<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 (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 September 30, 1997 was 12,334,070.
<PAGE> 2
RES-CARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 1
Condensed Consolidated Statements of Income for the three months
ended September 30, 1997 and 1996, and the nine months ended
September 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial Statements ---
September 30, 1997 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on 8-K 14
Index to Exhibits 16
Signatures 17
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 7,548 $ 7,932
Accounts and notes receivable, net .................................. 51,099 33,996
Inventories ......................................................... 638 656
Deferred income taxes ............................................... 3,865 2,498
Prepaid expenses .................................................... 2,541 1,961
--------- ---------
Total current assets ............................................ 65,691 47,043
Property and equipment, net .............................................. 53,236 43,581
Goodwill, net of accumulated amortization of $1,294 and $633 ............. 49,851 14,558
Other assets ............................................................. 15,741 10,130
--------- ---------
Total assets .................................................... $ 184,519 $ 115,312
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .............................................. $ 8,062 $ 5,241
Accrued expenses .................................................... 22,275 16,059
Accrued income taxes ................................................ 3,048 2,021
Current portion of long-term debt..................................... 123 369
--------- ---------
Total current liabilities ....................................... 33,508 23,690
Long-term debt ........................................................... 48,955 30,672
Other liabilities ........................................................ 1,624 1,421
Deferred income taxes............. ....................................... 38 1,361
--------- ---------
Total liabilities ........................................................ 84,125 57,144
Minority interest in consolidated subsidiary ............................. 177 73
Shareholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares, no shares
issued or outstanding ........................................... -- --
Common stock, no par value, authorized 40,000,000 shares, issued
15,721,650 shares ............................................... 41,680 15,535
Additional paid-in capital .......................................... 10,676 4,035
Retained earnings ................................................... 51,235 42,314
Treasury stock, 3,387,580 shares .................................... (3,374) (3,789)
--------- ---------
Total shareholder's equity ...................................... 100,217 58,095
--------- ---------
Total liabilities and shareholders' equity ............................... $ 184,519 $ 115,312
========= =========
</TABLE>
See accompanying notes.
- 1 -
<PAGE> 4
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net revenues .................................. $ 76,945 $ 56,388 $ 211,802 $ 164,610
Facility and program expenses ................ 66,006 48,673 183,586 143,717
Operating expenses:
Corporate general and administrative .... 2,853 2,488 7,668 7,199
Depreciation and amortization ........... 1,640 964 4,194 2,590
------------ ------------ ------------ ------------
Total operating expenses ............ 4,493 3,452 11,862 9,789
------------ ------------ ------------ ------------
Operating income ............................. 6,446 4,263 16,354 11,104
Other expenses (income):
Interest expense ........................ 475 384 1,391 956
Interest income ......................... (130) (103) (408) (319)
Gain from sale of assets ................ (34) (1) (60) (10)
------------ ------------ ------------ ------------
Total other expenses, net ........... 311 280 923 627
------------ ------------ ------------ ------------
Minority interest in (income) loss of
consolidated subsidiary ................. (23) (19) (103) 2
------------ ------------ ------------ ------------
Income before income taxes ................... 6,112 3,964 15,328 10,479
Income taxes ............................ 2,450 1,469 6,172 3,891
------------ ------------ ------------ ------------
Net income ................................... $ 3,662 $ 2,495 $ 9,156 $ 6,588
Earnings per share ........................... $ 0.29 $ 0.24 $ 0.78 $ 0.63
============ ============ ============ ============
Weighted average shares outstanding .......... 12,700,461 10,500,736 11,773,882 10,433,008
============ ============ ============ ============
</TABLE>
See accompanying notes.
- 2 -
<PAGE> 5
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------- ---------
<S> <C> <C>
Net cash provided by operating activities................... $ 9,930 $ 5,321
Cash flows from investing activities:
Purchases of property and equipment ........................ (7,018) (4,058)
Payments for acquisition of businesses, net of cash acquired (30,458) (7,631)
Payments for covenants not to compete ...................... (3,510) --
Deferred start-up costs .................................... (1,085) (1,702)
Other ...................................................... (216) 60
-------- --------
Net cash used in investing activities .................. (42,287) (13,331)
-------- --------
Cash flows from financing activities:
Long-term borrowings ....................................... 4,404 6,866
Proceeds from sale of common stock, net of expenses of $611 26,145 --
Proceeds from exercise of stock options .................... 1,659 1,228
Other ...................................................... (235) (456)
-------- --------
Net cash provided by financing activities .............. 31,973 7,638
-------- --------
Net decrease in cash and cash equivalents ....................... $ (384) $ (372)
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Depreciation and amortization was $4,194 and $2,590 in the nine months ended
September 30, 1997 and 1996, respectively.
See accompanying notes.
- 3 -
<PAGE> 6
RES-CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
Business Activity. Res-Care, Inc. and its subsidiaries 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.
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted and are unaudited. The unaudited condensed consolidated financial
statements reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature. The results of operations for the interim period ended
September 30, 1997 are not necessarily indicative of the results for the full
fiscal year. For further information, refer to the Company's audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1996.
Earnings per Share. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share, which the Company will be
required to adopt for its year ending December 31, 1997. Under Statement No.
128, the historical measures of earnings per share (primary and fully diluted)
are replaced with two new computations of earnings per share (basic and
diluted). The impact of Statement No. 128 on the calculation of diluted earnings
per share for the nine months ended September 30, 1997 and 1996, respectively is
not expected to be material.
2. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
----
<S> <C>
Revolving credit facility with banks ....................... $42,123
Notes payable to Beverly Health and Rehabilitation Services,
with interest rates of 9.0% on the original $600
and 7.5% on the remaining $3,000. These notes are
secured by a deed of trust for real estate. The
$600 note is payable in annual installments of $100, with
final payment due April 30, 2001. The remaining notes
are due at maturity on April 30, 2001 .................... 3,400
Note payable on CNC acquisition, with an interest
rate of 7.0%. The note is payable in two consecutive
annual installments of $1,250 on July 31, 1998 and 1999 .. 2,500
Other ...................................................... 1,055
-------
49,078
Less current portion ............................. 123
-------
$48,955
</TABLE> =======
- 4 -
<PAGE> 7
The Company's principal credit agreement was entered into on December 23,
1996 with PNC Bank, Kentucky, Inc., National City Bank of Kentucky, SunTrust
Bank, Nashville, N.A. and Bank One, Kentucky, N.A. ("the Revolving Credit
Facility"). On June 23, 1997, the Company entered into a First Amendment to the
Revolving Credit Facility ("the Amendment"). The Amendment extended the
revolving line of credit from $65.0 million to $100.0 million, increased the
Swing Line Credit Facility from $7.5 million to $12.5 million, amended
certain financial covenants, and added Wachovia Bank, N.A. as a party to the
Revolving Credit Facility.
At September 30, 1997, the Company had $42.1 million outstanding under the
Revolving Credit Facility, and $4.6 million in letters of credit. Interest is
based on margins over LIBOR and was 6.451% on September 30, 1997. The Revolving
Credit Facility is secured by the common stock of all of the Company's
subsidiaries. The Revolving Credit Facility contains financial covenants related
to net worth, current ratio, debt service coverage ratio and ratio of total
indebtedness to cash flow from operations. At September 30, 1997, the Company
was in compliance with these covenants.
3. ACQUISITIONS
Effective January 1, 1997, the Company acquired all of the partnership
interests in Premier Rehabilitation Centers in exchange for 409,250 shares of
the Company's common stock in a business combination accounted for as a
pooling-of-interests. Historical financial information presented in this and
future consolidated financial statements has been restated to include Premier
Rehabilitation Centers.
On July 31, 1997, the Company acquired all of the outstanding common stock
of Communications Network Consultants, Inc. ("CNC"), a privately-owned provider
of supported living services to approximately 1,000 persons with disabilities,
including mental retardation, in North Carolina. The agreement provides for
additional contingent consideration to be paid by the Company. The amount of
additional consideration, if any, is based on the financial performance of CNC.
The Company may be required to pay approximately $3 million for each of the next
three years. If these contingent payments are made, they will be recorded as
additional goodwill.
On September 30, 1997, the Company purchased the business and assets of
Teledyne Economic Development, a private operator of five Job Corps Centers.
In addition to the above mentioned acquisitions, in the nine months ended
September 30, 1997 the Company has completed 11 acquisitions at an estimated
cost of $18.7 million. During the nine months ended September 30, 1996, the
Company completed eight acquisitions at an approximate cost of $12.5 million.
4. INCOME TAXES
During the nine months ended September 30, 1997, the Company recorded income
tax expense of $6.2 million. The effective income tax rates for the nine months
ended September 30, 1997 did not differ substantially from the expected combined
federal and state income tax expense rates calculated using applicable statutory
rates.
The Company has net deferred tax assets of $4.3 million. No valuation
allowance for deferred tax assets was required. Realization of deferred tax
assets is dependent upon the ability of the Company to generate taxable income
in the future. Deferred taxes relate primarily to temporary differences
consisting, in part, of deferred start-up costs, goodwill and various allowances
and reserves which are not deductible for income tax purposes until paid or
realized.
- 5 -
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
I. RESULTS OF OPERATIONS
Three months ended September 30, 1997 compared with three months ended
September 30, 1996
Revenues.
Total net revenues for the third quarter of 1997 increased by 36.5%, or
$20.5 million, to $76.9 million compared to $56.4 million for the third quarter
of 1996. Of the increase, 90.3% resulted from increased disabilities services
revenues. Disabilities services net revenues increased by 40.8%, or $18.5
million, to $64.0 million in the third quarter of 1997 compared to $45.5 million
in the third quarter of 1996. Increased revenues resulted primarily from the
acquisition and development of new facilities, group homes, and supported
living programs and from higher rates in certain states in 1997 and from the
full period effect of operations of the facilities, group homes, and programs
added in 1996. Average revenue per census day increased to $128.22 in the third
quarter of 1997 compared to $114.99 for the same period in 1996, an increase of
11.5% primarily due to rate increases in some states. Average disabilities
services facility and program occupancy rates for the third quarter of 1997 were
96.7% compared to 97.6% for the third quarter 1996.
- 6 -
<PAGE> 9
Recent federal budget legislation enacted in August, 1997 repealed a
provision of the Medicaid Act known as the "Boren Amendment", the effect of
which is to limit in some respect providers' ability to challenge state rate
setting determinations. Actions taken by state regulators following the repeal
of the Boren Amendment could have a material adverse effect on the Company's
business and results of operations.
Youth services net revenues for the third quarter of 1997 increased by
18.3%, or $2.0 million, to $12.9 million compared to $10.9 million during the
third quarter of 1996. The increase was due primarily to an acquisition in the
Company's Youthtrack operations late in the third quarter of 1996 and increased
acquisition activity in the Company's AYS operations since the third
quarter of 1996.
Facility and Program Expenses
Facility and program expenses in the third quarter of 1997 increased 35.6%,
or $17.3 million, compared to the third quarter of 1996. Of this increase,
approximately $13.3 million, or 76.9%, was due to payroll and payroll-related
expenses. These expenses reflected additional personnel as well as other costs
associated with new facilities and programs in the disabilities services and
youth services divisions. Facility and program expenses in the third quarter of
1997 decreased as a percentage of total revenues to 85.8% from 86.3% for the
same period of 1996.
Disabilities services facility and program expenses in the third quarter of
1997 increased 39%, or $15.3 million, to $54.4 million compared to $39.1 million
during the third quarter of 1996. Of this increase, approximately $11.8 million,
or 77.1%, was attributable to payroll and payroll-related expenses due primarily
to the additional personnel as well as other costs associated with the new
facilities and programs that were operational in the third quarter of 1997 as
compared to 1996. Disabilities services facility and program expenses as a
percentage of disabilities services net revenues in the third quarter of 1997
decreased to 84.9% from 86%for the same period of 1996.
Youth services facility and program expenses in the third quarter of 1997
increased 21.6%, or $2.0 million to $11.6 million compared to $9.6 million
during the third quarter of 1996. Payroll and payroll-related expenses
represented 71.4% of the increase due primarily to the additional personnel and
other costs associated with new facilities and programs that were operational
during the third quarter of 1997 compared to the same period in 1996. As a
percentage of youth services net revenues, youth services facility and program
expenses increased to 90.1% in the third quarter of 1997 from 87.6% for the
third quarter of 1996. This increase was due primarily to additional costs
associated with transitioning new acquisitions.
- 7 -
<PAGE> 10
Operating Expenses
Corporate general and administrative expenses increased $365,000, or 14.7%
in the third quarter of 1997 compared to the third quarter of 1996. Payroll and
payroll-related expenses for administrative personnel represented substantially
all of the increase due primarily to the addition of support staff and increases
in staff salaries. Corporate general and administrative expenses in the third
quarter of 1997 decreased as a percentage of total net revenues to 3.7% from
4.4% for the same period in 1996. This reduction is due primarily to the
Company's net revenue growth and an increase in direct expense allocations
reflecting the Company's increased focus on providing resources to support its
regional operations.
Depreciation and amortization expenses in the third quarter of 1997
increased 70.1%, or $676,000, to $1.6 million compared to $1.0 million during
the third quarter of 1996. The increase resulted primarily from the higher level
of acquisition activity which commenced during 1996.
Other (Income) Expenses, Net
Net interest expense in the third quarter of 1997 increased $64,000 to
$345,000 compared to the third quarter of 1996. The increase resulted primarily
from increased utilization of the Company's credit facility for acquisitions
made during the year.
Income Taxes
Income taxes increased to $2.4 million in the third quarter of 1997
compared to $1.5 million in the third quarter of 1996, and reflects effective
tax rates of 40.0% and 37.1% respectively. The increase in the effective rate is
attributable to the tax effect of the Premier operations as a corporation in
1997.
Net Income
Net income increased 46.8% to $3.7 million, or $0.29 a share, in the third
quarter of 1997 from $2.5 million, or $0.24 a share, in the third quarter of
1996. This increase is the result of expanded operations, particularly as a
result of acquisitions and the effect of the more favorable reimbursement
environment in certain states.
II. RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to September 30, 1996
Revenues
Total net revenues for the nine months ended September 30, 1997 increased by
28.7%, or $47.2 million, to $211.8 million compared to the nine months ended
September 30, 1996. Of the increase, 85.7% was a result of growth in the
disabilities services division. For the nine months ended September 30, 1997,
disabilities services net revenues increased by 30.4%, or $40.4 million, to
$173.6 million compared to $133.2 million during the nine
- 8 -
<PAGE> 11
months ended September 30, 1996. Increased revenues resulted primarily from the
acquisition and development of new facilities, group homes and supported living
programs and higher reimbursement rates in certain states in 1997 and the full
period effect of operations of the facilities, group homes, and programs added
in 1996. Average revenue per census day increased to $124.01 in the nine months
ended September 30, 1997 compared to $113.97 in the nine months ended September
30, 1996. This average increase of 8.8% was due primarily to rate increases in
some states. Facility occupancy rates for the nine months ended September 30,
1997 were 96.3% compared to 96.4% for the nine months ended September 30, 1996.
Youth services net revenues for the nine months ended September 30, 1997
increased by 21.5%, or $6.8 million, to $38.2 million compared to $31.4 million
during the nine months ended September 30, 1996. This increase was due primarily
to acquisitions in AYS operations that became operational in the nine months
ended September 30, 1997. The increase in revenues was offset in part by the
loss of the Job Corps Center located in Crystal Springs, Mississippi during July
1996.
Facility and Program Expenses
Facility and program expenses in the nine months ended September 30, 1997
increased 27.7%, or $39.9 million, compared to the nine months ended September
30, 1996. Of this increase, $31.4 million, or 79.1% was due to payroll and
payroll-related expenses. These expenses reflect the additional personnel as
well as other costs associated with new facilities and programs in disabilities
services and youth services. Facility and program expenses in the nine months
ended September 30, 1997 decreased as a percentage of total revenues to 86.7%
from 87.3% for the nine months ended September 30, 1996.
Disabilities services facility and program expenses in the nine months ended
September 30, 1997 increased 29.1%, or $33.7 million, to $149.5 million compared
to $115.8 million during the nine months ended September 30, 1996. Payroll and
payroll-related expenses represented 79.1% of the increase due primarily to the
additional personnel and other costs associated with new facilities and programs
that were operational in the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996. As a percentage of disabilities
services net revenues, disabilities services facility and program expenses in
the nine months ended September 30, 1997 decreased to 86.1% from 86.9% for the
nine months ended September 30, 1996 due primarily to the favorable
reimbursement environment in certain states.
Youth services facility and program expenses in the nine months ended
September 30, 1997 increased 22.2%, or $6.2 million, to $34.1 million compared
to $27.9 million during the nine months ended September 30, 1996. Payroll and
payroll-related expenses represented 77.4% of the increase due primarily to the
additional personnel and other costs associated with new facilities and programs
that were operational during the nine months ended September 30, 1997 compared
to the nine months ended September 30, in 1996. As a percentage of youth
services net revenues, youth services facility and program expenses increased to
89.3% in the nine months ended September 30, 1997 from 88.8% for the nine months
ended September 30, 1996. The increase was due primarily to the additional costs
associated with transitioning new acquisitions and a rate decrease in an
existing operation.
-9-
<PAGE> 12
Operating Expenses
Corporate general and administrative expenses increased 6.5%, or $469,000,
in the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996. Payroll and payroll-related expenses for administrative
personnel represented substantially all of the increase due primarily to the
addition of support staff and increase in staff salaries. Corporate general and
administrative expenses in the nine months ended September 30, 1997 decreased as
a percentage of total net revenues to 3.6% from 4.4% for the same period of
1996. This reduction was due primarily to the Company's net revenue growth and
an increase in direct expense allocations reflecting the Company's increased
focus on providing resources to support its regional operations.
Depreciation and amortization expenses in the nine months ended September
30, 1997 increased 61.9%, or $1.6 million, to $4.2 million compared to $2.6
million for the nine months ended September 30, 1996. The increase resulted
primarily from the higher level of acquisition activity which commenced during
1996.
Other (Income) Expense, Net
Net interest expense in the nine months ended September 30, 1997 increased
$346,000 to $983,000 compared to $637,000 for the nine months ended September
30, 1996. The increase resulted primarily from the increased utilization of the
Company's credit facility for acquisitions made during the past year.
Income Taxes
Income taxes increased to $6.2 million in the nine months ended September
30, 1997 compared to the nine months ended September 30, 1996, and reflect
effective tax rates of 40.3% and 37.1%, respectively. The increase in income tax
expense is attributable to the higher level of operating income as discussed
above, and the increase in the effective tax rate is attributable to the tax
effect of the Premier operations as a corporation in 1997.
Net Income
Net income increased 39.0%, to $9.2 million or $0.78 per share for the nine
months ended September 30, 1997 from $6.6 million or $0.63 per share for the
nine months ended September 30, 1996. This increase is the result of expanded
operations, particularly as a result of completed acquisitions and the effect of
the more favorable reimbursement environment in certain states.
LIQUIDITY AND CAPITAL RESOURCES
The Company's needs for capital are attributable primarily to the Company's
plans to expand through acquisitions and the development of new facilities and
programs, and to have sufficient working capital for general corporate purposes.
Since most of the Company's facilities and programs are operating at or near
capacity, and budgetary pressures and other forces are expected to limit
increases in reimbursement rates received by the Company, the Company's ability
to continue to grow at its current rate is directly dependent upon such
acquisitions and development.
-10-
<PAGE> 13
In the nine months ended September 30, 1997, net cash provided by operating
activities was $9.9 million compared to $5.3 million provided by operating
activities for the nine months ended September 30, 1996, an increase of $4.6
million. The increase was due primarily to the increase in net income,
depreciation and amortization, accrued expenses, accrued income taxes, and trade
payables offset in part by the increase in accounts and notes receivables.
During the nine months ended September 30, 1997, net cash used in investing
activities was $42.3 million compared to $13.3 million for the nine months ended
September 30, 1996, an increase of $29.0 million, due primarily to acquisitions.
For the nine months ended September 30, 1997, net cash provided by financing
activities was $32.0 million compared to $7.6 million for the nine months ended
September 30, 1996. The increase of $24.4 million was due primarily to proceeds
from the sale of Common Stock.
On June 23, 1997, the Company amended its Revolving Credit Facility with its
banks: PNC Bank, Kentucky, Inc., National City Bank of Kentucky, SunTrust Bank,
Nashville, N.A., Bank One Kentucky, N.A. and Wachovia Bank. The Revolving Credit
Facility provides for maximum borrowings of $100 million, including up to $10
million in letters of credit.
As of September 30, 1997, the Company had $53.3 million available under the
Revolving Credit Facility and $7.5 million in cash and cash equivalents.
Outstanding at that date were irrevocable standby letters of credit in the
principal amount of $4.6 million issued in connection with workers' compensation
insurance and certain facility leases.
On April 15, 1997, the Company closed an offering of its Common Stock which
generated proceeds of $26.1 million, which was used to repay amounts borrowed
under the Company's Revolving Credit Facility.
The Company has historically sought to provide its services under management
contracts or in leased facilities, especially in the case of larger facilities.
In response to changes in certain reimbursement methodologies and with its
expansion of services provided to consumers in community-based settings, the
Company has increased its facility purchases, particularly residential homes.
Also, acquisitions may involve significant capital expenditures for facilities.
The Company has no material commitments for capital expenditures for its current
facilities, although the Company maintains an ongoing capital improvements
program.
The Company believes that borrowing under its Revolving Credit Facility
together with its cash and cash equivalents, the use of operating leases
whenever possible, and the net cash generated from operations will be able to
satisfy its existing and expected commitments for at least the next twelve
months.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including 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.
- 11 -
<PAGE> 14
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
Division for Persons with Disabilities and its Division for Youth Services. This
growth is largely dependent upon development-driven activities, including the
acquisition of other businesses or facilities or 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 not-for-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 depend significantly upon the
success of these development activities, and in particular on the Company's
ability to obtain additional contracts and other rights to provide services to
the special needs populations it serves, whether through acquisitions, awards in
response to requests for proposals for new facilities or programs 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 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 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.
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 formulae. 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 or reviewed 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 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 existing operations,
and its ability to expand into providing services to other populations utilizing
the Company's core competencies 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 reimbursement environment. 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 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.
- 12 -
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company (or a provider with which the Company has a
management agreement), becomes a party to legal and/or administrative
proceedings involving state program administrators and others, that, in the
event of unfavorable outcomes, may affect revenues and period-to-period
comparisons. In Indiana, the Company and another provider have been in
litigation with the State over the rate-setting methodology for large
facilities. In September, 1997, except for an issue involving staffing hours,
the court denied the plaintiffs' motion for injunctive relief. The ruling
resulted in a reduction in rates payable to the Company by the State of Indiana
for the thirty-nine months ended September 30, 1997 although the amount of the
reduction had been adequately reserved by the Company in prior periods. The
reduction was recorded against the Company's allowance for contractual
adjustments during September 1997. The plaintiffs have filed a motion with the
trial court seeking reconsideration on one of the principal issues.
The Company is also involved in litigation against the landlord of four of
the Company's large facilities in Indiana. 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 in light of the outcome of the Indiana rate litigation described
above. The Company subleased three other large facilities in Indiana from the
same landlord. The sublease, which did not include a renegotiation provision,
expired July 31, 1996 and the parties entered into a new lease, on essentially
the same terms and conditions as the previous sublease, which was extended until
December 31, 1997. The parties have agreed to extend it again through August 31,
1998, with a one-year renewal. These three facilities account for approximately
$6.0 million annual revenues. The Company cannot predict at this time whether it
may be compelled to or elect to reduce certain facility-based operations in
Indiana.
The Kentucky Department of Medicaid Services ("Kentucky") has notified the
provider of record of a large facility managed by the Company of certain
adjustments to the facility cost report for the 1991 fiscal year as a result of
the completion of its audit for that year. Kentucky has also audited the
facility for fiscal years 1992 through 1995, but has not yet issued its audit
reports with respect to these years. The provider has filed an action for
declaratory judgement and injunctive relief against Kentucky. The provider and
the Company, based on the opinion of their respective counsel for this matter,
believe that there is a significant likelihood that the provider will ultimately
prevail on the merits of its argument that improper legal standards have been
applied in the adjustments. The Company believes that upon application of the
appropriate legal standards, the ultimate net effect of the adjustments on the
results of its operations, cash flow or financial condition will not be
material. However, if Kentucky ultimately prevails in the litigation and
requires similar adjustments for the subsequent years under audit (fiscal years
1992 through 1995), up to $3.4 million of the provider's costs in the aggregate
could be disallowed. The Company is unable at this time to determine the extent
of its exposure, if any, should Kentucky prevail in the litigation or whether it
will be impractical for the provider of record or the Company to continue
operations at this facility in such event.
In May 1996, legislation was passed in Florida that would have significantly
reduced rates effective September 1, 1996 for the operations that the Company
manages in that state. A preliminary injunction was granted in a lawsuit by
individual consumers which requires the State to continue full funding of
certain intermediate care facilities and services for persons with developmental
disabilities. Trial is set for January 1998. The Company is unable, at this
time, to predict the outcome of the litigation or the effect of any
reimbursement changes on revenues and profit contributions. In Tennessee, new
regulations which could have adversely affected the management fees of the
Company under its management contracts with not-for-profit providers for group
homes were withdrawn. No new regulations have been enacted.
In March 1997, certain small providers brought an action against the Texas
Department of Mental Health and Mental Retardation seeking to enjoin the
implementation of a provision (not applicable to the Company) of a new
reimbursement system implemented in Texas effective January 1, 1997. The new
reimbursement system was the result of a settlement of litigation brought by a
provider association challenging prior rate structures. The new reimbursement
system has favorably affected the Company's results, and Texas has been paying
under the new rates during the pendency of the litigation. A hearing on the
temporary injunction was concluded on April 30, 1997 and the parties await the
judge's ruling. While management of the Company, after consultation with counsel
participating in the litigation on behalf of the provider association, believes
that it is not likely that the ultimate effect of the litigation (and any
administrative actions that may follow) will result in the new Texas
reimbursement system being set aside, an adverse ruling in the proceedings could
affect period to period comparisons.
In addition, the Company is a party to various other legal proceedings
encountered in the ordinary 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 consolidated financial condition or
results of operation.
- 13 -
<PAGE> 16
ITEM 2. CHANGES IN SECURITIES
On July 18, 1997, the Company acquired all of the outstanding shares of
common stock of Rudd Aviation, Inc. from Rudd Enterprises, Inc. and Mason C.
Rudd in exchange for 89,517 shares of common stock of the Company. The
transaction was exempt from registration under Section 4 of the Securities Act
of 1933 since the stock was issued only to the sellers and was not a public
offering. Subsequently, on July 31, 1997, the Company filed a Registration
Statement on Form S-3 registering 35,000 of the shares to be sold by selling
stockholders who had acquired the shares pursuant to charitable donations from
Mr. Rudd.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Donald B. Rice, formerly president and chief executive officer of the
Company's Youthtrack subsidiary, has resigned to pursue other business
interests. Robert S. Hietala, vice president of operations, has been appointed
acting senior vice president of operations with responsibility for all
operations and administrative functions in the interim.
Stanley M. Goldstein, formerly president of the Premier operations, has
resigned to pursue other interests. Ronald G. Geary succeeds Mr. Goldstein as
president. Mr. Goldstein has entered into a consulting and development agreement
with the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1. Amendment to the Employment Agreement between the Company
and Jeffrey M. Cross dated August 4, 1997. Exhibit 10.3 to the Company's Report
on Form 10-Q for the quarter ending June 30, 1997 is hereby incorporated by
reference.
10.2. Amendment to the Employment Agreement between the Company
and Paul G. Dunn dated August 4, 1997. Exhibit 10.4 to the Company's Report on
Form 10-Q for the quarter ending June 30, 1997 is hereby incorporated by
reference.
10.3. Employment Agreement between the Company and Pamela M.
Spaniac dated July 10, 1997. Exhibit 10.5 to the Company's Report on Form 10-Q
for the quarter ending June 30, 1997 is hereby incorporated by reference.
- 14 -
<PAGE> 17
10.4. Stock Purchase Agreement by and among Res-Care, Inc. and
Richard Greer, Robert Greer and Alicia Greer Austin dated July 31, 1997. Exhibit
2-1 to the Company's Report on Form 8-K dated July 31, 1997 is hereby
incorporated by reference.
27. Financial Data Schedule.
(b) Reports on Form 8-K:
On August 14, 1997, the Company filed a Report on Form 8-K
dated July 31, 1997 to report the Company's acquisition of all of the
outstanding stock of Communications Network Consultants, Inc. Financial
statements were not filed with this report in reliance on Item 7(a)(4) of the
Report on Form 8-K.
- 15 -
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
-------------- ----------------------- --------------
<S> <C> <C>
Exhibit 10.1. Amendment to the Employment Agreement
between the Company and Jeffrey M. Cross dated
August 4, 1997. Exhibit 10.3 to the Company's
Report on Form 10-Q for the quarter ending June
30, 1997 is hereby incorporated by reference.
Exhibit 10.2. Amendment to the Employment Agreement
between the Company and Paul G. Dunn dated
August 4, 1997. Exhibit 10.4 to the Company's
Report on Form 10-Q for the quarter ending June
30, 1997 is hereby incorporated by reference.
Exhibit 10.3. Employment Agreement between the Company
and Pamela M. Spaniac dated July 10, 1997.
Exhibit 10.5 to the Company's Report on Form
10-Q for the quarter ending June 30, 1997 is
hereby incorporated by reference.
Exhibit 10.4. Stock Purchase Agreement by and among
Res-Care, Inc. and Richard Greer, Robert Greer
and Alicia Greer Austin dated July 31, 1997.
Exhibit 2-1 to the Company's Report on Form 8-K
dated July 31, 1997 is hereby incorporated by
reference.
Exhibit 27. Financial Data Schedule.
</TABLE>
- 16 -
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RES-CARE, INC.
Registrant
Date: November 6, 1997 By: /S/ RONALD G. GEARY
---------------- ----------------------------------
Ronald G. Geary
President and Chief Executive Officer
Date: November 6, 1997 By: /S/ PAMELA M. SPANIAC
---------------- ----------------------------------
Pamela M. Spaniac
Executive Vice President of Finance &
Administration
- 17 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,548
<SECURITIES> 0
<RECEIVABLES> 51,099
<ALLOWANCES> 0
<INVENTORY> 638
<CURRENT-ASSETS> 65,691
<PP&E> 62,912
<DEPRECIATION> 9,676
<TOTAL-ASSETS> 184,519
<CURRENT-LIABILITIES> 33,508
<BONDS> 0
0
0
<COMMON> 41,680
<OTHER-SE> 58,537
<TOTAL-LIABILITY-AND-EQUITY> 184,519
<SALES> 0
<TOTAL-REVENUES> 211,802
<CGS> 0
<TOTAL-COSTS> 195,448
<OTHER-EXPENSES> (103)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 983
<INCOME-PRETAX> 15,328
<INCOME-TAX> 6,172
<INCOME-CONTINUING> 9,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,156
<EPS-PRIMARY> 0
<EPS-DILUTED> .78
</TABLE>
