Res Care (RSCR) 10-Q 2013 Q2 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 June 30, 2013

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 July 31, 2013 was 21,344,741.

INDEX

RES-CARE, INC. AND SUBSIDIARIES

		PAGE
PART I.	FINANCIAL INFORMATION	NUMBER
Item 1.	Condensed Consolidated Balance Sheets – June 30, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Comprehensive Income – Three Months Ended June 30, 2013 and 2012; Six Months Ended June 30, 2013 and 2012	4
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012	5
	Notes to Condensed Consolidated Financial Statements – June 30, 2013	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations 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	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
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)

	June 30			December 31
	2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	61,076			$	50,134
Accounts receivable, net of allowance for doubtful accounts of $15,144 in 2013 and $11,997 in 2012	230,439				228,377
Refundable income taxes	3,767				—
Deferred income taxes	17,355				17,589
Prepaid expenses and other current assets	23,345				22,116
Total current assets	335,982				318,216
Property and equipment, net	98,202				97,030
Goodwill	289,686				288,265
Other intangible assets, net	319,287				321,293
Other assets	23,972				27,154
Total assets	$	1,067,129			$	1,051,958
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	34,737			$	37,738
Accrued expenses	115,147				114,876
Current portion of long-term debt	9,996				14,695
Current portion of obligations under capital leases	6,670				6,052
Accrued income taxes	225				1,813
Total current liabilities	166,775				175,174
Long-term liabilities	56,739				56,469
Long-term debt	354,538				358,420
Obligations under capital leases	14,028				11,632
Deferred income taxes	108,366				106,253
Total liabilities	700,446				707,948
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 2013 and 2012	—				—
Common stock, no par value, authorized 40,000,000 shares, issued and outstanding 21,344,741 in 2013 and 2012	—				—
Additional paid-in capital	245,897				244,345
Retained earnings	121,345				99,734
Accumulated other comprehensive income (loss)	(384		)		30
Total shareholder’s equity – Res-Care, Inc.	366,858				344,109
Noncontrolling interest	(175		)		(99)
Total shareholder’s equity	366,683				344,010
Total liabilities and shareholder’s equity	$	1,067,129			$	1,051,958

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						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
Revenues	$	396,233		$	399,902		$	785,687		$	797,244
Cost of services	295,168			301,143			589,544			600,423
Gross profit	101,065			98,759			196,143			196,821
Operating expenses:
Operational general and administrative	61,049			58,732			119,819			119,081
Corporate general and administrative	16,244			16,464			31,354			34,131
Total operating expenses	77,293			75,196			151,173			153,212
Operating income	23,772			23,563			44,970			43,609
Interest expense, net	7,665			8,389			16,202			18,832
Loss on extinguishment of debt	—			7,129			—			7,129
Income before income taxes	16,107			8,045			28,768			17,648
Income tax expense	5,868			3,246			7,233			7,114
Net income	10,239			4,799			21,535			10,534
Net loss-noncontrolling interest	(40		)	(31		)	(76		)	(61		)
Net income-Res-Care, Inc.	10,279			4,830			21,611			10,595
Other comprehensive income:
Foreign currency translation adjustments	(223		)	(132		)	(414		)	29
Comprehensive income attributable to Res-Care, Inc.	$	10,056		$	4,698		$	21,197		$	10,624
Total comprehensive income	$	10,016		$	4,667		$	21,121		$	10,563

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)

	Six Months Ended
	June 30
	2013			2012
Cash flows from operating activities:
Net income	$	21,535		$	10,534
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	16,726			17,009
Amortization of discount and deferred debt issuance costs	1,742			1,267
Share-based compensation	1,552			2,025
Deferred income taxes, net	2,347			624
Provision for losses on accounts receivable	3,343			2,885
Loss on extinguishment of debt, net of original issue discount paid	—			6,400
Loss on sale of assets	100			95
Changes in operating assets and liabilities	(13,279		)	(16,320		)
Cash provided by operating activities	34,066			24,519
Cash flows from investing activities:
Purchases of property and equipment	(8,212		)	(7,415		)
Acquisitions of businesses, net of cash acquired	(2,234		)	(8,662		)
Proceeds from sale of assets	184			43
Cash used in investing activities	(10,262		)	(16,034		)
Cash flows from financing activities:
Long-term debt repayments	(9,280		)	(168,866		)
Long-term debt borrowings	—			175,000
Payments on obligations under capital leases	(3,499		)	(3,003		)
Debt issuance costs	(2		)	(3,978		)
Cash used in financing activities	(12,781		)	(847		)
Effect of exchange rate changes on cash and cash equivalents	(81		)	9
Increase in cash and cash equivalents	10,942			7,647
Cash and cash equivalents at beginning of period	50,134			25,651
Cash and cash equivalents at end of period	$	61,076		$	33,298
Supplemental schedule of non-cash investing and financing activities:
Notes issued in connection with acquisitions	$	336		$	39
Capital lease obligations	$	6,513		$	2,756
Settlement of Seller obligations in connection with an acquisition	$	1,240		$	—

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”, “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 2012 Annual Report on Form 10-K filed February 19, 2013.

Reclassification

Certain immaterial reclassifications have been made to 2012 amounts to conform to 2013 presentation.

Segments

Effective January 1, 2013, we began managing and operating our Pharmacy Services as a new reporting segment.  Pharmacy Services is a limited, closed-door pharmacy focused on serving individuals with cognitive, intellectual and developmental disabilities.  The pharmacy operations were previously included with our Residential Services segment.  As a result of this change, the results of our Residential Services segment has been retrospectively recast for all periods presented.  Further information regarding our segments is included in Note 7.

Note 2.Acquisitions

We completed three acquisitions within our Residential Services, ResCare HomeCare and Youth Services segments during the first six months of 2013. Aggregate consideration for these acquisitions was approximately $3.8 million, including $0.3 million of notes issued and net settlement of management fees of $1.2 million. 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.

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

Accounts receivable	$	984
Property and equipment	1
Other intangible assets	1,448
Goodwill	1,363
Other assets	14
Aggregate purchase price	$	3,810

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 $1.4 million of goodwill will be deductible for tax purposes.

Note 3.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 change in our reportable segments, more fully described herein in Note 7, resulted in a change in the composition of our reporting units, which is the unit of accounting for goodwill.  Accordingly, we reallocated goodwill between our Residential Services and Pharmacy Services reporting units using the relative fair value approach.  A summary of changes to goodwill during the six months ended June 30, 2013 is as follows:

	Residential		ResCare		Youth		Workforce		Pharmacy
	Services		HomeCare		Services		Services		Services		Total
Balance at January 1, 2013
Goodwill	$	160,727	$	65,663	$	24,829	$	32,720	$	4,326	$	288,265
Goodwill added through acquisitions	7		968		388		—		—		1,363
Other	58		—		—		—		—		58
Balance at June 30, 2013	$	160,792	$	66,631	$	25,217	$	32,720	$	4,326	$	289,686

Note 4.Debt

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

	June 30		December 31
	2013		2012
10.75% senior notes due 2019	$	200,000	$	200,000
Senior secured Term Loan A due 2017	161,888		170,625
Senior secured credit facility	—		—
Obligations under capital leases	20,698		17,683
Notes payable and other	2,646		2,491
	385,232		390,799
Less current portion	16,666		20,747
	$	368,566	$	370,052

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

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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 agreement continues to provide for the exclusion of charges incurred with the resolution of certain legal proceedings provided in Note 8 to Notes to the Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants.

Our obligations under capital leases are $20.7 million as of June 30, 2013, due primarily to vehicle capital leases.  The current portion of these lease obligations was $6.7 million (see Note 11).

Note 5.Income Taxes

The effective tax rate was 36.4% and 40.3% for the three months ended June 30, 2013 and 2012, respectively, and 25.1% and 40.3% for the six months ended June 30, 2013 and 2012, respectively. The decrease in the effective tax rate relates primarily to the impact of jobs tax credits.  On January 2, 2013, legislation was enacted that reinstated the jobs credit provisions retroactive to January 1, 2012.  The six months ended June 30, 2013 includes the current six month’s jobs tax credit impact of $1.6 million and $3.3 million related to 2012 and prior periods’ jobs tax credit impact.

Note 6.Financial Instruments

At June 30, 2013 and December 31, 2012, 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:

	June 30, 2013		December 31, 2012
	Carrying	Fair	Carrying	Fair
	Amount	Value	Amount	Value
Long-term debt:
10.75% senior notes	$   200,000	$   223,250	$   200,000	$   221,000
Senior secured Term Loan A	161,888	161,888	170,625	170,625
Notes payable and other	2,646	2,565	2,491	2,410

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 7.Segment Information

We have five reportable operating segments: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services, (iv) Workforce Services and (v) Pharmacy Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare

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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 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.  Pharmacy Services is a limited, closed-door pharmacy focused on serving individuals with cognitive, intellectual and developmental disabilities.

Effective July 1, 2013, we made certain changes within our business lines to meet our future growth objectives.  Our reportable segments will not change significantly. Some of the components and structure within certain reportable segments will change and our Youth Services segment’s name will change to Education and Training Services.  The majority of our Residential Youth reporting unit will be moved from the Education and Training Services segment to the Residential Services segment.  We will also be moving a small operation from our ResCare HomeCare segment to our Education and Training Services segment.

The following table sets forth information about our reportable segments:

	Residential			ResCare		Youth		Workforce		Pharmacy
	Services			HomeCare		Services		Services		Services	Corporate			Total
Three months ended June 30:
2013
Revenues	$	207,580	$	89,991	$	42,494	$	39,596	$	16,572	$	—	$	396,233
Operating income (loss) (1)	24,493			6,064		2,810		4,068		2,577	(16,240)			23,772
Total assets	552,497			197,163		91,326		78,322		18,786	129,035			1,067,129
Capital expenditures	1,865			181		42		110		64	1,847			4,109
Depreciation and amortization	5,113			673		347		270		38	2,090			8,531
2012
Revenues	$	202,943	$	84,129	$	45,042	$	51,487	$	16,301	$	—	$	399,902
Operating income (loss) (1)	27,436			5,432		3,604		2,355		1,167	(16,431)			23,563
Total assets	528,951			182,050		105,093		81,709		13,083	107,646			1,018,532
Capital expenditures	1,103			169		24		105		2	1,751			3,154
Depreciation and amortization	4,631			688		385		311		38	2,149			8,202
Six months ended June 30:
2013
Revenues	$	412,081	$	178,059	$	84,374	$	79,414	$	31,759	$	—	$	785,687
Operating income (loss) (1)	48,891			10,596		5,871		7,680		3,604	(31,672)			44,970
Capital expenditures	3,535			399		75		125		233	3,845			8,212
Depreciation and amortization	9,952			1,355		708		546		70	4,095			16,726
2012
Revenues	$	403,741	$	168,148	$	91,599	$	100,316	$	33,440	$	—	$	797,244
Operating income (loss) (1)	54,005			10,230		6,865		4,303		2,312	(34,106)			43,609
Capital expenditures	2,362			561		112		175		78	4,127			7,415
Depreciation and amortization	9,849			1,371		792		621		85	4,291			17,009

(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 8.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

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already provided, will have a material adverse effect on our condensed consolidated 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 9.Noncontrolling Interest

As of June 30, 2013, 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, 2011	$	11
Net loss-noncontrolling interest	(110)
Noncontrolling interest as of December 31, 2012	(99)
Net loss-noncontrolling interest	(76)
Noncontrolling interest as of June 30, 2013	$	(175)

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Note 10.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 condensed consolidated financial position or results of operations.

Note 11.Revision of Previously Reported Data

As discussed in the lease arrangements footnote (Note 13) on our 2012 Form 10-K, we recorded an out-of-period adjustment in the fourth quarter of 2012 to correct the accounting treatment for our leased vehicles.  Due to the immateriality of the amount, the 2011 and prior pre-tax income impact of approximately $0.7 million ($0.4 million after tax) was corrected in our revised first quarter 2012 results.  The table below includes the correction of the 2012 impact of the adjustment in the revised three month and six months ended June 30, 2012.  These amounts were not considered material to the prior periods.

	As Reported			Adjustment			As Revised
Three Months Ended June 30, 2012
Revenues	$	399,902		$	—		$	399,902
Gross profit	98,560			199			98,759
Operating income	23,332			231			23,563
Interest expense	8,142			247			8,389
Net income (loss):
Net income (loss)	4,809			(10		)	4,799
Net loss – noncontrolling interest	(31		)	—			(31)
Net income (loss) – ResCare, Inc.	$	4,840		$	(10	)	$	4,830
Six Months Ended June 30, 2012
Revenues	$	797,244		$	—		$	797,244
Gross profit	197,012			(191		)	196,821
Operating income	43,832			(223		)	43,609
Interest expense	18,350			482			18,832
Net income (loss):
Net income (loss)	10,964			(430		)	10,534
Net loss – noncontrolling interest	(61		)	—			(61)
Net income (loss) – ResCare, Inc.	$	11,025		$	(430	)	$	10,595
As of June 30, 2012
Property and equipment, net	$	82,348		$	16,631		$	98,979
Current portion of Long-term debt, including capital leases	78			5,732			5,810
Obligations under capital leases	306			11,644			11,950
Six Months Ended June 30, 2012
Cash provided by operating activities	$	21,562		$	2,957		$	24,519
Cash provided by (used in) financing activities	2,110			(2,957		)	(847)

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Note 12.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.

In connection with the preparation of our condensed consolidated financial statements for the second quarter of 2013, we made certain immaterial adjustments to our condensed consolidating statement of cash flows for the six months ended June 30, 2012 to reflect the proper classification of cash flows related to intercompany transactions in which the parent company made direct payments and collected direct receipts on behalf of certain guarantor and non-guarantor subsidiaries. We will also make similar adjustments to our condensed consolidating statements of cash flows for comparative periods presented in future filings. This condensed consolidating financial information is provided in connection with outstanding senior notes that are fully and unconditionally guaranteed by a group of our subsidiaries. These adjustments did not affect the assets available to the group of subsidiaries guaranteeing our senior notes; did not change the net increase or decrease in cash and cash equivalents for the parent company, the issuer, the guarantor subsidiaries or the non-guarantor subsidiaries; and had no impact on consolidated amounts. The substantial majority of these adjustments had the effect of a) decreasing the parent company’s net cash inflows from operating activities and increasing the parent company’s net cash inflows from financing activities by $158.5 million, b) increasing the guarantors’ net cash inflows from operating activities and increasing the guarantors’ net cash outflows from financing activities by $78.9 million and c) decreasing the non-guarantors’ net cash outflows from operating activities and decreasing the non-guarantors’ net cash inflows from financing activities by $79.6 million.

- 12 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	57,765		$	2,693		$	618		$	—		$	61,076
Accounts receivable, net	18,391			211,757			291			—			230,439
Refundable income taxes	3,767			—			—			—			3,767
Deferred income taxes	17,355			—			—			—			17,355
Prepaid expenses and other current assets	11,247			11,678			420			—			23,345
Total current assets	108,525			226,128			1,329			—			335,982
Property and equipment, net	47,543			50,281			378			—			98,202
Goodwill	284,556			—			5,130			—			289,686
Other intangible assets, net	299,913			19,371			3			—			319,287
Intercompany	—			697,700			69,392			(767,092		)	—
Investment in subsidiaries	973,477			41,782			—			(1,015,259		)	—
Other assets	20,103			3,852			17			—			23,972
	$	1,734,117		$	1,039,114		$	76,249		$	(1,782,351	)	$	1,067,129
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	16,940		$	17,737		$	60		$	—		$	34,737
Accrued expenses	57,541			56,778			828			—			115,147
Current portion of long-term debt	8,751			1,245			1,382			(1,382		)	9,996
Current portion of obligations under capital leases	—			6,670			—			—			6,670
Accrued income taxes	272			—			(47		)	—			225
Total current liabilities	83,504			82,430			2,223			(1,382		)	166,775
Intercompany	765,710			—			—			(765,710		)	—
Long-term liabilities	56,541			198			—			—			56,739
Long-term debt	353,138			1,400			—			—			354,538
Obligations under capital leases	—			14,028			—			—			14,028
Deferred income taxes	108,366			—			—			—			108,366
Total liabilities	1,367,259			98,056			2,223			(767,092		)	700,446
Preferred shares	—			—			—			—			—
Common stock	—			—			—			—			—
Additional paid-in capital	245,897			477,447			122,951			(600,398		)	245,897
Retained earnings	121,345			463,629			(47,672		)	(415,957		)	121,345
Accumulated other comprehensive (loss) income	(384		)	(18		)	(1,078		)	1,096			(384		)
Total shareholder’s equity-Res-Care, Inc.	366,858			941,058			74,201			(1,015,259		)	366,858
Noncontrolling interest	—			—			(175		)	—			(175		)
Total shareholder’s equity	366,858			941,058			74,026			(1,015,259		)	366,683
	$	1,734,117		$	1,039,114		$	76,249		$	(1,782,351	)	$	1,067,129

- 13 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2012

(In thousands)

			Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	42,633	$	4,795		$	2,706		$	—		$	50,134
Accounts receivable, net	21,515		206,491			371			—			228,377
Refundable income taxes	—		—			—			—			—
Deferred income taxes	17,589		—			—			—			17,589
Prepaid expenses and other current assets	11,620		9,981			515			—			22,116
Total current assets	93,357		221,267			3,592			—			318,216
Property and equipment, net	43,320		53,282			428			—			97,030
Goodwill	282,832		—			5,433			—			288,265
Other intangible assets, net	302,293		19,000			—			—			321,293
Intercompany	—		622,481			70,335			(692,816		)	—
Investment in subsidiaries	900,087		41,782			—			(941,869		)	—
Other assets	24,073		3,064			17			—			27,154
	$	1,645,962	$	960,876		$	79,805		$	(1,634,685	)	$	1,051,958
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	20,499	$	17,181		$	58		$	—		$	37,738
Accrued expenses	55,299		58,729			848			—			114,876
Current portion of long-term debt	13,098		1,573			1,746			(1,722		)	14,695
Current portion of obligations under capital leases	—		6,052			—			—			6,052
Accrued income taxes	1,843		—			(30		)	—			1,813
Total current liabilities	90,739		83,535			2,622			(1,722		)	175,174
Intercompany	691,094		—			—			(691,094		)	—
Long-term liabilities	56,240		229			—			—			56,469
Long-term debt	357,527		893			—			—			358,420
Obligations under capital leases	—		11,632			—			—			11,632
Deferred income taxes	106,253		—			—			—			106,253
Total liabilities	1,301,853		96,289			2,622			(692,816		)	707,948
Preferred shares	—		—			—			—			—
Common stock	—		—			—			—			—
Additional paid-in capital	244,345		476,811			125,104			(601,915		)	244,345
Retained earnings	99,734		387,794			(47,445		)	(340,349		)	99,734
Accumulated other comprehensive (loss) income	30		(18		)	(377		)	395			30
Total shareholder’s equity-Res-Care, Inc.	344,109		864,587			77,282			(941,869		)	344,109
Noncontrolling interest	—		—			(99		)	—			(99		)
Total shareholder’s equity	344,109		864,587			77,183			(941,869		)	344,010
	$	1,645,962	$	960,876		$	79,805		$	(1,634,685	)	$	1,051,958

- 14 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended June 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	62,612		$	332,866		$	755		$	—		$	396,233
Operating expenses	67,277			304,324			860			—			372,461
Operating (loss) income	(4,665		)	28,542			(105		)	—			23,772
Other expenses (income):
Interest, net	7,935			(327		)	57			—			7,665
Equity in earnings of subsidiaries	(24,576		)	(304		)	—			24,880			—
Total other (income) expenses	(16,641		)	(631		)	57			24,880			7,665
Income (loss) before income taxes	11,976			29,173			(162		)	(24,880		)	16,107
Income tax (benefit) expense	1,697			4,195			(24		)	—			5,868
Net income (loss)	10,279			24,978			(138		)	(24,880		)	10,239
Net loss-noncontrolling interest	—			—			(40		)	—			(40		)
Net income (loss)-Res-Care, Inc.	10,279			24,978			(98		)	(24,880		)	10,279
Other comprehensive income (loss):
Foreign currently translation adjustments	(223		)	—			(223		)	223			(223		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	10,056		$	24,978		$	(321	)	$	(24,657	)	$	10,056
Total comprehensive income (loss)	$	10,056		$	24,978		$	(361	)	$	(24,657	)	$	10,016

- 15 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Six Months Ended June 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	123,064		$	661,116		$	1,507		$	—		$	785,687
Operating expenses	132,454			606,571			1,692			—			740,717
Operating (loss) income	(9,390		)	54,545			(185		)	—			44,970
Other expenses (income):
Interest, net	16,230			(142		)	114			—			16,202
Equity in earnings of subsidiaries	(40,791		)	(447		)	—			41,238			—
Total other (income) expenses	(24,561		)	(589		)	114			41,238			16,202
Income (loss) before income taxes	15,171			55,134			(299		)	(41,238		)	28,768
Income tax (benefit) expense	(6,440		)	13,748			(75		)	—			7,233
Net income (loss)	21,611			41,386			(224		)	(41,238		)	21,535
Net loss-noncontrolling interest	—			—			(76		)	—			(76		)
Net income (loss)-Res-Care, Inc.	21,611			41,386			(148		)	(41,238		)	21,611
Other comprehensive income (loss):
Foreign currently translation adjustments	(414		)	—			(414		)	414			(414		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	21,197		$	41,386		$	(562	)	$	(40,824	)	$	21,197
Total comprehensive income (loss)	$	21,197		$	41,386		$	(638	)	$	(40,824	)	$	21,121

- 16 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Three Months Ended June 30, 2012

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	62,473		$	336,609		$	820		$	—		$	399,902
Operating expenses	68,154			307,314			871			—			376,339
Operating (loss) income	(5,681		)	29,295			(51		)	—			23,563
Other expenses (income):
Interest, net	8,132			260			(3		)	—			8,389
Loss on extinguishment of debt	7,129			—			—			—			7,129
Equity in earnings of subsidiaries	(17,332		)	(40		)	—			17,372			—
Total other (income) expenses	(2,071		)	220			(3		)	17,372			15,518
(Loss) income before income taxes	(3,610		)	29,075			(48		)	(17,372		)	8,045
Income tax (benefit) expense	(8,440		)	11,706			(20		)	—			3,246
Net income (loss)	4,830			17,369			(28		)	(17,372		)	4,799
Net loss-noncontrolling interest	—			—			(31		)	—			(31		)
Net income (loss)-Res-Care, Inc.	4,830			17,369			3			(17,372		)	4,830
Other comprehensive income (loss):
Foreign currently translation adjustments	(132		)	—			(132		)	132			(132		)
Comprehensive income (loss) attributable to Res-Care, Inc.	$	4,698		$	17,369		$	(129	)	$	(17,240	)	$	4,698
Total comprehensive income (loss)	$	4,698		$	17,369		$	(160	)	$	(17,240	)	$	4,667

- 17 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

Six Months Ended June 30, 2012

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	127,315		$	668,372		$	1,557		$	—		$	797,244
Operating expenses	139,171			612,734			1,730			—			753,635
Operating (loss) income	(11,856		)	55,638			(173		)	—			43,609
Other expenses (income):
Interest, net	18,436			401			(5		)	—			18,832
Loss on extinguishment of debt	7,129			—			—			—			7,129
Equity in earnings of subsidiaries	(32,951		)	(84		)	—			33,035			—
Total other (income) expenses	(7,386		)	317			(5		)	33,035			25,961
(Loss) income before income taxes	(4,470		)	55,321			(168		)	(33,035		)	17,648
Income tax (benefit) expense	(15,065		)	22,247			(68		)	—			7,114
Net income (loss)	10,595			33,074			(100		)	(33,035		)	10,534
Net loss-noncontrolling interest	—			—			(61		)	—			(61		)
Net income (loss)-Res-Care, Inc.	10,595			33,074			(39		)	(33,035		)	10,595
Other comprehensive income (loss):
Foreign currently translation adjustments	29			—			29			(29		)	29
Comprehensive income (loss) attributable to Res-Care, Inc.	$	10,624		$	33,074		$	(10	)	$	(33,064	)	$	10,624
Total comprehensive income (loss)	$	10,624		$	33,074		$	(71	)	$	(33,064	)	$	10,563

- 18 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2013

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income (loss)	$	21,611		$	41,386		$	(224	)	$	(41,238	)	$	21,535
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	8,826			7,820			80			—			16,726
Amortization of discount and deferred debt issuance costs on notes	1,742			—			—			—			1,742
Share-based compensation	1,552			—			—			—			1,552
Deferred income taxes, net	2,347			—			—			—			2,347
Provision for losses on accounts receivable	505			2,838			—			—			3,343
Loss from sale of assets	—			100			—			—			100
Equity in earnings of subsidiaries	(40,791		)	(447		)	—			41,238			—
Changes in operating assets and liabilities	(9,356		)	(4,363		)	440			—			(13,279		)
Cash provided by (used in) operating activities	(13,564		)	47,334			296			—			34,066
Investing activities:
Purchases of property and equipment	(4,242		)	(3,940		)	(30		)	—			(8,212		)
Acquisitions of businesses, net of cash acquired	—			(2,234		)	—			—			(2,234		)
Proceeds from sale of assets	—			184			—			—			184
Cash used in investing activities	(4,242		)	(5,990		)	(30		)	—			(10,262		)
Financing activities:
Long-term debt (repayments) borrowings	(8,737		)	(179		)	(364		)	—			(9,280		)
Payments on obligations under capital leases	—			(3,499		)	—			—			(3,499		)
Debt issuance costs	(2		)	—			—			—			(2		)
Net payments relating to intercompany financing	41,677			(39,687		)	(1,990		)	—			—
Cash (used in) provided by financing activities	32,938			(43,365		)	(2,354		)	—			(12,781		)
Effect of exchange rate changes on cash and cash equivalents	—			(81		)	—			—			(81		)
(Decrease) increase in cash and cash equivalents	15,132			(2,102		)	(2,088		)	—			10,942
Cash and cash equivalents at beginning of period	42,633			4,795			2,706			—			50,134
Cash and cash equivalents at end of period	$	57,765		$	2,693		$	618		$	—		$	61,076

- 19 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2012

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income (loss)	$	10,595		$	33,074		$	(100	)	$	(33,035	)	$	10,534
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	9,107			7,813			89			—			17,009
Amortization of discount and deferred debt issuance costs on notes	1,267			—			—			—			1,267
Share-based compensation	2,025			—			—			—			2,025
Deferred income taxes, net	624			—			—			—			624
Provision for losses on accounts receivable	417			2,468			—			—			2,885
Loss on extinguishment of debt, net of original issue discount paid	6,400			—			—			—			6,400
Loss from sale of assets	—			95			—			—			95
Equity in earnings of subsidiaries	(32,951		)	(84		)	—			33,035			—
Changes in operating assets and liabilities	(21,132		)	7,915			(3,103		)	—			(16,320		)
Cash provided by (used in) operating activities	(23,648		)	51,281			(3,114		)	—			24,519
Investing activities:
Purchases of property and equipment	(4,942		)	(2,340		)	(133		)	—			(7,415		)
Acquisitions of businesses, net of cash acquired	—			(8,662		)	—			—			(8,662		)
Proceeds from sale of assets	—			43			—			—			43
Cash used in investing activities	(4,942		)	(10,959		)	(133		)	—			(16,034		)
Financing activities:
Long-term debt repayments	(167,447		)	(1,294		)	(125		)	—			(168,866		)
Long-term debt borrowings	175,000			—			—			—			175,000
Debt issuance costs	(3,978		)	—			—			—			(3,978		)
Payments on obligations under capital leases	—			(3,003		)	—			—			(3,003		)
Net payments relating to intercompany financing	35,617			(39,055		)	3,438			—			—
Cash (used in) provided by financing activities	39,192			(43,352		)	3,313			—			(847		)
Effect of exchange rate changes on cash and cash equivalents	—			9			—			—			9
Increase (decrease) in cash and cash equivalents	10,602			(3,021		)	66			—			7,647
Cash and cash equivalents at beginning of period	16,733			6,547			2,371			—			25,651
Cash and cash equivalents at end of period	$	27,335		$	3,526		$	2,437		$	—		$	33,298

- 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, 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 I, Item 1A of our Annual Report on Form 10-K and in Part II, Item 1A of this Report. 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 five reportable operating segments: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services, (iv) Workforce Services and (v) Pharmacy 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 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.  Pharmacy Services is a limited, closed-door pharmacy focused on serving individuals with cognitive, intellectual and developmental disabilities.

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, who are generally not-for-profit providers that 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,

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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. At 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. Despite cost containment efforts, many states are dealing with budget deficits or shortfalls as a result of recent economic conditions, including their Medicaid budgets that fund a significant portion of the services we provide.  We will soon start to see some unfavorable sequestration impacts to our Youth Services and Workforce Services segments.  The Department of Labor (DOL) has announced slot reductions across all Job Corps centers effective July 1, 2013 and preliminary Workforce Investment Act (WIA) adult and youth related funding cuts.  These future impacts are discussed further in the Results of Operations section.

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 2012 Annual Report on Form 10-K filed February 19, 2013. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first six months of 2013, there were no material changes in the critical accounting policies and assumptions.

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Results of Operations

	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
	(Dollars in thousands)
Revenues:
Residential Services	$	207,580		$	202,943		$	412,081		$	403,741
ResCare HomeCare	89,991			84,129			178,059			168,148
Youth Services	42,494			45,042			84,374			91,599
Workforce Services	39,596			51,487			79,414			100,316
Pharmacy Services	16,572			16,301			31,759			33,440
Consolidated	$	396,233		$	399,902		$	785,687		$	797,244
Operating income:
Residential Services	$	24,493		$	27,436		$	48,891		$	54,005
ResCare HomeCare	6,064			5,432			10,596			10,230
Youth Services	2,810			3,604			5,871			6,865
Workforce Services	4,068			2,355			7,680			4,303
Pharmacy Services	2,577			1,167			3,604			2,312
Corporate (1)	(16,240		)	(16,431		)	(31,672		)	(34,106		)
Consolidated	$	23,772		$	23,563		$	44,970		$	43,609
Operating margin:
Residential Services	11.8%			13.5%			11.9%			13.4%
ResCare HomeCare	6.7%			6.5%			6.0%			6.1%
Youth Services	6.6%			8.0%			7.0%			7.5%
Workforce Services	10.3%			4.6%			9.7%			4.3%
Pharmacy Services	15.6%			7.2%			11.3%			6.9%
Corporate (1)	(4.1%		)	(4.1%		)	(4.0%		)	(4.3%		)
Consolidated	6.0%			5.9%			5.7%			5.5%

________

(1)       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 six months ended June 30, 2013 decreased $3.7 million and $11.6 million, or 0.9% and 1.4%, respectively, from the same periods in 2012.  Revenues are more fully described in the segment discussions.

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended June 30, 2013, was $23.8 million compared to operating income of $23.6 million from the same period in 2012. Consolidated operating margins were 6.0% and 5.9% for the quarterly periods in 2013 and 2012, respectively. The increase in operating income and margin primarily resulted from margin improvement in our Workforce Services business and lower corporate expenses, which were partially offset by margin erosion in our Residential Services and Youth Services businesses.

Consolidated operating income for the six months ended June 30, 2013 was $45.0 million compared to $43.6 million for the same period in 2012. Consolidated operating margins were 5.7% and 5.5% for the six month periods in 2013 and 2012, respectively.

Net interest expense decreased $0.7 million for the second quarter of 2013 and $2.6 million for the six months ended June 30, 2013, compared to the same periods in 2012. The decreases for the three and six month periods were due primarily to lower rates from the new senior secured credit facility that closed during the second quarter of 2012.   The 2012 second quarter and six month periods also include $7.1 million related to a loss on extinguishment of debt from the refinancing that is further described in Note 4 to the Notes to the Condensed Consolidated Financial Statements. Our

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effective income tax rate for the six months ended June 30, 2013 was 25.1% as compared to 40.3% over the same period in 2012.  The 2013 rate was favorably impacted by the renewal of jobs tax credits.  Due to the retroactive application of the tax credit to January 1, 2012, our effective tax rate for the first six months of 2013 reflects not only the 2013 year-to-date impact, but also $3.3 million related to 2012 and prior periods.

Residential Services

Residential Services revenues for the quarter ended June 30, 2013 increased $4.6 million, or 2.3%, over the same period in 2012. This increase was due primarily to acquisitions of $6.5 million, which were partially offset by rate decreases and decreased census of $1.6 million in certain states. Operating margin was 11.8% for the quarter ended June 30, 2013 compared to 13.5% for the same period in 2012. The reduction in margin is attributable to higher costs for wages, employee benefits and insurance.

Residential Services revenues for the six months ended June 30, 2013 increased $8.3 million, or 2.1%, over the same period in 2012. This increase was due primarily to acquisition and organic growth of $18.5 million and rate increases in certain states of $0.3 million, which were partially offset by decreased census of $8.1 million in certain states and $2.2 million related to one less operating day in February 2013. Operating margin was 11.9% for the six months ended June 30, 2013 compared to 13.4% for the same period in 2012. The reduction in margin is attributable to higher costs for wages, employee benefits and insurance.

ResCare HomeCare

ResCare HomeCare revenues for the quarter ended June 30, 2013 increased $5.9 million, or 7.0%, over the same period in 2012. This increase was due primarily to acquisition and organic growth of $5.2 million and $1.4 million, respectively, which were partially offset by rate and service cuts of $0.7 million in certain states. Operating margin increased from 6.5% in 2012 to 6.7% in 2013.

ResCare HomeCare revenues for the six months ended June 30, 2013 increased $9.9 million, or 5.9%, over the same period in 2012. This increase was due primarily to acquisition and organic growth of $10.0 million and $3.1 million, respectively, which were partially offset by rate and service cuts of $2.0 million in certain states and $1.1 million related to one less operating day in February 2013. Operating margin decreased from 6.1% in 2012 to 6.0% in 2013.

Youth Services

Youth Services revenues for the quarter ended June 30, 2013 decreased $2.5 million, or 5.7%, from the same period of 2012, due primarily to spending reductions in our Job Corps business of $0.4 million, as well as rate, census and referral declines in certain states within our Residential Youth and Education businesses for $2.0 million.  Operating margin was 6.6% in the second quarter of 2013 and 8.0% for the same period in 2012.  The reduction in margin is primarily attributable to higher general and administrative expenses, which were not reduced ratably with the revenue changes within the Residential Youth and Education businesses.

Youth Services revenues for the six months ended June 30, 2013 decreased $7.2 million, or 7.9%, from the same period of 2012, due primarily to spending reductions in our Job Corps business of $3.0 million, as well as rate, census and referral declines in certain states within our Residential Youth and Education businesses for $4.2 million.  Operating margin was 7.0% in the first six months of 2013 and 7.5% for the same period in 2012.  The reduction in margin is primarily attributable to higher general and administrative expenses, which were not reduced ratably with the revenue changes within the Residential Youth and Education businesses.

Effective July 1, 2013, the DOL’s Employment and Training Administration (ETA) is implementing slot reductions across all Job Corps centers.  This will result in a reduction of approximately 1,000 students or 21% of the total students we are currently contracted to serve.  For the fourteen centers operated by ResCare, this is estimated to result in approximately $8.0 million in reduced revenue to current contract value on an annualized basis.

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Workforce Services

Workforce Services revenues for the quarter ended June 30, 2013 decreased $11.9 million, or 23.1%, from the same period in 2012, due primarily to the loss of certain contracts, including the previously reported WeCare contract. Operating margin increased from 4.6% in the second quarter of 2012 to 10.3% in the same period in 2013, due primarily to net contract changes of $0.3 million and lower spending on insurance costs of $1.4 million.

Workforce Services revenues for the six months ended June 30, 2013 decreased $20.9 million, or 20.8%, from the same period in 2012, due primarily to the loss of certain contracts, including the previously reported WeCare contract. Operating margin increased from 4.3% in the first six months of 2012 to 9.7% in the same period in 2013, due primarily to increased contract performance incentive payments of $1.1 million and a reduction in insurance costs of $2.6 million.

The DOL announced preliminary Workforce Investment Act (WIA) adult and youth related funding cuts that we estimate will impact our results starting in the third quarter of 2013.  At this time, the individual workforce boards are still determining how these cuts will be implemented, but based on what we know at this time, we estimate our third quarter revenues will be down approximately $2 million from our current run rate.

Pharmacy Services

Pharmacy Services revenues for the quarter ended June 30, 2013 increased $0.3 million, or 1.7%, from the same period in 2012.  This increase was due primarily to $0.9 million related to starting pharmacy operations in California, which were partially offset by the change from name brand drugs to generic drugs.  Operating margin increased from 7.2% in the second quarter of 2012 to 15.6% in the same period in 2013.  The improvement in margin is attributable to lower product cost.

Pharmacy Services revenues for the six months ended June 30, 2013 decreased $1.7 million, or 5.0%, from the same period in 2012, due primarily to a change from name brand drugs to generic drugs, which are billed at lower rates. Operating margin increased from 6.9% in the first six months of 2012 to 11.3% in the same period in 2013.  The improvement in margin is attributable to lower product cost.

Corporate

Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total expenses in the quarter ended June 30, 2013 were flat compared to same period in 2012.  Total expenses in the first six months of 2013 decreased $2.4 million compared to first six months of 2012 due primarily to a decrease in incentive compensation accruals, professional services expense and share-based compensation expense of $1.1 million, $0.8 million and $0.5 million, respectively.

Financial Condition, Liquidity and Capital Resources

Total assets increased $15.2 million, or 1.4%, at June 30, 2013 over balances at December 31, 2012.  This increase was primarily related to additional cash and cash equivalents of $10.9 million and refundable income taxes of $3.8 million.

Cash and cash equivalents were $61.1 million at June 30, 2013, as compared to $50.1 million at December 31, 2012. Cash provided by operations for the six months ended June 30, 2013 was $34.1 million compared to $24.5 million for the six months ended June 30, 2012.  This increase was primarily due to higher collections on accounts receivable in the 2013 period and higher payments for accounts payable and accrued expenses in the 2012 period.

Net accounts receivable at June 30, 2013 increased to $230.4 million, compared to $228.4 million at December 31, 2012. Days of revenue in net accounts receivable were 50 days at June 30, 2013, compared with 49 days at December 31, 2012. The increase in days of revenue is due primarily to temporary payment delays from several payors caused by a variety of reasons including transitioning from legacy payor systems and awaiting executed contract changes.

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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.

Cash used in investing activities at June 30, 2013 decreased $5.8 million over the same period in 2012 primarily due to there being less business acquisitions during the first six months of 2013 compared to the same period of 2012.

Our financing activities included payments of debt and capital lease obligations of $12.8 million for the first six months of 2013. This compares to a net borrowing of $6.1 million of debt offset by capital lease obligations and payments of debt issuance costs of $3.0 million and $4.0 million, respectively, for the same period in 2012, which included our refinancing discussed below.  In addition to quarterly principal and seller note payments made in the six months ended June 30, 2013, we made an additional required $4.3 million principal payment resulting from the annual Excess Cash Flow calculation, which is part of our financial covenants discussed below.

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 quarterly covenants that require us to maintain specific ratios with respect to interest coverage and leverage. The Credit Agreement also contains covenants relating to capital expenditures and Excess Cash Flows which are to be completed annually.  The Excess Cash Flow calculation is defined in the Credit Agreement.  A cash flow recapture can be required based on the Company’s leverage ratio and ending cash balance at year end.  Any recaptured amount derived from the calculation is used to pre pay the Company’s Term Loan A. The new agreement continues to provide for the exclusion of charges incurred with the resolution of certain legal proceedings provided in Note 7 to Notes to the Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants.

As of June 30, 2013, we had irrevocable standby letters of credit in the principal amount of $58.3 million issued primarily in connection with our insurance programs. As of June 30, 2013, we had $141.7 million available under the amended and restated revolving credit 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 June 30, 2013, 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 June 30, 2013. The commitment fee on the unused balance was 0.5%. The margin over LIBOR and the commitment fee is determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

We were in compliance with our debt covenants at June 30, 2013, and we believe we will continue to be in compliance with these covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial

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covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

Operating funding sources were approximately 68% through Medicaid reimbursement, 8% from the DOL and 24% 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 2013 or 2012.

Impact of Recently Issued Accounting Pronouncements

See Note 10 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 no outstanding borrowings as of June 30, 2013 and December 31, 2012.

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 June 30, 2013 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.

PART II.               OTHER INFORMATION

Item 1.                   Legal Proceedings

Information regarding the legal proceedings is provided in Note 8 to the condensed consolidated financial statements set forth in Part I of this report and incorporated by reference into this Part II, Item 1.

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Item 1A.                Risk Factors

There have been no material changes from the risk factors previously disclosed in our 2012 Annual Report on Form 10-K filed February 19, 2013 and our first quarter 2013 10-Q.

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.
*	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 June 30, 2013, 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:	August 5, 2013	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	August 5, 2013	By:	/s/ D. Ross Davison
			D. Ross Davison
			Chief Financial Officer

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