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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, 1999
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)
KENTUCKY 61-0875371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10140 LINN STATION ROAD 40223
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 394-2100
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, 1999, was 24,304,559.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.......................................................... 2
Condensed Consolidated Statements of Income for the three
months ended September 30, 1999 and 1998 and
nine months ended September 30, 1999 and 1998.................................. 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998.................................. 4
Notes to Condensed Consolidated Financial Statements................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
Index to Exhibits...................................................................... 18
Signatures............................................................................. 19
</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
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,314 $ 19,956
Accounts and notes receivable, net 159,320 132,707
Refundable income taxes 3,289 100
Deferred income taxes 8,940 9,257
Prepaid expenses and other current assets 6,235 5,307
--------------- ----------------
Total current assets 196,098 167,327
--------------- ----------------
Property and equipment, net 94,242 90,053
Excess of acquisition cost over net assets acquired, net 221,883 213,723
Other assets 29,092 35,005
--------------- ----------------
$ 541,315 $ 506,108
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 24,638 $ 32,757
Accrued expenses 58,112 48,367
Accrued income taxes -- 3,637
Current portion of long-term debt 4,815 7,080
--------------- ----------------
Total current liabilities 87,565 91,841
--------------- ----------------
Long-term liabilities 5,437 6,340
Long-term debt 286,175 251,682
Deferred income taxes 555 1,658
--------------- ----------------
Total liabilities 379,732 351,521
--------------- ----------------
Commitments and contingencies
Shareholders' equity:
Preferred shares -- --
Common stock 50,866 50,866
Additional paid-in capital 34,203 31,353
Retained earnings 80,740 76,722
--------------- ----------------
165,809 158,941
Less cost of common shares in treasury (4,226) (4,354)
--------------- ----------------
Total shareholders' equity 161,583 154,587
--------------- ----------------
$ 541,315 $ 506,108
=============== ================
</TABLE>
See accompanying notes to unaudited 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
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 210,804 $ 186,580 $ 619,477 $ 510,512
Facility and program expenses 180,850 160,302 531,383 441,124
------------ ------------ ------------ ------------
Facility and program contribution 29,954 26,278 88,094 69,388
Operating expenses (income):
Corporate general and administrative 5,805 6,776 21,813 20,266
Depreciation and amortization 5,345 4,968 15,820 12,986
Merger-related charge -- -- 20,498 --
Other income (1) (327) (42) (346)
------------ ------------ ------------ ------------
Total operating expenses 11,149 11,417 58,089 32,906
------------ ------------ ------------ ------------
Operating income 18,805 14,861 30,005 36,482
Interest, net 4,610 3,878 13,444 9,529
------------ ------------ ------------ ------------
Income from continuing operations before
income taxes 14,195 10,983 16,561 26,953
Income tax expense 5,691 4,475 8,408 10,788
------------ ------------ ------------ ------------
Income from continuing operations 8,504 6,508 8,153 16,165
Gain from sale of unconsolidated affiliate, net of tax -- -- 534 --
Cumulative effect of accounting change, net of tax -- -- (3,932) --
------------ ------------ ------------ ------------
Net income $ 8,504 $ 6,508 $ 4,755 $ 16,165
============ ============ ============ ============
Basic earnings per share from continuing
operations $ 0.35 $ 0.27 $ 0.34 $ 0.68
Gain from sale of unconsolidated affiliate, net of tax -- -- 0.02 --
Cumulative effect of accounting change, net of tax -- -- (0.16) --
------------ ------------ ------------ ------------
Basic earnings per share $ 0.35 $ 0.27 $ 0.20 $ 0.68
============ ============ ============ ============
Diluted earnings per share from continuing
operations $ 0.31 $ 0.25 $ 0.33 $ 0.64
Gain from sale of unconsolidated affiliate, net of tax -- -- 0.02 --
Cumulative effect of accounting change, net of tax -- -- (0.16) --
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.31 $ 0.25 $ 0.19 $ 0.64
============ ============ ============ ============
Weighted average number of common shares:
Basic 24,299 23,974 24,215 23,912
Diluted 31,760 31,251 25,139 31,118
</TABLE>
See accompanying notes to unaudited 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
--------------------------------
1999 1998
------------- ---------------
<S> <C> <C>
Cash provided by (used in) operating activities $ (6,669) $ 19,629
Cash flows from investing activities:
Purchase of property and equipment (11,136) (10,413)
Acquisitions of businesses, net of cash acquired (13,204) (95,591)
Other -- (1,724)
------------- ---------------
Cash used in investing activities (24,340) (107,728)
-------------- ---------------
Cash flows from financing activities:
Net borrowings under notes payable
to banks 56,828 40,786
Repayments of notes payable (29,252) (2,987)
Proceeds received from exercise of stock options 1,791 2,565
------------- --------------
Cash provided by financing activities 29,367 40,364
------------- --------------
Decrease in cash and cash equivalents $ (1,642) $ (47,735)
============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Res-Care, Inc. and its subsidiaries (ResCare or 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.
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, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
For further information, refer to the consolidated financial
statements and footnotes thereto in ResCare's annual report on Form 10-K for the
year ended December 31, 1998.
NOTE 2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
--------------- ----------------
(In thousands)
<S> <C> <C>
Revolving credit facilities with banks................................. $ 144,022 $ 87,193
6% convertible subordinated notes due 2004, net of
unamortized discount of $2,414 and $2,765 in
1999 and 1998..................................................... 106,946 106,595
5.9% convertible subordinated notes due 2005........................... 22,000 22,000
Obligations under capital leases....................................... 7,409 18,608
Notes payable and other................................................ 10,613 24,366
--------------- ----------------
290,990 258,762
Less current portion.............................................. 4,815 7,080
--------------- ----------------
$ 286,175 $ 251,682
=============== ================
</TABLE>
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NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share from continuing operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Income available to shareholders for
basic earnings per share........................... $ 8,504 $ 6,508 $ 4,755 $ 16,165
Interest expense, net of income tax effect,
on convertible subordinated notes.................. 1,230 1,301 -- 3,737
------------ ------------ ------------ ------------
Income available to shareholders after
assumed conversion of convertible
subordinated notes................................. $ 9,734 $ 7,809 $ 4,755 $ 19,902
============ ============ ============ ============
Weighted average number of common shares
used in basic earnings per share................... 24,299 23,974 24,215 23,912
Effect of dilutive securities:
Stock options .................................... 795 611 924 759
Convertible subordinated notes..................... 6,666 6,666 -- 6,447
------------ ------------ ------------ ------------
Weighted average number of common shares
and dilutive potential common shares used
in diluted earnings per share...................... 31,760 31,251 25,139 31,118
============ ============ ============ ============
</TABLE>
The shares issuable upon conversion of the convertible
subordinated notes (6,666,000) were not included in the computation of diluted
earnings per share for the nine months ended September 30, 1999 because to do so
would have been antidilutive.
NOTE 4. ACCOUNTING CHANGE
Effective January 1, 1999, the Company adopted the provisions
of Statement of Position (SOP), 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that all costs of start-up activities and
organization costs be expensed as incurred. Adoption of SOP 98-5 also required
the write-off of the unamortized value of such costs previously capitalized. The
write-off of $3.9 million ($0.16 per basic share and $0.12 per diluted share,
using the weighted average common shares for the first quarter of 1999), net of
tax, is reflected in the consolidated statement of income as the cumulative
effect of an accounting change. The effect of adopting SOP 98-5 on income before
income taxes and net income for the third quarter of 1999 was determined to be
immaterial.
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NOTE 6. SEGMENT INFORMATION
The following table sets forth information about reportable segment
profit or loss.
<TABLE>
<CAPTION>
Other
Disabilities Job Youth All Consolidated
Quarter ended September 30: Services Corps Services Other (1) Totals
- --------------------------- -------- ----- -------- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
1999
Net revenues......................................... $ 165,999 $ 31,467 $ 13,338 $ -- $ 210,804
Segment profit (loss)................................ 20,641 2,943 1,360 (6,139) 18,805
1998
Net revenues......................................... $ 148,263 $ 28,184 $ 10,133 $ -- $ 186,580
Segment profit (loss)................................ 18,109 2,986 1,007 (7,241) 14,861
Nine months ended September 30:
- -------------------------------
1999
Net revenues......................................... $ 485,272 $ 95,250 $ 38,955 $ -- $ 619,477
Segment profit (loss)................................ 59,577 9,449 4,250 (22,773) 50,503
1998
Net revenues......................................... $ 413,155 $ 70,802 $ 26,555 $ -- $ 510,512
Segment profit (loss)................................ 47,311 7,744 2,780 (21,353) 36,482
</TABLE>
(1) All Other is comprised of corporate general and administrative expenses and
corporate depreciation and amortization. The merger-related charge recorded in
the second quarter of 1999 is excluded from the calculation of segment loss for
the 1999 periods presented.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Res-Care, Inc. (ResCare or the Company) receives revenues primarily
from the delivery of residential, training, education and support services to
populations with special needs. The Company has three reportable operating
segments: (i) disabilities services; (ii) Job Corps program; and (iii) other
youth services programs. Management's discussion and analysis of each segment
follows.
MERGER AND ACQUISITIONS
On June 28, 1999, ResCare completed its merger with PeopleServe, Inc.
(PeopleServe), which primarily operates facilities and programs for persons with
mental retardation and other developmental disabilities. In the merger, ResCare
issued a total of 5.2 million common shares in exchange for preferred stocks,
common stock, and options and warrants which were issued and outstanding prior
to the merger. The merger has been accounted for as a pooling of interests.
Accordingly, the Company's consolidated financial statements and all financial
information included herein have been restated to include the combined financial
results of ResCare and PeopleServe. For further information regarding the
merger, refer to the Company's final Proxy Statement/Prospectus dated May 3,
1999 as filed with the Securities and Exchange Commission.
In connection with the merger, ResCare recorded a pretax merger-related
charge of $20.5 million during the second quarter of 1999. This consisted
primarily of $7.3 million in severance and employee-related costs (principally
related to the elimination of PeopleServe's corporate offices and various other
administrative costs), $2.8 million in lease termination costs, $3.0 million in
information system conversion and integration costs and $4.5 million in
transaction costs, including investment banking, legal, accounting and other
professional fees and transaction costs. Through September 30, 1999,
approximately $15.7 million of the charge had been utilized through $11.0
million in cash payments (principally severance and transaction costs) and $4.7
million in asset write-downs (relating principally to the discontinued
PeopleServe information systems). The Company believes the remaining balance of
accrued merger-related cost of $4.8 million at September 30, 1999 represents its
remaining cash obligations and expects a significant portion of the balance to
be paid by the end of 1999.
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RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Total net revenues in 1999 increased 13%, or $24.2 million, to $210.8
million compared to $186.6 million in 1998. Net income for the third quarter of
1999 was $8.5 million, compared to $6.5 million for the same period in 1998. The
contribution each segment made to this growth is discussed below.
Disabilities Services
Disabilities services net revenues increased 12%, or $17.7 million, to
$166.0 million in the third quarter of 1999 compared to $148.3 million in 1998.
Revenues increased primarily as a result of the effects of a full quarter of
operating results from programs added during the first half of 1999. As a
percentage of net revenues, disabilities services facility and program expenses
decreased from 85.2% in 1998 to 84.8% in 1999. Overall segment profit increased
14%, or $2.5 million, over 1998 due principally to the volume and efficiencies
achieved through the 1998 and 1999 acquisitions.
Job Corps Program
Job Corps net revenues in 1999 increased 12%, or $3.3 million, to $31.5
million compared to $28.2 million in 1998. Segment profit remained stable from
1998 to 1999. The increase in revenues resulted primarily from the addition of
the contract to manage the Treasure Island Job Corps Center commencing in the
second quarter of 1999. Subsequent to the end of the quarter, ResCare was
awarded two contracts representing $26.4 million in annual revenues by the U.S.
Department of Labor to continue operating Job Corps centers in Phoenix and
Tuscon, Arizona.
Other Youth Services Programs
Other youth services net revenues in 1999 increased 32%, or $3.2
million, to $13.3 million compared to $10.1 million in 1998. Revenues increased
primarily as a result of the effects of a full quarter of operating results from
some programs added during the last half of 1998. Segment profit increased 35%
in 1999 also as a result of the acquisitions and improvements realized in
operations acquired in 1998.
Corporate Expenses
Corporate general and administrative expenses decreased 14%, or
$971,000, in the third quarter of 1999 compared to 1998. Savings from
efficiencies achieved in the PeopleServe merger represented the majority of the
decrease. These savings included corporate and administrative personnel and
office reductions in former PeopleServe operations. Corporate general and
administrative expenses in 1999 decreased as a percentage of total net revenues
to 2.8% from 3.6% in 1998.
Net interest expense in 1999 increased $732,000 to $4.6 million
compared to $3.9 million for 1998. The increase resulted primarily from
borrowings under the Company's credit facilities.
Income taxes increased to $5.7 million in 1999 compared to $4.5
million in 1998, and reflect effective tax rates of 40.1% and 40.7%
respectively.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
In addition to the PeopleServe merger, during the first nine months of
1999, the Company completed seven acquisitions and added two new contracts
representing programs and facilities serving approximately 1,700 individuals
with special needs. Total net revenues in 1999 increased 21%, or $109.0 million,
to $619.5 million compared to $510.5 million in 1998. Net income for the nine
months of 1999, including the merger-related charge, was $4.8 million, compared
to net income of $16.2 million for the same period in 1998. Income from
continuing operations before the merger-related charge increased 35% over 1998.
The contribution each segment made to this growth is discussed below.
Disabilities Services
Disabilities services net revenues increased 17%, or $72.1 million, to
$485.3 million in the first nine months of 1999 compared to $413.2 million in
1998. Revenues increased primarily as a result of the effects of a full nine
months of operating results from programs added during the last half of 1998, as
well as the 1999 acquisitions. As a percentage of net revenues, disabilities
services facility and program expenses decreased from 86.0% in 1998 to 84.9% in
1999. Overall segment profit increased 26%, or $12.3 million, over 1998 due
principally to the volume and efficiencies achieved through the 1998
acquisitions.
Job Corps Program
Job Corps net revenues in 1999 increased 35% to $95.3 million compared
to $70.8 million in 1998. Additionally, segment profit increased 22%, or $1.7
million, from 1998 to 1999. The increases in both revenues and profitability
resulted primarily from the addition of the contract to manage the Treasure
Island Job Corps Center commencing in the second quarter of 1999 and the
addition of the Earle C. Clements Job Corps Center contract awarded in the
second quarter of 1998.
Other Youth Services Programs
Other youth services net revenues in 1999 increased 47%, or $12.4
million, to $39.0 million compared to $26.6 million in 1998. Revenues increased
primarily as a result of the effects of a full nine months of operating results
from programs added during the last half of 1998. Segment profit increased 54%
from $2.8 million in 1998 to $4.3 million in 1999 also as a result of the
acquisitions and improvements realized in operations acquired in 1998.
Corporate Expenses
Corporate general and administrative expenses increased 8%, or $1.5
million, in the first nine months of 1999 compared to 1998. Payroll and
payroll-related expenses represented the majority of the increase due primarily
to the addition of support staff and increases in salaries. Also contributing to
the increase is the lease expense associated with the company-wide deployment of
computer workstations in 1999 as part of the Company's Year 2000 remediation
efforts. These increases were offset by savings achieved as a result of the
PeopleServe merger. Corporate general and administrative expenses in 1999
decreased as a percentage of total net revenues to 3.5% from 4.0% in 1998.
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Net interest expense in 1999 increased $3.9 million to $13.4 million
compared to $9.5 million for 1998. The increase resulted primarily from interest
on the convertible subordinated notes issued in the March 1998 acquisition of
Normal Life, Inc. as well as borrowings under the Company's credit facilities.
As a result of the merger-related charge recorded in the second quarter
of 1999, income tax expense decreased to $8.4 million in 1999 compared to $10.8
million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 1999, cash used in operating activities
was $6.7 million compared to cash provided of $19.6 million in the same period
of 1998, a decrease of $26.3 million, due primarily to the increase in accounts
receivable. This increase in accounts receivable is primarily related to delays
in payment from certain state Medicaid programs as well as the Department of
Labor.
For the first nine months of 1999, cash used in investing activities
was $24.3 million compared to $107.7 million in the same period of 1998, a
decrease of $83.4 million. The decrease was due primarily to the Company's use
of stock to finance its merger with PeopleServe and a corresponding reduction in
cash financed acquisitions. Cash used in investing activities for the first half
of 1998 includes funds used in the acquisition of Normal Life, Inc.
For the first nine months of 1999, cash provided by financing
activities was $29.4 million compared to $40.4 million in the same period of
1998, a decrease of $11.0 million, due primarily to long-term borrowings for the
Normal Life and other acquisitions during the first quarter of 1998, offset by
the borrowings necessary in 1999 to fund working capital needs primarily
resulting from the increase in accounts receivable noted above.
At September 30, 1999, the Company had $45.2 million available on its
line-of-credit and $18.3 million in cash and cash equivalents. Outstanding at
that date were irrevocable standby letters of credit in the principal amount of
$14.1 million issued in connection with workers' compensation insurance and
certain facility leases.
Net days revenue in accounts receivable was 70 days at September 30,
1999, compared to 61 days at December 31, 1998. The increase is primarily
related to delays in payment from certain state Medicaid programs as well as the
Department of Labor. Through October 15, 1999, net days revenue in accounts
receivable improved with the collection of approximately $9.1 million of amounts
due from the Department of Labor which had been delayed due to administrative
problems encountered by the Department of Labor.
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 these sources, as well as the issuance of long-term
obligations and common stock. The Company believes that cash generated from
operations and availability under its existing credit facility will continue to
be sufficient to meet its working capital, planned capital expenditure, business
acquisition and scheduled debt repayment requirements for at least the next
twelve months.
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YEAR 2000 ISSUE
Assessment and Remediation Plans
In response to the Year 2000 issue, the Company established a task
force to address Year 2000 issues in the following specific areas: (i)
information systems; (ii) medical equipment and physical facilities; and (iii)
third party relationships.
Information Systems: The Company has completed its assessment of the
capability of its information systems to meet Year 2000 processing requirements.
Based on this assessment, the Company determined that it was required to modify
or replace certain portions of its information systems. The Company has focused
a significant portion of its internal remediation efforts on the aspects of
information systems that affect revenue generation. Management has acquired and
is installing a Year 2000 compliant software program which will be utilized to
generate substantially all invoices electronically and monitor accounts
receivable. A significant number of the Company's operations are currently
utilizing the software and installation and testing for the remaining operations
is expected to be completed by November 30, 1999.
The Company has completed the requisite upgrades to its general ledger
and payroll systems and believes these systems are currently Year 2000
compliant. Substantially all desktop computers, network devices and related
software have been tested and those found to be noncompliant have been replaced.
The Company plans to rely principally on its own staff resources for Year 2000
remediation of its information systems.
Medical Equipment and Physical Facilities: The effort to identify
potential Year 2000 problems within the Company's medical equipment and physical
facilities is complete. Vendors, manufacturers and others with whom the Company
conducts business, and where the interruption of such business could have a
material adverse effect on the Company, have been contacted, and cost effective
efforts have been made to remediate or minimize possible problems. The Company
presently believes that the Year 2000 issue will not pose significant
operational problems for the Company.
Third Party Relationships: The Company has substantially completed its
assessment of 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 and
local governmental agencies are noncompliant, the Company's cash flows,
liquidity and financial condition could be materially adversely affected. The
Health Care Financing Administration has issued guidance requiring state
Medicaid agencies to certify that the state's Medicaid Management Information
Systems, and mission-critical interfaces, were Year 2000 compliant by March 31,
1999. The Company has received representations from a substantial portion of its
third party payors and vendors, its third party payroll processor, as well as
its significant relationship banks, that their systems will be Year 2000
compliant. There can be no assurance that the systems of these third parties
will be compliant and will not have a material adverse effect on the Company's
operations.
Contingency Plans
The Company has established a formal contingency plan to address
failures in the Company's Year 2000 assessment and remediation plan. The
Company's task force has completed plans for significant portions of the three
areas described in this section, as well as
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other less significant areas within the Company. Contingency plans have been
developed for any area of the Year 2000 remediation effort where the consequence
of a possible Year 2000 problem is materially adverse and a viable contingency
plan is possible and economically reasonable. After contacting its significant
third party reimbursement sources, the Company has developed contingency plans
to receive temporary reimbursement in the event of system failures by these
entities. The Company's contingency plans also cover failures by suppliers and
vendors. Further, each of the Company's operating units has plans to handle
emergency situations such as a loss of utility services or supplies.
Year 2000 Risk
The Company believes the greatest risk posed by the Year 2000 issue is
the 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 materially adversely affected.
Management continues to evaluate its financing needs, including needs arising
from Year 2000 problems. While the 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 materially 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. Further, in an environment of
significant collection delays, the Company may elect to temporarily reduce its
internal growth or acquisition activities.
Effect of Merger with PeopleServe
As part of the integration of the systems and facilities of PeopleServe
with those of ResCare, the Company has addressed the Year 2000 issues of
PeopleServe in the same three areas discussed above. The significant information
systems of PeopleServe are being discontinued and the data is being incorporated
into ResCare's information systems. Further, the medical equipment, physical
facilities and third party relationships of PeopleServe have been assessed
concurrently with those of ResCare. The Company presently believes that the
merger with PeopleServe will not materially increase the Company's Year 2000
risks beyond those already described above. The cost of remediation efforts with
respect to PeopleServe is not expected to be material.
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Cost of Plan
The total cost of modifying and replacing information systems is
currently expected to approximate $4 million. Certain of these costs related to
capital assets will be capitalized and amortized over a three to five year
period in accordance with normal accounting policies. Other costs to remediate
the Year 2000 issue will be expensed as incurred. The most significant portion
of the total estimated cost is generally attributable to replacement equipment
which is being leased under an operating lease over a base term of 60 months. At
September 30, 1999, the Company had deployed replacement equipment with a value
of approximately $3.3 million under this operating lease. The total cost of
modifying and replacing medical equipment and physical facility components is
not expected to be material. 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 are based on management's best estimates using information currently
available. 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 delivery quality services, 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. Additionally, many of the
Company's contracts to provide disabilities and youth services and to operate
Job Corps centers 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 may adversely affect the Company's abilities to obtain
and retain these contracts.
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
14
<PAGE> 16
which billings/costs are reviewed and audited could also affect revenues and
operating profitability.
The Company's cost structure and ultimate operating profitability are
significantly dependent on its labor costs, 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,
strikes or work stoppages by certain of its employees represented by labor
unions, 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result
of its outstanding variable rate debt, the Company does not currently utilize
any derivative financial instruments related to its interest rate exposure. The
Company believes that its exposure to market risk will not result in a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
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 August 1998, with the approval of the State of Indiana, the Company
relocated approximately 100 individuals from three of its larger facilities to
community-based settings. In June 1999, the owner of these facilities filed suit
against the Company in U.S. District Court, Southern District of Indiana,
alleging in connection therewith breach of contract, conversion and fraudulent
concealment. The Company, on the advice of counsel, believes that the amount of
damages being sought by the plaintiffs is approximately $21 million. Management
believes that this lawsuit is without merit and will defend it vigorously. The
Company does not believe the ultimate resolution of this matter is likely to
have a material adverse effect on its consolidated financial condition, results
of operations or liquidity.
The Texas Attorney General, on behalf of the Texas Department of Human
Services, filed suit in the District Court of Harris County, Texas initially
seeking civil penalties of approximately $2.7 million in connection with the
operation of one group home in Texas. The complaint alleges that the Company
failed to ensure that the needs of the individuals residing in this home were
being adequately assessed and provided for, including appropriate medical care.
The Company and the Attorney General are currently engaged in settlement
discussions. While the Company cannot predict whether these discussions will
resolve the matter or the terms of any resolution, the Company does not believe
that the ultimate resolution of the matter with the State is likely to have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity.
In addition, the Company is a party to various other legal proceedings
arising out of the operation of its facilities and programs and arising in the
ordinary course of business. The Company believes that most of these claims are
without merit. Further, many of such claims may be covered by insurance. The
Company does not believe the results of these proceedings or claims,
individually or in the aggregate, are likely to have a material adverse effect
on its consolidated financial condition, results of operations or liquidity.
16
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule - September 30, 1999
27.2 Financial Data Schedule - September 30, 1998
(Restated)
(b) Reports on Form 8-K:
On September 10, 1999, the Company filed an amendment to its report on Form
8-K dated June 7, 1999 to report that no additional financial statements were
required by Item 7 of Form 8-K in connection with the merger with PeopleServe,
Inc.
17
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
27.1 Financial Data Schedule - September 30, 1999
27.2 Financial Data Schedule - September 30, 1998 (Restated)
18
<PAGE> 20
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 12, 1999 By: /s/ Ronald G. Geary
-------------------- ---------------------------
Ronald G. Geary
Chairman, President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ Ralph G. Gronefeld, Jr.
-------------------- ---------------------------
Ralph G. Gronefeld, Jr.
Executive Vice President of
Finance & Administration
and Chief Financial Officer
19
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