by the U.S. Department
of Labor (DOL), which provides for the educational and vocational skills
training, health care, employment counseling and other support necessary to
enable disadvantaged youths to become responsible working adults.
The Company operates 14 Job Corps centers with a contracted capacity of
approximately 7,200 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
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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 condition. Each center offers training in several
vocational areas depending upon the particular needs and job market
opportunities in the region. Students are required to participate in basic
education classes to improve their academic skills and to complement their
vocational training. High school equivalency classes are available to obtain GED
certificates. Upon graduation or other departure from the program, each student
is referred to the nearest Job Corps placement agency for assistance in finding
a job or enrolling in a school or training program. Approximately 70% of the
students completing the program have obtained jobs or continued their education
elsewhere.
The Company also provides certain administrative, counseling,
education, vocational and other support services for three Job Corps centers
located in Kentucky, North Carolina and West Virginia under a five-year contract
with the Department of Interior expiring in 2003.
Other Youth Services Programs
In December 1995, the Company began a strategic initiative to expand
its Division for Youth Services beyond the Job Corps program and develop
services that are designed to address the specific needs of at-risk and troubled
youths to enable each youth to be a more productive member of the community. The
youths targeted to be served through the strategic initiative range from youths
who have special educational or support needs, to youths who exhibit a variety
of behavioral and emotional disorders and in some instances have been diagnosed
with mental retardation or other developmental disability, to pre-adjudicated
and adjudicated youths who have entered the juvenile justice system. Special
needs and at-risk youth programs operated through the Company's Alternative
Youth Services (AYS) subsidiary include residential treatment programs, the
operation of alternative schools, foster care programs and emergency shelters.
The Company plans to continue to expand the services provided to these youths.
Programs offered for troubled youths through the Company's Youthtrack
(Youthtrack) subsidiary include secure and staff-secure detention programs,
long-term treatment programs, secure transportation, day treatment programs and
monitoring, and transition and after-care programs.
The Company's programs include a variety of educational and vocational
training programs and comprehensive programs for behavior change, including
individual, group and family counseling and training in social and independent
living skills. These programs emphasize self-esteem, academic enhancement,
empathy development, critical thinking and problem solving, anger management and
coping strategies, substance abuse treatment and relapse prevention. Programs
are designed to: (i) increase self-control and effective problem-solving; (ii)
teach youths how to understand and consider other people's values, behaviors and
feelings; (iii) show youths how to recognize the effects of their behavior on
other people and why others respond to them as they do; and (iv) enable youths
to develop alternative, responsible, interpersonal behaviors. Although certain
youths in the Company's programs require both drug therapy and treatment for use
or abuse of drugs, the Company's goal is to minimize or eliminate the use of
medication whenever possible. When appropriate, medication is prescribed by
independent physicians and may be administered by Company personnel. Management
believes that the breadth of the Company's services and its history of working
with youths make the Company attractive to local, state and federal governmental
agencies.
OPERATIONS
Disabilities Services
Disabilities services operations are under the direct supervision of
the Company's Executive Vice President, Operations, Division for Persons with
Disabilities, who is responsible for six geographic regions, each headed by a
Regional Vice President, and for ABI operations nationally, headed by a Senior
Vice President. Each Vice President supervises the regional directors and/or
administrators responsible for the various MR/DD or ABI facilities and programs
under his or her control. In general, each cluster of group homes, supported
living program or larger facility is overseen by an administrator. In addition,
a program manager supervises a comprehensive team 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
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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 has the most frequent contact with,
and generally are recruited from, the community in which the facility or program
is located. These staff members are screened to meet certain qualification
requirements and receive orientation, training and continuing education.
The provision of disabilities services is subject to complex and
substantial state and federal regulation and the Company strives to ensure that
its internal controls and reporting systems comply with Medicaid reimbursement
and other program requirements, policies and guidelines. The Company designs and
implements programs, often in coordination with appropriate state agencies, in
order to assist the state in meeting its objectives and to facilitate the
efficient delivery of quality services. Management and personnel resources are
devoted to keeping abreast of new laws, regulations and policy directives
affecting the quality and reimbursement of the services provided. In addition,
the Company believes it has developed expertise in accurately monitoring
eligibility for Medicaid and other benefits and in processing reimbursement
claims.
The Company has developed a model of ongoing program evaluation and
quality management which the Company believes provides critical feedback to
measure the quality of its various operations. Each operation conducts its own
quality assurance program, the Best in Class (BIC) performance benchmarking
system, which is reviewed by the responsible Regional Vice President. BIC
performance results are reviewed on a quarterly basis with the Executive Vice
President, Operations, Division for Persons with Disabilities. Management and
operational goals and objectives are established for each facility and program
as part of an annual budget and strategic planning process. A weekly statistical
reporting system and quarterly statement of progress provide management with
relevant and timely information on the operations of each facility. Survey
results from governmental agencies for each operation are recorded in a database
and quarterly summary reports are reviewed by senior management. The Company
believes the BIC system is a vital management tool to evaluate the quality of
its programs and has been useful as a marketing tool to promote the Company's
programs, since it provides more meaningful and significant data than is usually
provided by routine monitoring by governmental agencies. All disabilities
services senior staff participate in a performance-based management system which
evaluates individual performance based on critical job function outcomes.
Job Corps Program
Job Corps centers are under the direct supervision of the President,
Job Corps Operations, who supervises three operational vice presidents who in
turn supervise the center directors responsible for the various centers. The
Company's Job Corps centers are operated under contract with the DOL which
provides the physical plant and equipment. The Company is directly responsible
for the management, staffing and administration of Job Corps centers. A typical
Res-Care Job Corps operation consists of a three-tier management staff
structure. The center director has the overall responsibility for day-to-day
management at each facility and is assisted by several senior staff managers who
typically are responsible for academics, vocational training, social skills,
safety and security, health services and behavior management. Managers are
assisted by front line supervisors who have specific responsibilities for such
areas as counseling, food services, maintenance, finance, residential life,
recreation, property, purchasing, human resources and transportation.
An outcome performance measurement report for each center, issued by
the DOL monthly, measures two primary categories of performance: (i) education
results, as measured by GED/HSD achievement and/or vocational completion and
attainment of employability skills; and (ii) placement of graduates. These are
then combined into an overall performance rating. Centers are ranked as either
"Not Meeting Expectations," "Meeting Expectations" or "Exceeding Expectations."
Performance standards reports are reviewed by center directors, Vice Presidents,
and the President, Job Corps Operations, and acted upon as appropriate to
address areas where improvement is needed.
Other Youth Services Programs
Other youth services operations are under the direct supervision of the
Company's Executive Vice President - Operations for Youthtrack and AYS, who
supervises the Vice Presidents of Youthtrack and AYS. They in turn supervise the
Executive Directors and Administrators responsible for the various facilities or
programs.
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The Company's youth programs are designed to provide consistent, high
quality and cost-effective education and treatment to address the needs of the
various segments of the special needs, at-risk and troubled youth populations.
The Company generally is responsible for the overall operation of its facilities
and programs, including management, general administration, staff recruitment,
security and supervision of the youths in their programs.
The Company has assembled an experienced team of managers, counselors
and staff that blends program expertise with business and financial experience.
The Company believes that its recruitment, selection and training programs
generate sufficient personnel capable of implementing the Company's systems and
procedures as it expands this segment of its business. The Company's staff
includes teachers, counselors, mental health professionals, juvenile justice
administrators and licensed clinicians.
The Company's internal policies require its teachers, counselors,
security and other direct service staff to complete extensive training. Core
training includes courses in the major Company program components, such as
behavior change education, positive peer culture, nonviolent crisis
intervention, discipline and limit-setting, anger management and social skills
training. Continuing education also is required for all staff. The Company
demonstrates its commitment to its employees' professional development by
offering classes and training programs, as well as tuition reimbursement
benefits. The Company has also implemented its BIC system at the majority of its
youth services programs.
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 staff and
youths within a facility, as well as the neighboring community. Thus, the
Company's programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
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FACILITIES AND PROGRAMS
The following tables set forth information as of December 31, 1999
regarding the Company's disabilities services and youth services operations,
respectively:
DIVISION FOR PERSONS WITH DISABILITIES
Contract Initial Operation
Location Types of Programs Capacity (1) in Location
-------- ------------------ ------------ ------------
Alabama............................. Group Homes 56 1998
Arizona............................. Periodic Services, Supported Living 980 1998
California.......................... Larger Facilities, Group Homes 953 1995
Colorado............................ Supported Living, Group Homes 244 1992
Delaware............................ Group Homes 15 1999
Florida............................. Larger Facilities, Group Homes, ABI, 396 1983
Supported Living
Georgia............................. Supported Living, Periodic Services, 1,696 1997
Group Homes
Illinois............................ Larger Facilities, ABI, Group Homes 112 1995
Indiana............................. Larger Facilities, Group Homes, 1,408 1983
Supported Living
Iowa................................ ABI 16 1998
Kansas.............................. Supported Living, Day Programs, 415 1995
Group Homes
Kentucky............................ Larger Facilities, Group Homes, Supported 644 1978
Living, Day Programs
Louisiana........................... Group Homes, Supported Living 478 1984
Maryland............................ Group Homes 21 1999
Missouri............................ Supported Living, ABI, Group Homes 462 1997
Nebraska............................ Group Homes, Supported Living, Day 338 1992
Program, Periodic Services
Nevada.............................. Group Homes 247 1999
New Jersey.......................... Supported Living, Group Homes 99 1997
New Mexico.......................... Supported Living, Group Homes 351 1994
North Carolina...................... Periodic Services, Supported Living, 2,026 1997
Group Homes
Ohio................................ Larger Facility, Group Homes, Supported 1,108 1995
Living
Oklahoma............................ Supported Living 221 1995
Ontario, Canada..................... ABI 42 1999
Pennsylvania........................ Supported Living 24 1997
South Carolina...................... Periodic Services 130 1998
Tennessee........................... Group Homes, Supported Living 395 1993
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FACILITIES AND PROGRAMS (CONTINUED)
DIVISION FOR PERSONS WITH DISABILITIES
Contract Initial Operation
Location Types of Programs Capacity (1) in Location
-------- ------------------ ------------ ------------
Texas............................... Larger Facilities, Group Homes, Supported 2,077 1993
Living, Day Programs, ABI
Washington.......................... Supported Living 67 1998
Washington, D.C..................... Group Homes 239 1999
West Virginia....................... Group Homes, Supported Living 959 1987
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Total............................... 16,219
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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
generally in 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
Location Types of Programs Capacity (1) in Location
-------- ----------------- ------------ -----------
Arizona....................... Job Corps (2 centers) 1,128 1997
Residential, Alternative School
California.................... Job Corps 850 1999
Colorado...................... Residential, Non-Residential, Secure, 634 1996
Day Treatment, Apartment Living
Florida....................... Job Corps, Residential 566 1983
Georgia....................... Residential, Alternative School 75 1997
Indiana....................... Foster Care, Residential 106 1997
Kentucky...................... Residential, Alternative School, 2,956 1996
Foster Care, Job Corps
Maryland...................... Residential 11 1997
Mississippi................... Alternative School 65 1998
New Jersey.................... Job Corps 530 1995
New York...................... Job Corps 305 1986
Ohio.......................... Foster Care 49 1997
Oklahoma...................... Job Corps 550 1997
Pennsylvania.................. Job Corps 800 1997
Puerto Rico................... Job Corps (3 centers) 795 1990
Tennessee..................... Alternative School, Shelter, 104 1997
Wilderness Program
Utah.......................... Residential 32 1998
Virginia...................... Job Corps (2 centers) 550 1997
Washington, DC................ Residential 45 1999
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Total.................... 10,151
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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
generally in 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 to
comply with requests and audits of information pertaining to the services
rendered. Provider agreements can be terminated at any time for non-compliance
with the federal, state or local regulations. Reimbursement methods vary by
state and are typically based on a flat-rate or cost-based reimbursement system
on a per person, per diem basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements."
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Contracts for the Company's youth services programs, excluding Job
Corps, are regulated by state and local governmental entities. Contracts
generally have one-year terms, subject to annual renewal, or cover individuals
for specific terms. The contract rate is also accepted as payment in full for
services rendered.
Management Contracts. Management contracts with states, local agencies
or other providers of record typically call for the Company to manage the
day-to-day operations of facilities or programs. Many of these contracts are
short-term (generally one year in duration) and are subject to renewal or
re-negotiation provided that program standards and regulatory requirements are
met. Depending upon the state's reimbursement policies and practices, management
contracts provide fees to the Company computed on the basis of a fixed fee per
individual (which may include some form of incentive payment), a percentage of
operating expenses (cost-plus contracts), a percentage of revenue or an overall
fixed fee paid regardless of occupancy. Historically, the Company's Medicaid
provider contracts and management contracts have been renewed or satisfactorily
renegotiated. The Company believes its experience in this regard is consistent
with the overall experience of other operators in the disabilities services
business.
Job Corps Contracts. Contracts for Job Corps centers are awarded
pursuant to a rigorous bid process. After successfully bidding, the Company
operates the Job Corps centers under comprehensive contracts negotiated with the
DOL. Under Job Corps contracts, the Company is reimbursed for all facility and
program costs related to Job Corps center operations and allowable indirect
costs for general and administrative expenses, plus a predetermined management
fee, normally a fixed percentage of facility and program expense.
The contracts cover a five-year period, consisting of an initial
two-year term with three one-year renewal terms exercisable at the option of the
DOL. The contracts specify that the decision to exercise an option is based on
an assessment of: (i) the performance of the center as compared to its budget;
(ii) compliance with federal, state and local regulations; (iii) qualitative
assessments of center life, education, outreach efforts and placement record;
and (iv) the overall rating received by the center. Shortly prior to the
expiration of the five-year contract period (or earlier if the DOL elects not to
exercise a renewal term), the contract is re-bid, regardless of the operator's
performance. The current operator may participate in the re-bidding process. In
situations where the DOL elects not to exercise a renewal term, however, it is
unlikely that the current operator will be successful in the re-bidding process.
It is the Company's experience that there is usually an inverse correlation
between the performance ratings of the current operator and the number of
competitors who will participate in the re-bidding process, with relatively
fewer competitors expected where such performance ratings are high.
The Company operates 14 Job Corps centers under contract with the DOL
in South Bronx, New York, New York; Miami, Florida; Edison, New Jersey; Puerto
Rico (3); Pittsburgh, Pennsylvania; Monroe, Virginia; Guthrie, Oklahoma; Phoenix
and Tucson, Arizona; Marion, Virginia; Morganfield, Kentucky and San Francisco,
California. Of the five-year periods covered by the Company's Job Corps
contracts, seven expire in 2000, one in 2001, one in 2002, two in 2003 and three
in 2004. The Company intends to selectively pursue additional centers through
the Request for Proposals (RFP) process.
The Company also provides certain administrative, counseling,
education, vocational and other support services for three Job Corps centers
located in Kentucky, North Carolina and West Virginia under a five-year contract
with the Department of Interior expiring in 2003.
MARKETING AND DEVELOPMENT
The primary focus of the Company's marketing activities is identifying
other providers who may consider an acquisition or a management contract
arrangement, and contacting state and local governments and governmental
agencies responsible for the provision of the types of disabilities services and
youth services offered by the Company.
The Executive Vice President responsible for the Company's development
department directs the Company's marketing efforts for disabilities services and
youth services, excepting Job Corps. Responsibility for marketing activities
also extends to other officers of the Company and its subsidiaries including the
Executive Vice President, Operations, Division for Persons with Disabilities,
the Executive Vice President, Operations for
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Youthtrack and AYS, the President, Job Corps Operations, and the various
regional or unit operational personnel. Marketing activities are reviewed on a
regular basis by senior management.
In its pursuit of government contracts, the Company contacts
governments and governmental agencies in geographical areas in which it operates
and in others in which it has identified expansion potential. Contacts are made
and maintained by both regional operations personnel and corporate development
personnel, augmented as appropriate by other senior management. The Company
targets new areas based largely on its assessment of the need for its services,
the system of reimbursement, the receptivity to out-of-state and proprietary
operators, expected changes in the service delivery system (i.e., privatization
or downsizing), the labor climate and existing competition.
The Company also seeks to identify service needs or possible changes in
the service delivery or reimbursement system of governmental entities that may
be driven by changes in administrative philosophy, budgetary considerations,
pressure or legal actions brought by advocacy groups. As needs or possible
changes are identified, the Company attempts to work with and provide input to
the responsible governmental personnel and to work with provider associations
and consumer advocacy groups to this end. If an RFP results from this process,
the Company then determines whether and on what terms it will respond and
participate in the competitive process.
With regard to identifying other providers who may be acquisition or
management contract candidates, the Company attempts to establish relationships
with providers through presentations at national and local conferences,
membership in national and local provider associations, direct contact by mail,
telephone or personal visits and follow up with information packets including
video presentations.
In some cases, the Company may be contacted directly and requested to
submit proposals or become a provider in order to provide services to address
specific problems. These may include an emergency takeover of a troubled
operation or the need to develop a large number of community placements within a
certain time period.
REFERRAL SOURCES
The Company receives substantially all of its MR/DD clients from third
party referrals. Generally, family members of persons with MR/DD are made aware
of available residential or alternative living arrangements through a state or
local case management system. Case management systems are operated by
governmental or private agencies. The Company's ABI services receive referrals
from doctors, hospitals, private and workers' compensation insurers and
attorneys. In either case, where it is determined that some form of MR/DD or ABI
service is appropriate, a referral of one or more providers of such services is
then made to family members or other interested parties. The Company generally
receives referrals or placements of individuals to its AYS and Youthtrack
programs through state or local agencies or entities responsible for such
services. Individuals are recruited to the Company's Job Corps programs largely
through private contractors. The Company also has contracts directly with the
DOL to recruit students to its own centers. The Company's reputation and prior
experience with agency staff, case workers and others in positions to make
referrals to the Company are important for building and maintaining census in
the Company's operations.
COMPETITION
The provision of disabilities services and youth services is subject to
a number of competitive factors, including range and quality of services
provided, cost-effectiveness, reporting and regulatory expertise, reputation in
the community, and the location and appearance of facilities and programs. These
markets are highly fragmented, with no single company or entity holding a
dominant market share. The Company competes with other for-profit companies,
not-for-profit entities and governmental agencies.
With regard to disabilities services, individual states remain a major
provider of MR/DD services, primarily through the operation of large
institutions. Not-for-profit organizations are also active in all states and
range from small agencies serving a limited area with specific programs to
multi-state organizations. Many of these organizations are affiliated with
advocacy and sponsoring groups such as community mental health and mental
retardation centers and religious organizations.
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The other youth services business in which the Company engages is one
that other entities may easily enter without substantial capital investment or
experience in management of education or treatment facilities. In addition,
certain not-for-profit entities may offer education and treatment programs at a
lower cost than the Company due in part to government subsidies, foundation
grants, tax deductible contributions or other financial resources not available
to for-profit companies.
Currently, only a limited number of companies actively seek Job Corps
contracts because the bidding process is highly specialized and technical and
requires a significant investment of personnel and other resources over a period
of several months. Approximately one-half of the privately-operated centers are
operated by the three largest operators. Competition for Job Corps contracts has
increased as the DOL has made efforts to encourage new participants in the
program, particularly minority-owned businesses.
Certain proprietary competitors operate in multiple jurisdictions and
may be well capitalized. The Company also competes in some markets with smaller
local companies that may have a better understanding of the local conditions and
may be better able to gain political and public acceptance. Such competition may
adversely affect the Company's ability to obtain new contracts and complete
acquisitions on favorable terms. The Company faces significant competition from
all of these providers in the states in which it now operates and expects to
face similar competition in any state that it may enter in the future.
Professional staff retention and development is a critical factor in
the successful operation of the Company's business. The competition for talented
professional personnel, such as therapists and QMRPs, is intense. The Company
typically utilizes a standard professional service agreement for provision of
services by certain professional personnel, which is generally terminable on 30
or 60-day notice. The demands of providing the requisite quality of service to
persons with special needs contribute to a high turnover rate of direct service
staff. Consequently, a high priority is placed on recruiting, training and
retaining competent and caring personnel. In some tight labor markets, the
Company has experienced difficulty in hiring direct service staff. This is
expected to result in higher labor costs in certain operating units of the
Company.
GOVERNMENT REGULATION AND REIMBURSEMENT
The operations of the Company are subject to compliance with various
federal, state and local statutes and regulations. Compliance with state
licensing requirements is a prerequisite for participation in
government-sponsored health care assistance programs, such as Medicaid. The
following sets forth in greater detail certain regulatory considerations
applicable to the Company:
Funding Levels. Federal and state funding for the Company's
disabilities services business is subject to statutory and regulatory changes,
administrative rulings, interpretations of policy, intermediary determinations
and governmental funding restrictions, all of which may materially increase or
decrease program reimbursement. Congress has historically attempted to curb the
growth of federal funding of such programs, including limitations on payments to
facilities under the Medicaid program. Although states in general have
historically increased rates to compensate for inflationary factors, some have
curtailed funding due to state budget deficiencies or other reasons. In such
instances, providers acting through their state health care trade associations,
may attempt to negotiate or employ legal action in order to reach a compromise
settlement. Future revenues may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed or under
consideration in states where the Company operates.
Reimbursement Requirements. To qualify for reimbursement under Medicaid
programs, facilities and programs are subject to various requirements of
participation and other requirements imposed by federal and state authorities.
In order to maintain a Medicaid or state contract, certain statutory and
regulatory requirements must be met. These participation requirements relate to
client rights, quality of services, physical plant and administration. Long-term
providers, like the Company, are subject to periodic unannounced inspection by
state authorities, often under contract with the appropriate federal agency, to
ensure compliance with the requirements of participation in the Medicaid or
state program.
Licensure. In addition to the requirements to be met by the Company for
participation in the Medicaid program, the Company's facilities and programs are
usually subject to annual licensing and other regulatory requirements of state
and local authorities. These requirements relate to the condition of the
facilities, the quality
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and adequacy of personnel and the quality of services. State licensing and other
regulatory requirements vary from jurisdiction to jurisdiction and are subject
to change.
Regulatory Enforcement. From time to time, the Company receives notices
from regulatory inspectors that, in their opinion, there are deficiencies for
failure to comply with various regulatory requirements. The Company reviews such
notices and takes corrective action as appropriate. In most cases, the Company
and the reviewing agency agree upon the steps to be taken to bring the facility
or program into compliance with regulatory requirements, and from time to time,
the Company or one or more of its subsidiaries may enter into agreements with
regulatory agencies requiring the Company to take certain corrective action in
order to maintain licensure. Serious deficiencies, or failure to comply with any
regulatory agreement, may result in decertification or delicensure actions by
the Health Care Financing Administration or state regulatory agencies, as
appropriate.
Restrictions on Acquisitions and Additions. All states in which the
Company currently operates have adopted laws or regulations which generally
require that a state agency approve the Company as provider, and many require a
determination that a need exists prior to the addition of beds or services.
Cross Disqualifications and Delicensure. In certain circumstances,
conviction of abusive or fraudulent behavior with respect to one facility or
program may subject other facilities and programs under common control or
ownership to disqualification from participation in the Medicaid program.
Executive Order 12549 prohibits any corporation or facility from participating
in federal contracts if it or its principals (including but not limited to
officers, directors, owners and key employees) have been debarred, suspended, or
declared ineligible, or have been voluntarily excluded from participating in
federal contracts. In addition, some state regulators provide that all
facilities licensed with a state under common ownership or control are subject
to delicensure if any one or more of such facilities are delicensed.
Regulation of Certain Transactions. The Social Security Act, as amended
by the Health Insurance Portability and Accountability Act of 1996 (the "Health
Insurance Act"), provides for the mandatory exclusion of providers and related
persons from participation in the Medicaid program if the individual or entity
has been convicted of a criminal offense related to the delivery of an item or
service under the Medicaid program or relating to neglect or abuse of residents.
Further, individuals or entities may be, but are not required to be, excluded
from the Medicaid program under certain circumstances including, but not limited
to, the following: convictions relating to fraud; obstruction of an
investigation of a controlled substance; license revocation or suspension;
exclusion or suspension from a state or federal health care program; filing
claims for excessive charges or unnecessary services or failure to furnish
medically necessary services; or ownership or control by an individual who has
been excluded from the Medicaid program, against whom a civil monetary penalty
related to the Medicaid program has been assessed, or who has been convicted of
a crime described in this paragraph. The illegal remuneration provisions of the
Social Security Act make it a felony to solicit, receive, offer to pay, or pay
any kickback, bribe, or rebate in return for referring a resident for any item
or service, or in return for purchasing, leasing or ordering any good, service
or item, for which payment may be made under the Medicaid program. Other
provisions in the Health Insurance Act proscribe false statements in billing and
in meeting reporting requirements and in representations made with respect to
the conditions or operations of facilities. A violation of the illegal
remuneration statute is a felony and may result in the imposition of criminal
penalties, including imprisonment for up to five years and/or a fine of up to
$25,000. Further, a civil action to exclude a provider from the Medicaid program
could occur. There are also other civil and criminal statutes applicable to the
industry, such as those governing false billings and anti-supplementation
restrictions and the new health care offenses contained in the Health Insurance
Act, including health care fraud, theft or embezzlement, false statements and
obstruction of criminal investigation of health care offenses. Criminal
sanctions for these new health care criminal offenses can be severe. Sanctions
for health care fraud offense, for example, include imprisonment for up to 20
years. The agencies administering the Medicaid program have increased their
criminal and civil enforcement activity in the prevention of program fraud and
abuse, including the payment of illegal remuneration.
Environmental Laws. Certain federal and state laws govern the handling
and disposal of medical, infectious, and hazardous waste. Failure to comply with
those laws or the regulations promulgated under them could subject an entity
covered by these laws to fines, criminal penalties, and other enforcement
actions.
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
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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 and general liability insurance on
professionals and other staff employed in each of its locations in addition to
coverage for the customary risks inherent in the operation of business in
general. While the Company believes its insurance policies to be adequate in
amount and coverage for its current operations, there can be no assurance that
coverage will continue to be available in adequate amounts or at a reasonable
cost.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 29,000
employees. As of that date, the Company was subject to collective bargaining
agreements with approximately 1,400 of its employees. The Company has not
experienced any work stoppages and believes it has good relations with its
employees.
ITEM 2. PROPERTIES
As of December 31, 1999, the Company owned approximately 350 properties
and operated facilities and programs at approximately 2,000 leased properties.
All other facilities and programs are operated under management contracts. The
Company owns its primary corporate office building which is located in
Louisville, Kentucky, and has an aggregate of 45,000 square feet of office
space. See "Business - Facilities and Programs."
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company (or a provider with whom the Company has
a management agreement), becomes a party to legal and/or administrative
proceedings involving state program administrators and others that, in the event
of unfavorable outcomes, may adversely affect revenues and period to period
comparisons.
Two class action lawsuits, styled Joyce Opper v. Res-Care, Inc., et.
al., and Phronesis Partners, L.P. v. James R. Fornear, et. al., were filed in
the Jefferson County, Kentucky Circuit Court in March 2000. The plaintiffs, who
claim to be stockholders of the Company, allege that the Company and four of its
directors breached fiduciary duties in connection with a buyout proposal by a
management-led group which the Company described in its February 24, 2000 press
release. The group, which included members of the Company's management and three
equity investment funds, proposed to purchase all of the Company's common stock
for $18 per share. The group subsequently withdrew its proposal before the
execution of definitive transaction agreements when the lead equity investment
fund decided not to proceed with the transaction because of its concern about
the availability of debt financing at acceptable rates in light of current
conditions in the credit markets. Representatives of management and the two
remaining investment funds have indicated to the Company their desire to
continue negotiations regarding a possible transaction. The lawsuits seek to
enjoin the named defendants from carrying out the buyout proposal and from
breaching fiduciary duties in connection with any sale or acquisition of the
Company and seek compensatory damages. The Company believes the lawsuits are
without merit and is defending these actions vigorously. The Company does not
believe the ultimate resolution of these actions will have a material adverse
effect on its consolidated financial condition, results of operations or
liquidity.
In August 1998, with the approval of the State of Indiana, the Company
relocated approximately 100 individuals from three of its larger facilities to
community-based settings. In June 1999, the owner of these facilities filed suit
against the Company in U.S. District Court, Southern District of Indiana,
alleging in connection therewith breach of contract, conversion and fraudulent
concealment. The Company, on the advice of counsel, believes that the amount of
damages being sought by the plaintiffs is approximately $21 million. Management
believes that this lawsuit is without merit and will defend it vigorously. The
Company does not believe the ultimate resolution of this matter is likely to
have a material adverse effect on its consolidated financial condition, results
of operations or liquidity.
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The Texas Attorney General, on behalf of the Texas Department of Human
Services, filed suit in the District Court of Harris County, Texas initially
seeking civil penalties of approximately $2.7 million in connection with the
operation of one group home in Texas. The complaint alleges that the Company
failed to ensure that the needs of the individuals residing in this home were
being adequately assessed and provided for, including appropriate medical care.
The Company and the Attorney General are currently engaged in settlement
discussions and mediation has been scheduled in April 2000. While the Company
cannot predict whether these discussions will resolve the matter or the terms of
any resolution, the Company does not believe that the ultimate resolution of the
matter with the State is likely to have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
In addition, the Company is a party to various other legal proceedings
arising out of the operation of its facilities and programs and arising in the
ordinary course of business. The Company believes that most of these claims are
without merit. Further, many of such claims may be covered by insurance. The
Company does not believe the results of these proceedings or claims,
individually or in the aggregate, are likely to have a material adverse effect
on its consolidated financial condition, results of operations or liquidity.
Defaults Upon Senior Securities
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the NASDAQ National Market on
December 15, 1992, under the symbol "RSCR". As of February 29, 2000, the Company
had approximately 9,000 shareholders based on the number of holders of record
and an estimate of the number of individual participants represented by security
position listings.
The following table sets forth the reported high and low sale prices for
Res-Care's common stock as reported by NASDAQ. The prices have been adjusted to
reflect the 3-for-2 stock split effective May 22, 1998.
1999 1998
---------------------------------- -------------------------------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31 26 19 1/2 25 11/16 17 1/2
June 30 23 1/2 16 26 1/2 18 1/4
September 30 24 1/2 16 1/2 20 3/16 13 1/4
December 31 17 5/8 10 3/4 25 1/4 15 1/2
The Company currently does not pay dividends and does not anticipate doing
so in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes.
Year Ended December 31
----------------------
1999 1998 1997 1996 1995
---------------------------------------------------------
FINANCIAL DATA (1): (In thousands, except per share and operating data)
Revenues ................................................. $ 834,078 $ 708,385 $ 470,966 $ 317,810 $ 257,332
Operating income (2)...................................... 38,639 52,310 32,362 20,108 15,070
Income from continuing operations......................... 9,736 22,932 15,631 10,822 8,860
Net income (3)............................................ 6,338 22,932 15,631 10,822 18,107
Basic earnings per share:
From continuing operations........................... $ 0.40 $ 0.96 $ 0.69 $ 0.54 $ 0.45
Net income........................................... 0.26 0.96 0.69 0.54 0.92
Diluted earnings per share:
From continuing operations........................... 0.39 0.90 0.68 0.52 0.43
Net income........................................... 0.25 0.90 0.68 0.52 0.89
Pro forma net earnings per share (1):
Basic................................................ 0.26 0.96 0.69 0.53 0.91
Diluted.............................................. 0.25 0.90 0.68 0.51 0.89
Working capital........................................... $ 100,529 $ 75,486 $ 106,001 $ 39,475 $ 22,599
Total assets.............................................. 523,131 493,793 344,301 190,029 126,446
Long-term obligations..................................... 285,039 251,682 150,910 63,870 35,176
Shareholders' equity...................................... 163,384 154,587 126,285 77,117 64,712
OPERATING DATA (1):
Disabilities Services:
Contract capacity (4)................................ 16,219 12,271 6,831 5,031 4,286
Persons served....................................... 15,927 11,952 6,628 4,899 4,099
Capacity utilized.................................... 98.2 % 97.4 % 97.0 % 97.4 % 95.6 %
Job Corps and Other Youth Services:
Contract capacity (4)................................ 10,151 8,572 5,455 2,670 2,500
Persons served....................................... 8,340 8,395 5,323 2,605 2,562
Capacity utilized.................................... 82.2 % 97.9 % 97.6 % 97.6 % 102.5 %
(1) In June 1999, the Company completed a merger with PeopleServe, Inc. and
in January 1997, the Company acquired the partnership interests in
Premier Rehabilitation Centers. Both transactions were accounted for as
poolings-of-interests. Accordingly, the Company's financial statements
have been restated for all periods presented to include the financial
condition and results of operations of PeopleServe and Premier. Pro
forma amounts have been presented to reflect the tax effect of the
Premier partnership interests in prior years. Operating data has not
been restated to reflect the operations of PeopleServe and Premier. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(2) Operating income for 1999 includes an additional provision for doubtful
accounts of $8.0 million ($4.6 million net of tax, or $0.19 per diluted
share). Operating income for 1999 also includes the merger-related
charge of $20.5 million ($13.7 million net of tax or $0.55 per share)
recorded in connection with the PeopleServe merger.
(3) Net income for 1999 includes a charge of $3,932 ($0.16 per basic and
diluted share) for the cumulative effect of the adoption of Statement
of Position 98-5, Reporting on the Costs of Start-up Activities,
effective January 1, 1999. Net income also includes income from a
discontinued operation of $428 in 1995 and gains recognized on the sale
of the discontinued operation of $534 and $8,819 in 1999 and 1995,
respectively (aggregate of $0.02 per basic and diluted share in 1999
and $0.47 and $0.46 per basic and diluted share, respectively, in
1995).
(4) Contract capacity includes, in the case of licensed facilities, the
number of persons covered by the applicable license or permit and, in
all other cases, the number of persons covered by the applicable
contract. Contract capacity does not include capacity for day or
respite programs.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Res-Care, Inc. (ResCare or the Company) receives revenues primarily
from the delivery of residential, training, education and support services to
populations with special needs. The Company has three reportable operating
segments: (i) disabilities services; (ii) Job Corps program; and (iii) other
youth services programs. Management's discussion and analysis of each segment
follows. Further information regarding each of these segments, including the
required disclosure of certain segment financial information, is included in
Note 9 of Notes to Consolidated Financial Statements of the Company. Such
disclosures are incorporated herein by reference and should be read in
conjunction with this Item.
Revenues for the Company's disabilities services operations are derived
primarily from state government agencies under the Medicaid reimbursement system
and from management contracts with private operators, generally not-for-profit
providers, who contract with state government agencies and are also reimbursed
under the Medicaid system. Reimbursement methods vary by state and are typically
based on a flat rate or cost-based reimbursement system on a per person, per
diem basis. Generally, rates are adjusted annually based primarily upon
historical costs experienced by the Company and by other service providers, and
on inflation. At facilities and programs where it is the provider of record, the
Company is directly reimbursed under state Medicaid programs for services it
provides and such reimbursement is affected by occupancy levels. At most
facilities and programs that the Company operates pursuant to management
contracts, the management fee is negotiated based upon the reimbursement amount
expected to be earned by the provider of record, which is affected by occupancy
levels. Under certain management contracts, the Company is paid a fixed fee
regardless of occupancy levels. See Note 1 of Notes to Consolidated Financial
Statements for a further discussion of the Company's revenue recognition
policies with respect to Medicaid contracts.
The Company operates 14 vocational training programs under the federal
Job Corps program administered by the United States Department of Labor (DOL).
Under the Job Corps program, the Company is reimbursed for direct costs related
to Job Corps center operations and allowable indirect costs for general and
administrative expenses, plus a predetermined management fee, normally a fixed
percentage of facility and program expenses. All of such amounts are reflected
as revenue, and all such direct costs are reflected as facility and program
expenses. Final determination of amounts due under Job Corps contracts is
subject to audit and review by the DOL, and renewals and extension of Job Corps
contracts are based in part on performance reviews.
In 1996, the Company began operating other programs for at-risk and
troubled youths through its Youthtrack (Youthtrack) and Alternative Youth
Services (AYS) subsidiaries. Most of the youth services programs are funded
directly by federal, state and local government agencies including school
systems. Under these contracts, the Company is typically reimbursed based on
fixed contract amounts, flat rates or cost-based rates.
Expenses incurred under federal, state and local government agency
contracts for disabilities services, Job Corps and other youth services, as well
as management contracts with providers of record for such agencies, are subject
to examination by agencies administering the contracts and services. Any
resulting adjustments would be recorded as contractual adjustments to revenues
in the period in which the adjustment is made. See Note 1 of Notes to
Consolidated Financial Statements.
The Company's revenues and net income may fluctuate from quarter to
quarter, in part because annual Medicaid rate adjustments may be announced by
the various states inconsistently and are usually retroactive to the beginning
of the particular state's fiscal reporting period. The Company expects that
future adjustments in reimbursement rates in most states will consist primarily
of cost-of-living adjustments. However, in some cases states have revised their
rate-setting methodologies, which has resulted in rate decreases as well as rate
increases. Current initiatives at the federal or state level may materially
change the Medicaid system as it now exists. Retroactively calculated
contractual adjustments are estimated and accrued in the periods the related
services are rendered and recorded as adjustments in future periods as final
adjustments are received. Because the cumulative effect of rate adjustments may
differ from previously estimated amounts, net income as a percentage of revenues
for a period in which an adjustment occurs may not be indicative of expected
results in succeeding periods. Future revenues 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
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initiating managed care plans for persons currently in Medicaid programs. At
this time, the Company cannot determine the impact of such changes, or the
effect of various federal initiatives that have been proposed.
RECENT DEVELOPMENTS
In February 2000, the Company announced that it received a proposal,
which was subsequently withdrawn, for a management-led group to acquire all the
Company's outstanding shares of common stock through a merger at a price of $18
per share in cash. The proposal was made by a group, which included members of
the Company's management and three equity investment funds. Prior to execution
of the definitive agreements for the transaction, the group withdrew its
proposal when the lead equity investment fund decided not to proceed with the
transaction because of its concern about the availability of debt financing at
acceptable rates in light of current conditions in the credit markets.
Representatives of management and the two remaining investment funds have
indicated to the Company their desire to continue negotiations regarding a
possible transaction. A special committee of the Board of Directors was formed
to negotiate and evaluate any possible transaction. The special committee is
being advised by J.C. Bradford & Co. There can be no assurance that discussions
regarding a possible transaction will continue, that any new offer will be made
to the Company, or that any transaction will ultimately be consummated.
RESULTS OF OPERATIONS
On June 28, 1999, ResCare completed a merger with PeopleServe, Inc.
(PeopleServe), which primarily operates facilities and programs for persons with
mental retardation and other developmental disabilities. PeopleServe provides
services to approximately 4,300 persons. The merger has been accounted for as a
pooling-of-interests. Accordingly, the Company's consolidated financial
statements and the financial information contained in this section for all
periods presented have been restated to include the combined financial results
of ResCare and PeopleServe.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
During 1999, exclusive of the PeopleServe merger, the Company completed
10 acquisitions and added four new contracts representing programs and
facilities serving approximately 2,500 individuals with special needs. In these
transactions, the Company paid total consideration of approximately $12.6
million (generally funded with advances under the Company's credit facility).
Total revenues increased by 18%, or $125.7 million, to $834.1 million
in 1999 compared to $708.4 million in 1998. Of the increase, 67% resulted from
increased disabilities services revenues. Facility and program expenses
increased 19%, or $115.8 million, to $726.1 million in 1999 compared to 1998.
These expenses reflected additional personnel, and other costs associated with
new facilities and programs added during the year, as well as payroll and other
cost increases. Facility and program expenses increased as a percentage of total
revenues to 87.1% from 86.1% in 1998. This increase was due to the additional
provision for losses on doubtful accounts receivable which is further described
below, offset by rate increases and improved operating efficiencies. Operating
results of each segment are discussed below.
Disabilities Services
Disabilities services revenues increased by 15%, or $83.9 million, to
$654.6 million in 1999 compared to 1998. Revenues increased primarily from the
effects of a full year of operating results from programs added in 1998, as well
as the 1999 acquisitions described above. Revenues also increased due to certain
cost-of-living and other rate adjustments. Disabilities services facility and
program expenses increased 16%, or $77.3 million, to $566.0 million in 1999
compared to 1998. During 1999, the Company provided an additional allowance for
doubtful accounts of approximately $8 million ($0.19 per share after tax). In
the fourth quarter of 1999 and in early 2000, management had discussions with
various state agencies and obtained clarification regarding certain aspects of
state billing procedures. As a result of these discussions and the additional
information obtained, management revised its previous estimates regarding the
collectibility of certain older accounts. The Company is in the process of
implementing a new comprehensive accounts receivable system which will replace
its existing systems. Management believes this will enable it to more
effectively track and manage its accounts receivable. Also during 1999,
operating results for the disabilities services division were negatively
affected by an incremental charge of approximately $2.3 million recorded as a
result of higher claims incurred as the Company transitioned from its
self-insured employee medical plan to a new plan, effective January 1, 2000 with
a fixed level
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of self-insurance exposure. As a percentage of disabilities services revenues,
disabilities services facility and program expenses increased to 86.5% in 1999
from 85.7% in 1998. This increase was due primarily to the effect of the
additional provision for losses on doubtful accounts receivable described above.
Job Corps Program
Job Corps revenues increased by 28%, or $27.4 million, to $126.8
million in 1999 compared to 1998, resulting primarily from the addition of the
Treasure Island Job Corps Center in early 1999. Segment profit as a percentage
of revenues decreased from 10.8% in 1998 to 9.8% in 1999 due principally to
increased costs associated with the start-up of the Treasure Island Job Corps
Center.
Other Youth Services Programs (Youthtrack and AYS)
Other youth services revenues increased by 38%, or $14.4 million, to
$52.7 million in 1999 compared to 1998, resulting primarily from increased
occupancy at its AYS operations and a full year of operations for a Youthtrack
operation acquired in the fourth quarter of 1998. Segment profit declined from
10.4% in 1998 to 10.1% in 1999 due in part to costs associated with the start-up
of the Villalba Juvenile Treatment Facility in Puerto Rico which opened in
January 2000.
Corporate and Other Expenses
Corporate general and administrative expenses increased 0.5%, or
$136,000, to $27.7 million in 1999 compared to 1998. As a percentage of total
net revenues, such expenses decreased to 3.3% in 1999 compared to 3.9% in 1998.
This decrease primarily reflected savings resulting from the PeopleServe merger.
In connection with the merger with PeopleServe, ResCare recorded a
pretax merger-related charge of $20.5 million in 1999. This consisted primarily
of $7.3 million in severance and employee-related costs (principally related to
the elimination of PeopleServe's corporate offices and various other
administrative costs), $2.8 million in lease termination costs, $3.0 million in
information system conversion and integration costs and $4.5 million in
transaction costs, including investment banking, legal, accounting and other
professional fees and transaction costs. Through December 31, 1999,
approximately $18.1 million of the charge had been utilized through $13.4
million in cash payments (principally severance and transaction costs) and $4.7
million in asset write-downs (relating principally to the discontinued
PeopleServe information systems). The Company believes the remaining balance of
accrued merger-related costs of $2.4 million at December 31, 1999 represents its
remaining cash obligations.
Interest expense increased $4.4 million to $19.9 million in 1999
compared to 1998. The increase resulted from increased utilization of the credit
facility for acquisitions and working capital.
Income taxes decreased 34%, or $5.3 million, to $10.2 million in 1999
compared to 1998, and reflect effective tax rates of 51.0% and 40.3% in 1999 and
1998, respectively. The increase in the effective tax rate is due primarily to
nondeductible amortization of goodwill recorded in the PeopleServe merger and
nondeductible portions of the merger-related charge.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During 1998, the Company completed 25 acquisitions and added seven new
contracts representing programs and facilities serving approximately 8,100
individuals with special needs. In these transactions, the Company paid total
consideration of approximately $133 million (generally funded with advances
under the Company's credit facility) and issued $22.0 million principal amount
of 5.9% convertible subordinated notes in the acquisition of Normal Life, Inc.
As a result of these transactions and a full year of operations for
1997 acquisitions, total revenues in 1998 increased 50%, or $237.4 million, to
$708.4 million compared to $471.0 million in 1997. Net income increased 47% over
1997.
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Disabilities Services
Disabilities services revenues increased 40%, or $162.9 million, to
$570.6 million in 1998 compared to $407.7 million in 1997. Revenues increased
primarily as a result of the acquisition of Normal Life in March 1998, in
addition to the other 1998 disabilities services acquisitions, as well as the
effects of a full year of operating results from programs added during 1997. As
a percentage of revenues, disabilities services facility and program expenses
decreased from 86.5% in 1997 to 85.7% in 1998. Overall segment profit increased
43% over 1997 due principally to the volume and efficiencies achieved through
the 1998 acquisitions. The increased profitability was offset by an increase in
depreciation and amortization expense of 81%, or $6.8 million, due to the
acquisition of property, equipment and intangible assets during the year.
Job Corps Program
Job Corps revenues in 1998 increased 114%, or $53.1 million, to $99.5
million compared to $46.4 million in 1997. Additionally, segment profit
increased 123%, or $5.9 million, from 1997 to 1998. The increases in both
revenues and profitability resulted primarily from the acquisition of five Job
Corps centers from Teledyne Economic Development in October 1997 and the
addition of the contract to manage the Earle C. Clements Job Corps Center
commencing in the second quarter of 1998.
Other Youth Services Programs (Youthtrack and AYS)
Other youth services revenues in 1998 increased 127%, or $21.4 million,
to $38.3 million compared to $16.9 million in 1997. Revenues increased primarily
as a result of the effects of a full year of operating results from programs
added during 1997, as well as acquisitions during 1998. Segment profit increased
147% from $1.6 million in 1997 to $4.0 million in 1998 also as a result of the
acquisitions and improvements realized in operations started in 1997. The
increased profitability was offset by an increase in depreciation and
amortization expense of 166%, or $800,000, due to the acquisition of property,
equipment and intangible assets during the year.
Corporate Expenses
Corporate general and administrative expenses increased 38%, or $7.5
million, in 1998 compared to 1997. Payroll and payroll-related expenses
represented the majority of the increase due primarily to the addition of
support staff and increases in staff salaries. Corporate general and
administrative expenses in 1998 decreased as a percentage of total net revenues
to 3.9% from 4.3% in 1997.
Interest expense in 1998 increased $9.0 million to $15.6 million
compared to $6.6 million for 1997. The increase resulted primarily from interest
on the convertible subordinated notes issued in November and December 1997 (in a
financing) and March 1998 (in an acquisition) as well as borrowings under the
Company's credit facilities. Interest income in 1998 increased $700,000 to $1.7
million from $1.0 million for 1997. This increase was due primarily to interest
earned on the investment of proceeds from the issuance of the convertible
subordinated notes in November and December 1997.
Income taxes increased to $15.5 million in 1998 compared to $11.0
million in 1997, and reflect effective tax rates of 40.3% and 41.3%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for capital is attributable primarily to the
Company's plans to expand through the development of new facilities and programs
and selected acquisitions, and the working capital required 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 expansion.
During the year ended December 31, 1999, cash provided by operating
activities was $5.5 million compared to $5.7 million for 1998 and $17.9 million
for 1997. The decrease in 1999 from 1998 was due primarily to a growth in
accounts receivable as well as declines in the growth of current liabilities.
The increase in accounts receivable is primarily related to the increased number
of acquisitions made during 1998 and 1999, as well as
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delays in payment from certain Medicaid programs and the integration of acquired
operations. The decrease in 1998 from 1997 was due primarily to an increase in
income from continuing operations, trade payables and accrued expenses, offset
by an increase in accounts receivable. The increase in accounts receivable,
accounts payable and accrued expenses is primarily related to the increased
number of acquisitions made during 1997.
During the years ended December 31, 1999, 1998 and 1997, cash used in
investing activities was $37.0 million, $139.6 million and $70.3 million,
respectively, relating primarily to acquisitions and purchases of property and
equipment.
Cash provided by financing activities was $29.5 million for 1999,
related primarily to borrowings under the revolving line-of-credit. Cash
provided by financing activities in 1998 was $74.6 million, related primarily to
the issuance of convertible subordinated notes, offset by repayment of the
line-of-credit. Cash provided by financing activities was $109.2 million for
1997 consisting primarily of borrowings against the line-of-credit. As of
December 31, 1999, the Company had $44.7 million available on its line-of-credit
and $7.1 million in cash and cash equivalents. Outstanding at that date were
irrevocable standby letters of credit in the principal amount of $14.7 million
issued in connection with workers' compensation insurance and certain facility
leases.
Net days revenue in accounts receivable, including the $8.0 million
additional provision for doubtful accounts discussed above, was 62 days at
December 31, 1999, compared to 60 days at December 31, 1998 and 61 days at
December 31, 1997. Accounts receivable at December 31, 1999, increased to $141.8
million, compared to $127.1 million at December 31, 1998, and $87.7 million at
December 31, 1997. Growth in these amounts from 1998 to 1999 has been primarily
related to delays in payment from certain state Medicaid programs and the
integration of acquired operations.
The Company has historically sought to provide its services in leased
premises, especially in the case of larger facilities. However, the Company has
increased its real estate purchases, particularity residential homes, in
response to changes in certain reimbursement methodologies primarily related to
its expansion of services provided to consumers in community-based settings.
Further, when cost-effective, the Company may exercise options to purchase real
estate available under the terms of certain of its leasing arrangements. In the
first quarter of 2000, the Company expects to exercise its option under a lease
arrangement to purchase approximately $8 million in real estate. Also,
acquisitions may involve the purchase of real estate.
The Company has historically satisfied its working capital
requirements, capital expenditures and scheduled debt payments from its
operating cash flow and utilization of its credit facility. Cash requirements
for the acquisition of new business operations have generally been funded
through a combination of cash generated from operating activities, utilization
of the Company's revolving credit facility and the issuance of long-term
obligations and common stock. Current conditions in the capital markets,
especially for companies identified as health-care related, have limited the
Company's ability to raise significant amounts of expansion capital. As a
result, the Company's growth rate going forward, with its emphasis on
internally-generated growth, is expected to be lower than in recent years when
acquisitions produced higher growth rates. The Company is exploring other
sources of capital, including a sale-leaseback of its owned real estate
properties, and believes such sources in addition to cash generated from
operations and amounts remaining available under its credit facility will be
sufficient to meet its working capital, planned capital expenditure and
scheduled debt repayment requirements in 2000, in light of the Company's reduced
growth rate.
CERTAIN RISK FACTORS
The Company's growth in revenues has been directly related to a
considerable increase in the number of individuals served in each of its
operating segments. This growth has been 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. As discussed above, the Company's ability to raise additional
capital to support such development-driven activities, particularly
acquisitions, is currently limited. For this reason and as a result of the
Company's emphasis on internal growth as discussed above, the Company expects
its growth over the next twelve months to be lower than the rates achieved in
recent years.
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24
The Company's future revenues will depend significantly upon the
Company's ability to obtain additional contracts to provide services to the
special needs populations it serves, whether through selected acquisitions or
awards in response to requests for proposals for new programs or in connection
with facilities being privatized by governmental agencies, which do not require
significant outlays of capital. Future revenues also depend on the Company's
ability to maintain and renew its existing services contracts and its existing
leases. Changes in the market for acquisitions and contracts, including
increasing competition and the cost to transition or implement these
acquisitions or awarded contracts, could also adversely affect the timing and/or
viability of future development activities.
Revenues of the Company's disabilities services segment are highly
dependent on reimbursement under federal and state Medicaid programs. Generally,
each state has its own Medicaid reimbursement regulations and formula. The
Company's revenues and operating profitability are dependent upon its ability to
maintain its existing reimbursement levels and to obtain periodic increases in
reimbursement rates. Changes in the manner in which Medicaid reimbursement rates
are established or reviewed in one or more of the states in which the Company
conducts its operations could adversely affect revenues and profitability. Other
changes in the manner in which federal and state reimbursement programs are
operated, and in the manner in which billings/costs are reviewed and audited,
could also affect revenues and operating profitability. As discussed above,
following discussions with various state agencies and clarification obtained
regarding certain aspects of state billing procedures, the Company increased its
reserve for doubtful accounts by approximately $8 million reflecting a revision
of its previous estimate regarding the collectibility of certain older accounts.
Management has taken steps to address this issue, including implementing a new
comprehensive accounts receivable system to replace its existing systems.
Management believes this will enable it to more effectively track and manage
its accounts receivable. The failure to properly manage its account balances
could adversely affect the Company's consolidated financial condition, results
of operations and liquidity.
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. As discussed above, the difficulty experienced in hiring
direct service staff in certain markets is expected to result in higher labor
costs in certain operating units of the Company.
Additionally, the Company's continued maintenance and expansion of its
operations are dependent upon continuation of trends toward downsizing,
privatization and consolidation and the Company's ability to tailor its services
to meet the specific needs of the populations it serves. The success in
operating in a changing environment is subject to a variety of political,
economic, social and legal pressures, including desires of governmental agencies
to reduce costs and increase levels of services, federal, state and local
budgetary constraints and actions brought by advocacy groups and the courts to
change existing service delivery systems. Material changes resulting from these
trends and pressures could adversely affect the demand for and reimbursement of
the Company's services and its operating flexibility, and ultimately its
revenues and profitability.
From time to time, the Company (or a provider with which the Company
has a management agreement), is a party to legal and/or administrative
proceedings involving state program administrators and others that, in the event
of unfavorable outcomes, may adversely affect revenues and period-to-period
comparisons. In addition, the Company is a party to various legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such legal proceedings are without merit. Further, such claims may be covered
by insurance. The Company does not believe the results of such proceedings or
litigation will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements and include, but are not limited to: (1)
projections of revenues, income or loss, earnings or loss per share, capital
structure and other financial items; (2) statements of plans and objectives of
the Company or its management or Board of Directors; (3) statements of future
actions or economic performance,
23
25
including development activities; and (4) statements of assumptions underlying
such statements. Words such as "believes," "anticipates," "expects," "intends,"
"plans," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements. Some of
the events or circumstances that could cause actual results to differ from those
discussed in the forward-looking statements are discussed in the "Certain Risk
Factors" section above. Such forward-looking statements speak only as of the
date on which such statements are made, and the Company undertakes no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made to reflect the occurrence of
unanticipated events.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result
of its outstanding variable rate debt, the Company does not currently utilize
any derivative financial instruments related to its interest rate exposure. The
Company believes that its exposure to market risk will not result in a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
25
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements - Res-Care, Inc. and Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Refer to pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company
is filing a definitive proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this report which includes
the required information. The required information contained in the Company's
proxy statement is incorporated herein by reference.
27
29
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Report
(1) Consolidated Financial Statements - Res-Care, Inc. and Subsidiaries
(refer to "F" pages):
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) All financial statement schedules have been omitted, as the required
information is inapplicable or the information is presented in the
financial statements or related notes.
(3) Listing of Exhibits:
2.1 Stock Purchase Agreement by and among the Company and (i) Normal Life,
Inc., (ii) J. Robert Shaver, Kathryn S. Graham, and Frederic H. Davis,
and (iii) minority shareholders, dated February 4, 1998. Exhibit 2.1
to the Company's Report on Form 8-K dated March 12, 1998 filed on
March 27, 1998 is hereby incorporated by reference.
2.2 Agreement and Plan of Merger by and among Res-Care, Inc., Res-Care
Sub., Inc., and PeopleServe, Inc. Appendix A to the Company's
Registration Statement on Form S-4 (Reg. No. 333-75875) is hereby
incorporated by reference.
3.1 Amended and Restated Articles of Incorporation of the Company dated
December 18, 1992 incorporating the Amendment to Amended and Restated
Articles of Incorporation dated May 29, 1997. Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998 is hereby incorporated by reference.
3.2 Bylaws of the Company. Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-48749) is hereby incorporated by
reference.
4.1 Article VI of the Amended and Restated Articles of Incorporation of
the Company included in Exhibit 3.1.
4.2 Indenture, dated as of November 21, 1997, between the Company and PNC
Bank, Kentucky, Inc. Exhibit 4.3 to the Company's Registration
Statement on Form S-3, (Reg. No. 333-44029) is hereby incorporated by
reference.
4.3 Statement of Additional Terms and Conditions dated as of March 15,
1998 relating to $22,000,000 of 5.9% Convertible Subordinated Notes
due 2005. Exhibit 2.2 of the Company's Report on Form 8-K dated March
12, 1998 and filed on March 27, 1998 is hereby incorporated by
reference.
10.1 1991 Incentive Stock Option Plan of the Company (adopted April 24,
1991, amended and restated as of February 23, 1995). Exhibit 4 to the
Company's Registration Statement on Form S-8 (Reg. No. 33-80331) is
hereby incorporated by reference.
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30
10.2 Amendment to Amended and Restated 1991 Incentive Stock Option Plan of
the Company. Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 is hereby incorporated by
reference. *
10.3 1991 Compensation/Evaluation Bonus Plan. Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-48749) is
hereby incorporated by reference. *
10.4 1993 Non-Employee Directors Stock Ownership Incentive Plan of the
Company (adopted October 28, 1993). Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Reg. No. 33-76612) is hereby
incorporated by reference.
10.5 Res-Care, Inc. 1998 Omnibus Stock Plan effective June 18, 1998.
Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No.
333-57167) is hereby incorporated by reference.
10.6 1994 Employee Stock Purchase Plan effective July 1, 1995. Exhibit 4.1
to the Company's Registration Statement on Form S-8 (Reg. No.
33-85964) is hereby incorporated by reference.
10.7 Res-Care, Inc. 401(K) Restoration Plan effective December 1, 1995.
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 is hereby incorporated by reference.
10.8 Amended and Restated Employment Agreement dated as of October 26,
1995, and amended November 5, 1996, between the Company and Ronald G.
Geary. Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 is hereby incorporated by reference.
*
10.9 Employment Agreement dated January 1, 1997 between the Company and
Jeffrey M. Cross. Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 is hereby incorporated
by reference. *
10.10 Employment Agreement dated April 13, 1997 between the Company and
Paul G. Dunn. Exhibit 10.2 to the Company's Report on Form 10-Q for
the quarter ended March 31, 1997 is hereby incorporated by reference.
*
10.11 Amendment to the Employment Agreement between the Company and Jeffrey
M. Cross, dated August 4, 1997. Exhibit 10.3 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1997 is hereby
incorporated by reference. *
10.12 Amendment to the Employment Agreement between the Company and Paul G.
Dunn, dated August 4, 1997. Exhibit 10.4 to the Company's Report on
Form 10-Q for the quarter ended June 30, 1997 is hereby incorporated
by reference. *
10.13 Employment Agreement between the Company and E. Halsey Sandford,
dated January 26, 1998. Exhibit 10.20 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 is hereby
incorporated by reference. *
10.14 1998 Amended and Restated Loan Agreement by and among PNC Bank,
National Association as Administrative Agent, and the banks listed on
Schedule 1 thereto and Res-Care, Inc., dated June 30, 1998. Exhibit
10.1 to the Company's Report on Form 10-Q for the quarter ended June
30, 1998 is hereby incorporated by reference.
10.15 Amendment to the Employment Agreement between the Company and Ralph
G. Gronefeld, Jr., dated August 15, 1998. Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ended September 30,
1998 is hereby incorporated by reference. *
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10.16 Employment Agreement between the Company and Ralph G. Gronefeld, Jr.,
dated January 1, 1998. Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 is hereby
incorporated by reference.*
10.17 1999A Amendment to Loan Instruments by and between PNC Bank, National
Association; the Banks identified on Schedule 1 thereto; and
Res-Care, Inc., dated June 28, 1999. Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999 is hereby
incorporated by reference.
10.18 1999B Amendment to Loan Instruments by and between PNC Bank, National
Association; the Banks identified on Schedule 1 thereto; and
Res-Care, Inc., dated June 28, 1999. Exhibit 10.2 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999 is hereby
incorporated by reference.*
10.19 Extension of Employment Agreement between the Company and E. Halsey
Sandford, dated February 3, 2000 (filed herewith).*
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule - December 31, 1999
27.2 Financial Data Schedule - December 31, 1998 (Restated)
27.3 Financial Data Schedule - December 31, 1997 (Restated)
* Management contracts or compensatory plan or arrangements.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1999.
On February 28, 2000, the Company filed a report on Form 8-K to announce its
fourth quarter and 1999 results and that the Company had received a proposal
to acquire all of the outstanding ResCare shares from a management-led
buyout group, which was subsequently withdrawn.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RES-CARE, INC
Date: March 29, 2000 By: /s/ Ronald G. Geary
-------------- -------------------------------------
Ronald G. Geary
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald G. Geary Chairman of the Board, President, Chief March 29, 2000
- ----------------------------- --------------
Ronald G. Geary Executive Officer and Director
(Principal Executive Officer)
/s/ E. Halsey Sandford Senior Executive and Director March 29, 2000
- ----------------------------- --------------
E. Halsey Sandford
/s/ Ralph G. Gronefeld, Jr. Executive Vice President, March 29, 2000
- ----------------------------- --------------
Ralph G. Gronefeld, Jr. Finance and Administration and
Chief Financial Officer
(Principal Financial Officer)
/s/ James R. Fornear Director March 29, 2000
- ----------------------------- --------------
James R. Fornear
/s/ Seymour L. Bryson Director March 29, 2000
- ----------------------------- --------------
Seymour L. Bryson
/s/ W. Bruce Lunsford Director March 29, 2000
- ----------------------------- --------------
W. Bruce Lunsford
/s/ Spiro B. Mitsos Director March 29, 2000
- ----------------------------- --------------
Spiro B. Mitsos
/s/ Olivia F. Kirtley Director March 29, 2000
- ----------------------------- --------------
Olivia F. Kirtley
/s/ Vincent D. Pettinelli Director March 29, 2000
- ----------------------------- --------------
Vincent D. Pettinelli
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report........................................................................................F-2
Consolidated Balance Sheets - As of December 31, 1999 and 1998......................................................F-3
Consolidated Statements of Income - Years Ended December 31, 1999, 1998 and 1997....................................F-4
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1999, 1998 and 1997......................F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998 and 1997................................F-6
Notes to Consolidated Financial Statements..........................................................................F-7
F-1
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Res-Care, Inc.:
We have audited the accompanying consolidated balance sheets of Res-Care,
Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Res-Care,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Louisville, Kentucky
February 24, 2000
F-2
35
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
1999 1998
---- ----
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 7,057 $ 10,376
Accounts and notes receivable, net of allowance for doubtful
accounts of $17,163 in 1999 and $10,291 in 1998............................ 141,807 127,093
Refundable income taxes........................................................ -- 100
Deferred income taxes.......................................................... 14,406 9,257
Prepaid expenses and other current assets...................................... 7,286 9,372
----------- -----------
Total current assets................................................ 170,556 156,198
----------- -----------
Property and equipment, net......................................................... 102,739 90,053
Excess of acquisition cost over net assets acquired, less accumulated
amortization of $16,199 in 1999 and $8,433 in 1998............................. 220,493 213,723
Other assets........................................................................ 29,343 33,819
----------- -----------
$ 523,131 $ 493,793
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................................... $ 13,388 $ 14,820
Accrued expenses............................................................... 48,820 55,175
Accrued income taxes........................................................... 1,145 3,637
Current portion of long-term debt.............................................. 6,047 6,297
Current portion of obligations under capital leases............................ 627 783
----------- -----------
Total current liabilities........................................... 70,027 80,712
----------- -----------
Long-term liabilities............................................................... 4,572 6,340
Long-term debt .................................................................... 276,537 233,847
Obligations under capital leases.................................................... 8,502 17,835
Deferred income taxes............................................................... 109 472
----------- -----------
Total liabilities................................................... 359,747 339,206
----------- -----------
Commitments and contingencies Shareholders' equity:
Preferred shares, no par value, authorized 1,000,000 shares, no shares
issued or outstanding...................................................... -- --
Common stock, no par value, authorized 40,000,000 shares, issued
28,727,027 shares in 1999 and 1998......................................... 50,770 50,770
Additional paid-in capital..................................................... 28,413 26,084
Retained earnings.............................................................. 87,175 80,837
----------- -----------
166,358 157,691
Less cost of common shares in treasury (4,474,139 shares in 1999
and 4,670,749 shares in 1998).............................................. (2,974) (3,104)
----------- -----------
Total shareholders' equity.......................................... 163,384 154,587
----------- -----------
$ 523,131 $ 493,793
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
36
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
Revenues ...........................................................................$ 834,078 $ 708,385 $ 470,966
Facility and program expenses....................................................... 726,068 610,231 408,835
----------- ----------- -----------
Facility and program contribution................................................... 108,010 98,154 62,131
Operating expenses (income):
Corporate general and administrative........................................... 27,726 27,590 20,061
Depreciation and amortization.................................................. 21,107 18,561 9,808
Merger-related charge.......................................................... 20,498 -- --
(Gain) loss from sale of assets................................................ 40 (307) (100)
----------- ----------- -----------
Total operating expenses............................................ 69,371 45,844 29,769
----------- ----------- -----------
Operating income............................................................... 38,639 52,310 32,362
Other expenses (income):
Interest expense............................................................... 19,925 15,556 6,600
Interest income................................................................ (1,175) (1,662) (1,002)
----------- ----------- -----------
Total other expenses................................................ 18,750 13,894 5,598
----------- ----------- -----------
Minority interest in income of consolidated subsidiary.............................. -- -- (146)
----------- ----------- -----------
Income from continuing operations before income taxes............................... 19,889 38,416 26,618
Income tax expense.................................................................. 10,153 15,484 10,987
----------- ----------- -----------
Income from continuing operations................................................... 9,736 22,932 15,631
Gain from sale of unconsolidated affiliate, net of tax.............................. 534 -- --
Cumulative effect of accounting change, net of tax.................................. (3,932) -- --
----------- ----------- -----------
Net income .................................................................... $ 6,338 $ 22,932 $ 15,631
======= ========= =========
Basic earnings per share from continuing operations................................. $ 0.40 $ 0.96 $ 0.69
Gain from sale of unconsolidated affiliate, net of tax.............................. 0.02 -- --
Cumulative effect of accounting change, net of tax.................................. (0.16) -- --
----------- ----------- -----------
Basic earnings per share............................................................ $ 0.26 $ 0.96 $ 0.69
=========== =========== ===========
Diluted earnings per share from continuing operations............................... $ 0.39 $ 0.90 $ 0.68
Gain from sale of unconsolidated affiliate, net of tax.............................. 0.02 -- --
Cumulative effect of accounting change, net of tax.................................. (0.16) -- --
----------- ----------- -----------
Diluted earnings per share.......................................................... $ 0.25 $ 0.90 $ 0.68
=========== =========== ===========
Weighted average number of common shares:
Basic.......................................................................... 24,184 23,898 22,554
Diluted........................................................................ 24,970 31,225 23,714
See accompanying notes to consolidated financial statements.
F-4
37
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In Retained Treasury Stock
------------ --------------
Shares Amount Capital Earnings Shares Amount Total
------ ------ ------- -------- ------ ------ -----
(In thousands)
Balance at January 1, 1997............... 25,901 $ 24,627 $ 13,771 $ 42,508 5,706 $ (3,789) $ 77,117
Net income............................... -- -- -- 15,631 -- -- 15,631
Exercise of stock options,
including related tax benefit....... -- -- 3,331 -- (537) 359 3,690
Income tax benefit related to
Premier pooling-of-interests........ -- -- 2,320 -- -- -- 2,320
Sale of common stock, net of
expenses............................ 2,826 26,143 -- -- -- -- 26,143
Issuance of shares in
connection with an acquisition...... -- -- 1,529 -- (135) 89 1,618
Partnership distributions................ -- -- -- (234) -- -- (234)
--------- ---------- ---------- --------- ------- -------- -----------
Balance at December 31, 1997............. 28,727 50,770 20,951 57,905 5,034 (3,341) 126,285
Net income............................... -- -- -- 22,932 -- -- 22,932
Exercise of stock options,
including related tax benefit....... -- -- 4,670 -- (337) 220 4,890
Issuance of shares in connection
with an acquisition................. -- -- 463 -- (26) 17 480
--------- ---------- ---------- --------- ------- -------- -----------
Balance at December 31, 1998............. 28,727 50,770 26,084 80,837 4,671 (3,104) 154,587
Net income............................... -- -- -- 6,338 -- -- 6,338
Exercise of stock options,
including related tax benefit....... -- -- 2,329 -- (197) 130 2,459
--------- ---------- ----- --------- ------- -------- -----
Balance at December 31, 1999............. 28,727 $ 50,770 $ 28,413 $ 87,175 4,474 $ (2,974) $ 163,384
========= ========== ========== ========= ======= ======== ===========
See accompanying notes to consolidated financial statements.
F-5
38
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
(In thousands)
OPERATING ACTIVITIES:
Net income..................................................................... $ 6,338 $ 22,932 $ 15,631
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.............................................. 21,107 18,561 9,808
Amortization of discount on notes.......................................... 723 467 49
Deferred income taxes...................................................... (3,891) (598) (706)
Loss (gain) from sale of assets............................................ 40 (307) (100)
Merger-related charge...................................................... 3,726 -- --
Provision for losses on accounts receivable................................ 10,533 2,136 2,462
Gain from sale of unconsolidated affiliate, net of tax..................... (534) -- --
Cumulative effect of change in accounting, net of tax...................... 3,932 -- --
Income applicable to minority interest of consolidated
subsidiary............................................................ -- -- 146
Changes in operating assets and liabilities:
Accounts and notes receivable.............................................. (22,868) (34,784) (24,365)
Prepaid expenses and other current assets.................................. (2,095) (1,476) (904)
Other assets............................................................... (358) (1,109) (259)
Accounts payable........................................................... (2,306) (5,398) 8,524
Accrued expenses........................................................... (5,859) 3,950 6,532
Accrued income taxes....................................................... (1,174) 2,576 1,724
Long-term liabilities...................................................... (1,779) (1,254) (593)
----------- ----------- -----------
Cash provided by operating activities................................. 5,535 5,696 17,949
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment......................................... (23,604) (16,677) (10,518)
Acquisitions of businesses, net of cash acquired........................... (14,780) (121,813) (57,813)
Other .................................................................... -- (1,115) (2,002)
----------- ----------- -----------
Cash used in investing activities..................................... (38,384) (139,605) (70,333)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under notes payable to bank.................... 56,987 79,244 (17,045)
Repayment of notes payable................................................. (20,786) (7,456) (7,275)
Payments on obligations under capital lease................................ (7,794) (721) (562)
Proceeds from issuance of convertible subordinated notes................... -- -- 106,079
Proceeds from sale of common stock, net of expenses........................ -- 45 26,143
Proceeds received from exercise of stock options........................... 1,123 3,480 2,118
Partnership distributions.................................................. -- -- (234)
----------- ----------- -----------
Cash provided by financing activities................................. 29,530 74,592 109,224
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.................................... (3,319) (59,317) 56,840
Cash and cash equivalents at beginning of year...................................... 10,376 69,693 12,853
----------- ----------- -----------
Cash and cash equivalents at end of year............................................ $ 7,057 $ 10,376 $ 69,693
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest................................................................... $ 18,806 $ 13,665 $ 5,950
Income taxes............................................................... 15,567 16,085 10,581
Supplemental Schedule of Non-cash Investing and Financing Activities:
Issuance of common stock in connection with acquisitions....................... $ -- $ 480 $ 1,618
Issuance of notes in connection with acquisitions.............................. 2,504 30,289 4,070
See accompanying notes to consolidated financial statements.
F-6
39
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business
The consolidated financial statements include the accounts of Res-Care,
Inc. and its subsidiaries (ResCare or the Company). Intercompany transactions
and balances are eliminated in consolidation.
The Company receives revenues primarily from the delivery of
residential, training, educational and support services to various populations
with special needs. As more fully described in Note 9, the Company has three
reportable operating segments: (i) disabilities services; (ii) Job Corps
program; and (iii) other youth services programs.
Revenue Recognition
Disabilities Services: Client services are provided at rates
established at the time services are rendered. Payments for services rendered to
clients covered by Medicaid are generally less than the Company's established
rates. Contractual allowances and adjustments are recorded to reflect the
difference between established rates and expected reimbursement. Retroactively
calculated contractual adjustments are accrued on an estimated basis in the
periods the related services are rendered. Final settlements are recorded as
adjustments in future periods when they are determined.
Revenues are derived primarily from state government agencies under the
Medicaid reimbursement system and from management contracts with private
operators, generally not-for-profit providers, who contract with state
government agencies and are also reimbursed under the Medicaid system.
Revenues in the future may be affected by changes in rate-setting
structures, methodologies or interpretations that may be proposed in states
where the Company operates. Some states are considering initiating managed care
plans for persons served in the Medicaid programs and expanding Medicaid waiver
funding for community residential services. At this time, the Company cannot
determine the impact of such changes, or the effect of any possible governmental
actions.
Job Corps Program: Revenues include amounts reimbursable under cost
reimbursement contracts with the U.S. Department of Labor for operating Job
Corps centers. The contracts provide reimbursement for all facility and program
costs related to Job Corps center operations and allowable indirect costs for
general and administrative expenses, plus a predetermined management fee,
normally a fixed percentage of facility and program expenses. Final
determination of amounts due under the contracts is subject to audit and review
by the U.S. Department of Labor.
Other Youth Services Programs: Juvenile treatment revenues are derived
primarily from state-awarded contracts from state agencies under various
reimbursement systems. Reimbursement from state or locally awarded contracts
varies per facility or program, and is typically paid under fixed contract
amounts, flat rates, or cost-based rates.
For each operating segment, expenses are subject to examination by
agencies administering the contracts and services. Management believes that
adequate provisions have been made for potential adjustments arising from such
examinations. Provision for bad debt expense is provided for in the period the
expense is determined by management.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-7
40
Depreciation and Amortization
Depreciation and amortization are provided by the straight-line method
over the estimated useful lives of the assets. Estimated useful lives for
buildings are 20 - 40 years. Assets under capital lease and leasehold
improvements are generally amortized over the life of the respective lease. The
useful lives of furniture and equipment vary from three to seven years.
Depreciation expense includes amortization of assets under capital lease. The
Company acts as custodian of assets where it has contracts to operate facilities
or programs owned or leased by the U.S. Department of Labor, various states and
private providers.
The excess of acquisition cost over net assets acquired and the cost of
licenses are amortized over 20-30 years using the straight-line method.
Covenants not to compete are amortized over the terms of the respective
agreements which are generally five to ten years. The Company assesses the
recoverability of goodwill and other intangibles as events or circumstances
indicate a possible inability to recover their carrying amount. Such evaluation
is based on cash flow, profitability and projections that incorporate current
operating results. This analysis involves significant management judgment.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
Per Share Data
The Company's Board of Directors authorized a three-for-two stock split
which was distributed on June 4, 1998, to shareholders of record on May 22,
1998. All share and per share data included in this annual report have been
restated to reflect the stock split. Per share amounts have also been restated
to reflect the issuance of approximately 5,145,000 shares of common stock in the
merger with PeopleServe, Inc. (PeopleServe) on June 28, 1999 and the issuance of
613,875 shares of common stock in the acquisition of Premier Rehabilitation
Centers (Premier) on January 1, 1997.
Insurance
The Company maintains insurance in the form of commercial general
liability and commercial umbrella liability policies, which include professional
liability insurance. Management intends to maintain such coverages in the future
and is of the opinion that insurance coverages are adequate to cover any
potential losses on asserted claims. Management is unaware of any incidents that
would ultimately result in a loss in excess of the Company's insurance
coverages. In addition, the Company self-insures group health insurance for its
employees. Such self-insurance costs are accrued based upon the aggregate of the
liability for reported claims and an estimated liability for claims incurred but
not reported. The Company has aggregate stop-loss limits in place to mitigate
any material exposure. Workers' compensation claims are covered either under
large deductible or retrospective policies or through sponsored insurance funds.
Financial Instruments
Various methods and assumptions were used by the Company in estimating
the fair value disclosures for significant financial instruments. Fair values of
cash and cash equivalents, short-term investments, accounts and notes receivable
and trade accounts payable approximate their carrying amount because of the
short maturity of those investments. The fair value of long-term debt is based
on the present value of the underlying cash flows discounted at the current
estimated borrowing rates available to the Company, and approximates its
carrying value as interest rates are variable.
F-8
41
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Accounting Change
Effective January 1, 1999, the Company adopted the provisions of
Statement of Position (SOP), 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that all costs of start-up activities and
organization costs be expensed as incurred. Adoption of SOP 98-5 also required
the write-off of the unamortized value of such costs previously capitalized. The
write-off of $3.9 million ($0.16 per basic and diluted share), net of tax, is
reflected in the consolidated statement of income as the cumulative effect of an
accounting change. The effect of adopting SOP 98-5 on income before income taxes
and net income for 1999 was determined to be immaterial.
2. MERGER AND ACQUISITIONS
On June 28, 1999, ResCare completed a merger with PeopleServe, which
primarily operates facilities and programs for persons with mental retardation
and other developmental disabilities. In the merger, the Company issued a total
of 5.1 million common shares in exchange for preferred stocks, common stock, and
options and warrants which were issued and outstanding prior to the merger. The
merger has been accounted for as a pooling-of-interests. Accordingly, the
Company's consolidated financial statements for all periods presented have been
restated to include the combined financial results of ResCare and PeopleServe.
Following is a reconciliation of the operating results previously
reported for the years 1995 through 1998 with restated amounts:
1998 1997 1996 1995
Revenues:
As previously reported by ResCare........................ $ 524,818 $ 308,516 $ 225,065 $ 177,428
PeopleServe.............................................. 183,567 162,450 92,745 79,904
-------------- ------------- ------------- --------------
As restated.............................................. $ 708,385 $ 470,966 $ 317,810 $ 257,332
============== ============= ============= ==============
Net income:
As previously reported by ResCare........................ $ 19,466 $ 12,977 $ 9,443 $ 16,558
PeopleServe ............................................. 3,466 2,654 1,379 1,549
-------------- ------------- ------------- --------------
As restated.............................................. $ 22,932 $ 15,631 $ 10,822 $ 18,107
============== ============= ============= ==============
In connection with the merger, ResCare recorded a pretax merger-related
charge of $20.5 million in 1999. This consisted primarily of $7.3 million in
severance and employee-related costs (principally related to the elimination of
PeopleServe's corporate offices and various other administrative costs), $2.8
million in lease termination costs, $3.0 million in information system
conversion and integration costs and $4.5 million in transaction costs,
including investment banking, legal, accounting and other professional fees and
transaction costs. Through December 31, 1999, approximately $18.1 million of the
charge had been utilized through $13.4 million in cash payments (principally
severance and transaction costs) and $4.7 million in asset write-downs (relating
principally to the discontinued PeopleServe information systems). The Company
believes the remaining balance of accrued merger-related costs of $2.4 million
at December 31, 1999 represents its remaining cash obligations.
During the two years ended December 31, 1999, the Company has made
various acquisitions as set forth below. Except for the PeopleServe merger which
was accounted for as a pooling-of-interests, all have been accounted for as
purchases. The consolidated financial statements include the operating results
of each business acquired for as a purchase from the date of its acquisition.
Except for the acquisition of Normal Life, Inc. (Normal Life), pro forma results
of operations have not been presented because the effects of these acquisitions
were not significant.
F-9
42
The following table sets forth information regarding acquisitions
during 1999 and 1998 which were accounted for as purchases:
Year Ended December 31
1999 1998
---- ----
Number of acquisitions:
Disabilities services.......................................................... 10 19
Job Corps program.............................................................. -- --
Other youth services programs.................................................. -- 6
----------- -----------
10 25
=========== ===========
Allocation of purchase price:
Buildings, land and equipment.................................................. $ 844 $ 7,014
Excess of acquisition cost over net assets acquired............................ 11,113 135,840
Other intangible assets........................................................ 85 4,574
Other.......................................................................... 549 604
----------- -----------
$ 12,591 $ 148,032
=========== ===========
The following summary of results of operations on a pro forma basis for
the year ended December 31, 1998 gives effect to the acquisition of Normal Life
as though the acquisition had taken place as of January 1, 1998:
Revenues ...........................................................................$ 719,328
Net income.......................................................................... 22,585
Basic earnings per share............................................................ 0.95
Diluted earnings per share.......................................................... 0.89
These unaudited pro forma results of operations do not reflect the
total cost savings or other synergies that may result from the acquisition. In
the opinion of management of the Company, all adjustments necessary to present
pro forma results of operations have been made. The unaudited pro forma results
of operations do not purport to be indicative of the results that would have
occurred had the acquisition occurred at the beginning of 1998 or results of
operations that may be achieved in the future.
In connection with the Normal Life acquisition, the Company recognized
a liability of approximately $2.4 million associated with termination benefits
and the closing of duplicate facilities. Through December 31, 1999, the Company
paid approximately $2.1 million against the liability established for such
purposes.
3. OTHER ASSETS
Other assets are as follows:
December 31
1999 1998
---- ----
Long-term receivables and advances to managed facilities............................ $ 10,716 $ 6,532
Deferred start-up costs, net of accumulated amortization............................ -- 6,205
Licenses, net of accumulated amortization........................................... 2,757 2,869
Covenants not to compete, net of accumulated amortization........................... 10,441 12,342
Deposits ........................................................................... 2,951 2,681
Related party receivables........................................................... -- 844
Other assets........................................................................ 2,478 2,346
----------- -----------
$ 29,343 $ 33,819
=========== ===========
F-10
43
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31
1999 1998
---- ----
Property and Equipment:
Land and land improvements..................................................... $ 11,108 $ 8,506
Leasehold improvements......................................................... 9,448 6,214
Buildings...................................................................... 73,500 51,635
Land and buildings under capital lease......................................... 7,849 20,760
Equipment under capital lease.................................................. 1,514 --
Furniture and equipment........................................................ 38,887 36,532
----------- -----------
142,306 123,647
Less accumulated depreciation and amortization...................................... 39,567 33,594
----------- -----------
Net property and equipment $ 102,739 $ 90,053
=========== ===========
5. DEBT
Long-term debt consists of the following:
December 31
1999 1998
---- ----
Revolving credit facilities with banks.............................................. $ 144,181 $ 87,194
6% convertible subordinated notes due 2004, net of unamortized discount
of $2,298 in 1999 and $2,765 in 1998........................................... 107,062 106,595
5.9% convertible subordinated notes due 2005........................................ 22,000 22,000
Notes payable and other............................................................. 9,341 24,355
----------- -----------
282,584 240,144
Less current portion........................................................... 6,047 6,297
----------- -----------
$ 276,537 $ 233,847
=========== ===========
As of December 31, 1999, the Company had $44.7 million available on its
revolving credit facility with PNC Bank and $7.1 million in cash and cash
equivalents. Outstanding at that date were irrevocable standby letters of credit
in the principal amount of $14.7 million issued in connection with workers'
compensation insurance and certain facility leases. Interest on the revolving
credit facility is based on margins over LIBOR. The rate being paid on the
three-month LIBOR at December 31, 1999 was approximately 8%. The revolving
credit facility is secured by the common stock of all of the Company's
subsidiaries. The revolving credit facility contains financial covenants related
to net worth, debt service coverage, indebtedness to cash flow from operations
and debt to capitalization.
Maturities of long-term debt are as follows:
Year Ended
December 31
- -----------
2000
.......................................................................................................... $ 6,047
2001 ..................................................................................................... 2,098
2002 ..................................................................................................... 764
2003 ..................................................................................................... 141,101
2004 ..................................................................................................... 110,455
Thereafter................................................................................................ 22,119
---------
$ 282,584
F-11
44
ACCRUED EXPENSES
Accrued expenses are summarized as follows:
December 31
1999 1998
---- ----
Trade payables...................................................................... $ 5,143 $ 5,905
Wages and payroll taxes............................................................. 15,024 15,306
Vacation............................................................................ 7,745 7,533
Workers' compensation............................................................... 5,635 6,673
Taxes other than income taxes....................................................... 5,506 4,487
Interest............................................................................ 2,329 3,060
Other............................................................................... 7,438 12,211
----------- -----------
$ 48,820 $ 55,175
=========== ===========
7. INCOME TAXES
Income tax expense attributable to income from continuing operations is
summarized as follows:
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
Federal:
Current........................................................................ $ 11,296 $ 12,558 $ 8,981
Deferred (benefit)............................................................. (3,200) (380) (631)
----------- ----------- -----------
Total federal.............................................................. 8,096 12,178 8,350
State and local:
Current........................................................................ 2,748 3,524 2,712
Deferred (benefit)............................................................. (691) (218) (75)
----------- ----------- -----------
Total state and local...................................................... 2,057 3,306 2,637
----------- ----------- -----------
Total income tax expense.............................................. $ 10,153 $ 15,484 $ 10,987
=========== =========== ===========
A reconciliation of the U.S. Federal income tax rate of 35% to income
tax expense expressed as a percent of pretax income follows:
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
Federal income tax at the statutory rate............................................ 35.0% 35.0% 35.0%
Increase (decrease) in income taxes:
State taxes, net of federal benefit............................................ 5.1 5.2 5.9
Surtax exemption............................................................... -- (0.2) (0.6)
Nondeductible amortization of goodwill......................................... 5.8 2.5 0.8
Nondeductible portion of merger-related charge................................. 7.5 -- --
Jobs tax credits, net.......................................................... (2.0) (0.4) (0.2)
Other.......................................................................... (0.4) (1.8) 0.4
--------- --------- ---------
51.0% 40.3% 41.3%
========= ========= =========
During the years ended December 31, 1999, 1998 and 1997, the Company
credited additional paid-in capital for the tax benefits associated with the
exercise of stock options in the amounts of $3,308, $1,410 and $1,571,
respectively.
F-12
45
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
December 31
1999 1998
---- ----
Deferred tax assets:
Accounts receivable, principally due to allowance for contractual
adjustments................................................................ $ 6,515 $ 3,273
Goodwill and other intangible assets, principally due to purchase
accounting basis differences and differences in amortization............... -- 517
Workers' compensation costs, principally due to accrual for financial
reporting purposes......................................................... 2,277 1,551
Compensated absences, due to accrual for financial reporting purposes.......... 2,412 2,170
Other liabilities and reserves, deductible in different periods for
financial reporting and tax purposes....................................... 2,656 2,585
Capital lease obligations...................................................... 765 1,669
Deferred gains and revenues, taxable in different periods for financial
reporting and tax purposes................................................. 946 523
Property and equipment due to differences in depreciation...................... 358 --
Other.......................................................................... -- 492
----------- -----------
Total deferred tax assets........................................... 15,929 12,780
Deferred tax liabilities:
Accounts receivable, principally due to experience rated revenue
recognition for income tax reporting purposes.............................. 140 100
Property and equipment, due to differences in depreciation..................... -- 667
Deferred start-up costs, due to capitalization for financial reporting
purposes................................................................... -- 1,929
Goodwill and other intangible assets, principally due to capitalization
for financial reporting purposes and differences in amortization........... 1,232 --
Change in accounting method for income tax purposes............................ 260 1,131
Other.......................................................................... -- 168
----------- -----------
Total deferred tax liabilities...................................... 1,632 3,995
----------- -----------
Net deferred tax asset..................................................... $ 14,297 $ 8,785
=========== ===========
Classified as follows:
Current deferred income tax asset.............................................. $ 14,406 $ 9,257
Noncurrent deferred income tax liability....................................... (109) (472)
----------- -----------
Net deferred tax asset..................................................... $ 14,297 $ 8,785
=========== ===========
No valuation allowance for deferred tax assets was required as of
December 31, 1999 or 1998, nor was there any change in the total valuation
allowance for the years ended December 31, 1999, 1998 and 1997. 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.
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46
8. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per
share from continuing operations and the effect on income and the weighted
average number of shares of dilutive potential common stock.
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
Income from continuing operations and income available to
shareholders for basic earnings per share...................................... $ 9,736 $ 22,932 $ 15,631
Interest expense, net of income tax effect, on convertible
subordinated notes............................................................. -- 5,041 446
----------- ----------- -----------
Income available to shareholders after assumed conversion
of convertible subordinated notes.............................................. $ 9,736 $ 27,973 $ 16,077
=========== =========== ===========
Weighted average number of common shares used in basic
earnings per share............................................................. 24,184 23,898 22,554
Effect of dilutive securities:
Stock options.................................................................. 786 825 544
Convertible subordinated notes................................................. -- 6,502 616
----------- ----------- -----------
Weighted number of common shares and dilutive potential
common shares used in diluted earnings per share............................... 24,970 31,225 23,714
=========== =========== ===========
The shares issuable upon conversion of the convertible subordinated
notes (6,666,000) were not included in the computation of diluted earnings per
share for the year ended December 31, 1999 because to do so would have been
antidilutive.
9. SEGMENT INFORMATION
The Company has three reportable operating segments: disabilities
services, Job Corps program and other youth services programs. The Company's
disabilities services division offers services for individuals with
developmental and other disabilities, including acquired brain injury. These
services are provided through supported living and supported employment
programs, community group homes, and facility-based operations. The Job Corps
segment operates various centers under the federal Job Corps program
administered by the U.S. Department of Labor which provides for the educational
and vocational training and other support necessary to enable disadvantaged
youths to become responsible working adults. The other youth services segment
provides services to address the specific needs of at-risk and troubled youths
to enable each youth to be a more productive member of the community. The
Company's reportable segments are business units that offer distinct services to
different special needs populations and are managed separately.
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest, income taxes, accounting changes
and non-recurring items. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are not significant.
F-14
47
The following table sets forth information about reportable segment
profit or loss and segment assets:
Other
Disabilities Job Youth All Consolidated
As of and for the year ended December 31: Services Corps Services Other (1) Totals
- ----------------------------------------- -------- ----- -------- --------- ------
1999
Revenues............................................. $ 654,553 $ 126,836 $ 52,689 $ -- $ 834,078
Segment profit (loss)................................ 70,562 12,427 5,313 (29,165) 59,137
Total assets......................................... 433,086 20,942 33,670 35,433 523,131
Capital expenditures................................. 14,665 -- 4,863 4,076 23,604
Depreciation and amortization........................ 17,885 294 1,487 1,441 21,107
1998
Revenues............................................. $ 570,626 $ 99,477 $ 38,282 $ -- $ 708,385
Segment profit (loss)................................ 67,019 10,753 3,964 (29,426) 52,310
Total assets......................................... 387,677 21,055 26,269 58,792 493,793
Capital expenditures................................. 12,939 -- 1,191 2,547 16,677
Depreciation and amortization........................ 15,070 296 1,282 1,913 18,561
1997
Revenues............................................. $ 407,749 $ 46,366 $ 16,851 $ -- $ 470,966
Segment profit (loss)................................ 46,973 4,828 1,605 (21,044) 32,362
Total assets......................................... 197,299 18,470 13,246 114,144 343,159
Capital expenditures................................. 8,284 -- 615 1,619 10,518
Depreciation and amortization........................ 8,311 49 482 966 9,808
(1) All Other is comprised of Corporate general and administrative expenses and
Corporate depreciation and amortization.
10. BENEFIT PLANS
The Company sponsors savings plans which were established to assist
eligible employees in providing for their future retirement needs. The Company's
contributions to the plans were $2,581, $2,607, and $1,437 in 1999, 1998 and
1997, respectively.
The Company's stock-based compensation plans are fixed stock option
plans. Under the 1998 Omnibus Stock Plan and the 1991 Incentive Stock Option
Plan, the Company may grant options to its salaried officers and employees for
up to 1,125,000 and 3,801,093 shares of common stock, respectively. Under both
plans, the exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is normally
five years. Generally all options, except those granted to certain key
executives which have varied vesting schedules, vest 20 percent at date of grant
and 20% per year over four years.
Under a stock option plan adopted October 28, 1993, the Company may
grant up to 90,000 shares to non-employee members of the Board of Directors at
an exercise price which cannot be less than the fair market value on the date of
grant.
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48
Stock option activity is shown below:
1999 1998 1997
----------------------- ------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Outstanding at beginning of year............... 2,981,127 $ 14.34 1,590,840 $ 10.25 1,474,796 $ 6.26
Granted........................................ 126,750 19.93 1,805,754 17.26 794,025 13.07
Exercised...................................... (196,610) 9.21 (337,211) 10.37 (537,506) 3.91
Canceled....................................... (130,140) 17.02 (78,256) 15.35 (140,475) 8.71
----------- ----------- -----------
Outstanding at end of year..................... 2,781,127 14.83 2,981,127 14.34 1,590,840 10.25
=========== =========== ===========
Exercisable at end of year..................... 1,794,701 $ 13.92 1,379,802 $ 12.92 880,680 $ 9.89
=========== =========== ===========
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- --------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
-------- ----------------- ---------------- ---------------- ----------------- -----------------
$ 6.78 to 8.68 359,532 1.2 years $ 7.12 309,087 $ 7.18
10.17 to 14.13 1,539,262 3.3 years 13.32 970,322 13.02
15.25 to 19.50 291,000 3.6 years 16.10 235,900 15.75
20.88 to 23.50 591,333 3.5 years 22.83 279,392 22.99
----------- -----------
2,781,127 3.1 years $ 14.83 1,794,701 $ 13.92
=========== ===========
For financial statement reporting purposes, the Company continues to
use the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value method prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
the Company's income from continuing operations, net income and earnings per
share amounts would have been reduced to the following pro forma amounts:
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
Income from continuing operations.......................................... $ 6,760 $ 17,599 $ 14,703
Net income................................................................ 3,362 17,599 14,703
Basic earnings per share:
From continuing operations............................................. 0.28 0.73 0.65
Net income............................................................. 0.14 0.73 0.65
Diluted earnings per share:
From continuing operations............................................. 0.27 0.72 0.64
Net income............................................................. 0.13 0.72 0.64
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49
The following table sets forth the fair value of each option grant
using the Black-Scholes option-pricing model and the applicable weighted-average
assumptions:
Year Ended December 31
----------------------
1999 1998 1997
---- ---- ----
Fair value per option........................................................... $ 8.25 $ 7.83 $ 3.95
Risk-free interest rate......................................................... 6.69% 4.66% 5.51%
Dividend yield ................................................................ 0% 0% 0%
Expected volatility............................................................. 0.49 0.48 0.48
Expected life (in years)........................................................ 3-4 4-5 5-6
11. GAIN ON SALE OF UNCONSOLIDATED AFFILIATE
On May 31, 1995, the Company sold all of its stock in its
unconsolidated affiliate, Home Care Affiliates, Inc. (HCAI) for $17.5 million in
cash. The Company recognized a gain of $8,819 in its 1995 consolidated financial
statements as a result of the transaction. In connection with the sale, the
Company entered into an agreement with HCAI, whereby HCAI could seek
indemnification for various contingencies present at the time of the
transaction. Upon expiration of that and related management agreements, the
Company recognized an additional gain on the sale of $534, net of applicable
taxes of $355, which is reflected in the 1999 consolidated statement of income.
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain operating facilities, office space, vehicles
and equipment under operating leases which expire at various dates. Total rent
expense was approximately $39,196, $32,598 and $20,022 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company also leases certain
land and buildings used in operations under capital leases. These leases expire
at various dates through 2022 (including renewal operations) and generally
require the Company to pay property taxes, insurance and maintenance costs.
Future minimum lease payments under capital leases, together with the
minimum lease payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year at December 31, 1999,
are as follows:
Capital
Lease
Capital Under Operating
Year Ended December 31 Leases Sublease Leases
- ---------------------- -------- ---------- -------
2000 .................................................................. $ 1,344 $ 152 $ 23,176
2001 .................................................................. 1,342 147 18,523
2002 .................................................................. 1,342 142 14,542
2003 .................................................................. 1,342 137 9,094
2004 .................................................................. 1,276 132 5,551
Thereafter............................................................. 6,987 650 17,379
------------- ------------- -------------
Total minimum lease payments...................................... 13,633 1,360 $ 88,265
=============
Less amounts representing interest..................................... (5,373) (491)
------------- -------------
Present value of minimum lease payments................................ 8,260 869
Less current maturities................................................ (558) (69)
------------- -------------
Total long-term obligations under capital leases.................. $ 7,702 $ 800
============= =============
The Company leases certain of its facilities under capital leases with
various partnerships controlled by a director of the Company. Annual payments
under these lease arrangements approximate $1.0 million.
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50
The Company also leases certain of its facilities under an operating
lease with a real estate investment trust in which the Company's chairman and
another director are members of the trust's board of directors. The lease
commenced in October 1998 and extends through 2009. Lease payments to the trust
approximated $735 and $183 in 1999 and 1998, respectively. Annual rentals,
included in the future minimum rental amounts above, are estimated to be
approximately $750, subject to annual increases based on the consumer price
index.
The Company is a party to various legal proceedings arising out of the
operation of its facilities and programs and arising in the ordinary course of
business. The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. After conferring with
counsel, it is the opinion of management that the ultimate resolution of these
claims will not have a material adverse effect on the consolidated financial
condition, results of operations, or liquidity of the Company.
13. QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
1999
Revenues............................................... $ 200,783 $ 208,913 $ 211,398 $ 212,984 $ 834,078
Facility and program contribution...................... 28,385 29,755 29,954 19,916 108,010
Net income (loss)...................................... 2,678 (6,427) 8,504 1,583 6,338
Basic earnings (loss) per share........................ 0.11 (0.27) 0.35 0.07 0.26
Diluted earnings (loss) per share...................... 0.13 (0.27) 0.31 0.06 0.25
1998
Revenues............................................... $ 149,619 $ 175,281 $ 187,145 $ 196,340 $ 708,385
Facility and program contribution...................... 19,414 23,696 26,278 28,766 98,154
Net income............................................. 4,656 4,999 6,508 6,769 22,932
Basic earnings per share............................... 0.20 0.21 0.27 0.28 0.96
Diluted earnings per share............................. 0.19 0.20 0.25 0.25 0.90