Res Care (RSCR) 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

or

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

For the transition period from            to    

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

KENTUCKY	61-0875371
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

9901 Linn Station Road
Louisville, Kentucky	40223-3808
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (502) 394-2100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o.

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 o  No o.

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: o	Accelerated filer: x
Non-accelerated filer: o	Smaller reporting company: o

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

The number of shares outstanding of the registrant’s common stock, no par value, as of April 30, 2010 was 29,404,551.

INDEX

RES-CARE, INC. AND SUBSIDIARIES

		PAGE NUMBER
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Balance Sheets – March 31, 2010 and December 31, 2009	2
	Condensed Consolidated Statements of Income – Three Months Ended March 31, 2010 and 2009	3
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2010 and 2009	4
	Notes to Condensed Consolidated Financial Statements – March 31, 2010	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
SIGNATURES		24
EXHIBITS

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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)

	March 31			December 31
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	16,102		$	20,672
Accounts receivable, net of allowance for doubtful accounts of $22,651 in 2010 and $22,627 in 2009	226,860			211,350
Refundable income taxes	149			3,952
Deferred income taxes	23,440			22,879
Non-trade receivables	2,284			3,960
Prepaid expenses and other current assets	15,255			17,761
Total current assets	284,090			280,574
Property and equipment	203,150			201,136
Accumulated depreciation	(124,263		)	(119,789		)
Property and equipment, net	78,887			81,347
Goodwill	430,198			422,626
Other intangible assets, net	47,947			45,842
Other assets	18,700			14,551
Total assets	$	859,822		$	844,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	41,263		$	44,502
Accrued expenses	117,343			109,400
Current portion of long-term debt	4,154			2,880
Current portion of obligations under capital leases	163			164
Accrued income taxes	245			—
Total current liabilities	163,168			156,946
Long-term liabilities	36,766			35,092
Long-term debt	191,548			195,040
Obligations under capital leases	1,112			1,153
Deferred gains	2,913			3,172
Deferred income taxes	23,037			20,812
Total liabilities	418,544			412,215
Shareholders’ equity:
Preferred shares, authorized 1,000,000 shares, no par value, 48,095 shares designated as Series A with stated value of $1,050 per share, 48,095 shares issued and outstanding in 2010 and 2009	46,609			46,609
Common stock, no par value, authorized 40,000,000 shares, issued 29,777,783 in 2010 and 29,823,872 in 2009, outstanding 29,409,695 in 2010 and 29,453,282 in 2009	50,577			50,577
Additional paid-in capital	94,608			94,892
Retained earnings	258,115			248,697
Accumulated other comprehensive loss	(8,439		)	(7,195		)
Total shareholders’ equity – Res-Care, Inc.	441,470			433,580
Noncontrolling interest(s)	(192		)	(855		)
Total shareholders’ equity	441,278			432,725
Total liabilities and shareholders’ equity	$	859,822		$	844,940

See accompanying notes to condensed consolidated financial statements.

2

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31
	2010			2009
Revenues	$	389,861		$	390,827
Facility and program expenses	354,953			351,929
Facility and program contribution	34,908			38,898
Corporate general and administrative expenses	15,413			15,535
Operating income	19,495			23,363
Interest expense, net	4,831			4,323
Income before income taxes	14,664			19,040
Income tax expense	5,328			6,969
Net income – including noncontrolling interests	9,336			12,071
Net loss – noncontrolling interests	(82		)	(284		)
Net income – ResCare, Inc.	9,418			12,355
Net income attributable to preferred shareholders	1,344			1,774
Net income attributable to common shareholders	$	8,074		$	10,581
Basic earnings per common share	$	0.28		$	0.37
Diluted earnings per common share	$	0.28		$	0.37
Weighted average number of common shares:
Basic	28,899			28,693
Diluted	28,899			28,693

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)

	Three Months Ended
	March 31
	2010			2009
Cash flows from operating activities:
Net income – including noncontrolling interests	$	9,336		$	12,071
Adjustments to reconcile net income, including noncontrolling interests, to cash provided by operating activities:
Depreciation and amortization	6,419			6,836
Amortization of discount and deferred debt issuance costs	408			302
Share-based compensation	845			1,271
Deferred income taxes, net	1,664			1,025
Excess tax expense from share-based compensation	185			—
Provision for losses on accounts receivable	1,714			1,658
Gain on purchase of business	—			(562		)
(Gain) loss on sale of assets	(14		)	30
Changes in operating assets and liabilities	(2,915		)	4,933
Cash provided by operating activities	17,642			27,564
Cash flows from investing activities:
Purchases of property and equipment	(2,277		)	(3,213		)
Acquisitions of businesses	(11,391		)	(1,711		)
Proceeds from sale of assets	24			120
Cash used in investing activities	(13,644		)	(4,804		)
Cash flows from financing activities:
Long-term debt borrowings (repayments)	284			(707		)
Short-term repayments – three months or less, net	(4,000		)	(20,800		)
Payments on obligations under capital lease, net	(41		)	(19		)
Debt issuance costs	(4,352		)	(14		)
Excess tax expense from share-based compensation	(185		)	—
Proceeds received from exercise of stock options	—			168
Employee withholding payments on share-based compensation	(260		)	(506		)
Cash used in financing activities	(8,554		)	(21,878		)
Effect of exchange rate changes on cash and cash equivalents	(14		)	(233		)
(Decrease) increase in cash and cash equivalents	(4,570		)	649
Cash and cash equivalents at beginning of period	20,672			13,594
Cash and cash equivalents at end of period	$	16,102		$	14,243

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 six acquisitions during the first quarter of 2010 within our Community Services segment. Aggregate consideration for these acquisitions was approximately $12.9 million, including $1.5 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $29.4 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:

Property and equipment	$	127
Other intangible assets	3,896
Goodwill	8,815
Other assets	50
Aggregate purchase price	$	12,888

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 $8.8 million of goodwill will be deductible for tax purposes.

5

Note 3.                   Goodwill

A summary of changes to goodwill during the three months ended March 31, 2010 are as follows:

			Job Corps		Employment
	Community		Training		Training
	Services		Services		Services			Other (2)			Total
Balance at December 31, 2009
Goodwill, gross	$	384,944	$	7,589	$	62,058		$	38,437		$	493,028
Accumulated impairment losses	—		—		(53,082		)	(17,320		)	(70,402		)
Goodwill, net	384,944		7,589		8,976			21,117			422,626
Goodwill added through acquisitions	8,815		—		—			—			8,815
Adjustments to previously recorded goodwill (1)	189		—		—			(1,432		)	(1,243		)
Balance at March 31, 2010
Goodwill, gross	393,948		7,589		62,058			37,005			500,600
Accumulated impairment losses	—		—		(53,082		)	(17,320		)	(70,402		)
Goodwill, net	$	393,948	$	7,589	$	8,976		$	19,685		$	430,198

(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.

Note 4.                   Comprehensive Income

The following table sets forth the computation of comprehensive income:

	Three Months Ended
	March 31
	2010			2009
Net income – Res-Care, Inc.	$	9,418		$	12,355
Foreign currency translation adjustments arising during the period	(1,244		)	(2,422		)
Comprehensive income	$	8,174		$	9,933

Note 5.                   Debt

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

	March 31		Dec. 31
	2010		2009
7.75% senior notes due 2013, net of discount of approximately $0.5 million in 2010 and 2009	$	149,515	$	149,480
Senior secured credit facility	40,000		44,000
Obligations under capital leases	1,275		1,317
Notes payable and other	6,187		4,440
	196,977		199,237
Less current portion	4,317		3,044
	$	192,660	$	196,193

On January 28, 2010, we amended our existing senior secured credit facility, which originally had been scheduled to expire on October 3, 2010. The amendment increased the revolving credit facility by $25 million to a total of $275 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $325 million. The credit facility expires on July 28, 2013, and will be used primarily for working capital purposes, letters of

6

credit required under our insurance programs and for acquisitions. The amended and restated senior credit facility contains various financial covenants relating to net worth, capital expenditures and rentals, and requires us to maintain specified ratios with respect to interest coverage and leverage. The amendment provides for the exclusion of charges incurred in connection with certain legal proceedings, as well as any non-cash impairment charges, in the calculation of certain financial covenants. In addition, the amendment excludes transactions with our preferred stockholders from certain events that would constitute a default. The amended and restated senior credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

Note 6.                   Financial Instruments

At March 31, 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:

	March 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Long-term debt:
7.75% senior notes	$	149,515	$	150,750	$	149,480	$	148,688
Senior secured credit facility	40,000		40,000		44,000		44,000
Notes payable and other	6,187		6,146		4,440		4,380

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

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.

	Three Months Ended
	March 31
	2010		2009
Net income	$	9,418	$	12,355
Attributable to preferred shareholders	1,344		1,774
Attributable to common shareholders	$	8,074	$	10,581
Weighted average number of common shares used in basic earnings per common share	28,899		28,693
Effect of dilutive securities:
Stock options	—		—
Restricted stock	—		—
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per common share	28,899		28,693
Basic earnings per common share	$	0.28	$	0.37
Diluted earnings per common share	$	0.28	$	0.37

7

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:

	Three Months Ended
	March 31
	2010	2009
Stock options	235	233
Restricted shares	311	419

Note 8.                   Segment Information

The following table sets forth information about our reportable segments:

			Job Corps		Employment
	Community		Training		Training		All			Consolidated
Three months ended March 31:	Services		Services		Services		Other (1)			Totals
2010
Revenues	$	287,528	$	31,286	$	60,791	$	10,256		$	389,861
Operating income	27,289		2,269		5,623		(15,686		)	19,495
Total assets	638,236		36,528		85,966		99,092			859,822
Capital expenditures	1,195		—		304		778			2,277
Depreciation and amortization	3,013		—		666		2,740			6,419
2009
Revenues	$	281,423	$	40,587	$	55,066	$	13,751		$	390,827
Operating income	32,107		3,176		4,603		(16,523		)	23,363
Total assets	610,849		34,751		136,044		124,589			906,233
Capital expenditures	1,836		—		581		796			3,213
Depreciation and amortization	2,691		—		609		3,536			6,836

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

Note 9.                   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. The appeal bond is unsecured, with the exception of a letter of credit of $0.2 million.

There have been no other material developments in the case since we filed our Annual Report on Form 10-K for the year ended December 31, 2009. We, as well as the plaintiffs, are appealing and we will continue to defend this matter vigorously. Although we have reserved for this self-insured matter, the amount of the reserve and related interest is less than the $15.5 million damages awarded plus any applicable post-judgment interest. In the event a new trial is not granted or the case is not settled, interest on any final judgment will be assessed at 15% per annum. We are accruing interest on the provision we have made in our financial statements and are expensing costs associated with the bond as incurred. If our appeal to obtain a new trial or reduce the amount of the damages does not succeed, it could have a material adverse effect on our results of operations and cash flows.

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Note 10.                 Noncontrolling Interests

In December 2007, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 810, Noncontrolling Interests in Consolidated Financial Statements, (ASC 810). ASC 810 applies to all companies that prepare consolidated financial statements but only affects companies that have a noncontrolling interest in a subsidiary or that deconsolidate a subsidiary. As of March 31, 2010, ResCare held a 66.7% interest in Rest Assured LLC, a limited liability company comprised of public and private organizations providing remote monitoring services for persons with disabilities and the elderly. In February 2010, we acquired the remaining 19% interest in ResCare Maatwerk B.V., which had previously been included in noncontrolling interests. ASC 810 clarifies that noncontrolling interests be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary be recorded as equity transactions if the parent retains its controlling interest in the subsidiary. The statement also requires consolidated net income to include amounts attributable to both the parent and the noncontrolling interest on the face of the income statement. In addition, ASC 810 requires a parent to recognize a gain or loss in net income on the date the parent deconsolidates a subsidiary, or ceases to have a controlling financial interest in a subsidiary.

Noncontrolling interests as of December 31, 2009	$	(855	)
Consolidation of noncontrolling interest acquired	745
Net loss – noncontrolling interests	(82		)
Noncontrolling interest as of March 31, 2010	$	(192	)

Note 11.                 Subsequent Events

There were no material recognizable or disclosable subsequent events.

Note 12.                 Impact of Recently Issued Accounting Pronouncements

In October 2009, the FASB issued Accounting Standard Update 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 amends the Accounting Standards Codification to eliminate the requirement that all undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when VSOE or TPE is unavailable. This amendment will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted as of the beginning of a fiscal year. We are currently evaluating the impact of ASU 2009-13.

Note 13.                 Subsidiary Guarantors

The Senior Notes are jointly, severally, fully and unconditionally guaranteed by our 100% owned U.S. subsidiaries. There are no restrictions on our ability to obtain funds from our U.S. subsidiaries by dividends or other means. The following are condensed consolidating financial statements of our company, including the guarantors. This information is provided pursuant to Rule 3 — 10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Senior Notes. The following condensed consolidating financial statements present the balance sheet, statement of income and cash flows of (i) Res-Care, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries, (iii) the non-guarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for our company on a consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying condensed consolidated financial statements.

9

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2010

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	(758	)	$	8,012		$	8,848		$	—		$	16,102
Accounts receivable, net	48,724			175,319			2,817			—			226,860
Refundable income taxes	144			—			5			—			149
Deferred income taxes	23,416			—			24			—			23,440
Non-trade receivables	487			1,511			286			—			2,284
Prepaid expenses and other current assets	6,698			8,147			410			—			15,255
Total current assets	78,711			192,989			12,390			—			284,090
Property and equipment, net	33,177			45,020			690			—			78,887
Goodwill	31,619			378,191			20,388			—			430,198
Other intangible assets, net	6,883			37,564			3,500			—			47,947
Investment in subsidiaries	705,312			41,794			80,255			(827,361		)	—
Other assets	13,580			4,932			188			—			18,700
	$	869,282		$	700,490		$	117,411		$	(827,361	)	$	859,822
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	23,323		$	16,479		$	1,461		$	—		$	41,263
Accrued expenses	54,165			62,108			1,070			—			117,343
Current portion of long-term debt	—			2,153			2,001			—			4,154
Current portion of obligations under capital leases	12			151			—			—			163
Accrued income taxes	123			—			122			—			245
Total current liabilities	77,623			80,891			4,654			—			163,168
Intercompany	102,048			(104,662		)	2,614			—			—
Long-term liabilities	34,517			2,054			195			—			36,766
Long-term debt	189,515			2,033			—			—			191,548
Obligations under capital leases	3			1,109			—			—			1,112
Deferred gains	1,256			1,657			—			—			2,913
Deferred income taxes	23,042			—			(5		)	—			23,037
Total liabilities	428,004			(16,918		)	7,458			—			418,544
Total shareholders’ equity	441,278			717,408			109,953			(827,361		)	441,278
	$	869,282		$	700,490		$	117,411		$	(827,361	)	$	859,822

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2009

(In thousands)

			Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	6,763	$	4,655		$	9,254		$	—		$	20,672
Accounts receivable, net	38,042		171,280			2,028			—			211,350
Refundable income taxes	3,963		—			(11		)	—			3,952
Deferred income taxes	22,853		—			26			—			22,879
Non-trade receivables	509		3,295			156			—			3,960
Prepaid expenses and other current assets	9,266		8,064			431			—			17,761
Total current assets	81,396		187,294			11,884			—			280,574
Property and equipment, net	34,561		45,994			792			—			81,347
Goodwill	31,619		369,480			21,527			—			422,626
Other intangible assets	7,111		34,811			3,920			—			45,842
Investment in subsidiaries	599,992		41,794			80,255			(722,041		)	—
Other assets	9,315		5,034			202			—			14,551
	$	763,994	$	684,407		$	118,580		$	(722,041	)	$	844,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	23,559	$	19,527		$	1,416		$	—		$	44,502
Accrued expenses	53,711		54,669			1,020			—			109,400
Current portion of long-term debt	—		1,688			1,192			—			2,880
Current portion of obligations under capital leases	14		150			—			—			164
Accrued income taxes	—		—			—			—			—
Total current liabilities	77,284		76,034			3,628			—			156,946
Intercompany	5,367		(10,247		)	4,880			—			—
Long-term liabilities	32,937		1,949			206			—			35,092
Long-term debt	193,481		1,559			—			—			195,040
Obligations under capital leases	6		1,147			—			—			1,153
Deferred gains	1,377		1,795			—			—			3,172
Deferred income taxes	20,817		—			(5		)	—			20,812
Total liabilities	331,269		72,237			8,709			—			412,215
Total shareholders’ equity	432,725		612,170			109,871			(722,041		)	432,725
	$	763,994	$	684,407		$	118,580		$	(722,041	)	$	844,940

11

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2010

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	66,191		$	317,625		$	6,045		$	—		$	389,861
Operating expenses	70,155			294,233			5,978			—			370,366
Operating (loss) income	(3,964		)	23,392			67			—			19,495
Other (income) expenses:
Interest, net	4,808			(22		)	45			—			4,831
Equity in earnings of subsidiaries	(14,922		)	—			—			14,922			—
Total other (income) expenses	(10,114		)	(22		)	45			14,922			4,831
Income before income taxes	6,150			23,414			22			(14,922		)	14,664
Income tax (benefit) expense	(3,186		)	8,506			8			—			5,328
Net income – including noncontrolling interests	9,336			14,908			14			(14,922		)	9,336
Net loss – noncontrolling interests	—			(40		)	(42		)	—			(82		)
Net income – Res-Care, Inc.	$	9,336		$	14,948		$	56		$	(14,922	)	$	9,418

12

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2009

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	76,843		$	309,095		$	4,889		$	—		$	390,827
Operating expenses	76,077			284,869			6,518			—			367,464
Operating income (loss)	766			24,226			(1,629		)	—			23,363
Other (income) expenses:
Interest, net	4,354			(18		)	(13		)	—			4,323
Equity in earnings of subsidiaries	(14,346		)	—			—			14,346			—
Total other (income) expenses	(9,992		)	(18		)	(13		)	14,346			4,323
Income (loss) before income taxes	10,758			24,244			(1,616		)	(14,346		)	19,040
Income tax (benefit) expense	(1,313		)	8,873			(591		)	—			6,969
Net income (loss) – including noncontrolling interests	12,071			15,371			(1,025		)	(14,346		)	12,071
Net loss – noncontrolling interests	—			(38		)	(246		)	—			(284		)
Net income (loss) – Res-Care, Inc.	$	12,071		$	15,409		$	(779	)	$	(14,346	)	$	12,355

13

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2010

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income – including noncontrolling interests	$	9,336		$	14,908		$	14		$	(14,922	)	$	9,336
Adjustments to reconcile net income, including noncontrolling interests, to cash provided by operating activities:
Depreciation and amortization	2,796			3,370			253			—			6,419
Amortization of discount and deferred debt issuance costs on notes	408			—			—			—			408
Share-based compensation	845			—			—			—			845
Deferred income taxes, net	1,662			—			2			—			1,664
Excess tax expense from exercise of stock options	185			—			—			—			185
Provision for losses on accounts receivable	—			1,714			—			—			1,714
Gain on sale of assets	—			(14		)	—			—			(14		)
Equity in earnings of subsidiaries	(14,922		)	—			—			14,922			—
Changes in operating assets and liabilities	92,519			(93,927		)	(1,507		)	—			(2,915		)
Cash provided by (used in) operating activities	92,829			(73,949		)	(1,238		)	—			17,642
Investing activities:
Purchases of property and equipment	(1,184		)	(1,127		)	34			—			(2,277		)
Acquisitions of businesses, net of cash acquired	—			(11,391		)	—			—			(11,391		)
Proceeds from sale of assets	—			24			—			—			24
Cash (used in) provided by investing activities	(1,184		)	(12,494		)	34			—			(13,644		)
Financing activities:
Long-term debt (repayments) borrowings	(1,213		)	1,497			—			—			284
Short-term repayments–three months or less, net	(2,758		)	(2,051		)	809			—			(4,000		)
Payments on obligations under capital leases	—			(41		)	—			—			(41		)
Debt issuance costs	(4,352		)	—			—			—			(4,352		)
Net payments relating to intercompany financing	(90,398		)	90,330			68			—			—
Excess tax expense from share-based compensation	(185		)	—			—			—			(185		)
Employee withholding payments on share-based compensation	(260		)	—			—			—			(260		)
Cash (used in) provided by financing activities	(99,166		)	89,735			877			—			(8,554		)
Effect of exchange rate changes on cash and cash equivalents	—			65			(79		)	—			(14		)
(Decrease) increase in cash and cash equivalents	(7,521		)	3,357			(406		)	—			(4,570		)
Cash and cash equivalents at beginning of period	6,763			4,655			9,254			—			20,672
Cash and cash equivalents at end of period	$	(758	)	$	8,012		$	8,848		$	—		$	16,102

14

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2009

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income – including noncontrolling interests	$	12,071		$	15,371		$	(1,025	)	$	(14,346	)	$	12,071
Adjustments to reconcile net income, including noncontrolling interests, to cash provided by (used in) operating activities:
Depreciation and amortization	2,917			2,994			925			—			6,836
Amortization of discount and deferred debt issuance costs on notes	302			—			—			—			302
Share-based compensation	1,271			—			—			—			1,271
Deferred income taxes, net	1,024			—			1			—			1,025
Provision for losses on accounts receivable	—			1,658			—			—			1,658
Gain on purchase of business	—			(562		)	—			—			(562		)
Loss on sale of assets	—			30			—			—			30
Equity in earnings of subsidiaries	(14,346		)	—			—			14,346			—
Changes in operating assets and liabilities	111,004			(104,988		)	(1,083		)	—			4,933
Cash provided by (used in) operating activities	114,243			(85,497		)	(1,182		)	—			27,564
Investing activities:
Purchases of property and equipment	(1,269		)	(1,923		)	(21		)	—			(3,213		)
Acquisitions of businesses	—			(1,711		)	—			—			(1,711		)
Proceeds from sale of assets	—			120			—			—			120
Cash used in investing activities	(1,269		)	(3,514		)	(21		)	—			(4,804		)
Financing activities:
Long-term debt (repayments) borrowings	(938		)	231			—			—			(707		)
Short-term repayments – three months or less, net	(19,828		)	(972		)	—			—			(20,800		)
Payments on obligations under capital leases, net	—			(19		)	—			—			(19		)
Debt issuance costs	(14		)	—			—			—			(14		)
Net payments relating to intercompany financing	(90,764		)	90,366			398			—			—
Proceeds received from exercise of stock options	168			—			—			—			168
Employee withholding payments on share-based compensation	(506		)	—			—			—			(506		)
Cash (used in) provided by financing activities	(111,882		)	89,606			398			—			(21,878		)
Effect of exchange rate changes on cash and cash equivalents	—			—			(233		)	—			(233		)
Increase (decrease) in cash and cash equivalents	1,092			595			(1,038		)				649
Cash and cash equivalents at beginning of period	146			4,048			9,400			—			13,594
Cash and cash equivalents at end of period	$	1,238		$	4,643		$	8,362		$	—		$	14,243

15

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

Management’s Discussion and Analysis (MD&A) is intended to help the reader understand ResCare’s financial performance and condition. MD&A complements, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in MD&A to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries.

Preliminary Note Regarding Forward-Looking Statements

Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make such forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These 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 ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as “believes”, “anticipates”, “expects”, “intends”, “plans”, “targets”, 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 “Risk Factors” section in Part II, Item 1A of this Report and in our 2009 Annual Report on Form 10-K. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.

Overview of Our Business

We receive revenues primarily from the delivery of residential, training, educational and support services to various populations with special needs. Our programs include an array of services provided in both residential and non-residential settings for adults and youths with intellectual, cognitive or other developmental disabilities, and youths who have special educational or support needs, are from disadvantaged backgrounds, or have severe emotional disorders, including some who have entered the juvenile justice system. We also offer, through drop-in or live-in services, personal care, meal preparation, housekeeping, transportation and some skilled nursing care to the elderly in their own homes. Additionally, we provide services to transition welfare recipients, young people and people who have been laid off or have special barriers to employment, into the workforce and become productive employees.

We have three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. Management’s discussion and analysis of each segment is included below. Further information regarding our segments is included in the notes to condensed consolidated financial statements.

Revenues for our Community Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies and from management contracts with private operators, generally not-for-profit providers, who contract with state government agencies and are also reimbursed under the Medicaid program. Our services include social, functional and vocational skills training, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. We also provide respite, therapeutic and other services to individuals with special needs and to older people in their homes. These services are provided on an as-needed basis or hourly basis through our periodic in-home services programs that are reimbursed on a unit-of-service basis.

16

Reimbursement varies by state and service type, and may be based on a variety of methods including flat-rate, cost-based reimbursement, per person per diem, or unit-of-service basis. Generally, rates are adjusted annually based upon historical costs experienced by us and by other service providers, or economic conditions and their impact on state budgets. At facilities and programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. At most facilities and programs that we operate pursuant to management contracts, the management fee is negotiated with the provider of record. Through ResCare HomeCare, we also provide in-home services to seniors on a private pay basis. We are concentrating growth efforts in the home care private pay business to further diversify our revenue streams.

We operate vocational training centers under the federal Job Corps program administered by the Department of Labor (DOL) through our Job Corps Training Services operations. Under Job Corps contracts, we are reimbursed for direct facility and program costs related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. All of such amounts are reflected as revenue, and all such direct costs are reflected as facility and program costs. Final determination of amounts due under Job Corps contracts is subject to audit and review by the DOL, and renewals and extension of Job Corps contracts are based in part on performance reviews.

We operate job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Employment Training Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct facility and program costs related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services.

Outlook

We provide a variety of vital human services and derive a significant portion of our revenue from state and federal government sources.  Historically, strong demand for the services we provide continues during cyclical economic downturns such as the ongoing crisis in the financial markets and general recessionary environment.  Despite cost containment efforts, many states are dealing with budget deficits or shortfalls as a result of current economic conditions, including their Medicaid budgets that fund a significant portion of the services we provide.

Application of Critical Accounting Policies

Our discussion and analysis of the financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements 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.

We continually review our accounting policies and financial information disclosures. A summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in our 2009 Annual Report on Form 10-K. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2010, there were no material changes in the critical accounting policies and assumptions.

17

Results of Operations

	Three Months Ended March 31
	2010			2009
	(Dollars in thousands)
Revenues:
Community Services	$	287,528		$	281,423
Job Corps Training Services	31,286			40,587
Employment Training Services	60,791			55,066
Other (1)	10,256			13,751
Consolidated	$	389,861		$	390,827
Operating income (loss):
Community Services	$	27,289		$	32,107
Job Corps Training Services	2,269			3,176
Employment Training Services	5,623			4,603
Other (1)	(186		)	(881		)
Total Operating Expenses (2)	(15,500		)	(15,642		)
Consolidated	$	19,495		$	23,363
Operating margin:
Community Services	9.5		%	11.4		%
Job Corps Training Services	7.3		%	7.8		%
Employment Training Services	9.2		%	8.4		%
Other (1)	(1.8		)%	(6.4		)%
Total Operating Expenses (2)	(4.0		)%	(4.0		)%
Consolidated	5.0		%	6.0		%

(1)Represents our international job training and placement agencies, as well as our charter and alternative education schools.

(2)Represents corporate general and administrative expenses, as well as other operating income and (expenses) related to the corporate office.

Consolidated

Consolidated revenues for the quarter ended March 31, 2010 remained consistent over the same period in 2009. Revenues are more fully described in the segment discussions.

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended March 31, 2010, was $19.5 million compared to $23.4 million over the same period in 2009. Consolidated operating margins were 5.0% and 6.0% for the quarterly periods in 2010 and 2009, respectively, due primarily to lower margins in the Community Services and Job Corps Training Services segments, which were partially offset by higher margins in the Employment Training Services segment.

Net interest expense increased $0.5 million for the first quarter of 2010 over the same period in 2009. The increases were primarily attributable to higher rates. Our effective income tax rate for the three months ended March 31, 2010 was 36.3% as compared to 36.6% over the same period in 2009.

Community Services

Community Services revenues for the quarter ended March 31, 2010 increased by $6.1 million, or 2.2%, over the same period in 2009. This increase was due primarily to acquisition growth, which was partially offset by rate and service cuts in certain states. Operating margin decreased from 11.4% in the first quarter of 2009 to 9.5% in the same period in 2010 due primarily to rate and service cuts in certain states, higher insurance related costs and increased costs due to poor weather conditions.

18

Job Corps Training Services

Job Corps Training Services revenues for the quarter ended March 31, 2010 decreased $9.3 million, or 22.9%, from the same period in 2009 primarily due to the loss of the Pittsburgh and Treasure Island Job Corps contracts. Operating margin decreased from 7.8% in the first quarter of 2009 to 7.3% in the same period in 2010 primarily due to higher general and administrative expenses. In December 2009, we were informed that the contract to operate the Phoenix Job Corps center had been awarded to another operator through the re-bidding process. The contract ended January 31, 2010, and had annual revenues of approximately $10.0 million. ResCare filed a formal protest with the DOL regarding the Phoenix Job Corps center procurement and the DOL found that such protest had merit. It is uncertain as to when the DOL will make its final decision.

Employment Training Services

Employment Training Services revenues increased $5.7 million, or 10.4%, in the quarter ended March 31, 2010 over the same period in 2009. Operating margin increased from 8.4% in the first quarter of 2009 to 9.2% in the same period in 2010. The increases in revenues and overall margin were primarily attributable to the close-out of the previous Indiana workforce services sub-contract.

Other

A portion of our business is dedicated to alternative education and international job training and placement agencies. Revenues decreased from $13.8 million in the 2009 first quarter to $10.3 million in the same period in 2010 primarily due to a reduction in our Schools reporting unit revenues in Florida due to lost contracts. Operating income increased from an operating loss of $0.9 million in the first quarter of 2009 to an operating loss of $0.2 million for the same period in 2010 due primarily to higher foreign exchange losses and amortization on intangible assets recorded in the 2009 period for our international business.

Total Operating Expenses

Total operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total operating expenses for the quarter ended March 31, 2010 remained consistent over the same period in 2009.

Financial Condition, Liquidity and Capital Resources

Total assets increased $14.9 million, or 1.8%, in 2010 over balances at December 31, 2009. This was primarily due to an increase in accounts receivable.

Cash and cash equivalents were $16.1 million at March 31, 2010, as compared to $20.7 million at December 31, 2009. Cash provided from operations for the three months ended March 31, 2010 was $17.6 million compared to $27.6 million for the three months ended March 31, 2009. The decrease is primarily due to an increase in accounts receivable of $17.2 million, offset by an increase in accrued expenses of $7.2 million.

Net accounts receivable at March 31, 2010 increased to $226.9 million, compared to $211.4 million at December 31, 2009. Days of revenue in net accounts receivable were 48 days at March 31, 2010, compared with 51 days at December 31, 2009. The improvement in days of revenue, while the accounts receivable balance increased, is due to a decrease in the average receivable balance used in the calculation, which had a large beginning balance in the December 31, 2009 calculation.

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new facilities and programs, and our need for sufficient working capital for general corporate purposes. Since most of our facilities and programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at

19

the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flows and borrowings under our revolving credit facility.

Our investing activities at March 31, 2010 increased $8.8 million over the same period in 2009. We invested $2.3 million during the first three months of 2010 on purchases of property and equipment as compared to $3.2 million during the same period in 2009. We also used $11.4 million on business acquisitions during the first three months of 2010 compared to $1.7 million during the same period of 2009.

Our financing activities included a net payment of debt and capital lease obligations of $3.8 million for the first three months of 2010. This compares to a net payment of debt and capital lease obligations of $21.5 million for the same period in 2009. There were no proceeds from stock option activity for the 2010 period versus $0.2 million in 2009. We also paid $4.4 million in debt issuance costs due to the amendment of our credit facility in 2010, which will be amortized on a straight-line basis over the life of the facility.

On January 28, 2010, we amended our senior secured credit facility, which originally had been scheduled to expire on October 3, 2010. The amendment increased the credit facility by $25 million to a total of $275 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $325 million. The credit facility expires on July 28, 2013, and will be used primarily for working capital purposes, letters of credit required under our insurance programs, and for acquisitions. The amended and restated senior credit facility contains various financial covenants relating to net worth, capital expenditures, and rentals, and requires us to maintain specified ratios with respect to interest coverage and leverage. The amendment provides for the exclusion of charges incurred in connection with certain legal proceedings, as well as any non-cash impairment charges, in the calculation of certain financial covenants. In addition, the amendment excludes transactions with our preferred shareholders from the events that would constitute a default. The amended and restated senior credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

In addition, the amended and restated senior credit facility, among other things, (i) increases the spread on London Interbank Offered Rate (LIBOR) and base rate loans to 375 basis points and 275 basis points, respectively, as of January 28, 2010, through September 30, 2010; subsequent to September 30, 2010, our calculated leverage ratio will determine loan pricing as established in the amended and restated senior credit facility and (ii) changes the required leverage ratio to 3.50 times until September 30, 2010, after which it becomes 3.25 times.

As of March 31, 2010, we had $172.8 million available under the amended and restated senior credit facility with an outstanding balance of $40.0 million. Outstanding balances bear interest at 3.75% over the LIBOR or other bank developed rates at our option. As of March 31, 2010, the weighted average interest rate was 3.98%. As of March 31, 2010, we had irrevocable standby letters of credit in the principal amount of $62.2 million issued primarily in connection with our insurance programs. Letters of credit had a borrowing rate of 3.875% as of March 31, 2010. The commitment fee on the unused balance was 0.50%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

We are in compliance with our debt covenants as of March 31, 2010 and we believe we will continue to be in compliance with our bank covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

Operating funding sources were approximately 63% through Medicaid reimbursement, 8% from the DOL and 29% from other payors. We believe our sources of funds through operations and available through the credit facility described above will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

We had no significant off-balance sheet transactions or interests in 2010 or 2009.

20

Impact of Recently Issued Accounting Pronouncements

See Note 12 of the Notes to Condensed Consolidated Financial Statements.

Item 3.                    Quantitative and Qualitative Disclosures about Market Risk

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.

Interest Rates

While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate or foreign currency exposures. Our senior secured credit facility, which has an interest rate based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $40.0 million as of March 31, 2010 and $44.0 million as of December 31, 2009. A 100 basis point movement in the interest rate would result in an approximate $0.4 million annualized effect on interest expense and cash flows.

Foreign Currency Exchange Risk

Revenues, operating expenses and other financial transactions with our international operations are denominated in their respective functional currencies. As a result, our results of operations and certain receivables and payables are subject to fluctuations in exchange rates between the local currencies and the U.S. dollar. The primary currencies to which we are exposed include the Canadian dollar, the British pound sterling and the Euro. We do not currently hedge against foreign currency rate fluctuations. Gains and losses from such fluctuations have not been material to our consolidated financial position, results of operations or cash flows. International net assets are an immaterial portion of our consolidated net assets.

Item 4.                    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

ResCare’s management, under the supervision and with the participation of the Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO concluded that ResCare’s disclosure controls and procedures are effective in timely making known to them material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act. There were no changes in ResCare’s internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple errors or mistakes, and that controls can be circumvented by the acts of individuals or groups. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II.                OTHER INFORMATION

Item 1.                    Legal Proceedings

Information regarding the legal proceedings is described in Note 9 to the condensed consolidated financial statements set forth in Part I of this report and incorporated by reference into this Part II, Item 1.

Item 1A.                 Risk Factors

The following sets forth changes from the risk factors previously disclosed in our 2009 Annual Report on Form 10-K.

The federal health care reform legislation could adversely affect our financial condition or results of operations.

In March 2010, the U.S. Congress passed and the President signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which represent significant changes to the current U.S. health care system. The legislation contains a large number of health-related provisions to take effect over several years, including imposing new requirements on employer-sponsored health plans which may increase the cost of providing such benefits, modifying certain payment systems, reducing Medicare reimbursement rates for home health care services we provide to our clients and a number of other provisions that could reasonably be expected to impact our business.

Many of the provisions of the legislation do not take effect for an extended period of time. Further revisions to this legislation could result from its implementation. We are unable to predict at this time all of the ramifications the enacted laws, or subsequent changes, may have on our business. This legislation could have a material adverse effect on our financial condition or results of operations.

Item 2.                    Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities     None

Issuer Repurchases of Securities:

					Maximum Number (or
					Approximate Dollar
				Total Number of Shares	Value) of Shares
	(1)	Average Price		Purchased as Part of	That May Yet Be
	Total Number of	Paid		Publicly Announced	Purchased under the
	Shares Purchased	per Share		Plans or Programs	Plans or Programs
January 1-31, 2010	23,199	$	11.17	N/A	N/A
February 1-28, 2010	205	8.96		N/A	N/A
March 1-31, 2010	—	—		N/A	N/A
	23,404	$	11.15	N/A	N/A

(1)These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements.

Item 5.                    Other Information

From time to time executive officers and directors of ResCare may adopt non-discretionary, written trading plans that comply with SEC Rule 10b5-1, which provides executives with a method to monetize their equity-based compensation in an automatic and non-discretionary manner over time. The trading plans adopted by our executives must comply with our compensation and trading policies, and applicable laws and regulations.

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Consistent with ResCare’s philosophy of open communication with our shareholders, we post information about any trading plans of our executive officers and directors in effect from time to time on our corporate website.

Item 6.                    Exhibits

(a) Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
32.	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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:	May 7, 2010	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	May 7, 2010	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and Chief Financial Officer

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