Res Care (RSCR) 10-Q 2012 Q3 Quarterly report

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, 2012

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)

KENTUCKY	61-0875371
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
9901 Linn Station Road	40223-3808
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 üNo __.

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 üNo __.

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: __ Non-accelerated filer: ü 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, 2012 was 21,344,741.

INDEX

RES-CARE, INC. AND SUBSIDIARIES

		PAGE
PART I.	FINANCIAL INFORMATION	NUMBER
Item 1.	Condensed Consolidated Balance Sheets – September 30, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of Comprehensive Income – Three Months Ended September 30, 2012 and 2011; Nine Months Ended September 30, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements – September 30, 2012	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES
EXHIBITS

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PART I. FINANCIAL INFORMATION

Item 1.                    Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

	September 30				December 31
		2012				2011
ASSETS
Current assets:
Cash and cash equivalents		$	29,084			$	25,651
Accounts receivable, net of allowance for doubtful accounts of $10,604 in 2012 and $6,413 in 2011		222,786				221,089
Refundable income taxes		7,546				11,432
Deferred income taxes		17,181				13,668
Non-trade receivables		3,404				6,684
Prepaid expenses and other current assets		18,243				18,532
Total current assets		298,244				297,056
Property and equipment, net		81,386				84,893
Goodwill		281,569				267,697
Other intangible assets, net		318,635				314,954
Other assets		27,811				27,658
Total assets		$	1,007,645			$	992,258
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable		$	34,746			$	46,107
Accrued expenses		111,513				122,632
Current portion of long-term debt		9,899				4,540
Current portion of obligations under capital leases		74				89
Accrued income taxes		1,318				969
Total current liabilities		157,550				174,337
Long-term liabilities		55,957				55,200
Long-term debt		364,822				364,854
Obligations under capital leases		288				342
Deferred gains		188				300
Deferred income taxes		103,405				98,270
Total liabilities		682,210				693,303
Shareholder’s equity:
Preferred shares, authorized 1,000,000 shares, no par value, except 48,095 shares designated as Series A with stated value of $1,050 per share, no shares issued and outstanding in 2012 and 2011		—				—
Common stock, no par value, authorized 40,000,000 shares, issued and outstanding 21,344,741 in 2012 and 2011		—				—
Additional paid-in capital		243,455				240,509
Retained earnings		81,936				58,611
Accumulated other comprehensive income (loss)		118				(176		)
Total shareholder’s equity – Res-Care, Inc.		325,509				298,944
Noncontrolling interest		(74		)		11
Total shareholder’s equity		325,435				298,955
Total liabilities and shareholder’s equity		$	1,007,645			$	992,258

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Revenues	$	396,838		$	396,267		$	1,194,082		$	1,181,443
Cost of services	296,202			297,555			896,434			890,488
Gross profit	100,636			98,712			297,648			290,955
Operating expenses:
Operational general and administrative	57,364			56,068			176,413			174,818
Corporate general and administrative	14,774			11,256			48,905			39,524
Total operating expenses	72,138			67,324			225,318			214,342
Operating income	28,498			31,388			72,330			76,613
Interest expense, net	7,951			10,394			26,301			31,757
Loss on extinguishment of debt	—			—			7,129			—
Income from continuing operations before income taxes	20,547			20,994			38,900			44,856
Income tax expense	8,271			7,361			15,660			14,399
Income from continuing operations	12,276			13,633			23,240			30,457
Income from discontinued operations, net of tax	—			16,657			—			10,441
Net income	12,276			30,290			23,240			40,898
Net loss-noncontrolling interest	(24		)	(57		)	(85		)	(125		)
Net income-Res-Care, Inc.	12,300			30,347			23,325			41,023
Other comprehensive income:
Foreign currency translation adjustments	265			(374		)	294			(685		)
Comprehensive income attributable to Res-Care, Inc.	$	12,565		$	29,973		$	23,619		$	40,338
Total comprehensive income	$	12,541		$	29,916		$	23,534		$	40,213

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)

	Nine Months Ended
	September 30
	2012			2011
Cash flows from operating activities:
Net income	$	23,240		$	40,898
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	20,010			14,219
Amortization of discount and deferred debt issuance costs	2,091			2,256
Share-based compensation	2,945			—
Deferred income taxes, net	1,622			4,272
Provision for losses on accounts receivable	4,237			4,962
Write down of assets held for sale	—			1,642
Loss on extinguishment of debt, net of original issue discount paid	6,400			—
Loss on sale of assets	76			378
Changes in operating assets and liabilities	(22,807		)	(25,252		)
Cash provided by operating activities	37,814			43,375
Cash flows from investing activities:
Purchases of property and equipment	(11,324		)	(9,133		)
Acquisitions of businesses, net of cash acquired	(22,077		)	(17,803		)
Proceeds from sale of assets	80			217
Cash used in investing activities	(33,321		)	(26,719		)
Cash flows from financing activities:
Long-term debt repayments	(172,077		)	(33,176		)
Long-term debt borrowings	175,000			—
Payments on obligations under capital leases	(69		)	(70		)
Funds contributed by co-investors	—			1,400
Debt issuance costs	(4,007		)	(561		)
Cash used in financing activities	(1,153		)	(32,407		)
Effect of exchange rate changes on cash and cash equivalents	93			(137		)
Increase (decrease) in cash and cash equivalents	3,433			(15,888		)
Cash and cash equivalents at beginning of period	25,651			27,552
Cash and cash equivalents at end of period	$	29,084		$	11,664
Supplemental schedule of non-cash investing and financing activities:
Notes issued in connection with acquisitions	$	739		$	1,282
Forgiveness of management fees and promissory note in connection with an acquisition	$	—		$	2,718

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 services 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”, “Company”, “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 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 only of normal recurring adjustments) considered necessary for a fair statement 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 2011 Annual Report on Form 10-K filed February 16, 2012.

Reclassification

Effective in the quarter ended June 30, 2011, we ceased providing international services within the Workforce Services operating segment. In accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations, the closure and sale of the international operations have been accounted for as discontinued operations in the Quarterly Report on Form 10-Q for the quarter ending June 30, 2011. Accordingly, the results of our international Workforce Services operations, loss on sale of the business and all exit costs have been classified as discontinued operations, net of taxes, for all periods presented, in the accompanying condensed consolidated statements of comprehensive income. Additional information regarding discontinued operations can be found in Note 10.

Certain immaterial reclassifications between segments, not affecting net income, have been made to 2011 amounts to conform to 2012 presentation.

Note 2.                   Onex Transaction

On November 16, 2010, an affiliate of Onex Partners III LP (“Purchaser”) purchased 21,044,765 shares of ResCare common stock in a tender offer. Upon the completion of the tender offer, affiliates of Onex Corporation (the “Onex Investors”) beneficially owned 87.4% of the issued and outstanding shares of ResCare’s common stock on an as-converted basis. On December 22, 2010, upon completion of a share exchange and other reorganization transactions, ResCare became a wholly owned subsidiary of Onex Rescare Holdings Corp., which in turn, is owned by the Onex Investors, certain co-investors and members of our management team.

The total purchase price was $452.4 million based on 34.1 million outstanding ResCare shares (fully converted) at $13.25 per share. The purchase price allocation was finalized in 2011.

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Note 3.                   Acquisitions

We completed four acquisitions within our Residential Services and ResCare HomeCare segments during the first nine months of 2012. Aggregate consideration for these acquisitions was approximately $22.8 million, including $0.7 million of notes issued. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition. Proforma results and other disclosure have not been included as the acquisitions are considered immaterial, individually and in the aggregate.

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

Property and equipment	$	340
Other intangible assets	8,677
Goodwill	13,691
Other assets	107
Aggregate purchase price	$	22,815

The other intangible assets consist primarily of customer relationships, trade names and covenants not to compete. All intangible assets will be amortized over five to twenty years. We expect all of the $13.7 million of goodwill will be deductible for tax purposes.

Note 4.                   Goodwill

Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist. The date of our annual impairment test is October 1. A summary of changes to goodwill during the nine months ended September 30, 2012 is as follows:

	Residential		ResCare		Youth		Workforce
	Services		HomeCare		Services		Services		Total
Balance at December 31, 2011	$	147,648	$	62,500	$	24,829	$	32,720	$	267,697
Goodwill added through acquisitions	13,621		70		—		—		13,691
Other	181		—		—		—		181
Balance at September 30, 2012	$	161,450	$	62,570	$	24,829	$	32,720	$	281,569

In February 2012, we were informed by the New York Human Resources Administration that our Workforce Services’ Wellness, Comprehensive Assessment, Rehabilitation and Employment (“WeCARE”) contract had been awarded to another operator through the competitive bid process. Our performance is scheduled to continue under a contract extension until December 21, 2012. Annual revenues for this contract are approximately $28 million. Our formal protest was denied and we filed two lawsuits in the second quarter of 2012 to challenge the contract award and the bid process. These two lawsuits were unsuccessful and we have ceased legal remedies in attempts to retain the contract.

During the three months ended March 31, 2012, we considered the loss of the WeCARE contract to be an indicator of potential impairment and performed an interim analysis on the Workforce Services reporting unit and concluded that its goodwill was not impaired at March 31, 2012. However, the interim analysis did indicate that Workforce Services’ excess of fair value over its carrying value had decreased to approximately a three percent margin.  During the three months ended June 30, 2012 and September 30, 2012, we continued to monitor this reporting unit.  While operating results are still below original projected levels, margins have improved since March 31, 2012 due to measures that have been implemented within this reporting unit.  Based on our review of the three months ended September 30, 2012, we have concluded there were no impairment indicators present and therefore, no impairment analysis was performed.  If our ongoing performance improvement measures are not successful or sustainable, or we lose additional significant contracts, further deterioration of this business could lead to impairment in the future.

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Note 5.                   Debt

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

	September 30		December 31
	2012		2011
10.75% senior notes due 2019	$	200,000	$	200,000
Senior secured Term Loan B due 2016, net of discount of $2.8 million in 2011	—		165,487
Senior secured Term Loan A due 2017	172,812		—
Senior secured revolving facility	—		—
Obligations under capital leases	362		431
Notes payable and other	1,909		3,907
	375,083		369,825
Less current portion	9,973		4,629
	$	365,110	$	365,196

On April 5, 2012, we entered into a new senior secured credit facility (the “Credit Agreement”) in an aggregate principal amount of $375 million, which replaced our 2010 senior secured revolving credit facility and the senior secured term loan (the “Term Loan B”). The new Credit Agreement consists of a new term loan (the “Term Loan A”) in an aggregate principal amount of $175 million and a new revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $200 million. The Term Loan A and the Revolving Facility each mature on April 5, 2017. The Term Loan A will amortize in an aggregate annual amount equal to a percentage of the original principal amount of the Term Loan A as follows: (i) 5% during each of the first two years after funding, (ii) 10% during the third year after funding and (iii) 15% during each of the final two years of the term. The balance of the Term Loan A is payable at maturity. Pricing for the Term Loan A will be variable, at the London Interbank Offer Rate (LIBOR) plus a spread, which is currently 275 basis points. LIBOR is defined as having no minimum rate. The spread varies between 225 and 300 basis points depending on our total leverage ratio.  The proceeds of the Term Loan A were used to repay the Company’s prior Term Loan B and pay certain related fees and expenses. The proceeds of the Revolving Facility may be used for working capital and for other general corporate purposes permitted under the Credit Agreement, including certain acquisitions and investments. The Credit Agreement also provides that, upon satisfaction of certain conditions, the Company may increase the aggregate principal amount of loans outstanding thereunder by up to $175 million, subject to receipt of additional lending commitments for such loans. The loans and other obligations under the Credit Agreement are (i) guaranteed by Onex Rescare Holdings Corp. (“Holdings”) and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Company, Holdings and substantially all of its subsidiaries (subject to certain exceptions and limitations). The Credit Agreement contains various financial covenants relating to capital expenditures and rentals, and requires us to maintain specific ratios with respect to interest coverage and leverage. The new agreement continues to provide for the exclusion of charges incurred with the resolution of certain legal proceedings provided in Note 9 to Notes to the Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants.

We recorded a loss on extinguishment of debt of $7.1 million in the nine months ended September 30, 2012 associated with termination of the 2010 senior secured revolving credit facility and the Term Loan B prepayment. Loss on extinguishment of debt consists principally of write-offs of deferred debt issuance costs and original issue discount.

Note 6.                   Income Taxes

The effective tax rates were 40.3% and 35.1% for the three months ended September 30, 2012 and 2011, respectively, and 40.3% and 32.1% for the nine months ended September 30, 2012 and 2011, respectively. The increase in the effective tax rate relates primarily to the impact of jobs tax credits (not renewed for 2012) and an adjustment associated

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with the going private transaction costs, which was a discrete adjustment in the second quarter of 2011.  Renewal of the jobs tax credit is uncertain at this time.

Note 7.                   Financial Instruments

At September 30, 2012 and December 31, 2011, 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:

	September 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Long-term debt:
10.75% senior notes	$	200,000	$	222,000	$	200,000	$	205,750
Senior secured Term Loan B	—		—		165,487		159,044
Senior secured Term Loan A	172,812		171,948		—		—
Senior secured credit facility	—		—		—		—
Notes payable and other	1,909		1,868		3,907		3,823

We estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available to us (Level 2).

Note 8.                   Segment Information

The following table sets forth information about our reportable segments:

	Residential		ResCare		Youth		Workforce
	Services		HomeCare		Services		Services		Corporate			Total
Three months ended September 30:
2012
Revenues	$	220,950	$	82,485	$	44,606	$	48,797	$	—		$	396,838
Operating income (loss) (1)	30,772		5,477		3,602		3,448		(14,801		)	28,498
Total assets	541,257		174,645		95,993		89,366		106,384			1,007,645
Capital expenditures	1,385		137		251		123		2,013			3,909
Depreciation and amortization	3,308		611		347		319		2,076			6,661
2011
Revenues	$	217,012	$	79,572	$	46,320	$	53,363	$	—		$	396,267
Operating income (loss) (1)	28,100		6,279		3,342		4,985		(11,318		)	31,388
Total assets	526,914		168,050		97,412		93,932		95,016			981,324
Capital expenditures	1,856		155		29		46		1,747			3,833
Depreciation and amortization	2,252		473		186		315		966			4,192
Nine months ended September 30:
2012
Revenues	$	658,916	$	249,848	$	136,205	$	149,113	$	—		$	1,194,082
Operating income (loss) (1)	87,360		15,654		10,473		7,750		(48,907		)	72,330
Capital expenditures	3,824		699		425		236		6,140			11,324
Depreciation and amortization	9,856		1,810		1,044		933		6,367			20,010
2011
Revenues	$	635,840	$	237,652	$	137,984	$	169,967	$	—		$	1,181,443
Operating income (loss) (1)	74,019		17,218		10,908		14,154		(39,686		)	76,613
Capital expenditures	4,176		339		129		850		3,639			9,133
Depreciation and amortization	7,551		1,548		749		998		3,310			14,156

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(1)Under Corporate, the operating loss is comprised of our corporate general and administrative expenses, as well as other operating income and expenses related to the corporate office.

Note 9.                   Legal Proceedings

ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our programs and arising in the ordinary course of business. Except for the matter discussed below, 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 financial condition, results of operations or cash flows.

We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. Nevertheless, it is reasonably possible that the outcome of these matters may have a material adverse effect on our financial condition, results of operations or cash flows or may affect our reputation.

In March 2007, a lawsuit was filed in Bernalillo County, New Mexico State Court styled Larry Selk, by and through his legal guardian, Rani Rubio v. Res-Care New Mexico, Inc., Res-Care, Inc., et al. The lawsuit sought compensatory and punitive damages for claims of negligence, negligence per se, violations of the Unfair Practices Act and violations of the Resident Abuse and Neglect Act. Settlement discussions were unsuccessful and a jury trial commenced on November 9, 2009 on the issue of negligence. The jury returned a verdict of approximately $53.9 million in damages against the Company, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages, which was entered as a judgment in December 2009. On February 19, 2010, the New Mexico trial court judge ruled on post-trial motions reducing the jury award to $15.5 million, which consists of approximately $10.8 million in punitive damages and $4.7 million in compensatory damages. We believe the parent company is not liable for the actions of its subsidiary (Res-Care New Mexico, Inc.) or its employees and that both the compensatory and punitive amounts awarded are excessive and contrary to United States Supreme Court and New Mexico Supreme Court precedent which would warrant a new trial or, in the alternative, would reduce the judgment amount. We, as well as the plaintiffs, have appealed. Oral arguments before the Court of Appeals were held on November 15, 2011, and we anticipate a ruling from the Court of Appeals in the near future.  We will continue to defend this matter vigorously. Although we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the original amount of the damages awarded, plus accrued interest. The ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations or cash flows.

Note 10.                 Discontinued Operations

In our Form 10-Q for the quarter ended March 31, 2011, we disclosed that we had incurred costs associated with the closure of our international operations in Germany and the Netherlands. We also disclosed that since we were not awarded any contracts under the Work Programme bidding process, we were considering various strategic alternatives for our international operations in the United Kingdom, which included its sale, liquidation or continuation.

On July 1, 2011, we sold our operation in the United Kingdom for one euro. We recorded a charge of $2.2 million in the second quarter of 2011 to adjust assets and liabilities to their net realizable value for this operation. Gross assets were $4.3 million and gross liabilities were $2.1 million before the charge.

In accordance with ASC 205-20, the closure and sale of these international operations have been accounted for as discontinued operations. Accordingly, the results of the international operations of our Workforce Services reportable segment for all periods reported, loss on sale and exit costs have been classified as discontinued operations, net of income taxes, in the accompanying condensed consolidated statements of comprehensive income.

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There were no additional charges related to the closure and sale activities noted above for the nine months ended September 30, 2012. As of September 30, 2012 and December 31, 2011, a liability of $0.4 million and $0.6 million for the vendor and customer claims associated with the Netherlands and Germany closures is included in accrued expenses in the accompanying condensed consolidated balance sheets.

Summarized financial information for the discontinued operations for the three and nine months ended September 30, 2011 is set forth below:

	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
Revenues		$	—			$	4,465
Cost of services		—				5,688
Gross loss		—				(1,223		)
Operational general and administrative expense (1)		(27		)		(5,134		)
Other expense (2)		(50		)		(2,198		)
Interest expense, net		(42		)		(159		)
Loss from discontinued operations, before income taxes		(119		)		(8,714		)
Income tax benefit		16,776				19,155
Income from discontinued operations, net of tax		$	16,657			$	10,441

__________

(1)The nine months ended September 30, 2011 includes a $1.4 million charge in connection with the closures of the Netherlands and Germany operations, which was recorded in the three months ended March 31, 2011.

(2)The nine months ended September 30, 2011 includes a $2.2 million charge for adjusting assets and liabilities to their net realizable value due to the sale of the operations in the United Kingdom on July 1, 2011, which was recorded in the three months ended June 30, 2011. The balance remaining for 2011 periods represents other miscellaneous income.

Note 11.                 Noncontrolling Interest

As of September 30, 2012, 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. ASC 810, Noncontrolling Interests in Consolidated Financial Statements, (“ASC 810”) clarifies that noncontrolling interest 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. There is no foreign currency translation adjustment related to Rest Assured. Balances are as follows:

Noncontrolling interest as of December 31, 2010	$	182
Net loss-noncontrolling interest	(171		)
Noncontrolling interest as of December 31, 2011	11
Net loss-noncontrolling interest	(85		)
Noncontrolling interest as of September 30, 2012	$	(74	)

Note 12.                 Impact of Recently Issued Accounting Pronouncements

We do not believe there are any new accounting pronouncements that have been issued that might have a material impact on our financial position, results of operations or cash flows.

- 11 -

Note 13.                 Subsidiary Guarantors

The Senior Notes are jointly, severally, fully and unconditionally guaranteed, subject to certain automatic customary release provisions, 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 comprehensive 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.

- 12 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2012

(In thousands)

			Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	22,292	$	4,095		$	2,697		$	—		$	29,084
Accounts receivable, net	19,140		203,295			351			—			222,786
Refundable income taxes	7,546		—			—			—			7,546
Deferred income taxes	17,181		—			—			—			17,181
Non-trade receivables	1,508		1,715			181			—			3,404
Prepaid expenses and other current assets	9,590		8,383			270			—			18,243
Total current assets	77,257		217,488			3,499			—			298,244
Property and equipment, net	43,612		37,317			457			—			81,386
Goodwill	237,170		38,916			5,483			—			281,569
Other intangible assets, net	303,572		15,063			—			—			318,635
Investment in subsidiaries	958,972		41,782			—			(1,000,754		)	—
Other assets	24,634		3,160			17			—			27,811
Total assets	$	1,645,217	$	353,726		$	9,456		$	(1,000,754	)	$	1,007,645
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	19,236	$	15,445		$	65		$	—		$	34,746
Accrued expenses	53,023		57,646			844			—			111,513
Current portion of long-term debt	8,750		1,131			1,835			(1,817		)	9,899
Current portion of obligations under capital leases	—		74			—			—			74
Accrued income taxes	1,448		—			(130		)	—			1,318
Total current liabilities	82,457		74,296			2,614			(1,817		)	157,550
Intercompany	713,799		(644,766		)	(70,850		)	1,817			—
Long-term liabilities	55,792		165			—			—			55,957
Long-term debt	364,062		760			—			—			364,822
Obligations under capital leases	—		288			—			—			288
Deferred gains	188		—			—			—			188
Deferred income taxes	103,410		—			(5		)	—			103,405
Total liabilities	1,319,708		(569,257		)	(68,241		)	—			682,210
Preferred shares	—		—			—			—			—
Common stock	—		—			—			—			—
Additional paid-in capital	243,455		476,811			125,104			(601,915		)	243,455
Retained earnings	81,936		446,172			(47,058		)	(399,114		)	81,936
Accumulated other comprehensive (loss) income	118		—			(275		)	275			118
Total shareholder’s equity-Res-Care, Inc.	325,509		922,983			77,771			(1,000,754		)	325,509
Noncontrolling interest	—		—			(74		)	—			(74		)
Total shareholder’s equity	325,509		922,983			77,697			(1,000,754		)	325,435
Total liabilities and shareholder’s equity	$	1,645,217	$	353,726		$	9,456		$	(1,000,754	)	$	1,007,645

- 13 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2011

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	16,733		$	6,547		$	2,371		$	—		$	25,651
Accounts receivable, net	22,947			197,925			217			—			221,089
Refundable income taxes	11,432			—			—			—			11,432
Deferred income taxes	13,668			—			—			—			13,668
Non-trade receivables	752			5,650			282			—			6,684
Prepaid expenses and other current assets	8,556			9,738			238			—			18,532
Total current assets	74,088			219,860			3,108			—			297,056
Property and equipment, net	45,827			38,628			438			—			84,893
Goodwill	237,076			25,338			5,283			—			267,697
Other intangible assets, net	307,566			7,388			—			—			314,954
Investment in subsidiaries	827,281			41,782			—			(869,063		)	—
Other assets	24,548			3,079			31			—			27,658
Total assets	$	1,516,386		$	336,075		$	8,860		$	(869,063	)	$	992,258
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	26,293		$	19,697		$	117		$	—		$	46,107
Accrued expenses	64,061			57,607			964			—			122,632
Current portion of long-term debt	1,700			2,704			2,143			(2,007		)	4,540
Current portion of obligations under capital leases	—			89			—			—			89
Accrued income taxes	1,051			—			(82		)	—			969
Total current liabilities	93,105			80,097			3,142			(2,007		)	174,337
Intercompany	606,864			(537,240		)	(71,631		)	2,007			—
Long-term liabilities	55,112			88			—			—			55,200
Long-term debt	363,786			1,068			—			—			364,854
Obligations under capital leases	—			342			—			—			342
Deferred gains	300			—			—			—			300
Deferred income taxes	98,275			—			(5		)	—			98,270
Total liabilities	1,217,442			(455,645		)	(68,494		)	—			693,303
Preferred shares	—			—			—			—			—
Common stock	—			—			—			—			—
Additional paid-in capital	240,509			476,808			125,106			(601,914		)	240,509
Retained earnings	58,611			314,912			(46,986		)	(267,926		)	58,611
Accumulated other comprehensive (loss) income	(176		)	—			(777		)	777			(176		)
Total shareholder’s equity-Res-Care, Inc.	298,944			791,720			77,343			(869,063		)	298,944
Noncontrolling interest	—			—			11			—			11
Total shareholder’s equity	298,944			791,720			77,354			(869,063		)	298,955
Total liabilities and shareholder’s equity	$	1,516,386		$	336,075		$	8,860		$	(869,063	)	$	992,258

- 14 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended September 30, 2012

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	62,506		$	333,462		$	870		$	—		$	396,838
Operating expenses	68,257			299,211			872			—			368,340
Operating (loss) income	(5,751		)	34,251			(2		)				28,498
Other (income) expenses:
Interest, net	7,960			(6		)	(3		)	—			7,951
Loss on extinguishment of debt	—			—			—			—			—
Equity in earnings of subsidiaries	(20,465		)	(69		)	—			20,534			—
Total other (income) expenses	(12,505		)	(75		)	(3		)	20,534			7,951
Income before income taxes	6,754			34,326			1			(20,534		)	20,547
Income tax (benefit) expense	(5,522		)	13,792			1			—			8,271
Net income	12,276			20,534			—			(20,534		)	12,276
Net loss – noncontrolling interest	(24		)	—			(24		)	24			(24		)
Net income – Res-Care, Inc.	$	12,300		$	20,534		$	24		$	(20,558	)	$	12,300
Other comprehensive income:
Foreign currency translation adjustments	265			—			265			(265		)	265
Comprehensive income attributable to Res-Care, Inc.	$	12,565		$	20,534		$	289		$	(20,823	)	$	12,565
Total comprehensive income	$	12,541		$	20,534		$	265		$	(20,799	)	$	12,541

- 15 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Nine Months Ended September 30, 2012

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	189,821		$	1,001,834		$	2,427		$	—		$	1,194,082
Operating expenses	207,428			911,722			2,602			—			1,121,752
Operating (loss) income	(17,607		)	90,112			(175		)	—			72,330
Other (income) expenses:
Interest, net	26,396			(87		)	(8		)	—			26,301
Loss on extinguishment of debt	7,129			—			—			—			7,129
Equity in earnings of subsidiaries	(53,785		)	(153		)	—			53,938			—
Total other (income) expenses	(20,260		)	(240		)	(8		)	53,938			33,430
Income (loss) before income taxes	2,653			90,352			(167		)	(53,398		)	38,900
Income tax (benefit) expense	(20,587		)	36,314			(67		)	—			15,660
Net income (loss)	23,240			54,038			(100		)	(53,938		)	23,240
Net loss – noncontrolling interest	(85		)	—			(85		)	85			(85		)
Net income (loss) – Res-Care, Inc.	$	23,325		$	54,038		$	(15	)	$	(54,023	)	$	23,325
Other comprehensive income:
Foreign currency translation adjustments	294			—			294			(294		)	294
Comprehensive income attributable to Res-Care, Inc.	$	23,619		$	54,038		$	279		$	(54,317	)	$	23,619
Total comprehensive income	$	23,534		$	54,038		$	194		$	(54,232	)	$	23,534

- 16 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended September 30, 2011

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	65,051		$	330,677		$	539		$	—		$	396,267
Operating expenses	70,603			294,063			213			—			364,879
Operating (loss) income	(5,552		)	36,614			326			—			31,388
Other (income) expenses:
Interest, net	10,421			(2		)	(25		)	—			10,394
Equity in earnings of subsidiaries	(21,205		)	—			—			21,205			—
Total other (income) expenses	(10,784		)	(2		)	(25		)	21,205			10,394
Income before income taxes	5,232			36,616			351			(21,205		)	20,994
Income tax (benefit) expense	(5,903		)	13,170			94			—			7,361
Income from continuing operations	11,135			23,446			257			(21,205		)	13,633
Income (loss) from discontinued operations, net of tax	19,155			—			(2,498		)	—			16,657
Net income (loss) – including noncontrolling interests	30,290			23,446			(2,241		)	(21,205		)	30,290
Net loss – noncontrolling interest	(57		)	—			(57		)	57			(57		)
Net income (loss) – Res-Care, Inc.	$	30,347		$	23,446		$	(2,184	)	$	(21,262	)	$	30,347
Other comprehensive income (loss):
Foreign currency translation adjustments	(374		)	—			(374		)	374			(374		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	29,973		$	23,446		$	(2,558	)	$	(20,888	)	$	29,973
Total comprehensive income (loss)	$	29,916		$	23,446		$	(2,615	)	$	(20,831	)	$	29,916

- 17 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Nine Months Ended September 30, 2011

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	192,966		$	987,163		$	1,314		$	—		$	1,181,443
Operating expenses	206,911			896,174			1,745			—			1,104,830
Operating (loss) income	(13,945		)	90,989			(431		)	—			76,613
Other (income) expenses:
Interest, net	31,846			(58		)	(31		)	—			31,757
Equity in earnings of subsidiaries	(52,835		)	—			—			52,835			—
Total other (income) expenses	(20,989		)	(58		)	(31		)	52,835			31,757
Income (loss) before income taxes	7,044			91,047			(400		)	(52,835		)	44,856
Income tax (benefit) expense	(14,699		)	29,226			(128		)	—			14,399
Income (loss) from continuing operations	21,743			61,821			(272		)	(52,835		)	30,457
Income (loss) from discontinued operations, net of tax	19,155			—			(8,714		)	—			10,441
Net income (loss) – including noncontrolling interests	40,898			61,821			(8,986		)	(52,835		)	40,898
Net loss – noncontrolling interest	(125		)	—			(125		)	125			(125		)
Net income (loss) – Res-Care, Inc.	$	41,023		$	61,821		$	(8,861	)	$	(52,960	)	$	41,023
Other comprehensive income (loss):
Foreign currency translation adjustments	(685		)	—			(685		)	685			(685		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	40,338		$	61,821		$	(9,546	)	$	(52,275	)	$	40,338
Total comprehensive income	$	40,213		$	61,821		$	(9,671	)	$	(52,150	)	$	40,213

- 18 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2012

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Cash flows from operating activities:
Net income	$	23,240		$	54,038		$	(100	)	$	(53,938	)	$	23,240
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	13,588			6,288			134			—			20,010
Amortization of discount and deferred debt issuance costs	2,091			—			—			—			2,091
Share-based compensation	2,945			—			—			—			2,945
Deferred income taxes, net	1,622			—			—			—			1,622
Provision for losses on accounts receivable	793			3,444			—			—			4,237
Write down of assets held for sale	—			—			—			—			—
Loss on extinguishment of debt, net of original issue discount paid	6,400			—			—			—			6,400
Loss on sale of assets	—			76			—			—			76
Equity in earnings of subsidiaries	(53,785		)	(153		)	—			53,938			—
Changes in operating assets and liabilities	164,153			(104,210		)	(82,750		)	—			(22,807		)
Cash provided by (used in) operating activities	161,047			(40,517		)	(82,716		)	—			37,814
Cash flows from investing activities:
Purchases of property and equipment	(7,258		)	(3,913		)	(153		)	—			(11,324		)
Acquisitions of businesses, net of cash acquired	—			(22,077		)	—			—			(22,077		)
Proceeds from sale of assets	—			80			—			—			80
Cash used in investing activities	(7,258		)	(25,910		)	(153		)	—			(33,321		)
Cash flows from financing activities:
Long-term debt repayments	(169,640		)	(2,129		)	(308		)	—			(172,077		)
Long-term debt borrowings	175,000			—			—			—			175,000
Debt issuance costs	(4,007		)	—			—			—			(4,007		)
Payments on obligations under capital leases	—			(69		)	—			—			(69		)
Net payments relating to intercompany financing	(149,583		)	66,080			83,503			—			—
Cash (used in) provided by financing activities	(148,230		)	63,882			83,195			—			(1,153		)
Effect of exchange rate changes on cash and cash equivalents	—			93			—			—			93
Increase (decrease) in cash and cash equivalents	5,559			(2,452		)	326			—			3,433
Cash and cash equivalents at beginning of period	16,733			6,547			2,371			—			25,651
Cash and cash equivalents at end of period	$	22,292		$	4,095		$	2,697		$	—		$	29,084

- 19 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2011

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Cash flows from operating activities:
Net income – including noncontrolling interest	$	40,898		$	61,821		$	(8,986	)	$	(52,835	)	$	40,898
Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities:
Depreciation and amortization	8,253			5,862			104			—			14,219
Amortization of discount and deferred debt issuance costs on notes	2,256			—			—			—			2,256
Deferred income taxes, net	4,280			—			(8		)	—			4,272
Provision for losses on accounts receivable	3,781			1,161			20			—			4,962
Write down of assets held for sale	2,808			—			(1,166		)	—			1,642
Loss on sale of assets	—			378			—			—			378
Equity in earnings of subsidiaries	(52,835		)	—			—			52,835			—
Changes in operating assets and liabilities	(19,275		)	(12,274		)	6,297			—			(25,252		)
Cash (used in) provided by operating activities	(9,834		)	56,948			(3,739		)	—			43,375
Investing activities:
Purchases of property and equipment	(19,452		)	10,085			234			—			(9,133		)
Acquisitions of businesses, net of cash acquired	—			(17,803		)	—			—			(17,803		)
Proceeds from sale of assets	—			217			—			—			217
Cash (used in) provided by investing activities	(19,452		)	(7,501		)	234			—			(26,719		)
Financing activities:
Long-term (repayments) debt borrowings	(35,095		)	1,282			637			—			(33,176		)
Payments on obligations under capital leases, net	—			(70		)	—			—			(70		)
Funds contributed by co-investors	1,400			—			—			—			1,400
Debt issuance costs	(561		)	—			—			—			(561		)
Net payments relating to intercompany financing	54,023			(52,458		)	(1,565		)	—			—
Cash provided by (used in) financing activities	19,767			(51,246		)	(928		)	—			(32,407		)
Effect of exchange rate changes on cash and cash equivalents	—			(138		)	1			—			(137		)
(Decrease) increase in cash and cash equivalents	(9,519		)	(1,937		)	(4,432		)	—			(15,888		)
Cash and cash equivalents at beginning of period	11,084			9,825			6,643			—			27,552
Cash and cash equivalents at end of period	$	1,565		$	7,888		$	2,211		$	—		$	11,664

- 20 -

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 is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in MD&A to “ResCare”, “Company”, “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 our other 2012 Quarterly Reports on Form 10-Q and in Item 1A of our 2011 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.

Onex Transaction

As more fully described in our 2011 Annual Report on Form 10-K, on November 16, 2010, an affiliate of Onex Partners III LP (“Purchaser”) purchased 21,044,765 shares of ResCare common stock in a tender offer. Upon the completion of the tender offer, affiliates of Onex Corporation (the “Onex Investors”) beneficially owned 87.4% of the issued and outstanding shares of ResCare’s common stock on an as-converted basis. On December 22, 2010, upon completion of a share exchange and other reorganization transactions, ResCare became a wholly owned subsidiary of Onex Rescare Holdings Corp., which in turn, is owned by the Onex Investors, certain co-investors and members of our management team.

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 assist them in becoming productive employees.

We have four reportable operating segments: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services and (iv) Workforce Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Youth Services consists of our Job Corps centers, a variety of youth programs including foster care, alternative education programs and charter schools. Workforce Services

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is comprised of our domestic job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects.

Revenues for our Residential 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.

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. Rates are periodically adjusted based upon state budgets or economic conditions and their impact on state budgets. At 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. For most 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 Youth Services operations. Under Job Corps contracts, we are reimbursed for direct costs of services 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 cost of services. 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 Workforce Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct costs of services 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 2011 Annual Report on Form 10-K filed February 16, 2012. Management has discussed the development, selection,

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and application of our critical accounting policies with our Audit Committee. During the nine months ended September 30, 2012, there have been no material changes in the critical accounting policies and assumptions.

Results of Operations

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
	(Dollars in thousands)
Revenues:
Residential Services	$	220,950		$	217,012		$	658,916		$	635,840
ResCare HomeCare	82,485			79,572			249,848			237,652
Youth Services	44,606			46,320			136,205			137,984
Workforce Services (1)	48,797			53,363			149,113			169,967
Consolidated	$	396,838		$	396,267		$	1,194,082		$	1,181,443
Operating income:
Residential Services	$	30,772		$	28,100		$	87,360		$	74,019
ResCare HomeCare	5,477			6,279			15,654			17,218
Youth Services	3,602			3,342			10,473			10,908
Workforce Services (1)	3,448			4,985			7,750			14,154
Corporate (2)	(14,801		)	(11,318		)	(48,907		)	(39,686		)
Consolidated	$	28,498		$	31,388		$	72,330		$	76,613
Operating margin:
Residential Services	13.9%			12.9%			13.3%			11.6%
ResCare HomeCare	6.6%			7.9%			6.3%			7.2%
Youth Services	8.1%			7.2%			7.7%			7.9%
Workforce Services (1)	7.1%			9.3%			5.2%			8.3%
Corporate (2)	(3.7%		)	(2.9%		)	(4.1%		)	(3.4%		)
Consolidated	7.2%			7.9%			6.1%			6.5%

(1)Excludes results for international operations, which were reclassified to discontinued operations for all periods presented.

(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 and nine months ended September 30, 2012 increased $0.6 million and $12.6 million, or 0.1% and 1.1%, respectively, from the same periods in 2011. Revenues are more fully described in the segment discussions.

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended September 30, 2012, was $28.5 million compared to operating income of $31.4 million from the same period in 2011. Consolidated operating margins were 7.2% and 7.9% for the quarterly periods in 2012 and 2011, respectively. The decrease in operating income and margin primarily resulted from margin erosion in our ResCare HomeCare and Workforce Services businesses, as well as higher depreciation expense and share-based compensation expense in our corporate general and administrative expenses.  In addition, the third quarter of 2011 included a favorable workers’ compensation insurance adjustment in our corporate general and administrative expenses.

Consolidated operating income for the nine months ended September 30, 2012 was $72.3 million compared to $76.6 million for the same period in 2011. Consolidated operating margins were 6.1% and 6.5% for the nine month periods in 2012 and 2011, respectively.

Net interest expense decreased $2.4 million for the third quarter of 2012 and $5.5 million for the nine months ended September 30, 2012, compared to the same periods in 2011. The decreases were due primarily to lower rates from the new senior secured credit facility that closed during the second quarter.  The 2012 nine month period also includes $7.1 million related to a loss on extinguishment of debt from the refinancing that is further described in Note 5 to the Notes to

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the Condensed Consolidated Financial Statements. Our effective income tax rate for the nine months ended September 30, 2012 was 40.3% as compared to 32.1% over the same period in 2011. The 2012 rate was negatively impacted by the expiration of jobs tax credits and an adjustment associated with the going private transaction costs, which was a discreet adjustment in the second quarter of 2011.  Renewal of the jobs tax credit is uncertain at this time.

Residential Services

Residential Services revenues for the quarter ended September 30, 2012 increased $3.9 million, or 1.8%, over the same period in 2011 due primarily to acquisition growth of $5.4 million and rate/system reimbursement increases of $2.0 million, which were partially offset by a decrease in organic business of $3.4 million. Residential Services revenues for the nine months ended September 30, 2012 increased $23.1 million, or 3.6%, over the same period in 2011 due primarily to acquisition growth of $15.1 million, rate/system reimbursement increases of $4.2 million, an increase of $2.3 million due to an extra billable day and organic growth of $1.4 million. Operating margins increased to 13.9% and 13.3% for the quarter and nine months ended September 30, 2012, respectively, compared to 12.9% and 11.6%, respectively, for the same periods in 2011 due primarily to growth and effective management of labor and controllable costs.

ResCare HomeCare

ResCare HomeCare revenues for the quarter ended September 30, 2012 increased $2.9 million, or 3.7%, over the same period in 2011 due primarily to acquisition growth of $5.9 million, which was partially offset by rate and service cuts of $1.1 million and a decrease in organic business of $1.8 million across several states. Operating margins decreased to 6.6% for the quarter ended September 30, 2012 from 7.9% for the same period in 2011due primarily to $0.4 million in rate and service cuts, $0.6 million reduction in organic business and $0.3 million increase in marketing expenses, which were partially offset by $0.7 million impact from acquisitions.  Revenues for the nine months ended September 30, 2012 increased $12.2 million, or 5.1%, over the same period in 2011 due primarily to acquisition growth of $19.9 million, which was partially offset by rate and service cuts of $3.1million and $4.6 million reduction in organic business across several states. Operating margins decreased to 6.3% for the nine months ended September 30, 2012 from 7.2% for the same period in 2011 due primarily to $1.0 million in rate and service cuts, $1.5 million reduction in organic business and $0.8 million increase in bad debt expense, which were partially offset by $2.7 million impact from acquisitions.

Youth Services

Youth Services revenues for the quarter ended September 30, 2012 decreased $1.7 million, or 3.7%, from the same period of 2011, due primarily to the loss of the contract for the Cleveland Job Corps Center and Job Corps contract spending reductions. Revenue for the nine months ended September 30, 2012 decreased $1.8 million, or 1.3% from the same period in 2011, including $1.0 million relating to our sale of New Summit, an education operation, and the Cleveland Jobs Corps Center contract loss of $0.7 million.  Operating margins were 8.1% and 7.7% for the quarter and nine month periods ended September 30, 2012, respectively, compared to 7.2% and 7.9%, respectively, for the same periods in 2011.  The increase in operating margins for the quarter was due primarily to reducing controllable costs in our Residential Youth reporting unit.

Workforce Services

Workforce Services revenues for the quarter ended September 30, 2012 decreased $4.6 million, or 8.6%, from the same period in 2011 due primarily to net contract losses of $3.3 million, contract amendments of $1.0 million and contract performance issues of $0.3 million. Operating margins decreased to 7.1% for the quarter ended September 30, 2012 from 9.3% for the same period in 2011 due primarily to net contract losses of $1.0 million, contract performance issues of $1.0 million, which were partially offset by overhead cost reductions of $0.3 million.  Revenues for the nine months ended September 30, 2012 decreased $20.9 million, or 12.3%, from the same period in 2011 due primarily to net contract losses of $12.4 million, contract amendments of $2.4 million and contract performance issues of $6.0 million .  Operating margins decreased to 5.2% for the nine months ended September 30, 2012 from 8.3% for the same period in 2011 due primarily to contract performance issues of $5.2 million and net contract losses of $2.7 million, which were partially offset by overhead cost reductions of $0.5 million.  Workforce Services has achieved sequential operating margin improvement over the first three quarters in 2012.

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In February 2012, we were informed by the New York Human Resources Administration that our Workforce Services’ Wellness, Comprehensive Assessment, Rehabilitation and Employment (“WeCARE”) contract had been awarded to another operator through the competitive bid process. Our performance is scheduled to continue under a contract extension until December 21, 2012. Annual revenues for this contract are approximately $28 million. Our formal protest was denied and we filed two lawsuits in the second quarter of 2012 to challenge the contract award and the bid process. These two lawsuits were unsuccessful and we have ceased legal remedies in attempts to retain the contract.

During the three months ended March 31, 2012, we considered the loss of the WeCARE contract to be an indicator of potential impairment and performed an interim analysis on the Workforce Services reporting unit and concluded that its goodwill was not impaired at March 31, 2012. That interim analysis did indicate that Workforce Services’ excess of fair value over its carrying value had decreased to approximately a three percent margin.  During the three months ended June 30, 2012 and September 30, 2012, we continued to monitor this reporting unit.  While operating results are still below original projected levels, margins have improved since March 31, 2012 due to measures that have been implemented within this reporting unit.  Based on our review of the three months ended September 30, 2012, we have concluded there were no impairment indicators present and therefore, no impairment analysis was performed.  If our ongoing performance improvement measures are not successful or sustainable, or we lose additional significant contracts, further deterioration of this business could lead to impairment in the future.

Corporate

Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total expenses for the third quarter ended September 30, 2012 increased $3.5 million compared to the same period in 2011 due primarily to an increase in depreciation expense of $2.5 million and share-based compensation expense of $0.9 million.  Total expenses for the nine months ended September 30, 2012 increased $9.2 million compared to the same period in 2011 due primarily to an increase in depreciation expense of $5.8 million and share-based compensation expense of $2.9 million.

Financial Condition, Liquidity and Capital Resources

Total assets increased $15.4 million, or 1.6%, at September 30, 2012 over balances at December 31, 2011. This was primarily a result of an increase in goodwill and other intangible assets from 2012 acquisitions, along with an increase in cash and cash equivalents.

Cash and cash equivalents were $29.1 million at September 30, 2012, as compared to $25.7 million at December 31, 2011. Cash provided from operations for the nine months ended September 30, 2012 was $37.8 million compared to $43.4 million for the nine months ended September 30, 2011.

Net accounts receivable at September 30, 2012 increased to $222.8 million, compared to $221.1 million at December 31, 2011. Days of revenue in net accounts receivable were 49.8 days at September 30, 2012, compared with 49.0 days at December 31, 2011.

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new programs, and our need for sufficient working capital for general corporate purposes. Since most of our 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 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, and expect that this will continue for at least the next twelve months.

Our investing activities for the nine months ended September 30, 2012 increased $6.6 million over the same period in 2011 due to acquisitions and investment in acquisitions and purchases of property and equipment. We used $22.1 million on business acquisitions during the first nine months of 2012 compared to $17.8 million during the same period of 2011.

Our financing activities included net proceeds of debt and capital lease obligations of $2.9 million for the first nine months of 2012, which included proceeds of $175 million related to the new term loan (the “Term Loan A”) and the payoff of $172.1 million related to the old term loan (the “Term Loan B”), both of which are discussed below. This

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compares to a net payment of debt and capital lease obligations of $33.2 million for the same period in 2011. During 2012, we have paid $4.0 million in debt issuance costs resulting from the a new senior secured credit facility (the “Credit Agreement”) we entered into on April 5, 2012. In January 2011 we paid the remainder due of $30.5 million on the 7.75% Senior Notes due October 2013. During the first quarter of 2011, we received funds of $1.4 million from co-investors through the Onex transaction.

On December 22, 2010, we issued $200 million of 10.75% Senior Notes due January 15, 2019 in a private placement to qualified institutional buyers under the Securities Act of 1933. The Senior Notes, which had an issue price of 100% of the principal amount, are unsecured obligations ranking equal to existing and future debt and are subordinate to existing and future secured debt. The effective interest rate for these notes is approximately 10.75%. Proceeds were used to fund the redemption of $120 million of our 7.75% Senior Notes tendered by the holders. The remaining $30 million of the 7.75% Senior Notes were satisfied and discharged in January 2011 by delivering to the trustee amounts sufficient to pay the applicable redemption price. The Senior Notes are jointly, severally, fully and unconditionally guaranteed, subject to certain automatic customary release provisions, by our domestic subsidiaries.

As noted above, on April 5, 2012, we entered into a new “Credit Agreement” in an aggregate principal amount of $375 million, which replaced our 2010 senior secured credit facility and the $170 million senior secured Term Loan B. The new Credit Agreement consists of the Term Loan A in an aggregate principal amount of $175 million and a new revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $200 million. The Term Loan A and the Revolving Facility each mature on April 5, 2017.  The Term Loan A will amortize in an aggregate annual amount equal to a percentage of the original principal amount of the Term Loan A as follows: (i) 5% during each of the first two years after funding, (ii) 10% during the third year after funding and (iii) 15% during each of the final two years of the term. The balance of the Term Loan A is payable at maturity. Pricing for the Term Loan A will be variable, at the London Interbank Offer Rate (LIBOR) plus a spread, which is currently 275 basis points. LIBOR is defined as having no minimum rate. The spread varies between 225 and 300 basis points depending on our total leverage ratio.  The proceeds of the Term Loan A were used to prepay our Term Loan B and pay certain related fees and expenses. The proceeds of the Revolving Facility may be used for working capital and for other general corporate purposes permitted under the Credit Agreement, including certain acquisitions and investments. The Credit Agreement also provides that, upon satisfaction of certain conditions, the Company may increase the aggregate principal amount of loans outstanding thereunder by up to $175 million, subject to receipt of additional lending commitments for such loans. The loans and other obligations under the Credit Agreement are (i) guaranteed by Onex Rescare Holdings Corp. (“Holdings”) and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Company, Holdings and substantially all of its subsidiaries (subject to certain exceptions and limitations). The Credit Agreement contains various financial covenants relating to capital expenditures and rentals, and requires us to maintain specific ratios with respect to interest coverage and leverage. The new agreement continues to provide for the exclusion of charges incurred with the resolution of legal proceedings provided in Note 9 to Notes to the Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants. We recorded a loss on extinguishment of debt of $7.1 million in the nine months ended September 30, 2012 associated with replacement of the 2010 revolving credit facility and the Term Loan B prepayment. Loss on extinguishment of debt consists principally of write-offs of deferred debt issuance costs and original issue discount.

As of September 30, 2012, we had irrevocable standby letters of credit in the principal amount of $59.1 million issued primarily in connection with our insurance programs. As of September 30, 2012, we had $140.9 million available under the new Revolving Facility, with no outstanding balance. Outstanding balances bear interest at 2.75% over the LIBOR or other bank developed rates at our option. As of September 30, 2012, the weighted average interest rate was not applicable as there were no outstanding borrowings. Letters of credit had a borrowing rate of 2.88% as of September 30, 2012. The commitment fee on the unused balance was 0.50%. The margin over LIBOR and the commitment fee is determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

We are in compliance with our debt covenants at September 30, 2012, and we believe we will continue to be in compliance with our bank covenants over the next twelve months. We believe 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 66% through Medicaid reimbursement, 8% from the DOL and 26% from other payors. We believe our sources of funds through operations and available through the credit facility described

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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 2012 or 2011.

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. 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 exposures. Our senior secured term loan and senior secured credit facility, which have interest rates based on margins over LIBOR or prime, tiered based upon leverage calculations, had outstanding borrowings of $172.8 million and $165.5 million as of September 30, 2012 and December 31, 2011, respectively.  A 100 basis point movement in the interest rate would result in an approximate $1.7 million annualized effect on interest expense and cash flows.

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 September 30, 2012 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 risk factors update the risk factors previously disclosed in our 2011 Annual Report on Form 10-K filed February 16, 2012 and our 2012 Quarterly Reports on Form 10-Q.

Federal, state and local budgetary shortfalls or changes in reimbursement policies could adversely affect our revenues and profitability and collectability of receivables.

We derive a substantial amount of our revenues from federal, state and local government agencies, including state Medicaid programs and employment training programs. Our revenues therefore depend to a large degree on the size of the governmental appropriations for the services we provide. Budgetary pressures, issues with the federal government’s debt ceiling, as well as economic, industry, political and other factors, could influence governments to significantly decrease or eliminate appropriations for these services, which could reduce our revenues materially. The majority of states have forecasted budget shortfalls as a result of the current economic environment. Many state governments also continue to experience shortfalls in their Medicaid budgets despite cost containment efforts. The recent health reform legislation places further demands on Medicaid budgets by mandating that states expand Medicaid eligibility. Future federal or state initiatives could institute managed care programs for individuals we serve, eliminate programs or otherwise make material changes to the Medicaid program as it now exists. Future revenues may be affected by changes in rate-setting structures, methodologies or interpretations that may be proposed or are under consideration in states where we operate.

Our ability to collect accounts receivable is also subject to developments at state payor agencies, state budget pressures, economic conditions and other factors outside our control that may cause us to record higher provisions for allowances for doubtful accounts or incur bad debt write-offs, both of which could have a material adverse effect on our business, financial position, results of operations and liquidity. Changes in reimbursement procedures by the states, including engaging new agents to manage the reimbursement function, may delay reimbursement payments and create backlogs. Paying aged receivables may be a lower priority for states experiencing budgetary pressures despite our meeting applicable billing requirements. This may increase the need to pursue more aggressive collection activities, including litigation, against government agencies and other payors. Events that delay or prevent our collection of accounts receivable could have a material adverse effect on our financial condition.

Furthermore, federal, state and local government agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If a government agency does not receive an appropriation sufficient to cover its contractual obligations with us, it may terminate a contract or defer or reduce our reimbursement. Previously appropriated funds could also be reduced or eliminated through subsequent legislation. Additionally, the Budget Control Act of 2011, signed by President Obama in August 2011, contained provisions which resulted in automatic reductions in spending for various programs to address concerns about the federal deficit and national debt levels.  We are unable to estimate the impact to our Company for these automatic spending reductions.  The loss or reduction of reimbursement under our contracts could have a material adverse effect on our business, financial condition and operating results.

Our industry is subject to substantial government regulation and if we fail to comply with those regulations, we could suffer penalties or be required to make significant changes to our operations.

The human services industry, including our company, is required to comply with extensive and complex laws and regulations at each foreign country level and domestically at the federal, state and local government levels relating to, among other things:

·licensure and certification;

·adequacy and quality of health care services and employment services;

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·qualifications of health care and support personnel;

·confidentiality, maintenance and security issues associated with medical or other personal records and claims processing;

·relationships with referral sources;

·operating policies and procedures;

·addition of programs and services; and

·billing for services.

Many of these laws and regulations are expansive, and we do not always have the benefit of significant regulatory or judicial interpretation of them. In the future, changing interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our programs, equipment, personnel, services, capital expenditure programs and operating expenses.

If we fail to comply with applicable laws and regulations, we could be subject to various sanctions, including criminal penalties, civil penalties (including the loss of our licenses or contracts to operate one or more of our homes or programs) and exclusion of one or more of our homes or programs from participation in the Medicare, Medicaid and other federal and state health care programs. Similar risks would apply in each foreign country where we do business. In the past we have had some of our licenses suspended or terminated and/or one or more of our programs excluded. If allegations of noncompliance were to arise in the future in respect of a significant subsidiary or in respect of ResCare that might jeopardize its participation in Medicare or Medicaid, an adverse outcome could have a material adverse effect on our business, results of operations or liquidity.

Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care companies. These investigations relate to a wide variety of topics, including:

·billing practices;

·quality of care;

·financial relationships with referral sources; and

·medical necessity of services provided.

Like other participants in the human services industry, we receive requests and demands for information from government agencies in connection with the regulatory or investigational authority. Such requests can include subpoenas, civil investigative demands, demand letters or search warrants for documents to assist the government in audits or investigations. In addition, under the False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. A number of states and cities have adopted similar whistleblower and false claims provisions.

As a result of an audit report prepared by the U.S. Office of the Inspector General regarding a subcontract awarded at one of our Job Corps Centers, we received and accepted negative recommendations from the U.S. Department of Labor, Employment & Training Administration, Office of Contract Management (“OCM”).  In addition, OCM recommended further investigation and consideration of possible additional remedial measures pursuant to the Federal Acquisition Regulation.  Although we are engaging in mitigation efforts to avoid imposition of remedial measures, such measures could negatively affect the ability of the Company, its subsidiaries and affiliates to retain existing and secure future federal and state government contracts.  The imposition of penalties pursuant to the Federal Acquisition Regulation could have a material adverse effect on our reputation, business, financial condition, liquidity and results of operations.

A loss of our status as a service provider in any jurisdiction could result in the termination of existing services and our inability to market our services in that jurisdiction.

We operate in numerous jurisdictions and are required to maintain licenses and certifications in order to conduct our operations in each of them. Each state and county has its own regulations, which can be complicated, and each of our service lines can be regulated differently within a particular jurisdiction. As a result, maintaining the necessary licenses

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and certifications to conduct our operations can be cumbersome. Our licenses and certifications could be suspended, revoked or terminated for a number of reasons, including: the failure by some of our programs or employees to properly care for clients; the failure to submit proper documentation to the government agency, including documentation supporting reimbursements for costs; the failure by our programs to abide by the applicable regulations relating to the provisions of human services; or the failure of our programs to abide by the applicable building, health and safety codes and ordinances. We have had some of our licenses or certifications suspended or terminated in the past. One of our subsidiaries is currently under scrutiny from state oversight agencies, which has resulted in the loss of one provider services agreement, which we have appealed.  We are working closely with state oversight agencies to mitigate any additional possible sanctions so the subsidiary can remain in good standing with the state under other existing provider agreements. If we were to lose our status as a licensed provider of human services in any jurisdiction or any other required certification, we may be unable to market our services in that jurisdiction, and the contracts under which we provide services in that jurisdiction could be subject to termination. Moreover, such an event could constitute a violation of provisions of contracts in other jurisdictions, resulting in other contract terminations. Any of these events could have a material adverse effect on our reputation, business, results of operations, financial condition or ability to satisfy our obligations under our indebtedness.

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

None.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.Exhibits

	Exhibit		Description of Exhibit
*		31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.

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	Exhibit		Description of Exhibit
*		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.
*		101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.
		*	Filed herewith

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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:	November 1, 2012	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	November 1, 2012	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and Chief Financial Officer

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