<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 March 31, 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 March 31, 1996 was 6,286,449.
<PAGE> 2
RES-CARE, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
NUMBER
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1996 3
and December 31, 1995
Condensed Consolidated Statements of Operations for the 4
three months ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the 5
three months ended March 31, 1996 and 1995
Notes to Condensed Consolidated Financial 6
Statements -- March 31, 1996
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM I
RES-CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1996 1995
----------- -----------
(UNAUDITED) (NOTE)
(in thousands)
<S> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $ 5,988 $ 7,253
Accounts and notes receivable, less allowance
for contractual adjustments of $1,859 in
1996 and $1,911 in 1995. 28,842 25,281
Inventories 553 468
Deferred income taxes 2,390 2,313
Other current assets 1,352 1,162
------- -------
Total current assets 39,125 36,477
Property and equipment, less accumulated
depreciation of $5,303 in 1996 and
$4,851 in 1995. 33,567 32,815
Deferred start-up cost less accumulated
amortization of $3,049 in 1996 and
$2,988 in 1995. 1,901 1,605
Excess of acquisition cost over net assets acquired,
less accumulated amortization of $289 in 1996
and $213 in 1995. 8,628 8,521
Licenses cost less accumulated amortization of
$79 in 1996 and $53 in 1995. 3,078 3,104
Long-term receivables and advances to managed facilities 957 963
Other assets 970 1,008
------- -------
Total Assets $88,226 $84,493
======= =======
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable $ 117 $ 123
Trade accounts payable 4,508 4,424
Accrued expenses 15,043 13,356
Accrued income taxes 3,064 2,032
------- -------
Total current liabilities 22,732 19,935
------- -------
Long-term liabilities 391 429
Long-term debt 16,446 17,594
Long-term deferred income taxes 690 637
------- -------
Total liabilities 40,259 38,595
------- -------
Minority interest in Equity of
Consolidated Subsidiary 27 37
------- -------
Shareholders' equity:
Preferred shares, no par value, authorized
1,000 shares, no shares issued
or outstanding - -
Common stock, no par value, authorized
20,000 shares, issued 9,225
shares in 1996 and 1995 15,535 15,535
Additional paid in capital 2,548 2,316
Retained earnings 34,244 32,427
------- -------
52,327 50,278
Less cost of common shares in treasury
(2,939 shares in 1996 and 2,957
shares in 1995). 4,387 4,417
------- -------
Total shareholders' equity 47,940 45,861
------- -------
Total Liabilities and Shareholders' Equity $88,226 $84,493
======= =======
</TABLE>
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.
3
<PAGE> 4
RES-CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net revenues $ 52,688 $ 35,670
Operating expenses:
Facility and program expense 46,586 31,739
Corporate general and administrative 2,248 1,605
Depreciation and amortization 771 329
Compensation-stock options 4 7
---------- ----------
Total operating expenses 49,609 33,680
Operating income 3,079 1,990
Other expenses (income):
(Gain) loss from sale of assets (15) (4)
Interest expense 237 46
Interest income (106) (255)
---------- ----------
Total other expenses (income), net 116 (213)
Minority Interest in Loss of
Consolidated Subsidiary 10 --
Income from continuing operations before income tax 2,973 2,203
Income tax 1,156 907
---------- ----------
Income from continuing operations 1,817 1,296
Discontinued operations:
Income from operations of unconsolidated
affiliate sold, net of applicable income
tax expense -- 247
---------- ----------
Net income $ 1,817 $ 1,543
========== ==========
Income data:
Income from continuing operations per share 0.28 0.20
Income from discontinued operations per share 0.00 0.04
Net income per share $ 0.28 $ 0.24
Weighted average shares used in per share
calculation 6,547,312 6,455,638
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,817 $ 1,543
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 771 329
Provision for contractual adjustments 200 156
Deferred income taxes - net (24) (67)
Provision for compensation - stock options 4 7
Income from operations of unconsolidated affiliate sold 0 (247)
Gain from sale of assets (15) (4)
Payments under noncompetition covenants (37) 0
Loss applicable to minority interest of consolidated subsidiary (10) 0
Changes in operating assets and liabilities
Increase in accounts and notes receivable (3,765) (1,530)
Increase in inventories (86) (25)
Increase in other current assets (190) (70)
Increase in other assets (1) (95)
Increase (decrease) in trade accounts payable 83 (81)
Increase in accrued expenses 1,686 359
Increase in accrued income taxes 1,032 895
------- -------
Net cash provided by operating activities 1,467 1,170
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in advances to unconsolidated affiliate sold 0 (101)
Purchase of property and equipment (1,325) (2,391)
Payments received on notes from sale of assets 10 10
Deferred start-up costs (364) (141)
Increase in goodwill (180) 0
Decrease in other assets 24 0
------- -------
Net cash used in investing activities (1,835) (2,623)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable 0 (78)
Long-term debt borrowings 0 1,134
Repayment of long-term debt (1,154) 0
Proceeds received from sale of treasury stock 258 55
--- --
Net cash (used in) provided by financing activities (896) 1,111
------- -------
Decrease in cash and cash equivalents (1,265) (342)
Cash and cash equivalents at beginning of period 7,253 10,287
------- -------
Cash and cash equivalents at end of period $ 5,988 $ 9,945
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
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 three-month period
ended March 31, 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 March 31, 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 March 31, 1996,
letters of credit in the amount of $2.6 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 $3.7 million were outstanding at March 31,
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 March 31, 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.
6
<PAGE> 7
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operation
I. Results of Operations
Three Months Ended March 31, 1996 compared to March 31, 1995
Revenues
Total net revenues for the first quarter of 1996 increased by 47.6%, or
$17.0 million, to $52.7 million compared to $35.7 million for the first quarter
of 1995. Of the increase, 84.4% was a result of revenue growth in the
disabilities services division.
Disabilities Services. For the first quarter of 1996, net revenues
increased by 51.1%, or $14.4 million, to $42.6 million compared to $28.2 million
during the first 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 $115.95 in the
first quarter of 1996 compared to $112.18 for the same period of 1995, an
increase of 3.4% primarily due to the recognition of a retroactive provider tax
adjustment in Indiana. Facility occupancy rate for the first quarter of 1996
increased 3.9% to 96.9% compared to 93.0% for the first quarter 1995.
The Company is a party to legal proceedings involving state program
administrators and others, that, in the event of an unfavorable outcome, may
affect revenues and period-to-period comparisons. In Indiana, the Company and
other providers have been notified of reimbursement rates issued retroactive to
July 1, 1994 which are lower than the Company and certain other providers
projected based on a settlement that had been reached with the State concerning
rate-setting methodology for large ICR/MR facilities. The State intended to
recover by the end of August 1995 from providers amounts it considered to be
overpayments, which, if the State is ultimately successful on all issues, could
result in a reduction of net revenues to the Company of approximately $1.3
million for the twenty-one months ended March 31, 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.
However, the Company and another provider have filed a lawsuit challenging the
State's interpretation and application of the methodology. After obtaining a
temporary restraining order against the recoupment, the parties entered into an
agreement concerning the implementation of the new rate structure.
7
<PAGE> 8
The State implemented the new rates effective March 1, 1996. A preliminary
injunction was denied and the trial on the merits is scheduled for late May
1996. 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 judgement
against the landlord of four of the Company's large facilities in Indiana to
enforce a provision in the leases 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 were
unsuccessful in mediating the issues, and the Company is unable at this time to
determine whether it will prevail in the matter. The Company leases three other
large facilities in Indiana from the same landlord. These three leases, which
do not include a renegotiation provision, expire on July 31, 1996, and account
for approximately $6 million in annual revenues. As a result of these matters,
the Company may be compelled or may elect 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 was scheduled for December 1995. The hearing has been
postponed on two occasions and has not been rescheduled pending settlement
negotiations. The demand to dispose of the homes is suspended pending settlement
of the case or a ruling on the temporary injunction. The Company is unable to
form an opinion as to the likelihood that it will prevail at the hearing;
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 book value of
approximately $1.3 million, of which approximately $400,000 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
8
<PAGE> 9
are currently under consideration in states where the Company operates. In
addition, some states are considering various managed care plans for persons
currently in the Medicaid program. At this time, the Company cannot determine
the impact of such changes, or the effect of block grants or other legislation
which Congress may enact. In early May 1996, legislation was passed in Florida
that would significantly reduce rates as early as July 1, 1996 to the group
homes that the Company manages in that state. The legislation has not yet been
sent to the governor for his signature. At this time, the Company cannot
predict the outcome of this legislative effort nor its ultimate effect on the
Company's results of operations, cash flows or financial condition.
Training Services. For the first quarter of 1996, net revenues
increased by 36.5% or $2.7 million, to $10.1 million compared to $7.4 million
for the first quarter of 1995 primarily as a result of the award 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 has been extended through June 30, 1996. The Company has
submitted a proposal for the new contract and expects to have substantial
difficulty in obtaining it.
Facility and Program Expenses
Facility and program expenses in the first quarter of 1996 increased
46.8%, or $14.8 million, compared to the first quarter of 1995. Of this
increase, $7.9 million, or 53.4% was due to payroll and payroll-related
expenses. These expenses reflected additional personnel as well as other costs
associated with the additional facilities and programs in disabilities services
and training services. Facility and program expenses in the first quarter of
1996 decreased as a percentage of total net revenues to 88.4% from 89.0% for the
same period of 1995.
Disabilities Services. Facility and program expenses in the first
quarter of 1996 increased 48.8%, or $12.3 million, to $37.5 million compared to
$25.2 million during the first quarter of 1995. Payroll and payroll-related
expenses represented 77.8% 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 first quarter of 1996 as compared to 1995.
As a percentage of net revenues for disabilities services, facility and program
expenses in the first quarter 1996 decreased to 88.2% from 89.4% for the same
period of 1995.
Training Services. Facility expenses in the first quarter of 1996
increased 40.0%, or $2.6 million, to $9.1 million compared to $6.5 million
during the first 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 89.5% in the
first quarter of 1996 from 87.4% for the first quarter of 1995, due primarily to
6
<PAGE> 10
the change in recruitment and placement contracts from fee-based to cost-plus
contracts.
Operating and Other Expenses (Income)
Corporate general and administrative expenses increased 40.1% in the
first quarter of 1996 compared to the first quarter of 1995. Payroll and
payroll-related expenses represented 38.4% of the increase due primarily to the
addition of support staff for the newly-acquired facilities and programs.
General and administrative expenses in the first quarter of 1996 decreased as a
percentage of total net revenues to 4.3% from 4.5% for the same period of 1995.
The increase in depreciation and amortization in the first quarter of
1996 resulted from purchases of group homes, large ICFs/MR, and equipment in
1995.
Interest expense in the first quarter of 1996 increased by $340,000 to
$131,000 compared to the first quarter of 1995. The increase resulted primarily
from increased utilization of the credit facility for acquisitions made during
1995.
Liquidity and Capital Resources
For the first three months of 1996, net cash provided by operating
activities was $1.5 million compared to $1.2 million for the first three months
of 1995, an increase of $300,000. The increase was due primarily to increases in
net income, accrued expenses and accrued income taxes offset by an increase in
accounts and notes receivable.
During the first three months of 1996, net cash used in investing
activities was $1.8 million compared to $2.6 million for the first three months
of 1995, a decrease of $800,000, due primarily to a decrease in purchases of
property and equipment.
For the first three months of 1996, net cash used in financing
activities was $900,000 compared to $1.1 million net cash provided by financing
activities for the first three months of 1995. The decrease of $2.0 million was
due primarily to repayment of long-term debt.
As of March 31, 1996, the Company had $21.1 million available on its
line-of-credit and $6.0 million in cash and cash equivalents. Outstanding at
that date were irrevocable standby letters of credit in the principal amount of
$2.6 million issued in connection with workers' compensation insurance and
certain facility leases.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various 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.
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 facilities. 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.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10-1 - Second Amendment to Loan Instruments dated as of
February 16, 1996 by and among Res-Care, Inc. and PNC Bank,
Kentucky, Inc. National City Bank, Kentucky and Sun Trust
Bank, Nashville, N.A. Exhibit 10-12 to the Company's Report on
Form 10-K for the year ending December 31, 1995 is hereby
incorporated by reference.
11
<PAGE> 12
10-2 - Second Amended and Restated Employment Agreement dated
March 17, 1996 between the Company and E. Halsey Sandford.
Exhibit 10-13 to the Company's Report on Form 10-K for the
year ending December 31, 1995 is hereby incorporated by
reference.
(b) Reports on Form 8-K: None
12
<PAGE> 13
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 13, 1996 By: S/T RONALD G. GEARY
------------------------- ----------------------------------------
Ronald G. Geary
President and Chief Executive Officer
Date May 13, 1996 By: S/T T. DOUGLAS WEBB
------------------------- ----------------------------------------
T. Douglas Webb
Vice President of Finance/Administration
13
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000776325
<NAME>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 5,988
<SECURITIES> 0
<RECEIVABLES> 30,701
<ALLOWANCES> 1,859
<INVENTORY> 553
<CURRENT-ASSETS> 39,125
<PP&E> 38,870
<DEPRECIATION> 5,303
<TOTAL-ASSETS> 88,226
<CURRENT-LIABILITIES> 22,732
<BONDS> 17,527
15,535
0
<COMMON> 0
<OTHER-SE> 32,405
<TOTAL-LIABILITY-AND-EQUITY> 88,226
<SALES> 0
<TOTAL-REVENUES> 52,688
<CGS> 0
<TOTAL-COSTS> 46,586
<OTHER-EXPENSES> 3,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> 2,973
<INCOME-TAX> 1,156
<INCOME-CONTINUING> 1,817
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 1,817
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
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