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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, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from ________ to _________
Commission File Number: 0-20372
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RES-CARE, INC.
(Exact name of Registrant as specified in its charter)
KENTUCKY 61-0875371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10140 LINN STATION ROAD 40223
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 394-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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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 March 16, 1998, there were 12,431,428 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 March 16, 1998, was
approximately $318,641,091. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 12, 1998.
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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. 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
Res-Care's MR/DD consumers require services over their entire lives and many
states have extensive waiting lists for services, Res-Care has experienced high
occupancy rates in its MR/DD operations.
The Company has experienced significant growth since September 30,
1992, in numbers of persons served, revenues and operating income. As a result
of a combination of strategic acquisitions and internal growth, Res-Care
currently provides services to approximately 12,000 persons with special needs
in 24 states and Puerto Rico compared to approximately 3,300 persons at
September 30, 1992, representing a compound annual growth rate of approximately
32%. The Company currently provides services to approximately 6,600 persons with
disabilities in larger facilities, group homes, personal residences and other
community-based programs, and to approximately 5,400 at-risk and troubled youths
in federally-funded Job Corps centers and juvenile treatment programs operated
for state and local agencies.
There is a growing trend throughout the United States toward
privatization of social services functions for special needs populations as
governments of all types face continuing pressure to control costs and improve
the quality of services. The markets for services for special needs populations
in the United States are large, growing and highly fragmented as evidenced by
the following industry estimates:
o Approximately 1.6% of the nation's population, or 4.2 million
persons, have some level of developmental disability to the extent
that professional services are required throughout their lives;
o Funding for MR/DD services totaled approximately $22.9 billion in
1996;
o Over 4,000 providers of MR/DD services operate over 10,000 facilities
and programs;
o In 1996, an estimated 2.8 million juvenile arrests accounted for 25%
of all arrests and 49% of all property crime arrests;
o The number of youths in the United States between the ages of 14 and
17 years, the highest risk juvenile group, is expected to increase
20% from 14 million in 1994 to 17 million in 2005;
o Reports of child abuse and neglect have grown 45% from 2.0 million in
1985 to 2.9 million in 1993; and
o Most of the estimated 6,000 residential youth services providers are
small and operate in limited geographic areas.
The Company believes it has significant opportunities to participate in
the growth and consolidation of these markets because of its quality programs
and operating systems, its financial strength, the economies of scale it can
achieve and its experience working with special needs populations and
governmental agencies.
The Company strives to provide quality and caring services through the
operation of efficient and flexible programs. To achieve this goal, the
Company's business strategy is based upon the following key elements; (i)
continuing to expand upon the Company's leadership position as a provider of
disabilities services; (ii) leveraging the Company's 20 years of experience in
providing training and support services for disadvantaged youths and other
special needs populations to become a leading provider of services to at-risk
and troubled youths; (iii) focusing on quality management of existing programs
through models of ongoing program evaluation developed by the Company; and (iv)
implementing and maintaining high quality, cost-effective alternatives to
programs operated directly by governmental entities and private agencies by
providing proven management systems and procedures that assure efficient
application of financial and human resources.
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The Company's growth strategy is to: (i) pursue acquisitions; (ii) add
programs and expand its existing programs in markets in which it currently
operates; and (iii) expand into additional geographic areas in the United
States. The markets for the Company's services are highly fragmented, and the
Company believes that there are significant opportunities to enhance its market
positions through an active acquisition program in the disabilities and at-risk
and troubled youth sectors that will enable the Company to expand its operations
into new geographic areas, add program offerings and establish new relationships
with governmental entities. The Company believes it has developed a disciplined
approach to acquisitions which focuses on acquiring generally profitable
operations in favorable reimbursement environments which: (i) expand service
offerings; (ii) increase market share in existing markets; or (iii) help attain
critical mass in new markets. The Company intends to build upon its established
relationships with governmental entities to expand its current programs and
obtain contracts for additional programs in existing markets, and to develop new
programs in response to societal trends and the needs of governmental agencies.
The Company also intends to expand its programs to additional geographic areas
which management identifies as having favorable reimbursement and operating
environments.
SERVICES
Disabilities Services
The Company began providing service to persons with disabilities in
1978 through the operation and management of larger facilities (generally
serving 40 or more individuals) that offered alternatives to placement in state
institutions or traditional nursing homes or other long-term care facilities not
capable of providing specialized active treatment required by these individuals.
In 1983, the Company began offering services through community-based group homes
(generally serving up to eight individuals) and, in 1992, through supported
living programs, in which persons with disabilities reside in their own
residences or apartments with outside support provided as needed. Some of these
individuals require 24-hour staffing while others need only drop-in services,
day programs, supported employment or transportation. Community-based settings
enable persons with developmental or other disabilities to live and develop in
an environment that encourages each person to achieve maximum independence and
self-respect. Approximately 75% 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"), physicians, psychologists, therapists,
social workers and other direct service staff. These services include social,
functional and vocational skills training, and emotional and psychological
counseling or therapy as needed for each individual.
Social Skills Training. The Company's social skills training
focuses on problem solving, anger management and adaptive skills to
allow individuals with disabilities to interact with others in the
residential setting and in the community. Emphasis is placed on contact
with the community at large as appropriate for each individual. The
desired outcome is to enable each individual to participate in home,
family and community life as fully as possible.
Many individuals with developmental and other disabilities
require behavioral intervention services. The Company provides these
services through psychiatrists, psychologists and behavioral
specialists, some of whom serve as consultants on a contract basis. All
operations utilize a non-aversive approach to behavior management which
has been pioneered by the Company and which is designed to avoid
consequences involving punishment or extreme restrictions on individual
rights. Behavior management techniques are employed by the
interdisciplinary team and direct service staff rather than
psychotropic medications to modify behavior, the goal being to minimize
the use of medications whenever possible. When necessary, medications
are handled in strict compliance with federal regulations.
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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 and self-respect and the
development of additional personal or vocational skills.
Youth Services
Since 1976, the Company has been operating programs for the
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.
In December 1995, the Company began a strategic initiative to expand its
Division for Youth Services 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
another developmental disability, to pre-adjudicated and adjudicated youths who
have entered the juvenile justice system. Special needs and at-risk youth
programs include residential treatment programs, the operation of alternative
schools, foster care programs and emergency shelters. Over time, the Company
expects to continue to expand the services provided by the Company to these
youths. Programs offered for troubled youths include secure and staff-secure
detention programs, boot camps, long-term treatment programs, secure
transportation, day treatment programs and monitoring, and transition and
after-care programs.
The Company's programs include a variety of educational and vocational
training programs and comprehensive programs for behavior change, including
individual, group and family counseling and training in social and independent
living skills. These programs emphasize self-esteem, academic enhancement,
empathy development, critical thinking and problem solving, anger management and
coping strategies, substance abuse treatment and relapse prevention. Programs
are designed to: (i) increase self-control and effective problem-solving; (ii)
teach youths how to understand and consider other people's values, behaviors and
feelings; (iii) show youths how to recognize the effects of their behavior on
other people and why others respond to them as they do; and (iv) enable youths
to develop alternative, responsible, interpersonal behaviors. Although certain
youths in the Company's programs require both drug therapy and treatment for use
or abuse of drugs, the Company's goal is to
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minimize or eliminate the use of medication whenever possible. When appropriate,
medication is prescribed by independent physicians and may be administered by
Company personnel. Management believes that the breadth of the Company's
services and its history of working with youths make the Company attractive to
local, state and federal governmental agencies.
As an integral part of its youth services program, the Company operates
12 Job Corps centers with a contracted capacity of 4,490 persons, including five
centers acquired September 30, 1997 and the Blue Ridge Job Corps center awarded
January 1, 1998. The Job Corps program is designed to address the severe
unemployment problem faced by disadvantaged youths throughout the country. The
typical Job Corps student is a 16- to 24-year old high school dropout who reads
at the seventh grade level, comes from a disadvantaged background, has not held
a regular job, and was living in an environment characterized by a troubled home
life or other disruptive conditions. Each center offers training in several
vocational areas depending upon the particular needs and job market
opportunities in the region. Students are required to participate in basic
education classes to improve their academic skills and to complement their
vocational training. High school equivalency classes are available to obtain GED
certificates. Upon graduation or other departure from the program, each student
is referred to the nearest Job Corps placement agency for assistance in finding
a job or enrolling in a school or training program. Approximately 70% of the
students completing the program have obtained jobs or continued their education
elsewhere.
OPERATIONS
Disabilities Services
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 four geographic regions, each headed by a
Regional Vice President, and two Vice Presidents responsible for ABI operations
nationally. 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 input
from professionals, family members and advocates, as well as from the
neighboring community, on how to continue to improve service delivery and
increase involvement with the neighborhood or community.
The Company's direct service staff have the most frequent contact with,
and generally are recruited from, the community in which the facility or program
is located. These staff members are screened to meet certain qualification
requirements and receive orientation, training and continuing education.
The provision of disabilities services is subject to complex and
substantial state and federal regulation and the Company strives to ensure that
its internal controls and reporting systems comply with Medicaid reimbursement
and other program requirements, policies and guidelines. The Company designs and
implements programs, often in coordination with appropriate state agencies, in
order to assist the state in meeting its objectives and to facilitate the
efficient delivery of quality services. Management and personnel resources are
devoted to keeping abreast of new laws, regulations and policy directives
affecting the quality and reimbursement of the services provided. In addition,
the Company believes it has developed expertise in accurately monitoring
eligibility for Medicaid and other benefits and in processing reimbursement
claims. The Company's billing system is centralized to facilitate expedited
payment procedures, such as electronic billing, that may be available.
The Company has developed a model of ongoing program evaluation and
quality management which the Company believes provides critical feedback to
measure the quality of its various operations. Each operation conducts its own
quality assurance program, the Periodic Service Review ("PSR"), which is
reviewed by the responsible Regional Vice President. Results from the PSRs are
reviewed on a quarterly basis with the Executive Vice President, Operations,
Division for Persons with Disabilities. Management and operational goals and
objectives are established for each facility and program as part of an annual
budget and strategic planning process. A weekly statistical reporting system and
quarterly statement of progress provide management with relevant and timely
information on the operations of each facility. Survey results from governmental
agencies for each operation are
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recorded in a database and quarterly summary reports are reviewed by senior
management. The Company believes the PSR system is a vital management tool to
evaluate the quality of its programs, and has been useful as a marketing tool to
promote the Company's programs, since it provides more meaningful and
significant data than is usually provided by routine monitoring by governmental
agencies.
Youth Services
Youth services operations are under the direct supervision of the
Company's Executive Vice President, Operations for Youth Services. Under his
direct supervision is the President of the Job Corps Centers, the Vice President
of Youthtrack and Regional Executive Directors who oversee Alternative Youth
Services. These in turn supervise the Center Directors or Executive Directors
responsible for the various centers, facilities or programs.
The Company's programs are designed to provide consistent, high quality
and cost-effective education and treatment to address the needs of the various
segments of the special needs, at-risk and troubled youth populations. The
Company generally is responsible for the overall operation of its facilities and
programs, including management, general administration, staff recruitment,
security and supervision of the youth in their programs.
The Company has assembled an experienced team of managers, counselors
and staff that blends program expertise with business and financial experience.
The Company believes that its recruitment, selection and training programs
generate sufficient personnel capable of implementing the Company's systems and
procedures as it expands this segment of its business. The Company's staff
includes teachers, counselors, mental health professionals, juvenile justice
administrators and licenses 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 PSR system at the majority of its
youth services programs and expects to complete implementation of the Company's
remaining programs during 1998.
The Company recognizes that, in the operation of programs for at-risk
and troubled youths, a primary mission is to protect the safety of the community
within a facility, as well as the neighboring community. Thus, the Company's
programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
The Company's Job Corps centers are operated under contract with the
DOL which provides the physical plant and equipment. The Company is directly
responsible for the management, staffing and administration of Job Corps
centers. A typical Res-Care Job Corps operation consists of a three-tier
management staff structure. The center director has the overall responsibility
for day-to-day management at each facility and is assisted by several senior
staff managers who typically are responsible for academics, vocational training,
social skills, safety and security, health services and behavior management.
Managers are assisted by front line supervisors who have specific
responsibilities for such areas as counseling, food services, maintenance,
finance, residential life, recreation, property, purchasing, human resources and
transportation.
An outcome performance measurement report for each center, issued by
the DOL monthly, measures three primary categories of performance: (i) placement
of graduates; (ii) education results, as measured by GED achievement and reading
and math gains; and (iii) the number of students completing a prescribed
vocational curriculum to make a student job-ready. These are then combined into
an overall performance rating. Centers are ranked as either "Not Meeting
Expectations," "Meeting Expectations" or "Outstanding." Performance standards
reports are reviewed by center directors and the President, Job Corps
Operations, and acted upon as appropriate to address areas where improvement is
needed. At December 31, 1997, all centers operated by the Company received
evaluations of either "Meeting Expectations" or "Outstanding".
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Facilities and Programs
The following tables set forth information as of December 31, 1997
regarding the Company's disabilities services and youth services operations,
respectively:
DIVISION FOR PERSONS WITH DISABILITIES
Initial
Contract Operation
State Types of Programs Capacity (1) in State
----- ------------------ ------------ ---------
California.......................... Larger Facilities, Group Homes, Day Programs 741 1995
Colorado............................ Larger Facility, Supported Living 237 1992
Florida............................. Larger Facilities, Group Homes, ABI 171 1983
Georgia............................. Supported Living 79 1997
Illinois............................ Larger Facilities, ABI 160 1995
Indiana............................. Larger Facilities, Group Homes, 850 1983
Supported Living
Kansas.............................. Larger Facilities, Supported Living 357 1995
Kentucky............................ Larger Facilities, Group Home, Supported 592 1978
Living, Day Program
Louisiana........................... Group Homes 215 1984
Missouri............................ Supported Living, ABI 129 1997
Nebraska............................ Group Homes, Supported Living, Day Program 303 1992
New Jersey.......................... Supported Living 25 1997
New Mexico.......................... Supported Living 245 1994
North Carolina...................... Supported Living 1,055 1997
Ohio................................ Larger Facility, Group Homes, Supported Living, 144 1995
Respite Program
Oklahoma............................ Supported Living 155 1995
Pennsylvania........................ Supported Living 21 1997
Tennessee........................... Group Homes, Supported Living 299 1993
Texas............................... Larger Facilities, Group Homes, Day Program 838 1993
West Virginia....................... Larger Facility, Group Homes, Supported Living,
Day Program 215 1987
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Total.......................... 6,831
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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
State Types of Programs Capacity (1) in State
----- ----------------- ------------ --------
Arizona....................... Job Corps (2 centers) 715 1997
Colorado...................... Residential, Non-Residential, Secure, 418 1996
Day Treatment, Apartment Living
Florida....................... Job Corps 300 1983
Georgia....................... Residential, Alternative School 60 1997
Kentucky...................... Residential, Alternative School, 440 1996
Foster Care
Maryland...................... Residential 35 1997
New Jersey.................... Job Corps 530 1995
New York...................... Job Corps 305 1986
Ohio.......................... Foster Care 65 1997
Oklahoma...................... Job Corps 550 1997
Pennsylvania.................. Job Corps 800 1997
Puerto Rico................... Job Corps (3 centers) 795 1990
Tennessee..................... Alternative School, Shelter, 92 1997
Wilderness Program
Virginia...................... Job Corps 350 1997
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Total.................... 5,455
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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."
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.
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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. The provider of record is generally paid
a net operating income (facility gross revenues minus lease payment, facility
operating expenses and the Company's management fee), some specified minimum
amount or a fixed amount. Historically, the Company's Medicaid provider
contracts and management contracts have been renewed or satisfactorily
renegotiated. The Company believes its experience in this regard is consistent
with the overall experience of other operators in the disabilities services
business.
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 currently operates 12 Job Corps Centers 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
and Marion, Virginia. Of the five-year periods covered by the Company's Job
Corps contracts, one expires in 1998, two in 1999, seven in 2000, one in 2001,
and one in 2002. The Company intends to selectively pursue additional centers
through the Request for Proposals ("RFP") process.
MARKETING AND DEVELOPMENT
The primary focus of the Company's marketing activities is 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 provides support as needed for the youth services marketing efforts.
Responsibility for marketing activities related to youth services are divided
among the following officers of the Company and its subsidiaries: the Executive
Vice President, Operations, Division for Youth Services; the President, Job
Crops Operations; and the Vice President, Operations and Vice President,
Marketing, of Youthtrack. Marketing activities are reviewed on a regular basis
by senior management.
In its pursuit of government contracts, the Company contacts
governments and governmental agencies in geographical areas in which it operates
and in others in which it has identified expansion potential. Contacts are made
and maintained by both regional operations personnel and corporate development
personnel, augmented as appropriate by other senior management. The Company
targets new areas based largely on its assessment of the 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.
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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'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.
The youth services business in which the Company engages is one that
other entities may easily enter without substantial capital investment or
experience in management of education or treatment facilities. In addition,
certain not-for-profit entities may offer education and treatment programs at a
lower cost than the Company due in part to government subsidies, foundation
grants, tax deductible contributions or other financial resources not available
to for-profit companies.
Currently, only a limited number of companies actively seek Job Crops
contracts because the bidding process is highly specialized and technical and
requires a significant investment of personnel and other resources over a period
of several months. Approximately one-half of the privately-operated centers are
operated by the three largest operators. Competition for Job Corps contracts has
increased as the DOL has made efforts to encourage new participants in the
program, particularly minority-owned businesses.
9
11
Certain proprietary competitors operate in multiple jurisdictions and
may be well capitalized. The Company also competes in some markets with smaller
local companies that may have a better understanding of the local conditions and
may be better able to gain political and public acceptance. Such competition may
adversely affect the Company's ability to obtain new contracts and complete
acquisitions on favorable terms. The Company faces significant competition from
all of these providers in the states in which it now operates and expects to
face similar competition in any state that it may enter in the future.
Professional staff retention and development is a critical factor in
the successful operation of the Company's business. The competition for talented
professional personnel, such as therapists and QMRPs, is intense. The Company
typically utilizes a standard professional service agreement for provision of
services by certain professional personnel, which is generally terminable on 30
or 60-day notice. The demands of providing the requisite quality of service to
persons with special needs contribute to a high turnover rate of direct service
staff. Consequently, a high priority is placed on recruiting, training and
retaining competent and caring personnel.
GOVERNMENT REGULATION AND REIMBURSEMENT
The operations of the Company are subject to compliance with various
federal, state and local statutes and regulations. Compliance with state
licensing requirements is a prerequisite for participation in
government-sponsored health care assistance programs, such as Medicaid. The
following sets forth in greater detail certain regulatory considerations
applicable to the Company:
Funding Levels. Federal and state funding for the Company's
disabilities services business is subject to statutory and regulatory changes,
administrative rulings, interpretations of policy, intermediary determinations
and governmental funding restrictions, all of which may materially increase or
decrease program reimbursement. Congress has historically attempted to curb the
growth of federal funding of such programs, including limitations on payments to
facilities under the Medicaid program. These efforts have intensified in recent
years. Although states in general have historically increased rates to
compensate for inflationary factors, some have curtailed funding due to state
budget deficiencies or for other reasons. In several such instances providers,
acting through their state health care trade associations, have been able to
negotiate or employ legal action in order to reach a compromise settlement.
Revenues in the future may be affected by changes in rate-setting structures,
methodologies or interpretations that may be proposed or under consideration in
states where the Company operates.
Reimbursement Requirements. To qualify for reimbursement under Medicaid
programs, facilities and programs are subject to various requirements of
participation and other requirements imposed by federal and state authorities.
In order to maintain a Medicaid or state contract, certain statutory and
regulatory requirements must be met. These participation requirements relate to
client rights, quality of services, physical plant and administration. Long-term
providers, like the Company, are subject to periodic unannounced inspection by
state authorities, often under contract with the appropriate federal agency, to
assure compliance with the requirements of participation in the Medicaid or
state program.
Licensure. In addition to the requirements to be met by the Company for
participation in the Medicaid program, the Company's facilities and programs are
usually subject to annual licensing and other regulatory requirements of state
and local authorities. These requirements relate to the condition of the
facilities, the quality and adequacy of personnel and the quality of services.
State licensing and other regulatory requirements vary from jurisdiction to
jurisdiction and are subject to change.
Regulatory Enforcement. From time to time, the Company receives notices
from regulatory inspectors that in their opinion there are deficiencies for
failure to comply with various regulatory requirements. The Company reviews such
notices and takes corrective action as appropriate. In most cases, the Company
and the reviewing agency agree upon the steps to be taken to bring the facility
or program into compliance with regulatory requirements. Serious deficiencies
can result in decertification or delicensure actions by the Health Care
Financing Administration or state regulatory agencies.
Restrictions on Acquisitions and Additions. All states in which the
Company currently operates have adopted laws or regulations which generally
require that a state agency approve the Company as provider, and many require a
determination that a need exists prior to the addition of beds or services.
10
12
Cross Disqualifications and Delicensure. In certain circumstances,
conviction of abusive or fraudulent behavior with respect to one facility or
program may subject other facilities and programs under common control or
ownership to disqualification from participation in the Medicaid program.
Executive Order 12549 prohibits any corporation or facility from participating
in federal contracts if it or its principals (including but not limited to
officers, directors, owners and key employees) have been debarred, suspended, or
declared ineligible, or have been voluntarily excluded from participating in
federal contracts. In addition, some state regulators provide that all
facilities licensed with a state under common ownership or control are subject
to delicensure if any one or more of such facilities are delicensed.
Regulation of Certain Transactions. The Social Security Act, as amended
by the Health Insurance Portability and Accountability Act of 1996 (the "Health
Insurance Act"), provides for the mandatory exclusion of providers and related
persons from participation in the Medicaid program if the individual or entity
has been convicted of a criminal offense related to the delivery of an item or
service under the Medicaid program or relating to neglect or abuse of residents.
Further, individuals or entities may be, but are not required to be, excluded
from the Medicaid program under certain circumstances including, but not limited
to, the following: convictions relating to fraud; obstruction of an
investigation of a controlled substance; license revocation or suspension;
exclusion or suspension from a state or federal health care program; filing
claims for excessive charges or unnecessary services or failure to furnish
medically necessary services; or ownership or control by an individual who has
been excluded from the Medicaid program, against whom a civil monetary penalty
related to the Medicaid program has been assessed, or who has been convicted of
a crime described in this paragraph. The illegal remuneration provisions of the
Social Security Act make it a felony to solicit, receive, offer to pay, or pay
any kickback, bribe, or rebate in return for referring a resident for any item
or service, or in return for purchasing, leasing or ordering any good, service
or item, for which payment may be made under the Medicaid program. Other
provisions in the Health Insurance Act proscribe false statements in billing and
in meeting reporting requirements and in representations made with respect to
the conditions or operations of facilities. A violation of the illegal
remuneration statute is a felony and may result in the imposition of criminal
penalties, including imprisonment for up to five years and/or a fine of up to
$25,000. Further, a civil action to exclude a provider from the Medicaid program
could occur. There are also other civil and criminal statutes applicable to the
industry, such as those governing false billings and anti-supplementation
restrictions and the new health care offenses contained in the Health Insurance
Act, such as health care fraud, theft or embezzlement, false statements and
obstruction of criminal investigation of health care offenses. Criminal
sanctions for these new health care criminal offenses can be severe. Sanctions
for the newly-enacted health care fraud offense, for example, include
imprisonment for up to 20 years. The agencies administering the Medicaid program
have increased their criminal and civil enforcement activity in the prevention
of program fraud and abuse, including the payment of illegal remuneration.
Environmental Laws. Certain federal and state laws govern the handling
and disposal of medical, infectious, and hazardous waste. Failure to comply with
those laws or the regulations promulgated 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 bloodborne
pathogens. The Company cannot predict the frequency of compliance, monitoring,
or enforcement actions to which it may be subject as regulations are implemented
and there can be no assurance that such regulations will not adversely affect
the operations of the Company.
INSURANCE
The Company maintains professional malpractice and general liability
insurance on professionals and other staff employed in each of its locations in
addition to coverage for the customary risks inherent in the operation of
business in general. While the Company believes its insurance policies to be
adequate in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or at
a reasonable cost.
11
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EMPLOYEES
As of December 31, 1997, the Company employed approximately 11,900
employees. As of that date, the Company was not subject to collective bargaining
agreements with any of its employees. The Company has entered into negotiations
with approximately 30 employees represented by a labor union at the Pittsburgh
Job Corps center which was acquired as of September 30, 1997.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company owned 196 properties and operated
facilities and programs at 328 leased properties. All other facilities and
programs are operated under management contracts. The Company owns its corporate
office building which is located in Louisville, Kentucky, and has an aggregate
of 45,000 square feet of office space. See "Business - Facilities and Programs."
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company (or a provider with which the Company
has a management agreement), becomes a party to legal and/or administrative
proceedings involving state program administrators and others, that, in the
event of unfavorable outcomes, may affect revenues and period-to-period
comparisons. In Indiana, the Company and another provider have been in
litigation with the State over the rate-setting methodology for larger
facilities. In September 1997, except for an issue involving staffing hours, the
court denied plaintiffs' motion for injunctive relief. The ruling resulted in a
reduction in rates payable to the Company by the State of Indiana for the
thirty-nine months ending September 30, 1997. The reduction had been adequately
reserved by the Company in prior periods and was recorded against the Company's
allowance for contractual adjustments during September 1997. The Company does
not believe the results of this litigation will have a material adverse effect
on its consolidated financial condition, results of operations or liquidity.
The Company is also involved in litigation against the landlord of four
of the Company's larger facilities in Indiana. The parties have agreed to stay
the litigation pending the outcome of the Indiana rate litigation, and the
Company is unable at this time to determine whether it will ultimately prevail
in the matter in light of the outcome of the Indiana rate litigation described
above. The Company subleased three other larger facilities in Indiana from the
same landlord. The sublease expired and a new lease, on essentially the same
terms and conditions as the previous sublease, was extended through August 31,
1998. The State of Indiana has approved relocation of the individuals to
community-based settings. The Company does not believe the resolution of this
matter will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
Effective January 1, 1998, the Company became the provider of record of
a larger facility in Kentucky which it managed. Based upon adjustments to the
facility's 1991 cost report by the Kentucky Department of Medicaid Services
("Kentucky"), the Company assumed a contingent liability of up to $5.7 million
for fiscal years 1991 through 1997. In 1997, the former provider timely filed an
action for declaratory judgement and injunctive relief against Kentucky which
will ultimately decide the issue involved for 1991 and subsequent years. On
March 17, 1998, the court ruled in favor of the provider.
In May 1996, legislation was passed in Florida that would have
significantly reduced rates effective September 1, 1996 for the operations that
the Company manages in that state. A preliminary injunction was granted in a
lawsuit by individual consumers, which requires the State to continue full
funding of certain intermediate care facilities and services for persons with
developmental disabilities. At the request of the State, the trial, which was
previously set for January, was postponed until May 1998. The Company does not
believe the results of this matter will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
In March 1997, certain small providers brought an action against the
Texas Department of Mental Health and Mental Retardation seeking to enjoin the
implementation of a provision (not applicable to the Company) of a new
reimbursement system which was favorable to the Company and implemented in Texas
effective as of January 1, 1997. The trial court in the providers' action
recently ruled in favor of the State, thus leaving the new reimbursement system
in effect.
12
14
In addition, the Company is a party to various other legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such lawsuits are without merit. Further, such claims are generally covered
by insurance. The Company does not believe the results of such litigation will
have a material adverse effect on its consolidated financial condition, 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 March 16, 1998, the Company
had approximately 5,000 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 June 4, 1996.
-----------------------------------------------------------------------
1996 HIGH LOW
-----------------------------------------------------------------------
First Quarter 14 1/2 10
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Second Quarter 26 1/2 12 3/4
-----------------------------------------------------------------------
Third Quarter 25 15 3/4
-----------------------------------------------------------------------
Fourth Quarter 18 1/2 14 3/4
-----------------------------------------------------------------------
-----------------------------------------------------------------------
1997 HIGH LOW
-----------------------------------------------------------------------
First Quarter 20 3/4 16 1/2
-----------------------------------------------------------------------
Second Quarter 20 1/8 14 3/4
-----------------------------------------------------------------------
Third Quarter 25 18 3/4
-----------------------------------------------------------------------
Fourth Quarter 29 3/4 20 1/2
-----------------------------------------------------------------------
The Company currently does not pay dividends and does not anticipate doing
so in the foreseeable future.
Unregistered Sales of Securities
Effective January 1, 1998, the Company acquired through merger, the
twenty-percent minority interest in its Youthtrack, Inc. subsidiary held by
members of its founding management and is operating it as a wholly-owned
subsidiary under its present management.
In November 1997, the Company completed a Rule 144A private placement
of $109.4 million (including an over allotment of $9.4 million) principal amount
of 6% convertible subordinated notes due in 2004. The notes were initially sold
within the United States to qualified institutional accredited investors and
qualified institutional buyers and outside the United States to non-U.S.
investors. The notes are initially convertible into Res-Care common stock at a
conversion price of $28.2125, which represents approximately 3,878,000 shares of
common stock.
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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. The selected consolidated financial data presented below under the
captions "Statement of Income Data" and "Balance Sheet Data" as of, and for the
end of, each of the years in the four-year period ended December 31, 1997, are
derived from the consolidated financial statements of the Company, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected consolidated financial data presented as of, and for the year ended
December 31, 1993, are derived from unaudited consolidated financial statements.
Years Ended December 31
-----------------------
1993 1994 1995 1996 1997
---------------------------------------------------------
STATEMENT OF INCOME DATA (1): (In thousands, except per share and operating data)
Net revenues:
Disabilities services................................ $ 88,338 $ 114,358 $ 146,062 $ 181,280 $ 243,045
Youth services....................................... 27,534 28,600 31,366 42,985 63,009
----------- ----------- ----------- ----------- -----------
Total net revenues............................... 115,872 142,958 177,428 224,265 306,054
Facility and program expenses:
Disabilities services................................ 77,336 101,473 129,245 156,661 209,000
Youth services....................................... 24,507 25,544 27,529 38,221 56,041
----------- ----------- ----------- ----------- -----------
Total facility and program expenses.............. 101,843 127,017 156,774 194,882 265,041
----------- ----------- ----------- ----------- -----------
Facility and program contribution......................... 14,029 15,941 20,654 29,383 41,013
Operating expenses:
Corporate general and administrative................. 5,401 6,085 7,161 9,813 11,222
Depreciation and amortization........................ 1,053 1,443 2,196 3,683 6,298
----------- ----------- ----------- ----------- -----------
Total operating expenses......................... 6,454 7,528 9,357 13,496 17,520
----------- ----------- ----------- ----------- -----------
Operating income.......................................... 7,575 8,413 11,297 15,887 23,493
Other (income) expenses, net.............................. (295) (574) (713) 926 1,779
------------ ----------- ----------- ----------- -----------
Income from continuing operations before income
taxes................................................ 7,870 8,987 12,010 14,961 21,714
Income taxes.............................................. 3,510 3,862 4,699 5,518 8,737
----------- ----------- ----------- ----------- -----------
Income from continuing operations......................... 4,360 5,125 7,311 9,443 12,977
Net income (2)............................................ $ 5,105 $ 6,179 $ 16,558 $ 9,443 $ 12,977
=========== =========== =========== =========== ===========
Basic earnings per share:
Income from continuing operations.................... $ 0.45 $ 0.52 $ 0.75 $ 0.95 $ 1.12
Net income........................................... 0.52 0.63 1.69 0.95 1.12
Diluted earnings per share:
Income from continuing operations.................... 0.43 0.51 0.72 0.91 1.08
Net income........................................... 0.51 0.61 1.64 0.91 1.08
Pro forma net earnings per share:
Basic................................................ 0.52 0.63 1.68 0.92 ----
Diluted.............................................. 0.51 0.61 1.64 0.88 ----
Weighted average shares used in per share calculations:
Basic................................................ 9,774,790 9,781,091 9,797,750 9,900,446 11,606,238
Diluted.............................................. 10,036,045 10,080,599 10,089,188 10,409,225 12,379,600
OPERATING DATA (1):
Disabilities Services:
Number of facilities and programs ................... 215 237 264 286 407
Contract capacity (3)................................ 2,786 3,040 4,286 5,031 6,831
Persons served....................................... 2,624 2,876 4,099 4,899 6,628
Capacity utilized.................................... 94.2% 94.6% 95.6% 97.4% 97.0%
Youth Services:
Number of facilities and programs ................... 7 7 8 28 44
Contract capacity (3)................................ 1,880 1,970 2,500 2,670 5,455
Persons served....................................... 1,824 2,000 2,562 2,605 5,323
Capacity utilized.................................... 97.0% 101.5% 102.5% 97.6% 97.6%
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
As of December 31
-----------------
1993 1994 1995 1996 1997
---------------------------------------------------------
BALANCE SHEET DATA (1):
Working capital........................................... $ 15,415 $ 16,790 $ 17,123 $ 23,353 $ 90,082
Total assets.............................................. 44,343 50,368 87,440 115,312 255,168
Long-term debt, less current portion...................... 4,748 5,742 18,644 30,672 108,470
Shareholders' equity...................................... 23,939 30,279 47,069 58,095 104,609
- ----------
(1) In January 1997, the Company acquired the partnership interests in Premier
Rehabilitation Centers in a transaction accounted for as a
pooling-of-interests. Accordingly, the Company's financial statements have
been restated for all periods presented to include the financial condition
and results of operations of Premier. Pro forma amounts have been presented
to reflect the tax effect of the Premier partnership interests in prior
years. Operating data has not been restated to reflect the operations of
Premier. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
(2) Net income includes income from operation of an unconsolidated affiliate
sold, accounted for as a discontinued operation, of $745, $1,054 and $428 in
1993, 1994 and 1995, respectively, and includes an $8,819 gain from sale of
this discontinued operation in 1995, net of applicable income taxes of
$6,270. The aggregate net income per share is as follows: basic $0.08, $0.11
and $0.94, diluted $0.07, $0.10 and $0.92 in 1993, 1994 and 1995
respectively.
(3) Contract capacity includes, in the case of licensed facilities, the number
of persons covered by the applicable license or permit and, in all other
cases, the number of persons covered by the applicable contract. Contract
capacity does not include capacity for day or respite programs.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Res-Care receives revenues primarily from the delivery of residential,
training, education and support services to populations with special needs,
including persons with developmental and other disabilities ("disabilities
services") and at-risk and troubled youths ("youth services"). Revenues for the
Company's disabilities services operations are derived primarily from state
government agencies under the Medicaid reimbursement system and from management
contracts with private operators, generally not-for-profit providers, who
contract with state government agencies and are also reimbursed under the
Medicaid system. Reimbursement methods vary by state and are typically based on
a flat rate or cost-based reimbursement system on a per person, per diem basis.
Generally, rates are adjusted annually based primarily upon historical costs
experienced by the Company and by other service providers, and 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's youth services operations include 12 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 and Alternative Youth Services
subsidiaries. Most of the youth services programs are funded directly by
federal, state and local government agencies including school systems. Under
these contracts, the Company is typically reimbursed based on fixed contract
amounts, flat rates or cost-based rates. In 1996 and 1997, the effect of
Youthtrack management's ownership interest is reflected in the Company's
consolidated statements of income as a minority interest. On January 1, 1998,
the Company acquired through merger, the twenty-percent minority interest in
Youthtrack, Inc. formerly held by members of its founding management.
Expenses incurred under federal, state and local government agency
contracts for disabilities services and youth services, as well as management
contracts with providers of record for such agencies, are subject to examination
by agencies administering the contracts and services. Any resulting adjustments
would be recorded as contractual adjustments to revenues in the period in which
the adjustment is made. See Note 1 of Notes to Consolidated Financial
Statements.
The Company's revenues and net income 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 net
revenues for a period in which an adjustment occurs may not be indicative of
expected results in succeeding periods. Revenues in the future may be affected
by changes in rate-setting structures, methodologies or interpretations that may
be proposed or are under consideration in states where the Company operates.
Also, some states have considered initiating managed care plans for persons
currently in Medicaid programs. At this time, the Company cannot determine the
impact of such changes, or the effect of various federal initiatives that have
been proposed.
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19
The Company is currently engaged in litigation or administrative
proceedings with various states' Medicaid programs regarding rate-setting and
reimbursement methodologies which could adversely affect the Company's business,
financial condition or results of operations, especially in any period in which
such adjustments exceed amounts previously estimated. See "Legal Proceedings."
The loss of one or more contracts to operate the Company's programs or
facilities could have a material adverse effect on the Company's current or
future results of operations. In 1997, the Company's contract to operate the
Gulfport, Mississippi Job Corps center was not renewed. The loss of this
contract represented approximately $4.6 million in annual revenues.
In January 1997, the Company acquired the partnership interests in
Premier Rehabilitation Centers in a transaction accounted for as a
pooling-of-interests. Premier provides disabilities services to clients with
ABI. The Company's consolidated financial statements and all financial data
derived therefrom have been restated for all periods presented to include the
financial condition and results of operations of Premier. Operating Data has not
been restated to reflect the operations of Premier.
In May 1995, the Company sold to a third party all of its interest in
an unconsolidated affiliate engaged in providing home health care services and
reported a gain on this transaction of $8.8 million after applicable income
taxes. The effect of the sale has been recorded in the Company's financial
statements as a discontinued operation.
During 1997, the Company added 18 acquisitions and new contracts
representing programs and facilities serving approximately 6,890 individuals
with special needs. In these transactions, the Company paid total consideration
of approximately $53 million (generally funded from the Revolving Credit
ility) and issued 409,250 shares of common stock in the Premier transaction,
which was accounted for as a pooling-of-interests.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
from the Company's consolidated statements of income expressed as a percentage
of the Company's total net revenues and in the case of facility and program
expenses and facility and program contribution, as a percentage of related net
revenues, and the percentage change in the amounts of such items from the prior
year:
Year to Year
Increase
-------------
Year Ended December 31, 1995 1996
----------------------- to to
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
Net revenues:
Disabilities services................................................. 82.3% 80.8% 79.4% 24.1% 34.1%
Youth services........................................................ 17.7 19.2 20.6 37.0 46.6
---- ---- ----
Total net revenues.............................................. 100.0 100.0 100.0 26.4 36.5
Facility and program expenses:
Disabilities services................................................. 88.5 86.4 86.0 21.2 33.4
Youth services........................................................ 87.8 88.9 88.9 38.8 46.6
---- ---- ----
Total facility and program expenses............................. 88.3 86.9 86.6 24.3 36.0
Facility and program contribution:
Disabilities services................................................. 11.5 13.6 14.0 46.4 38.3
Youth services........................................................ 12.2 11.1 11.1 24.2 46.3
---- ---- ----
Total facility and program contribution......................... 11.6 13.1 13.4 42.3 39.6
Operating expenses:
Corporate general and administrative.................................. 4.0 4.4 3.7 37.0 14.4
Depreciation and amortization.............................................. 1.2 1.6 2.1 67.7 71.0
--- --- ---
Operating income........................................................... 6.4 7.1 7.7 40.6 47.9
Other (income) expenses, net............................................... (0.4) 0.4 0.6 NM 92.1
----- --- ---
Income from continuing operations before income taxes...................... 6.8 6.7 7.1 24.6 45.1
Income taxes............................................................... 2.7 2.5 2.9 17.4 58.3
--- --- ---
Income from continuing operations.......................................... 4.1% 4.2% 4.2% 29.2% 37.4%
==== ==== ====
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YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Total net revenues increased by 36.5%, or $81.8 million, to $306.1
million in 1997 compared to $224.3 million in 1996. Of the increase, 75.6%
resulted from increased disabilities services revenues. Disabilities services
net revenues increased by 34.1%, or $61.8 million, to $243.0 million in 1997
compared to 1996. Revenues increased primarily from the acquisition of 11
operations and one management contract in 1997, the opening of 39 new operations
and supported living programs in 1997 and the effects of a full year of
operations added in 1996. Revenues also increased due to certain cost-of-living
and other rate adjustments. Average disabilities services facility and program
occupancy rates for 1997 decreased 0.4% to 97.0% compared to 97.4% in 1996.
Youth services net revenues increased by 46.6%, or $20.0 million, to
$63.0 million in 1997 compared to 1996, resulting primarily from the acquisition
of five Job Corps centers from Teledyne Economic Development in October 1997 and
three acquisitions and two management contracts by the Alternative Youth
Services subsidiary during 1997.
Facility and Program Expenses
Facility and program expenses increased 36.0%, or $70.2 million, to
$265.0 million in 1997 compared to 1996. Of this increase, $51.7 million, or
73.6% was due to payroll and payroll-related expenses. These expenses reflected
additional personnel, and other costs associated with new facilities and
programs during the year, as well as payroll and other cost increases. Facility
and program expenses decreased as a percentage of total revenues to 86.6% from
86.9% in 1996. This decrease was due to the effect of the rate increases
described above, improved operating efficiencies.
Disabilities services facility and program expenses increased 33.4%, or
$52.2 million, to $209.0 million in 1997 compared to 1996. Payroll and
payroll-related expenses represented 77.6% of this increase due primarily to the
new facilities in 1997 and the effects of a full year of operations of programs
that were added in 1996. As a percentage of disabilities services net revenues,
disabilities services facility and program expenses decreased to 86.0% in 1997
from 86.4% in 1996. This decrease was due to the effect of the rate increases
described above, improved operating efficiencies.
Youth services facility and program expenses increased 46.6%, or $17.8
million, to $56.0 million in 1997 compared to 1996. Payroll and payroll-related
expenses represented 62.9% of the increase due primarily to the new facilities
in 1997 and the effects of a full year of operations of programs that were added
in 1996. As a percentage of net revenues for youth services, facility and
program expenses remained unchanged at 88.9% in 1997. This increase was due
primarily to new acquisitions during 1997 and the increased costs associated
with transitioning acquisitions.
Operating Expenses
Corporate general and administrative expenses increased 14.4%, or $1.4
million, to $11.2 million in 1997 compared to 1996. The increase primarily
reflected additional personnel to support the growth of the Company's
operations, as well as increased use of professional services. As a percentage
of total net revenues, such expenses decreased to 3.7% in 1997 compared to 4.4%
in 1996.
Depreciation and amortization increased 71.0%, or $2.6 million, to $6.3
million in 1997 compared to 1996. The increase is due primarily to the purchase
of real property and intangible assets related to acquisitions during 1996 and
1997. Amortization expense also includes amortization of deferred start-up
expenses relating to the development of new facilities and programs. Deferred
start-up expenses include administrative and staff salaries, rent, professional
fees, insurance and other costs incurred during the period prior to operation of
facilities and programs. Such costs are amortized using the straight-line method
over periods ranging from five to seven years, consistent with applicable state
reimbursement regulations. At December 31, 1997, unamortized start-up costs
totaled $4.5 million. See Notes 1 and 4 of Notes to Consolidated Financial
Statements.
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Other (Income) Expense, Net
Net interest expense increased $840,000 to $1.7 million in 1997
compared to 1996. The increase resulted from increased utilization of the credit
facility for acquisitions, development and working capital prior to the
convertible debt offering. Also, during November 1997, the Company issued,
before discount, $109.4 million of convertible notes with a stated rate of
interest of 6%. See Note 6 of Notes to Consolidated Financial Statements
Income Taxes
Income taxes increased 58.3%, or $3.2 million, to $8.7 million in 1997
compared to 1996, and reflect effective tax rates of 40.2% and 36.9% in 1997 and
1996, respectively. The change in the effective tax rate is due primarily to
Premier being taxed as a partnership prior to 1997. The increase in income tax
expense is attributable to a higher level of operating income as described above
and the restatement of 1996 financial statements for the Premier
pooling-of-interests completed January 1, 1997.
Income From Continuing Operations and Net Income
Income from continuing operations increased 37.4%, or $3.5 million, to
$13.0 million in 1997 compared to 1996 resulting primarily from the revenues of
acquired and new programs and facilities, as well as improved occupancy and per
diem rates.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total net revenues increased by 26.4%, or $46.8 million, to $224.3
million in 1996 compared to 1995. Of this increase, 75.2% resulted from
increased disabilities services revenues. Disabilities services net revenues
increased by 24.1%, or $35.2 million, to $181.3 million in 1996 compared to
1995. Revenues increased primarily from the acquisition of 12 facilities and
four supported living operations in 1996, the opening of nine new facilities in
1996 and the effect of a full year of operations of 21 new facilities and
programs added in 1995. Revenues also increased due to certain cost-of-living
and other rate adjustments providing reimbursement for payroll and other
expenses incurred in prior periods. Average disabilities services facility and
program occupancy rates for 1996 increased 1.8% to 97.4% compared to 95.6% in
1995.
Youth services net revenues increased by 37.0%, or $11.6 million, to
$43.0 million in 1996 compared to 1995, resulting primarily from the first full
year of operations of the Edison Job Corps Center and the Company's first year
of operations of Youthtrack. During 1996, the Company began providing services
to more than 350 youths through an acquisition by and a new contract awarded to
Youthtrack. Revenues were also impacted by inflationary increases. In addition,
during 1996, the Company was awarded a contract by the DOL to continue operating
the South Bronx Job Corps Center. In December 1996, the Company was awarded a
10-month basic education contract to provide support services at the Great Onyx
Job Corps Center in Mammoth Cave, Kentucky.
Facility and Program Expenses
Facility and program expenses increased 24.3%, or $38.1 million, to
$194.9 million in 1996 compared to 1995. Of this increase, $26.6 million, or
69.8%, was due to payroll and payroll-related expenses. These expenses reflected
additional personnel, primarily for the facilities and programs added during the
year, as well as annual pay increases. Facility and program expenses decreased
as a percentage of total net revenues to 86.9% in 1996 from 88.3% in 1995 due to
improved operating efficiencies, higher occupancy levels and the effect of the
rate increases described above.
Disabilities services facility and program expenses increased 21.2%, or
$27.4 million, to $156.7 million in 1996 compared to 1995. Payroll and
payroll-related expenses represented 76.7% of this increase due primarily to the
new facilities in and the effects of a full year of operations of programs that
were added in 1995. As a percentage of disabilities services net revenues,
disabilities services facility and program expenses decreased to 86.4% in 1996
from 88.5% in 1995. This decrease was due to improved operating efficiencies,
higher occupancy levels and the effect of the rate increases described above.
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Youth services facility and program expenses increased 38.8%, or $10.7
million, to $38.2 million in 1996 compared to 1995. The increase related
primarily to the first full year of the operation of the Edison Job Corps Center
and the initial costs of the Youthtrack operation. As a percentage of youth
services net revenues, youth services facility and program expenses increased to
88.9% in 1996 from 87.8% in 1995. The increase in facility and program expenses
as a percentage of net revenues was due primarily to the initial costs of the
Youthtrack operation.
Operating Expenses
Corporate general and administrative expenses increased 37.0%, or $2.7
million, to $9.8 million in 1996 compared to 1995. The increase primarily
reflected additional personnel to support the growth of the Company's
operations, as well as increased use of professional services. As a percentage
of total net revenues, such expenses increased to 4.4% in 1996 compared to 4.0%
in 1995.
Depreciation and amortization expense increased 67.7%, or $1.5 million,
to $3.7 million in 1996 compared to 1995. The increase is due primarily to the
purchase of real property and intangible assets in disabilities services during
1995 and 1996. Amortization expense also includes amortization of deferred
start-up costs relating to the development of new facilities and programs.
Deferred start-up costs include administrative and staff salaries, rent,
professional fees, insurance and other costs incurred during the period prior to
operate the facilities and programs. Such costs are amortized using the
straight-line method over periods ranging from five to seven years, consistent
with applicable state reimbursement regulations. At December 31, 1996,
unamortized start-up costs totaled $3.5 million. See Notes 1 and 4 of Notes to
Consolidated Financial Statements.
Other (Income) Expense, Net
Net interest expense increased $1.1 million, to $893,000, in 1996
compared to net interest income of $221,000 in 1995. The difference resulted
primarily from increased borrowings for acquisitions and working capital. In
1995, funds held in escrow from a 1988 transaction for the sale of the assets of
a facility were returned, and the Company recognized a one-time credit of
$507,000, net of expenses.
Income Taxes
Income taxes increased 17.4%, or $819,000, to $5.5 million in 1996
compared to 1995, and reflect effective tax rates of 36.9% and 39.1% in 1996 and
1995, respectively. The decrease in the effective income tax rate is due
primarily to Premier being taxed as a partnership prior to 1997. Net income for
1995 and 1996 was restated to reflect the Premier pooling-of-interests.
Income From Continuing Operations and Net Income
Income from continuing operations increased 29.2%, or $2.1 million, to
$9.4 million in 1996 compared to 1995, resulting primarily from the revenue
contribution of acquired and new programs and facilities as well as improved
occupancy and per diem rates. Included in 1995 net income is $9.1 million, or
$0.88 diluted earnings per share, attributable to income from and gain on the
sale of the Company's discontinued home health care operations. This operation
was sold during 1995, resulting in an after tax gain of $8.8 million. Due to the
effect of the sale of the discontinued operation, net income was $9.4 million,
or $0.91 diluted earnings per share, in 1996 versus $16.6 million or $1.64
diluted earnings per share in 1995.
Liquidity and Capital Resources
The Company's need for capital is attributable primarily to the
Company's plans to expand through acquisitions and the development of new
facilities and programs, and to have sufficient working capital for general
corporate purposes. Since most of the Company's facilities and programs are
operating at or near capacity, and budgetary pressures and other forces are
expected to limit increases in reimbursement rates received by the Company, the
Company's ability to continue to grow at its current rate is directly dependent
upon such acquisitions and development.
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During the year ended December 31, 1997, net cash provided by operating
activities was $15.2 million compared to $8.1 million for 1996, and $4.1 million
for 1995. The increase in 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, trade
payables and accrued expenses is primarily related to the increased number of
acquisitions made during 1997.
During the year ended December 31, 1997, net cash used in investing
activities was $59.6 million, relating primarily to acquisitions and purchases
of property and equipment. During 1996, net cash used in investing activities
was $20.7 million, related primarily to acquisitions and the purchase of
property and equipment. During 1995, net cash used in investing activities was
$17.3 million, related primarily to acquisitions and the purchase of property
and equipment, offset by dividends from the unconsolidated affiliate sold and
the proceeds from the sale of the unconsolidated affiliate net of income taxes.
Net cash provided by financing activities was $103.1 million for 1997,
related primarily to the secondary stock offering and the issuance of
convertible subordinated notes, offset by repayment of the line-of-credit. Net
cash provided by financing activities was $13.0 million for 1996, and $10.3
million for 1995, both consisting primarily of borrowings against the
line-of-credit.
On April 15, 1997, the Company completed a secondary offering of its
common stock generating proceeds of $26.8 million before offering expenses. The
proceeds were used to repay borrowings on the Company's line-of-credit.
On June 23, 1997, the Company amended its Revolving Credit Facility
with its banks: PNC Bank, Kentucky, Inc., National City Bank of Kentucky, Sun
Trust Bank, Nashville, N.A., Bank One Kentucky, N.A., and Wachovia Bank, which
expires on December 31, 2001, subject to extension. The Revolving Credit
Facility provides for maximum borrowings of $100 million, including up to $10
million in letters of credit. The Revolving Credit Facility bears interest at
the Company's option at either (i) LIBOR plus a range of 0.5% to 1.625%,
depending upon certain financial ratios or (ii) the lead lender's prime rate. At
December 31, 1997, the Company had $5.1 million outstanding in letters of
credit.
On November 20, 1997, the Company entered into a Second Amendment to
the Revolving Credit Facility which provided for: (i) bank consent for the
Company to issue convertible subordinated notes not to exceed $115 million, (ii)
the amendment of certain financial covenants and (iii) the addition of new
subsidiaries as parties to the loan instruments.
On March 12, 1998, the Company entered into a Third Amendment to the
Revolving Credit Facility which provided for: (i) the issuance of the
convertible subordinated notes related to the acquisition of Normal Life, Inc.
and (ii) the addition of new subsidiaries as parties to the loan instruments.
On November 18, 1997, the Company completed a private placement of
$109.4 million, prior to discount, 6.0% Convertible Subordinated Notes due 2004.
The notes are initially convertible into Res-Care common stock based on a
conversion price of $28.2125. The proceeds from the issuance of these notes were
used to pay off the Company's line-of-credit and together with amounts available
under the line-of-credit will be used to finance future acquisitions.
Net days revenue in accounts receivable for the Company was 61 days at
December 31, 1997, compared to 50 days at December 31, 1996 and 46 days at
December 31, 1995. Accounts receivable for disabilities services at December 31,
1997, increased to $47.9 million, compared to $31.2 million at December 31,
1996, and $22.8 million at December 31, 1995. In youth services, payment is
generally received within 15 to 45 days of billings.
The Company has historically sought to provide its services in leased
premises, especially in the case of larger facilities. However, in response to
changes in certain reimbursement methodologies primarily related to its
expansion of services provided to consumers in community-based settings; the
Company has increased its real estate purchases, particularity residential
homes. Also, acquisitions may involve the purchase of real estate.
On March 12, 1998, the Company acquired all of the outstanding common
stock of Normal Life, Inc., a provider of MR/DD services based in Louisville,
Kentucky serving approximately 1,300 individuals. The transaction
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was structured as a purchase of stock for a combination of $51 million in cash
and a $22 million Res-Care subordinated note convertible into 567,697 shares of
stock.
The Company believes that borrowings under its Revolving Credit
Facility together with its cash and cash equivalents, the use of operating
leases whenever possible, cash generated from operations and the net proceeds of
the secondary common stock offering and the subordinated convertible notes
offering will be sufficient to satisfy its existing and expected commitments for
the next twelve months.
Year 2000 Processing Issue
Many existing computer programs employed throughout the world use two
digits rather than four to identify the year. These programs, if not modified,
will not correctly handle the change from "99" to "00" on January 1, 2000, and
will no longer be able to perform necessary functions. The Year 2000 issue
affects all companies and organizations.
The Company has implemented steps intended to assure that its computer
systems and processes are capable of Year 2000 processing. Year 2000 readiness
assessments have been made in the Company's major application areas. Plans for
remediation efforts have been developed and are underway with implementation
expected to be completed by the end of the first quarter 1999. The Company is
reliant on systems maintained by third parties, including states and other
reimbursers, and is developing plans to address the risks of third-party
non-compliance. However, the Company is not presently in a position to make a
definitive assessment of the effect on results of operations or liquidity of
non-compliance by one or more states in which the Company conducts significant
operations.
The Company has not made a full assessment of the costs of its Year
2000 compliance efforts, however; the Company believes that it will be able to
fund any additional costs from available resources without materially affecting
liquidity, financial condition, or results of operations.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 defines comprehensive income
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. The
Statement requires comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997. The
Company does not expect the implementation of this Statement to have a material
effect on the consolidated financial statements.
SFAS No. 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly report to
shareholders. The Statement requires that companies disclose segment data based
on how management makes decisions about allocating resources to segments and
measuring their performance. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company does not expect the
implementation of this Statement to have a material effect on the consolidated
financial statements.
Risks Associated With Forward-looking Statements
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including the following
cautionary statements that are intended to identify certain important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements concerning the Company made by or on
behalf of the Company, whether contained herein or elsewhere.
The Company's growth in revenues and earnings per share has been
directly related to a considerable increase in the number of individuals served
in its Division for Persons with Disabilities and its Division for Youth
Services. This growth is largely dependent upon development-driven activities,
including the acquisitions of other businesses or facilities or of management
contract rights to operate facilities, the award of contracts to open new
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facilities or start new operations or to assume management of facilities
previously operated by governmental agencies or not-for-profit organizations and
the extension or renewal of contracts previously awarded to the Company. The
Company often makes forward-looking statements regarding its development
activities.
Changes in the Company's future revenues depend significantly upon the
success of these development activities, and in particular on the Company's
ability to obtain additional contracts to provide services to the special needs
populations it serves, whether through acquisitions, awards in response to
requests for proposals for new facilities or programs or for facilities being
privatized by governmental agencies, or other development activities. Future
revenues also depend on the Company's ability to maintain and renew its existing
services contracts and its existing leases. The Company actively seeks
acquisitions of other companies, facilities and assets as a means of increasing
the number of consumers served. Changes in the market for such acquisition
prospects, including increasing competition for and increasing pricing of such
acquisition prospects, could also adversely affect the timing and/or viability
of future development activities.
Revenues of the Company's Division for Persons with Disabilities are
highly dependent on reimbursement under federal and state Medicaid programs.
Generally, each state has its own Medicaid reimbursement regulations and
formula. The Company's revenues and operating profitability are dependent upon
its ability to maintain its existing reimbursement levels and to obtain periodic
increases in reimbursement rates. Changes in the manner in which Medicaid
reimbursement rates are established or reviewed in one or more of the states in
which the Company conducts its operations could adversely affect revenues and
profitability. Other changes in the manner in which federal and state
reimbursement programs are operated, and in the manner in which billings/costs
are reviewed and audited, could also affect revenues and operating
profitability.
The Company's cost structure and ultimate operating profitability are
significantly dependent on its labor costs and the availability and utilization
of its labor force and thus may be affected by a variety of factors, including
local competitive forces, changes in minimum wages or other direct personnel
costs, the Company's effectiveness in managing its direct service staff, and
changes in consumer services models, such as the trends toward supported living
and managed care.
Additionally, the Company's continued expansion of its existing
operations, and its ability to expand its provision of services to other
populations utilizing the Company's core competencies are dependent upon
continuation of trends toward downsizing, privatization and consolidation and
the Company's ability to tailor its services to meet the specific needs of these
different populations. The success in operating in a changing environment is
subject to a variety of political, economic, social and legal pressures,
including desires of governmental agencies to reduce costs and increase levels
of services, federal, state and local budgetary constraints and actions brought
by advocacy groups and the courts to change existing service delivery systems.
Material changes resulting from these trends and pressures could adversely
affect the demand for and reimbursement of the Company's services and its
operating flexibility, and ultimately its revenues and profitability.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to "F" pages.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company
is filing a definitive proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this report which includes
the required information. The required information contained in the Company's
proxy statement is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Index to Consolidated Financial Statements-Res-Care, Inc. and Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Income for the years ended December 31, 1995,
1996 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
(b)(1) On October 14, 1997, the Company filed a Report on Form 8-K/A-1 to amend
the Report on 8-K filed August 14, 1997 by filing financial statements
of the business acquired and pro forma financial information.
(b)(2) On November 7, 1997, the Company filed a Report on Form 8-K to report a
press release issued on November 6, 1997 announcing a private placement
of convertible subordinated notes.
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.
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INDEX TO EXHIBITS
Exhibit
No. Exhibit
--- -------
2.1 Agreement by and among Res-Care, Inc., RSCR California, Inc.,
Res-Care Illinois, Inc., Res-Care Kansas, Inc., and RSCR Texas, Inc.
and Beverly Health and Rehabilitation Services, Inc., Beverly
Enterprises-California, Inc., Beverly Enterprises-Illinois, Inc.,
Beverly Enterprises-Kansas, Inc. and Beverly Enterprises-Texas,
Inc., dated April 5, 1995 (excluding Exhibits and Schedules).
Exhibit 2-1 to the Company's Report on Form 8-K dated May 1, 1995
filed on May 12, 1995 is hereby incorporated by reference.
2.2 Stock Purchase Agreement by and among Housecall Medical Resources
Inc. and Res-Care, Inc., Blair S. Gordon and J. Paul Gordon dated as
of May 31, 1995 (excluding Exhibits and Schedules). Exhibit 2-1 to
the Company's Report on Form 8-K dated May 31, 1995 filed on June
15, 1995 is hereby incorporated by reference.
2.3 Stock Purchase Agreement by and among the Company and Richard Greer,
Robert Greer and Alicia Greer Austin dated July 31, 1997. Exhibit
2-1 to the Company's Report on Form 8-K dated July 31, 1997 filed on
August 14, 1997 is hereby incorporated by reference.
2.4 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.
3.1 Amendment to Restated Articles of Incorporation of the Company.
Exhibit 3.1 to the Company's Registration Statement on Form S-3
(Reg. No. 333-32513) is hereby incorporated by reference.
3.2 Amended and Restated Articles of Incorporation 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.
3.3 Bylaws of the Company. Exhibit 3.1 to the Company's Registration
Statement on Form S-3 (Reg. No. 333-44029) is hereby incorporated by
reference.
4.1 Specimen Common Stock Certificate. Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-48749) is hereby
incorporated by reference.
4.2 Article VI of the Amended and Restated Articles of Incorporation of
the Company included in Exhibit 3.1.
4.3 Indenture, dated as of November 21, 1997, between the Company and
PNC Bank, Kentucky, Inc. Exhibit 4.3 to the Company's Registration
Statement on Form S-3, (Reg. No. 333-44029) is hereby incorporated
by reference.
4.4 Registration Rights Agreement, dated as of November 21, 1997, by and
among the Company, NationsBanc Montgomery Securities, Inc., J.C.
Bradford & Co., L.L.C. and Equitable Securities Corporation. Exhibit
4.4 to the Company's Registration Statement on Form S-3 (Reg. No.
333-44029) is hereby incorporated by reference.
4.5 Statement of Additional Terms and Conditions dated as of March 15,
1998 relating to $22 million 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.
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INDEX TO EXHIBITS (CONTINUED)
Exhibit
No. Exhibit
--- -------
10.1* 1991 Incentive Stock Option Plan of the Company (adopted April 24,
1991, amended and restated as of February 23, 1995). Exhibit 4 to
the Company's Registration Statement on Form S-8 (Reg. No. 33-80331)
is hereby incorporated by reference.
10.2* Amendment to Amended and Restated 1991 Incentive Stock Option Plan
of the Company. (filed herewith)
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 Amended and Restated Loan Agreement dated as of April 26, 1995 by
and among Res-Care, Inc. and PNC Bank, Kentucky, Inc. and National
City Bank, Kentucky. Exhibit 10-7 to the Company's Annual Report on
Form 10-K for the year ending December 31, 1995 is hereby
incorporated by reference.
10.6 1994 Employee Stock Purchase Plan effective July 1, 1995. Exhibit
4.1 to the Company's Registration Statement on Form S-8 (Reg. No.
33-85964) is hereby incorporated by reference.
10.7* Employment Agreement dated October 26, 1995 between the Company and
Ronald G. Geary. Exhibit 10-1 to the Company's Report on Form 10-Q
for the quarter ending September 30, 1995 is hereby incorporated by
reference.
10.8 Res-Care, Inc. 401(K) Restoration Plan effective December 1, 1995.
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
year ending December 31, 1995, is hereby incorporated by reference.
10.9 Second Amendment to Loan Instruments dated as of February 16, 1996
by and among Res-Care, Inc., and PNC Bank, Kentucky, Inc. National
City Bank, Kentucky and Sun Trust Bank, Nashville, N.A. Exhibit
10.12 to the Company's Report on Form 10-K for the year ending
December 31, 1995, is hereby incorporated by reference.
10.10 Second Amended and Restated Employment Agreement dated March 17,
1996, between the Company and E. Halsey Sandford. Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the year ending
December 31, 1995, is hereby incorporated by reference.
10.11 Amended and Restated Employment Agreement dated as of October 26,
1995, and amended November 5, 1996, between the Company and Ronald
G. Geary. Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ending December 31, 1996 is hereby incorporated by
reference.
10.12 Loan Agreement dated as of December 23, 1996 by and among Res-Care,
Inc. and all of its subsidiaries and PNC Bank, Kentucky, Inc.,
National City Bank of Kentucky, SunTrust Bank, Nashville, N.A., and
Bank One, Kentucky, NA. Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the year ending December 31, 1996 is hereby
incorporated by reference.
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INDEX TO EXHIBITS (CONTINUED)
Exhibit
No. Exhibit
--- -------
10.13* Employment Agreement dated January 1, 1997 between the Company and
Jeffrey M. Cross. Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the year ending December 31, 1996 is hereby
incorporated by reference.
10.14* Employment Agreement dated April 13, 1997 between the Company and
Paul G. Dunn. Exhibit 10.2 to the company's Report on Form 10-Q for
the quarter ending March 31, 1997 is hereby incorporated by
reference.
10.15* Amendment to the Employment Agreement between the Company and
Jeffrey M. Cross dated August 4, 1997. Exhibit 10.3 to the Company's
Report on Form 10-Q for the quarter ending June 30, 1997 is hereby
incorporated by reference.
10.16* Amendment to the Employment Agreement between the Company and Paul
G. Dunn dated August 4, 1997. Exhibit 10.4 to the Company's Report
on Form 10-Q for the quarter ending June 30, 1997 is hereby
incorporated by reference.
10.17* Employment Agreement between the Company and Pamela M. Spaniac dated
July 10, 1997. Exhibit 10.5 to the Company's Report on Form 10-Q for
the quarter ending June 30, 1997 is hereby incorporated by
reference.
10.18 First Amendment to Loan Instruments by and between PNC Bank,
Kentucky, Inc.; National City Bank of Kentucky; SunTrust Bank,
Nashville, N.A.; Bank One, Kentucky, NA; Wachovia Bank, NA; and
Res-Care, Inc. and Subsidiaries dated June 17, 1997. Exhibit 10.6 to
the Company's Report on Form 10-Q for the quarter ending June 30,
1997 is hereby incorporated by reference.
10.19 Second Amendment to Loan Instruments by and between PNC Bank,
Kentucky, Inc.; National City Bank of Kentucky; SunTrust Bank,
Nashville, N.A.; Bank One, Kentucky, NA; Wachovia Bank, NA; and
Res-Care, Inc. and Subsidiaries dated November 20, 1997. Exhibit
10.19 to the Company's Registration Statement on Form S-3 (Reg. No.
333-44029) is hereby incorporated by reference.
10.20* Employment Agreement between the Company and E. Halsey Sandford,
dated January 26, 1998 (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
- ----------
* Management contracts or compensatory plan or arrangements.
30
32
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: By: /s/ Ronald G. Geary
----------------------------- ------------------------
Ronald G. Geary
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James R. Fornear Chairman of the Board and Director _______________
- ----------------------------------
James R. Fornear
/s/ Ronald G. Geary President, Chief Executive Officer _______________
- ---------------------------------- (Principal Executive Officer) and
Ronald G. Geary Director
/s/ E. Halsey Sandford Senior Executive and Director _______________
- ----------------------------------
E. Halsey Sandford
/s/ Pamela Mandel Spaniac Executive Vice President, _______________
- ---------------------------------
Pamela Mandel Spaniac Finance and Administration
(Chief Financial Officer)
/s/ Seymour L. Bryson Director _______________
- ---------------------------------
Seymour L. Bryson
/s/ W. Bruce Lunsford Director _______________
- ---------------------------------
W. Bruce Lunsford
/s/ Spiro B. Mitsos Director _______________
- ----------------------------------
Spiro B. Mitsos
31
33
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report....................................................................................... F-2
Consolidated Balance Sheets - As of December 31, 1996 and 1997..................................................... F-3
Consolidated Statements of Income - Years Ended December 31, 1995, 1996 and 1997................................... F-4
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1995, 1996 and 1997..................... F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1996 and 1997............................... F-6
Notes to Consolidated Financial Statements......................................................................... F-8
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, 1996 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
February 24, 1998
F-2
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
-----------
1996 1997
---- ----
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 7,932 $ 66,584
Accounts and notes receivable, net............................................. 33,996 57,240
Inventories.................................................................... 656 634
Deferred income taxes.......................................................... 2,498 3,483
Prepaid expenses............................................................... 1,961 2,259
----------- -----------
Total current assets................................................ 47,043 130,200
----------- -----------
Property and equipment, net......................................................... 43,581 54,403
Excess of acquisition cost over net assets acquired, less accumulated
amortization of $633 in 1996 and $1,751 in 1997................................ 14,558 51,751
Other assets........................................................................ 10,130 18,814
----------- -----------
$ 115,312 $ 255,168
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................................... $ 5,241 $ 13,888
Accrued expenses............................................................... 16,059 22,907
Accrued income taxes........................................................... 2,021 1,564
Current portion of long-term debt.............................................. 369 1,759
----------- -----------
Total current liabilities........................................... 23,690 40,118
----------- -----------
Long-term liabilities............................................................... 1,421 1,714
Long-term debt .................................................................... 30,672 108,470
Deferred income taxes............................................................... 1,361 38
----------- -----------
Total liabilities................................................... 57,144 150,340
----------- -----------
Commitments and contingencies
Minority interest................................................................... 73 219
Shareholders' equity:
Preferred shares, no par value, authorized 1,000,000 shares, no shares
issued or outstanding...................................................... ---- ----
Common stock, no par value, authorized 40,000,000 shares, issued
13,837,500 shares in 1996 and 15,721,650 shares in 1997.................... 15,535 41,678
Additional paid-in capital..................................................... 4,035 11,215
Retained earnings.............................................................. 42,314 55,057
----------- -----------
61,884 107,950
Less cost of common shares in treasury (3,803,822 shares in 1996 and
3,355,968 shares in 1997).................................................. (3,789) (3,341)
------------ ------------
Total shareholders' equity.......................................... 58,095 104,609
----------- -----------
$ 115,312 $ 255,168
=========== ===========
See accompanying notes.
F-3
36
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands, except per share data)
Net revenues........................................................................ $ 177,428 $ 224,265 $ 306,054
Facility and program expenses....................................................... 156,774 194,882 265,041
Operating expenses:
Corporate general and administrative........................................... 7,161 9,813 11,222
Depreciation and amortization.................................................. 2,196 3,683 6,298
----------- ----------- -----------
Total operating expenses............................................ 9,357 13,496 17,520
----------- ----------- -----------
Total facility, program and operating expenses...................... 166,131 208,378 282,561
----------- ----------- -----------
Operating income............................................................... 11,297 15,887 23,493
Other expenses (income):
Interest expense............................................................... 630 1,351 2,544
Interest income................................................................ (851) (458) (811)
Gain from sale of assets....................................................... (489) (4) (100)
------------ ------------ ------------
Total other expenses (income), net.................................. (710) 889 1,633
------------ ----------- -----------
Minority interest in (income) loss of consolidated subsidiary....................... 3 (37) (146)
Income from continuing operations before income taxes............................... 12,010 14,961 21,714
Income tax expense.................................................................. 4,699 5,518 8,737
----------- ----------- -----------
Income from continuing operations................................................... 7,311 9,443 12,977
Discontinued operations:
Income from operation of unconsolidated affiliate sold, net of
applicable income tax of $37 in 1995....................................... 428 ---- ----
Gain from sale of unconsolidated affiliate, net of applicable
income taxes of $6,270..................................................... 8,819 ---- ----
----------- ----------- -----------
Net income .................................................................... $ 16,558 $ 9,443 $ 12,977
=========== =========== ===========
Income per share data:
Basic earnings per share:
Income from continuing operations.......................................... $ 0.75 $ 0.95 $ 1.12
Net income................................................................. 1.69 0.95 1.12
Diluted earnings per share:
Income from continuing operations.......................................... $ 0.72 $ 0.91 $ 1.08
Net income................................................................. 1.64 0.91 1.08
Pro forma income data (unaudited):
Net income as reported......................................................... $ 16,558 $ 9,443 ----
Pro forma adjustment to provision for income taxes............................. (56) (292) ----
------------ ----------- -----------
Pro forma net income........................................................... $ 16,502 $ 9,151 ----
=========== =========== ===========
Pro forma net income per share:
Basic...................................................................... $ 1.68 $ 0.92 ----
Diluted.................................................................... 1.64 0.88 ----
Weighted average shares used in per share calculations:
For basic earnings per share................................................... 9,798 9,900 11,606
For diluted earnings per share................................................. 10,089 10,409 12,380
See accompanying notes.
F-4
37
RES-CARE, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
------ ------ ------- -------- ------ ------ -----
(In thousands)
Balance at December 31, 1994............. 13,838 $ 15,535 $ 2,089 $ 16,693 4,056 $ (4,038) $ 30,279
Net income............................... ---- ---- ---- 16,558 ---- ---- 16,558
Exercise of stock options................ ---- ---- 208 ---- (29) 28 236
Distributions by Premier, net............ ---- ---- --- (4) ---- ---- (4)
--------- ---------- ---------- ---------- ------- -------- ------------
Balance at December 31, 1995............. 13,838 15,535 2,297 33,247 4,027 (4,010) 47,069
Net income............................... ---- ---- ---- 9,443 ---- ---- 9,443
Exercise of stock options................ ---- ---- 1,738 ---- (223) 221 1,959
Distributions by Premier, net............ ---- ---- --- (376) ---- ---- (376)
--------- ---------- ---------- ---------- ------- -------- ------------
Balance at December 31, 1996............. 13,838 15,535 4,035 42,314 3,804 (3,789) 58,095
Net income............................... ---- ---- ---- 12,977 ---- ---- 12,977
Exercise of stock options................ ---- ---- 3,331 ---- (358) 359 3,690
Income tax benefit related to
Premier pooling-of-interests........ ---- ---- 2,320 ---- ---- ---- 2,320
Sale of common stock, net of
expenses............................ 1,884 26,143 ---- ---- ---- ---- 26,143
Issuance of treasury shares in
connection with an acquisition...... ---- ---- 1,529 ---- (90) 89 1,618
Partnership distributions................ ---- ---- ---- (234) ---- ---- (234)
--------- ---------- ---------- --------- ------- -------- -----------
Balance at December 31, 1997............. 15,722 $ 41,678 $ 11,215 $ 55,057 3,356 $ (3,341) $ 104,609
========= ========== ========== ========= ===== ========= ===========
See accompanying notes.
F-5
38
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income..................................................................... $ 16,558 $ 9,443 $ 12,977
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................................. 2,196 3,683 6,298
Amortization of discount on convertible subordinated notes................. ---- ---- 49
Deferred income taxes - net................................................ (672) 539 (46)
Provision for compensation - stock options................................. 27 4 ----
Income from operation of unconsolidated affiliate sold, net of
applicable income tax expense......................................... (428) --- ----
Gain from sale of unconsolidated affiliate, net of applicable income
tax expense of $6,270................................................. (8,819) --- ----
Gain from sale of assets................................................... (489) (4) (100)
Income (loss) applicable to minority interest of consolidated
subsidiary............................................................ (3) 37 146
Change in operating assets and liabilities:
Increase in accounts and notes receivable.................................. (9,291) (7,619) (17,673)
(Increase) decrease in inventories......................................... 5 (157) 19
(Increase) decrease in prepaid expenses.................................... (341) (645) 68
Increase in other assets................................................... (537) (102) (259)
Increase in trade accounts payable......................................... 887 660 8,524
Increase in accrued expenses............................................... 3,343 2,110 4,678
Increase in accrued income taxes........................................... 1,736 488 1,112
Decrease in long-term liabilities.......................................... (87) (325) (593)
----------- ----------- -----------
Net cash provided by operating activities............................. 4,085 8,112 15,200
----------- ----------- -----------
Cash flows from investing activities:
Repayment of advances to former unconsolidated affiliate................... 586 ---- ----
Dividend from unconsolidated affiliate sold................................ 3,024 ---- ----
Proceeds from sale of unconsolidated affiliate, net of costs............... 16,425 ---- ----
Payment of income taxes associated with the gain from sale of
unconsolidated affiliate.............................................. (6,270) ---- ----
Proceeds from sale of assets............................................... 541 7 1
Purchase of property and equipment......................................... (12,531) (5,721) (8,537)
Acquisitions of businesses, net of cash acquired........................... (17,773) (12,718) (49,145)
Payments received on notes from sale of assets............................. 39 39 39
Deferred start-up costs.................................................... (1,291) (2,269) (2,002)
------------ ------------ ------------
Net cash used in investing activities................................. (17,250) (20,662) (59,644)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under notes payable to bank.................... 10,172 12,006 (26,196)
Repayment of notes payable................................................. (113) (66) (4,814)
Proceeds from issuance of convertible subordinated notes................... ---- ---- 106,079
Proceeds from sale of common stock, net of expenses of $614................ ---- ---- 26,143
Proceeds received from exercise of stock options........................... 209 1,457 2,118
Partnership distributions.................................................. (4) (376) (234)
Contribution from minority interest of consolidated subsidiary............. 40 ---- ----
----------- ----------- -----------
Net cash provided by financing activities............................. 10,304 13,021 103,096
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.................................... (2,861) 471 58,652
Cash and cash equivalents at beginning of year...................................... 10,322 7,461 7,932
----------- ----------- -----------
Cash and cash equivalents at end of year............................................ $ 7,461 $ 7,932 $ 66,584
=========== =========== ===========
See accompanying notes.
F-6
39
RES-CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest (net of amount capitalized in 1996)............................... $ 581 $ 1,352 $ 1,894
Income taxes............................................................... 9,909 4,362 7,469
Supplemental Schedule of Non-cash Investing and Financing Activities:
Issuance of stock in connection with an acquisition............................ ---- ---- 1,618
Issuance of notes in connection with acquisitions.............................. 3,600 ---- 4,070
See accompanying notes.
F-7
40
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business
The consolidated financial statements include the accounts of Res-Care,
Inc. and its subsidiaries (the Company). Intercompany transactions and balances
are eliminated in consolidation.
The Company receives revenues primarily from the delivery of
residential, training, educational and support services to various populations
with special needs, including persons with mental retardation and other
developmental disabilities and at-risk and troubled youth that have typically
been provided by state and local government agencies and not-for-profit
organizations.
Net Revenues
Disabilities Services: Client services are provided at rates
established at the time services are rendered. Payments for services rendered to
clients covered by Medicaid are generally less than the Company's established
rates. Contractual allowances and adjustments are recorded to reflect the
difference between established rates and expected reimbursement. Retroactively
calculated contractual adjustments are accrued on an estimated basis in the
periods the related services are rendered. 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.
Youth Services: Revenues include amounts reimbursable under cost
reimbursement contracts with the U.S. Department of Labor for operating Job
Corps centers. The contracts provide 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.
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 both disabilities services and youth services, expenses are subject
to examination by agencies administering the contracts and services. Management
believes that adequate provisions have been made for potential adjustments
arising from such examinations. Revenues and accounts receivable are recorded
net of estimated allowances and adjustments. Provision for bad debt expense, if
any, is provided for in the period the expense is determined by management.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
F-8
41
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful
lives of the assets, by the straight-line method. Estimated useful lives for
buildings are 20 - 40 years. Leasehold improvements are generally amortized over
the life of the respective leases. The useful lives of furniture and equipment
vary from three to seven years. The Company acts as custodian of assets where 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. The
Company assesses the recoverability of goodwill and other intangibles as events
or circumstances indicate a possible inability to recover their carrying amount.
Such evaluation is based on cash flow, profitability and projections that
incorporate current operating results. This analysis involves significant
management judgment.
Inventories
Inventories consist principally of supplies, food and linens, and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
Deferred Start-Up Costs
Deferred start-up costs are reimbursable under applicable state
regulations and include administrative and staff salaries, rent, professional
fees, insurance and other costs incurred during the period prior to operation of
the various facilities. These costs are amortized on a straight-line method over
periods ranging from five to seven years consistent with applicable state
reimbursement regulations.
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 to be
distributed on June 4, 1996, to shareholders of record on May 24, 1996. All
share and per share data included in this annual report have been restated to
reflect the stock split. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 simplifies the computation of earnings
per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. The Statement requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted EPS. Both basic and diluted
earning per share have been restated for all periods presented. Per share
amounts have also been restated to reflect the issuance of 409,250 shares of
common stock in the Premier acquisition on January 1, 1997.
F-9
42
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Insurance
The Company maintains insurance in the form of commercial general
liability and commercial umbrella liability policies, which include malpractice
insurance. Management intends to maintain such coverages in the future and is of
the opinion that insurance coverages are adequate to cover any potential losses
on asserted claims. Management is unaware of any incidents that would ultimately
result in a loss in excess of the Company's insurance coverages. In addition,
the Company self-insures group health insurance for its employees. Such
self-insurance costs are accrued based upon the aggregate of the liability for
reported claims and an estimated liability for claims incurred but not reported.
The Company has an annual stop-loss limit of $150,000 for each covered
individual.
Workers' compensation policies covering all operations except for New
York, West Virginia, Ohio, Puerto Rico and Community Network Consultants, Inc.,
located in North Carolina, are covered under large deductible or retrospective
policies. The Company is responsible for paying the first $250,000 for each
claim in excess of the deductible and for all claims in excess of the aggregate
stop loss. At this time, no claim is likely to exceed the deductible and all
claims combined are not likely to exceed the aggregate stop loss. Estimated
future payments have been expensed.
Financial Instruments
Various methods and assumptions were used by the Company in estimating
the fair value disclosures for significant financial instruments. Fair values of
cash and cash equivalents, short-term investments, accounts and notes receivable
and trade accounts payable approximate their carrying amount because of the
short maturity of those investments. The fair value of short-term debt
approximates its carrying amount. The fair value of long-term debt is based on
the present value of the underlying cash flows discounted at the current
estimated borrowing rates available to the Company, and approximates its
carrying value as interest rates are variable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in 1995 and 1996 have been reclassified to conform with
the 1997 presentation. The effect of any reclassifications was not material.
Effect of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 defines comprehensive income as the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. The Statement
requires comprehensive income to be reported in a financial statement that is
displayed with the same prominence as other financial statements. This Statement
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the implementation of this Statement to have a material effect
on the consolidated financial statements.
F-10
43
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SFAS No. 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly report to
shareholders. The Statement requires that companies disclose segment data based
on how management makes decisions about allocating resources to segments and
measuring their performance. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company does not expect the
implementation of this Statement to have a material effect on the consolidated
financial statements.
2. ACQUISITIONS
During the two years ended December 31, 1997, the Company has made
various acquisitions as set forth below. Except for the Premier acquisition
which was accounted for as a pooling-of-interests, all have been accounted for
as purchases. The consolidated financial statements include the operating
results of each business acquired for as a purchase from the date of its
acquisition. Except for the acquisitions of Communications Network Consultants,
Inc. and Teledyne Economic Development, pro forma results of operations have not
been presented because the effects of these acquisitions were not significant.
During the year ended December 31, 1997, the Company made 13
acquisitions accounted for as purchases, including Communications Network
Consultants, Inc. and Teledyne Economic Development. Ten of the acquisitions
were businesses providing disabilities services. The other acquisitions were
providers of youth services. The total purchase price of these acquisitions was
$49.1 million, allocated as follows (in thousands):
Buildings, land and equipment......................................... $ 4,657
Excess of acquisition cost over net assets acquired................... 38,198
Other................................................................. 6,290
-----------
$ 49,145
===========
The following summary of results of operations on a pro forma basis
gives effect to the acquisitions of Communications Network Consultants, Inc. and
Teledyne Economic Development as though both acquisitions had taken place as of
January 1, 1996:
Years Ended December 31
-----------------------
1996 1997
---- ----
(In thousands, except per share data)
Net revenues .......................................................................... $275,920 $345,924
Income from continuing operations ..................................................... 10,449 13,626
Net income ............................................................................ 10,449 13,626
Basic earnings per share:
Income from continuing operations................................................. 1.06 1.17
Net income ....................................................................... 1.06 1.17
Diluted earnings per share:
Income from continuing operations................................................. 1.00 1.14
Net income ....................................................................... $ 1.00 $ 1.14
Effective January 1, 1997, the Company acquired all of the partnership
interests in Premier Rehabilitation Centers in exchange for 409,250 shares of
the Company's common stock in a business combination accounted for as a
pooling-of-interests. Premier provides disability services to clients with
acquired brain injuries and is included in the operations of the Division for
Persons with Disabilities.
F-11
44
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Premier revenues and net income included in the Company's consolidated
statements of income for the two years ended December 31, 1996 are summarized as
follows:
Years Ended December 31
-----------------------
1995 1996
---- ----
(In thousands)
Revenues ........................................................................... $5,760 $5,919
Net income.......................................................................... 142 752
3. DISCONTINUED OPERATIONS
On May 31, 1995, the Company sold all of its stock in its
unconsolidated affiliate, Home Care Affiliates, Inc. ("HCAI"), to Housecall
Medical Resources, Inc. of Atlanta, Georgia, for $17.5 million in cash before
accounting for other costs of $2.0 million. The Company owned 68% of the stock
of HCAI, a provider of home nursing and related home health services, a business
separate from that of the Company. Due to certain provisions of the shareholder
agreement, HCAI was accounted for as an unconsolidated affiliate. The effect of
the sale of the Company's interest in HCAI has been reported in the accompanying
financial statements as a discontinued operation.
The Company provided managerial and administrative services to a
division of HCAI under an administrative management agreement. Administrative
expenses include personnel, management, accounting, risk management, benefits
management, purchasing and various other services, and amounted to approximately
$433,000 for the five months ended May 31, 1995. The Company will continue to
provide these services under a separate administrative services agreement that
expires May 31, 1999.
4. OTHER ASSETS
Other assets are as follows:
December 31
-----------
1996 1997
---- ----
(In thousands)
Long-term receivables and advances to managed facilities............................ $ 1,102 $ 2,994
Deferred start-up costs, net of accumulated amortization............................ 3,456 4,487
Licenses, net of accumulated amortization........................................... 3,013 2,958
Covenants not to compete, net of accumulated amortization........................... 1,864 6,585
Other assets........................................................................ 695 1,790
----------- -----------
$ 10,130 $ 18,814
=========== ===========
5. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31
-----------
1996 1997
---- ----
(In thousands)
Property and Equipment:
Land and land improvements..................................................... $ 4,556 $ 6,863
Leasehold improvements......................................................... 2,932 2,521
Buildings...................................................................... 35,900 42,686
Furniture and equipment........................................................ 7,761 13,151
----------- -----------
51,149 65,221
Less accumulated depreciation and amortization...................................... 7,568 10,818
----------- -----------
Net property and equipment $ 43,581 $ 54,403
=========== ===========
F-12
45
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. DEBT
Long-term debt consists of the following:
December 31
-----------
1996 1997
---- ----
(In thousands)
Revolving credit facility with banks................................................ $ 26,196 $ ----
6% convertible subordinated notes due 2004, net of unamortized discount
of $3,232...................................................................... ---- 106,128
Notes payable....................................................................... 4,748 2,500
Other............................................................................... 97 1,601
----------- -----------
31,041 110,229
Less current portion........................................................... 369 1,759
----------- -----------
$ 30,672 $ 108,470
=========== ==========
The Company's principal credit agreement was entered into on December
23, 1996 with PNC Bank, Kentucky, Inc., National City Bank of Kentucky, SunTrust
Bank, Nashville, N.A. and Bank One, Kentucky, N.A. ("the Revolving Credit
Facility"). On June 23, 1997, the Company entered into a First Amendment to the
Revolving Credit Facility ("the Amendment"). The Amendment extended the
revolving line-of-credit from $65.0 million to $100.0 million, increased the
Swing Line-of-Credit Facility from $7.5 million to $12.5 million, amended
certain financial covenants, and added Wachovia Bank, N.A. as a party to the
Revolving Credit Facility. The credit facility expires and is due at maturity in
December 2001, subject to extension.
On November 20, 1997, the Company entered into a Second Amendment to
the Revolving Credit Facility which provided for: (i) bank consent for the
Company to issue convertible subordinated notes not to exceed $115 million,
(ii) the amendment of certain financial covenants and (iii) the addition of new
subsidiaries as parties to the loan instruments.
On March 12, 1998, the Company entered into a Third Amendment to the
Revolving Credit Facility which provided for: (i) the issuance of the
convertible subordinated notes in relation to the acquisition of Normal Life,
Inc., and (ii) the addition of new subsidiaries as parties to the loan
instrument.
At December 31, 1997, the Company had no outstanding amounts under the
Revolving Credit Facility, and $5.1 million of letters of credit outstanding.
Interest is based on margins over LIBOR. The six-month LIBOR rate at December
31, 1997 was 6.7%. 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, current ratio, debt service coverage
ratio and ratio of total indebtedness to cash flow from operations. At December
31, 1997, the Company was in compliance with these covenants.
Under the credit facility, the Company is provided a cash management
system in which accounts are replenished daily for checks clearing the previous
day. Account replenishments are applied against the outstanding borrowing.
In November 1997, the Company issued, before discount, $100.0 million
of 6% convertible subordinated notes under Rule 144A in a private placement
statement filed with the Securities and Exchange Commission in November 1997. In
December 1997, the Company issued, before discount, an additional $9.4 million
of 6% convertible subordinated notes as the result of the exercise of an
over-allotment option. The notes are due December 1, 2004. A portion of the net
proceeds from the issuance was used to repay amounts outstanding under the
Company's Revolving Credit Facility, and the balance will be used for general
corporate purposes, including acquisitions and working capital. Interest on the
notes will be paid semi-annually. The notes are convertible, at the option of
the holder, at any time prior to maturity, unless previously redeemed, into
common stock at a conversion price of $28.2125 per share, subject to customary
anti-dilution adjustments. Subsequent to December 4, 2000, the
F-13
46
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
notes are redeemable by the Company, in whole or in part, at any time, at the
following redemption prices: 103.43% in the year 2000, 102.57% in the year 2001,
101.71% in the year 2002, 100.86% in the year 2003 and 100.00% in the year 2004.
The notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior indebtedness of the Company. At
December 31, 1997, the senior indebtedness of the Company aggregated $4.1
million.
Interest expense was $630, $1,351, and $2,544 in the years 1995, 1996
and 1997, respectively. During 1995, $136 of interest paid was capitalized as
part of the purchase and renovation of a corporate office building.
Maturities of long-term debt are as follows:
Years Ended
December 31
-----------
(In thousands)
1998 ........................................................................... $ 1,759
1999 ........................................................................... 1,685
2000 ........................................................................... 429
2001 ........................................................................... 228
2002 ........................................................................... ----
Thereafter...................................................................... 106,128
-----------
$ 110,229
===========
7. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
December 31
-----------
1996 1997
---- ----
(In thousands)
Accrued trade payables.............................................................. $ 2,064 $ 2,890
Accrued wages and payroll taxes..................................................... 5,620 9,915
Accrued vacation.................................................................... 1,710 2,794
Accrued workers' compensation....................................................... 1,395 1,323
Other............................................................................... 5,270 5,985
----------- -----------
$ 16,059 $ 22,907
=========== ===========
8. INCOME TAXES
Total income taxes are allocated as follows:
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Income from continuing operations................................................... $ 4,699 $ 5,518 $ 8,737
Discontinued operations............................................................. 6,307 ---- ----
Shareholders' equity, for tax benefits related to stock options..................... ---- (498) (1,571)
----------- ----------- -----------
$ 11,006 $ 5,020 $ 7,166
=========== =========== ===========
F-14
47
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income tax expense (benefit) attributable to income from continuing
operations is summarized as follows:
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Federal:
Current........................................................................ $ 4,017 $ 3,937 $ 6,543
Deferred....................................................................... (492) 317 204
----------- ----------- -----------
Total federal.............................................................. 3,525 4,254 6,747
State and local:
Current........................................................................ 1,317 1,042 1,916
Deferred....................................................................... (143) 222 74
----------- ----------- -----------
Total state and local...................................................... 1,174 1,264 1,990
----------- ----------- -----------
Total income tax expense.............................................. $ 4,699 $ 5,518 $ 8,737
=========== =========== ===========
A reconciliation of income tax expense in relation to the amounts computed
by application of the U.S. Federal income tax rate of 35% to pretax income
follows:
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Federal income tax at the statutory rate............................................ $ 4,204 $ 5,236 $ 7,600
Increase (decrease) in income taxes:
State taxes, net of federal benefit............................................ 730 883 1,234
Surtax exemption............................................................... (100) (100) (100)
Income taxes on income taxed directly to partners.............................. (57) (302) ----
Other.......................................................................... (78) (199) 3
----------- ----------- -----------
$ 4,699 $ 5,518 $ 8,737
=========== =========== ===========
F-15
48
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996, and 1997, are presented below:
December 31
-----------
1996 1997
---- ----
(In thousands)
Deferred tax assets:
Accounts receivable, principally due to allowance for contractual
adjustments................................................................ $ 774 $ 1,189
Goodwill and other intangible assets, principally due to purchase
accounting basis differences and differences in amortization............... ---- 1,551
Workers' compensation costs, principally due to accrual for financial
reporting purposes......................................................... 558 612
Compensated absences, due to accrual for financial reporting purposes.......... 371 737
Other liabilities and reserves, deductible in different periods for
financial reporting and tax purposes....................................... 911 1,091
Other.......................................................................... 40 41
----------- -----------
Total............................................................... 2,654 5,221
----------- -----------
Deferred tax liabilities:
Accounts receivable, principally due to experience rated revenue
recognition for income tax reporting purposes.............................. 74 66
Property and equipment, due to differences in depreciation..................... 104 61
Deferred start-up costs, due to capitalization for financial reporting
purposes................................................................... 969 1,470
Amortization of goodwill and licenses.......................................... 337 ----
Other.......................................................................... 33 155
----------- -----------
Total gross deferred tax liabilities................................ 1,517 1,752
----------- -----------
Net deferred tax asset..................................................... $ 1,137 $ 3,469
=========== ===========
Classified as follows:
Deferred income tax asset:
Current.................................................................... $ 2,498 $ 3,483
Long-term.................................................................. ---- 24
Deferred income tax liability.................................................. 1,361 38
----------- -----------
Net deferred tax asset..................................................... $ 1,137 $ 3,469
=========== ===========
No valuation allowance for deferred tax assets was required as of
December 31, 1996 or 1997, nor was there any change in the total valuation
allowance for the years ended December 31, 1996 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.
F-16
49
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock. The number of shares used in the calculations
for all years reflect a three-for-two stock split on June 4, 1996. Per share
amounts have also been restated to reflect the issuance of 409,250 shares of
common stock in the Premier acquisition.
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Income from continuing operations and income available to
shareholders for basic earnings per share...................................... $ 7,311 $ 9,443 $ 12,977
Interest expense, net of income tax effect, on 6% convertible.......................
subordinated notes............................................................. ---- ---- 446
----------- ----------- -----------
Income available to shareholders after assumed conversion
of 6% convertible subordinated notes........................................... $ 7,311 $ 9,443 $ 13,423
=========== =========== ===========
Weighted average number of common shares used in basic
earnings per share............................................................. 9,798 9,900 11,606
Effect of dilutive securities:
Stock options ................................................................ 291 509 363
Convertible subordinated notes................................................. ---- ---- 411
----------- ----------- -----------
Weighted number of common shares and dilutive potential
common shares used in diluted earnings per share............................... 10,089 10,409 12,380
=========== =========== ===========
Earnings per share attributable to discontinued operations for 1995 are as
follows:
Basic earnings per share:
Income from operation of unconsolidated affiliate sold......................... $ 0.04 ---- ----
Gain from sale of unconsolidated affiliate..................................... 0.90 ---- ----
Diluted earnings per share:
Income from operation of unconsolidated affiliate sold......................... 0.04 ---- ----
Gain from sale of unconsolidated affiliate..................................... $ 0.88 ---- ----
F-17
50
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. SEGMENT INFORMATION
The Company's continuing operations, all of which are in the United
States and Puerto Rico, are broken into two business segments as described in
note 1.
Operating income is defined as net revenues less facility, program and
operating expenses. Identifiable assets are those assets used in the operations
of each business segment. The following table shows net revenues, operating
income and other financial information by business segment.
Facility and Depreciation
Net Program and Operating Identifiable Capital
As of and for the years ended December 31: Revenues Expenses Amortization Income Assets Expenditures
- ------------------------------------------ -------- -------- ------------ ------ ------ ------------
(In thousands)
1995
Disabilities services....................... $ 146,062 $ 129,245 $ 1,530 $ 9,163 $ 58,987 $ 4,345
Youth services.............................. 31,366 27,529 ---- 2,134 5,250 ----
Corporate and other......................... ---- ---- 666 ---- 23,203 8,186
------------- ----------- ----------- ---------- ----------- ---------
Total.................................. $ 177,428 $ 156,774 $ 2,196 $ 11,297 $ 87,440 $ 12,531
============= =========== =========== ========== =========== =========
1996
Disabilities services....................... $ 181,280 $ 156,661 $ 2,573 $ 13,546 $ 81,818 $ 4,842
Youth services.............................. 42,985 38,221 104 2,341 8,843 170
Corporate and other......................... ---- ---- 1,006 ---- 24,651 709
------------- ----------- ----------- ---------- ----------- ---------
Total.................................. $ 224,265 $ 194,882 $ 3,683 $ 15,887 $ 115,312 $ 5,721
============= =========== =========== ========== =========== =========
1997
Disabilities services....................... $ 243,045 $ 209,000 $ 4,801 $ 19,979 $ 140,243 $ 6,302
Youth services.............................. 63,009 56,041 531 3,514 31,716 615
Corporate and other......................... ---- ---- 966 ---- 83,209 1,620
------------- ----------- ----------- ---------- ----------- ---------
Total.................................. $ 306,054 $ 265,041 $ 6,298 $ 23,493 $ 255,168 $ 8,537
============= =========== =========== ========== =========== =========
11. BENEFIT PLANS
On January 1, 1995, the Company amended and restated its Money Purchase
Pension Plan in its entirety as the Res-Care, Inc. Retirement Savings Plan. In
connection with this plan, the Company contributed an amount equal to 3% of
eligible employee salary and an additional 3% of employee salary in excess of
$40. The total expense relating to this plan for the years ended December 31,
1995 and 1996, was $1,357 and $1,883, respectively.
On January 1, 1995, as part of the Retirement Savings Plan, the Company
established a 401(k) plan in which eligible employees may participate. In 1995
and 1996, in connection with the plan, the Company matched one-half of the
employee's contribution up to a maximum of 2%. The total expense relating to the
plan for the years ended December 31, 1995, and 1996, was $344 and $354,
respectively.
On January 1, 1997, the Company amended its Retirement Savings Plan. In
connection with the plan, the Company matches an amount up to a maximum of 6% of
eligible employee salary. The total expense relating to the plan for the year
ended December 31, 1997 was $1,305.
F-18
51
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has stock-based compensation plans, which are described
below. For financial statement reporting purposes, the Company continues to use
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and earnings
per share amounts would have been reduced to the pro forma amounts indicated
below.
Years Ended December 31
-----------------------
1995 1996 1997
---- ---- ----
(In thousands, except per share data)
INCOME DATA:
As Reported
Income from continuing operations.......................................... $ 7,311 $ 9,443 $ 12,977
Income from operation of unconsolidated affiliate sold..................... 428 ---- ----
Gain from sale of unconsolidated affiliate................................. 8,819 ---- ----
----------- ----------- -----------
Net income............................................................. $ 16,558 $ 9,443 $ 12,977
=========== =========== ===========
Pro Forma
Income from continuing operations.......................................... $ 7,154 $ 9,032 $ 12,049
Income from operation of unconsolidated affiliate sold..................... 428 ---- ----
Gain from sale of unconsolidated affiliate................................. 8,819 ---- ----
----------- ----------- -----------
Net income............................................................. $ 16,401 $ 9,032 $ 12,049
=========== =========== ===========
INCOME PER SHARE DATA:
As Reported
Basic earnings per share:
Income from continuing operations...................................... $ 0.75 $ 0.95 $ 1.12
Income from operation of unconsolidated affiliate sold................. 0.04 ---- ----
Gain from sale of unconsolidated affiliate............................. 0.90 ---- ----
----------- ----------- -----------
Net income............................................................. $ 1.69 $ 0.95 $ 1.12
=========== =========== ===========
Diluted earnings per share:
Income from continuing operations...................................... $ 0.72 $ 0.91 $ 1.08
Income from operation of unconsolidated affiliate sold................. 0.04 ---- ----
Gain from sale of unconsolidated affiliate............................. 0.88 ---- ----
----------- ----------- -----------
Net income............................................................. $ 1.64 $ 0.91 $ 1.08
=========== =========== ===========
Pro Forma
Basic earnings per share:
Income from continuing operations...................................... $ 0.73 $ 0.91 $ 1.04
Income from operation of unconsolidated affiliate sold................. 0.04 ---- ----
Gain from sale of unconsolidated affiliate............................. 0.90 ---- ----
----------- ----------- -----------
Net income............................................................. $ 1.67 $ 0.91 $ 1.04
=========== =========== ===========
Diluted earnings per share:
Income from continuing operations...................................... $ 0.71 $ 0.88 $ 1.01
Income from operation of unconsolidated affiliate sold................. 0.04 ---- ----
Gain from sale of unconsolidated affiliate............................. 0.88 ---- ----
----------- ----------- -----------
Net income............................................................. $ 1.63 $ 0.88 $ 1.01
=========== =========== ===========
F-19
52
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's stock-based compensation plans are fixed stock option
plans. Under the 1991 Incentive Stock Option Plan, the Company may grant options
to its salaried officers and employees for up to 2,534,062 shares of common
stock. Under the plan, the exercise price of each option equals the market price
of the Company's stock on the date of grant, and an option's maximum term is
normally five years. 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, 60,000 shares are
available for issuance to non-employee members of the Board of Directors at an
exercise price which cannot be less than the fair market value on the date of
grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997: no dividends paid, as it has
been the Company's policy not to declare or pay dividends since its initial
public offering in 1992 and the Company does not anticipate paying dividends in
the foreseeable future; expected volatility, 49% for 1995 and 1996 and 48% for
1997; risk-free interest rate, 6.36% for 1995 and 1996 and 5.51% for 1997; and
expected lives, five to six years.
Stock option activity is shown below:
1995 1996 1997
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
FIXED OPTIONS Shares Price Shares Price Shares Price
- ------------- ------ ----- ------ ----- ------ -----
Outstanding at beginning of year............... 635,175 $ 6.06 849,210 $ 7.59 983,197 $ 9.41
Granted........................................ 295,050 11.44 397,647 11.82 529,350 19.60
Exercised (prices ranging from $1.11 to
$19.25 per share)......................... (27,900) 7.50 (222,725) 6.54 (358,337) 5.86
Canceled....................................... (53,115) 10.89 (40,935) 11.24 (93,650) 13.06
------------ ----------- -----------
Outstanding at end of year..................... 849,210 7.59 983,197 9.39 1,060,560 15.37
=========== =========== ===========
Exercisable at end of year (prices ranging
from $7.50 to $24.75 per share)........... 400,814 $ 4.57 490,780 $ 6.79 587,120 $ 14.83
=========== =========== ===========
Weighted-average fair value of options
granted during the year................... $ 3.93 $ 4.08 $ 5.92
=========== =========== ===========
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------------------------- -------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
------ ----------------- ---------------- -------------- ----------------- --------------
$ 7.50 to 10.67 275,035 3.2 years $ 10.22 154,075 $ 10.26
11.17 to 13.02 185,228 1.8 years 11.70 106,688 11.69
15.25 to 19.25 491,947 4.3 years 18.33 309,207 17.79
20.50 to 24.75 108,350 5.2 years 21.29 17,150 22.18
----------- ----------
$ 7.50 to 24.75 1,060,560 3.6 years $ 15.37 587,120 $ 14.83
=========== ==========
F-20
53
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain operating facilities, office space, vehicles
and equipment under operating leases which expire at various dates from 1998
through 2003. Total rent expense was approximately $8,625, $9,361 and $13,456
for the years ended December 31, 1995, 1996 and 1997, respectively. Approximate
future minimum lease payments under all non-cancelable operating leases are as
follows:
Years Ended
December 31
-----------
(In thousands)
1998 ..................................................................................................... $8,938
1999 ..................................................................................................... 7,440
2000 ..................................................................................................... 3,996
2001 ..................................................................................................... 2,922
2002 ..................................................................................................... 986
Thereafter................................................................................................ 2,007
In connection with two acquisitions, the Company will pay additional
consideration contingent upon the acquired companies meeting certain earnings
levels over the next three years. Assuming the acquired companies meet the
targeted earnings levels, the Company will pay an additional $9.8 million.
13. QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands, except per share data)
1996
Net revenues........................................... $ 54,066 $ 54,156 $ 56,388 $ 59,655 $ 224,265
Facility and program contribution...................... 6,386 6,788 7,715 8,494 29,383
Net income............................................. 1,921 2,172 2,495 2,855 9,443
Historical net income per share:
Basic earnings per share.......................... 0.20 0.22 0.25 0.28 0.95
Diluted earnings per share........................ 0.19 0.21 0.24 0.27 0.91
Pro forma net income per share:
Basic earnings per share.......................... 0.19 0.21 0.24 0.28 0.92
Diluted earnings per share........................ 0.19 0.20 0.23 0.26 0.88
1997
Net revenues........................................... $ 64,867 $ 69,990 $ 76,945 $ 94,252 $ 306,054
Facility and program contribution...................... 8,596 8,681 10,939 12,797 41,013
Net income............................................. 2,607 2,887 3,662 3,821 12,977
Basic earnings per share............................... 0.26 0.25 0.30 0.31 1.12
Diluted earnings per share............................. 0.25 0.24 0.29 0.30 1.08
F-21
54
RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. SUBSEQUENT EVENTS
Effective January 1, 1998, the Company acquired through merger, the
twenty-percent minority interest in its Youthtrack, Inc. subsidiary held by
members of its founding management and is operating it as a wholly-owned
subsidiary under its present management.
On March 12, 1998, the Company acquired all of the outstanding common
stock of Normal Life, Inc., a provider of MR/DD services based in Louisville,
Kentucky serving approximately 1,300 individuals. The transaction was structured
as a purchase of stock for a combination of $51 million (unaudited) in cash and
a $22 million (unaudited) Res-Care subordinated note convertible into 567,697
shares of stock. The results of operations of Normal Life, Inc. will be included
with the results of the Company from March 1, 1998, the effective date of the
acquisition.
The Company has also announced six additional acquisitions in 1998,
serving more than 3,000 individuals, at an estimated aggregate cost of $22.4
million (unaudited). All have closed or are anticipated to close by the end of
the first quarter of 1998 and will be accounted for as purchase transactions.
F-22