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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to ___________________
Commission File Number: 0-20372
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RES-CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
KENTUCKY 61-0875371
<S> <C>
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10140 LINN STATION ROAD 40223
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (502) 394-2100
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's common stock, no par value,
as of October 31, 1998, was 18,866,811.
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INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997.......................................................... 2
Condensed Consolidated Statements of Income for the three
months ended September 30, 1998 and 1997 and
nine months ended September 30, 1998 and 1997.................................. 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997.................................. 4
Notes to Condensed Consolidated Financial Statements................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 16
Item 5. Other Information...................................................................... 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
Index to Exhibits...................................................................... 17
Signatures............................................................................. 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
--------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,076 $ 66,584
Accounts and notes receivable, net 88,178 57,240
Inventories 701 634
Deferred income taxes 6,570 3,483
Prepaid expenses and other current assets 2,286 2,259
--------------- ----------------
Total current assets 114,811 130,200
--------------- ----------------
Property and equipment, net 62,053 54,403
Excess of acquisition cost over net assets acquired, net 165,064 51,751
Other assets 27,684 18,814
--------------- ----------------
$ 369,612 $ 255,168
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 19,911 $ 13,888
Accrued expenses 39,105 22,907
Accrued income taxes 3,315 1,564
Current portion of long-term debt 3,785 1,759
--------------- ----------------
Total current liabilities 66,116 40,118
--------------- ----------------
Long-term liabilities 6,915 1,714
Long-term debt 172,395 108,470
Deferred income taxes 1,730 38
--------------- ----------------
Total liabilities 247,156 150,340
--------------- ----------------
Commitments and contingencies
Minority interest ---- 219
Shareholders' equity:
Preferred shares ---- ----
Common stock 41,678 41,678
Additional paid-in capital 15,186 11,215
Retained earnings 68,755 55,057
--------------- ----------------
125,619 107,950
Less cost of common shares in treasury (3,163) (3,341)
---------------- ----------------
Total shareholders' equity 122,456 104,609
--------------- ----------------
$ 369,612 $ 255,168
=============== ================
</TABLE>
See notes to condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 141,066 $ 76,945 $ 376,599 $ 211,802
Facility and program expenses 120,638 66,006 324,125 183,586
Operating expenses (income):
Corporate general and administrative 4,512 2,853 13,440 7,668
Depreciation and amortization 3,893 1,640 9,981 4,194
Other income (327) (34) (347) (60)
------------- ------------- ------------- ------------
Total operating expenses, net 8,078 4,459 23,074 11,802
------------ ------------ ------------ ------------
Total facility, program and operating
expenses 128,716 70,465 347,199 195,388
------------ ------------ ------------ ------------
Operating income 12,350 6,480 29,400 16,414
Other expenses (income):
Interest expense 3,190 475 8,065 1,391
Interest income (214) (130) (1,227) (408)
------------- ------------ ------------- ------------
Total other expenses, net 2,976 345 6,838 983
------------ ------------ ------------ ------------
Minority interest in income of consolidated
subsidiary ---- (23) ---- (103)
------------ ------------- ------------ -------------
Income before income taxes 9,374 6,112 22,562 15,328
Income tax expense 3,769 2,450 8,864 6,172
------------ ------------ ------------ ------------
Net income $ 5,605 $ 3,662 $ 13,698 $ 9,156
============ ============ ============ ============
Income per share data:
Basic earnings per share $ .30 $ .20 $ .73 $ .54
============ ============ ============ ============
Diluted earnings per share $ .27 $ .19 $ .67 $ .52
============ ============ ============ ============
Weighted average shares used in per share calculations:
Basic earnings per share 18,775 18,437 18,713 17,030
Diluted earnings per share 26,052 18,916 25,919 17,542
</TABLE>
See notes to condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Cash provided by operating activities $ 15,263 $ 9,930
Cash flows from investing activities:
Purchase of property and equipment (6,710) (7,018)
Acquisitions of businesses, net of cash acquired (95,591) (33,968)
Other (1,724) (1,301)
-------------- ---------------
Cash used in investing activities (104,025) (42,287)
-------------- ---------------
Cash flows from financing activities:
Net borrowings under notes payable to bank 39,136 5,504
Repayments of notes payable (2,447) (1,100)
Proceeds from sale of common stock,
net of expenses of $611 ---- 26,145
Proceeds received from exercise of stock options 2,565 1,659
Partnership distributions ---- (235)
------------- ---------------
Cash provided by financing activities 39,254 31,973
------------- --------------
Decrease in cash and cash equivalents $ (49,508) $ (384)
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Res-Care, Inc. and its subsidiaries (the Company) are
primarily engaged in the delivery of residential, training, educational and
support services to various populations with special needs, including persons
with mental retardation and other developmental disabilities and at-risk and
troubled youth. These services have in the past traditionally been provided by
state and local government agencies and not-for-profit organizations.
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X and do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
financial condition and results of operations for the interim periods have been
included. Operating results for the periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
For further information, refer to the consolidated financial
statements and footnotes thereto in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE 2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
--------------- ----------------
(In thousands)
<S> <C> <C>
Revolving credit facility with banks................................... $ 39,136 $ ----
6% convertible subordinated notes due 2004, net of
unamortized discount of $2,882 and $3,232 in
1998 and 1997..................................................... 106,478 106,128
5.9% convertible subordinated notes due 2005........................... 22,000 ----
Notes payable.......................................................... 8,535 2,500
Other.................................................................. 31 1,601
--------------- ----------------
176,180 110,229
Less current portion.............................................. 3,785 1,759
--------------- ----------------
$ 172,395 $ 108,470
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</TABLE>
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On June 30, 1998, the Company amended and restated its credit
agreement with a group of banks to: provide for maximum borrowings of $200
million; increase the letter of credit portion of the facility from $10 million
to $20 million; amend certain financial covenants; and add additional Company
subsidiaries and banks as parties to the credit agreement. At September 30,
1998, the Company had borrowings of $39.1 million under the credit facility and
$3.6 million of letters of credit outstanding. Interest is based on margins over
LIBOR. The amended and restated credit facility is secured by the common stock
of all of the Company's subsidiaries and contains various covenants, including
financial covenants related to net worth, debt service coverage, indebtedness to
cash flow from operations, and debt to capitalization.
NOTE 3. ACQUISITIONS
On March 12, 1998, the Company acquired all of the outstanding
common stock of Normal Life, Inc. (Normal Life), a Kentucky corporation, which
provides services to persons with mental retardation and other developmental
disabilities in Indiana, Kentucky, California, Louisiana, Texas, Georgia and
Florida.
The aggregate stock purchase price of $73 million was paid
with $51 million in cash and $22 million in principal amount of the Company's
5.9% convertible subordinated notes due 2005. The notes are convertible into
common stock of the Company at a conversion price of $25.8354, or approximately
851,545 shares, commencing one year from the closing date of the transaction.
The funds for the acquisition came from the Company's existing cash and
revolving credit facility.
The acquisition is being accounted for under the purchase
method of accounting. Accordingly, the cost to acquire Normal Life has been
preliminarily allocated to the assets acquired and liabilities assumed according
to their respective estimated fair values. Results of operations of Normal Life
are included in the condensed consolidated statements of income effective March
1, 1998.
Summarized below are the unaudited pro forma results of the
Company's operations for the nine months ended September 30, 1998 and 1997, as
though the acquisition had occurred on January 1, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
------------------ ------------------
(In thousands,
except earnings per share)
<S> <C> <C>
Net revenues........................................................... $ 387,542 $ 248,597
Income before income taxes............................................. 22,011 14,506
Net income............................................................. 13,349 8,687
Basic earnings per share............................................... $ .71 $ .51
======== ========
Diluted earnings per share............................................. $ .66 $ .50
======== ========
</TABLE>
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These unaudited pro forma results of operations do not reflect
the total cost savings or other synergies that may result from the acquisition.
In the opinion of management of the Company, all adjustments necessary to
present pro forma results of operations have been made. The unaudited pro forma
results of operations do not purport to be indicative of the results that would
have occurred had the acquisition occurred at the beginning of these periods or
results of operations that may be achieved in the future.
In connection with the Normal Life acquisition, the Company
recognized a liability of approximately $2.4 million associated with termination
benefits and the closing of duplicate facilities. The termination benefits
relate principally to corporate employees. During the nine months ended
September 30, 1998, the Company paid approximately $986,000 against the
liability established for such purposes. The Company estimates that the
remaining amounts will be paid by February 28, 1999.
During the first nine months of 1998, the Company also
completed fifteen other acquisitions of programs or facilities serving more than
4,100 individuals, at an aggregate cost of approximately $33.8 million. The
purchase price for these acquired operations was funded primarily from the
Company's credit facility. Additionally, the Company was awarded six contracts
to operate facilities serving approximately 2,100 consumers.
During October 1998, the Company completed the acquisition of
an operation which is expected to generate approximately $14 million in
annualized revenue and serve approximately 125 consumers.
NOTE 4. EARNINGS PER SHARE
The following table shows the amounts used in computing
earnings per share and the effect on income and the weighted average number of
shares of dilutive potential common stock.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Income available to shareholders for basic
earnings per share................................. $ 5,605 $ 3,662 $ 13,698 $ 9,156
Interest expense, net of income tax effect,
on convertible subordinated notes.................. 1,301 ---- 3,737 ----
------------ ------------ ------------ ------------
Income available to shareholders after
assumed conversion of convertible
subordinated notes................................. $ 6,906 $ 3,662 $ 17,435 $ 9,156
============ ============ ============ ============
Weighted average number of common shares
used in basic earnings per share................... 18,775 18,437 18,713 17,030
Effect of dilutive securities:
Stock options .................................... 611 479 759 512
Convertible subordinated notes..................... 6,666 ---- 6,447 ----
------------ ------------ ------------ ------------
Weighted average number of common shares
and dilutive potential common shares used
in diluted earnings per share...................... 26,052 18,916 25,919 17,542
============ ============ ============ ============
</TABLE>
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On May 12, 1998, at its annual meeting, the Company's Board of
Directors declared a 3-for-2 stock split, payable to shareholders of record at
the close of business on May 22, 1998. All shares outstanding and per share
amounts have been restated to reflect the stock split.
NOTE 5. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARD
In April 1998, the Accounting Standards Executive Committee
issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up
Activities. The SOP requires that all costs of start-up activities and
organization costs be expensed as incurred. The SOP is effective for the
Company's year ending December 31, 1999. Initial application of the SOP will
result in the write-off of any unamortized start-up and organization costs, the
impact of which will be reported as the cumulative effect of a change in
accounting principle. It is the intention of management of the Company to adopt
the provisions of the SOP effective January 1, 1999. As of September 30, 1998,
deferred start-up and organization costs of $7.2 million (net of accumulated
amortization of $4.3 million) were included in other assets in the Company's
consolidated balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACQUISITIONS AND CONTRACTS
During the third quarter of 1998, the Company completed eight
transactions which are expected to generate approximately $19 million in
annualized revenue and serve approximately 600 new consumers. The Division for
Persons with Disabilities added four operations during the quarter which are
expected to generate approximately $14 million in annualized revenue and serve
over 280 consumers. The Division for Youth Services added four operations during
the quarter, serving more than 300 students and generating approximately $5
million in annualized revenue.
During the nine months ended September 30, 1998, the Company
completed transactions which are expected to generate more than $155 million in
annualized revenue and serve more than 7,600 consumers. In connection with the
acquisitions consummated during the nine months ended September 30, 1998, the
Company paid total consideration of approximately $108 million. This amount was
funded from proceeds from the issuance of convertible subordinated notes and the
Company's revolving credit facility.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 1997
Revenues
Total net revenues in the third quarter of 1998 increased 83%,
or $64.2 million, to $141.1 million compared to $76.9 million in the third
quarter of 1997. Of the increase, 60% resulted from increased disabilities
services revenues. Disabilities services net revenues increased 60%, or $38.7
million, to $102.7 million in the third quarter of 1998 compared to $64.0
million in the third quarter of 1997. Revenues increased primarily as a result
of the effects of a full quarter of operations added during the last half of
1997 and the first half of 1998.
Youth services net revenues in the third quarter of 1998
increased 197%, or $25.4 million, to $38.3 million compared to $12.9 million in
the third quarter of 1997. The increase resulted primarily from the acquisition
of five Job Corps centers from Teledyne Economic Development in October 1997,
other acquisitions that were operational in the third quarter of 1998 compared
to the same period of 1997, and the addition of the contract to manage the Earle
C. Clements Job Corps Center commencing in the second quarter of 1998.
Facility and Program Expenses
Facility and program expenses in the third quarter of 1998
increased 83%, or $54.6 million, to $120.6 million compared to the third quarter
of 1997. Of the increase, $34.8 million, or 64%, was due to payroll and
payroll-related expenses associated primarily with new facilities and programs
in both of the Company's divisions. Facility and program expenses decreased as a
percentage of total net revenues from 85.8% in 1997 to 85.5% in 1998.
Disabilities services facility and program expenses in the
third quarter of 1998 increased 59%, or $32.3 million, to $86.7 million compared
to $54.4 million in the third quarter
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of 1997. Of the increase, $22.5 million, or 70%, was due to payroll and
payroll-related expenses associated primarily with the new facilities and
programs that were operational in the third quarter of 1998 compared to the same
period in 1997. As a percentage of net revenues, disabilities services facility
and program expenses decreased from 84.9% in 1997 to 84.4% in 1998.
Youth services facility and program expenses in the third
quarter of 1998 increased 192%, or $22.3 million, to $33.9 million compared to
$11.6 million in the third quarter of 1997. Of the increase, $12.3 million, or
55%, was due to payroll and payroll-related expenses associated primarily with
the new facilities and programs that were operational in the third quarter of
1998 compared to the same period in 1997. As a percentage of net revenues, youth
services facility and program expenses decreased to 88.5% in the third quarter
of 1998 from 90.1% for the third quarter of 1997.
Operating Expenses (Income)
Corporate general and administrative expenses increased 58%,
or $1.7 million, in the third quarter of 1998 compared to the third quarter of
1997. Payroll and payroll-related expenses represented the majority of the
increase due primarily to the addition of support staff and increases in staff
salaries. Corporate general and administrative expenses in the third quarter of
1998 decreased as a percentage of total net revenues to 3.2% from 3.7% for the
same period in 1997.
Depreciation and amortization expenses in the third quarter of
1998 increased $2.3 million to $3.9 million compared to $1.6 million during the
third quarter of 1997. The increase resulted primarily from the purchase of real
property and intangible assets since the third quarter of 1997.
Other Expenses (Income)
Interest expense in the third quarter of 1998 increased $2.7
million to $3.2 million compared to $500,000 for the third quarter of 1997. The
increase resulted primarily from interest on the convertible subordinated notes
issued in November and December 1997 and March 1998 as well as borrowings under
the Company's credit facility.
Income Taxes
Income taxes increased to $3.8 million in the third quarter of
1998 compared to $2.4 million in the third quarter of 1997, and reflect
effective tax rates of 40.2% and 40.0%, respectively.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues
Total net revenues in the first nine months of 1998 increased
78% or $164.8 million, to $376.6 million compared to $211.8 million in the first
nine months of 1997. Of the increase, 64% resulted from increased disabilities
services revenues. Disabilities services net revenues increased 61%, or $105.6
million, to $279.2 million in the first nine months of 1998 compared to $173.6
million in the first nine months of 1997. Revenues increased primarily as a
result of the effects of a full nine months of operations added during 1997, as
well as acquisitions during the first nine months of 1998.
Youth services net revenues in the first nine months of 1998
increased 155%, or $59.2 million, to $97.4 million compared to $38.2 million in
the first nine months of 1997. The increase resulted primarily from the
acquisition of five Job Corps centers from Teledyne Economic Development in
October 1997, other acquisitions that were operational in the first nine months
of 1998 compared to the same period of 1997, and the addition of the contract to
manage the Earle C. Clements Job Corps Center commencing in the second quarter
of 1998.
Facility and Program Expenses
Facility and program expenses in the first nine months of 1998
increased 77%, or $140.5 million, to $324.1 million compared to the first nine
months of 1997. Of the increase, $92.7 million, or 66%, was due to payroll and
payroll-related expenses associated primarily with new facilities and programs
in both of the Company's divisions. Facility and program expenses decreased as a
percentage of total net revenues from 86.7% in 1997 to 86.1% in 1998.
Disabilities services facility and program expenses in the
first nine months of 1998 increased 59%, or $88.9 million, to $238.4 million
compared to $149.5 million in the first nine months of 1997. Of the increase,
$63.7 million, or 72%, was due to payroll and payroll-related expenses
associated primarily with the new facilities and programs that were operational
in the first nine months of 1998 compared to the same period in 1997. As a
percentage of net revenues, disabilities services facility and program expenses
decreased from 86.1% in 1997 to 85.4% in 1998.
Youth services facility and program expenses in the first nine
months of 1998 increased 151%, or $51.6 million, to $85.7 million compared to
$34.1 million in the first nine months of 1997. Of the increase, $29.0 million,
or 56%, was due to payroll and payroll-related expenses associated primarily
with the new facilities and programs that were operational in the first nine
months of 1998 compared to the same period in 1997. As a percentage of net
revenues, youth services facility and program expenses decreased to 88.0% in the
first nine months of 1998 from 89.3% for the first nine months of 1997.
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Operating Expenses (Income)
Corporate general and administrative expenses increased 75%,
or $5.8 million, in the first nine months of 1998 compared to the first nine
months of 1997. Payroll and payroll-related expenses represented the majority of
the increase due primarily to the addition of support staff and increases in
staff salaries. Corporate general and administrative expenses in the first nine
months of 1998 remained level as a percentage of total net revenues at 3.6%
compared to the same period in 1997.
Depreciation and amortization expenses in the first nine
months of 1998 increased $5.8 million to $10.0 million compared to $4.2 million
during the first nine months of 1997. The increase resulted primarily from the
purchase of real property and intangible assets since the first nine months of
1997.
Other Expenses (Income)
Interest expense in the first nine months of 1998 increased
$6.7 million to $8.1 million compared to $1.4 million for the first nine months
of 1997. The increase resulted primarily from interest on the convertible
subordinated notes issued in November and December 1997 and March 1998 as well
as borrowings under the Company's credit facility. Interest income for the nine
months of 1998 increased $800,000 to $1.2 million from $400,000 for the same
period in 1997. This increase was due primarily to interest earned on the
investment of proceeds from the issuance of the convertible subordinated notes
in November and December 1997.
Income Taxes
Income taxes increased to $8.9 million in the first nine
months of 1998 compared to $6.2 million in the first nine months of 1997, and
reflect effective tax rates of 39.3% and 40.3%, respectively.
Liquidity and Capital Resources
In the first nine months of 1998, cash provided by operating
activities was $15.3 million compared to $9.9 million in the first nine months
of 1997, an increase of $5.4 million, due primarily to an increase in accrued
expenses.
In the first nine months of 1998, cash used in investing
activities was $104.0 million compared to $42.3 million in the first nine months
of 1997, an increase of $61.7 million, due primarily to the acquisition of
businesses and related assets.
In the first nine months of 1998, cash provided by financing
activities was $39.3 million compared to $32.0 million in the first nine months
of 1997, an increase of $7.3 million, due primarily to long-term borrowings for
acquisitions.
At September 30, 1998, the Company had $157.3 million
available on its line-of-credit and $17.1 million in cash and cash equivalents.
Outstanding at that date were irrevocable standby letters of credit in the
principal amount of $3.6 million issued in connection with workers' compensation
insurance and certain facility leases.
12
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Days revenue in accounts receivable was 59 days at September
30, 1998, compared to 61 days at December 31, 1997. Accounts receivable at
September 30, 1998, increased to $88.2 million, compared to $57.2 million at
December 31, 1997.
The Company has historically satisfied its working capital
requirements, capital expenditures and scheduled debt payments from its
operating cash flow and utilization of its credit facility. Cash requirements
for the acquisition of new business operations have generally been funded
through a combination of cash generated from operating activities, utilization
of the Company's revolving credit facility and the issuance of long-term
obligations and common stock. The Company believes that cash generated from
operations and availability under its expanded credit facility will continue to
be sufficient to meet its working capital, planned capital expenditure, business
acquisition and scheduled debt repayment requirements over the next twelve
months.
Year 2000 Issue
The Company has substantially completed its initial assessment
of the capability of its information systems to meet Year 2000 processing
requirements. Based on this assessment, the Company has determined that it will
be required to modify or replace certain portions of its information systems.
Plans for remediation have been developed, priorities have been established, and
remediation of all mission critical information systems is expected to be
completed by the end of the second quarter of 1999. In addition, the Company is
currently in the process of assessing the Year 2000 readiness of those aspects
of its equipment and facilities that utilize embedded processors that may be
Year 2000 sensitive. Upon completion of this assessment, remediation plans will
be developed. The Company presently believes that with appropriate and timely
modifications and replacements, the Year 2000 issue will not pose significant
operational problems for the Company. The Company plans to rely principally on
its own staff resources for Year 2000 remediation of information systems,
facilities and equipment.
The Company continues to assess the Year 2000 compliance
capability of its significant third party payors and vendors. Because a
substantial portion of the Company's revenues are derived from Medicaid
programs, to the extent that certain federal and state governmental agencies are
noncompliant, the Company's cash flows, liquidity and financial condition could
be adversely affected. There can be no assurance that the systems of these third
parties will be compliant and will not have an adverse effect on the Company's
operations. An inventory of significant third party payors and vendors is in
process, and questionnaires are being mailed requesting representations
regarding their Year 2000 readiness. Contingency plans will be developed by
early 1999 for payors and vendors that the Company believes may have substantial
Year 2000 operational risks. In addition, written representations of Year 2000
readiness have been received from all significant relationship banks.
The Company will be focusing its internal remediation efforts
primarily on the aspects of information systems (and facilities) that affect
revenue generation. The Company plans to upgrade certain software utilized to
generate customer invoices and monitor accounts receivable, and has contingency
plans in place to process billings in the event of a Year 2000 failure. However,
as described above, uncertainties exist with respect to timely reimbursement by
third party governmental payors. Management believes that delays in the
collection of accounts receivable potentially represent significant operational
risk with respect to the Year 2000 issue. Should cash collections on accounts
receivable from third party payors be significantly delayed, the Company's
working capital could be adversely affected. While the
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Company could utilize its existing revolving credit facility to fund working
capital needs, the Company could also be forced to seek additional external
financing. Use of funding sources for working capital could also adversely
affect plans to expand the Company's business through internally-generated
growth or acquisitions. No assurance can be given that additional financing to
support working capital, growth or acquisitions would be available to the
Company.
The total cost of modifying and replacing information systems
is currently expected to range from $3 million to $4 million. Certain of these
costs will be capitalized and amortized over a three to five year period. At
September 30, 1998, the Company had incurred approximately $150,000 of these
costs. The Company believes that the total costs associated with replacing and
modifying its current systems will not have a material adverse effect on its
results of operations or liquidity. The costs of the project and the date on
which the Company believes that it will substantially complete the Year 2000
modifications are based on management's best estimates using currently available
information. Actual results could differ from those estimates.
Certain Risk Factors
The Company's growth in revenues and earnings per share has
been directly related to significant increases in the number of individuals
served in its Division for Persons with Disabilities and its Division for Youth
Services. This growth is primarily dependent upon development-driven activities,
including the acquisitions of other businesses and facilities and of management
contract rights to operate facilities, the award of contracts to open new
facilities or start new operations or to assume management of facilities
previously operated by governmental agencies or other organizations, and the
extension and renewal of contracts previously awarded to the Company. The
Company often makes forward-looking statements regarding its development
activities.
Increases in the Company's future revenues depend
significantly upon the success of these development activities, and in
particular on the Company's ability to obtain licenses and other rights to
provide services to the special needs populations it serves. Future revenues
also depend on the Company's ability to maintain high levels of occupancy in its
residential programs and high utilization levels in other programs, as well as
to maintain and renew its existing services contracts and its existing leases.
The Company actively seeks acquisitions of other companies, facilities and
assets as a means of increasing the number of individuals served. Changes in the
market for such business opportunities, including increased competition for and
pricing of acquisition prospects, could also adversely affect the timing and/or
viability of future development activities.
Revenues of the Company's Division for Persons with
Disabilities are highly dependent on reimbursement under federal and state
Medicaid programs. Generally, each state has its own Medicaid reimbursement
regulations and formula. The Company's revenues and operating profitability are
dependent upon the Company's ability to maintain its existing reimbursement
levels and to obtain periodic increases in reimbursement rates. Changes in the
manner in which Medicaid reimbursement rates are established in one or more of
the states in which the Company conducts its operations could adversely affect
revenues and profitability. Other changes in the manner in which federal and
state reimbursement programs are operated and in the manner in which
billings/costs are reviewed and audited could also affect revenues and operating
profitability.
14
<PAGE> 16
The Company's cost structure and ultimate operating
profitability are significantly dependent on its labor costs, the availability
of qualified personnel in each geographic area and the effective utilization of
its labor force, and may be adversely affected by a variety of factors,
including local competitive forces, changes in minimum wages or other direct
personnel costs, the Company's future effectiveness in managing its direct
service staff, and changes in consumer services models, such as the trends
toward supported living and managed care.
Additionally, the Company's continued expansion of its
business and its ability to serve populations utilizing the Company's core
competencies, are dependent upon the continuation of current trends toward
downsizing, privatization and consolidation and the Company's ability to tailor
its service models to meet the changing needs of these populations and the
requirements of government payors. The Company's future operating performance
will be subject to a variety of political, economic, social and legal pressures,
including desires of governmental agencies to reduce costs and increase levels
of services, federal, state and local budgetary constraints and actions brought
by advocacy groups and the courts to change existing service delivery systems.
Material changes resulting from these trends and pressures could adversely
affect the demand for and reimbursement of the Company's services and its
operating flexibility, and ultimately its revenues and profitability. As
discussed above under "Year 2000 Issue", the Company's operations and liquidity
may also be significantly affected by the ability of third party governmental
payors to timely reimburse the Company for the services it provides to many of
its consumers.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form
10-Q which are not statements of historical fact constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
(the Act). In addition, certain statements in future filings by the Company with
the Securities and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of the Company which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Act. Examples of 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 the Company or its management or Board of Directors; (3)
statements of future actions or economic performance; and (4) statements of
assumptions underlying such statements. Words such as "believes," "anticipates,"
"expects," "intends," "plans," "targeted," and similar expressions are intended
to identify forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties
which may cause actual results to differ materially from those in such
statements. Some of the events or circumstances that could cause actual results
to differ from those discussed in the forward-looking statements are discussed
in the "Certain Risk Factors" and "Year 2000 Issue" sections above. Such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made to reflect the occurrence of unanticipated events.
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company (or a provider with whom the
Company has a management agreement), becomes a party to legal and/or
administrative proceedings involving state program administrators and others
that, in the event of unfavorable outcomes, may adversely affect revenues and
period-to-period comparisons. In May 1996, legislation was passed in Florida
that would have significantly reduced rates effective September 1, 1996 for the
operations that the Company manages and operates in that state. A preliminary
injunction was granted in a lawsuit by individual consumers, which required the
State to continue full funding of certain intermediate care facilities and
services for persons with developmental disabilities. On October 13, 1998, the
court entered an agreed order retroactive to January 8, 1998, declaring the
legislation illegal, thus reviving the statutory language and reimbursement
system which existed prior to the enactment of the 1996 legislation. The Company
does not believe the results of this matter will have a material adverse effect
on its consolidated financial condition, results of operations or liquidity.
In addition, the Company is a party to various other legal
proceedings encountered in the ordinary course of business. The Company believes
that many of such lawsuits are without merit. Further, such claims are generally
covered by insurance. The Company does not believe the results of such
litigation will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
ITEM 5. OTHER INFORMATION
On October 15, 1998, the Company announced that its Board of
Directors elected Olivia F. Kirtley as a new member of its board of directors.
The action was taken at a special meeting of the board on October 13, 1998, and
increases the board membership to seven. She will serve until the next annual
meeting of shareholders, a term contemporaneous with the other directors.
On October 26, 1998, the Company announced the appointment of
Ralph G. Gronefeld as executive vice president of finance and administration and
chief financial officer. Mr. Gronefeld was named acting chief financial officer
in May 1998. Prior to that date, he served as executive vice president of the
Division for Youth Services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment to Employment Agreement between
the Company and Ralph G. Gronefeld, Jr.
dated August 15, 1998.
27.1 Financial Data Schedule - September 30, 1998
27.2 Financial Data Schedule - September 30, 1997
(Restated)
(b) Reports on Form 8-K: None.
16
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.1 Amendment to Employment Agreement between the Company and Ralph G.
Gronefeld, Jr. dated August 15, 1998.
27.1 Financial Data Schedule - September 30, 1998
27.2 Financial Data Schedule - September 30, 1997 (Restated)
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
Registrant
Date: November 10, 1998 By: /s/ Ronald G. Geary
----------------- -------------------------------------
Ronald G. Geary
Chairman, President and
Chief Executive Officer
Date: November 10, 1998 By: /s/ Ralph G. Gronefeld, Jr.
----------------- -------------------------------------
Ralph G. Gronefeld, Jr.
Executive Vice President of Finance &
Administration and Chief Financial Officer
18
<PAGE> 1
Exhibit 10.1
AMENDMENT TO
------------
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") is made this 15th
day of August, 1998, between RES-CARE, INC., a Kentucky corporation (the
"Company"), and RALPH G. GRONEFELD, JR. (the "Employee").
RECITALS:
WHEREAS, the Company and the Employee executed that certain Employment
Agreement dated as of January 1, 1998 (the "Employment Agreement"); and
WHEREAS, the Board of Directors of the Company recognizes that the
Employee's contribution to the growth and success of the Company has been
substantial and wishes to modify the Employment Agreement to increase the
Employee's base salary and to accelerate the granting of certain options to
purchase shares of Company common stock.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties agree as follows:
1. Section 3(a) of the Employment Agreement is deleted in its entirety and
the following is substituted therefor:
(a) BASE SALARY. The Company shall pay to the Employee during
the period January 1, 1998 through August 14, 1998 of the first year of
the Term a fixed, annual salary (the "Initial Base Salary") of
$127,500. Commencing on August 15, 1998, the Company shall pay to the
Employee a fixed, annual salary (the "Revised Base Salary") of
$155,000. The Initial Base Salary and the Revised Base Salary shall
sometimes be collectively referred to as the "Base Salary". The Base
Salary shall be due and payable in substantially equal bi-weekly
installments or in such other installments as may be necessary to
comport with the Company's normal pay periods for all employees.
Provided that this Employment Agreement or Employee's
employment hereunder shall not have been terminated for any reason,
commencing on January 1, 1999, the Revised Base Salary shall be
increased, effective as of the first day of each year of the Term, in
proportion to the increase in the Consumer Price Index "All- Items"
category, as published by the Bureau of Labor Statistics (the "CPI")
established for the month of December immediately preceding the date on
which the adjustment is to be made over that established for the month
of December 1998. If the Bureau of Labor Statistics suspends or
terminates its publication of the CPI, the
1
<PAGE> 2
parties agree that a reasonably comparable price index shall be
substituted for the CPI.
2. Section 3(d) of the Employment Agreement is deleted in its entirety and
the following is substituted therefor:
(d) PARTICIPATION IN STOCK OPTION PLAN. Employee shall be
entitled to participate in the Company stock option plan which is
applicable to its managerial employees. On August 15, 1998, Employee
shall be granted options to purchase 37,500 shares of Company common
stock (which amount reflects the adjustment for the 3-for-2 stock split
declared by the Board on May 12, 1998), which options shall vest and be
exercisable on August 15, 1999 if Employee is then employed hereunder.
Provided Employee continues to be employed hereunder, on September 1,
1998, Employee shall be granted options to purchase 75,000 shares of
Company common stock (which amount reflects the adjustment for the
3-for-2 stock split declared by the Board on May 12, 1998), and
provided Employee continues to be employed hereunder, 37,500 of such
options shall vest and be exercisable on September 1, 1999 and the
remaining 37,500 of such options shall vest and be exercisable on
September 1, 2000. Any stock options granted to Employee pursuant to
this paragraph (d) shall have an exercise price based upon the closing
sale price of Company common stock as reported on the NASDAQ National
Market System on the respective date of grant and the number of shares
which are subject to this paragraph (d) and such options shall be
equitably adjusted for stock splits, stock dividends, recapitalizations
and the like occurring after August 15, 1998.
3. Employee acknowledges and agrees that notwithstanding the provisons of
Section 3(b) of the Employment Agreement, no bonus shall be payable to
Employee pursuant to such Section 3(b) or the Annual Bonus Plan (as
defined in the Employment Agreement) for the calendar year 1998.
4. Except as otherwise specifically set forth in this Amendment, the
Employment Agreement shall be unamended and in full force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the day and year set forth above.
RES-CARE, INC.
By:_____________________________________________
Ronald G. Geary
Chairman, President and Chief Executive
Officer
_________________________________________________
Ralph G. Gronefeld, Jr.
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<PERIOD-START> JAN-01-1997
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