RES CARE INC /KY/ - 10-Q Quarterly Report


(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, 2003
		or
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934

		For the transition period from to


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)

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 þ No [ ].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No [ ].

The number of shares outstanding of the registrant’s common stock, no par value, as of July 31, 2003, was 24,429,476.


		PAGE
PART I	FINANCIAL INFORMATION	NUMBER

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – June 30, 2003 (Unaudited)
	and December 31, 2002	2

	Condensed Consolidated Statements of Income –
	Three Months Ended June 30, 2003 and 2002 (Unaudited);
	Six Months Ended June 30, 2003 and 2002 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows –
	Six Months Ended June 30, 2003 and 2002 (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements – June 30, 2003	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	21

Item 4.	Controls and Procedures	21

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 6.	Exhibits and Reports on Form 8-K	25


			June 30		December 31
			2003		2002

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	73,605	$	72,089
	Accounts receivable, net			129,051		124,609
	Refundable income taxes			4,052		11,890
	Deferred income taxes			17,339		16,621
	Prepaid expenses and other current assets			14,997		16,102

		Total current assets		239,044		241,311

Property and equipment, net				63,856		61,668
Goodwill				228,836		218,256
Other assets				23,422		25,377

			$	555,158	$	546,612

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Trade accounts payable		$	32,465	$	33,957
	Current portion of long-term debt			1,793		1,301
	Accrued expenses			64,438		61,507

		Total current liabilities		98,696		96,765

Long-term liabilities				6,183		5,853
Long-term debt				259,069		261,123
Deferred income taxes				6,327		5,692

		Total liabilities		370,275		369,433

Commitments and contingencies
Shareholders’ equity:
	Preferred shares			—		—
	Common stock			47,910		47,904
	Additional paid-in capital			29,640		29,620
	Retained earnings			107,333		99,655

		Total shareholders’ equity		184,883		177,179

			$	555,158	$	546,612

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)


			Three Months Ended						Six Months Ended
			June 30						June 30

			2003			2002			2003			2002

Revenues			$	238,293		$	229,867		$	476,837		$	452,781
Facility and program expenses				214,225			206,975			428,303			407,917

Facility and program contribution				24,068			22,892			48,534			44,864

Operating expenses (income):
	Corporate general and administrative			8,573			8,299			18,480			17,223
	Depreciation and amortization			3,030			2,846			6,035			6,019
	Other income			(264	)		(228	)		(235	)		(302	)

		Total operating expenses		11,339			10,917			24,280			22,940


Operating income				12,729			11,975			24,254			21,924
Interest expense, net				6,120			6,145			12,257			12,182

Income before income taxes				6,609			5,830			11,997			9,742
Income tax expense				2,379			2,186			4,319			3,653

Net income			$	4,230		$	3,644		$	7,678		$	6,089


Basic and diluted earnings per share			$	0.17		$	0.15		$	0.31		$	0.25


Weighted average number of common shares:
	Basic			24,421			24,412			24,420			24,401
	Diluted			24,606			24,645			24,489			24,685

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


			Six Months Ended
			June 30

			2003			2002

Cash flows from operating activities:
Net income			$	7,678		$	6,089
Adjustments to reconcile net income to cash provided by operating activities:
	Depreciation and amortization			6,035			6,019
	Amortization of discount on notes			214			239
	Deferred income taxes, net			(83	)		(1,121	)
	Provision for losses on accounts receivable			3,729			2,434
	Loss from sale of assets			37			83
	Gain on extinguishment of debt			(219	)		(251	)
	Changes in operating assets and liabilities			4,066			(1,776	)

		Cash provided by operating activities		21,457			11,716


Cash flows from investing activities:
	Purchases of property and equipment			(8,394	)		(6,116	)
	Acquisitions of businesses, net of cash acquired			(9,000	)		(272	)
	Proceeds from sales of assets			234			331

		Cash used in investing activities		(17,160	)		(6,057	)


Cash flows from financing activities:
	Repayments of long-term debt			(2,807	)		(923	)
	Proceeds received from exercise of stock options			26			214

		Cash used in financing activities		(2,781	)		(709	)


Increase in cash and cash equivalents			$	1,516		$	4,950

Res-Care, Inc. is primarily engaged in the delivery of residential, training, educational and support services to various populations with special needs. All references in these financial statements to “ResCare,” “we,” “us,” or “our” mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries.

The accompanying condensed consolidated financial statements of ResCare 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 accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, 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 three month and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

Certain amounts in the 2002 financial statements have been reclassified to conform with the 2003 presentation. Revenues are reported net of provider and gross receipts taxes. For the quarter ended June 30, 2002, provider and gross receipts taxes of $3.8 million were reclassified from facility and program expenses (amounts of $3.5 million were reclassified for each of the first, third and fourth quarters of 2002). Such reclassifications have no effect on previously reported net income or shareholders’ equity.

For further information, including a description of our critical accounting policies, refer to the consolidated financial statements and footnotes thereto in our annual report on Form 10-K for the year ended December 31, 2002.


		June 30		December 31
		2003		2002

		*(In thousands)*
10.625% senior notes due 2008		$	150,000	$	150,000
Credit facility			—		—
6% convertible subordinated notes due 2004, net of unamortized discount of $554 and $749 in 2003 and 2002			90,797		90,602
5.9% convertible subordinated notes due 2005			13,311		15,613
Obligations under capital leases			3,661		3,717
Notes payable and other			3,093		2,492

			260,862		262,424
	Less current portion		1,793		1,301

		$	259,069	$	261,123

During June 2003, we redeemed $2.3 million of our 5.9% convertible subordinated notes realizing a gain of approximately $219,000, which is included in other income. During June 2002, we redeemed $1.4 million of our 6% convertible subordinated notes realizing a gain of approximately $251,000, which is also included in other income.

The following table sets forth the computation of basic and diluted earnings per share:


		Three Months Ended					Six Months Ended
		June 30					June 30

		2003			2002		2003		2002

				*(In thousands, except per share data)*
Income attributable to shareholders for basic and diluted earnings per share		$	4,230		$	3,644	$	7,678	$	6,089

Weighted average number of common shares used in basic earnings per share			24,421			24,412		24,420		24,401
Effect of dilutive securities:
	Stock options		185			233		69		284

Weighted average number of common shares and dilutive potential common shares used in diluted earnings per share			24,606			24,645		24,489		24,685

Basic and diluted earnings per share		$	0.17		$	0.15	$	0.31	$	0.25


The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented:

		Three Months Ended					Six Months Ended
		June 30					June 30

		2003			2002		2003		2002

					*(In thousands)*
Convertible subordinated notes			5,448			5,781		5,454		5,781
Stock options			2,235			1,830		2,240		1,813


	Disabilities		Youth		Training		All			Consolidated
	Services		Services		Services		Other⁽¹⁾			Totals

Three months ended June 30:	(In thousands)

2003
Revenues	$	183,835	$	13,336	$	41,122	$	—		$	238,293
Operating income		16,711		926		4,454		(9,362	)		12,729

2002
Revenues	$	179,736	$	14,580	$	35,551	$	—		$	229,867
Operating income		16,095