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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, 2000
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
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RES-CARE, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-0875371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10140 LINN STATION ROAD 40223-3813
LOUISVILLE, KENTUCKY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 394-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ___.
The number of shares outstanding of the registrant's common stock, no par value,
as October 31, 2000, was 24,319,952.
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INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.......................................................... 3
Condensed Consolidated Statements of Income for the three
months ended September 30, 2000 and 1999 and
nine months ended September 30, 2000 and 1999.................................. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999.................................. 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk.............................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................... 19
Item 5. Other Information...................................................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................... 20
Index to Exhibits...................................................................... 21
Signatures............................................................................. 22
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,980 $ 7,057
Accounts and notes receivable, net 163,243 141,807
Deferred income taxes 14,770 14,406
Prepaid expenses and other current assets 8,324 7,286
--------- ---------
Total current assets 203,317 170,556
--------- ---------
Property and equipment, net 109,957 102,739
Excess of acquisition cost over net assets acquired, net 219,932 220,493
Other assets 28,733 29,343
--------- ---------
$ 561,939 $ 523,131
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 25,020 $ 13,388
Accrued expenses 51,312 48,820
Accrued income taxes -- 1,145
Current portion of long-term debt 3,906 6,674
--------- ---------
Total current liabilities 80,238 70,027
--------- ---------
Long-term liabilities 3,925 4,572
Long-term debt 300,937 285,039
Deferred income taxes 1,015 109
--------- ---------
Total liabilities 386,115 359,747
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares -- --
Common stock 50,770 50,770
Additional paid-in capital 28,947 28,413
Retained earnings 99,036 87,175
--------- ---------
178,753 166,358
Less cost of common shares in treasury (2,929) (2,974)
--------- ---------
Total shareholders' equity 175,824 163,384
--------- ---------
$ 561,939 $ 523,131
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 218,246 $ 208,758 $ 642,484 $ 613,453
Facility and program expenses 192,632 178,804 564,097 525,359
--------- --------- --------- ---------
Facility and program contribution 25,614 29,954 78,387 88,094
Operating expenses (income):
Corporate general and administrative 7,079 5,805 20,572 21,813
Depreciation and amortization 5,642 5,345 16,635 15,820
Non-recurring charges 1,673 -- 3,670 20,498
Other (income) expense 66 (1) 304 (42)
--------- --------- --------- ---------
Total operating expenses 14,460 11,149 41,181 58,089
--------- --------- --------- ---------
Operating income 11,154 18,805 37,206 30,005
Interest, net 5,926 4,610 16,932 13,444
--------- --------- --------- ---------
Income from continuing operations
before income taxes 5,228 14,195 20,274 16,561
Income tax expense 2,169 5,691 8,413 8,408
--------- --------- --------- ---------
Income from continuing operations 3,059 8,504 11,861 8,153
Gain from sale of unconsolidated affiliate, net of tax -- -- -- 534
Cumulative effect of accounting change, net of tax -- -- -- (3,932)
--------- --------- --------- ---------
Net income $ 3,059 $ 8,504 $ 11,861 $ 4,755
========= ========= ========= =========
Basic earnings per share from continuing operations $ 0.13 $ 0.35 $ 0.49 $ 0.34
Gain from sale of unconsolidated affiliate, net of tax -- -- -- 0.02
Cumulative effect of accounting change, net of tax -- -- -- (0.16)
--------- --------- --------- ---------
Basic earnings per share $ 0.13 $ 0.35 $ 0.49 $ 0.20
========= ========= ========= =========
Diluted earnings per share from continuing
operations $ 0.13 $ 0.31 $ 0.49 $ 0.33
Gain from sale of unconsolidated affiliate, net of tax -- -- -- 0.02
Cumulative effect of accounting change, net of tax -- -- -- (0.16)
--------- --------- --------- ---------
Diluted earnings per share $ 0.13 $ 0.31 $ 0.49 $ 0.19
========= ========= ========= =========
Weighted average number of common shares:
Basic 24,320 24,299 24,306 24,215
Diluted 24,320 31,760 24,306 25,139
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash provided by (used in) operating activities $ 15,493 $ (6,669)
Cash flows from investing activities:
Purchase of property and equipment (18,381) (11,136)
Acquisitions of businesses, net of cash acquired (2,307) (13,204)
Proceeds from sale of asset 2,042 --
-------- --------
Cash used in investing activities (18,646) (24,340)
-------- --------
Cash flows from financing activities:
Net borrowings under notes payable to banks 16,934 56,828
Repayments of notes payable (4,378) (29,252)
Proceeds received from exercise of stock options 520 1,791
-------- --------
Cash provided by financing activities 13,076 29,367
-------- --------
Increase (decrease) in cash and cash equivalents $ 9,923 $ (1,642)
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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RES-CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Res-Care, Inc. and its subsidiaries (ResCare or the Company) are
primarily engaged in the delivery of residential, training, educational and
support services to various populations with special needs, including persons
with mental retardation and other developmental disabilities and at-risk and
troubled youth.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X and do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
financial condition and results of operations for the interim periods have been
included. Operating results for the periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
For further information, refer to the consolidated financial
statements and footnotes thereto in ResCare's annual report on Form 10-K for the
year ended December 31, 1999.
NOTE 2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Revolving credit facilities with banks $161,115 $144,181
6% convertible subordinated notes due 2004, net of
unamortized discount of $1,947 and $2,298 in
2000 and 1999 107,413 107,062
5.9% convertible subordinated notes due 2005 22,000 22,000
Obligations under capital leases 8,638 9,129
Notes payable and other 5,677 9,341
-------- --------
304,843 291,713
Less current portion 3,906 6,674
-------- --------
$300,937 $285,039
======== ========
</TABLE>
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NOTE 3. EARNINGS PER SHARE
The average shares listed below were not included in the computation
of diluted earnings per share because to do so would have been antidilutive for
the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Convertible subordinated notes 6,666 -- 6,666 6,666
Stock options -- -- 71 --
</TABLE>
NOTE 4. SEGMENT INFORMATION
The following table sets forth information about reportable segment
profit or loss.
<TABLE>
<CAPTION>
Other
Disabilities Job Youth All Consolidated
Services Corps Services Other (1) Totals
-------- ----- -------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Quarter ended September 30:
2000
Revenues $172,244 $ 30,810 $ 15,192 $ -- $218,246
Segment profit (loss) 16,176 3,574 801 (7,724) 12,827
1999
Revenues $166,548 $ 29,002 $ 13,208 $ -- $208,758
Segment profit (loss) 20,641 2,943 1,360 (6,139) 18,805
Nine months ended September 30:
2000
Revenues $506,247 $ 90,394 $ 45,843 $ -- $642,484
Segment profit (loss) 49,564 10,040 3,954 (22,682) 40,876
1999
Revenues $486,736 $ 87,762 $ 38,955 $ -- $613,453
Segment profit (loss) 59,577 9,449 4,250 (22,773) 50,503
</TABLE>
(1) All Other is comprised of corporate general and administrative expenses
and corporate depreciation and amortization. The non-recurring charges
recorded in 2000 and 1999 are excluded from the calculation of segment
profit (loss) for all periods presented.
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NOTE 5. CONTINGENCIES
In September 1997, a lawsuit, styled Cause No.: 98-00740, Nancy Chesser
v. Normal Life of North Texas, Inc., and Normal Life, Inc. District Court of
Travis County, Texas (Chesser) was filed against a Texas facility being operated
by the former owners of Normal Life, Inc. and Normal Life of North Texas, Inc.,
subsidiaries of the Company, asserting causes of action for negligence,
intentional infliction of emotional distress and retaliation regarding the
discharge of residents of the facility. In May 2000, a judgment was entered in
favor of the plaintiff awarding the plaintiff damages, prejudgment interest and
attorneys' fees totaling $4.8 million. In October 2000, the Company and American
International Specialty Lines Insurance Company (AISL) entered into an agreement
whereby any settlement reached in Chesser and a related lawsuit also filed in
District Court of Travis County, Texas would not be dispositive of whether the
claims in the suits were covered under the policies issued by AISL. AISL
thereafter settled the suits and filed a Complaint for Declaratory Judgment
against Normal Life of North Texas, Inc. and Normal Life, Inc. in the U.S.
District Court for the Northern District of Texas, Dallas Division. In the
Complaint, AISL seeks a declaration of what insurance coverage is available to
the Company in the lawsuits. It is the Company's position that the lawsuits
initiated coverage under the primary policies of insurance, thus affording
adequate coverage to settle the lawsuits within coverage and policy limits.
Also, in addition to having adequate available coverage under the Company's
policies of insurance, the Company believes that damages, if any, would
ultimately be covered through indemnification agreements with the former owners
of the subsidiaries. The Company does not believe that the ultimate resolution
of this matter will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
In July 2000, AISL filed a Complaint for Declaratory Judgment against
the Company and one of its subsidiaries in the U.S. District Court for the
Southern District of Texas, Houston Division. In the Complaint, AISL seeks a
declaration of what insurance coverage is available to the Company in Cause No.
299291-401; In re: Estate of Trenia Wright, Deceased, et al. v. Res-Care, Inc.,
et al. which was filed in Probate Court No. 1 of Harris County, Texas (the
Lawsuit). Subsequent to the filing, the Company and AISL entered into an
agreement whereby any settlement reached in the Lawsuit would not be dispositive
of whether the claims in the Lawsuit were covered under the policies issued by
AISL. AISL thereafter settled the Lawsuit. It is the Company's position that the
Lawsuit initiated coverage under the primary policies of insurance in more than
one policy year, thus affording adequate coverage to settle the Lawsuit within
coverage and policy limits. The Company does not believe the ultimate resolution
of this matter will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Res-Care, Inc. (ResCare or the Company) receives revenues primarily
from the delivery of residential, training, education and support services to
populations with special needs. The Company has three reportable operating
segments: (i) disabilities services; (ii) Job Corps program; and (iii) other
youth services programs. Management's discussion and analysis of each segment
follows.
RECENT DEVELOPMENTS
During the third quarter of 2000, the Company approved and implemented
a restructuring and operational reorganization plan. In connection with the
plan, the Company recorded a pre-tax charge of approximately $1.7 million ($1.0
million, net of tax, or $0.04 per share) during the third quarter of 2000, which
is reflected as a non-recurring charge in the accompanying statement of income.
This charge consisted primarily of $700,000 in severance and employee-related
costs, $500,000 in lease termination costs, $300,000 in asset write-offs
(principally deferred costs associated with pending acquisitions which were
discontinued as a result of the plan) and $200,000 in transaction and other
costs. Through September 30, 2000, approximately $500,000 of the costs had been
utilized.
On June 29, 2000, the Company announced that an agreement had been
mutually terminated with an investor group which had proposed to acquire all the
outstanding shares of ResCare common stock for $15.75 per share in cash.
Although the termination did not result in the payment by ResCare of any
cancellation or breakup fees, a non-recurring charge of $2.0 million ($1.2
million, net of tax) of previously deferred costs associated with the
transaction was expensed in the second quarter of 2000, which is included in the
non-recurring charges in the accompanying statement of income for the nine
months ended September 30, 2000.
MERGER
On June 28, 1999, ResCare completed its merger with PeopleServe, Inc.
(PeopleServe), which primarily operates facilities and programs for persons with
mental retardation and other developmental disabilities. In connection with the
merger, ResCare recorded a pretax merger-related charge of $20.5 million during
the second quarter of 1999, which is reflected as a non-recurring charge in the
accompanying 1999 statement of income. This consisted primarily of $7.3 million
in severance and employee-related costs (principally related to the elimination
of PeopleServe's corporate offices and various other administrative costs), $2.8
million in lease termination costs, $3.0 million in information system
conversion and integration costs and $4.5 million in transaction costs,
including investment banking, legal, accounting and other professional fees and
transaction costs. Through September 30, 2000, approximately $19.7 million of
the charge had been utilized through $15.0 million in cash payments (principally
severance and transaction costs) and $4.7 million in asset write-downs (relating
principally to the discontinued PeopleServe information systems). The Company
believes the remaining balance of accrued merger-related cost of approximately
$800,000 at September 30, 2000 represents its remaining cash obligations.
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RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Total revenues in 2000 increased 5%, or $9.4 million, to $218.2 million
compared to $208.8 million in 1999. Including a non-recurring charge recorded in
the third quarter of 2000 (discussed above), net income for the third quarter of
2000 was $3.1 million, compared to $8.5 million for the same period in 1999.
Excluding the non-recurring charge, net income for the third quarter of 2000 was
$4.0 million. The contribution each operating segment made during the quarter is
discussed below.
Disabilities Services
Disabilities services revenues increased 3%, or $5.7 million, to $172.2
million in the third quarter of 2000 compared to $166.5 million in 1999.
Revenues increased primarily as a result of rate increases and census growth. As
a percentage of revenues, disabilities services facility and program expenses
increased from 84.9% in 1999 to 88.0% in 2000 due principally to increased labor
costs. Overall segment profit decreased 21.6%, or $4.5 million, from 1999.
Job Corps Program
Job Corps revenues in 2000 increased 6%, or $1.8 million, to $30.8
million compared to $29.0 million in 1999. Segment profit increased 21%, or
$600,000 from 1999 to 2000. The increase in revenues resulted primarily from
census build up under the contract to manage the Treasure Island Job Corps
Center.
Other Youth Services Programs
Other youth services revenues in 2000 increased 15%, or $2.0 million,
to $15.2 million compared to $13.2 million in 1999. Revenues increased primarily
as a result of rate increases and census growth. Segment profit decreased 41% in
2000 principally as a result of increased labor costs.
Corporate Expenses
Corporate general and administrative expenses increased 22%, or $1.3
million, in the third quarter of 2000 compared to 1999. Costs associated with
the development and implementation of various information system projects
contributed to this increase. Corporate general and administrative expenses in
2000 increased as a percentage of total revenues to 3.2% from 2.8% in 1999.
Net interest expense in 2000 increased $1.3 million to $5.9 million
compared to $4.6 million for 1999. The increase resulted from a combination of
higher average interest rates and increased levels of borrowings under the
Company's credit facilities from period to period.
Income taxes decreased to $2.2 million in 2000 compared to $5.7 million
in 1999, and reflect effective tax rates of 41.5% and 40.1%, respectively.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Total revenues in 2000 increased 5%, or $29.0 million, to $642.5
million compared to $613.5 million in 1999. Net income for the first nine months
of 2000, including the non-recurring charges discussed above, was $11.9 million,
compared to $4.8 million for the same period in 1999. Income from continuing
operations before the non-recurring charges decreased 36% from 1999. The
contribution each operating segment made during the period is discussed below.
Disabilities Services
Disabilities services revenues increased 4%, or $19.5 million, to
$506.2 million in the first nine months of 2000 compared to $486.7 million in
1999. Revenues increased primarily as a result of census growth and rate
increases. As a percentage of revenues, disabilities services facility and
program expenses increased from 85.0% in 1999 to 87.6% in 2000 due to increased
labor costs. Overall segment profit decreased 17.0%, or $10.0 million, from
1999.
Job Corps Program
Job Corps revenues in 2000 increased 3% to $90.4 million compared to
$87.8 million in 1999. Additionally, segment profit increased 6%, or $600,000,
from 1999 to 2000. The increases in both revenues and profitability resulted
primarily from the addition of the contract to manage the Treasure Island Job
Corps Center commencing in the second quarter of 1999.
Other Youth Services Programs
Other youth services revenues in 2000 increased 18%, or $6.8 million,
to $45.8 million compared to $39.0 million in 1999. Revenues increased primarily
as a result of internal growth initiatives and census growth. Segment profit
decreased 7% from $4.3 million in 1999 to $4.0 million in 2000 due principally
to increased labor costs.
Corporate Expenses
Corporate general and administrative expenses decreased 6%, or $1.2
million, in the first nine months of 2000 compared to 1999. This decrease was
primarily attributable to savings achieved as a result of the PeopleServe
merger. These were offset by increases in payroll and payroll-related expenses
due primarily to the addition of support staff and increases in salaries, and by
an increase in lease expense associated with the company-wide deployment of
computer workstations in 1999 as part of the Company's Year 2000 remediation
efforts. Corporate general and administrative expenses in 2000 decreased as a
percentage of total revenues to 3.2% from 3.6% in 1999.
Net interest expense in 2000 increased $3.5 million to $16.9 million
compared to $13.4 million for 1999. The increase resulted from a combination of
higher average interest rates and increased levels of borrowings under the
Company's credit facilities from period to period.
As a result of the merger-related charge recorded in the second quarter
of 1999, the effective tax rate of 50.8% for 1999 was higher than the effective
tax rate of 41.5% for 2000.
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LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 2000, cash provided by operating
activities was $15.5 million compared to cash used of $6.7 million in the same
period of 1999, an increase of $22.2 million, due primarily to improvements in
payment terms of accounts payable and collections on accounts receivable in 2000
compared to 1999.
For the first nine months of 2000, cash used in investing activities
was $18.6 million compared to $24.3 million in the same period of 1999, a
decrease of $5.7 million. The decrease was due primarily to a reduction in
cash-financed acquisitions offset by an $8.5 million acquisition of formerly
leased homes in the first nine months of 2000.
For the first nine months of 2000, cash provided by financing
activities was $13.1 million compared to $29.4 million in the same period of
1999, a decrease of $16.3 million, due primarily to lower levels of borrowings
necessary in 2000 to fund working capital needs.
At September 30, 2000, the Company had $17.3 million available on its
lines-of-credit and $17.0 million in cash and cash equivalents. Outstanding at
that date were irrevocable standby letters of credit in the principal amount of
$20.1 million issued in connection with workers' compensation insurance and
certain facility leases.
Days revenue in accounts receivable were 69 days at September 30, 2000,
compared to 66 days at June 30, 2000 and 62 days at December 31, 1999. Accounts
receivable were $163.2 million, $156.4 million, and $141.8 million at September
30, 2000, June 30, 2000 and December 31, 1999, respectively. Growth in these
amounts has been primarily attributable to delays in payment from certain state
Medicaid programs. The Company has devoted significant resources and implemented
various programs to accelerate collection of outstanding balances. Additionally,
the Company continues to deploy its comprehensive accounts receivable system to
its DPD operations in various states which is expected to facilitate
improvements in collections.
The Company has historically satisfied its working capital
requirements, capital expenditures and scheduled debt payments from its
operating cash flow and utilization of its credit facility. Cash requirements
for the acquisition of new business operations have generally been funded
through a combination of these sources, as well as the issuance of long-term
obligations and common stock. Current conditions in the capital markets,
especially for companies identified as health-care related, have limited the
Company's ability to raise capital. As a result, the Company's growth rate going
forward, with emphasis on internally-generated growth, can be expected to be
lower than in recent years when acquisition activity, combined with the
Company's internal growth, produced higher overall growth rates. The Company
continues to explore other sources of capital, including the sale and leaseback
of its owned real properties. However, management believes cash generated from
operations, amounts remaining available under its credit facility and possible
sale-leaseback transactions will continue to be sufficient to meet its working
capital, planned capital expenditure and scheduled debt repayment requirements
for the next twelve months under a reduced growth rate.
As of September 30, 2000, the Company has in place a revolving credit
facility with a group of banks (the Credit Facility) which provides for maximum
borrowings of $195 million. The Credit Facility contains various financial
covenants including those related to net worth, debt service coverage,
indebtedness to cash flow from operations and debt to capitalization. Under the
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provisions of the Credit Facility, certain of the financial covenants become
more restrictive with the passage of time. As of September 30, 2000, the ratio
of debt to capitalization must not exceed .65 to 1.0 and the ratio of
indebtedness to cash flow from operations must not exceed 5.25 to 1.0. At
September 30, 2000, the Company's ratios were .63 to 1.0 and 5.14 to 1.0,
respectively. On December 31, 2000, the ratio of debt to capitalization must not
exceed .60 to 1.0 and the ratio of indebtedness to cash flow from operations
must not exceed 5.00 to 1.0. The Company's ability to achieve the thresholds
provided for in the financial covenants is largely dependent upon the
maintenance of continued profitability and reductions of amounts borrowed under
its Credit Facility during the fourth quarter of 2000. Management believes the
significant efforts being undertaken, including those to reduce days revenues in
accounts receivable and to effect a sale-leaseback of owned real properties,
will enable the Company to satisfy the requirements of the Credit Facility.
CERTAIN RISK FACTORS
The Company's historical growth in revenues and earnings per share has
been directly related to significant increases in the number of individuals
served in each of its operating segments. This growth has depended largely upon
development-driven activities, including the acquisitions of other businesses or
facilities, the acquisition of management contract rights to operate facilities,
the award of contracts to open new facilities or start new operations or to
assume management of facilities previously operated by governmental agencies or
other organizations, and the extension or renewal of contracts previously
awarded to the Company. As discussed above, the Company's ability to raise
additional capital to support development-driven activities, particularly
acquisitions, is currently limited. For this reason and as a result of the
Company's emphasis on internal growth as discussed above, management believes
the Company's growth over the next twelve months will be significantly lower
than the rates achieved in recent years.
The Company's future revenues will depend significantly upon the
Company's ability to obtain additional contracts to provide services to the
special needs populations it serves, whether through selected acquisitions,
awards in response to requests for proposals for new programs or in connection
with facilities being privatized by governmental agencies, without significant
outlays of capital. Future revenues also depend on the Company's ability to
maintain and renew its existing services contracts and its existing leases.
Changes in the market for services and contracts, including increasing
competition, transition costs associated with acquisitions or costs to implement
awarded contracts, could also adversely affect the timing and/or viability of
future development activities. Additionally, many of the Company's contracts are
subject to state or federal government procurement rules and procedures; changes
in procurement policies that may be adopted by one or more of these agencies
could adversely affect the Company's abilities to obtain and retain these
contracts.
Revenues of the Company's disabilities services segment depend highly
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 depend on the Company's ability to maintain
its existing reimbursement levels and to obtain periodic increases in
reimbursement rates. Changes in the manner in which Medicaid reimbursement rates
are established in one or more of the states in which the Company conducts its
operations could adversely affect revenues and profitability. Other changes in
the manner in which federal and state reimbursement programs are operated,
including changes in the interpretation of program policies and procedures by
the current administrations, and in the
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manner in which billings/costs are reviewed and audited could also affect
revenues and operating profitability. Additionally, the Health Care Financing
Administration is undertaking initiatives that are expected to result in
increased scrutiny of state-funded programs. Such initiatives, including audits
of state-funded programs and reviews of waiver programs administered by states
in which the Company operates, could adversely affect revenues and
profitability.
The Company's cost structure and ultimate operating profitability
significantly depend on its labor costs, the availability of qualified personnel
in each geographic area and the effective utilization of its labor force, and
may be adversely affected by a variety of factors, including local competitive
forces, changes in minimum wages or other direct personnel costs, strikes or
work stoppages by certain of its employees represented by labor unions, the
Company's future effectiveness in managing its direct service staff, and changes
in consumer services models, such as the trends toward supported living and
managed care. The difficulty experienced in hiring direct service staff in
certain markets has resulted in higher labor costs in certain operating units of
the Company. These include costs associated with increased overtime, recruitment
and retention and training programs, and use of temporary staffing personnel and
outside clinical consultants.
Additionally, the Company's continued maintenance and expansion of its
operations depend on the continuation of trends toward downsizing, privatization
and consolidation and the Company's ability to tailor its services to meet the
specific needs of the populations it serves. The success of operating in a
changing environment is 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. Recent media coverage of the health care industry, including
operators of facilities and programs for persons with mental retardation and
other developmental disabilities, has included reports critical of the current
trend toward privatization and of the operation of certain of these facilities
and programs, including some operated by the Company. Adverse media coverage
about providers of these services in general and the Company in particular has
led to increased regulatory scrutiny in some areas, and could, among other
things, adversely affect the Company's ability to obtain or retain contracts,
discourage government agencies from privatizing facilities and programs,
increase regulation and resulting compliance costs, discourage clients from
using the Company's services, or otherwise adversely affect the Company's
revenues and profitability.
The Company maintains professional and general liability insurance on
professionals and other staff employed in each of its locations in addition to
coverage for the customary risks inherent in the operation of business in
general. While the Company believes its insurance policies to be adequate in
amount and coverage for its current operations, there can be no assurance that
coverage will continue to be available in adequate amounts or at a reasonable
cost. The Company is currently in the process of negotiating with insurance
carriers for coverages in 2001. However, the insurance markets have recently
tightened, particularly for healthcare providers, with increasing premium costs
and limited availability of coverage in some states. Material increases in the
cost of insurance coverages, or the inability to obtain adequate coverage,
including the risk of increased self-insurance, will likely adversely affect the
Company's profitability.
14
<PAGE> 15
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact, as well as statements in future filings by the
Company with the Securities and Exchange Commission, in press releases, and in
oral and written statements made by or with the approval of the Company that are
not statements of historical fact, constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act (the Act). Examples
of forward-looking statements include, but are not limited to: (1) projections
of revenues, income or loss, earnings or loss per share, capital structure and
other financial items; (2) statements of plans and objectives of the Company or
its management or Board of Directors; (3) statements of future actions or
economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"plans," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from those in such statements. Some of
the events or circumstances that could cause actual results to differ from those
discussed in the forward-looking statements are discussed in the "Certain Risk
Factors" section above. Forward-looking statements speak only as of the date on
which those statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made to reflect the occurrence of
unanticipated events.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result
of its outstanding variable rate debt, the Company does not currently utilize
any derivative financial instruments related to its interest rate exposure. The
Company believes that its exposure to market risk will not result in a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company (or a provider with whom the Company has
a management agreement), becomes a party to legal and/or administrative
proceedings involving state program administrators and others that, in the event
of unfavorable outcomes, may adversely affect revenues and period to period
comparisons.
In September 1997, a lawsuit, styled Cause No.: 98-00740, Nancy Chesser
v. Normal Life of North Texas, Inc., and Normal Life, Inc. District Court of
Travis County, Texas (Chesser) was filed against a Texas facility being operated
by the former owners of Normal Life, Inc. and Normal Life of North Texas, Inc.,
subsidiaries of the Company, asserting causes of action for negligence,
intentional infliction of emotional distress and retaliation regarding the
discharge of residents of the facility. In May 2000, a judgment was entered in
favor of the plaintiff awarding the plaintiff damages, prejudgment interest and
attorneys' fees totaling $4.8 million. In October 2000, the Company and American
International Specialty Lines Insurance Company (AISL) entered into an agreement
whereby any settlement reached in Chesser and a related lawsuit also filed in
District Court of Travis County, Texas would not be dispositive of whether the
claims in the suits were covered under the policies issued by AISL. AISL
thereafter settled the suits and filed a Complaint for Declaratory Judgment
against Normal Life of North Texas, Inc. and Normal Life, Inc. in the U.S.
District Court for the Northern District of Texas, Dallas Division. In the
Complaint, AISL seeks a declaration of what insurance coverage is available to
the Company in the lawsuits. It is the Company's position that the lawsuits
initiated coverage under the primary policies of insurance, thus affording
adequate coverage to settle the lawsuits within coverage and policy limits.
Also, in addition to having adequate available coverage under the Company's
policies of insurance, the Company believes that damages, if any, would
ultimately be covered through indemnification agreements with the former owners
of the subsidiaries. The Company does not believe that the ultimate resolution
of this matter will have a material adverse effect on its consolidated financial
condition, results of operation or liquidity.
In August 1998, with the approval of the State of Indiana, the Company
relocated approximately 100 individuals from three of its larger facilities to
community-based settings. In June 1999, in a lawsuit styled Omega Healthcare
Investors, Inc. v. Res-Care Health Services, Inc., the owner of these facilities
filed suit against the Company in U.S. District Court, Southern District of
Indiana, alleging in connection therewith breach of contract, conversion and
fraudulent concealment. The Company, on the advice of counsel, believes that the
amount of damages being sought by the plaintiffs is approximately $21 million.
It appears the claims for compensatory damages may be duplicative. Management
believes that this lawsuit is without merit and will defend it vigorously. The
Company does not believe the ultimate resolution of this matter will have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity.
The Texas Attorney General, on behalf of the Texas Department of Human
Services, filed suit in the District Court of Harris County, Texas initially
seeking civil penalties of approximately $2.7 million in connection with the
operation of one group home in Texas. The complaint alleges that the Company
failed to ensure that the needs of the individuals residing in this home were
being adequately assessed and provided for, including appropriate medical care.
The Company and the Attorney General are currently engaged in settlement
discussions. While the Company cannot predict whether these discussions will
resolve the matter or the terms of any
17
<PAGE> 18
resolution, the Company does not believe that the ultimate resolution of the
matter with the State will have a material adverse effect on its consolidated
financial condition, results of operations or liquidity.
In July 2000, AISL filed a Complaint for Declaratory Judgment against
the Company and one of its subsidiaries in the U.S. District Court for the
Southern District of Texas, Houston Division. In the Complaint, AISL seeks a
declaration of what insurance coverage is available to the Company in Cause No.
299291-401; In re: Estate of Trenia Wright, Deceased, et al. v. Res-Care, Inc.,
et al. which was filed in Probate Court No. 1 of Harris County, Texas (the
Lawsuit). Subsequent to the filing, the Company and AISL entered into an
agreement whereby any settlement reached in the Lawsuit would not be dispositive
of whether the claims in the Lawsuit were covered under the policies issued by
AISL. AISL thereafter settled the Lawsuit. It is the Company's position that the
Lawsuit initiated coverage under the primary policies of insurance in more than
one policy year, thus affording adequate coverage to settle the lawsuit within
coverage and policy limits. The Company does not believe the ultimate resolution
of this matter will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity.
Also in October 2000, the Company and a subsidiary, Res-Care Florida,
Inc., f/k/a Normal Life Florida, Inc., entered into an agreement with AISL to
resolve through binding arbitration a dispute as to the amount of coverage
available to settle a lawsuit which had previously been filed in Pinellas County
Circuit Court, Florida and subsequently settled after the agreement was entered
into. AISL contends that a portion of the settlement reached was comprised of
punitive damages and, therefore, not the responsibility of AISL. It is the
Company's position that the settlement was an amount which a reasonable and
prudent insurer would pay for the actual damages alleged and that AISL had
opportunities to settle all claims within available coverage limits. The Company
does not believe the ultimate resolution of this matter will have a material
adverse effect on its consolidated financial condition, results of operation or
liquidity.
In addition, the Company is a party to various other legal and/or
administrative proceedings arising out of the operation of its facilities and
programs and arising in the ordinary course of business. The Company believes
that most of these claims are without merit. Further, many of such claims may be
covered by insurance. The Company does not believe the results of these
proceedings or claims, individually or in the aggregate, will have a material
adverse effect on its consolidated financial condition, results of operations or
liquidity.
18
<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The regular annual meeting of shareholders of ResCare was held in
Louisville, Kentucky on September 26, 2000. Represented at the meeting, either
in person or by proxy, were 20,655,537 voting shares out of a total of
24,371,403 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) Four 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:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
James R. Fornear 20,265,503 390,034
Ronald G. Geary 20,260,341 395,196
E. Halsey Sandford 20,254,670 400,867
Spiro B. Mitsos 20,276,537 379,000
Seymour L. Bryson 20,274,728 380,809
W. Bruce Lunsford 20,148,398 507,139
Olivia F. Kirtley 20,272,498 383,039
Vincent D. Pettinelli 20,276,974 378,563
</TABLE>
2. To approve the 2000 Stock Option and Incentive
Compensation Plan for employees:
<TABLE>
<S> <C>
Votes For Proposal 17,137,218
Votes Against Proposal 3,425,033
Votes Abstaining 93,286
</TABLE>
3. To approve the 2000 Non-Employee Directors Stock
Ownership Incentive Plan:
<TABLE>
<S> <C>
Votes For Proposal 19,743,586
Votes Against Proposal 804,581
Votes Abstaining 107,370
</TABLE>
4. To approve the proposal to ratify the selection of
KPMG LLP as the Company's independent auditors for
the fiscal year ending December 31, 2000:
<TABLE>
<S> <C>
Votes For Proposal 20,565,841
Votes Against Proposal 67,439
Votes Abstaining 22,257
</TABLE>
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
On November 2, 2000, the Company announced that its Board of Directors
authorized the investment of up to $5.0 million to repurchase the Company's
common stock. Subject to availability, the transactions may be made from time
to time in the open market or directly from shareholders at prevailing market
prices that the Company deems appropriate. Shares repurchased will be reserved
for later reissue in connection with stock option plans and other general
corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule - September 30, 2000
27.2 Financial Data Schedule - September 30, 1999
(Restated)
(b) Reports on Form 8-K:
None.
20
<PAGE> 21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
27.1 Financial Data Schedule - September 30, 2000
27.2 Financial Data Schedule - September 30, 1999 (Restated)
21
<PAGE> 22
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 14, 2000 By: /s/ Ronald G. Geary
-----------------------------------------------
Ronald G. Geary
Chairman, President and Chief Executive Officer
Date: November 14, 2000 By: /s/ Ralph G. Gronefeld, Jr.
-----------------------------------------------
Ralph G. Gronefeld, Jr.
Executive Vice President of Finance &
Administration and Chief Financial Officer
22
