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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 March 31, 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
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 April 30, 1999 was 19,026,214.
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INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Index to Exhibits 16
Signatures 17
</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>
March 31 December 31
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,344 $ 18,939
Accounts and notes receivable, net 126,873 99,454
Inventories 673 683
Deferred income taxes 7,386 6,997
Prepaid expenses and other current assets 3,263 3,409
--------- ---------
Total current assets 154,539 129,482
--------- ---------
Property and equipment, net 64,305 64,129
Excess of acquisition cost over net assets acquired, net 176,861 173,949
Other assets 25,709 29,054
--------- ---------
$ 421,414 $ 396,614
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 21,103 $ 22,924
Accrued expenses 40,351 33,349
Accrued income taxes 6,397 5,597
Current portion of long-term debt 2,931 4,019
--------- ---------
Total current liabilities 70,782 65,889
--------- ---------
Long-term liabilities 5,909 6,340
Long-term debt 213,066 193,282
Deferred income taxes -- 1,658
--------- ---------
Total liabilities 289,757 267,169
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares -- --
Common stock 41,678 41,678
Additional paid-in capital 16,736 16,348
Retained earnings 76,329 74,523
--------- ---------
134,743 132,549
Less cost of common shares in treasury (3,086) (3,104)
--------- ---------
Total shareholders' equity 131,657 129,445
--------- ---------
$ 421,414 $ 396,614
========= =========
</TABLE>
See accompanying 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
March 31
1999 1998
<S> <C> <C>
Net revenues $ 150,492 $ 105,938
Facility and program expenses 129,655 91,878
Operating expenses:
Corporate general and administrative 4,286 4,055
Depreciation and amortization 3,696 2,470
Loss on sale of assets 4 9
--------- ---------
Total operating expenses 7,986 6,534
--------- ---------
Total facility, program and operating expenses 137,641 98,412
--------- ---------
Operating income 12,851 7,526
Other expenses (income):
Interest expense 3,248 1,958
Interest income (205) (724)
--------- ---------
Total other expenses, net 3,043 1,234
--------- ---------
Income before income taxes 9,808 6,292
Income tax expense 4,070 2,455
--------- ---------
Income before cumulative effect of accounting change 5,738 3,837
Cumulative effect of accounting change, net of tax benefit of $2,226 (3,932) --
--------- ---------
Net income $ 1,806 $ 3,837
========= =========
Income per share data:
Basic earnings per share before cumulative
effect of accounting change $ 0.30 $ 0.21
Cumulative effect of accounting change, net of tax (0.21) --
--------- ---------
Basic earnings per share $ 0.09 $ 0.21
========= =========
Diluted earnings per share before cumulative
effect of accounting change $ 0.26 $ 0.19
Cumulative effect of accounting change, net of tax (0.15) --
--------- ---------
Diluted earnings per share $ 0.11 $ 0.19
========= =========
Weighted average shares used in per share calculations:
Basic earnings per share 18,929 18,615
Diluted earnings per share 26,684 25,429
</TABLE>
See accompanying 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>
Three Months Ended
March 31
1999 1998
<S> <C> <C>
Cash used in operating activities $(12,087) $ (1,236)
Cash flows from investing activities:
Purchase of property and equipment (1,882) (1,786)
Acquisitions of businesses, net of cash acquired (7,120) (88,638)
Other -- (388)
-------- --------
Cash used in investing activities (9,002) (90,812)
-------- --------
Cash flows from financing activities:
Net borrowings under notes payable to bank 20,012 40,953
Repayments of notes payable (1,813) (527)
Proceeds received from exercise of stock options 295 1,243
-------- --------
Cash provided by financing activities 18,494 41,669
-------- --------
Decrease in cash and cash equivalents $ (2,595) $(50,379)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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 period have been
included. Operating results for the three-month period ended March 31, 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 the Company'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>
March 31 December 31
1999 1998
(In thousands)
<S> <C> <C>
Revolving credit facility with banks $ 79,012 $ 59,000
6% convertible subordinated notes due 2004, net of
unamortized discount of $2,648 and $2,765 in
1999 and 1998 106,712 106,595
5.9% convertible subordinated notes due 2005 22,000 22,000
Notes payable 8,249 9,680
Other 24 26
-------- --------
215,997 197,301
Less current portion 2,931 4,019
-------- --------
$213,066 $193,282
======== ========
</TABLE>
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NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
(In thousands)
<S> <C> <C>
Income available to shareholders for basic
earnings per share $ 1,806 $ 3,837
Interest expense, net of income tax effect,
on convertible subordinated notes 1,230 1,109
------- -------
Income available to shareholders after assumed
conversion of convertible subordinated notes $ 3,036 $ 4,946
======= =======
Weighted average common shares used in
basic earnings per share 18,929 18,615
Effect of dilutive securities:
Stock options 1,089 810
Convertible subordinated notes 6,666 6,004
------- -------
Weighted average common shares and dilutive potential
common shares used in diluted earnings per share 26,684 25,429
======= =======
</TABLE>
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 1998 shares outstanding and per share
amounts have been restated to reflect the stock split.
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 ($0.21 per basic share and $0.15 per diluted
share), net of tax, is reflected in the consolidated statement of income as the
cumulative effect of an accounting change. Exclusive of the cumulative effect
adjustment, the effect of adopting SOP 98-5 on income before income taxes and
net income for the first quarter of 1999 was determined to be immaterial.
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NOTE 5. SEGMENT INFORMATION
The following table sets forth information about reportable
segment profit or loss and segment assets.
<TABLE>
<CAPTION>
Other
Disabilities Job Youth All Consolidated
As of and for the quarter ended March 31: Services Corps Services Other(1) Totals
- ----------------------------------------- -------- ----- -------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
1999
Net revenues $ 106,735 $ 31,074 $ 12,683 $ -- $150,492
Segment profit (loss) 13,028 3,216 1,200 (4,593) 12,851
Total assets 324,456 30,042 27,572 39,344 421,414
1998
Net revenues $ 79,844 $ 18,603 $ 7,491 $ -- $105,938
Segment profit (loss) 8,914 2,138 789 (4,315) 7,526
</TABLE>
(1) All Other is comprised of corporate general and administrative expenses and
corporate depreciation and amortization.
Total assets for the Job Corps segment increased by approximately $9
million at March 31, 1999 versus the amount reported in the December 31, 1998
annual report due principally to an increase in accounts receivable related to
delays in payment from the Department of Labor.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Res-Care, Inc. (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.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
During the first quarter of 1999, the Company completed three
acquisitions and added two new contracts representing programs and facilities
serving approximately 1,500 individuals with special needs. As a result of these
transactions and a full quarter of operations for 1998 acquisitions, the Company
achieved record revenues during the first quarter of 1999. Total net revenues in
1999 increased 42%, or $44.6 million, to $150.5 million compared to $105.9
million in 1998. Income before the cumulative effect of an accounting change
increased 50% over 1998. These increases represent continued progress in the
Company's efforts to improve results by expanding operations and improving
quality. The contribution each segment made to this growth is discussed below.
Disabilities Services
Disabilities services net revenues increased 34%, or $26.9 million, to
$106.7 million in the first quarter of 1999 compared to $79.8 million in 1998.
Revenues increased primarily as a result of the effects of a full quarter of
operating results from programs added during 1998. Disabilities services
facility and program expenses in the first quarter of 1999 increased 31%, or
$21.7 million, to $90.7 million compared to $69.0 million in 1998. Of the
increase, $15.1 million, or 70%, was due to payroll and payroll-related expenses
associated primarily with the new facilities and programs that were operational
in 1999 compared to 1998. As a percentage of net revenues, disabilities services
facility and program expenses decreased from 86.5% in 1998 to 85.0% in 1999.
Overall segment profit increased 46% over 1998 due principally to the volume and
efficiencies achieved through the 1998 acquisitions.
Job Corps Program
Job Corps net revenues in 1999 increased 67%, or $12.5 million, to
$31.1 million compared to $18.6 million in 1998. Additionally, segment profit
increased 50%, or $1.1 million, from 1998 to 1999. The increases in both
revenues and profitability resulted primarily from the addition of the contract
to manage the Earle C. Clements Job Corps center commencing in the second
quarter of 1998.
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Other Youth Services Programs (Youthtrack and AYS)
Other youth services net revenues in 1999 increased 69%, or $5.2
million, to $12.7 million compared to $7.5 million in 1998. Revenues increased
primarily as a result of the effects of a full quarter of operating results from
programs added during 1998. Segment profit increased 52% from $789,000 in 1998
to $1.2 million in 1999 also as a result of the acquisitions and improvements
realized in operations started in 1998.
Corporate Expenses
Corporate general and administrative expenses increased 6%, or
$231,000, in the first quarter 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 staff salaries. Corporate
general and administrative expenses in 1999 decreased as a percentage of total
net revenues to 2.8% from 3.8% in 1998.
Interest expense in 1999 increased $1.3 million to $3.2 million
compared to $1.9 million for 1998. The increase resulted primarily from interest
on the convertible subordinated notes issued in March 1998 (in an acquisition)
as well as borrowings under the Company's credit facility. Interest income in
1999 decreased $519,000 to $205,000 from $724,000 for 1998. This decrease was
due primarily to the use of the proceeds from the issuance of the convertible
subordinated notes for acquisitions in early 1998.
Income taxes increased to $4.1 million in 1999 compared to $2.5 million
in 1998, and reflect effective tax rates of 41.5% and 39.0%, respectively.
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 ($0.21 per basic share and $0.15 per diluted
share), net of tax, is reflected in the consolidated statement of income as the
cumulative effect of an accounting change. Exclusive of the cumulative effect
adjustment, the effect of adopting SOP 98-5 on income before income taxes and
net income for the first quarter of 1999 was determined to be immaterial.
LIQUIDITY AND CAPITAL RESOURCES
In the first three months of 1999, cash used in operating activities
was $12.1 million compared to $1.2 million in the first three months of 1998, an
increase of $10.9 million, due primarily to the growth in accounts receivable.
The increase in accounts receivable is primarily related to delays in payment
from certain state Medicaid programs and the Department of Labor as well as the
integration of acquired operations.
In the first three months of 1999, cash used in investing activities
was $9.0 million compared to $90.8 million in the first three months of 1998, a
decrease of $81.8 million, due primarily to the acquisition of Normal Life, Inc.
in March 1998.
In the first three months of 1999, cash provided by financing
activities was $18.5 million
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compared to $41.7 million in the first three months of 1998, a decrease of $23.2
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 during the first quarter of 1999
as a result of the growth in accounts receivable noted above.
At March 31, 1999, the Company had $116.5 million available on its
line-of-credit and $16.3 million in cash and cash equivalents. Outstanding at
that date were irrevocable standby letters of credit in the principal amount of
$4.5 million issued in connection with workers' compensation insurance and
certain facility leases.
Net days revenue in accounts receivable was 76 days at March 31, 1999,
compared to 63 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. During April 1999, the Company's collection efforts improved
with the receipt of a substantial portion of past due accounts from the
Department of Labor as well as significant progress in the collection of
overdue amounts in its disabilities services division.
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
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 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.
The Company will be focusing a significant portion of its internal remediation
efforts on the aspects of information systems that affect revenue generation.
Currently, the Company utilizes certain purchased software to monitor accounts
receivable and generate a portion of its billings to third party payors. The
Company also utilizes software supplied by certain states or their contracted
third party vendors to electronically generate its billings to third party
payors. It is the intention of management to upgrade its accounts receivable and
billing system beginning in the second quarter of 1999 with an estimated
completion date in the third quarter of 1999. In addition to this upgrade,
management is in the process of acquiring a Year 2000 compliant software program
which will be utilized to generate substantially all invoices electronically and
monitor accounts receivable. The estimated completion date for
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installation and testing of this billing system is October 31, 1999. The Company
has completed the requisite upgrades to its general ledger and payroll systems
in order for those systems to be 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 ongoing. When 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, will be contacted, and cost
effective efforts made to remediate or minimize possible problems. Upon
completion of this assessment, remediation plans will be developed. The Company
believes that it will be able to complete its assessment of material adverse
risk associated with Year 2000 problems in its medical equipment and physical
facilities sufficiently in advance of January 1, 2000, to effect remedial
measures where such measures are possible and cost effective. The current target
date for completing the assessment is June 30, 1999 and the target date for
completing any remedial measures is September 30, 1999. 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 medical equipment and physical facilities.
Third Party Relationships: 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. 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, are Year 2000 compliant by March 30, 1999. The Company has received
representations from 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 an adverse effect on the Company's operations. An
inventory of significant third party payors and vendors is in process, and
questionnaires were mailed during March 1999 requesting representations
regarding their Year 2000 readiness. The Company anticipates completing its
assessment and any necessary actions by the end of the third quarter of 1999.
Contingency Plans
The Company has not established a formal contingency plan to address
failures in the Company's Year 2000 assessment and remediation plan. The task
force has been directed to complete plans for the three areas described in this
section, as well as other less significant areas within the Company, and to
submit the plans to the executive management team by June 30, 1999. Contingency
plans will be developed for any area of the Year 2000 remediation effort where
such effort is incomplete, the consequence of a possible Year 2000 problem is
materially adverse and a viable contingency plan is possible and economically
reasonable. Substantially all critical financial information systems currently
in place, including the internal accounts receivable and billing system
described above, are being remediated to be Year 2000 compliant
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in the event of an unanticipated delay in the implementation of the Company's
new systems. As the Company contacts third party reimbursement sources, it is
developing contingency plans to receive temporary reimbursement in the event of
system failures by these entities. The Company's contingency plans will 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 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 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.
Cost of Plan
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. Other
costs to remediate the Year 2000 issue will be expensed as incurred. The most
significant portion of the total estimated cost (generally attributable to
replacement equipment) is being leased under an operating lease over a base term
of 60 months. At March 31, 1999, the Company had deployed replacement equipment
with a value of approximately $2.4 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 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 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.
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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.
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.
From time to time, the Company (or a provider with which the Company
has a management agreement) is a party to legal and/or administrative
proceedings involving state program administrators and others that, in the event
of unfavorable outcomes, may adversely affect revenues and period-to-period
comparisons. In addition, the Company is a party to various legal proceedings
encountered in the ordinary course of business. The Company believes that many
of such legal proceedings are without merit. Further, such claims may be
covered by insurance. The Company does not believe the results of such
proceedings or litigation will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
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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.
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.
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 5. OTHER INFORMATION
On April 5, 1999, the Company announced that it signed a definitive
agreement in which PeopleServe, Inc. will merge with the Company. PeopleServe,
headquartered in Dublin, Ohio, is one of the largest privately held providers of
services to persons with developmental disabilities, with operations in 12
states and Washington, D.C., and revenues of approximately $184 million for the
year ended December 31, 1998 and $50 million for the three months ended March
31, 1999. PeopleServe was founded in 1979 and serves approximately 4,300
individuals in community-based settings, including group homes and supported
living. Other services include supported employment and day habilitation
programs. The transaction is expected to be accounted for as a
pooling-of-interests.
Under the terms of the agreement, the Company will exchange between
approximately 4.7 million and 5.8 million shares of its common stock for all of
the ownership interests of PeopleServe under a formula based upon the market
price of the Company stock prior to closing. The merger is subject to approval
of the shareholders of both companies as well as regulatory and other customary
approvals. The Boards of Directors of both companies have approved the
transaction and it is expected to be completed no later than the third quarter
of 1999. Vincent D. Pettinelli, chairman and one of the founders of PeopleServe,
will join the Board of Directors of the Company, bringing the number of Board
members to eight.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger by and
among Res-Care, Inc., Res-Care Sub, Inc. and
PeopleServe, Inc. Appendix A to the Company's
Registration Statement on Form S-4 (Reg. No.
333-75875) is hereby incorporated by reference.
27.1 Financial Data Schedule - March 31, 1999
27.2 Financial Data Schedule - March 31, 1998 (Restated)
(b) Reports on Form 8-K:
(i) On April 5, 1999, the Company filed a Report
on Form 8-K to report that the Company had
entered into an Agreement and Plan of Merger
with PeopleServe, Inc.
15
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Agreement and Plan of Merger by and among Res-Care, Inc., Res-Care
Sub, Inc. and PeopleServe, Inc. Appendix A to the Company's
Registration Statement on Form S-4 (Reg. No. 333-75875) is hereby
incorporated by reference.
27.1 Financial Data Schedule - March 31, 1999
27.2 Financial Data Schedule - March 31, 1998 (Restated)
16
<PAGE> 18
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: May 14, 1999
------------
By: /s/ Ronald G. Geary
------------------------------------
Ronald G. Geary
Chairman, President and
Chief Executive Officer
Date: May 14, 1999
------------
By: /s/ Ralph G. Gronefeld, Jr.
------------------------------------
Ralph G. Gronefeld, Jr.
Executive Vice President of Finance &
Administration and Chief Financial Officer
17
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