-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IJAWNmR1puFJ2+gzlXkqOy6xikkV/IyoZx7DfR6ps+avECmgbX5UWBGGTQJ/QNlp KLt2n1/BWbfTjLaSTH37Pw== 0000950152-99-008957.txt : 19991115 0000950152-99-008957.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950152-99-008957 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RES CARE INC /KY/ CENTRAL INDEX KEY: 0000776325 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 610875371 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20372 FILM NUMBER: 99748984 BUSINESS ADDRESS: STREET 1: 10140 LINN STATION RD CITY: LOUISVILLE STATE: KY ZIP: 40223 BUSINESS PHONE: 5023942100 MAIL ADDRESS: STREET 1: 10140 LINN STATION RD CITY: LOUISVILLE STATE: KY ZIP: 40223 10-Q 1 RES-CARE, INC. 10-Q 1 - ------------------------------------------------------------------------------- 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 ------------------- 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. - ------------------------------------------------------------------------------- 2 INDEX
PAGE PART I. FINANCIAL INFORMATION NUMBER 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
1 3 PART I. FINANCIAL INFORMATION ITEM 1. UNAUDITED FINANCIAL STATEMENTS RES-CARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
September 30 December 31 1999 1998 --------------- ---------------- 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 =============== ================
See accompanying notes to unaudited condensed consolidated financial statements. 2 4 RES-CARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ 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
See accompanying notes to unaudited condensed consolidated financial statements. 3 5 RES-CARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30 -------------------------------- 1999 1998 ------------- --------------- 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) ============== ===============
See accompanying notes to unaudited condensed consolidated financial statements. 4 6 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:
September 30 December 31 1999 1998 --------------- ---------------- (In thousands) 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 =============== ================
5 7 NOTE 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share from continuing operations:
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In thousands) 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 ============ ============ ============ ============
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. 6 8 NOTE 6. SEGMENT INFORMATION The following table sets forth information about reportable segment profit or loss.
Other Disabilities Job Youth All Consolidated Quarter ended September 30: Services Corps Services Other (1) Totals - --------------------------- -------- ----- -------- ----- ------ (In thousands) 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
(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. 7 9 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. 8 10 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. 9 11 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. 10 12 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. 11 13 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 12 14 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. 13 15 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 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 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 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 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 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 EX-27.1 2 EXHIBIT 27.1
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 18,314 0 159,320 0 1,015 196,098 131,509 37,267 541,315 87,565 0 0 0 50,866 110,717 541,315 0 619,477 0 531,383 20,498 0 13,444 16,561 8,408 8,153 0 534 (3,932) 4,755 0.20 0.19
EX-27.2 3 EXHIBIT 27.2
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 19,956 0 132,707 0 683 167,327 123,647 33,594 506,108 91,841 0 0 0 50,866 103,721 506,108 0 510,512 0 441,124 0 0 9,529 26,953 10,788 16,165 0 0 0 16,165 0.68 0.64
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