RSCR Res-Care, Inc. (MM)

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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, 2010

or

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

For the transition period from           to           

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

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    ü    No       .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes          No       .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12-b of the Act (Check one):

Large accelerated filer:      Accelerated filer:    ü Non-accelerated filer:      Smaller reporting company:     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes         No    ü .

The number of shares outstanding of the registrant’s common stock, no par value, as of October 31, 2010 was 29,415,653.

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INDEX

RES-CARE, INC. AND SUBSIDIARIES

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PART I.         FINANCIAL INFORMATION

Item 1. Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1.            Basis of Presentation

Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, youth with special needs, adults who are experiencing barriers to employment, and older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “our company”, “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 (U.S. GAAP) for comprehensive annual 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 interim periods are not necessarily indicative of the results that may be expected for a full year.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

For further information refer to the consolidated financial statements and footnotes thereto in our 2009 Annual Report on Form 10-K.

Note 2.            Acquisitions

We completed ten acquisitions during the first nine months of 2010 within our Community Services segment. Aggregate consideration for these acquisitions was approximately $25.3 million, including $4.1 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $55.1 million. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.

The preliminary aggregate purchase price for these acquisitions was allocated as follows:

The other intangible assets consist primarily of customer relationships, licenses and covenants not to compete. All intangible assets will be amortized up to ten years except licenses, which have an indefinite life. We expect all of the $14.7 million of goodwill will be deductible for tax purposes.

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Note 3.            Goodwill

In accordance with Accounting Standards Codification (ASC) 350,  Intangibles-Goodwill and Other (ASC 350) , the Company is required to evaluate the carrying value of its goodwill for potential impairment at least annually as of year end or an interim basis if there are indicators of potential impairment.

During the third quarter of 2010, we updated our current and future year forecasts. The updated revenues and profits in the forecasts were negatively impacted by various contract losses, rate and service cuts by numerous states and other factors attributed to the general economic environment. We concluded that these factors were indicators of possible impairment of goodwill, requiring an interim impairment test during the quarter. We elected to perform the interim test on all five reporting units.

Under ASC 350, the test for, and measurement of, impairment of goodwill consists of two steps. In Step I, the initial test for potential impairment, the Company compares the fair value of each reporting unit to its carrying amount. Fair values were determined using a combination of an income approach and a market based approach. Based on this Step I evaluation, it was determined that the fair values of our Community Services, International and Schools reporting units were less than their carrying values, thus indicating potential impairment. The fair values of our Job Corps Training Services and Employment Training Services reporting units significantly exceeded their carrying values. In Step II, which is the measurement of the impairment, the fair value, as determined in Step I, is assigned to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination at the date of the impairment test. The fair value of tangible net assets and both recognized and unrecognized intangible assets is deducted from the fair value of the reporting unit to determine the implied fair value of reporting unit goodwill. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and written down to its implied fair value. Due to the complexity involved with identifying and properly valuing previously unrecognized intangibles assets, as required by Step II, the Company has yet to complete the Step II evaluation as of the date of these financials. In accordance with ASC 450, Contingencies , the Company determined that an impairment loss is probable and estimates that the range of potential goodwill impairment is from $65.6 million to $150.0 million.

As such, the Company recorded an estimated impairment charge during the third quarter of 2010 of $65.6 million. Accordingly, the net carrying values of goodwill in the Community Services, International and Schools reporting units were reduced $46.9 million, $13.8 million and $4.9 million, respectively. Once the Step II evaluation is completed, any revision to the estimated goodwill impairment charge will be recorded during the fourth quarter of 2010.

A summary of changes to goodwill during the nine months ended September 30, 2010 are as follows:

(1)       Adjustments to previously recorded goodwill primarily relate to foreign currency translation and purchase price allocation adjustments.

(2)              Other is comprised of international and school operations.

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Note 4.            Comprehensive (Loss) Income

The following table sets forth the computation of comprehensive (loss) income:

Note 5.            Debt

Long-term debt and obligations under capital leases consist of the following:

Note 6.            Financial Instruments

At September 30, 2010, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated carrying value because of the short-term nature of these instruments. The fair value of our other financial instruments subject to fair value disclosures are as follows:

We estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available to us.

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Note 7.            Earnings Per Share

The following data shows the amounts used in computing earnings per common share and the effect on income and the weighted average number of shares of dilutive potential common stock.

(1)       Net losses are not allocated to preferred shareholders.

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

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Note 8.            Segment Information

The following table sets forth information about our reportable segments:

(1)              All Other is comprised of our international operations, schools and corporate general and administrative expenses.

(2)              Operating income includes an estimated $65.6 million goodwill impairment charge, with $46.9 million related to our Community Services segment and $18.7 million related to our All Other segment.

Note 9.            Pending Transaction

On September 6, 2010, the Company entered into a definitive agreement with an entity sponsored by Onex Partners III, L.P. (“Onex”), an affiliate of Onex Corporation. Under the terms of the agreement, Onex would acquire all of the outstanding shares of ResCare common stock not owned by Onex affiliates or participating members of ResCare’s management for $13.25 per share in cash (“Onex Transaction”). Affiliates of Onex currently own common and preferred stock representing approximately 24.9% of the Company’s outstanding common stock, assuming conversion of the preferred stock.

The definitive agreement provides that Onex will conduct a tender offer to purchase shares of the Company’s common stock. The tender offer is subject to a non-waivable condition that a majority of the public, non-Onex shares be tendered. There is no financing condition to consummate the transaction. The transaction is also subject to the satisfaction of other customary closing conditions.

The tender offer commenced on September 22, 2010, and will expire at 5 p.m. on November 5, 2010, unless extended in accordance with the terms of the definitive agreement and applicable law. Following the consummation of the tender offer, Onex would acquire any remaining public shares for $13.25 per share in cash through a statutory share exchange.

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Officers of the Company, who together currently own approximately 1% of its outstanding shares, have agreed to exchange their shares for equity interests in the sponsored purchasing entity in lieu of receiving cash consideration for their shares. These shares are not included in the public, non-Onex shares. The officer agreements will terminate if the definitive agreement terminates.

Note 10.          Fair Value

The following table presents the fair value for those assets or liabilities measured at fair value on a nonrecurring basis:

The three levels of hierarchy are:

(a)        Level 1   Quoted prices in active markets for identified assets or liabilities.

(b)        Level 2   Inputs other than quoted prices included within Level 1 that are observable for the asset or liability.

(c)        Level 3   Unobservable inputs used in valuations in which there is little market activity for the asset or liability at the measurement date.

Fair value measurements of assets or liabilities are assigned a level within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement in its entirety. We utilize the market and income approaches to measure fair value for our goodwill. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and therefore is classified as Level 3. The income approach uses valuation techniques to convert future amounts to a single present amount, and therefore is classified as Level 3.

In accordance with the provisions of ASC 350,  Intangibles-Goodwill and Other , goodwill with a carrying amount of $419.9 million was written down to its estimated implied fair value of $354.3 million, resulting in an estimated impairment charge of $65.6 million, which was included in earnings for the period.

Note 11.          Legal Proceedings

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our facilities and programs and arising in the ordinary course of business. We do not believe the ultimate liability, if any, for these proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.

In April 2010, Res-Care, Inc. and its wholly owned subsidiary, Res-Care New Mexico, Inc. posted a $20.2 million appeal bond in Bernalillo County, New Mexico for the previously disclosed New Mexico State Court case styled Larry Selk, by and through his legal guardian, Rani Rubio v. Res-Care New Mexico, Inc., Res-Care, Inc., et al. In July 2010, upon motion by plaintiffs’ counsel, the trial judge required the bond to be increased by an additional $7.0 million to reflect five (5) years of possible interest instead of two (2) years on the previously reduced judgment, for a total appeal bond of $27.2 million. Res-Care, Inc. and Res-Care New Mexico, Inc. posted the additional appeal bond. The appeal bond is secured by a $7.2 million letter of credit and $20.0 million is unsecured.

There have been no other material developments in this case since we filed our Annual Report on Form 10-K for the year ended December 31, 2009. We, as well as the plaintiffs, have appealed and we will continue to defend

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