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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 June 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 of July 31, 2000 was 24,319,952.
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INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999........................................... 2
Condensed Consolidated Statements of Income for the three
months ended June 30, 2000 and 1999 and
six months ended June 30, 2000 and 1999......................... 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999......................... 4
Notes to Condensed Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk............... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................ 16
Index to Exhibits....................................................... 17
Signatures.............................................................. 18
</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>
June 30 December 31
2000 1999
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,946 $ 7,057
Accounts and notes receivable, net 156,411 141,807
Deferred income taxes 15,222 14,406
Prepaid expenses and other current assets 7,312 7,286
--------- ---------
Total current assets 188,891 170,556
--------- ---------
Property and equipment, net 110,315 102,739
Excess of acquisition cost over net assets acquired, net 221,874 220,493
Other assets 30,018 29,343
--------- ---------
$ 551,098 $ 523,131
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 15,378 $ 13,388
Accrued expenses 48,805 48,820
Accrued income taxes -- 1,145
Current portion of long-term debt 4,950 6,674
--------- ---------
Total current liabilities 69,133 70,027
--------- ---------
Long-term liabilities 4,242 4,572
Long-term debt 304,103 285,039
Deferred income taxes 862 109
--------- ---------
Total liabilities 378,340 359,747
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares -- --
Common stock 50,770 50,770
Additional paid-in capital 28,940 28,413
Retained earnings 95,977 87,175
--------- ---------
175,687 166,358
Less cost of common shares in treasury (2,929) (2,974)
--------- ---------
Total shareholders' equity 172,758 163,384
--------- ---------
$ 551,098 $ 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 Six Months Ended
June 30 June 30
---------------------------- --------------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $ 213,471 $ 206,211 $424,238 $ 404,695
Facility and program expenses 188,130 176,456 371,465 346,555
--------- --------- -------- ---------
Facility and program contribution 25,341 29,755 52,773 58,140
Operating expenses (income):
Corporate general and administrative 7,186 8,225 13,493 16,008
Depreciation and amortization 5,621 5,389 10,993 10,475
Non-recurring charges 1,997 20,498 1,997 20,498
Other income (45) (46) 239 (41)
--------- --------- -------- ---------
Total operating expenses 14,759 34,066 26,722 46,940
--------- --------- -------- ---------
Operating income (loss) 10,582 (4,311) 26,051 11,200
Interest, net 5,599 4,663 11,005 8,834
--------- --------- -------- ---------
Income (loss) from continuing operations
before income taxes 4,983 (8,974) 15,046 2,366
Income tax expense (benefit) 2,068 (2,013) 6,244 2,717
--------- --------- -------- ---------
Income (loss) from continuing operations 2,915 (6,961) 8,802 (351)
Gain from sale of unconsolidated affiliate, net of tax -- 534 -- 534
Cumulative effect of accounting change, net of tax -- -- -- (3,932)
--------- --------- -------- ---------
Net income (loss) $ 2,915 $ (6,427) $ 8,802 $ (3,749)
========= ========= ======== =========
Basic earnings (loss) per share from
continuing operations $ 0.12 $ (0.29) $ 0.36 $ (0.01)
Gain from sale of unconsolidated affiliate, net of tax -- 0.02 -- 0.02
Cumulative effect of accounting change, net of tax -- -- -- (0.16)
--------- --------- -------- ---------
Basic earnings (loss) per share $ 0.12 $ (0.27) $ 0.36 $ (0.15)
========= ========= ======== =========
Diluted earnings (loss) per share from
continuing operations $ 0.12 $ (0.29) $ .36 $ (0.01)
Gain from sale of unconsolidated affiliate, net of tax -- 0.02 -- 0.02
Cumulative effect of accounting change, net of tax -- -- -- (0.16)
--------- --------- -------- ---------
Diluted earnings (loss) per share $ 0.12 $ (0.27) $ .36 $ (0.15)
========= ========= ======== =========
Weighted average number of common shares:
Basic 24,318 24,218 24,298 24,173
Diluted 24,318 24,218 24,298 24,173
</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>
Six Months Ended
June 30
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash provided by (used in) operating activities $ 304 $ (371)
Cash flows from investing activities:
Purchase of property and equipment (14,850) (6,680)
Acquisitions of businesses, net of cash acquired (2,002) (13,098)
Proceeds from sale of asset 2,042 --
-------- --------
Cash used in investing activities (14,810) (19,778)
-------- --------
Cash flows from financing activities:
Net borrowings under notes payable to banks 20,741 47,414
Repayments of notes payable (3,850) (29,173)
Proceeds received from exercise of stock options 504 1,611
-------- --------
Cash provided by financing activities 17,395 19,852
-------- --------
Increase (decrease) in cash and cash equivalents $ 2,889 $ (297)
======== ========
</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
JUNE 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 June 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>
June 30 December 31
2000 1999
------- -----------
(In thousands)
<S> <C> <C>
Revolving credit facilities with banks ........... $164,922 $144,181
6% convertible subordinated notes due 2004, net of
unamortized discount of $2,303 and $2,298 in
2000 and 1999 ............................... 107,057 107,062
5.9% convertible subordinated notes due 2005 ..... 22,000 22,000
Obligations under capital leases ................. 8,762 9,129
Notes payable and other .......................... 6,312 9,341
-------- --------
309,053 291,713
Less current portion ........................ 4,950 6,674
-------- --------
$304,103 $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 Six Months Ended
June 30 June 30
------------------ -------------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Convertible subordinated notes................ 6,666 6,666 6,666 6,666
Stock options .............................. 84 882 125 987
</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 June 30:
2000
Revenues ................ $168,353 $29,722 $15,396 $ -- $213,471
Segment profit (loss) ... 15,400 3,194 1,720 (7,735) 12,579
1999
Revenues ................ $163,226 $28,774 $14,211 $ -- $206,211
Segment profit (loss) ... 19,729 3,290 1,702 (8,534) 16,187
Six months ended June 30:
2000
Revenues ................ $334,003 $59,584 $30,651 $ -- $424,238
Segment profit (loss) ... 33,387 6,466 3,153 (14,958) 28,048
1999
Revenues ................ $320,188 $58,760 $25,747 $ -- $404,695
Segment profit (loss) ... 38,936 6,506 2,890 (16,634) 31,698
</TABLE>
(1) All Other is comprised of corporate general and administrative expenses and
corporate depreciation and amortization. The non-recurring charges of $2.0
million and $20.5 million recorded in 2000 and 1999, respectively, 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 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. Based on the advice of counsel, the
Company believes that significant grounds exist to reverse the judgment on
appeal and expects that a new trial will ultimately be granted. Management
believes that the resolution of the appeal and any subsequent new trial will be
favorable to the Company. Further, the Company believes that damages, if any,
will ultimately be covered by insurance and through indemnification agreements
with the former owners. The Company does not believe that the ultimate
resolution of the matter is likely to have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
In July 2000, American International Specialty Lines Insurance Company
(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 is
likely to 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
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. The
agreement, which ResCare had indicated was subject to a number of conditions,
had been announced April 12, 2000. 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 were expensed in the second quarter of 2000,
which is reflected as a non-recurring charge in the accompanying statement of
income.
Additionally, the Company intends to initiate in the third quarter of
2000 a restructuring and operational reorganization plan. The Company expects to
record a charge of approximately $1.5 million before taxes in the third quarter
in connection with the plan. When fully implemented later this year, the
restructuring is expected to reduce ResCare's annual operating costs by
approximately $3.0 million.
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 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 June 30, 2000, approximately $19.2 million of the
charge had been utilized through $14.5 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 $1.3 million at
June 30, 2000 represents its remaining cash obligations.
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RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
Total revenues in 2000 increased 4%, or $7.3 million, to $213.5 million
compared to $206.2 million in 1999. Including certain non-recurring charges
recorded in the second quarter of each year (discussed above), net income for
the second quarter of 2000 was $2.9 million, compared to a net loss of $6.4
million for the same period in 1999. Excluding the non-recurring charges, net
income for the second quarter of 2000 was $4.1 million compared to $6.7 million
for the 1999 period. The contribution each segment made is discussed below.
Disabilities Services
Disabilities services revenues increased 3%, or $5.2 million, to $168.4
million in the second quarter of 2000 compared to $163.2 million in 1999.
Revenues increased primarily as a result of the effects of internal growth
initiatives coupled with rate increases and census growth. As a percentage of
revenues, disabilities services facility and program expenses increased from
85.1% in 1999 to 88.2% in 2000 due principally to increased labor costs. Overall
segment profit decreased 22%, or $4.3 million, over 1999.
Job Corps Program
Job Corps revenues in 2000 increased 3%, or $900,000, to $29.7 million
compared to $28.8 million in 1999. Segment profit decreased 3% or $100,000 from
1999 to 2000. The increase in revenues 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 8%, or $1.2 million, to
$15.4 million compared to $14.2 million in 1999. Revenues increased primarily as
a result of rate increases and census growth. Segment profit remained stable
from period to period.
Corporate Expenses
Corporate general and administrative expenses decreased 13%, or $1.0
million, in the second quarter of 2000 compared to 1999. Savings from
efficiencies achieved in the PeopleServe merger represented the majority of the
decrease. These savings included corporate and administrative personnel and
office reductions in former PeopleServe operations. Corporate general and
administrative expenses in 2000 decreased as a percentage of total revenues to
3.4% from 4.0% in 1999.
Net interest expense in 2000 increased $900,000 to $5.6 million
compared to $4.7 million for 1999. The increase resulted primarily from
borrowings under the Company's credit facilities to fund working capital needs.
Income tax expense was $2.1 million in 2000 reflecting an effective tax
rate of 41.5%. The Company recorded a tax benefit of $2.0 million in the second
quarter of 1999 as a result of the net loss attributable primarily to the
merger-related charge.
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SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Total revenues in 2000 increased 5%, or $19.5 million, to $424.2
million compared to $404.7 million in 1999. Including the non-recurring charges
discussed above, net income for the first half of 2000 was $8.8 million,
compared to a loss from continuing operations of $400,000 for the same period of
1999. Excluding the non-recurring charges, income from continuing operations for
the second quarter of 2000 was $10.0 million compared to $14.0 million for the
1999 period. The contribution each segment made is discussed below.
Disabilities Services
Disabilities services revenues increased 4%, or $13.8 million, to
$334.0 million in the first six months of 2000 compared to $320.2 million in
1999. Revenues increased primarily as a result of internal growth initiatives,
coupled with census growth and rate increases. As a percentage of revenues,
disabilities services facility and program expenses increased from 85.0% in 1999
to 87.4% in 2000 due principally to increased labor costs. Overall segment
profit decreased 14%, or $5.5 million, from 1999.
Job Corps Program
Job Corps revenues in 2000 increased 1% to $59.6 million compared to
$58.8 million in 1999. Segment profit remained stable from 1999 to 2000.
Other Youth Services Programs
Other youth services revenues in 2000 increased 19% or $4.9 million, to
$30.6 million compared to $25.7 million in 1999. Revenues increased primarily as
a result of the effects of internal growth initiatives and census growth.
Segment profit increased 9% from $2.9 million in 1999 to $3.2 million in 2000
also as a result of these initiatives.
Corporate Expenses
Corporate general and administrative expenses decreased 16%, or $2.5
million, in the first six months of 2000 compared to 1999, primarily due to
savings from efficiencies achieved in the PeopleServe merger. Corporate general
and administrative expenses in 2000 decreased as a percentage of total net
revenues to 3.2% from 4.0% in 1999.
Interest expense in 2000 increased $2.2 million to $11.0 million
compared to $8.8 million for 1999. The increase resulted primarily from interest
on borrowings under the Company's credit facilities to fund working capital
needs.
LIQUIDITY AND CAPITAL RESOURCES
For the first half of 2000, cash provided by operating activities was
$304,000 compared to cash used of $371,000 in the same period of 1999, an
increase of $675,000, due primarily to improvements in levels of accounts
receivable in 2000 compared to 1999.
For the first half of 2000, cash used in investing activities was $14.8
million compared to $19.8 million in the same period of 1999, a decrease of $5.0
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 half of 2000.
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For the first half of 2000, cash provided by financing activities was
$17.4 million compared to $19.9 million in the same period of 1999, a decrease
of $2.5 million, due primarily to lower levels of borrowings necessary in 2000
to fund working capital needs.
At June 30, 2000, the Company had $12.3 million available on its
lines-of-credit and $9.9 million in cash and cash equivalents. Outstanding at
that date were irrevocable standby letters of credit in the principal amount of
$21.3 million issued in connection with workers' compensation insurance and
certain facility leases.
Days revenue in accounts receivable was 66 days at June 30, 2000,
compared to 69 days at March 31, 2000 and 62 days at December 31, 1999. The
increase from December 31, 1999 is primarily related to accelerated collections
from the Department of Labor in December 1999 in advance of Year 2000.
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, management believes the
Company's growth rate going forward, with emphasis on internally-generated
growth, will 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 a
sale-leaseback of its owned real properties. However, management believes cash
generated from operations and amounts remaining available under its credit
facility, 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.
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
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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 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
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costs, discourage clients from using the Company's services, or otherwise
adversely affect the Company's revenues and profitability.
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.
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.
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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.
Two class action lawsuits, styled Joyce Opper v. Res-Care, Inc., et.
al., and Phronesis Partners, L.P. v. James R. Fornear, et. al., were filed in
the Jefferson County, Kentucky Circuit Court in March 2000. The plaintiffs, who
claimed to be stockholders of the Company, alleged that the Company and four of
its directors breached fiduciary duties in connection with a buyout proposal by
a management-led group. The group, which included members of the Company's
management and three equity investment funds, proposed to purchase all of the
Company's common stock for $18 per share. The group subsequently withdrew its
proposal before the execution of definitive transaction agreements when the lead
equity investment fund decided not to proceed with the transaction because of
its concern about the availability of debt financing at acceptable rates in
light of current conditions in the credit markets. After a new investment fund
replaced the withdrawing fund, negotiations continued between the investor group
and a special committee of the Company's board of directors. On April 12, 2000,
the investor group entered into an agreement with the Company to acquire all
outstanding Company shares in a transaction in which the Company's public
stockholders would receive $15.75 per share in cash. After the transaction was
voluntarily terminated by the parties on June 29, 2000, the plaintiffs
voluntarily dismissed both lawsuits with prejudice, without any payment by the
Company.
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 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. Based on the advice of counsel, the
Company believes that significant grounds exist to reverse the judgment on
appeal and expects that a new trial will ultimately be granted. Management
believes that the resolution of the appeal and any subsequent new trial will be
favorable to the Company. Further, the Company believes that damages, if any,
will ultimately be covered by insurance and through indemnification agreements
with the former owners. The Company does not believe that the ultimate
resolution of the matter is likely to have a material adverse effect on its
consolidated financial condition, results of operations 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
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matter is likely to 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 resolution, the Company does not believe
that the ultimate resolution of the matter with the State is likely to have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity.
In July 2000, American International Specialty Lines Insurance Company
(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 is
likely to have a material adverse effect on its consolidated financial
condition, results of operations 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, are likely to have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2 Termination Agreement dated as of June 28, 2000, by and
among Res-Care, Inc., Redwood Acquisition, Inc. and RWD Holdings, Inc. is
incorporated by reference to Exhibit 2 to the Company's Form 8-K dated June 29,
2000.
27.1 Financial Data Schedule - June 30, 2000
27.2 Financial Data Schedule - June 30, 1999 (Restated)
(b) Reports on Form 8-K:
On June 29, 2000, the Company filed a Current Report on Form
8-K announcing that an agreement with an investor group that proposed to acquire
all of the outstanding shares of ResCare common stock had been terminated by
mutual agreement.
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2 Termination Agreement dated as of June 28, 2000, by and among
Res-Care, Inc., Redwood Acquisition, Inc. and RWD Holdings,
Inc. is incorporated by reference to Exhibit 2 to the
Company's Form 8-K dated June 29, 2000.
27.1 Financial Data Schedule - June 30, 2000
27.2 Financial Data Schedule - June 30, 1999 (Restated)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
RES-CARE, INC.
Registrant
Date: August 14, 2000 By: /s/ Ronald G. Geary
------------------------------
Ronald G. Geary
Chairman, President and Chief
Executive Officer
Date: August 14, 2000 By: /s/ Ralph G. Gronefeld, Jr.
------------------------------
Ralph G. Gronefeld, Jr.
Executive Vice President of
Finance & Administration and
Chief Financial Officer
18
