<PAGE> 1
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 June 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period.
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 (I.R.S. Employer
incorporation or organization) Identification No.)
10140 LINN STATION ROAD
LOUISVILLE, KENTUCKY 40223
(Address of principal executive offices) (Zip Code)
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, on June 30, 1996 was 9,509,898.
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RES-CARE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1996 and 3
December 31, 1995
Condensed Consolidated Statements of Operations for the three 4
months ended June 30, 1996 and 1995 and the six months ended June
30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the six months 5
ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements -- June 30, 6
1996
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM I
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
----------- -----------
(UNAUDITED) (NOTE)
(in thousands)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 6,817 $ 7,253
Accounts and notes receivable, less allowance
for contractual adjustments of $2,040 in
1996 and $1,911 in 1995. 28,295 25,281
Inventories 556 468
Deferred income taxes 2,353 2,313
Other current assets 854 1,162
---------- ---------
Total current assets 38,875 36,477
Property and equipment, less accumulated
depreciation of $5,897 in 1996 and
$4,851 in 1995. 34,213 32,815
Deferred start-up cost less accumulated
amortization of $2,823 in 1996 and
$2,988 in 1995. 2,579 1,605
Excess of acquisition cost over net assets acquired,
less accumulated amortization of $363 in 1996
and $213 in 1995. 8,554 8,521
Licenses cost less accumulated amortization of
$105 in 1996 and $53 in 1995. 3,051 3,104
Long-term receivables and advances to managed facilities 951 963
Other assets 923 1,008
---------- ---------
Total Assets $ 89,146 $ 84,493
========== =========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 112 $ 123
Trade accounts payable 4,294 4,424
Accrued expenses 14,619 13,356
Accrued income taxes 1,445 2,032
---------- ---------
Total current liabilities 20,470 19,935
---------- ---------
Long-term liabilities 354 429
Long-term debt 16,058 17,594
Long-term deferred income taxes 1,047 637
---------- ---------
Total liabilities 37,929 38,595
---------- ---------
Minority interest in equity of
consolidated subsidiary 16 37
---------- ---------
Shareholders' equity:
Preferred shares, no par value, authorized
1,000 shares, no shares issued
or outstanding - -
Common stock, no par value, authorized
30,000 shares, issued 13,837
shares in 1996 and 1995 15,535 15,535
Additional paid in capital 3,729 2,316
Retained earnings 36,247 32,427
---------- ---------
55,511 50,278
Less cost of common shares in treasury
(4,328 shares in 1996 and 4,436
shares in 1995) 4,310 4,417
---------- ---------
Total shareholders' equity 51,201 45,861
---------- ---------
Total liabilities and shareholders' equity $ 89,146 $ 84,493
========== =========
<FN>
See notes to condensed consolidated financial statements
Note: The condensed consolidated balance sheet at
December 31, 1995 has been derived from the
audited financial statements at that date.
</TABLE>
3
<PAGE> 4
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- --------------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 52,685 $ 41,003 $ 105,373 $ 76,673
Operating expenses:
Facility and program expense 46,256 36,179 92,842 67,918
Corporate general and administrative 2,190 1,736 4,438 3,341
Depreciation and amortization 819 421 1,590 750
Compensation-stock options 0 6 4 13
----------- ---------- ----------- ----------
Total operating expenses 49,265 38,342 98,874 72,022
Operating income 3,420 2,661 6,499 4,651
Other expenses (income):
(Gain) loss from sale of assets 6 (2) (9) (6)
Interest expense 265 158 503 204
Interest income (110) (245) (216) (500)
----------- ---------- ----------- ----------
Total other expenses (income), net 161 (89) 278 (302)
Minority Interest in Loss of
consolidated subsidiary 11 - 21
Income from continuing operations before income tax 3,270 2,750 6,242 4,953
Income tax 1,266 1,077 2,422 1,984
----------- ---------- ----------- ----------
Income from continuing operations 2,004 1,673 $ 3,820 $ 2,969
Discontinued operations:
Income from operations of unconsolidated
affiliate sold, net of applicable income
tax expense - 181 - 428
Gain from sale of unconsolidated affiliate
net of applicable income tax of $6,270 - 8,904 - 8,904
----------- ---------- ----------- ----------
Net income $ 2,004 $ 10,758 $ 3,820 $ 12,301
=========== ========== =========== ==========
Income data:
Income from continuing operations per share $ 0.20 $ 0.17 $ 0.38 $ 0.31
Income from discontinued operations per share 0.00 0.02 0.00 0.04
Gain from sale of discontinued operation
per share 0.92 0.92
Net income per share $ 0.20 $ $1.11 $ 0.38 $ 1.27
Weighted average shares used in per share
calculation 10,158,046 9,683,032 10,097,237 9,683,191
=========== ========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,820 $12,301
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,590 750
Provision for contractual adjustments 400 309
Deferred income taxes - net 370 (917)
Provision for compensation - stock options 4 13
Income from operations of unconsolidated affiliate sold 0 (428)
Gain from sale of unconsolidated affiliate, net of applicable income
tax expense of $6,270 0 (8,904)
Gain from sale of assets (9) (6)
Payments under noncompetition covenants (75) (13)
Loss applicable to minority interest of consolidated subsidiary (21) 0
Changes in operating assets and liabilities
Increase in accounts and notes receivable (3,421) (3,620)
(Increase) decrease in inventories (89) 12
Decrease in other current assets 308 90
(Increase) decrease in other assets 22 (117)
Decrease in trade accounts payable (131) (182)
Increase in accrued expenses 1,263 2,200
Increase (decrease) in accrued income taxes (587) 1,617
------ -------
Net cash provided by operating activities 3,445 3,105
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in advances to unconsolidated affiliate sold 0 586
Dividend from unconsolidated affiliate sold 0 3,024
Proceeds from sale of unconsolidated affiliate, net of cost of $906 0 16,562
Purchase of property and equipment (2,586) (4,993)
Purchase of ICF/MR facilities 0 (17,134)
Payments received on notes from sale of assets 19 19
Deferred start-up costs (1,117) (606)
Increase in goodwill (180) 0
(Increase) decrease in other assets 15 (284)
------ -------
Net cash used in investing activities (3,849) (2,826)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable 0 (78)
Long-term debt borrowings 0 3,415
Repayment of long-term debt (1,547) 0
Purchase of treasury stock (1) 0
Proceeds from exercise of stock options 1,093 95
Tax benefit related to employee stock options 424 0
------ -------
Net cash (used in) provided by financing activities (31) 3,432
------ -------
(Decrease) increase in cash and cash equivalents (436) 3,711
Cash and cash equivalents at beginning of period 7,253 10,287
------ -------
Cash and cash equivalents at end of period $6,817 $13,998
------ -------
</TABLE>
See notes to condensed consolidated financial statements.
5
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Res-Care, Inc.
Notes to Condensed Consolidated Financial Statements
NOTE 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the 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 have been included. Operating results for the six-month
period ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report to shareholders, which are incorporated by
reference in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
NOTE 2. Long-term Debt
As of June 30, 1996, the Company had a line-of-credit
agreement with its banks, PNC Bank, Kentucky, Inc., National City Bank,
Louisville, Kentucky, and Suntrust Bank, Nashville, N.A., which is subject to a
maximum borrowing of $35 million including provisions for letters of credit. As
of June 30, 1996, letters of credit in the amount of $5.8 million were
outstanding against the line of credit. Under terms of the agreement, the
Company is provided a cash management system in which accounts are replenished
daily for checks clearing the previous day. Account replenishments are applied
against the line of credit. Uncleared checks in the amount of $3.5 million were
outstanding at June 30, 1996 and are reflected in long-term debt. The agreement
contains certain covenants pertaining to net worth, current ratio, ratio of
total-funded debt to net worth and debt service coverage. The Company was in
compliance with all covenants as of June 30, 1996. In addition to the $35
million line-of-credit, the Company has a separate $4 million term loan from
the banks which is due April 30, 1999.
Note 3. Share and Per-Share Information
On May 14, 1996, the shareholders authorized a 3-for-2 stock
split effective June 4, 1996, thereby increasing the number of outstanding
shares to 9,509,898. All references in the accompanying financial statements to
the number of common shares and per share amounts for 1995 have been restated
to reflect the stock split.
6
<PAGE> 7
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operation
I. Results of Operations
Three Months Ended June 30, 1996 compared to June 30, 1995
Revenues
Total net revenues for the second quarter of 1996 increased by
28.5%, or $11.7 million, to $52.7 million compared to $41.0 million for the
second quarter of 1995. Of the increase, 76.0% was a result of revenue growth
in the disabilities services division.
Disabilities Services. For the second quarter of 1996, net
revenues increased by 26.6%, or $8.9 million, to $42.3 million compared to
$33.4 million during the second quarter of 1995, primarily as a result of
acquisitions and development during 1995 of new facilities, group homes and
supported living programs serving approximately 1,300 consumers. Revenues also
increased due to reimbursement for general cost-of-living increases in staff
and other expenses in prior periods. Average revenue per census day increased
to $110.14 in the second quarter of 1996 compared to $108.07 for the same
period of 1995, an increase of 1.9%. Facility occupancy rates for the second
quarter of 1996 decreased 1.4% to 95.5% compared to 96.9% for the second
quarter 1995 due primarily to the downsizing of a larger ICF/MR facility and
lower occupancy in certain group home operations.
Effective July 1, 1996, the Company acquired the MR/DD
business of ADEPT Corporation and now serves 68 individuals in ten group homes
and approximately 60 individuals in supportive living settings in the
Indianapolis, Indiana area.
The Company is a party to legal proceedings involving state
program administrators and others, that, in the event of unfavorable outcomes,
may affect revenues and period-to-period comparisons. In Indiana, in July
1995, the Company and other providers were notified of reimbursement rates
issued retroactive to July 1, 1994 which were lower than the Company and
certain other providers projected based on a settlement that had been reached
with the State concerning the rate-setting methodology for large ICF/MR
facilities. The Company and another provider filed a lawsuit and an agreement
was reached with the State under which the implementation of the new rate
structure was delayed until March 1, 1996. A preliminary injunction was denied
and the trial on the merits commenced and has been continued until August 1996.
If the State is ultimately successful on all issues it could result in a
reduction of net revenues to the Company of approximately $1.3 million for the
twenty-four months ended June
7
<PAGE> 8
30, 1996. Any reduction would be recorded against the Company's allowance for
contractual adjustments and net revenues, as appropriate, in the period in
which the issues are resolved. Based on the outcome of the preliminary
injunction proceedings, the Company is unable to predict whether it will
prevail on the merits of all issues in the litigation but the opinion of its
legal counsel in the case is that there is a significant likelihood that the
Company will ultimately prevail on the merits of the principal issues involved,
in which case the Company believes that the ultimate net effect on the results
of its operations, cash flow or financial position will not be material.
In January 1995, the Company filed an action for declaratory
judgment against the landlord of four of the Company's large facilities in
Indiana to enforce a provision in the leases for such facilities to the effect
that the parties would renegotiate the terms of the leases if any change in the
Medicaid program becomes effective or is implemented such that reimbursement is
reduced to the extent that the economic feasibility of the lease is materially
and adversely affected. The parties have agreed to suspend the litigation
pending the outcome of the Indiana rate litigation and the Company is unable at
this time to determine whether it will ultimately prevail in the matter. The
Company subleases three other large facilities in Indiana from the same
landlord. The sublease, which did not include a renegotiation provision,
expired on July 31, 1996. The parties have entered into a new nine-month lease,
on essentially the same terms and conditions as the previous sublease, which
will expire on April 30, 1997. These three facilities account for
approximately $6 million in annual revenues. As a result of these matters, the
Company may be compelled or may elect ultimately to reduce certain of its
facility-based operations in Indiana.
In June 1994, after the Company had agreed to acquire a block
of eight group homes in Texas, the State of Texas unexpectedly imposed, as a
condition of the licensure of those homes, certain performance criteria for all
of the Company's operations in the state. These conditions were not fully met
and the state notified the Company that it must dispose of the eight homes by
October 1, 1995. The Company filed a lawsuit contesting this decision and a
temporary injunction hearing has been postponed pending settlement
negotiations. The Company is unable to form an opinion as to the outcome of
this matter; however, the Company believes that there will be no material
effect on the results of operations, cash flow or financial condition of the
Company if it is ultimately required to dispose of the homes. The eight homes
have accounted for approximately $2.0 million in annual revenues and have a net
book value of $1.3 million, of which $343,000 is represented by tangible
assets.
Future revenues, earnings and period-to-period comparisons may
be affected by legislative, administrative or judicial changes in rate-setting
structures, methodologies or interpretations that may be proposed or are
currently under consideration in states where the Company operates. In
addition, some states are considering various managed care plans for persons
currently in Medicaid programs. At this time, the Company cannot determine the
impact of such changes, as well as the effect of block grants or other
legislation which Congress may enact.
In May 1996, legislation was passed in Florida that would
significantly reduce rates
8
<PAGE> 9
effective September 1, 1996 to the operations that the Company manages in that
state. Both individual consumers and the trade association have filed motions in
pre-existing lawsuits to stop implementation of the new rates. A hearing on a
motion for injunctive relief on the rates filed in the consumers' litigation is
scheduled for the end of August and the trial on the merits in the trade
association case is scheduled for mid-September. In the interim, the Company is
preparing for operational changes in order to minimize the impact of the reduced
rate structure. The outcome of the litigation efforts cannot be determined at
this time; however, if the State is ultimately successful, the new rate
structure could result in a reduction in annual net revenues of approximately
$3,500,000. After identifying costs which the Company presently estimates it
could eliminate, this could result in a net reduction in annual operating income
attributable to these activities in the range of $300,000 to $400,000. In
Tennessee, new regulations are scheduled to take effect October 1, 1996, which
will reduce certain allowable costs to providers which could affect the
management fees of the Company under its management contracts with non-profit
providers for group homes. The Company is unable, at this time, to determine
the extent of the effect the regulations will have on revenues and profit
contributions.
Training Services. For the second quarter of 1996, net
revenues increased by 36.8% or $2.8 million, to $10.4 million compared to $7.6
million for the second quarter of 1995 primarily as a result of a new contract
to operate the Edison Job Corps Center in Edison, New Jersey effective November
1, 1995. Revenues were also affected by normal inflationary increases. In 1995,
the Department of Labor notified the Company that it would not exercise its
option to extend the Company's contract for the Job Corps Center in Crystal
Springs, Mississippi, for the final one-year renewal term ending December 1,
1996 due to the Company's performance solely at that facility. However, the
contract was subsequently extended through July 31, 1996. The Mississippi Job
Corps Center accounted for approximately $5.9 million in annual revenues. In
April, the Company was awarded a contract by the State of Colorado Office of
Youth Services to operate an 80-bed orientation program for newly committed
delinquent males. The Company took over operation of this program effective
July 1, 1996 and based on the contract, annual revenues are expected to be $1.7
million. On July 12, 1996, the Company signed a definitive agreement to acquire
the assets of Community Learning Centers, Inc., a non-profit operation of
community-based facilities and services for troubled youth in Colorado.
Facility and Program Expenses
Facility and program expenses in the second quarter of 1996
increased 27.9%, or $10.1 million, compared to the second quarter of 1995.
Payroll and payroll-related expenses represented $6.5 million, or 64.4%, of the
increase. The increase was primarily due to costs associated with the
additional facilities and programs in disabilities services and training
services. Facility and program expenses in the second quarter of 1996 decreased
as a percentage of total net revenues to 87.8% from 88.2% for the same period
of 1995.
9
<PAGE> 10
Disabilities Services. Facility and program expenses in the
second quarter of 1996 increased 25.0%, or $7.4 million, to $37.0 million
compared to $29.6 million during the second quarter of 1995. Payroll and
payroll-related expenses represented 70.3% of the increase due primarily to the
additional personnel, as well as other costs, associated with the additional
facilities and programs that were operational in the second quarter of 1996 as
compared to 1995. As a percentage of net revenues for disabilities services,
facility and program expenses in the second quarter 1996 decreased to 87.4%
from 88.5% for the same period of 1995.
Training Services. Facility expenses in the second quarter of
1996 increased 40.9%, or $2.7 million, to $9.3 million compared to $6.6 million
during the second quarter of 1995. The increase in facility expenses was
primarily related to the new Edison Job Corps Center. As a percentage of net
revenues for training services, facility expenses increased to 89.4% in the
second quarter of 1996 from 87.1% for the second quarter of 1995, due primarily
to the change in recruitment and placement contracts from fee-based to
cost-plus contracts and to development costs of the newly-formed Youthtrack
operation.
Operating and Other Expenses (Income)
Corporate general and administrative expenses increased 26.2%
in the second quarter of 1996 compared to the second quarter of 1995, but
remained unchanged at 4.2% of total revenues. Payroll and payroll-related
expenses represented 97.1% of the increase due primarily to the addition of
support staff for the newly-acquired facilities and programs and annual merit
increases.
Depreciation and amortization increased by $398,000 in the
second quarter of 1996 primarily due to purchases of facilities and equipment
during the past twelve months.
Net interest expense in the second quarter of 1996 increased
by $242,000 to $155,000 compared to the second quarter of 1995. The increase
resulted primarily from increased utilization of the credit facility for
acquisitions made during 1995.
II. Results of Operation
Six Months Ended June 30, 1996 Compared to June 30, 1995
Revenues
Total net revenues for the first six months of 1996 increased
by 37.4%, or $28.7 million, to $105.4 million compared to the first six months
of 1995. Of the increase, 80.8% was a result of revenue growth in the
disabilities services division.
Disabilities Services. For the first six months of 1996, net
revenues increased by
10
<PAGE> 11
37.8%, or $23.3 million, to $84.9 million compared to $61.6 million during the
first six months of 1995. Increased revenues resulted primarily from the
acquisitions and development of new facilities, group homes and supported
living programs during 1995 and reimbursement for general cost-of-living
increases in staff and other facility and program expenses. Average revenue per
census day increased to $113.45 in the first six months of 1996 compared to
$109.91 in the first six months of 1995, an increase of 3.2%. The increase is
primarily the result of the recognition of a retroactive provider tax
adjustment in Indiana. Facility occupancy rates for the first six months of
1996 increased 1.3% to 95.8% compared to 94.5% for the first six months of
1995. This is primarily attributable to the higher occupancy levels of certain
group homes and to newly acquired facilities.
Training Services. Revenues for the first six months of 1996
increased by 36.7%, or $5.5 million, to $20.5 million compared to $15.0 million
during the first six months of 1995. This increase was primarily a result of
the newly awarded Edison Job Corps Center and related cost-funding revenues,
which are a direct pass through of funds for reimbursement of capital
expenditures made on behalf of the Department of Labor. An inflationary
increase in reimbursable operating and administrative expenses also contributed
to growth in revenues.
Facility and Program Expenses
Facility and program expenses in the first six months of 1996
increased 36.7%, or $25.0 million, compared to the first six months of 1995. Of
this increase, $16.3 million, or 65.2%, was due to payroll and payroll related
expenses. These expenses reflected additional personnel, as well as other costs
associated with the new facilities and programs in disabilities services and
the Edison Job Corps Center. Facility and program expenses in the first six
months of 1996 decreased as a percentage of total revenues to 88.1% from 88.6%
for the same period of 1995.
Disabilities Services. Facility and program expenses in the
first six months of 1996 increased 35.9%, or $19.7 million, to $74.5 million
compared to $54.8 million during the first six months of 1995. Payroll and
payroll-related expenses represented 70.1% of the increase due primarily to the
new facilities and programs that became fully operational in the first six
months of 1996. As a percentage of net revenues for disabilities services,
facility and program expenses in the first six months of 1996 decreased to
87.8% from 88.9% for the same period of 1995. This decrease is primarily due to
more efficient operations in California and Texas group home operations and the
increase in occupancy levels.
Training Services. Facility expenses in the first six months
of 1996 increased 39.7%, or $5.2 million, to $18.3 million compared to $13.1
million during the first six months of 1995. As a percentage of net revenues
for training services, facility expenses increased to 89.5% in the first six
months of 1996 from 87.3% for the first six months of 1995, due primarily to
costs associated with the newly formed Youthtrack corporation and related
cost-funding expenses which are a direct pass through of capital expenditures
purchases for the Department of Labor.
11
<PAGE> 12
Operating and Other Expenses (Income)
Corporate general and administrative expenses in the first six
months of 1996 increased 32.8%, or $1.1 million, over the respective prior
period. This represents 4.2% of total net revenues compared to 4.4% for the
same period of 1995. Payroll and payroll-related expenses represented 63.6% of
the increase due primarily to the addition of support staff for the facilities
and programs added in 1995.
Depreciation and amortization increased by $840,000 in the
first six months of 1996 due primarily to purchases of facilities and
equipment during 1995.
Net interest expense in the first six months of 1996 increased
$583,000 to $287,000, compared with $296,000 net interest income in the first
six months of 1995. The increase resulted primarily from the increased
utilization of the credit facility for newly acquired facilities and programs.
III. Liquidity and Capital Resources
For the first six months of 1996, net cash provided by
operating activities was $3.4 million compared to $3.1 million for the first
six months of 1995, an increase of $300,000. The increase was due primarily to
a decrease in deferred income taxes and increases in depreciation and
amortization and net income (adjusted for the effects of the sale of the
unconsolidated affiliate) offset by a decrease in accrued income taxes and
accrued expenses.
During the first six months of 1996, net cash used in
investing activities was $3.8 million compared to $2.8 million for the first
six months of 1995, an increase of $1.0 million, due primarily to decreases in
advances to, dividends from, and proceeds from the sale of the unconsolidated
affiliate which were substantially offset by decreases in purchases of ICF/MR
facilities and other property and equipment and to an increase in deferred
start-up costs.
For the first six months of 1996, net cash used in financing
activities was $31,000 compared to $3.4 million net cash provided by financing
activities for the first six months of 1995. The decrease of $3.4 million was
due primarily to repayment of long-term debt offset by proceeds from exercises
of stock options.
As of June 30, 1996, the Company had $22.4 million available
on its line-of-credit and $6.8 million in cash and cash equivalents.
Outstanding at that date were irrevocable standby letters of credit in the
principal amount of $5.8 million issued primarily in connection with workers'
compensation insurance and certain facility leases.
12
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to litigation in Indiana in which the state's
methodology for calculating reimbursement is being contested as well as to a
lawsuit to enforce provisions in leases on four large ICFs/MR. In Texas, the
Company has filed a lawsuit contesting an action by the state with respect to
eight group homes. These proceedings are discussed above in Item 2 of Part I.
The Company is a party to various other legal proceedings that arise
in the normal course of business. The Company believes that many of such
lawsuits are without merit. Further, such claims are generally covered by
insurance. The Company does not believe the results of such litigation will
have a material adverse effect on its financial position.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of Res-Care, Inc.
was held in Louisville, Kentucky on May 14, 1996. Represented
at the meeting, either in person or by proxy, were 5,177,136
voting shares out of a total of 6,278,839 voting shares
outstanding. The matters voted upon at the meeting are
described in (c) below.
(b) Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934 and there was no
solicitation in opposition to management's nominees as listed
in the proxy statement.
(c) Two proposals were submitted to a vote of stockholders as
follows:
1. The stockholders approved the election of the following
persons as directors of the Company:
NAME FOR WITHHELD
---- --- --------
James R. Fornear 5,165,002 12,134
Ronald G. Geary 5,165,002 12,134
E. Halsey Sandford 5,164,902 12,234
Spiro B. Mitsos 5,165,002 12,134
Seymour L. Bryson 5,164,902 12,234
W. Bruce Lunsford 5,163,387 13,749
13
<PAGE> 14
There were no votes against, abstentions or broker
non-votes with respect to the election of any nominee
named above.
2. To approve the proposal to ratify the selection of KPMG
Peat Marwick, LLP as the Company's independent auditors
for the fiscal year ending December 31, 1996:
Votes for Proposal 5,174,397
Votes Against Proposal 1,056
Votes Abstaining 1,683
Broker non-votes 0
Item 5. Other Information
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including in this
Quarterly Report on Form 10Q the following cautionary statements that are
intended to identify certain important factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements concerning the Company made by or on behalf of the Company, whether
contained herein or elsewhere.
The Company's growth in revenues and earnings per share has been
directly related to a considerable increase in the number of individuals served
in its MR/DD and training services divisions. This growth is largely dependent
upon development-driven activities including the acquisitions of other
businesses or facilities or of management contract rights to operate
facilities, the award of contracts to open new facilities or to assume
management of facilities previously operated by governmental agencies or
non-profit organizations, and the extension or renewal of contracts previously
awarded to the Company. The Company often makes forward-looking statements
regarding its development activities.
Changes in the Company's future revenues are significantly dependent upon
the success of these development activities, and in particular on the Company's
ability to obtain additional contracts to provide services to the consumer bases
it serves, whether through acquisitions, awards in response to requests for
proposals for new facilities or for facilities being privatized by governmental
agencies, or other development activities. Future revenues also depend on
the Company's ability to maintain and renew its existing service contracts and
its existing leases. The Company actively seeks acquisitions of other
companies, facilities and other assets as a means of increasing the number of
consumers served, and changes in the market for such acquisition prospects,
including increasing competition for and increasing pricing of such acquisition
prospects could also adversely affect the timing and/or viability of future
development activities.
14
<PAGE> 15
The Company's MR/DD revenues 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, such as
those recently encountered by the Company, 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 and the availability and utilization
of its labor force and thus may be affected by a variety of factors, including
local competitive forces, changes in minimum wages or other direct personnel
costs, the Company's effectiveness in managing its direct care staff, and
changes in consumer services models in the MR/DD and youth services field (e.g.,
trends toward supported living and managed care).
Additionally, the Company's continued expansion of its MR/DD and youth
services sectors, and its ability to expand into providing services to other
populations requiring the Company's specialized services, are dependent upon
continuation of trends toward downsizing, privatization, and consolidation, the
Company's ability to tailor its services to meet the specific needs of these
different populations and its success in operating in a changing environment of
managed care and block grants. The continuation of such trends and the nature of
its operating environment are 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 changes in response to pressures brought by advocacy groups and
the courts to improve service. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K:
On May 24, 1996, the Company filed a report on Form 8-K to
report the declaration at the Company's annual meeting of
stockholders of a 3-for-2 stock split.
15
<PAGE> 16
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: August 13, 1996 By: S/T RONALD G. GEARY
--------------------------------- -----------------------------
Ronald G. Geary
President and Chief Executive
Officer
Date: August 13, 1996 By: S/T T. DOUGLAS WEBB
--------------------------------- -----------------------------
T. Douglas Webb
Vice President of
Finance/Administration
16
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