-----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, MuGc9OWLrbbAUmnYcflh9oHtJBqGV2N4uHoUGEmtxLqt2kQEn9nzm9p63Wr+wSzJ m7rUIhkDV3R86vJ6I9dgZA== 0000950152-99-004414.txt : 19990517 0000950152-99-004414.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950152-99-004414 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99621492 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. QUARTERLY REPORT FORM 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 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. 2 INDEX
PAGE PART I. FINANCIAL INFORMATION NUMBER 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
1 3 PART I. FINANCIAL INFORMATION ITEM 1. UNAUDITED FINANCIAL STATEMENTS RES-CARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
March 31 December 31 1999 1998 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 ========= =========
See accompanying notes to 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 March 31 1999 1998 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
See accompanying notes to condensed consolidated financial statements. 3 5 RES-CARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31 1999 1998 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) ======== ========
See accompanying notes to condensed consolidated financial statements. 4 6 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:
March 31 December 31 1999 1998 (In thousands) 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 ======== ========
5 7 NOTE 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31 1999 1998 (In thousands) 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 ======= =======
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. 6 8 NOTE 5. SEGMENT INFORMATION The following table sets forth information about reportable segment profit or loss and segment assets.
Other Disabilities Job Youth All Consolidated As of and for the quarter ended March 31: Services Corps Services Other(1) Totals - ----------------------------------------- -------- ----- -------- ----- ------ (in thousands) 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
(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. 7 9 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. 8 10 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 9 11 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 10 12 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 11 13 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. 12 14 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. 13 15 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 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 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 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 EX-27.1 2 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 16,344 0 126,873 0 673 154,539 82,352 18,047 421,414 70,782 0 0 0 41,678 89,889 421,414 0 150,492 0 129,655 0 0 3,248 9,808 4,070 5,738 0 0 (3,932) 1,806 .09 .11
EX-27.2 3 EXHIBIT 27.2
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 16,205 0 77,563 0 678 103,402 72,184 12,861 346,954 55,470 0 0 0 41,678 69,085 346,954 0 105,938 0 91,878 0 0 1,958 6,292 2,455 3,837 0 0 0 3,837 .21 .19
-----END PRIVACY-ENHANCED MESSAGE-----