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EX-21.1 - EX-21.1 - RES CARE INC /KY/a09-36108_1ex21d1.htm
EX-31.1 - EX-31.1 - RES CARE INC /KY/a09-36108_1ex31d1.htm
EX-31.2 - EX-31.2 - RES CARE INC /KY/a09-36108_1ex31d2.htm

Table of Contents

 

 

 

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, 2009

 

or

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For transition period from              to           

 

Commission File Number: 0-20372

 

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

 

KENTUCKY

 

61-0875371

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

 

 

9901 Linn Station Road

 

 

Louisville, Kentucky

 

40223

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (502) 394-2100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Name of each exchange on

Title of each class

 

which registered

Common Stock, no par value

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes  o   No  x.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  o   No  x.

 

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  o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12-b of the Act:

Large accelerated filer: o   Accelerated filer: x   Non-accelerated filer: o   Smaller reporting company: o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  x.

 

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 Global Select Market on June 30, 2009, was $405,635,402. For purposes of the foregoing calculation only, all directors and executive officers of the registrant and their affiliates have been deemed affiliates of the registrant. As of February 28, 2010, there were 29,424,753 shares of the registrant’s common stock, no par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s proxy statement for its 2010 annual meeting of shareholders are incorporated by reference into Part III.

 

 

 



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009

 

Item

 

 

 

 

 

PART I.

 

 

 

Preliminary Note Regarding Forward Looking Statements

 

1.

Business

 

1A.

Risk Factors

 

1B.

Unresolved Staff Comments

 

2.

Properties

 

3.

Legal Proceedings

 

4.

Reserved

 

 

 

 

PART II.

 

 

 

5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

6.

Selected Financial Data

 

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

7A.

Quantitative and Qualitative Disclosures about Market Risk

 

8.

Financial Statements and Supplementary Data

 

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

9A.

Controls and Procedures

 

9B.

Other Information

 

 

 

 

PART III.

 

 

 

10.

Directors and Executive Officers of the Registrant

 

11.

Executive Compensation

 

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

13.

Certain Relationships and Related Transactions

 

14.

Principal Accountant Fees and Services

 

 

 

 

PART IV.

 

 

 

 

15.

Exhibits, Consolidated Financial Statement Schedules

 

SIGNATURES

 

 

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Preliminary Note Regarding Forward-Looking Statements

 

All references in this Annual Report on Form 10-K to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries. Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial items; (2) statements of plans and objectives of ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; and (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as “believes”, “anticipates”, “expects”, “intends”, “plans”, “targets”, and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in Item 1A – “Risk Factors.” Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.

 

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PART I

 

Item 1.                    Business

 

General

 

Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, to youth with special needs, to adults who are experiencing barriers to employment and to older people who need home care assistance. All references in this Annual Report on Form 10-K to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.

 

Our programs include an array of services provided in both residential and non-residential settings for adults and youths with intellectual, cognitive or other developmental disabilities, and youths who have special educational or support needs, are from disadvantaged backgrounds, or have severe emotional disorders, including some who have entered the juvenile justice system. We also offer, through drop-in or live-in services, personal care, meal preparation, housekeeping, transportation and some skilled nursing care to the elderly in their own homes. Additionally, we provide services to transition welfare recipients, young people and people who have been laid off or have special barriers to employment, into the workforce and become productive employees.

 

At December 31, 2009, we provided services to persons with special needs in 41 states, Washington, D.C., Puerto Rico, Canada and in a number of international locations in Europe.

 

Description of Services by Segment

 

As of December 31, 2009, we had three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. Note 9 of the Notes to Consolidated Financial Statements includes additional information regarding our segments, including the disclosure of required financial information. The information in Note 9 is incorporated herein by reference and should be read in conjunction with this section.

 

Community Services

 

We are the nation’s largest private provider of services for individuals with intellectual, cognitive or other developmental disabilities. We also provide periodic in-home care services to the elderly, a variety of youth programs including foster care and residential services, and a host of services to people with acquired brain injury, including vocational and residential placement. At December 31, 2009, we served approximately 41,000 individuals in 36 states and Canada. Our programs, administered in both residential and non-residential settings, are based predominantly on individual support plans designed to encourage greater independence and the development or maintenance of daily living skills. These goals are achieved through tailored application of our different services including social, functional and vocational skills training, supported employment and emotional and psychological counseling.

 

For our individuals with developmental disabilities, we offer an alternative to large, state-run institutional settings by providing high quality, and individually focused programs on a more cost efficient basis than traditional state-run programs. Individuals are supported by an interdisciplinary team consisting of our employees and professional contractors, such as qualified mental retardation professionals (QMRPs), support/service coordinators, physicians, psychologists, therapists, social workers and other direct support professionals. For seniors, we provide support services so they can continue to live safely in their homes and remain active in their community.

 

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Our community services are provided in a variety of different environments including:

 

·                  Periodic In-Home Services. These programs offer periodic and customized support for individuals and primary caregivers to assist and provide respite care. Our services enable select individuals with developmental and intellectual disabilities (DD/ID) to return home and receive care away from large, state-run institutions. This is often an alternative that states offer to assist the caregivers of individuals with DD/ID who are on a waiting list for long-term care placement. Our services also enable elderly individuals who need assistance to be served in the comfort of their own homes. For both individuals with DD/ID and the elderly, service is provided on an hourly basis and is coordinated in response to the individual’s identified needs and may include personal care, habilitation, respite care, attendant care, housekeeping and some skilled nursing care.

 

·                  Group Homes. Our group homes are family-style houses in the community where four to eight individuals live together usually with full-time staffing for supervision and support. Individuals are encouraged to take responsibility for their home, health and hygiene and are encouraged to actively take part in work and community functions.

 

·                  Supported Living. Our supported living programs provide services tailored to the specific needs of one, two or three individuals living in a home or an apartment in the community. Individuals may need only a few hours of staff supervision or support each week or they may require services 24 hours a day.

 

·                  Large Residential Facilities. Our fifteen large residential facilities each provide around-the-clock support to ten or more individuals. In these facilities, we strive to create a home-like atmosphere that emphasizes individuality and choice.

 

·                  Vocational Skills Training and Day Programs. These programs offer individuals with DD/ID the opportunity to become active in their communities and/or attain meaningful employment. Vocational skills training programs contract with local industries to provide short or long-term work. Day programs provide interactive and educational activities and projects for individuals to assist them in reaching their full potential.

 

·                  Rest Assured. ResCare has a partnership with the non-profit Wabash Center and Purdue University in Indiana that provides remote “telecare” services to people with DD/ID or seniors in their homes. Rest Assured is a remote monitoring and support service link between care giver and client giving the clients more independence and providing a more cost effective method of providing care either 24 hours a day (seven days a week) or by the hour.

 

·                  Pharmacy Services. Pharmacy Alternatives, LLC (PAL) is a non-retail pharmacy providing medications and pharmaceutical supplies to ResCare operations and other service providers. PAL is one of the only pharmacies in the nation to specialize in serving persons with developmental disabilities. PAL services are currently available in eight states.

 

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We believe that the breadth and quality of our services and support and training programs makes us attractive to state and local governmental agencies and not-for-profit providers who may wish to contract with us. Our programs are designed to offer specialized support that is not generally available in larger state institutions and traditional long-term care facilities and include the following:

 

·                  Social Skills Training. Social skills training focuses on problem solving, anger management and adaptive skills to enable individuals with disabilities to interact with others in the residential setting and in their community. We emphasize 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. We provide these services through psychiatrists, psychologists and behavioral specialists, most of whom serve as consultants on a contract basis. All operations utilize a non-aversive approach to behavior support which is designed to avoid consequences involving punishment or extreme restrictions on individual rights. Whenever possible, the interdisciplinary team and direct support staff employ behavior support techniques rather than medications to modify behavior, the goal being to minimize the use of medications whenever possible. When indicated, medications are administered in strict compliance with all applicable regulations.

 

·                  Functional Skills Training. Functional skills training encourages mastery of personal skills and the achievement of greater independence. As needed, individual habilitation or support plans may focus on basic skills training or maintenance 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. We provide extensive vocational training or specialized day programs for many of the individuals we support. Some individuals are able to be placed in community-based jobs, either independently or with job coaches, or may participate as a member 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. We operate such programs and also contract for these services with outside providers. Our philosophy is to enable all individuals served to perform productive work in the community or otherwise develop vocational skills based on their individual abilities. Individuals participating in specialized day programs may 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. Our counseling and therapy programs address the physical, emotional and behavioral challenges of individuals with developmental or other disabilities and the elderly. Goals of the programs include the development of enhanced physical agility and ambulation, acquisition and/or maintenance 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 each individual.

 

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At each of our operations, we provide comprehensive individualized support and training programs that encourage greater independence and the development of personal and vocational skills commensurate with the person’s capabilities. As the individuals progress, new programs are created to encourage greater independence, self-respect and the development of additional personal, social and/or vocational skills.

 

Revenues for our Community Services operations are derived primarily from services provided under the Medical Assistance Program, Title XIX of the Social Security Act (Medicaid), administered by the states 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 program. We provide respite, therapeutic and other services on an as-needed basis or hourly basis through our periodic in-home services programs that are reimbursed on a unit-of-service basis. Reimbursement methods vary by state and service type, and may be based on a variety of methods including flat-rate, cost-based reimbursement, per person per diem, or unit-of-service basis. Generally, rates are adjusted annually through state legislative actions, and are affected in large part by economic conditions and their impact on state budgets. At facilities and programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. At most facilities and programs that we operate pursuant to management contracts, the management fee is negotiated with the provider of record.

 

Job Corps Training Services

 

Since 1976, we have been operating programs for disadvantaged youths through the federal Job Corps program administered by the Department of Labor (DOL), which provides for the educational and vocational skills training, health care, employment counseling and other support necessary to enable disadvantaged youths to become responsible working adults. The Job Corps program is designed to address the severe unemployment problem faced by disadvantaged youths throughout the United States and Puerto Rico. The typical Job Corps student is a 16-24 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.

 

We operate sixteen Job Corps centers in seven states and Puerto Rico. Our centers currently operate at approximately 102% capacity due to high demand; however, only approximately 1% of the eligible population in the United States is served by some type of Job Corps program due to funding constraints. 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 complement their vocational training. High school equivalency classes are available to obtain General Educational Development (GED) certificates. We provide these services in campus-style settings utilizing housing and classroom facilities owned and managed by the DOL. Upon completion of the program, each student is referred to the nearest job placement agency for assistance in finding a job or enrolling in a school or training program. Approximately 79% of the students completing our programs have obtained jobs or continue their education elsewhere.

 

Under Job Corps contracts, we are reimbursed for direct facility and program costs related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. 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.

 

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Employment Training Services

 

We operate job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects. We currently operate approximately 300 career centers in 21 states and Washington, D.C. These centers are part of a nationwide system of government-funded offices that provide assistance, job preparation and placement to any youth or adult. The services include offering information on the local labor market, vocational assessments, career counseling, workshops to prepare people for success in the job market, referrals to occupational skill training for high-demand occupations, job search assistance, job placement and help with job retention and career advancement. In addition to job seekers, these centers serve the business community by providing job matching, screening, referral, and other specialized services for employers.

 

Our Employment Training Services programs are administered under contracts with local and state governments. We are typically reimbursed for direct facility and program costs related to the job training centers, allowable indirect costs, plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services (DHHS).

 

Other

 

A portion of our business is dedicated to operating alternative education programs and charter schools and international job training and placement agencies. Together these represent less than 5% of our total revenues, as of December 31, 2009.

 

Operations

 

Community Services

 

Community Services operations are organized under geographic regions. In general, each cluster of group homes, service sites, supported living program or facility is overseen by an Executive Director. 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 and case managers work with direct support professionals involved in the programs to ensure that quality standards are met and that progress towards each individual’s goals and objectives are monitored and outcomes are achieved. Individual support 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.

 

Our direct support professionals have the most frequent contact with the individuals we serve 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 community services is subject to complex and substantial state and federal regulations and we strive to ensure that our internal controls and reporting systems comply with Medicaid and other program requirements, policies and guidelines. We design and implement 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. With the support of our Compliance department, management and staff keep current with new laws, regulations and policy directives affecting the quality and reimbursement of the services provided.

 

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We have developed a model of ongoing program evaluation and quality management which we believe provides critical feedback to measure the quality of our various operations. Each operation conducts its own quality assurance program using the ResCare Best in Class (BIC) performance benchmarking system. BIC performance results are reviewed by management on an on-going basis. Management and operational goals and objectives are established for each facility and program as part of an annual budget and strategic planning process. A weekly statistical reporting system and quarterly statement of progress provide management with relevant and timely information on the operations of each facility. Survey results from governmental agencies for each operation are recorded in a database and summary reports are reviewed by senior management. We believe the BIC system is a vital management tool to evaluate the quality of our programs and has been useful as a marketing tool to promote our programs, since it provides more meaningful information than is usually provided by routine monitoring by governmental agencies. All Community Services senior staff participate in a performance-based management system which evaluates individual performance based on critical job function outcomes. Additionally, we demonstrate our commitment to the professional development of our employees by offering classes and training programs, as well as tuition reimbursement benefits.

 

Job Corps Training Services

 

We operate our Job Corps centers under contracts with the DOL, which provides the facility. We are directly responsible for the management, staffing and administration of our Job Corps centers. Our typical Job Corps operation consists of a three-tier management staff structure. The center director has the overall responsibility for day-to-day management at each facility and is assisted by several senior staff managers who typically are responsible for academics, vocational training, social skills, safety and security, health services and behavior management. Managers are assisted by front line supervisors who have specific responsibilities for such areas as counseling, food services, maintenance, finance, residential life, recreation, property, purchasing, human resources and transportation.

 

An outcome performance measurement report for each center, issued by the DOL monthly, measures two primary categories of performance: (i) education results, as measured by GED/HSD achievement and/or vocational completion and attainment of employability skills; and (ii) placements of graduates. These are then combined into an overall performance rating. The DOL ranks centers on a 100-point scale. We review performance standards reports and act upon them as appropriate to address areas where improvement is needed. As of December 31, 2009 and 2008, we were the third highest rated contractor of Job Corps centers under these measures.

 

Employment Training Services

 

We operate our programs under contracts with local and state funding sources, such as Workforce Investment Boards, who receive federal funds allotted to states and localities – cities, counties, or consortia thereof. The physical facilities that house these programs are leased by us, either from private landlords or from local funding sources under resource sharing agreements. The management structure is two-tiered, with on-site staff in the field receiving technical assistance and support in operations and financial management from a regional office. Field level program directors are responsible for day-to-day operation of their program, supervising staff that provides varying combinations of assessment, counseling, case management, instruction, job development and placement, and job retention/career advancement services. Each field director reports to a regional project director in the support office, who is responsible for overall management of each contract.

 

Basic performance measures are prescribed by the federal government, and supplemented at the discretion of state and local funding sources. The U.S. Office of Management and Budget has a standard set of “Common Measures” that are applied to all human and social services programs operated by various federal agencies – including the DOL and DHHS, from which the bulk of our funding originates. The common measures for adults are: entered employment, earnings change after six months, employment retention after six and nine months, and cost effectiveness – measured by cost per participant. The common measures for youth are: literacy and numeracy

 

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gains; attainment of degree or certificate; placement in employment, education, training, or the military; and cost per participant. Methods of performance evaluation and analysis by funding sources vary by state and locality. We review performance of all programs internally, on a weekly, monthly, quarterly, and annual basis.

 

Contracts

 

State Contracts. Primarily in the Community Services operations, we participate under contracts that are regulated by federal and state agencies as a provider of services under Medicaid. Although the contracts generally 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 we have 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, we contractually obligate ourselves 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 Medicaid and pertinent state Medicaid Assistance programs. Pursuant to provider agreements, we agree 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 ResCare, 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 service type and can be based on flat-rate, cost-based reimbursement, per person per diem, or unit-of-service basis.

 

Management Contracts. Private operators, generally not-for-profit providers who contract with state agencies, typically contract us to manage the day-to-day operations of facilities or programs under management contracts. Most of these contracts are long-term (generally two to five years in duration, with several contracts having 30-year terms) and are subject to renewal or re-negotiation provided that we meet program standards and regulatory requirements. Most management contracts cover groups of two to sixteen facilities except in West Virginia, in which contracts cover individual homes. Depending upon the state’s reimbursement policies and practices, management contract fees are 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. Our management contracts provide for working capital advances to the provider of record, subject to the contractual arrangement. Historically, our Medicaid provider contracts and management contracts have been renewed or satisfactorily renegotiated.

 

Job Corps Contracts. Contracts for Job Corps centers are awarded pursuant to a rigorous bid process. After successfully bidding, we operate the Job Corps centers under comprehensive contracts negotiated with the DOL. Under Job Corps contracts, we are reimbursed for direct facility and program costs related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. For our current contracts and any contract renewals, the management fee is a fixed contractual amount plus a computed amount based on certain performance criteria. 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.

 

The contracts cover a five-year period, consisting of an initial two-year term with a potential of 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 before 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 our experience that there is usually an inverse correlation between the performance

 

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ratings of the current operator and the number of competitors who will participate in the re-bidding process, with relatively fewer competitors expected where such performance ratings are high.

 

As of December 31, 2009, we operated sixteen Job Corps centers under thirteen separate contracts (covering the initial two-year term plus the potential three one-year renewals) with the DOL, one of which expired at the end of 2009, six of which expire in 2010, two in 2011, two in 2013 and two in 2014. We intend to selectively pursue additional centers through the Request for Proposals (RFP) process.

 

In December 2009, we were notified by the DOL that the contract to operate the Phoenix Job Corps center had been awarded to another operator through the re-bidding process. At that time, the Phoenix Job Corps center was ranked 29th out of over 120 centers in the country and was recognized for its Best Practices in serving students with disabilities. Annual revenues for this contract were approximately $10 million. We filed a protest during the last week of January 2010 and are currently waiting on an official response. Our contract to operate the center ended January 31, 2010.

 

On December 28, 2009, we were notified by the DOL that our contract to operate the Pinellas Job Corps center was terminated effective January 17, 2010. The DOL’s decision to terminate the contract was the result of the contract being protested. The DOL is currently re-evaluating all of the proposals to operate the Pinellas Job Corps center, including ResCare’s, and the contract will be awarded upon the completion of the DOL Regional reviews. Annual revenue for this contract was anticipated to be approximately $6 million.

 

Employment Training Services Contracts. Contracts for the Employment Training Services operations are awarded through a bid process. We are typically reimbursed for direct facility and program costs related to the job training centers, allowable indirect costs, plus a fee for profit. The fee can take the form of a fixed contract amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and DHHS. The contracts vary in duration, generally from 3 to 60 months, including option years.

 

Marketing and Development

 

Our marketing activities focus on initiating and maintaining contacts and working relationships with state and local governments and governmental agencies responsible for the provision of the types of services offered by us, and identifying other providers who may consider a management contract arrangement or other transaction with us. Additionally, multi-channel campaigns targeting decision makers and key influences detailing the benefits experienced from the array of services offered by ResCare provide an intensified effort pursuant to our plan to diversify our funding sources.

 

In our pursuit of government contracts, we contact governments and governmental agencies in geographical areas in which we operate and in others in which we have identified expansion potential. Contacts are made and maintained by both regional operations personnel and corporate development personnel, augmented as appropriate by other senior management. We target new areas based largely on our assessment of the need for our 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.

 

We also seek 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, we attempt to work with and provide input to the responsible government personnel and to work with provider associations and consumer advocacy groups to this end. If an RFP results from this process, we then determine whether and on what terms we will respond and participate in the competitive process.

 

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With regard to identifying other providers who may be management contract or other transaction candidates, we attempt 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.

 

In some cases, we may be contacted directly and requested to submit proposals or become a provider in order to provide services to address specific problems. These problems 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. Before taking over these operations, which may be financially and/or operationally troubled, the operations generally must meet specific criteria. These criteria include the ability to “tuck-in” the operations into our existing group home clusters, thereby substantially eliminating general and administrative expenses of the absorbed operations.

 

With the recent creation of a marketing department and branding of ResCare HomeCare, a new consumer-oriented marketing strategy has been introduced; increasing the application of metrics and research, implementing interactive initiatives, including website enhancements, and delivering targeted multi-channel campaigns to ensure growth in our home care services to seniors.

 

Referral Sources

 

We receive substantially all of our DD/ID clients from third party referrals. Generally, family members of individuals with DD/ID 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. Other service referrals come from doctors, hospitals, private and workers’ compensation insurers and attorneys. In either case, where it is determined that some form of service is appropriate, a referral of one or more providers of such services is then made to family members or other interested parties.

 

We generally receive referrals or placements of individuals to our youth and training programs, other than Job Corps, through state or local agencies or entities responsible for such services. Individuals are recruited to our Job Corps programs largely through private contractors. We also have contracts directly with the DOL to recruit students to our own centers. Our reputation and prior experience with agency staff, case workers and others in positions to make referrals to us are important for building and maintaining census in our operations.

 

Customers

 

We are substantially dependent on revenues received under contracts with federal, state and local government agencies. Generally, these contracts are subject to termination at the discretion of governmental agencies and in certain other circumstances such as failure to comply with applicable regulations or quality of service issues.

 

Seasonality

 

In general, our business does not experience significant fluctuations from seasonality. Revenues and operating results attributable to employment training service contacts can fluctuate depending on the timing of contract renewal, start-up costs associated with new contracts and the achievement of performance measures. In addition, employment training services experience lower operating margins during the winter months as the number of job placements tends to be reduced during this time period. We operate certain alternative and private schools which are subject to seasonality as a result of school being out of session in parts of the second and third quarters. However, this seasonality does not have a significant impact on our consolidated results of operations. As we grow our international business, we could be subject to seasonality as a result of the vacation/holiday season, which is typically in the third quarter in most European countries.

 

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Foreign Operations

 

We currently operate predominantly in the United States. We operate certain programs in Canada, through contracts with Canadian governmental agencies to provide disabilities services. We also operate companies with operations in the Netherlands, United Kingdom and Germany. These companies are private providers of government-funded job reintegration services that include job training and job placement assistance. The operating results of our foreign operations were not significant to our consolidated results of operations in 2009.

 

Competition

 

Our Community Services, Job Corps Training Services and Employment Training Services segments are 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. We compete with other for-profit companies, not-for-profit entities and governmental agencies.

 

With regard to Community Services, individual states remain a provider of DD/ID 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 centers and religious organizations.

 

Currently, only a limited number of companies actively seek Job Corps contracts because the bidding process is highly specialized and technical and requires a significant investment of personnel and other resources over a period of several months. Approximately one-half of the privately operated centers are operated by the three largest operators. Competition for Job Corps contracts has increased as the DOL has made efforts to encourage new participants in the program, particularly small businesses, including minority-owned businesses.

 

The job training and placement business is also one that other entities may enter without substantial capital investment. The industry is currently served by a small number of large for-profit service providers and many smaller providers, primarily local non-profits.

 

Certain proprietary competitors operate in multiple jurisdictions and may be well capitalized. We also compete 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 our ability to obtain new contracts and complete transactions on favorable terms. We face significant competition from all of these providers in the states in which we now operate and expect to face similar competition in any state that we may enter in the future.

 

Professional staff retention and development is a critical factor in the successful operation of our business. The competition for talented professional personnel, such as therapists, QMRPs and experienced workforce professionals, is intense. We typically utilize 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 individuals with special needs contribute to a high turnover rate of direct service staff, which may lead to increased overtime and the use of outside consultants and other personnel. Consequently, a high priority is placed on recruiting, training and retaining competent and caring personnel.

 

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Government Regulation and Reimbursement

 

Our operations must comply with various federal, state and local statutes and regulations. Compliance with state licensing requirements is a prerequisite for participation in government-sponsored assistance programs, such as Medicaid. The following sets forth in greater detail certain regulatory considerations applicable to us:

 

Funding Levels. Federal and state funding for our Community Services and Employment Training Services businesses is subject to statutory and regulatory changes, administrative rulings, interpretations of policy 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 programs under the Medicaid and Workforce Investment Act of 1998 (WIA). Although states and localities have historically increased rates to compensate for inflationary factors, some have curtailed funding due to budget deficiencies or other reasons. In response, providers may attempt to negotiate or employ legal action in order to reach a compromise settlement. Future revenues may be affected by changes in rate structures, governmental budgets, methodologies or interpretations that may be proposed or under consideration in areas where we operate. In the Fiscal Year 2008 budget (began October 1, 2007), the WIA program was reduced by $250 million or about 10% of its funding. However, in fiscal years 2009 and 2010, WIA funding for state and local programs was restored to pre-2008 levels. The passage of the American Recovery and Reinvestment Act (ARRA) has increased WIA funding by more than $3.95 billion for a two-year period from mid-2009 to mid-2011. The additional funds have resulted in only small increases in workforce business.

 

Temporary Assistance for Needy Families (TANF) funding is set by statute at almost $17 billion (plus over $10 billion of state matching funds) per year through fiscal year 2010. We expect funding at this level to continue into 2011. The ARRA has increased TANF funding by $5.0 billion. Most states have only recently begun to apply for these funds and the additional funds have not impacted our business.

 

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. These participation requirements relate to client rights, quality of services, physical facilities and administration. Long-term providers, like our company, are subject to periodic unannounced inspection by state authorities, often under contract with the appropriate federal agency, to ensure compliance with the requirements of participation in the Medicaid or state program.

 

Licensure. In addition to Medicaid participation requirements, our 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 by jurisdiction and are subject to change and interpretation.

 

Regulatory Enforcement. From time to time, we receive notices from regulatory inspectors that, in their opinion, there are deficiencies for failure to comply with various regulatory requirements. We review such notices and take corrective action as appropriate. In most cases, we and the reviewing agency agree upon the steps to be taken to address the deficiency, and from time to time, we or one or more of our subsidiaries may enter into agreements with regulatory agencies requiring us to take certain corrective action in order to maintain licensure. Serious deficiencies, or failure to comply with any regulatory agreement, may result in the assessment of fines or penalties and/or decertification or delicensure actions by the Center for Medicare and Medicaid Services or state regulatory agencies.

 

Restrictions on Acquisitions and Additions. All states in which we currently operate have adopted laws or regulations which generally require that a state agency approve us as a provider and many require a determination that a need exists prior to the addition of covered individuals or services.

 

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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 controls are subject to delicensure if any one or more of such facilities are delicensed.

 

Regulations Affecting Our Business

 

Health Insurance Portability and Accountability Act of 1996

 

The Social Security Act, as amended by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), provides for the mandatory exclusion of providers and related individuals 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 in 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. In addition, we are subject to the federal “anti-kickback law” which makes 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. A violation of the anti-kickback 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, as well as the imposition of civil penalties and/or exclusion from the Medicaid program. Some states have also enacted laws similar to the federal anti-kickback laws that restrict business relationships among health care service providers.

 

Federal and state criminal and civil statutes prohibit false claims. Certain criminal and civil provisions prohibit knowingly filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Violations are considered felonies punishable by up to five years imprisonment and/or $25,000 fines. In addition, under HIPAA, Congress enacted a criminal health care fraud statute for fraud involving a health care benefit program, which it defined to include both public and private payors. Penalties for civil violations are fines ranging from $5,500 to $11,000, plus treble damages, for each claim filed. Also, the statute allows any individual to bring a suit, known as a qui tam action, alleging false or fraudulent Medicare or Medicaid claims or other violations of the statute and to potentially share in any amounts paid by the entity to the government in fines or settlement. We have sought to comply with these statutes; however, we cannot assure you that these laws will ultimately be interpreted in a manner consistent with our practices or business transactions.

 

The DHHS, as required by HIPAA and the Health Information Technology and Clinical Health Act of 2009 (HITECH), has promulgated standards for the exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the healthcare industry.

 

The DHHS has also adopted several rules mandating the use of new standards with respect to certain health care transactions and health information. For instance, the DHHS has issued a rule establishing uniform standards for common health care transactions, including: health care claims information, plan eligibility, referral certification

 

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and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments, and coordination of benefits.

 

The DHHS also has released standards and rules relating to the privacy and security of individually identifiable health information. These standards and rules not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom we disclose information. Sanctions for failing to comply with the HIPAA and HITECH health information practices provisions include enhanced criminal penalties and civil sanctions against not only covered entities, but also individuals who obtain or disclose protected health information without authorization.

 

Federal Trade Commission Red Flag Rules

 

The Identity Theft Red Flag and Address Discrepancy Rules require creditors that maintain certain kinds of “covered accounts” to develop and implement a written program to detect and respond to identify theft. Any health care providers that do not require full payment at the time of services fall under the rule. Although we have sought to comply with this rule, the rule could ultimately be interpreted in a manner inconsistent with our practices or business transactions.

 

Deficit Reduction Act

 

The Deficit Reduction Act of 2005 (DRA), which was signed into law on February 8, 2006, contains provisions aimed at reducing Medicaid fraud and abuse and directly affects healthcare providers that receive at least $5 million in annual Medicaid payments.

 

The DRA also provides resources to establish the Medicaid Integrity Program (MIP). Historically, the states have been primarily responsible for addressing Medicaid fraud and abuse. With the MIP, Centers for Medicare and Medicaid Services (CMS) will be more involved in detecting and preventing Medicaid fraud and abuse. Among other things, CMS will engage Medicaid Integrity Contractors (MIC) to conduct audits, identify overpayments and educate providers on payment integrity. The DRA further provides incentives to states to enact their own false claims acts. It is likely that a number of states, including those where we operate, will enact such legislation in the near future. While we believe that our operations comply with Medicaid billing requirements, the added scrutiny that could result from the DRA may have an adverse impact on our operations and financial results.

 

The DRA also adds certain mandatory provisions to our compliance program. Specifically, we are required to implement written policies educating our employees, agents and contractors regarding federal and state false claims acts, whistleblower protections for plaintiffs in qui tam actions and our policies and procedures for detecting fraud and abuse. While we are in compliance, this requirement, together with the MIP, could result in an increase in frivolous investigations or suits against us.

 

Also under the DRA, states are required to obtain proper documentation of citizenship for Medicaid recipients. This provision may delay coverage for some individuals and will result in denials for individuals who are unable to provide the documentation. Similar enhanced documentation requirements have been implemented in some states, including certain states where we provide Medicaid reimbursed services. These requirements could have an adverse impact on our operations and financial results.

 

Payment Error Rate Measurement Program

 

We are subject to the Payment Error Rate Measurement program (PERM). CMS implemented the PERM program to measure improper payments in the Medicaid program and the Children’s Health Insurance Program (CHIP). Groups of states began participation in PERM in 2007. The list of states audited in 2009 includes states

 

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where we have significant operations. The new error rate calculations determined from PERM audits could have a material adverse effect on our business, financial condition or results of operations.

 

Fraud Enforcement and Recovery Act 2009 (FERA)

 

FERA increases funding for federal financial fraud enforcement and amends sections of the United States Criminal Code related to fraud against the government. FERA also expands liability under the False Claims Act (FCA) 31 U.S.C. §§ 3729-3733, which imposes liability on those who make false statements or claims for reimbursement to the government. FERA expands the scope of liability under the FCA to include: anyone who makes a false statement or claim to virtually any recipient of federal funds; and anyone who knowingly retains a government overpayment without regard to whether or not that entity used a false statement or claim to do so. FERA also expands the right of action for retaliation under the FCA. While we believe that our operations comply with Medicaid billing requirements, this could result in an increase in investigations or suits against us.

 

Workforce Investment Act

 

WIA funds “labor market intermediary” services for jobseekers and employers. WIA services are delivered through One-Stop Career Centers, where clients can access a range of workforce services provided not only by WIA, but by other related social service and educational agencies, at a single location. The WIA law mandates that certain of these agencies must be present at a one-stop location, but the actual complexion of one-stops is varied. WIA also includes a locally managed program for youth facing serious barriers to employment. This program constitutes about one-third of local funding.

 

WIA programs have various rules to determine the eligibility of potential service recipients. Federal WIA grants are allocated to states by a formula based on population, poverty levels and unemployment levels. States further allocate funds to local Workforce Investment Areas that, within broad federal guidelines, are negotiated between governors and local elected officials as to the number and size of a state’s local service areas. Variances exist greatly depending on population, urban and rural mix and funding levels. There have been few changes in the number and size of local service areas in the last ten years.

 

Typically, funding decisions about delivery of services within each service delivery area are made by local elected officials and Workforce Investment Boards (WIBs), which makes the WIA market highly decentralized. About one-third of the nation’s 585 WIBs utilize a competitive bidding model to select third-party contractors to serve their one-stops. By statute, all WIBs must use open, competitive bidding in awarding youth contracts. In both one-stops and youth programs, we may find ourselves disadvantaged as we compete with entrenched incumbents such as the traditional non-profit agencies. During 2008, WIBs in two states took services in-house as a result of state legislative initiatives. We may find ourselves further disadvantaged if more WIA markets are no longer available for our participation. In addition, the majority of our contracts have performance pay points for successfully placing our clients in employment and assisting them to retain employment. The current economic environment has negatively impacted our ability to succeed in achieving these benchmarks and impacted our revenue.

 

Temporary Assistance for Needy Families

 

TANF caseloads have fallen by over 60 percent since the welfare reform law was launched in 1996, although there continue to be increases in caseloads in some states as the economy has weakened. Today’s recipients are more difficult to place into competitive employment than their earlier counterparts. The majority of our contracts have performance pay points for successfully placing our clients in employment and assisting them to retain employment. The current economic environment has negatively impacted our ability to succeed in achieving these benchmarks and impacted our revenue. The program is administered by the states and they may look for new program models as the regulatory and performance expectations of the federal government adapt to new realities. Since TANF legislation expires in 2010, it is possible that programs under the legislation could be changed late in

 

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2010. However, we anticipate that the program will be extended under current law and with current funding for at least one additional year.

 

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.

 

Occupational Safety and Health Administration (OSHA). Federal regulations promulgated by OSHA impose additional requirements on us including those protecting employees from exposure to elements such as blood-borne pathogens. We cannot predict the frequency of compliance, monitoring, or enforcement actions to which we may be subject as those regulations are implemented, and regulations might adversely affect our operations.

 

Insurance

 

We maintain professional and general liability, automobile, workers’ compensation and other business insurance coverages. Beginning on July 1, 2005, we have excess general and professional liability insurance coverages. Prior to July 1, 2005, we were fully self-insured for general and professional liability claims. We believe insurance coverages and self-insurance reserves are adequate for our current operations. However, we cannot assure that any potential losses on asserted claims will not exceed such insurance coverages and self-insurance reserves.

 

Employees

 

As of December 31, 2009, we employed approximately 45,700 employees. As of that date, we were subject to collective bargaining agreements with approximately 4,800 of our employees. We have not experienced any work stoppages and believe we have good relations with our employees.

 

Available Information

 

ResCare files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports with the Securities and Exchange Commission (SEC). These reports are available at the SEC’s website at http://www.sec.gov. Our reports will also be available on our website at http://www.rescare.com as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. You may also obtain electronic or paper copies of our SEC reports free of charge by contacting our communications department, 9901 Linn Station Road, Louisville, Kentucky 40223, (telephone) 502-394-2100 or communications@rescare.com.

 

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Item 1A.

Risk Factors

 

Federal, state and local budgetary shortfalls or changes in reimbursement policies could adversely affect our revenues and profitability and collectability of receivables.

 

We derive a substantial amount of our revenues from federal, state and local government agencies, including state Medicaid programs and employment training programs. Our revenues therefore depend to a large degree on the size of the governmental appropriations for the services we provide. Budgetary pressures, as well as economic, industry, political and other factors, could influence governments to significantly decrease or eliminate appropriations for these services, which could reduce our revenues materially. The majority of states have forecasted budget shortfalls as a result of the recessionary environment. Many state governments also continue to experience shortfalls in their Medicaid budgets despite cost containment efforts. Future federal or state initiatives could institute managed care programs for individuals we serve, eliminate programs or otherwise make material changes to the Medicaid program as it now exists. Future revenues may be affected by changes in rate-setting structures, methodologies or interpretations that may be proposed or are under consideration in states where we operate.

 

Our ability to collect accounts receivable is also subject to developments at state payor agencies, state budget pressures, economic conditions and other factors outside our control which may cause us to record higher provisions for allowances for doubtful accounts or incur bad debt write-offs, both of which could have a material adverse effect on our business, financial position, results of operations and liquidity. Changes in reimbursement procedures by the states, including engaging new agents to manage the reimbursement function, may delay reimbursement payments and create backlogs. Paying aged receivables may have a lower priority for states experiencing budgetary pressures despite our meeting applicable billing requirements. This may increase the need to pursue more aggressive collection activities, including litigation, against government agencies and other payors. Events that delay or prevent our collection of accounts receivable could have a material adverse effect on our financial condition.

 

Furthermore, federal, state and local government agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If a government agency does not receive an appropriation sufficient to cover its contractual obligations with us, it may terminate a contract or defer or reduce our reimbursement. Previously appropriated funds could also be reduced or eliminated through subsequent legislation. The loss or reduction of reimbursement under our contracts could have a material adverse effect on our business, financial condition and operating results.

 

Our revenues and operating profitability depend on our reimbursement rates.

 

Our revenues and operating profitability depend on our ability to maintain our existing reimbursement levels, to obtain periodic increases in reimbursement rates to meet higher costs and demand for more services, and to receive timely payment. If we do not receive or cannot negotiate increases in reimbursement rates at approximately the same time as our costs of providing services increase, our revenues and profitability could be materially adversely affected.

 

Our inability to maintain and renew our existing contracts and to obtain additional contracts would adversely affect our revenues.

 

Each of our operating segments derives a substantial amount of revenue from contracts with government agencies. They also have contracts with non-governmental entities. Our contracts are generally in effect for a specific term, and our ability to renew or retain them depends on our operating performance and reputation, as well as other factors over which we have less or no control. We may not be successful in obtaining, renewing or retaining contracts to operate Job Corps or Employment Training centers. Our Job Corps contracts are re-bid,

 

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regardless of operating performance, at least every five years and our Employment Training Services contracts are typically re-bid every 3-60 months. Government contracts of the operations we acquire may be subject to termination upon such an event, and our ability to retain them may be affected by the performance of prior operators. Changes in the market for services and contracts, including increasing competition, transition costs or costs to implement awarded contracts, could adversely affect the timing and/or viability of future development activities. Additionally, many of our contracts are subject to state or federal government procurement rules and procedures. Changes in procurement policies that may be adopted by one or more of these agencies could also adversely affect our ability to obtain and retain these contracts. These contracts may not be renewed.

 

If the fair values of our reporting units decline, we may have to record an additional material non-cash charge to earnings from impairment of our goodwill.

 

At December 31, 2009, we had approximately $422.6 million of goodwill recorded. We expect to recover the carrying value of this goodwill through our future cash flows. On a quarterly basis, we look for indicators of impairment that might cause a reporting unit’s fair value to be below its carrying value. If these indicators exist during any quarterly review, or at least on an annual basis during our fourth quarter review, we evaluate, based on estimates of the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we would incur a non-cash charge to earnings that may have a material adverse effect on our reported financial results.

 

As a result of our annual goodwill impairment analysis, we recorded an impairment charge of $70.1 million related to goodwill as of December 31, 2009, including $53.1 million recorded in the Employment Training Services reporting unit, $8.8 million recorded in the Schools reporting unit and $8.2 million recorded in the International reporting unit. The impairment charge represents the amount by which the book value of goodwill exceeds the implied fair value of the reporting units’ goodwill determined through the goodwill impairment test described in Note 3 of the notes to our consolidated financial statements. These impairments were due to declining profitability in these reporting units as a result of deteriorating market conditions. We also determined that our Community Services reporting unit had a fair value that exceeded its carrying value by only a 6 percent margin. At December 31, 2009, the Community Services reporting unit had goodwill of $384.9 million. A 50 basis point increase in the discount rate would decrease the 6 percent margin to 2 percent, while a 50 basis point decrease in the long-term growth rate would decrease the margin to 3%. We will monitor all of our reporting units closely for indicators of impairment during 2010, as we do for each reporting period. Changes in forecasted cash flows or discount rates could reduce their fair values below carrying value, resulting in additional impairment charges that may have a material adverse effect on our financial results.

 

The current recessionary environment continues to be challenging and we cannot be certain of the duration of these conditions and their potential impact on our financial results and stock price performance. If a further decline in our market capitalization and other factors results in the decline in our fair value, it is reasonably likely that a goodwill impairment assessment before the next annual review in the fourth quarter of 2010 would be necessary and might result in an additional impairment of goodwill.

 

Our operations may subject us to substantial litigation.

 

Our management of residential, training, educational and support programs for our clients exposes us to potential claims or litigation by our clients, employees or other individuals for wrongful death, personal injury or other damages resulting from contact with our facilities, programs, personnel or other clients. Regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our programs and facilities and seek to impose monetary penalties on us. We could be required to pay substantial amounts of money to respond to regulatory investigations or, if we do not prevail, in damages or penalties arising from these legal proceedings. We also are subject to potential lawsuits under the False Claims Act or other federal and state whistleblower statutes designed to combat fraud and abuse in the human services industry. These lawsuits can involve significant monetary awards to private plaintiffs who successfully bring these suits. Finally, we are also

 

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subject to employee-related claims including wrongful discharge or discrimination, a violation of equal employment law, the Fair Labor Standards Act or state wage and hour laws and novel intentional tort claims. Some awards of damages or penalties may not be covered by any insurance. If our third-party insurance coverage and self-insurance reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results of operations, financial condition, and ability to satisfy our obligations under our indebtedness. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could also irreparably damage our reputation.

 

A recent unfavorable jury verdict could have a material adverse effect on our financial results.

 

As described in Item 3 Legal Proceedings, a jury returned a verdict of approximately $53.9 million in damages against us in November 2009, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages. Ruling on various post trial motions, on February 19, 2010, the New Mexico trial court judge reduced the jury award to $15.5 million, consisting of approximately $10.8 in punitive damages and $4.7 million in compensatory damages. We believe the parent company is not liable for the actions of its subsidiary or its employees and that both the compensatory and punitive damages awarded are excessive and contradict various United States Supreme Court and New Mexico Supreme Court decisions, which would warrant a new trial or, in the alternative, would limit the amount of damages awarded to a significantly lower amount. We, as well as the plaintiffs, are appealing and we will continue to defend this matter vigorously. Although we have made provisions in our consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the amount of the damages awarded. If our appeal to obtain a new trial or reduce the amount of the damages does not succeed, it could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Adverse credit market conditions could affect our ability to finance our business.

 

The capital markets remain under duress due to the ongoing financial crisis which may impede our ability to expand and grow our business if credit conditions remain tight or our access to these markets becomes limited. State budgetary pressures from the financial crisis may put further pressure on reimbursement rates and limit our ability to receive rate increases or increase service levels. We recently completed negotiations for our $250 million senior secured revolving credit facility and as expected, it has less favorable pricing terms than those previously in place.

 

We face substantial competition in attracting and retaining experienced personnel, and we may be unable to grow our business if we cannot attract and retain qualified employees.

 

Our success depends to a significant degree on our ability to attract and retain highly qualified and experienced social service professionals who possess the skills and experience necessary to deliver high quality services to our clients. These employees are in great demand and are likely to remain a limited resource for the foreseeable future. Contractual requirements and client needs determine the number, education and experience levels of social service professionals we hire. Our ability to attract and retain employees with the requisite experience and skills depends on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. The inability to attract and retain experienced personnel could have a material adverse effect on our business.

 

We may not realize the anticipated benefit of any future acquisitions and we may experience difficulties in integrating these acquisitions.

 

As part of our growth strategy, we intend to make selective acquisitions. Additionally, we also assess opportunities to maximize shareholder value and seek diversification through investments with other business

 

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partners. We may need additional funds to continue to take advantage of acquisition opportunities, and financing may not be available on acceptable terms or at all. Growing our business through acquisitions involves risks because with any acquisition there is the possibility that:

 

·                  we may be unable to maintain and renew the contracts of the acquired business;

 

·                  unforeseen difficulties may arise when integrating the acquired operations, including information systems and accounting controls;

 

·                  operating efficiencies, synergies, economies of scale and cost reductions may not be achieved as expected;

 

·                  the business we acquire may not continue to generate income at the same historical levels on which we based our acquisition decision;

 

·                  management may be distracted from overseeing existing operations by the need to integrate the acquired business;

 

·                  we may acquire or assume unexpected liabilities or there may be other unanticipated costs;

 

·                  we may fail to retain and assimilate key employees of the acquired business;

 

·                  we may finance the acquisition by additional debt and may become highly leveraged; and

 

·                  the culture of the acquired business may not match well with our culture.

 

As a result of these risks, our future acquisitions may not be successful, which may have a material adverse effect on our business, financial condition and results of operations.

 

Our insurance coverage and self-insurance reserves may not cover future claims.

 

Changes in the market for insurance may affect our ability to obtain insurance coverage at reasonable rates. Changes in our annual insurance costs and self-insured retention limits and excess coverage availability depend in large part on the insurance market. We utilize historical data to estimate our reserves for our insurance programs. Beginning on July 1, 2005, we have excess general and professional liability insurance coverages. Prior to July 1, 2005, we were fully self-insured for general and professional liability claims. If losses on asserted claims exceed the current insurance coverage and accrued reserves, our business, results of operations, financial condition and ability to meet obligations under our indebtedness could be adversely affected.

 

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Our industry is subject to substantial government regulation and if we fail to comply with those regulations, we could suffer penalties or be required to make significant changes to our operations.

 

The human services industry, including our company, is required to comply with extensive and complex laws and regulations at each foreign country level and domestically at the federal, state and local government levels relating to, among other things:

 

·                  licensure and certification;

 

·                  adequacy and quality of health care services and employment services;

 

·                  qualifications of health care and support personnel;

 

·                  confidentiality, maintenance and security issues associated with medical or other personal records and claims processing;

 

·                  relationships with referral sources;

 

·                  operating policies and procedures;

 

·                  addition of facilities and services; and

 

·                  billing for services.

 

Many of these laws and regulations are expansive, and we do not always have the benefit of significant regulatory or judicial interpretation of them. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

 

If we fail to comply with applicable laws and regulations, we could be subject to various sanctions, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more of our homes or facilities) and exclusion of one or more of our homes or facilities from participation in the Medicare, Medicaid and other federal and state health care programs. Similar risks would apply in each foreign country where we do business. If allegations of noncompliance were to arise in the future in respect of a significant subsidiary or in respect of ResCare that might jeopardize its participation in Medicare or Medicaid, an adverse outcome could have a material adverse effect on our business, results of operations or liquidity.

 

Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care companies. These investigations relate to a wide variety of topics, including:

 

·                  billing practices;

 

·                  quality of care;

 

·                  financial relationships with referral sources; and

 

·                  medical necessity of services provided.

 

Like other participants in the human services industry, we receive requests for information from government agencies in connection with the regulatory or investigational authority. In addition, under the False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. A number of states and cities have adopted similar whistleblower and false claims provisions.

 

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We are required to comply with laws governing the transmission of privacy of health information.

 

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and Health Information Technology and Clinical Health Act of 2009 (HITECH) requires us to comply with standards for the exchange of health information within our company and with third parties, such as payors, business associates and patients. These include standards for common health care transactions, such as:

 

·            claims information, plan eligibility, payment information and the use of electronic signatures;

 

·            unique identifiers for providers, employers, health plans and individuals; and

 

·            security, privacy and enforcement.

 

If we fail to comply with these standards, we could be subject to criminal penalties and civil sanctions.

 

We are required to comply with laws governing Medicaid services.

 

The Deficit Reduction Act of 2005 (DRA) requires our operations to comply with Medicaid billing requirements. The DRA also mandated changes to our compliance program. While we believe that our operations are in compliance, the added scrutiny resulting from the DRA could have a material adverse effect on our operations and financial results.

 

We are subject to the Payment Error Rate Measurement program implemented to measure improper payments in the Medicaid program and the Children’s Health Insurance Program (CHIP). If PERM audits require us to repay a material amount to states as a result of payment errors, it could have a material adverse effect on our business, financial condition or results of operations.

 

Increases in regulatory oversight can result in higher operating costs.

 

Although we are operating in compliance with established laws and regulations, state regulatory agencies often have broad powers to mandate the types and levels of services we provide to individuals without providing appropriate funding. Future increased regulatory oversight could result in higher operating costs, including labor, consulting and maintenance expenditures, and historical losses.

 

Media coverage critical of us or our industry may harm our results.

 

Media coverage of the industry, including operators of facilities and programs for individuals with intellectual and other developmental disabilities, has, from time to time, included reports critical of the current trend toward privatization and of the operation of certain of these facilities and programs. Adverse media coverage about providers of these services in general, and us in particular, could lead to increased regulatory scrutiny in some areas, and could have a material adverse effect on our revenues and profitability by, among other things, adversely affecting our ability to obtain or retain contracts, discouraging government agencies from privatizing facilities and programs, increasing regulation and resulting compliance costs, or discouraging clients from using our services.

 

Our facility and program expenses fluctuate.

 

Our facility and program expenses may also fluctuate from period to period, due in large part to changes in labor costs, insurance and energy costs. Labor costs are affected by a number of factors, including the availability of qualified personnel, effective management of our programs, changes in service models, state budgetary pressures, severity of weather and other natural disasters. Our annual insurance costs and self-insured retention limits can rise due to developments in the insurance market or our claims history. Significant fluctuations in our facility and

 

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program expenses may have a material adverse effect on our business, results of operations and financial condition.

 

Our quarterly operating results may fluctuate significantly.

 

Our revenues and net income may fluctuate from quarter to quarter, in part because annual Medicaid rate adjustments may be announced by the various states at different times of the year and are usually retroactive to the beginning of the particular state’s fiscal reporting period. Generally, future adjustments in reimbursement rates in most states will consist primarily of cost-of-living adjustments, adjustments based upon reported historical costs of operations, or other negotiated changes in rates. However, many states in which we operate are experiencing budgetary pressures and certain of these states, from time to time, have initiated service reductions, or rate freezes and/or rate reductions. Some reimbursement rate increases must be paid to our direct care staff in the form of wage pass-throughs. Additionally, some states have, from time to time, revised their rate-setting methodologies, which has resulted in rate decreases as well as rate increases.

 

If downsizing, privatization and consolidation in our industry does not continue, our business may not continue to grow.

 

The maintenance and expansion of our operations depend on the continuation of trends toward downsizing, privatization and consolidation, and our ability to tailor our services to meet the specific needs of the populations we serve. Our success in a changing operational environment is subject to a variety of political, economic, social and legal pressures, virtually all of which are beyond our control. Such pressures include a desire of governmental agencies to reduce costs and increase levels of services; federal, state and local budgetary constraints or shortfalls; political pressure from unions opposed to privatization or for-profit service providers; 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 our services and our operating flexibility, and ultimately our revenues and profitability.

 

If we fail to establish and maintain appropriate relationships with officials of government agencies, we may not be able to successfully procure or retain government-sponsored contracts which could negatively impact our revenues.

 

To facilitate our ability to procure or retain government-sponsored contracts, we rely in part on establishing and maintaining appropriate relationships with officials of various government agencies. These relationships enable us to maintain and renew existing contracts and obtain new contracts and referrals. These relationships also enable us to provide informal input and advice to the government agencies prior to the development of a “request for proposal” or program for privatization of social services and enhance our chances of procuring contracts with these payors. The effectiveness of our relationships may be reduced or eliminated with changes in the personnel holding various government offices or staff positions. We also may lose key personnel who have these relationships. Any failure to establish, maintain or manage relationships with government and agency personnel may hinder our ability to procure or retain government-sponsored contracts.

 

Events that harm our reputation with governmental agencies and advocacy groups could reduce our revenues and operating results.

 

Our success in obtaining new contracts and renewals of our existing contracts depends upon maintaining our reputation as a quality service provider among governmental authorities, advocacy groups for individuals with developmental disabilities and their families, and the public. We also rely on government entities to refer clients to our facilities and programs. Negative publicity, changes in public perception, the actions of clients under our care or investigations with respect to our industry, operations or policies could increase government scrutiny, increase compliance costs, hinder our ability to obtain or retain contracts, reduce referrals, discourage

 

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privatization of facilities and programs, and discourage clients from using our services. Any of these events could have a material adverse effect on our business, results of operations, financial condition or ability to satisfy our obligations under our indebtedness.

 

A loss of our status as a licensed service provider in any jurisdiction could result in the termination of existing services and our inability to market our services in that jurisdiction.

 

We operate in numerous jurisdictions and are required to maintain licenses and certifications in order to conduct our operations in each of them. Each state and county has its own regulations, which can be complicated, and each of our service lines can be regulated differently within a particular jurisdiction. As a result, maintaining the necessary licenses and certifications to conduct our operations can be cumbersome. Our licenses and certifications could be suspended, revoked or terminated for a number of reasons, including: the failure by some of our facilities or employees to properly care for clients; the failure to submit proper documentation to the government agency, including documentation supporting reimbursements for costs; the failure by our programs to abide by the applicable regulations relating to the provisions of human services; or the failure of our facilities to abide by the applicable building, health and safety codes and ordinances. We have had some of our licenses or certifications temporarily suspended in the past. If we lost our status as a licensed provider of human services in any jurisdiction or any other required certification, we would be unable to market our services in that jurisdiction, and the contracts under which we provide services in that jurisdiction could be subject to termination. Moreover, such an event could constitute a violation of provisions of contracts in other jurisdictions, resulting in other contract terminations. Any of these events could have a material adverse effect on our business, results of operations, financial condition or ability to satisfy our obligations under our indebtedness.

 

Expenses incurred and fees earned under government contracts are subject to scrutiny.

 

We derive substantially all of our revenues from federal, state and local government agencies. As a result of our participation in these government funded programs, we are often subject to governmental reviews, audits and investigations to verify our compliance with applicable laws and regulations. As a result of these reviews, audits and investigations, these government payors may be entitled to, in their discretion:

 

·                  terminate or modify our existing contracts;

 

·                  suspend or prevent us from receiving new contracts or extending existing contracts because of violations or suspected violations of procurement laws or regulations;

 

·                  impose fines, penalties or other sanctions on us;

 

·                  reduce the amount we are paid under our existing contracts; and/or

 

·                  require us to refund amounts we have previously been paid.

 

In some states, we operate on cost reimbursement contracts in which revenues are recognized at the time costs are incurred and services are rendered. These contracts provide reimbursement for direct facility and program costs related to operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee, normally a combination of fixed and performance-based. In these states, payors audit our historical costs on a regular basis, and if it is determined that we do not have enough costs to justify our rates, our rates may be reduced, or we may be required to retroactively return fees paid to us. We cannot be assured that our rates will be maintained, or that we will be able to keep all payments made to us until an audit of the relevant period is complete.

 

Under certain employment training contracts, we are required to maintain certain performance measures and if those measures are not met, we may be subject to financial penalties. Further, certain employment training contracts require us to administer payments for childcare and transportation on behalf of our participants, for which we are reimbursed by the customer. These costs are subject to governmental reviews and audits to verify our compliance with the contracts.

 

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Our revenue growth has been related to increases in the number of individuals served in each of our operating segments.

 

Our historical growth in revenues has been directly related to increases in the number of individuals served in each of our operating segments. This growth has depended largely upon development-driven activities, including the acquisitions of other businesses or facilities, the acquisition of management contract rights to operate facilities, the awarding of contracts to open new facilities, start new operations or to assume management of facilities previously operated by governmental agencies or other organizations, and the extension or renewal of contracts previously awarded to us. Our future revenues will depend primarily upon our ability to maintain, expand and renew existing service contracts and leases, and to a lesser extent upon our ability to obtain additional contracts to provide services to the special needs populations we serve, through awards in response to requests for proposals for new programs, in connection with facilities being privatized by governmental agencies, or by selected acquisitions.

 

We depend upon the continued services of certain members of our senior management team, without whom our business operations would be significantly disrupted.

 

Our success depends, in part, on the continued contributions of our executive officers and other key employees. Our management team has significant industry experience and would be difficult to replace. If we lose or suffer an extended interruption in the service of one or more of our senior officers, it could have a material adverse effect on our financial condition and operating results. Moreover, the market for qualified individuals is highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise.

 

Much of our revenue is derived from state and local government and government procedures can be complex.

 

Government reimbursement, group home credentialing and client Medicaid and Medicare eligibility and service authorization procedures are often complicated and burdensome, and delays can result from, among other reasons, difficulties in timely securing documentation and coordinating necessary eligibility paperwork between agencies. These reimbursement and procedural issues occasionally cause us to have to resubmit claims several times before payment is remitted and are primarily responsible for our aged receivables. Changes in the manner in which state agencies interpret program policies and procedures, and review and audit billings and costs could have a material adverse effect on our business, results of operations, financial condition and our ability to meet obligations under our indebtedness.

 

If we cannot maintain effective controls and procedures that govern our billing and collections processes, such as maintenance of required documentation to support the services rendered, then our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness could be adversely affected.

 

The collection of accounts receivable is a significant management challenge and requires continual focus. The limitations of some state information systems and procedures, such as the ability to obtain timely documentation or disperse funds electronically, may limit the benefits we derive from our automated billing and collection system. We must maintain effective controls and procedures for managing our billing and collection activities which includes having required documentation is necessary if we are to collect our accounts receivable on a timely basis. An inability to do so could have a material adverse effect on our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness.

 

Our ability to collect accounts receivable is also subject to developments at state payor agencies and other factors outside our control. Changes in reimbursement procedures by the states, including engaging new agents to manage the reimbursement function, may delay reimbursement payments and create backlogs. Paying aged receivables may have a lower priority for states experiencing budgetary pressures despite our meeting applicable

 

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billing requirements. Events that delay or prevent our collection of accounts receivable could have a material adverse effect on our results of operations and financial condition and ability to satisfy our obligations under our indebtedness.

 

We may not be able to generate sufficient cash flows to meet our debt service obligations.

 

Our ability to generate sufficient cash flows from operations to make scheduled payments on our debt obligations and maintain compliance with various financial covenants contained in our debt arrangements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. If we do not generate sufficient cash flows from operations to satisfy our debt obligations and maintain covenant compliance, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. In such circumstances, we may not be able to refinance our debt or obtain additional financing on acceptable terms, if at all. We also may not be able to sell any assets, nor control the timing of any asset sales or the amount of proceeds realized from those sales. Our inability to generate sufficient cash flows to satisfy our debt obligations, maintain covenant compliance or refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations under our indebtedness.

 

We have a significant amount of debt, which could adversely affect our business, financial condition and results of operations and could prevent us from fulfilling our obligations under the notes.

 

Our level of indebtedness could have important consequences, including:

 

·                  making it more difficult for us to satisfy our obligations under our indebtedness, which could result in an event of default under the debt;

 

·                  requiring us to dedicate a substantial portion of our cash flow from operations to make required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate purposes;

 

·                  limiting our ability to obtain additional financing in the future;

 

·                  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·                  impairing our ability to withstand a downturn in our business or in the economy generally; and

 

·                  placing us at a competitive disadvantage against other less leveraged competitors.

 

We may not be able to manage any of these risks successfully. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities. The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results of operations, as well as our ability to satisfy our obligations under our indebtedness.

 

We operate in a highly competitive industry, which can adversely affect our results.

 

We compete with other for-profit companies, not-for-profit entities, and governmental agencies for contracts. Competitive factors may favor other providers, thereby reducing our success in obtaining contracts, which in turn would hinder our growth. Non-profit providers may be affiliated with advocacy groups, health organizations, or religious organizations that have substantial influence with legislators and government agencies. States may give preferences to non-profit organizations in awarding contracts. Non-profit providers also may have access to government subsidies, foundation grants, tax deductible contributions and other financial resources not available to us. Governmental agencies and non-profit providers may be subject to limits on liability that do not apply to us.

 

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In some markets, smaller local companies may have a better understanding of local conditions and may have more political and public influence than we do. The competitive advantages enjoyed by other providers may decrease our ability to procure contracts and limit our revenues. Increased competition may also result in pricing pressures, loss of or failure to gain market share or loss of clients or payors, any of which could harm our business.

 

We are subject to a number of risks due to our growth in international operations.

 

We completed acquisitions of international companies in 2007 and continue to look for additional opportunities to expand our operations in international markets. These international operations and acquisitions are subject to a number of risks. These risks include not only compliance with U.S. laws when operating in foreign jurisdictions, but also potential conflict between U.S. laws and the laws of foreign countries where we may do business, including, among others, data privacy, laws regarding licensing and labor council requirements. Foreign laws may impose new or different requirements, which may have a material adverse effect on our operations. In addition, we may experience difficulty integrating the management and operations of businesses we acquire internationally, and we may have difficulty attracting, retaining and motivating highly skilled and qualified personnel to staff key managerial positions in our ongoing international operations. Further, our international operations are subject to a number of risks related to general economic and political conditions in foreign countries where we operate, including, among others, fluctuations in foreign currency exchange rates, cultural differences, political instability, employee work stoppages or strikes and additional expenses and risks inherent in conducting operations in geographically distant locations. If we are unable to manage these risks, it could have a material adverse effect on our business, financial condition and operating results.

 

Labor changes could reduce our margins and profitability and adversely affect the quality of our care.

 

Our cost structure and ultimate operating profitability are directly related to our labor costs. Labor costs may be adversely affected by a variety of factors, including limited availability of qualified personnel in each geographic area, local competitive forces, the ineffective utilization of our labor force, changes in minimum wages or other direct personnel costs, strikes or work stoppages by employees represented by labor unions, and changes in client services models, such as the trends toward supported living and managed care. We may not be able to negotiate labor agreements on satisfactory terms with our existing or any future labor unions. If any of the employees covered by collective bargaining agreements were to engage in a strike, work stoppage or other slowdown, we could experience a disruption of our operations and/or higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.

 

The federal minimum wage increased to $7.25 per hour in July 2009, which increased our labor costs. The difficulty experienced in hiring direct service staff and nursing staff in certain markets from time to time has resulted in higher labor costs in some of our operating units. These higher labor costs are associated with increased overtime, recruitment and retention, training programs, and use of temporary staffing personnel and outside clinical consultants.

 

If the Employee Free Choice Act is adopted, it would be easier for unions to win representation, which could increase our labor costs.

 

As of December 31, 2009, only 11% of our employees were represented by a labor union. The Employee Free Choice Act of 2007: H.R. 800 (EFCA) aims to amend the National Labor Relations Act by making it easier for workers to obtain union representation and increasing the penalties employers may incur if they engage in labor practices in violation of the National Labor Relations Act. If passed, the EFCA, or a variation of the bill, could increase future unionization activities, which may increase our labor and other costs.

 

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Item 1B.

Unresolved Staff Comments

 

None.

 

Item 2.

Properties

 

As of December 31, 2009, we owned approximately 81 properties and operated facilities and programs at approximately 1,910 leased properties. We lease approximately 110,000 square feet of an office building in Louisville, Kentucky, which serves as our corporate headquarters. Other facilities and programs are operated under management contracts. We believe that our properties are adequate and suitable for our business as presently conducted.

 

Item 3.

Legal Proceedings

 

From time to time, we, or a provider with whom we have a management agreement, become a party to legal and/or administrative proceedings that, in the event of unfavorable outcomes, may adversely affect revenues and period to period comparisons.

 

In March 2007, a lawsuit was filed in Bernalillo County, New Mexico State Court styled Larry Selk, by and through his legal guardian, Rani Rubio v. Res-Care New Mexico, Inc., Res-Care, Inc., et al. The lawsuit sought compensatory and punitive damages for negligence, negligence per se, violations of the Unfair Practices Act and violations of the Resident Abuse and Neglect Act. Settlement discussions were unsuccessful and a jury trial commenced on November 9, 2009 on the remaining issue of negligence. The jury returned a verdict of approximately $53.9 million in damages against the company, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages, which was entered as a judgment in December 2009. Ruling on various post trial motions, on February 19, 2010, the New Mexico trial court judge reduced the jury award to $15.5 million, consisting of approximately $10.8 million in punitive damages and $4.7 million in compensatory damages. We believe the parent company is not liable for the actions of its subsidiary or its employees and that both the compensatory and punitive amounts awarded are excessive and contradict various United States Supreme Court and New Mexico Supreme Court decisions which would warrant a new trial or, in the alternative, would limit the amount of damages awarded to a significantly lower amount. We, as well as the plaintiffs, are appealing and we will continue to defend this matter vigorously. Although we have made provisions in our consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the amount of the damages awarded. If our appeal to obtain a new trial or reduce the amount of the damages does not succeed, it could have a material adverse effect on our financial condition, results of operations and cash flows.

 

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our facilities and programs and arising in the ordinary course of business. We do not believe the ultimate liability, if any, for these proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.

 

Item 4.

Reserved

 

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PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

 

Our common stock trades on the NASDAQ Global Select Market, under the symbol “RSCR”. As of February 3, 2010, we had approximately 6,576 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 our common stock as reported by NASDAQ.

 

 

 

2009

 

2008

 

Quarter Ended

 

 

High

 

Low

 

High

 

Low

 

March 31

 

$

16.10

 

$

11.83

 

$

25.47

 

$

17.06

 

June 30

 

17.13

 

13.37

 

19.54

 

15.42

 

September 30

 

16.21

 

13.48

 

20.63

 

17.00

 

December 31

 

14.85

 

10.56

 

18.98

 

10.32

 

 

We currently do not pay dividends and do not anticipate doing so in the foreseeable future.

 

Unregistered Sales of Equity Securities

 

None.

 

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Stock Performance

 

The graph below shows the cumulative total shareholder return realized by ResCare’s shareholders during the period from December 31, 2004 through December 31, 2009 as compared to the NASDAQ Stock Market Index (U.S. Companies) and the NASDAQ Health Care Index. The NASDAQ Health Care Index is prepared for NASDAQ by the Center for Research in Security Prices at the University of Chicago using companies within Standard Industrial Classification code 80 (Health Care). Upon request, ResCare will promptly provide to shareholders a list of all companies included in this index. The graph assumes an investment of $100 in ResCare common shares and each of the other indices at the closing trading price on December 31, 2004. The performance shown in the graph represents past performance and should not be considered an indicator of future performance.

Issuer Repurchases of Equity Securities

 

 

 

 

 

 

 

 

 

Maximum Number (or

 

 

 

 

 

 

 

Total Number of

 

Approximate Dollar

 

 

 

 

 

 

 

Shares Purchased

 

Value) of Shares

 

 

 

Total Number

 

Average Price

 

as Part of Publicly

 

That May Yet Be

 

 

 

of Shares

 

Paid

 

Announced Plans

 

Purchased under the

 

 

 

Purchased (1)

 

per Share

 

or Programs

 

Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

October 1-31, 2009

 

 

$

 

N/A

 

N/A

 

November 1-30, 2009

 

 

 

N/A

 

N/A

 

December 1-31, 2009

 

6,903

 

11.17

 

N/A

 

N/A

 

Total

 

6,903

 

$

11.17

 

N/A

 

N/A

 

 


(1)

These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements.

 

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Item 6.

Selected Financial Data

 

The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes.

 

 

 

Year Ended December 31

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues (2)

 

$

1,579,155

 

$

1,543,583

 

$

1,433,298

 

$

1,302,118

 

$

1,046,556

 

Operating income (2)

 

3,142

(1)

76,820

(3)

87,164

 

83,695

 

54,980

(4)

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations, net of tax

 

(10,292

)

36,899

 

44,233

 

42,009

 

24,778

 

Loss from discontinued operations, net of tax

 

 

(339

)

(342

)

(5,313

)

(3,556

)

Net (loss) income — including noncontrolling interests

 

 

(10,292

)

 

36,560

 

 

43,891

 

 

36,696

 

 

21,222

 

Net loss — noncontrolling interests

 

(855

)

 

 

 

 

Net (loss) income — Res-Care, Inc.

 

$

(9,437

)

$

36,560

 

$

43,891

 

$

36,696

 

$

21,222

 

Net (loss) income attributable to common shareholders

 

(9,437

)

31,297

 

37,571

 

31,243

 

17,954

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

(0.33

)

$

1.11

 

$

1.34

 

$

1.30

 

$

0.79

 

From discontinued operations

 

(0.00

)

(0.01

)

(0.01

)

(0.17

)

(0.11

)

Basic (loss) earnings per common share

 

$

(0.33

)

$

1.10

 

$

1.33

 

$

1.13

 

$

0.68

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

(0.33

)

$

1.10

 

$

1.32

 

$

1.27

 

$

0.77

 

From discontinued operations

 

(0.00

)

(0.01

)

(0.01

)

(0.16

)

(0.11

)

Diluted (loss) earnings per common share

 

$

(0.33

)

$

1.09

 

$

1.31

 

$

1.11

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization (2)

 

$

26,161

 

$

22,933

 

$

19,756

 

$

16,914

 

$

13,460

 

Share-based compensation expense

 

4,259

 

4,846

 

6,621

 

2,747

 

141

 

Facility rent (2) (5)

 

61,878

 

58,686

 

53,435

 

47,872

 

37,519

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Historical Ratios:

 

 

 

 

 

 

 

 

 

 

 

Percentage of total debt to total capitalization

 

31.5

%

37.1

%

35.5

%

37.4

%

34.2

%

Ratio of earnings to fixed charges (6)

 

0.6x

 

2.7x

 

3.1x

 

3.1x

 

2.3x

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

123,628

 

$

135,562

 

$

109,547

 

$

109,920

 

$

113,313

 

Total assets

 

844,940

 

914,143

 

834,543

 

730,413

 

601,029

 

Long-term debt, including capital leases

 

196,193

 

255,386

 

220,491

 

205,889

 

152,584

 

Total debt, including capital leases

 

199,237

 

257,472

 

223,811

 

210,427

 

157,138

 

Shareholders’ equity

 

432,725

 

436,877

 

406,869

 

351,477

 

301,998

 

 


(1)          Operating income for the year ended December 31, 2009 includes a charge of $5.0 million ($3.1 million net of tax or $0.11 per diluted share) related to an increase in the Company’s legal reserve and a $72.0 million ($47.1 million net of tax or $1.64 per diluted share) charge for asset impairments.

(2)          Amounts for 2008, 2007 and 2006 have been restated, as appropriate, to exclude the effects of discontinued operations. During 2006, we ceased providing community services in Washington, D.C. and the state of New Mexico. The results of these operations, along with related exit costs, have been classified as discontinued operations for 2008, 2007 and 2006.

(3)          Operating income for the year ended December 31, 2008 includes a charge of $20.3 million ($12.4 million net of tax or $0.37 per diluted share) related to the resolution of four legal matters.

 

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(4)          Operating income for the year ended December 31, 2005 includes a charge of $11.9 million ($7.9 million net of tax or $0.25 per diluted share) related to the debt refinancing.

(5)          Facility rent is defined as land and building lease expense less amortization of any deferred gain on applicable lease transactions.

(6)          For the purpose of determining the ratio of earnings to fixed charges, earnings are defined as income from continuing operations before income taxes, plus fixed charges. Fixed charges consist of interest expense on all indebtedness and amortization of capitalized debt issuance costs and an estimate of interest within rental expense.

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

This Management’s Discussion and Analysis (MD&A) section is intended to help the reader understand ResCare’s financial performance and condition. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes. All references in this MD&A to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries. The individual sections of MD&A are:

 

·                  Our Business — a general description of our business and revenue sources.

 

·                  Application of Critical Accounting Policies — a discussion of accounting policies that require critical judgments and estimates.

 

·                  Results of Operations — an analysis of our consolidated results of operations for the periods presented including analysis of our operating segments.

 

·                  Financial Condition, Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash and financial position.

 

·                  Contractual Obligations and Commitments — a tabular presentation of our contractual obligations and commitments for future periods.

 

Our Business

 

We receive revenues primarily from the delivery of residential, training, educational and support services to various populations with special needs. As of December 31, 2009, we had three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. Management’s discussion and analysis of each segment is included below. Further information regarding our segments is included in the Notes to Consolidated Financial Statements.

 

Revenues for our Community Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies 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 program. Our services include social, functional and vocational skills training, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. We also provide respite, therapeutic and other services to individuals with special needs and to older people in their homes. These services are provided on an as-needed basis or hourly basis through our periodic in-home services programs that are reimbursed on a unit-of-service basis. Reimbursement varies by state and service type, and may be based on a variety of methods including flat-rate, cost-based reimbursement, per person per diem, or unit-of-service basis. Generally, rates are adjusted annually based upon historical costs experienced by us and by other service providers, or economic conditions and their impact on state budgets. At facilities and programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. At most facilities and programs that we operate pursuant to management contracts, the management fee is negotiated with the provider of record. Through ResCare

 

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HomeCare, we also provide in-home services to seniors on a private pay basis. We are concentrating growth efforts in the home care private pay business to further diversify our revenue streams.

 

We operate vocational training centers under the federal Job Corps program administered by the Department of Labor (DOL) through our Job Corps Training Services operations. Under Job Corps contracts, we are reimbursed for direct facility and program costs related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. All of such amounts are reflected as revenue, and all such direct costs are reflected as facility and program costs. 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.

 

We operate job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Employment Training Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct facility and program costs related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services (DHHS).

 

Application of Critical Accounting Policies

 

Our discussion and analysis of the financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee.

 

Valuation of Accounts Receivable

 

Accounts receivable consist primarily of amounts due from Medicaid programs, other government agencies and commercial insurance companies. An estimated allowance for doubtful accounts receivable is recorded to the extent it is probable that a portion or all of a particular account will not be collected. In evaluating the collectibility of accounts receivable, we consider a number of factors, including historical loss rates, age of the accounts, changes in collection patterns, the status of ongoing disputes with third-party payors, general economic conditions and the status of state budgets. Complex rules and regulations regarding billing and timely filing requirements in various states are also a factor in our assessment of the collectibility of accounts receivable. Actual collections of accounts receivable in subsequent periods may require changes in the estimated allowance for doubtful accounts. Changes in these estimates are charged or credited to the results of operations in the period of the change of estimate. There were no material changes in our method of providing for reserves for doubtful accounts during 2009.

 

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Insurance Losses

 

We self-insure a substantial portion of our professional, general and automobile liability, workers’ compensation and health benefit risks. These liabilities are necessarily based on estimates and, while we believe that the provision for loss is adequate, the ultimate liability may be more or less than the amounts recorded. Provisions for losses for workers’ compensation risks are based upon actuarially determined estimates and include an amount determined from reported claims and an amount based on past experiences for losses incurred but not reported. Estimates of workers’ compensation claims reserves have been discounted using a discount rate of 3% and 4% at December 31, 2009 and 2008, respectively. The liabilities are reviewed quarterly and any adjustments are reflected in earnings in the period known. Beginning on July 1, 2005, we have excess general and professional liability insurance coverages. Prior to July 1, 2005, we were fully self-insured for general and professional liability claims. There were no material changes to our method of providing reserves for insurance risks during 2009.

 

Legal Contingencies

 

We are party to numerous claims and lawsuits with respect to various matters. The material legal proceedings in which ResCare is currently involved are described in Item 3 of this report and Note 15 to the Consolidated Financial Statements. We provide for costs related to contingencies when a loss is probable and the amount is reasonably determinable. We confer with outside counsel in estimating our potential liability for certain legal contingencies. While we believe our provision for legal contingencies is adequate, the outcome of legal proceedings is difficult to predict and we may settle legal claims or be subject to judgments for amounts that exceed our estimates. There were no material changes to our method of providing reserves for legal contingencies during 2009.

 

Valuation of Long-Lived Assets

 

We regularly review the carrying value of long-lived assets with respect to any events or circumstances that indicate a possible inability to recover their carrying amount. Indicators of impairment include, but are not limited to, loss of contracts, significant census declines, reductions in reimbursement levels, significant litigation and impact of economic conditions on service demands and levels. Our evaluation is based on cash flow, profitability and projections that incorporate current or projected operating results, as well as significant events or changes in the reimbursement and regulatory environment. If circumstances suggest the recorded amounts cannot be recovered, the carrying values of such assets are reduced to fair value based upon various techniques to estimate fair value. In the fourth quarter of 2009, we recorded an impairment loss of $0.7 million in our International reporting unit, including $0.5 million related to customer relationships and $0.2 million related to trade name. In addition, we recorded an impairment loss of $1.0 million in the fourth quarter of 2009 related to a building under our Schools reporting unit. In the fourth quarter of 2008, we recorded an impairment loss of $0.3 million related to a building operated under our Community Services reporting unit.

 

Goodwill and Other Indefinite-Lived Intangible Assets

 

With respect to businesses we have acquired, we evaluate the costs of purchased businesses in excess of net assets acquired (goodwill) for impairment at least annually as of year end, unless significant changes in circumstances indicate a potential impairment may have occurred sooner. We are required to test goodwill on a reporting unit basis. We use a fair value approach to test goodwill for impairment and recognize an impairment charge for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values are established using a weighted average of comparative market multiples in the current market conditions and discounted cash flows.

 

Discounted cash flow computations depend on a number of factors including estimates of future market growth and trends, forecasted revenue and costs, expected periods the assets will be utilized, appropriate discount rates

 

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and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments about the selection of comparable companies used in determining market multiples in valuing our reporting units, as well as certain assumptions to allocate shared assets and liabilities to calculate values for each of our reporting units.

 

At December 31, 2009, we had approximately $422.6 million of goodwill recorded. The discount rates used for our 2009 annual impairment test for the Community Services, Job Corps Training Services, Employment Training Services, Schools and International reporting units were 12.0%, 15.0%, 15.0%, 17.5% and 21.0%, respectively. Our Employment Training Services, International, and Schools reporting units had carrying values that exceeded their respective fair values. A goodwill impairment charge was recorded in December 2009 in the amount of $53.1 million related to the Employment Training Services reporting unit, $8.8 million related to the Schools reporting unit and $8.2 million related to the International reporting unit. We also determined that our Community Services reporting unit had a fair value that exceeded its carrying value by a 6 percent margin. At December 31, 2009, the Community Services reporting unit had goodwill of $384.9 million. A 50 basis point increase in the discount rate would decrease the 6 percent margin to 2 percent, while a 50 basis point decrease in the long-term growth rate would decrease the margin to 3%. No impairment loss was recognized for any of the reporting units as a result of the impairment tests in 2008; however, in 2007 a $0.3 million impairment loss was recorded related to the Schools reporting unit.

 

We also performed a discounted cash flow analysis for indefinite-lived intangible assets. As a result of this analysis, we recorded an impairment loss of $0.2 million related to a trade name asset in the Schools reporting unit in December 2009.

 

The current recessionary environment continues to be challenging and we cannot be certain of the duration of these conditions and their potential impact on our stock price performance. If a further decline in our market capitalization and other factors results in the decline in our fair value, it is reasonably likely that a goodwill impairment assessment before the next annual review, in the fourth quarter of 2010, would be necessary and might result in an additional impairment of goodwill.

 

Revenue Recognition

 

Overview: We recognize revenues as they are realizable and earned in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104). SAB 104 requires that revenue can only be recognized when persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.

 

Community Services. Revenues are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies and from management contracts with private operators, generally not-for-profit providers, who contract with state agencies and are also reimbursed under the Medicaid programs. Revenues are recorded at rates established at or before the time services are rendered. Revenue is recognized in the period services are rendered. Depending upon the state’s reimbursement policies and practices, management contract fees are 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.

 

Job Corps Training Services. Revenues include amounts reimbursable under cost reimbursement contracts with the DOL for operating Job Corps centers for education and training programs. The contracts provide reimbursement for direct facility and program costs related to operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee, normally a combination of fixed and performance-based. Final determination of amounts due under the contracts is subject to audit and review by the applicable government agencies. Revenue is recognized in the period associated costs are incurred and services are rendered.

 

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Employment Training Services. Revenues are derived primarily through contracts with local and state governments funded by federal agencies. Revenue is generated from contracts which contain various pricing arrangements, including: (1) cost reimbursable, (2) performance-based, (3) hybrid and (4) fixed price.

 

With cost reimbursable contracts, revenue consists of the direct costs associated with functions that are specific to the contract, plus an indirect cost percentage that is applied to the direct costs, plus a profit. Revenue is recognized in the period the associated costs are incurred and services are rendered.

 

Under a performance-based contract, revenue is generally recognized as earned based upon the attainment of a unit performance measure times the fixed unit price for that specific performance measure. Typically, there are many different performance measures that are stipulated in the contract that must be tracked to support the billing and revenue recognition. Revenue may be recognized prior to achieving a benchmark as long as reliable measurements of progress-to-date activity can be obtained, indicating that it is probable that the benchmark will be achieved. This requires judgment in determining what is considered to be a reliable measurement.

 

Revenues for hybrid contracts are generally recognized based on the specific contract language. The most common type of hybrid contract is “cost-plus,” which provide for the reimbursement of direct and indirect costs with profit tied to meeting certain performance measures. Revenues for cost-plus contracts are generally recognized in the period the associated costs are incurred with an estimate made for the performance-based portion, as long as reliable measurements of progress-to-date activity can be obtained, indicating that it is probable that the benchmark will be achieved. This requires judgment in determining what is considered to be a reliable measurement.

 

Revenues for fixed price contracts are generally recognized in the period services are rendered. Certain of our long-term fixed price contracts may contain performance-based measures that can increase or decrease our revenue. Revenue is deferred in cases where the fixed price is not determinable as a result of these provisions.

 

Laws and regulations governing the government programs and contracts are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates could change by a material amount in the near term. For each operating segment, expenses are subject to examination by agencies administering the contracts and services. We believe that adequate provisions have been made for potential adjustments arising from such examinations. There were no material changes in the application of our revenue recognition policies during 2009.

 

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Results of Operations

 

 

 

Year Ended December 31

 

 

 

2009

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

Community Services

 

$

1,152,765

 

$

1,109,275

 

$

1,052,409

 

Job Corps Training Services

 

145,821

 

163,944

 

163,904

 

Employment Training Services

 

232,732

 

222,394

 

197,588

 

Other (3)

 

47,837

 

47,970

 

19,397

 

Consolidated

 

$

1,579,155

 

$

1,543,583

 

$

1,433,298

 

Operating Income (Loss):

 

 

 

 

 

 

 

Community Services (2) (4)

 

$

112,101

 

$

99,633

 

$

111,350

 

Job Corps Training Services

 

10,143

 

11,782

 

11,588

 

Employment Training Services (1)

 

(37,252

)

22,692

 

17,093

 

Other (1) (3)

 

(22,683

)

1,903

 

1,446

 

Total Operating Expenses (5)

 

(59,167

)

(59,190

)

(54,313

)

Consolidated

 

$

3,142

 

$

76,820

 

$

87,164

 

Operating Margin:

 

 

 

 

 

 

 

Community Services (2) (4)

 

9.7

%

9.0

%

10.6

%

Job Corps Training Services

 

7.0

%

7.2

%

7.1

%

Employment Training Services (1)

 

(16.0

)%

10.2

%

8.7

%

Other (1) (3)

 

(47.4

)%

4.0

%

7.5

%

Total Operating Expenses (5)

 

(3.7

)%

(3.8

)%

(3.8

)%

Consolidated

 

0.2

%

5.0

%

6.1

%

 


(1)          Operating income and margin were negatively impacted in 2009 due to a goodwill impairment charge of $70.1 million, of which $53.1 million related to Employment Training Services and $17.0 million related to Other.

(2)          Operating income and margin were negatively impacted in 2009 due to a $5.0 million charge related to an increase in the Company’s legal reserve.

(3)          Other is comprised of our international operations and schools.

(4)          Operating income and margin were negatively impacted in 2008 due to a $20.3 million charge related to the resolution of four legal matters.

(5)          Represents corporate general and administrative expenses, as well as other operating (income) and expenses related to the corporate office.

 

Consolidated

 

Consolidated revenues increased $35.6 million in 2009, compared to 2008, for an increase of 2.3%. Consolidated revenues increased $110.3 million, or 7.7% in 2008 from 2007. Revenues are more fully described in the segment discussions below.

 

Consolidated operating income decreased 95.9% in 2009 from 2008. Operating margin decreased from 5.0% in 2008 to 0.2% in 2009. The decreases in operating income and margin primarily resulted from a $70.1 goodwill impairment charge, a $5.0 legal charge related to an increase in the Company’s legal reserve, and an incremental increase in insurance costs of $16.6 million, partially offset by 2009 acquisitions in the Community Services segment and the $20.3 million legal charge recorded in 2008 to resolve four legal matters in the Community Services segment. The 2008 consolidated operating income decreased 11.9% and the operating margin decreased from 6.1% in 2007 to 5.0% in 2008. The reductions in operating income and margin were primarily related to the legal charge recorded in 2008. Operating income is discussed further in the segment sections which follow.

 

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As a percentage of total revenues, total operating expenses were 3.7% in 2009, 3.8% in 2008 and 3.8% in 2007. Operating expenses have remained level as a percentage of total revenue due to cost containment measures in a number of areas, partially offset by rising insurance costs in 2009.

 

Net interest expense decreased $2.6 million in 2009, compared to 2008, due primarily to lower average debt balances. The 2008 net interest expense was $0.6 million higher than 2007.

 

Our effective income tax rates were 22.7%, 36.1% and 35.6% in 2009, 2008 and 2007, respectively. The 2009 effective tax rate decreased primarily due to operating losses in our International reporting unit, including impairment charges taken in the fourth quarter, for which we received minimal tax benefit. The 2008 effective tax rate benefited from increases in job credits, offset by an increase in valuation allowances associated with foreign operations.

 

Community Services

 

Community Services revenues increased 3.9% in 2009 over 2008 due primarily to acquisition growth. In 2009, our Community Services segment acquired 16 operations with annual revenues of $50.0 million. Operating margin increased from 9.0% in 2008 to 9.7% in 2009 due primarily to a $15.3 million decrease in legal costs in 2009, which resulted from the $20.3 million legal charge for the resoltuion of four legal matters in 2008. This decrease was partially offset by additional insurance costs of $14.1 million in 2009, which primarily resulted from unfavorable workers’ compensation trends and higher health insurance enrollment.

 

Community Services revenues increased 5.4% in 2008 over 2007 due primarily to acquisition growth. In 2008, our Community Services segment acquired 13 operations with annual revenues of $56 million. Operating margin decreased from 10.6% in 2007 to 9.0% in 2008 due primarily to the $20.3 million legal charge for the resolution of four legal matters.

 

Job Corps Training Services

 

Job Corps Training Services revenues decreased from $163.9 million in 2008 to $145.8 in 2009 due to the loss of the Pittsburgh and Treasure Island Job Corps contracts during the second quarter of 2009, which had combined annual revenues of approximately $34.0 million. Job Corps Training Services revenues remained consistent between 2008 and 2007. Operating margins were 7.0%, 7.2% and 7.1% for 2009, 2008 and 2007, respectively. In December 2009, we were informed that the contract to operate the Phoenix Job Corps center had been awarded to another operator through the re-bidding process. The contract ended January 31, 2010 and had annual revenues of approximately $10.0 million.

 

Employment Training Services

 

Employment Training Services revenues increased $10.3 million in 2009 compared to 2008, due primarily to $13.9 million in revenue for contracts awarded at the end of 2008 and $13.9 million in additional funding through the American Recovery and Reimbursement Act (ARRA), offset by $13.2 million in lost contracts, and a $3.6 million revenue reduction from our New York contracts. Operating margin decreased from 10.2% in 2008 to (16.0%) in 2009 due primarily to a $53.1 million goodwill impairment charge recorded in 2009, increased expenses incurred in connection with our contracts in New York and Indiana and additional insurance costs of $2.2 million due to higher health insurance enrollment.

 

Employment Training Services revenues increased $24.8 million in 2008 compared to 2007, due primarily to the ramping up of the Arizona and Indiana contracts and new contracts in Texas, Arkansas and South Carolina, which were partially offset by lost contracts in Florida due to certain Workforce Investment Boards taking services in-house. Operating margin improved from 8.7% in 2007 to 10.2% in 2008 due primarily to a 1% increase in margin due to improvement in performance in the New York City Back to Work contract and a 0.5% increase in margin for incentives received in the Calworks program.

 

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Other

 

A portion of our business is dedicated to operating charter schools and international job training and placement agencies. Revenues remained consistent between 2009 and 2008. However, operating margins decreased from 4.0% to (47.4%) due to asset impairment charges of $8.2 million in our International reporting unit and $8.8 million in our Schools reporting unit, ramp-up costs related to the Flexible New Deal contracts awarded in October 2009 and out-of-year adjustments within the international business totaling $1.8 million related to foreign exchange losses and amortization of intangible assets.

 

Revenues increased $28.6 million or 147.3% from 2007 to 2008 due primarily to acquisition growth in the schools and international business. Operating margins decreased from 7.5% in 2007 to 4.0% in 2008 due primarily to integration costs associated with the international acquisitions.

 

Discontinued Operations

 

Net loss from discontinued operations was $0.3 million for 2008 and 2007. The discontinued operations relate to the Community Services segment’s exit from the District of Columbia and the state of New Mexico, which were effective on March 31, 2006 and October 31, 2006, respectively. There were no amounts presented as discontinued operations in 2009 as they were immaterial.

 

Financial Condition, Liquidity and Capital Resources

 

Total assets decreased $69.2 million, or 7.6%, in 2009 over 2008. This decrease was due primarily as a result of asset impairment charges of $72.0 million.

 

Cash and cash equivalents were $20.7 million at December 31, 2009, compared to $13.6 million at December 31, 2008. Cash provided by operating activities for 2009 was $104.6 million compared to $46.6 million for 2008 and $85.8 million for 2007. The increase from 2008 to 2009 was primarily due to increased accounts receivable collections in 2009 and $13.5 million of payments related to legal proceedings in 2008. The decrease from 2007 to 2008 was primarily related to lower net income due principally to the $20.3 million legal charge and the result of funding working capital requirements for the acquired operations.

 

Days revenue in net accounts receivable were 51 days at December 31, 2009 and December 31, 2008, and 49 days at December 31, 2007. Net accounts receivable at December 31, 2009 decreased to $211.4 million, compared to $231.0 million at December 31, 2008 and $206.5 million at December 31, 2007. The decrease in net accounts receivable from 2008 to 2009 is primarily due to a decrease of $14.7 million in Job Corps due to catch-up collections and lost contract revenue. Approximately 4.5%, 4.8% and 4.5% of the total net accounts receivable balance was greater than 540 days at December 31, 2009, December 31, 2008 and December 31, 2007, respectively.

 

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new facilities and programs, and our need for sufficient working capital for general corporate purposes. Since most of our facilities and programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flow and borrowing under our revolving credit facility.

 

Capital expenditures were $16 million at December 31, 2009, compared to $19 million at December 31, 2008. For 2009, we invested $23 million ($21 million in cash and $2 million in seller notes) on acquisitions, all of which

 

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were in the Community Services segment. We invested $58 million ($56 million in cash and $2 million in seller notes) on acquisitions in 2008, of which 13 of the acquisitions were completed within the Community Services segment. We invested $80 million ($77 million in cash and $3 million in seller notes) on acquisitions in 2007, of which $38 million related to domestic operations in our Community Services group and $42 million related to international businesses, which we have included in our All Other category for segment purposes.

 

Our financing activities for 2009 included net payments of $59.8 million on the revolver with payments of $0.8 million on our long-term debt. Option exercise activity resulted in $0.4 million in proceeds and $0.4 million in tax expenses.

 

Our financing activities for 2008 included net borrowings of $34.5 million on the revolver with payments of $2.5 million on our long-term debt. Option exercise activity resulted in $1.6 million in proceeds and $0.9 million in tax benefits.

 

Our financing activities during 2007 included net borrowings of $134.3 million on the revolver and $2.0 million in proceeds from sale and leaseback transactions. These inflows were offset by payments of debt of $125.0 million and $0.2 million in debt issuance costs associated with the November 2007 amendment of our credit facility. Option exercise activity resulted in $2.3 million in proceeds and $1.4 million in tax benefits.

 

On January 28, 2010, we amended our existing senior secured credit facility, which originally had been scheduled to expire on October 3, 2010 (Amended and Restated Senior Credit Facility). The amendment increased the revolving credit facility by $25 million to a total of $275 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $325 million. The credit facility expires on July 28, 2013, and will be used primarily for working capital purposes, letters of credit required under our insurance programs, and for acquisitions. The amended and restated senior credit facility contains various financial covenants relating to net worth, capital expenditures, and rentals, and requires us to maintain specified ratios with respect to interest coverage and leverage. The amendment provides for the exclusion of charges incurred in connection with the verdict described in Item 3 Legal Proceedings and below, as well as any non-cash impairment charges, in the calculation of certain financial covenants. In addition, the amendment excludes transactions with our preferred shareholders from the events that would constitute a default. The amended and restated senior credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

 

In addition, this amended and restated senior credit facility, among other things, (i) increases the spread on London Interbank Offered Rate (LIBOR) and base rate loans to 375 basis points and 275 basis points respectively, as of January 28, 2010, through September 30, 2010; subsequent to September 30, 2010, our calculated leverage ratio will determine loan pricing as established in the amended and restated senior credit facility, (ii) the required leverage ratio will be 3.50 times until September 30, 2010, after which it becomes 3.25 times and the required interest coverage ratio will be 3.0 times.

 

As of December 31, 2009, we had $143.8 million available under the revolver which had an outstanding balance of $44.0 million. Outstanding balances bear interest at 1.125% over the LIBOR or other bank developed rates at our option. As of December 31, 2009, the weighted average interest rate was 1.36%. As of December 31, 2009, we had irrevocable standby letters of credit in the principal amount of $62.2 million issued primarily in connection with our insurance programs. Letters of credit had a borrowing rate of 1.25% as of December 31, 2009. The commitment fee on the unused balance is .25%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

 

We were in compliance with our debt covenants as of December 31, 2009. We believe we will continue to be in compliance with our debt covenants over the next twelve months. Our ability to achieve the thresholds provided

 

41



Table of Contents

 

for in the financial covenants largely depends upon the maintenance of continued profitability and/or reductions of amounts borrowed under the facility, and continued cash collections.

 

Operating funding sources for 2009 were approximately 64% through Medicaid reimbursement, 8% from the DOL and 28% from other payors. We believe our sources of funds through operations and available through our credit facility will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

 

As described in Item 3 Legal Proceedings of this report, a jury returned a verdict of approximately $53.9 million in damages against us in November 2009, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages. Ruling on various post trial motions, on February 19, 2010, the New Mexico trial court judge reduced the jury award to $15.5 million, consisting of approximately $10.8 million in punitive damages and $4.7 million in compensatory damages. We believe that the compensatory and punitive damages awarded by the jury are excessive and do not comply with various United States and New Mexico Supreme Court precedents, which would warrant a new trial or, in the alternative, would limit the amount of damages the jury could have awarded to a significantly lower amount. In addition, we do not believe the parent company is liable for the actions of its subsidiary or its employees. We, as well as the plaintiffs, are appealing and we will continue to defend this matter vigorously. Although we have made provisions in our consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the amount of the damages awarded. If our appeal to obtain a new trial or to reduce the amount of the damages is unsuccessful, it would reduce our capital resources available to fund acquisitions and other operations, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Contractual Obligations and Commitments

 

Information concerning our contractual obligations and commercial commitments follows (in thousands):

 

 

 

Payments Due by Period

Twelve Months Ending December 31

 

Contractual Obligations

 

Total

 

2010

 

2011-2012

 

2013-2014

 

2015 and
Thereafter

 

Long-term Debt

 

$

198,439

 

$

2,880

 

$

1,104

 

$

194,142

 

$

313

 

Capital Lease Obligations

 

1,317

 

164

 

335

 

328

 

490

 

Operating Leases

 

216,189

 

57,681

 

72,786

 

45,352

 

40,370

 

Fixed interest payments on Long-term Debt and Capital Lease Obligations(1)

 

45,255

 

11,797

 

23,497

 

9,853

 

108

 

Total Contractual Obligations(2)

 

$

461,200

 

$

72,522

 

$

97,722

 

$

249,675

 

$

41,281

 

 


(1)

Excludes any interest payments on our variable rate debt.

(2)

This amount excludes $0.5 million of unrecognized tax benefits as we are unable to reasonably estimate the timing of these cash flows.

 

42



Table of Contents

 

 

 

Total

 

Amount of Commitments Expiring per Period

Twelve Months Ending December 31

 

Other Commercial
Commitments

 

Amounts
Committed

 

2010

 

2011-2012

 

2013-2014

 

2015 and
Thereafter

 

Standby Letters-of-Credit

 

$

62,177

 

$

62,177

 

¾

 

¾

 

¾

 

Surety Bonds

 

$

2,559

 

$

2,537

 

$

4

 

$

18

 

$

 

 

We had no significant off-balance sheet transactions or interests in 2009.

 

New Accounting Pronouncements Not Yet Adopted

 

See Note 1 to the Notes to Consolidated Financial Statements.

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.

 

Interest Rates

 

While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate or foreign currency exposures. Our senior secured credit facility, which has an interest rate based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $44.0 million as of December 31, 2009 and $103.8 million as of December 31, 2008. A 100 basis point movement in the interest rate would result in an approximate $0.4 million annualized effect on interest expense and cash flows.

 

Foreign Currency Exchange Risk

 

Revenues, operating expenses and other financial transactions with our international operations are denominated in their respective functional currencies. As a result, our results of operations and certain receivables and payables are subject to fluctuations in exchange rates between the local currencies and the U.S. dollar. The primary currencies to which we are exposed include the Canadian dollar, the British pound sterling and the Euro. We do not currently hedge against foreign currency rate fluctuations. Gains and losses from such fluctuations have not been material to our consolidated financial position, results of operations or cash flows. International net assets are an immaterial portion of our consolidated net assets.

 

Item 8.

Financial Statements and Supplementary Data

 

Refer to pages F-1 through F-41.

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

 

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Table of Contents

 

Item 9A.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

ResCare’s management, under the supervision and with the participation of the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009. Based on that evaluation, the CEO and CFO concluded that ResCare’s disclosure controls and procedures are effective in timely making known to them material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act. There were no changes in ResCare’s internal control over financial reporting during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple errors or mistakes, and that controls can be circumvented by the acts of individuals or groups. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report in Item 8.

 

Item 9B.

Other Information

 

None.

 

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Table of Contents

 

PART III

 

Items 10, 11, 12, 13 and 14.  Directors and Executive Officers of the Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions and Director Independence; and Principal Accountant Fees and Services.

 

The information required by these Items is omitted because we are 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 our proxy statement is incorporated herein by reference.

 

We have adopted a code of ethics applicable to directors, officers and employees, which is included with our Code of Conduct and is posted on our website at http://www.rescare.com. If we amend or waive any of the provisions of the Code of Conduct applicable to our directors, executive officers or senior financial officers, we intend to disclose the amendment or waiver on our website. We will provide to any person without charge, upon request, a copy of the Code of Conduct. You can request a copy by contacting our communications department, 9901 Linn Station Road, Louisville, Kentucky, 40223, (telephone) 502-394-2100 or communications@rescare.com.

 

45



Table of Contents

 

PART IV

 

Item 15.

Exhibits and Consolidated Financial Statement Schedules.

 

 

(a)(1)

Index to Consolidated Financial Statements and Financial Statement Schedules:

 

 

 

 

 

 

 

 

 

 

 

Reports of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

Consolidated Financial Statements:

 

 

 

Consolidated Balance Sheets — As of December 31, 2009 and 2008

 

 

 

Consolidated Statements of Operations — Years Ended December 31, 2009, 2008 and 2007

 

 

 

Consolidated Statements of Shareholders’ Equity and Comprehensive (Loss) Income – Years Ended December 31, 2009, 2008 and 2007

 

 

 

Consolidated Statements of Cash Flows — Years Ended December 31, 2009, 2008 and 2007

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

Financial Statement Schedule (1):

 

 

 

Schedule II — Valuation and Qualifying Accounts

 

 

 


(1)        All other financial statement schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

(a)(2)

Index to Exhibits

 

 

3.1 and 4.1

Amended and Restated Articles of Incorporation of the Registrant dated December 18, 1992. Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 incorporated herein by reference.

 

 

3.2 and 4.2

Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant dated May 29, 1997. Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 incorporated herein by reference.

 

 

3.3 and 4.3

Articles of Amendment to the Registrant’s Articles of Incorporation dated June 23, 2004. Exhibits 3(i) and 4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 incorporated herein by reference.

 

 

3.4 and 4.4

Amended and Restated Bylaws of the Registrant. Exhibit 4.5 to the Registrant’s Registration Statement on Form S-8 (Reg. No. 333-50726) incorporated herein by reference.

 

 

4.5

Preferred Stock Purchase Agreement, dated as of March 10, 2004, by and between the Registrant and Onex Partners LP, Onex American Holdings III, LLC, Onex U.S. Principals LP, Res-Care Executive Investco LLC. Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 is incorporated herein by reference.

 

46



Table of Contents

 

(a)(2)       Index to Exhibits (continued)

 

4.6

Registration Rights Agreement by and among the Registrant and Onex Partners LP, Onex American Holdings III, LLC, Onex U.S. Principals LP and Res-Care Executive Investco LLC dated as of March 10, 2004. Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 is incorporated herein by reference.

 

 

10.1

Management Services Agreement between Onex Partners Manager LP and the Registrant dated June 23, 2004. Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 is incorporated herein by reference.

 

 

10.2

Indenture dated October 3, 2005, by and among the Registrant, the Subsidiary Guarantors party thereto, and Wells Fargo Bank, National Association, as trustee, relating to the Registrant’s 7¾% Senior Notes due 2013. Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 is incorporated herein by reference.

 

 

10.3

Res-Care, Inc. 2005 Omnibus Incentive Compensation Plan (as amended effective June 27, 2007). Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 is incorporated herein by reference.

 

 

10.4

Form of Restricted Stock Award Agreement. Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 is incorporated herein by reference.

 

 

10.5

Employment Agreement between the Registrant and Ralph G. Gronefeld, Jr. Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on October 3, 2006 is incorporated herein by reference.

 

 

10.6

Employment Agreement between the Registrant and David W. Miles. Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 17, 2008 is incorporated herein by reference.

 

 

10.7

Employment Agreement between the Registrant and Patrick G. Kelley. Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 is incorporated herein by reference.

 

 

10.8

Employment Agreement between the Registrant and Richard L. Tinsley. Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed December 10, 2008 is incorporated herein by reference.

 

 

10.9

Employment Agreement between the Registrant and David S. Waskey. Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed December 10, 2008 is incorporated herein by reference.

 

 

10.10

Form of Stock Option Agreement. Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 is incorporated herein by reference.

 

47



Table of Contents

 

(a)(2)       Index to Exhibits (continued)

 

10.11

Form of Non-Employee Director Stock Option Agreement. Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 is incorporated herein by reference.

 

 

10.12

Form of Restricted Stock Agreement. Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 is incorporated herein by reference.

 

 

10.13

ResCare Nonemployee Director Deferred Stock Compensation Program. Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 25, 2006 is incorporated herein by reference.

 

 

10.14

ResCare Nonemployee Director Deferred Stock Compensation Program Election Form. Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on January 25, 2006 is incorporated herein by reference.

 

 

10.15

Second Amended and Restated Credit Agreement dated as of January 28, 2010. Exhibit 10 to the Registrant’s Current Report on Form 8-K filed on February 1, 2010 is incorporated herein by reference.

 

 

21.1

Subsidiaries of the Registrant. (filed herewith)

 

 

23.1

Consent of KPMG LLP. (filed herewith)

 

 

31.1

Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. (filed herewith)

 

 

31.2

Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. (filed herewith)

 

 

32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)

 

48



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

RES-CARE, INC

 

 

 

 

 

 

Date:

March 9, 2010

 

By:

/s/ Ralph G. Gronefeld, Jr.

 

 

Ralph G. Gronefeld, Jr.

 

 

President, Chief Executive Officer and

 

 

Director (Principal 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/ Ralph G. Gronefeld, Jr.

 

President, Chief Executive Officer and

 

March 9, 2010

Ralph G. Gronefeld, Jr.

 

Director (Principal Executive Officer)

 

 

 

 

 

 

 

/s/ David W. Miles

 

Chief Financial Officer

 

March 9, 2010

David W. Miles

 

(Principal Accounting Officer)

 

 

 

 

 

 

 

/s/ Ronald G. Geary

 

Chairman of the Board

 

March 9, 2010

Ronald G. Geary

 

 

 

 

 

 

 

 

 

/s/ David Braddock

 

Director

 

March 9, 2010

David Braddock

 

 

 

 

 

 

 

 

 

/s/ Robert E. Hallagan

 

Director

 

March 9, 2010

Robert E. Hallagan

 

 

 

 

 

 

 

 

 

/s/ Olivia F. Kirtley

 

Director

 

March 9, 2010

Olivia F. Kirtley

 

 

 

 

 

 

 

 

 

/s/ Robert M. Le Blanc

 

Director

 

March 9, 2010

Robert M. Le Blanc

 

 

 

 

 

 

 

 

 

/s/ Steven S. Reed

 

Director

 

March 9, 2010

Steven S. Reed

 

 

 

 

 

 

 

 

 

/s/ William E. Brock

 

Director

 

March 9, 2010

William E. Brock

 

 

 

 

 

 

 

 

 

/s/ James H. Bloem

 

Director

 

March 9, 2010

James H. Bloem

 

 

 

 

 

49



Table of Contents

 

Item 8.              Financial Statements and Supplementary Data

 

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

 

 

 

 

 

 

 

Reports of Independent Registered Public Accounting Firm:

 

 

Consolidated Financial Statements

 

 

Internal Control Over Financial Reporting

 

 

 

 

 

Consolidated Financial Statements:

 

 

Consolidated Balance Sheets - As of December 31, 2009 and 2008

 

 

Consolidated Statements of Operations - Years Ended December 31, 2009, 2008 and 2007

 

 

Consolidated Statements of Shareholders’ Equity and Comprehensive (Loss) Income — Years Ended December 31, 2009, 2008 and 2007

 

 

Consolidated Statements of Cash Flows - Years Ended December 31, 2009, 2008 and 2007

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Financial Statement Schedule:

 

 

Schedule II — Valuation and Qualifying Accounts

 

 

 

All other financial statement schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

F-1



Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

Res-Care, Inc.:

 

We have audited the consolidated financial statements of Res-Care, Inc. and subsidiaries (the Company) as listed in the accompanying index on page F-1. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index on page F-1. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Res-Care, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Res-Care, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 9, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

 

/s/ KPMG LLP

 

 

Louisville, Kentucky

March 9, 2010

 

F-2



Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

Res-Care, Inc.:

 

 

We have audited Res-Care, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Res-Care, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Res-Care, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Res-Care, Inc. and subsidiaries as listed in the accompanying index on page F-1, and our report dated March 9, 2010 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP

 

Louisville, Kentucky

March 9, 2010

 

F-3



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

(In thousands, except share data)

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

20,672

 

$

13,594

 

Accounts receivable, net of allowance for doubtful accounts of $22,627 in 2009 and $20,306 in 2008

 

211,350

 

230,976

 

Refundable income taxes

 

3,952

 

1,781

 

Deferred income taxes

 

22,879

 

22,702

 

Non-trade receivables

 

3,960

 

4,021

 

Prepaid expenses and other current assets

 

17,761

 

18,409

 

Total current assets

 

280,574

 

291,483

 

Property and equipment, net

 

81,347

 

84,157

 

Goodwill

 

422,626

 

476,196

 

Other intangible assets

 

45,842

 

45,985

 

Other assets

 

14,551

 

16,322

 

Total assets

 

$

844,940

 

$

914,143

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

44,502

 

$

49,216

 

Accrued expenses

 

109,400

 

103,520

 

Current portion of long-term debt

 

2,880

 

2,008

 

Current portion of obligations under capital leases

 

164

 

78

 

Accrued income taxes

 

 

1,099

 

Total current liabilities

 

156,946

 

155,921

 

Long-term liabilities

 

35,092

 

31,596

 

Long-term debt

 

195,040

 

254,827

 

Obligations under capital leases

 

1,153

 

559

 

Deferred gains

 

3,172

 

3,966

 

Deferred income taxes

 

20,812

 

30,397

 

Total liabilities

 

412,215

 

477,266

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares, authorized 1,000,000 shares, no par value, except 48,095 shares designated as Series A with stated value of $1,050 per share, 48,095 shares issued and outstanding in 2009 and 2008

 

46,609

 

46,609

 

Common stock, no par value, authorized 40,000,000 shares, issued 29,823,872 in 2009 and 29,864,949 in 2008, outstanding 29,453,282 in 2009 and 29,470,734 in 2008

 

50,577

 

50,550

 

Additional paid-in capital

 

94,892

 

91,786

 

Retained earnings

 

248,697

 

258,134

 

Accumulated other comprehensive loss

 

(7,195

)

(10,202

)

Total shareholders’ equity — Res-Care, Inc.

 

433,580

 

436,877

 

Noncontrolling interests

 

(855

)

 

Total shareholders’ equity

 

432,725

 

436,877

 

Total liabilities and shareholders’ equity

 

$

844,940

 

$

914,143

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2009, 2008 and 2007

(In thousands, except per share data)

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,579,155

 

$

1,543,583

 

$

1,433,298

 

Facility and program expenses

 

1,445,900

 

1,407,516

 

1,292,081

 

Facility and program contribution

 

133,255

 

136,067

 

141,217

 

 

 

 

 

 

 

 

 

Operating expenses (income):

 

 

 

 

 

 

 

Corporate general and administrative

 

59,281

 

58,893

 

54,293

 

Asset impairment charges

 

71,991

 

313

 

331

 

Other operating (income) expense, net

 

(1,159

)

41

 

(571

)

Total operating expenses

 

130,113

 

59,247

 

54,053

 

 

 

 

 

 

 

 

 

Operating income

 

3,142

 

76,820

 

87,164

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

Interest expense

 

16,576

 

19,908

 

18,963

 

Interest income

 

(121

)

(809

)

(445

)

Total other expenses, net

 

16,455

 

19,099

 

18,518

 

(Loss) income from continuing operations before income taxes

 

(13,313

)

57,721

 

68,646

 

Income tax (benefit) expense

 

(3,021

)

20,822

 

24,413

 

(Loss) income from continuing operations

 

(10,292

)

36,899

 

44,233

 

Loss from discontinued operations, net of tax

 

 

(339

)

(342

)

Net (loss) income — including noncontrolling interests

 

(10,292

)

36,560

 

43,891

 

Net loss — noncontrolling interests

 

(855

)

 

 

Net (loss) income — Res-Care, Inc.

 

(9,437

)

36,560

 

43,891

 

Net income attributable to preferred shareholders

 

 

5,263

 

6,320

 

Net (loss) income attributable to common shareholders

 

$

(9,437

)

$

31,297

 

$

37,571

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share:

 

 

 

 

 

 

 

From continuing operations

 

$

(0.33

)

$

1.11

 

$

1.34

 

From discontinued operations

 

0.00

 

(0.01

)

(0.01

)

Basic (loss) earnings per common share

 

$

(0.33

)

$

1.10

 

$

1.33

 

Diluted (loss) earnings per common share:

 

 

 

 

 

 

 

From continuing operations

 

$

(0.33

)

$

1.10

 

$

1.32

 

From discontinued operations

 

0.00

 

(0.01

)

(0.01

)

Diluted (loss) earnings per common share

 

$

(0.33

)

$

1.09

 

$

1.31

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

Basic

 

28,764

 

28,462

 

28,215

 

Diluted

 

28,764

 

28,600

 

28,589

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS) INCOME

Years Ended December 31, 2009, 2008 and 2007

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income/(Loss)

 

Interests

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2007

 

48

 

$

46,609

 

28,146

 

$

50,210

 

$

75,773

 

$

177,683

 

$

1,202

 

$

 

$

351,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

43,891

 

 

 

43,891

 

Foreign currency translation adjustment arising during period

 

 

 

 

 

 

 

993

 

 

993

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,884

 

Share-based compensation

 

 

 

 

 

6,621

 

 

 

 

6,621

 

Shares issued under stock option plans, including related tax benefit

 

 

 

1,015

 

202

 

3,685

 

 

 

 

3,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2007

 

48

 

46,609

 

29,161

 

50,412

 

86,079

 

221,574

 

2,195

 

 

406,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

36,560

 

 

 

36,560

 

Foreign currency translation adjustment arising during period

 

 

 

 

 

 

 

(12,397

)

 

(12,397

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,163

 

Share-based compensation

 

 

 

 

 

4,846

 

 

 

 

4,846

 

Shares issued under stock option plans, including related tax benefit

 

 

 

310

 

138

 

861

 

 

 

 

999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

48

 

$

46,609

 

29,471

 

$

50,550

 

$

91,786

 

$

258,134

 

$

(10,202

)

$

 

$

436,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(9,437

)

 

(855

)

(10,292

)

Foreign currency translation adjustment arising during period

 

 

 

 

 

 

 

3,007

 

 

3,007

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,285

)

Share-based compensation

 

 

 

 

 

4,259

 

 

 

 

4,259

 

Shares issued under stock option plans, including related tax benefit

 

 

 

(18

)

27

 

(1,153

)

 

 

 

(1,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

48

 

$

46,609

 

29,453

 

$

50,577

 

$

94,892

 

$

248,697

 

$

(7,195

)

$

(855

)

$

432,725

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2009, 2008 and 2007

(In thousands)

 

 

 

2009

 

2008

 

2007

 

Operating activities:

 

 

 

 

 

 

 

Net (loss) income — including noncontrolling interests

 

$

(10,292

)

$

36,560

 

$

43,891

 

Adjustments to reconcile net (loss) income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

26,161

 

22,943

 

19,789

 

Impairment charges

 

71,991

 

313

 

331

 

Amortization of discount and deferred debt issuance costs on notes

 

1,221

 

1,192

 

1,084

 

Share-based compensation

 

4,259

 

4,846

 

6,621

 

Deferred income taxes

 

(9,762

)

6,311

 

3,531

 

Provision for losses on accounts receivable

 

9,009

 

7,104

 

6,364

 

Excess tax expense (benefit) from share-based compensation

 

369

 

(935

)

(1,387

)

Gain on purchase of businesses

 

(1,474

)

 

 

Loss (gain) on sale of assets

 

269

 

(5

)

(72

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

11,176

 

(32,581

)

(10,848

)

Prepaid expenses and other current assets

 

792

 

(690

)

(3,370

)

Other assets

 

(1,627

)

4,899

 

(1,422

)

Accounts payable

 

(4,893

)

(5,325

)

7,825

 

Accrued expenses

 

3,840

 

13,011

 

9,592

 

Deferred gains

 

(794

)

(513

)

(668

)

Accrued income taxes

 

(1,838

)

2,954

 

(1,248

)

Long-term liabilities and other

 

6,230

 

(13,532

)

5,762

 

Cash provided by operating activities

 

104,637

 

46,552

 

85,775

 

Investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(15,928

)

(19,391

)

(24,011

)

Acquisitions of businesses, net of cash acquired

 

(20,397

)

(56,659

)

(72,375

)

Proceeds from sale of assets

 

188

 

633

 

984

 

Cash used in investing activities

 

(36,137

)

(75,417

)

(95,402

)

Financing activities:

 

 

 

 

 

 

 

Long-term debt repayments

 

(811

)

(2,531

)

(124,681

)

Borrowings of long-term debt

 

 

 

80,000

 

Short-term (repayments) borrowings — three months or less, net

 

(59,800

)

34,500

 

54,300

 

Payments on obligations under capital leases

 

(121

)

(75

)

(193

)

Proceeds from sale and leaseback transactions

 

 

 

1,966

 

Proceeds received from exercise of stock options

 

415

 

1,562

 

2,341

 

Excess tax (expense) benefit from share-based compensation

 

(369

)

935

 

1,387

 

Debt issuance costs

 

(72

)

(118

)

(225

)

Employee withholding payments on share-based compensation

 

(1,379

)

(1,593

)

 

Cash (used in) provided by financing activities

 

(62,137

)

32,680

 

14,895

 

Effect of exchange rate changes on cash and cash equivalents

 

715

 

(1,030

)

 

Increase in cash and cash equivalents

 

7,078

 

2,785

 

5,268

 

Cash and cash equivalents at beginning of year

 

13,594

 

10,809

 

5,541

 

Cash and cash equivalents at end of year

 

$

20,672

 

$

13,594

 

$

10,809

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

15,093

 

$

18,072

 

$

18,605

 

Income taxes (net of refunds of $0.3 million, $0.2 million and $1.2 million, respectively)

 

9,889

 

17,073

 

20,213

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Notes issued in connection with acquisitions

 

1,764

 

1,767

 

3,315

 

New capital lease obligations

 

733

 

 

643

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

1.                                      Summary of Significant Accounting Policies

 

Basis of Presentation and Description of Business

 

The consolidated financial statements include the accounts of Res-Care, Inc. and its subsidiaries. All references in these financial statements to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

We receive revenues primarily from the delivery of residential, therapeutic, job training and educational support services to various populations with special needs.

 

Fiscal Year

 

Operating results of acquired businesses are included in the Consolidated Statements of Operations from the date of acquisition. During the year, we eliminated the one-month lag between the reporting periods of our international operations and the rest of the company. Therefore, our international results include one additional month for the year ended December 31, 2009. This adjustment, a $0.5 million loss, did not have a material effect on our results of operations. The domestic and international subsidiaries are consolidated as of December 31, 2009.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

Segments

 

As of December 31, 2009, we had three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. Further information regarding our segments is included in Note 9.

 

Revenue Recognition

 

Overview: We recognize revenues as they are realizable and earned in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104). SAB 104 requires that revenue can only be recognized when persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.

 

Community Services: Revenues are derived primarily from 35 different state Medicaid programs 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 programs. Revenues from the state Medicaid programs are recorded at rates established at or before the time services are rendered. Depending upon the state’s reimbursement policies and practices, management contract fees are 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

 

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Table of Contents

 

contracts), a percentage of revenue or an overall fixed fee paid regardless of occupancy. Revenue is recognized in the period services are rendered.

 

Job Corps Training Services: Revenues include amounts reimbursable under cost reimbursement contracts with the Department of Labor (DOL) for operating Job Corps centers for education and training programs. The contracts provide reimbursement for direct facility and program costs related to operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee, normally a combination of fixed and performance-based. Final determination of amounts due under the contracts is subject to audit and review by the applicable government agencies. Revenue is recognized in the period associated costs are incurred and services rendered.

 

Employment Training Services: Revenues are derived primarily through contracts with local and state governments funded by federal agencies. Revenue is generated from contracts which contain various pricing arrangements, including: (1) cost reimbursable, (2) performance-based, (3) hybrid, and (4) fixed price.

 

With cost reimbursable contracts, revenue is recognized for the direct costs associated with functions that are specific to the contract, plus an indirect cost percentage that is applied to the direct costs, plus a profit. Revenue is recognized in the period the associated costs are incurred and services are rendered.

 

Under a performance-based contract, revenue is generally recognized as earned based upon the attainment of a unit performance measure times the fixed unit price for that specific performance measure. Typically, there are many different performance measures that are stipulated in the contract that must be tracked to support the billing and revenue recognition. Revenues may be recognized prior to achieving a benchmark as long as reliable measurements of progress-to-date activity can be obtained, indicating that it is probable that the benchmark will be achieved. This requires judgment in determining what is considered to be a reliable measurement.

 

Revenues for hybrid contracts are recognized based on the specific contract language. The most common type of hybrid contract is “cost-plus,” which provide for the reimbursement of direct and indirect costs with profit tied to meeting certain performance measures. Revenues for cost-plus contracts are generally recognized in the period the associated costs are incurred with an estimate made for the performance-based portion, as long as reliable measurements of progress-to-date activity can be obtained, indicating that it is probable that the benchmark will be achieved. This requires judgment in determining what is considered to be a reliable measurement.

 

Revenues for fixed price contracts are generally recognized in the period services are rendered. Certain of our long-term fixed price contracts may contain performance-based measures that can increase or decrease our revenue. Revenue is deferred in cases where the fixed price is not determinable as a result of these provisions.

 

Laws and regulations governing the government programs and contracts are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. For each operating segment, expenses are subject to examination by agencies administering the contracts and services. We believe that adequate provisions have been made for potential adjustments arising from such examinations.

 

We are substantially dependent on revenues received under contracts with federal, state and local government agencies. Operating funding sources for 2009 were approximately 64% through Medicaid reimbursement, 8% from the DOL and 28% from other payors. We derived 9%, 11% and 11% of our revenues for the years ended December 31, 2009, 2008 and 2007, respectively, under contracts from the DOL under the Federal Job Corps program. Generally, these contracts are subject to termination at the election of governmental agencies and in certain other circumstances such as failure to comply with applicable regulations or quality of service issues. There was no other single customer whose revenue was 10% or more of our consolidated revenue.

 

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Table of Contents

 

Facility and Program Expenses

 

We classify expenses directly related to providing services, along with depreciation and amortization attributable to our operating segments, as facility and program expenses. Direct costs and expenses principally include salaries and benefits for direct care professionals and operating management, contracted labor costs, insurance costs, transportation costs for clients requiring services, certain client expenses such as food, supplies and medicine, residential occupancy expenses, which primarily comprise rent and utilities, and other miscellaneous direct service-related expenses.

 

Cash Equivalents

 

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents and are treated as such for reporting cash flows. Cash equivalents are stated at cost, which approximates market value.

 

Valuation of Accounts Receivable

 

Accounts receivable consist primarily of amounts due from Medicaid programs, other government agencies and commercial insurance companies. An estimated allowance for doubtful accounts receivable is recorded to the extent it is probable that a portion or all of a particular account will not be collected. In evaluating the collectibility of accounts receivable, we consider a number of factors, including historical loss rates, age of the accounts, changes in collection patterns, the status of ongoing disputes with third-party payors, general economic conditions and the status of state budgets. Complex rules and regulations regarding billing and timely filing requirements in various states are also a factor in our assessment of the collectibility of accounts receivable. Actual collections of accounts receivable in subsequent periods may require changes in the estimated allowance for doubtful accounts. Changes in these estimates are charged or credited to the results of operations in the period of the change of estimate.

 

Valuation of Long-Lived Assets

 

We regularly review the carrying value of long-lived assets with respect to any events or circumstances that indicate a possible inability to recover their carrying amount. Indicators of impairment include, but are not limited to, loss of contracts, significant census declines, reductions in reimbursement levels, significant litigation and impact of economic conditions on service demands and levels. Our evaluation is based on undiscounted cash flow, profitability and projections that incorporate current or projected operating results, as well as significant events or changes in the reimbursement or regulatory environment. If circumstances suggest the recorded amounts cannot be recovered, the carrying values of such assets are reduced to fair value based upon various techniques to estimate fair value. We recorded an impairment loss of $1.0 million in the fourth quarter of 2009 related to a building operated under our Schools reporting unit. We recorded an impairment loss of $0.3 million in the fourth quarter of 2008 related to a building operated under our Community Services reporting unit.

 

Goodwill

 

We test goodwill for impairment annually as of year end, unless changes in circumstances indicate impairment may have occurred sooner. We test goodwill on a reporting unit basis, in which a reporting unit is generally defined as the operating segment, but can be a component of an operating segment. We use a fair value approach to test goodwill for impairment and recognize an impairment charge for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values are established using a weighted-average of discounted cash flows and comparative market multiples in the current market conditions. The goodwill impairment test is a two-part test. Step One of the impairment test compares the fair values of each of our reporting units to their carrying value. If the fair value is less than the carrying value for any of our reporting units, Step Two must be completed. Based on the Step One analysis performed, we concluded the fair value was less than the carrying value of the assets assigned to our Employment Services Training, International, and Schools reporting

 

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Table of Contents

 

units. These impairments were due to declining profitability in these reporting units as a result of deteriorating market conditions. As such, Step Two of the goodwill impairment test was performed for these reporting units. Step Two required that we determine the implied fair value of the reporting units’ goodwill by allocating the reporting units’ fair value determined in Step One to the fair value of the reporting units’ net assets, including unrecognized intangible assets. The goodwill calculated in Step Two is then compared to the recorded goodwill, with an impairment charge recorded in the amount that the book value of goodwill exceeds the implied fair value of goodwill calculated in this step. As such, we recorded an impairment charge of $70.1 million related to the goodwill, including $53.1 million recorded in the Employment Training Services reporting unit, $8.8 million recorded in the Schools reporting unit and $8.2 million recorded in the International reporting unit. No impairment loss was recorded in 2008; however, in 2007 a $0.3 million impairment loss was recorded related to the Schools component of our All Other reporting segment.

 

Intangible Assets

 

Our intangible assets from acquisitions, which consist primarily of non-competition agreements and customer contracts and relationships, are amortized over one to twenty years, based on their estimated useful lives. In the fourth quarter of 2009, we recorded an impairment loss of $0.7 million in our International reporting unit, consisting of $0.5 million related to customer relationships and $0.2 million related to trade name. In addition, we recorded an impairment loss of $0.2 million related to indefinite-lived trade name intangible assets in the Schools reporting unit.

 

Debt Issuance Costs

 

Debt issuance costs are capitalized and amortized as interest expense over the terms of the related debt.

 

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. A valuation allowance is provided for deferred assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

 

In June, 2006, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 740-10-25, Income Tax Position, (ASC 740-10-25) which clarifies the criteria that a tax position must satisfy for some or all of the benefits of that position to be recognized in an enterprise’s financial statements in accordance with ASC 740-10, Accounting for Income Taxes, (ASC 740-10). The Interpretation was effective for the Company in its fiscal year which began January 1, 2007. This Interpretation prescribes a recognition threshold of more-likely-than-not and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. Recognized income tax positions are measured at the largest amount that is more likely than not of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

Our policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as corporate general and administrative expense.

 

Deferred Gains on Sale and Leaseback of Assets

 

Gains from the sale and leaseback of assets are deferred and amortized over the term of the operating lease as a reduction of rental expense.

 

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Table of Contents

 

Legal Contingencies

 

We are a party to numerous claims and lawsuits with respect to various matters. We provide for costs, including legal costs, related to contingencies when a loss is probable and the amount is reasonably determinable. We confer with outside counsel in estimating our potential liability for certain legal contingencies. While we believe our provision for legal contingencies is adequate, the outcome of legal proceedings is difficult to predict and we may settle legal claims or be subject to judgments for amounts that exceed our estimates.

 

Insurance Losses

 

We self-insure a substantial portion of our professional, general and automobile liability, workers’ compensation and health benefit risks. These liabilities are necessarily based on estimates and, while we believe that the provision for loss is adequate, the ultimate liability may be more or less than the amounts recorded. Provisions for losses for workers’ compensation risks are based upon actuarially determined estimates and include an amount determined from reported claims and an amount based on past experiences for losses incurred but not reported. Estimates of workers’ compensation claims reserves have been discounted using a discount rate of 3% and 4% at December 31, 2009 and 2008, respectively. The liabilities are evaluated quarterly and any adjustments are reflected in earnings in the period known. Beginning on July 1, 2005, we have excess general and professional liability insurance coverages. Prior to July 1, 2005, we were fully self-insured for general and professional liability claims.

 

Operating Leases

 

We lease certain operating facilities, office space, vehicles and equipment under operating leases. Our operating lease terms generally range from one to fifteen years with renewal options. Facility lease agreements may include rent holidays and rent escalation clauses. We recognize rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date we take possession of the leased space.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets. Estimated useful lives for buildings are 20-35 years. Assets under capital lease and leasehold improvements are amortized over the term of the respective lease or the useful life of the asset, if shorter, which varies from one to fifteen years. The useful lives of furniture and equipment vary from three to seven years. Depreciation expense includes amortization of assets under capital lease.

 

We act as custodian of assets where we have contracts to operate facilities or programs owned or leased by the U.S. Department of Labor, various states and private providers.

 

Foreign Currency Translation

 

A foreign subsidiary designates its local currency as its functional currency. Operating results are translated into U.S. dollars using monthly average exchange rates, while balance sheet accounts are translated using year-end exchange rates. The resulting translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity.

 

Share-Based Compensation

 

Effective January 1, 2006, we adopted the provisions of ASC 718, Stock Compensation, (ASC 718) using the modified prospective transition method. Under this transition method, compensation expense recognized during the years ended December 31, 2009, 2008 and 2007 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of ASC 718, and (b) compensation expense for all share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of ASC 718. Pursuant to ASC 718, the income tax benefits exceeding the recorded deferred income tax

 

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benefit from share-based compensation awards (the excess tax benefits) are required to be reported in cash provided by financing activities. Our share-based compensation plans and share-based payments are described more fully in Note 11, “Share-Based Compensation” herein.

 

Financial Instruments

 

We used various methods and assumptions in estimating the fair value disclosures for significant financial instruments. Fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amount because of the short maturity of those investments. The fair value of long-term debt is determined using market quotes and calculations based on current market rates available to us.

 

Impact of Recently Issued Accounting Pronouncements

 

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In October 2009, the FASB issued Accounting Standard Update 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have vendor-specific evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when VSOE or TPE is unavailable. This amendment will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted as of the beginning of a fiscal year. We are currently evaluating the impact of ASU 2009-13.

 

2.             Acquisitions

 

2009

 

We completed sixteen acquisitions during 2009, all within our Community Services segment. Aggregate consideration for these acquisitions was approximately $22.8 million, including $1.8 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $50.0 million. The operating results of these acquisitions are included in the consolidated statements of income from the date of acquisition.

 

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The preliminary aggregate purchase price for these acquisitions was allocated as follows:

 

Property and equipment

 

$

1,056

 

Other intangible assets

 

6,255

 

Goodwill

 

15,844

 

Cash acquired

 

651

 

Other assets

 

592

 

Liabilities assumed

 

(112

)

Gain

 

(1,474

)

Aggregate purchase price

 

$

22,812

 

 

Two of the acquisitions were considered bargain purchases since the purchase price of the acquisitions was less than the value assigned to the assets and liabilities acquired. We recorded a $1.5 million gain on these acquisitions. This gain is included in the other operating (income) expense line item on our consolidated statement of income.

 

Approximately $5.3 million of other intangible assets will be amortized over five to twenty years and consist of $1.0 million of company trade name, $1.5 million of covenants not-to-compete and $2.8 million customer relationships, with $1.0 million of other intangibles not subject to amortization. Amortization expense for the above intangible assets totaled $0.3 million for the year ended December 31, 2009. The entire balance of goodwill was allocated to the Community Services segment. We expect all of the $15.8 million of goodwill will be deductible for tax purposes.

 

2008

 

We completed sixteen acquisitions during 2008. Thirteen acquisitions were completed within our Community Services segment, one acquisition was completed within our Employment Services segment and two school acquisitions were completed within the All Other category. Aggregate consideration for these acquisitions was approximately $58.4 million, including $1.8 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $72.0 million. The operating results of these acquisitions are included in the consolidated statements of income from the date of acquisition.

 

The aggregate purchase price for these acquisitions was allocated as follows:

 

Property and equipment

 

$

440

 

Other intangible assets

 

11,699

 

Goodwill

 

45,996

 

Other assets

 

495

 

Liabilities assumed

 

(204

)

Aggregate purchase price

 

$

58,426

 

 

Approximately $8.9 million of other intangible assets will be amortized over five to fifteen years and consist of $0.9 million of company trade name, $3.1 million of covenants not-to-compete, $4.6 million customer relationships and $0.3 million of other, with the remaining $2.5 million of company trade name and $0.3 million of other not subject to amortization. Amortization expense for the above intangible assets totaled $0.7 million for the year ended December 31, 2008. Approximately $34.5 million of goodwill was allocated to the Community Services segment, $1.6 million was allocated to Employment Training Services segment, and $9.9 million to All Other. We expect 97% of the $46.0 million of goodwill will be deductible for tax purposes.

 

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3.             Goodwill and Intangible Assets

 

A summary of changes to goodwill during the year follows:

 

 

 

 

 

Job Corps

 

Employment

 

 

 

 

 

 

 

Community

 

Training

 

Training

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Other (2)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2008

 

 

 

 

 

 

 

 

 

 

 

Goodwill, gross

 

$

332,482

 

$

7,589

 

$

60,457

 

$

43,426

 

$

443,954

 

Accumulated impairment losses

 

 

 

 

(331

)

(331

)

Goodwill, net

 

332,482

 

7,589

 

60,457

 

43,095

 

443,623

 

Goodwill added through acquisitions

 

34,464

 

 

1,596

 

9,936

 

45,996

 

Purchase price allocation adjustments, net

 

 

 

 

(7,318

)

(7,318

)

Adjustments to previously recorded goodwill (1)

 

1,236

 

 

 

(7,341

)

(6,105

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Goodwill, gross

 

368,182

 

7,589

 

62,053

 

38,703

 

476,527

 

Accumulated impairment losses

 

 

 

 

(331

)

(331

)

Goodwill, net

 

368,182

 

7,589

 

62,053

 

38,372

 

476,196

 

Goodwill added through acquisitions

 

15,844

 

 

 

 

15,844

 

Impairment charge

 

 

 

(53,082

)

(16,989

)

(70,071

)

Purchase price allocation adjustment, net

 

 

 

 

(1,430

)

(1,430

)

Adjustments to previously recorded goodwill (1)

 

918

 

 

5

 

1,164

 

2,087

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Goodwill, gross

 

384,944

 

7,589

 

62,058

 

38,437

 

493,028

 

Accumulated impairment losses

 

 

 

(53,082

)

(17,320

)

(70,402

)

Goodwill, net

 

$

384,944

 

$

7,589

 

$

8,976

 

$

21,117

 

$

422,626

 

 


(1)          Adjustments to previously recorded goodwill primarily relate to foreign currency translation and earn-out payments on acquisitions. Earn-out payments are generally determined at specific future dates based on the terms of the purchase agreement.

(2)          Other is comprised of international and school operations.

 

In December 2009, we performed our annual goodwill impairment analysis. The goodwill impairment test is a two-part test. Step One of the impairment test compares the fair values of each of our reporting units to their carrying value. If the fair value is less than the carrying value for any of our reporting units, Step Two must be completed. Based on the Step One analysis performed, we concluded the fair value was less than the carrying value of the assets assigned to our Employment Training Services, International, and Schools reporting units. These impairments were due to declining profitability in these reporting units as a result of deteriorating market conditions. As such, Step Two of the goodwill impairment test was performed for these reporting units. Step Two required that we determine the implied fair value of the reporting units’ goodwill by allocating the reporting units’ fair value determined in Step One to the fair value of the reporting units’ net assets, including unrecognized intangible assets. The goodwill calculated in Step Two is then compared to the recorded goodwill, with an impairment charge recorded in the amount that the book value of goodwill exceeds the implied fair value of goodwill calculated in this step. As such, we recorded an impairment charge of $70.1 million related to goodwill, including $53.1 million recorded in the Employment Training Services reporting unit, $8.8 million recorded in the Schools reporting unit and $8.2 million recorded in the International reporting unit.

 

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Intangible assets are as follows:

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

 

 

Accumulated

 

 

 

Accumulated

 

 

 

Gross

 

Amortization

 

Gross

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

Covenants not to compete

 

$

30,421

 

$

19,845

 

$

28,827

 

$

17,873

 

Customer relationships

 

37,186

 

9,707

 

33,049

 

5,079

 

Other intangibles

 

10,983

 

3,196

 

9,270

 

2,209

 

 

 

$

78,590

 

$

32,748

 

$

71,146

 

$

25,161

 

 

In 2009, we recorded impairment losses of $0.2 million related to indefinite-lived trade name intangible assets in the Schools reporting unit and $0.7 million related to amortizable intangible assets in our International reporting unit, including $0.5 million related to customer relationships and $0.2 million related to trade name.

 

The Company amortizes the covenants not to compete over two to fifteen years, customer relationships over ten to twenty years, and other intangibles over one to ten years, with $4.5 million not subject to amortization. Amortization expense for the years ended December 31, 2009, 2008 and 2007 was approximately $7.1 million, $4.8 million and $4.0 million, respectively. Estimated amortization expense for the next five years is as follows:

 

Year Ending December 31

 

 

 

 

2010

 

$

6,028

 

2011

 

5,665

 

2012

 

5,177

 

2013

 

4,656

 

2014

 

4,254

 

 

4.             Debt

 

Long-term debt and obligations under capital leases consist of the following:

 

 

 

December 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

7.75% senior notes due 2013, net of discount of approximately $0.5 million in 2009 and $0.7 million in 2008

 

$

149,480

 

$

149,342

 

Senior secured credit facility

 

44,000

 

103,800

 

Obligations under capital leases

 

1,317

 

637

 

Notes payable and other

 

4,440

 

3,693

 

 

 

199,237

 

257,472

 

Less current portion

 

3,044

 

2,086

 

 

 

$

196,193

 

$

255,386

 

 

On October 3, 2005, we issued $150 million of 7.75% Senior Notes due October 15, 2013 (the Senior Notes) in a private placement under Rule 144A of the Securities Act of 1933. The Senior Notes, which had an issue price of 99.261% of the principal amount, are unsecured obligations ranking equal to existing and future debt and are subordinate to existing and future secured debt. The effective interest rate for these notes is approximately 7.87%. Noteholders have the right to require us to repurchase all or any part of the Senior Notes at a purchase price in cash equal to 101% of the principal amount plus any accrued and unpaid interest in the event of a change of control. A change of control would occur upon (1) the acquisition of 35% of the voting power of our voting stock by any person or group other that the preferred shareholders and their affiliates; (2) the “continuing directors” (as defined in the Senior Note indenture) ceasing to constitute a majority of the members of our board of directors; (3) the sale or other disposition (other than by way of merger or consolidation) of substantially all of the assets of us and our subsidiaries to any person other than the preferred shareholders; or (4) the adoption by the shareholders of a plan for the liquidation or dissolution of our company. The Senior Notes are jointly, severally, fully and unconditionally

 

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guaranteed by our 100% owned U.S. subsidiaries. The Senior Notes were registered under the Securities Act of 1933 in February 2006.

 

As of December 31, 2009, we had irrevocable standby letters of credit in the principal amount of $62.2 million issued primarily in connection with our insurance programs. As of December 31, 2009, we had $143.8 million available under the revolver with an outstanding balance of $44.0 million. Outstanding balances bear interest at 1.125% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of December 31, 2009, the weighted average interest rate was 1.36%. Letters of credit had a borrowing rate of 1.25% as of December 31, 2009. The commitment fee on the unused balance is .25%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility. We are in compliance with our debt covenants at December 31, 2009.

 

On January 28, 2010, we amended our existing senior secured credit facility, which originally had been scheduled to expire on October 3, 2010. The amendment increased the revolving credit facility by $25 million to a total of $275 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $325 million. The credit facility expires on July 28, 2013, and will be used primarily for working capital purposes, letters of credit required under our insurance programs and for acquisitions. The amended and restated senior credit facility contains various financial covenants relating to net worth, capital expenditures and rentals, and requires us to maintain specified ratios with respect to interest coverage and leverage. The amendment provides for the exclusion of charges incurred in connection with the verdict described in Note 15, as well as any non-cash impairment charges, in the calculation of certain financial covenants. In addition, the amendment excludes transactions with our preferred stockholders from the events that would constitute a default. The amended and restated senior credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

 

Maturities of long-term debt and obligations under capital leases are as follows:

 

Year Ending December 31

 

 

 

 

2010

 

$

3,044

 

2011

 

1,199

 

2012

 

240

 

2013

 

194,227

 

2014

 

243

 

Thereafter

 

803

 

 

 

$

199,756

 

 

5.             Income Taxes

 

Income tax (benefit) expense attributable to (loss) income from continuing operations is summarized as follows:

 

 

 

Year Ended December 31

 

 

 

2009

 

2008

 

2007

 

Current:

 

 

 

 

 

 

 

Federal

 

$

4,971

 

$

12,381

 

$

17,986

 

State

 

1,353

 

2,616

 

3,494

 

Foreign

 

386

 

1,274

 

258

 

Total current

 

6,710

 

16,271

 

21,738

 

Deferred:

 

 

 

 

 

 

 

Federal

 

(7,578

)

3,979

 

3,024

 

State

 

(1,226

)

744

 

(349

)

Foreign

 

(927

)

(172

)

 

Total deferred

 

(9,731

)

4,551

 

2,675

 

 

 

 

 

 

 

 

 

Total income tax (benefit) expense

 

$

(3,021

)

$

20,822

 

$

24,413

 

 

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A reconciliation of the U.S. Federal income tax rate of 35% to income tax expense expressed as a percent of pretax income from continuing operations follows:

 

 

 

Year Ended December 31

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Federal income tax at the statutory rate

 

35.0

%

35.0

%

35.0

%

Increase (decrease) in income taxes:

 

 

 

 

 

 

 

State and foreign income taxes, net of federal benefits

 

(3.3

)

4.0

 

4.0

 

Jobs tax credits, net

 

27.7

 

(5.4

)

(3.0

)

Nondeductible expenses and other

 

(7.8

)

0.7

 

0.9

 

Reserves for income tax contingencies

 

0.7

 

0.6

 

 

Deferred tax valuation allowance

 

(7.6

)

1.2

 

(1.3

)

Nondeductible impairments

 

(22.0

)

 

 

 

 

22.7

%

36.1

%

35.6

%

 

During the years ended December 31, 2008 and 2007, we credited additional paid-in capital for the tax benefits associated with share-based compensation in the amounts of $0.9 million and $1.4 million, respectively. Additionally, during the year ended December 31, 2009, we debited additional paid-in capital for tax shortfalls associated with share-based compensation in the amount of $0.4 million.

 

As of December 31, 2009, we have state net operating loss carryforwards of approximately $39 million which are available to offset future taxable income, if any, of certain entities in certain states. These carryforwards will expire between 2010 and 2028. These carryforwards have been partially or fully offset by valuation allowances as our ability to apply these carryforwards may be limited.

 

As of December 31, 2009, we have federal foreign tax credit carryforwards of approximately $1.0 million. If not used, these carryforwards will expire between 2010 and 2019. These credit carryovers have been fully offset by a valuation allowance as our ability to apply these carryforwards is subject to limitation.

 

We have not recognized a deferred tax liability of approximately $2.4 million for the undistributed earnings of our foreign subsidiaries that arose in 2009 and prior years as we consider these earnings to be indefinitely reinvested. As of December 31, 2009, the undistributed earnings of these subsidiaries were approximately $6.2 million.

 

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

 

 

 

December 31

 

 

 

2009

 

2008

 

Deferred tax assets:

 

 

 

 

 

Accounts receivable

 

$

8,582

 

$

7,839

 

Covenants not to compete and other intangible assets

 

1,165

 

1,066

 

Workers’ compensation costs

 

12,567

 

10,057

 

Compensated absences

 

3,306

 

3,175

 

Other insurance reserves

 

4,539

 

4,212

 

Share-based compensation

 

2,042

 

2,277

 

Other liabilities and reserves

 

3,772

 

5,804

 

Deferred gains and revenues

 

1,772

 

2,310

 

Deferred state income tax net operating loss carryforwards

 

5,664

 

4,231

 

Deferred tax credits, foreign tax credit carryforwards and other

 

2,212

 

3,824

 

Total gross deferred tax assets

 

45,621

 

44,795

 

Less valuation allowance

 

5,388

 

5,353

 

Net deferred tax assets

 

40,233

 

39,442

 

Deferred tax liabilities:

 

 

 

 

 

Property and equipment

 

6,947

 

 

Goodwill and other intangible assets

 

31,007

 

46,796

 

Other

 

212

 

341

 

Total deferred tax liabilities

 

38,166

 

47,137

 

 

 

 

 

 

 

Net deferred tax asset (liability)

 

$

2,067

 

$

(7,695

)

 

 

 

 

 

 

Classified as follows:

 

 

 

 

 

Current deferred income tax asset

 

$

22,879

 

$

22,702

 

Noncurrent deferred income tax liability

 

(20,812

)

(30,397

)

Net deferred tax asset (liability)

 

$

2,067

 

$

(7,695

)

 

A valuation allowance for deferred tax assets was provided as of December 31, 2009 and 2008 related to state and foreign income tax net operating loss carryforwards and federal foreign tax credit carryovers. The realization of deferred tax assets is dependent upon generating future taxable income when temporary differences become deductible. Based upon the historical and projected levels of taxable income, we believe it is more likely than not that we will realize the benefits of the deductible differences after consideration of the valuation allowance.

 

We adopted the provisions related to unrecognized tax benefits on January 1, 2007. This adoption did not impact the consolidated financial position, results of operations or cash flows. A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Balance at beginning of year

 

$

725

 

$

483

 

Increase related to prior year tax positions

 

311

 

328

 

Decrease related to prior year tax positions

 

(8

)

(17

)

Increase related to current year tax positions

 

77

 

88

 

Settlements

 

(445

)

 

Lapse of statute of limitations

 

(120

)

(157

)

Balance at end of year

 

$

540

 

$

725

 

 

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Table of Contents

 

Included in the balance of total unrecognized tax benefits at December 31, 2009 are potential benefits of $0.1 million, which if recognized, would affect the effective tax rate on income from continuing operations.

 

We file numerous consolidated and separate income tax returns in the U.S. federal and various state and foreign jurisdictions. With few exceptions, we are no longer subject to income tax examinations by the taxing authorities for years prior to 2005. We believe that we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for income tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of the tax laws as applied to the facts of each matter. We do not expect that the amounts of unrecognized tax benefits will change significantly within the next twelve months.

 

Total accrued interest and penalties as of December 31, 2009 are approximately $0.1 million and are included in accrued expenses.

 

6.             Detail of Certain Balance Sheet Accounts

 

Property and equipment is summarized as follows:

 

 

 

December 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Land and land improvements

 

$

7,337

 

$

7,031

 

Furniture and equipment

 

107,864

 

101,814

 

Buildings

 

42,288

 

39,462

 

Leasehold improvements

 

34,683

 

32,005

 

Buildings under capital lease

 

1,384

 

659

 

Equipment under capital lease

 

4,659

 

4,583

 

Construction in progress

 

2,921

 

1,269

 

 

 

201,136

 

186,823

 

Less accumulated depreciation and amortization

 

119,789

 

102,666

 

Net property and equipment

 

$

81,347

 

$

84,157

 

 

Other assets are as follows:

 

 

 

December 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Long-term receivables and advances to managed facilities

 

$

2,235

 

$

2,669

 

Deposits

 

3,788

 

3,739

 

Deferred debt issuance costs

 

1,753

 

2,763

 

Insurance recoveries

 

5,613

 

6,023

 

Other assets

 

1,162

 

1,128

 

 

 

$

14,551

 

$

16,322

 

 

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Table of Contents

 

Accrued expenses are as follows:

 

 

 

December 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Wages and payroll taxes

 

$

36,046

 

$

38,313

 

Compensated absences

 

12,855

 

12,363

 

Health insurance

 

8,206

 

4,848

 

Workers’ compensation insurance

 

16,628

 

12,845

 

Automobile insurance

 

2,401

 

1,752

 

Professional services

 

2,391

 

9,443

 

General and professional liability insurance

 

6,570

 

1,825

 

Taxes other than income taxes

 

10,109

 

9,657

 

Interest

 

3,353

 

3,297

 

Deferred revenue

 

5,595

 

6,047

 

Other

 

5,246

 

3,130

 

 

 

$

109,400

 

$

103,520

 

 

Long-term liabilities are as follows:

 

 

 

December 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Workers’ compensation insurance

 

$

22,961

 

$

20,118

 

Automobile insurance

 

3,249

 

3,695

 

General and professional liability insurance

 

5,598

 

4,499

 

Other

 

3,284

 

3,284

 

 

 

$

35,092

 

$

31,596

 

 

7.             Preferred Stock Issuance

 

On June 23, 2004, ResCare issued 48,095 shares of Series A convertible preferred stock to four investment funds controlled by Onex Corporation (the Onex Funds), at a purchase price of $1,050 per share or a total price of $50.5 million. Each preferred share is convertible at the option of the holder into 100 shares of ResCare’s common stock, based on a value of $10.50 per common share which was contractually agreed to on March 10, 2004. Net proceeds from the transaction were $46.6 million. Issuance costs of approximately $3.9 million, including a $0.5 million transaction fee to Onex Corporation, were recorded as a reduction in shareholders’ equity.

 

The preferred shares are entitled to receive such dividends as may be paid on the common stock on an as-converted basis and to a liquidation preference of $1,050 per share plus unpaid, accrued dividends, if any. There were no dividends declared in 2007, 2008 and 2009. Preferred shares vote on an as-converted basis as of the date of issuance. The preferred shareholders also are entitled to certain corporate governance and special voting rights, as defined in the agreement, and have no preferential dividends. The preferred shareholders have the right to put the shares to ResCare at $1,050 per share plus accrued dividends, if any, if we close a sale of substantially all of our assets or equity by merger, consolidation or otherwise. ResCare cannot sell substantially all of its assets or equity by merger or otherwise without first giving the preferred shareholders the right to acquire our assets or equity on the same terms and conditions.

 

Additionally, in connection with the transaction, we entered into a management services agreement with Onex Corporation whereby Onex Corporation will advise and assist management and the board of directors from time to time on business and financial matters. We have agreed to pay Onex Corporation an annual advisory fee of $0.4 million for its services under this agreement effective July 1, 2004. The management services agreement will

 

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continue in effect until such time as the Onex Funds no longer hold at least 26,452 shares of preferred stock. Under this agreement, annual fees of $0.4 million were paid to Onex Corporation for all periods presented.

 

8.             Earnings per Share

 

The following data shows the amounts used in computing earnings per common share and the effect on income and the weighted average number of shares of dilutive potential common stock.

 

 

 

Year Ended December 31

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(9,437

)

$

36,899

 

$

44,233

 

Attributable to preferred shareholders

 

 

5,312

 

6,370

 

Attributable to common shareholders

 

$

(9,437

)

$

31,587

 

$

37,863

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

$

 

$

(339

)

$

(342

)

Attributable to preferred shareholders

 

 

(49

)

(50

)

Attributable to common shareholders

 

$

 

$

(290

)

$

(292

)

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(9,437

)

$

36,560

 

$

43,891

 

Attributable to preferred shareholders(1)

 

 

5,263

 

6,320

 

Attributable to common shareholders

 

$

(9,437

)

$

31,297

 

$

37,571

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used in basic (loss) earnings per common share

 

28,764

 

28,462

 

28,215

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 

48

 

266

 

Restricted stock

 

 

90

 

108

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and dilutive potential common shares used in diluted earnings per common share

 

28,764

 

28,600

 

28,589

 

 


(1) Net losses are not allocated to preferred shareholders.

 

The average shares listed below were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the period presented:

 

 

 

December 31

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Stock options

 

243

 

 

 

Restricted shares

 

323

 

 

 

 

9.             Segment Information

 

As of December 31, 2009, we had three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. We evaluate performance based on profit or loss from operations before corporate expenses and other income, interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment revenues and transfers are not significant.

 

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The following table sets forth information about reportable segment operating results and assets:

 

 

 

 

 

Job Corps

 

Employment

 

 

 

 

 

 

 

Community

 

Training

 

Training

 

All

 

Consolidated

 

As of and for the year ended December 31:

 

Services

 

Services

 

Services

 

Other (1)

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,152,765

 

$

145,821

 

$

232,732

 

$

47,837

 

$

1,579,155

 

Operating income (loss) (2) (3)

 

112,101

 

10,143

 

(37,252

)

(81,850

)

3,142

 

Total assets

 

621,227

 

24,473

 

88,772

 

110,468

 

844,940

 

Capital expenditures

 

8,542

 

 

1,596

 

5,790

 

15,928

 

Depreciation and amortization

 

11,245

 

 

2,520

 

12,396

 

26,161

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,109,275

 

$

163,944

 

$

222,394

 

$

47,970

 

$

1,543,583

 

Operating income (4)

 

99,633

 

11,782

 

22,692

 

(57,287

)

76,820

 

Total assets

 

606,681

 

39,074

 

133,814

 

134,574

 

914,143

 

Capital expenditures

 

8,097

 

 

1,043

 

10,251

 

19,391

 

Depreciation and amortization

 

10,037

 

 

2,321

 

10,585

 

22,943

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,052,409

 

$

163,904

 

$

197,588

 

$

19,397

 

$

1,433,298

 

Operating income

 

111,350

 

11,588

 

17,093

 

(52,867

)

87,164

 

Total assets

 

547,369

 

32,532

 

134,355

 

120,287

 

834,543

 

Capital expenditures

 

9,814

 

 

1,425

 

12,772

 

24,011

 

Depreciation and amortization

 

9,929

 

 

1,962

 

7,898

 

19,789

 

 


(1)          All Other is comprised of our international operations, charter schools and corporate general and administrative expenses.

(2)          Operating income includes a $5.0 million charge related to the increases in legal reserves within our Community Services segment.

(3)          Operating income includes a $70.1 million goodwill impairment charge, with $53.1 million related to our Employment Training Services segment, and $17.0 million related to our All Other segment.

(4)          Operating income includes a $20.3 million charge related to the resolution of four legal matters within our Community Services segment.

 

10.          Benefit Plans

 

We sponsor retirement savings plans which were established to assist eligible employees in providing for their future retirement needs. Our contributions to the plans were $4.5 million, $5.2 million and $4.9 million in 2009, 2008 and 2007, respectively.

 

11.          Share-Based Compensation

 

As of December 31, 2009, we had outstanding awards under three share-based incentive plans. Under the plans, stock options are awarded at a price equal to the market price of our common stock on the date of grant, and an option’s maximum vesting term is normally five years. Generally, all options have varied vesting schedules, varying between 20% and 50% at date of grant with the remaining options vesting over one to four years. Restricted stock awards generally are comprised of service-based restricted shares and performance-based restricted shares. The service-based restricted shares generally vest over three to four years from the date of grant. The performance-based restricted shares vest in increments if and when certain performance criteria are met.

 

The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. The expected volatility of our stock price is based on historical volatility over the expected term. The expected term of the option is based on historical employee stock option exercise behavior, the vesting term of the respective award and the contractual term. Our stock price volatility and expected option lives are based on management’s best estimates at the time of grant, both of which impact the fair value of the option calculated under the Black-Scholes

 

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methodology and, ultimately, the expense that will be recognized over the vesting term of the option. There have been no stock options granted since 2005.

 

Total share-based compensation expense by type of award for the years ended December 31, 2009, 2008 and 2007 was as follows:

 

 

 

Year Ended December 31

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Stock options

 

$

 

$

 

$

66

 

Restricted stock, service-based

 

3,299

 

3,164

 

3,537

 

Restricted stock, performance-based

 

960

 

1,682

 

3,018

 

Total share-based compensation expense

 

4,259

 

4,846

 

6,621

 

Tax effect

 

1,657

 

1,885

 

2,575

 

Share-based compensation expense, net of tax

 

$

2,602

 

$

2,961

 

$

4,046

 

 

We use authorized but unissued shares when a stock option is exercised or when restricted stock is granted.

 

Stock Options

 

As of December 31, 2009, a total of 243 thousand options were outstanding under the plans. The intrinsic value of the stock options exercised during 2009, 2008 and 2007 was $0.1 million, $2.4 million and $4.0 million, respectively. The fair value of the stock options which vested during 2008 and 2007 was approximately $0.7 million and $0.8 million, respectively. There were no stock options that vested in 2009.

 

As of December 31, 2009, there was no unrecognized share-based compensation related to stock options.

 

A summary of our stock option activity and related information for 2009 is as follows:

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

Average

 

Average

 

 

 

Stock

 

Exercise

 

Remaining

 

 

 

Options

 

Price

 

Contractual Life

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2008

 

310

 

$

15.78

 

2.6

 

Exercised

 

(20

)

12.26

 

 

 

Forfeited/canceled

 

(47

)

10.51

 

 

 

Outstanding at December 31, 2009

 

243

 

17.09

 

2.1

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2009

 

243

 

$

17.09

 

2.1

 

 

Restricted Stock, service-based

 

As of December 31, 2009, 323 thousand shares of service-based restricted stock were outstanding which vest based on years of service. During the twelve months ended December 31, 2009, we awarded 95 service-based restricted shares to key employees and directors. The fair value of the restricted stock awards was based on the closing market price of common stock on the date of award and is being amortized under the straight-line method over the service period. Share-based compensation expense recognized for 2009 is based on service-based restricted stock ultimately expected to vest, and therefore it has been reduced for estimated forfeitures. The fair value of service-based restricted shares which vested during 2009, 2008 and 2007 was approximately $2.8 million, $2.9 million and $3.1 million, respectively.

 

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As of December 31, 2009, there was $3.5 million of unrecognized share-based compensation related to nonvested service-based restricted stock. That cost is expected to be recognized over an estimated weighted-average amortization period of approximately three years.

 

A summary of our service-based restricted stock activity and related information for 2009 is as follows:

 

 

 

 

 

Weighted

 

 

 

Service-Based

 

Average

 

 

 

Restricted

 

Grant Date

 

 

 

Stock

 

Fair Value

 

 

 

 

 

 

 

Outstanding at December 31, 2008

 

441

 

$

18.09

 

Granted

 

95

 

14.58

 

Issued

 

(187

)

18.08

 

Forfeited/canceled

 

(26

)

17.75

 

Outstanding at December 31, 2009

 

323

 

$

17.17

 

 

Restricted Stock, performance-based

 

As of December 31, 2009, a total of 252 thousand shares of performance-based restricted shares were outstanding. The restricted stock primarily vests if ResCare meets certain operating targets set by our Board of Directors. The fair value of the restricted stock awards are based on the closing market price of common stock on the date of award and is being amortized over the estimated service period to achieve the operating targets. Share-based compensation expense recognized for 2009 is based on performance-based restricted stock ultimately expected to vest, and therefore it has been reduced for estimated forfeitures. The fair value of performance-based restricted shares which vested during 2009 and 2008 was approximately $0.9 million and $1.5 million, respectively.

 

As of December 31, 2009, there was $2.0 million of unrecognized share-based compensation related to nonvested performance-based restricted stock. The underlying performance criteria relate to meeting certain annual earnings targets. Based on current projections, meeting all criteria is considered probable.

 

A summary of performance-based restricted stock activity and related information for 2009 is as follows:

 

 

 

Performance-

 

Weighted

 

 

 

Based

 

Average

 

 

 

Restricted

 

Grant Date

 

 

 

Stock

 

Fair Value

 

 

 

 

 

 

 

Outstanding at December 31, 2008

 

336

 

$

18.97

 

Granted

 

 

 

Issued

 

(74

)

18.18

 

Forfeited/canceled

 

(10

)

19.30

 

 

 

 

 

 

 

Outstanding at December 31, 2009

 

252

 

$

19.19

 

 

12.                               Lease Arrangements

 

We lease certain residential and operating facilities, office space, vehicles and equipment under operating leases which expire at various dates. Total rent expense was approximately $72.8 million, $70.4 million and $65.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. Facility rent, defined as land and building lease expense less amortization of any deferred gain on applicable lease transactions, was approximately $61.9 million, $59.0 million and $53.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. We also lease certain land and buildings used in operations under capital leases. These leases expire

 

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at various dates through 2020 (including renewal options) and generally require us to pay property taxes, insurance and maintenance costs.

 

Future minimum lease payments under capital leases, together with the minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2009, are as follows:

 

 

 

Capital

 

Operating

 

Year Ending December 31

 

 

Leases

 

Leases

 

 

 

 

 

 

 

2010

 

$

265

 

$

57,681

 

2011

 

253

 

40,495

 

2012

 

243

 

32,291

 

2013

 

219

 

25,686

 

2014

 

217

 

19,666

 

Thereafter

 

553

 

40,370

 

Total minimum lease payments

 

1,750

 

$

216,189

 

Less amounts representing interest

 

433

 

 

 

Present value of minimum lease payments

 

1,317

 

 

 

Less current maturities

 

(164

)

 

 

Total long-term obligations under capital leases

 

$

1,153

 

 

 

 

Assets capitalized under capital leases as reflected in the accompanying consolidated balance sheets were $1.4 million and $0.7 million of buildings and $4.7 million and $4.6 million of equipment as of December 31, 2009 and 2008, respectively. The accumulated depreciation related to assets under capital leases was $4.4 million and $4.0 million as of December 31, 2009 and 2008, respectively.

 

During 2007, we sold five properties with an aggregate net book value of $1.8 million. Proceeds from the sale totaled $2.0 million, resulting in a gain on the sale totaling $0.2 million. All five properties are used in our Community Services segment. The properties have been leased back to us under lease agreements with terms of five to twelve years. As a result of the sale-leaseback transactions, the deferred gain is being recognized over the terms of the leases. The minimum lease payments required under these operating leases have been incorporated into the future minimum lease payments above. There were no sale-leaseback transactions in 2009 or 2008.

 

13.                               Fair Value

 

The following table presents the fair value for those assets or liabilities measured at fair value on a nonrecurring basis:

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices

 

Other

 

 

 

 

 

 

 

Fair Value

 

in Active

 

Observable

 

Unobservable

 

Total

 

 

 

At

 

Markets

 

Inputs

 

Inputs

 

Gains /

 

 

 

12/31/2009

 

Level 1 (a)

 

Level 2 (b)

 

Level 3 (c)

 

(Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets

 

$

2,971

 

$

 

$

2,971

 

$

 

$

(1,000

)

Goodwill

 

30,093

 

 

 

30,093

 

(70,071

)

Intangible assets

 

1,590

 

 

 

1,590

 

(920

)

 

 

 

 

 

 

 

 

 

 

$

(71,991

)

 

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The three levels of hierarchy are:

 

(a)

Level 1

Quoted prices in active markets for identified assets or liabilities.

(b)

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability.

(c)

Level 3

Unobservable inputs used in valuations in which there is little market activity for the asset or liability at the measurement date.

 

Fair value measurements of assets or liabilities are assigned a level within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement in its entirety. We utilize the market approach to measure fair value for our long lived assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and therefore is classified as Level 2.  We utilize the income approach to measure fair value for our goodwill and other intangible assets.  The income approach uses valuation techniques to convert future amounts to a single present amount, and therefore is classified as Level 3.

 

In accordance with the provision of the Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC 10, a building with a carrying amount of $4.0 million was written down to its fair value of $3.0 million, resulting in a loss of $1.0 million, which was included in earnings for the period.

 

In accordance with the provisions of FASB ASC 250, Intangibles-Goodwill and Other, goodwill with a carrying amount of $100.2 million was written down to its implied fair value of $30.1, resulting in an impairment charge of $70.1 million, which was included in earnings for the period.  In addition, other intangible assets with a carrying amount of $2.5 million were written down to their implied fair value of $1.6 million, resulting in an impairment charge of $0.9 million, which was included in earnings for the period.

 

14.                               Financial Instruments

 

At December 31, 2009 and 2008, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated carrying value because of the short-term nature of these instruments. The fair value of our other financial instruments subject to fair value disclosures are as follows:

 

 

 

2009

 

2008

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Long-term debt:

 

 

 

 

 

 

 

 

 

7.75% senior notes

 

$

149,480

 

$

148,688

 

$

149,342

 

$

127,050

 

Senior secured credit facility

 

44,000

 

44,000

 

103,800

 

103,800

 

Notes payable and other

 

4,440

 

4,380

 

3,693

 

3,619

 

 

We estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available to us.

 

15.                               Commitments and Contingencies

 

Litigation

 

From time to time, we, or a provider with whom we have a management agreement, become a party to legal and/or administrative proceedings that, in the event of unfavorable outcomes, may adversely affect revenues and period to period comparisons.

 

In March 2007, a lawsuit was filed in Bernalillo County, New Mexico State Court styled Larry Selk, by and through his legal guardian, Rani Rubio v. Res-Care New Mexico, Inc., Res-Care, Inc., et al. The lawsuit sought

 

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compensatory and punitive damages for negligence, negligence per se, violations of the Unfair Practices Act and violations of the Resident Abuse and Neglect Act. Settlement discussions were unsuccessful and a jury trial commenced on November 9, 2009 on the remaining issue of negligence. The jury returned a verdict of approximately $53.9 million in damages against the company, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages, which was entered as a judgment in December 2009. Ruling on various post trial motions, on February 19, 2010, the New Mexico trial court judge reduced the jury award to $15.5 million, consisting of approximately $10.8 million in punitive damages and $4.7 million in compensatory damages. We believe the parent company is not liable for the actions of its subsidiary or its employees and that both the compensatory and punitive amounts awarded are excessive and contradict various United States Supreme Court and New Mexico Supreme Court decisions which would warrant a new trial or, in the alternative, would limit the amount of damages awarded to a significantly lower amount. We, as well as the plaintiffs, are appealing and we will continue to defend this matter vigorously. Although we have made provisions in our consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the amount of the damages awarded. If our appeal to obtain a new trial or reduce the amount of the damages does not succeed, it could have a material adverse effect on our financial condition, results of operations and cash flows.

 

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our facilities and programs and arising in the ordinary course of business. We do not believe the ultimate liability, if any, for these proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.

 

16.                               Related Party Transactions

 

We lease certain of our facilities under an operating lease with Ventas, Inc., a publicly traded healthcare real estate investment trust. Ronald Geary, our Chairman of the Board and former President and Chief Executive Officer, is a member of Ventas’ board of directors. The lease commenced in October 1998 and extends through 2010. Lease payments to the trust approximated $1.0 million for year ended December 31, 2009, $1.0 million for 2008 and $0.9 million for 2007. Aggregate future rentals are estimated to be approximately $0.8 million, subject to annual increases based on the consumer price index.

 

U.S. Bank National Association, a subsidiary of U.S. Bancorp, is a member of our lender group and holds approximately 13% of outstanding indebtedness under our senior secured credit facility, which was amended in January 2010 and will expire on July 28, 2013. Mrs. Olivia Kirtley, a member of our board of directors, is also a member of U.S. Bancorp’s board of directors. The credit facility with our lending group was negotiated on an arms length basis with no involvement from Mrs. Kirtley.

 

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17.                               Quarterly Data (unaudited)

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Total

 

2009 (1)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

390,827

 

$

405,263

 

$

395,837

 

$

387,228

 

$

1,579,155

 

Facility and program contribution

 

38,898

 

32,258

 

37,008

 

25,091

 

133,255

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) — including noncontrolling interests

 

$

12,071

 

$

8,208

 

$

11,496

 

$

(42,067

)

$

(10,292

)

Net loss — noncontrolling interests

 

(284

)

(135

)

(159

)

(277

)

(855

)

Net income (loss) — Res-Care, Inc.

 

$

12,355

 

$

8,343

 

$

11,655

 

$

(41,790

)

$

(9,437

)

Net income (loss) attributable to common shareholders

 

10,338

 

7,149

 

9,990

 

(41,790

)

(9,437

)

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.36

 

$

(0.25

)

$

0.35

 

$

(1.45

)

$

(0.33

)

From discontinued operations

 

(0.00

)

(0.00

)

(0.00

)

(0.00

)

(0.00

)

Basic earnings (loss) per common share

 

$

0.36

 

$

(0.25

)

$

0.35

 

$

(1.45

)

$

(0.33

)

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.36

 

$

(0.25

)

$

0.35

 

$

(1.45

)

$

(0.33

)

From discontinued operations

 

(0.00

)

(0.00

)

(0.00

)

(0.00

)

(0.00

)

Diluted earnings (loss) per common share

 

$

0.36

 

$

(0.25

)

$

0.35

 

$

(1.45

)

$

(0.33

)

 

 

 

 

 

 

 

 

 

 

 

 

2008 (2)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

375,399

 

$

385,378

 

$

387,923

 

$

394,883

 

$

1,543,583

 

Facility and program contribution

 

38,224

 

16,616

 

37,758

 

43,469

 

136,067

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

12,100

 

$

(1,569

)

$

11,628

 

$

14,740

 

$

36,899

 

Loss from discontinued operations, net of tax

 

(54

)

(103

)

(122

)

(60

)

(339

)

Net income (loss)

 

$

12,046

 

$

(1,672

)

$

11,506

 

$

14,680

 

$

36,560

 

Net income (loss) attributable to common shareholders

 

10,308

 

(1,672

)

9,856

 

12,568

 

31,297

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.36

 

$

(0.06

)

$

0.35

 

$

0.44

 

$

1.11

 

From discontinued operations

 

(0.00

)

(0.00

)

(0.00

)

(0.00

)

(0.01

)

Basic earnings (loss) per common share

 

$

0.36

 

$

(0.06

)

$

0.35

 

$

0.44

 

$

1.10

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.36

 

$

(0.06

)

$

0.35

 

$

0.44

 

$

1.10

 

From discontinued operations

 

(0.00

)

(0.00

)

(0.01

)

(0.00

)

(0.01

)

Diluted earnings (loss) per common share

 

$

0.36

 

$

(0.06

)

$

0.34

 

$

0.44

 

$

1.09

 

 


(1)

Fourth quarter of 2009 includes a $5.0 million ($3.1 million, net of tax, or $0.11 per diluted share) charge related to an increase in the Company’s legal reserve, in addition to a $72.0 million ($47.1 million, net of tax, or $1.64 per diluted share) charge for asset impairments.

(2)

Second quarter of 2008 includes a $24.4 million ($14.9 million, net of tax, or $0.45 per diluted share) charge related to the resolution of three separate legal matters and the ongoing proceedings of another case. Fourth quarter of 2008 includes a $4.1 million ($2.5 million, net of tax, or $0.07 per diluted share) reduction of the legal reserves due to final judgment of one case.

 

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Table of Contents

 

18.                               Noncontrolling Interests

 

In December 2007, the FASB issued ASC 810, Noncontrolling Interests in Consolidated Financial Statements, (ASC 810). ASC 810 applies to all companies that prepare consolidated financial statements but only affects companies that have a noncontrolling interest in a subsidiary or that deconsolidate a subsidiary. As of December 31, 2009, ResCare held a 66.7% interest in Rest Assured LLC, a limited liability company comprised of public and private organizations providing remote monitoring services for persons with disabilities and the elderly, and an 81% interest in ResCare Maatwerk B.V., a private limited liability company under Dutch law providing government funded job reintegration services. ASC 810 clarifies that noncontrolling interests be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary be recorded as equity transactions if the parent retains its controlling interest in the subsidiary. The statement also requires consolidated net income to include amounts attributable to both the parent and the noncontrolling interest on the face of the income statement. In addition, ASC 810 requires a parent to recognize a gain or loss in net income on the date the parent deconsolidates a subsidiary, or ceases to have a controlling financial interest in a subsidiary.

 

Noncontrolling interests as of December 31, 2008

 

$

 

Net loss — noncontrolling interests

 

(855

)

Noncontrolling interests as of December 31, 2009

 

$

(855

)

 

19.                               Subsequent Events

 

All events or transactions that occurred after December 31, 2009 up through the date these financials were issued have been evaluated See Notes 4 and 15. There were no other material recognizable or disclosable subsequent events.

 

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Table of Contents

 

20.                               Subsidiary Guarantors

 

The Senior Notes are jointly, severally, fully and unconditionally guaranteed by our 100% owned U.S. subsidiaries. There are no restrictions on our ability to obtain funds from our U.S. subsidiaries by dividends or other means. The following are condensed consolidating financial statements of our company, including the guarantors. This information is provided pursuant to Rule 3 — 10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Senior Notes. The following condensed consolidating financial statements present the balance sheet, statement of income and cash flows of (i) Res-Care, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries, (iii) the nonguarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for our company on a consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying Consolidated Financial Statements.

 

F-32



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,763

 

$

4,655

 

$

9,254

 

$

 

$

20,672

 

Accounts receivable, net

 

38,042

 

171,280

 

2,028

 

 

211,350

 

Refundable income taxes

 

3,963

 

 

(11

)

 

3,952

 

Deferred income taxes

 

22,853

 

 

26

 

 

22,879

 

Non-trade receivables

 

509

 

3,295

 

156

 

 

3,960

 

Prepaid expenses and other current assets

 

9,266

 

8,064

 

431

 

 

17,761

 

Total current assets

 

81,396

 

187,294

 

11,884

 

 

280,574

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

34,561

 

45,994

 

792

 

 

81,347

 

Goodwill

 

31,619

 

369,480

 

21,527

 

 

422,626

 

Other intangible assets

 

7,111

 

34,811

 

3,920

 

 

45,842

 

Investment in subsidiaries

 

599,992

 

41,794

 

80,255

 

(722,041

)

 

Other assets

 

9,315

 

5,034

 

202

 

 

14,551

 

 

 

$

763,994

 

$

684,407

 

$

118,580

 

$

(722,041

)

$

844,940

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

23,559

 

$

19,527

 

$

1,416

 

$

 

$

44,502

 

Accrued expenses

 

53,711

 

54,669

 

1,020

 

 

109,400

 

Current portion of long-term debt

 

 

1,688

 

1,192

 

 

2,880

 

Current portion of obligations under capital leases

 

14

 

150

 

 

 

164

 

Accrued income taxes

 

 

 

 

 

 

Total current liabilities

 

77,284

 

76,034

 

3,628

 

 

156,946

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany

 

5,367

 

(10,247

)

4,880

 

 

 

Long-term liabilities

 

32,937

 

1,949

 

206

 

 

35,092

 

Long-term debt

 

193,481

 

1,559

 

 

 

195,040

 

Obligations under capital leases

 

6

 

1,147

 

 

 

1,153

 

Deferred gains

 

1,377

 

1,795

 

 

 

3,172

 

Deferred income taxes

 

20,817

 

 

(5

)

 

20,812

 

Total liabilities

 

331,269

 

72,237

 

8,709

 

 

412,215

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

432,725

 

612,170

 

109,871

 

(722,041

)

432,725

 

 

 

$

763,994

 

$

684,407

 

$

118,580

 

$

(722,041

)

$

844,940

 

 

F-33



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

146

 

$

4,048

 

$

9,400

 

$

 

$

13,594

 

Accounts receivable, net

 

50,172

 

177,149

 

3,655

 

 

230,976

 

Refundable income taxes

 

2,222

 

 

(441

)

 

1,781

 

Deferred income taxes

 

22,694

 

 

8

 

 

22,702

 

Non-trade receivables

 

475

 

3,710

 

(164

)

 

4,021

 

Prepaid expenses and other current assets

 

12,102

 

6,060

 

247

 

 

18,409

 

Total current assets

 

87,811

 

190,967

 

12,705

 

 

291,483

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

38,195

 

45,410

 

552

 

 

84,157

 

Goodwill

 

94,785

 

353,474

 

27,937

 

 

476,196

 

Other intangible assets

 

6,876

 

32,880

 

6,229

 

 

45,985

 

Investment in subsidiaries

 

572,440

 

41,741

 

80,228

 

(694,409

)

 

Other assets

 

10,614

 

5,246

 

462

 

 

16,322

 

 

 

$

810,721

 

$

669,718

 

$

128,113

 

$

(694,409

)

$

914,143

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

26,623

 

$

19,205

 

$

3,388

 

$

 

$

49,216

 

Accrued expenses

 

49,565

 

53,450

 

505

 

 

103,520

 

Current portion of long-term debt

 

 

2,008

 

 

 

2,008

 

Current portion of obligations under capital leases

 

13

 

65

 

 

 

78

 

Accrued income taxes

 

849

 

 

250

 

 

1,099

 

Total current liabilities

 

77,050

 

74,728

 

4,143

 

 

155,921

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany

 

(18,190

)

12,286

 

5,904

 

 

 

Long-term liabilities

 

29,799

 

1,559

 

238

 

 

31,596

 

Long-term debt

 

253,142

 

1,685

 

 

 

254,827

 

Obligations under capital leases

 

19

 

540

 

 

 

559

 

Deferred gains

 

1,623

 

2,343

 

 

 

3,966

 

Deferred income taxes

 

30,401

 

 

(4

)

 

30,397

 

Total liabilities

 

373,844

 

93,141

 

10,281

 

 

477,266

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

436,877

 

576,577

 

117,832

 

(694,409

)

436,877

 

 

 

$

810,721

 

$

669,718

 

$

128,113

 

$

(694,409

)

$

914,143

 

 

F-34



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

288,830

 

$

1,267,909

 

$

22,416

 

$

 

$

1,579,155

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

375,087

 

1,165,402

 

35,524

 

 

1,576,013

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(86,257

)

102,507

 

(13,108

)

 

3,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

16,368

 

(53

)

140

 

 

16,455

 

Equity in earnings of subsidiaries

 

(53,674

)

 

 

53,674

 

 

Total other (income) expenses

 

(37,306

)

(53

)

140

 

53,674

 

16,455

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations before income taxes

 

(48,951

)

102,560

 

(13,248

)

(53,674

)

(13,313

)

Income tax (benefit) expense

 

(38,659

)

36,225

 

(587

)

 

(3,021

)

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

(10,292

)

66,335

 

(12,661

)

(53,674

)

(10,292

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income — including noncontrolling interests

 

(10,292

)

66,335

 

(12,661

)

(53,674

)

(10,292

)

Net loss — noncontrolling interests

 

 

(152

)

(703

)

 

(855

)

Net (loss) income — Res-Care, Inc.

 

$

(10,292

)

$

66,487

 

$

(11,958

)

$

(53,674

)

$

(9,437

)

 

F-35



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

300,052

 

$

1,216,375

 

$

27,156

 

$

 

$

1,543,583

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

323,845

 

1,116,592

 

26,326

 

 

1,466,763

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(23,793

)

99,783

 

830

 

 

76,820

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

19,159

 

(75

)

15

 

 

19,099

 

Equity in earnings of subsidiaries

 

(64,018

)

 

 

64,018

 

 

Total other expenses

 

(44,859

)

(75

)

15

 

64,018

 

19,099

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

21,066

 

99,858

 

815

 

(64,018

)

57,721

 

Income tax (benefit) expense

 

(15,494

)

36,022

 

294

 

 

20,822

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

36,560

 

63,836

 

521

 

(64,018

)

36,899

 

Loss from discontinued operations, net of tax

 

 

(339

)

 

 

(339

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,560

 

$

63,497

 

$

521

 

$

(64,018

)

$

36,560

 

 

F-36



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2007

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

290,678

 

$

1,138,517

 

$

4,103

 

$

 

$

1,433,298

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

299,016

 

1,043,588

 

3,530

 

 

1,346,134

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(8,338

)

94,929

 

573

 

 

87,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

7,624

 

10,741

 

153

 

 

18,518

 

Equity in earnings of subsidiaries

 

(54,176

)

 

 

54,176

 

 

Total other expenses

 

(46,552

)

10,741

 

153

 

54,176

 

18,518

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

38,214

 

84,188

 

420

 

(54,176

)

68,646

 

Income tax (benefit) expense

 

(5,677

)

29,941

 

149

 

 

24,413

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

43,891

 

54,247

 

271

 

(54,176

)

44,233

 

Loss from discontinued operations, net of tax

 

 

(342

)

 

 

(342

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

43,891

 

$

53,905

 

$

271

 

$

(54,176

)

$

43,891

 

 

F-37



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2009

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income — including noncontrolling interests

 

$

(10,292

)

$

66,487

 

$

(11,958

)

$

(54,529

)

$

(10,292

)

Adjustments to reconcile net (loss) income to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

11,537

 

12,533

 

2,091

 

 

26,161

 

Impairment charge

 

62,082

 

1,000

 

8,909

 

 

71,991

 

Amortization of discount and deferred debt issuance costs on notes

 

1,221

 

 

 

 

1,221

 

Share-based compensation

 

4,259

 

 

 

 

4,259

 

Deferred income taxes, net

 

(9,743

)

 

(19

)

 

(9,762

)

Provision for losses on accounts receivable

 

 

9,009

 

 

 

9,009

 

Excess tax benefit from exercise of stock options

 

369

 

 

 

 

369

 

Gain on purchase of business

 

 

(1,474

)

 

 

(1,474

)

Loss on sale of assets

 

 

269

 

 

 

269

 

Equity in earnings of subsidiaries

 

(54,529

)

 

 

54,529

 

 

Changes in operating assets and liabilities

 

42,732

 

(25,562

)

(4,284

)

 

12,886

 

Cash provided by (used in) operating activities

 

47,636

 

62,262

 

(5,261

)

 

104,637

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(6,185

)

(9,279

)

(464

)

 

(15,928

)

Acquisitions of businesses, net of cash acquired

 

 

(20,397

)

 

 

(20,397

)

Proceeds from sale of assets

 

 

188

 

 

 

188

 

Cash used in investing activities

 

(6,185

)

(29,488

)

(464

)

 

(36,137

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt repayments

 

(2,575

)

1,764

 

 

 

(811

)

Borrowings of long-term debt

 

 

 

 

 

 

Short-term borrowings-three months or less, net

 

(57,831

)

(3,161

)

1,192

 

 

(59,800

)

Payments on obligations under capital leases

 

 

(121

)

 

 

(121

)

Proceeds from sale and leaseback transaction

 

 

 

 

 

 

Net payments relating to intercompany financing

 

26,977

 

(30,947

)

3,970

 

 

 

Proceeds received from exercise of stock options

 

415

 

 

 

 

415

 

Excess tax benefits from share-based compensation

 

(369

)

 

 

 

(369

)

Employee withholding payments on share-based compensation

 

(1,379

)

 

 

 

(1,379

)

Debt issuance costs

 

(72

)

 

 

 

(72

)

Cash (used in) provided by financing activities

 

(34,834

)

(32,465

)

5,162

 

 

(62,137

)

Effect of exchange rate on cash and cash equivalents

 

 

298

 

417

 

 

715

 

Increase in cash and cash equivalents

 

6,617

 

607

 

(146

)

 

7,078

 

Cash and cash equivalents at beginning of period

 

146

 

4,048

 

9,400

 

 

13,594

 

Cash and cash equivalents at end of period

 

$

6,763

 

$

4,655

 

$

9,254

 

$

 

$

20,672

 

 

F-38



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2008

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,560

 

$

63,497

 

$

521

 

$

(64,018

)

$

36,560

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

10,883

 

11,161

 

899

 

 

22,943

 

Impairment charge

 

 

313

 

 

 

313

 

Amortization of discount and deferred debt issuance costs on notes

 

1,192

 

 

 

 

1,192

 

Share-based compensation

 

4,846

 

 

 

 

4,846

 

Deferred income taxes, net

 

6,449

 

(131

)

(7

)

 

6,311

 

Provision for losses on accounts receivable

 

 

7,104

 

 

 

7,104

 

Excess tax benefit from exercise of stock options

 

(935

)

 

 

 

(935

)

Loss on sale of assets

 

 

(5

)

 

 

(5

)

Equity in earnings of subsidiaries

 

(64,018

)

 

 

64,018

 

 

Changes in operating assets and liabilities

 

(3,790

)

(2,139

)

(25,848

)

 

(31,777

)

Cash (used in) provided by operating activities

 

(8,813

)

79,800

 

(24,435

)

 

46,552

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(11,625

)

(7,576

)

(190

)

 

(19,391

)

Acquisitions of businesses, net of cash acquired

 

 

(56,659

)

 

 

(56,659

)

Proceeds from sale of assets

 

 

633

 

 

 

633

 

Cash used in investing activities

 

(11,625

)

(63,602

)

(190

)

 

(75,417

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt repayments

 

(2,531

)

 

 

 

(2,531

)

Borrowings of long-term debt

 

 

 

 

 

 

Short-term borrowings-three months or less, net

 

36,885

 

(2,385

)

 

 

34,500

 

Payments on obligations under capital leases

 

 

(75

)

 

 

(75

)

Proceeds from sale and leaseback transaction

 

 

 

 

 

 

Net payments relating to intercompany financing

 

(15,935

)

(13,414

)

29,349

 

 

 

Proceeds received from exercise of stock options

 

1,562

 

 

 

 

1,562

 

Excess tax benefits from share-based compensation

 

935

 

 

 

 

935

 

Employee withholding payments on share-based compensation

 

(1,593

)

 

 

 

(1,593

)

Debt issuance costs

 

(118

)

 

 

 

(118

)

Cash provided by (used in) financing activities

 

19,205

 

(15,874

)

29,349

 

 

32,680

 

Effect of exchange rate on cash and cash equivalents

 

 

 

(1,030

)

 

(1,030

)

Increase in cash and cash equivalents

 

(1,233

)

324

 

3,694

 

 

2,785

 

Cash and cash equivalents at beginning of period

 

1,379

 

3,724

 

5,706

 

 

10,809

 

Cash and cash equivalents at end of period

 

$

146

 

$

4,048

 

$

9,400

 

$

 

$

13,594

 

 

F-39



Table of Contents

 

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2007

(In thousands)

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

Consolidated

 

 

 

ResCare, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

43,891

 

$

53,905

 

$

271

 

$

(54,176

)

$

43,891

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

9,316

 

10,451

 

22

 

 

19,789

 

Impairment charge

 

 

331

 

 

 

331

 

Amortization of discount and deferred debt issuance costs on notes

 

1,084

 

 

 

 

1,084

 

Share-based compensation

 

6,621

 

 

 

 

6,621

 

Deferred income taxes, net

 

3,532

 

 

(1

)

 

3,531

 

Provision for losses on accounts receivable

 

 

6,364

 

 

 

6,364

 

Excess tax benefit from exercise of stock options

 

(1,387

)

 

 

 

(1,387

)

Loss on sale of assets

 

 

(72

)

 

 

(72

)

Equity in earnings of subsidiaries

 

(54,176

)

 

 

54,176

 

 

Changes in operating assets and liabilities

 

10,656

 

(44,890

)

39,857

 

 

5,623

 

Cash provided by operating activities

 

19,537

 

26,089

 

40,149

 

 

85,775

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(13,403

)

(10,569

)

(39

)

 

(24,011

)

Acquisitions of businesses, net of cash acquired

 

 

(33,802

)

(38,573

)

 

(72,375

)

Proceeds from sale of assets

 

 

984

 

 

 

984

 

Cash used in investing activities

 

(13,403

)

(43,387

)

(38,612

)

 

(95,402

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt repayments

 

(120,949

)

(3,732

)

 

 

(124,681

)

Borrowings of long-term debt

 

80,000

 

 

 

 

80,000

 

Short-term borrowings-three months or less, net

 

54,300

 

 

 

 

54,300

 

Payments on obligations under capital leases

 

 

(193

)

 

 

(193

)

Proceeds from sale and leaseback transaction

 

 

1,966

 

 

 

1,966

 

Net payments relating to intercompany financing

 

(23,805

)

22,955

 

850

 

 

 

Proceeds received from exercise of stock options

 

2,341

 

 

 

 

2,341

 

Excess tax benefits from share-based compensation

 

1,387

 

 

 

 

1,387

 

Debt issuance costs

 

(225

)

 

 

 

(225

)

Cash (used in) provided by financing activities

 

(6,951

)

20,996

 

850

 

 

14,895

 

(Decrease) increase in cash and cash equivalents

 

(817

)

3,698

 

2,387

 

 

5,268

 

Cash and cash equivalents at beginning of period

 

2,196

 

26

 

3,319

 

 

5,541

 

Cash and cash equivalents at end of period

 

$

1,379

 

$

3,724

 

$

5,706

 

$

 

$

10,809

 

 

F-40



Table of Contents

 

ResCare, Inc.

Schedule II — Valuation and Qualifying Accounts

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands)

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

Balance at

 

Charged to

 

 

 

 

 

Balance

 

 

 

Beginning

 

Costs and

 

Deductions

 

at End

 

 

 

of Period

 

Expenses

 

Write-offs

 

Reclassifications

 

of Period

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2009

 

$

20,306

 

$

9,009

 

$

(6,688

)

$

 

 

$

22,627

 

Year ended December 31, 2008

 

15,831

 

7,104

 

(2,629

)

 

20,306

 

Year ended December 31, 2007

 

11,327

 

6,364

 

(1,860

)

 

15,831

 

 

F-41