UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

or

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

For the transition period from          to          

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

KENTUCKY	61-0875371
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
9901 Linn Station Road
Louisville, Kentucky	40223-3808
(Address of principal executive offices)	(Zip Code)

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

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock, no par value, as of July 31, 2009, was 29,482,181.

INDEX

RES-CARE, INC. AND SUBSIDIARIES

PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Balance Sheets – June 30, 2009 and December 31, 2008
	Condensed Consolidated Statements of Income – Three Months Ended June 30, 2009 and 2008; Six Months Ended June 30, 2009 and 2008
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2009 and 2008
	Notes to Condensed Consolidated Financial Statements – June 30, 2009
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES
EXHIBITS

1

PART I.                FINANCIAL INFORMATION

Item 1.                   Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

	June 30			December 31
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	15,613		$	13,594
Accounts receivable, net of allowance for doubtful accounts of $21,317 in 2009 and $20,306 in 2008	230,253			230,976
Refundable income taxes	4,763			1,781
Deferred income taxes	23,349			22,702
Non-trade receivables	6,058			4,021
Prepaid expenses and other current assets	13,209			18,409
Total current assets	293,245			291,483
Property and equipment, net	82,771			84,157
Goodwill	485,984			476,196
Other intangible assets, net	47,448			45,985
Other assets	14,689			16,322
Total assets	$	924,137		$	914,143
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	51,294		$	49,216
Accrued expenses	101,515			103,520
Current portion of long-term debt	1,659			2,008
Current portion of obligations under capital leases	96			78
Accrued income taxes	1,101			1,099
Total current liabilities	155,665			155,921
Long-term liabilities	36,239			31,596
Long-term debt	231,254			254,827
Obligations under capital leases	563			559
Deferred gains	3,502			3,966
Deferred income taxes	35,976			30,397
Total liabilities	463,199			477,266
Shareholders’ 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, 48,095 shares issued and outstanding in 2009 and 2008	46,609			46,609
Common stock, no par value, authorized 40,000,000 shares, issued 29,829,569 in 2009 and 29,864,949 in 2008, outstanding 29,461,481 in 2009 and 29,470,734 in 2008	50,574			50,550
Additional paid-in capital	93,426			91,786
Retained earnings	278,832			258,134
Accumulated other comprehensive loss	(8,084		)	(10,202		)
Total shareholders’ equity — Res-Care, Inc.	461,357			436,877
Noncontrolling interests	(419		)	—
Total shareholders’ equity	460,938			436,877
Total liabilities and shareholders’ equity	$	924,137		$	914,143

See accompanying notes to condensed consolidated financial statements.

2

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2009			2008			2009			2008
Revenues	$	405,263		$	385,378		$	796,090		$	760,777
Facility and program expenses	373,005			368,762			724,934			705,937
Facility and program contribution	32,258			16,616			71,156			54,840
Corporate general and administrative expenses	14,893			14,682			30,428			29,257
Operating income	17,365			1,934			40,728			25,583
Interest expense, net	4,180			4,503			8,503			9,097
Income (loss) from continuing operations beforeincome taxes	13,185			(2,569		)	32,225			16,486
Income tax expense (benefit)	4,977			(1,000		)	11,946			5,955
Income (loss) from continuing operations	8,208			(1,569		)	20,279			10,531
Loss from discontinued operations, net of tax	—			(103		)	—			(157		)
Net income (loss) – including noncontrolling interests	8,208			(1,672		)	20,279			10,374
Net loss – noncontrolling interest	(135		)	—			(419		)	—
Net income (loss) – Res-Care, Inc.	8,343			(1,672		)	20,698			10,374
Net income attributable to preferred shareholders	1,194			—			2,966			1,496
Net income (loss) attributable to common shareholders	$	7,149		$	(1,672	)	$	17,732		$	8,878
Basic earnings (loss) per common share:
From continuing operations	$	0.25		$	(0.06	)	$	0.62		$	0.32
From discontinued operations	—			(0.00		)	—			(0.01		)
Basic earnings (loss) per common share	$	0.25		$	(0.06	)	$	0.62		$	0.31
Diluted earnings (loss) per common share:
From continuing operations	$	0.25		$	(0.06	)	$	0.62		$	0.32
From discontinued operations	—			(0.00		)	—			(0.01		)
Diluted earnings (loss) per common share	$	0.25		$	(0.06	)	$	0.62		$	0.31
Weighted average number of common shares:
Basic	28,795			28,466			28,751			28,401
Diluted	28,795			28,466			28,751			28,531

See accompanying notes to condensed consolidated financial statements.

3

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30
	2009			2008
Cash flows from operating activities:
Net income – including noncontrolling interest	$	20,279		$	10,374
Adjustments to reconcile net income, including noncontrolling interests,to cash provided by operating activities:
Depreciation and amortization	13,154			10,843
Amortization of discount and deferred debt issuance costs on notes	606			592
Share-based compensation	2,488			2,233
Deferred income taxes	4,932			(1,997		)
Excess tax benefit from share-based compensation	—			(851		)
Provision for losses on accounts receivable	3,927			3,519
Gain on purchase of business	(559		)	—
Loss (gain) on sale of assets	53			(49		)
Changes in operating assets and liabilities	1,939			7,017
Cash provided by operating activities	46,819			31,681
Cash flows from investing activities:
Purchases of property and equipment	(7,251		)	(9,383		)
Acquisitions of businesses	(12,723		)	(20,840		)
Proceeds from sale of assets	146			535
Cash used in investing activities	(19,828		)	(29,688		)
Cash flows from financing activities:
Long-term debt repayments	(1,431		)	(1,789		)
Short-term (repayments) borrowings – three months or less, net	(23,200		)	10,000
Payments on obligations under capital lease	(46		)	(39		)
Debt issuance costs	(36		)	(98		)
Excess tax benefit from share-based compensation	—			851
Proceeds received from exercise of stock options	360			962
Employee withholding payments on share-based compensation	(1,282		)	(1,442		)
Cash (used in) provided by financing activities	(25,635		)	8,445
Effect of exchange rate changes on cash and cash equivalents	663			(40		)
Increase in cash and cash equivalents	2,019			10,398
Cash and cash equivalents at beginning of period	13,594			10,809
Cash and cash equivalents at end of period	$	15,613		$	21,207
Supplemental schedule of non-cash investing and financing activities:
Notes issued in connection with acquisitions	$	777		$	1,600

See accompanying notes to condensed consolidated financial statements.

4

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, to youth with special needs, to adults who are experiencing barriers to employment and to older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.

The accompanying condensed consolidated financial statements of ResCare have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for comprehensive annual financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial condition and results of operations for the interim periods have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year.

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

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 (SFAS 160). SFAS 160 applies to all companies that prepare consolidated financial statements but will only affect companies that have a noncontrolling interest in a subsidiary or that deconsolidate a subsidiary. SFAS 160 clarifies that noncontrolling interests be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary be recorded as equity transactions if the parent retains its controlling interest in the subsidiary. The statement also requires consolidated net income to include amounts attributable to both the parent and the noncontrolling interest on the face of the income statement. In addition, SFAS 160 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.

A reconciliation of the beginning and ending carrying amount of the equity attributable to noncontrolling interests is as follows:

Noncontrolling interests as of December 31, 2008	$	—
Net loss — noncontrolling interests	(419		)
Noncontrolling interests as of June 30, 2009	$	(419	)

Effective this quarter, we implemented SFAS No. 165, Subsequent Events (SFAS 165). This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued. The adoption of SFAS 165 did not impact our financial position or results of operations. We evaluated all events or transactions that occurred after June 30, 2009 up through August 7, 2009, the date these financial statements were issued. During this period we did not have any material recognizable or disclosable subsequent events.

For further information refer to the consolidated financial statements and footnotes thereto in our 2008 Annual Report on Form 10-K.

Note 2.                   Acquisitions

We completed six acquisitions during the first half of 2009 within our Community Services segment. Aggregate consideration for these acquisitions was approximately $13.5 million, including $0.8 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $31.7 million. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.

5

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

Property and equipment	$	1,004
Other intangible assets	3,594
Goodwill	9,461
Other assets	37
Liabilities assumed	(37		)
Gain on purchase of business	(559		)
Aggregate purchase price	$	13,500

The other intangible assets consist primarily of customer relationships, licenses, covenants not to compete and company name. All intangible assets will be amortized up to ten years except licenses, which have an indefinite life.

Note 3.                  Goodwill

A summary of changes to goodwill during the six months ended June 30, 2009 are as follows:

				Job Corps		Employment
	Community			Training		Training
	Services			Services		Services		Other (2)		Total
Balance at December 31, 2008	$	368,182		$	7,589	$	62,053	$	38,372	$	476,196
Goodwill added through acquisitions	9,461			—		—		—		9,461
Adjustments to previously recorded goodwill (1)	(1,003		)	—		5		1,325		327
Balance at June 30, 2009	$	376,640		$	7,589	$	62,058	$	39,697	$	485,984

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

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

Note 4.                  Comprehensive Income

The following table sets forth the computation of comprehensive income (loss) attributable to Res-Care, Inc.:

	Three Months Ended					Six Months Ended
	June 30					June 30
	2009		2008			2009		2008
Net income (loss) – Res-Care, Inc.	$	8,343	$	(1,672	)	$	20,698	$	10,374
Foreign currency translation adjustments arising duringthe period	4,540		(1,703		)	2,118		(1,363		)
Comprehensive income (loss)	$	12,883	$	(3,375	)	$	22,816	$	9,011

6

Note 5.                  Debt

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

	June 30		Dec. 31
	2009		2008
7.75% senior notes due 2013, net of discount of approximately$0.6 million and $0.7 million in 2009 and 2008, respectively	$	149,411	$	149,342
Senior secured credit facility	80,600		103,800
Obligations under capital leases	659		637
Notes payable and other	2,902		3,693
	233,572		257,472
Less current portion	1,755		2,086
	$	231,817	$	255,386

Note 6.                  Financial Instruments

At June 30, 2009, 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, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Long-term debt:
7.75% senior notes	$	149,411	$	140,625	$	149,342	$	127,050
Senior secured credit facility	80,600		80,600		103,800		103,800
Notes payable and other	2,902		2,846		3,693		3,619

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

Note 7.                  Earnings Per Share

The following data shows the amounts used in computing earnings per common share and the effect on income and the weighted average number of shares of dilutive potential common stock attributable to Res-Care, Inc.

	Three Months Ended					Six Months Ended
	June 30					June 30
	2009		2008			2009		2008
Income (loss) from continuing operations	$	8,343	$	(1,569	)	$	20,698	$	10,531
Attributable to preferred shareholders	1,194		—			2,966		1,519
Attributable to common shareholders	$	7,149	$	(1,569	)	$	17,732	$	9,012
Loss from discontinued operations, net of tax	$	—	$	(103	)	$	—	$	(157	)
Attributable to preferred shareholders	—		—			—		(23		)
Attributable to common shareholders	$	—	$	(103	)	$	—	$	(134	)
Net income (loss)	$	8,343	$	(1,672	)	$	20,698	$	10,374
Attributable to preferred shareholders (1)	1,194		—			2,966		1,496
Attributable to common shareholders	$	7,149	$	(1,672	)	$	17,732	$	8,878
Weighted average number of common shares used in basic earnings per common share	28,795		28,466			28,751		28,401
Effect of dilutive securities:
Stock options	—		—			—		130
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per common share	28,795		28,466			28,751		28,531
Basic earnings (loss) per common share:
From continuing operations	$	0.25	$	(0.06	)	$	0.62	$	0.32
From discontinued operations	—		(0.00		)	—		(0.01		)
Basic earnings (loss) per common share	$	0.25	$	(0.06	)	$	0.62	$	0.31
Diluted earnings (loss) per common share:
From continuing operations	$	0.25	$	(0.06	)	$	0.62	$	0.32
From discontinued operations	—		(0.00		)	—		(0.01		)
Diluted earnings (loss) per common share	$	0.25	$	(0.06	)	$	0.62	$	0.31

(1)   Preferred shareholders are not contractually obligated to share in a net loss at any time during the year.

7

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

	Three Months Ended		Six Months Ended
	June 30		June 30
	2009	2008	2009	2008
Stock options	243	413	243	—
Restricted shares	343	304	343	304

Note 8.                  Segment Information

The following table sets forth information about reportable segment operating results and assets:

			Job Corps		Employment
	Community		Training		Training		All			Consolidated
	Services		Services		Services		Other (1)			Totals
Three months ended June 30:
2009
Revenues	$	290,627	$	40,825	$	59,224	$	14,587		$	405,263
Operating income	24,750		2,930		2,999		(13,314		)	17,365
Total assets	623,639		32,760		142,830		124,908			924,137
Capital expenditures	2,638		—		79		1,321			4,038
Depreciation and amortization	2,792		—		613		2,913			6,318
2008
Revenues	$	273,728	$	40,623	$	58,426	$	12,601		$	385,378
Operating income (2)	4,941		2,777		7,292		(13,076		)	1,934
Total assets	587,908		25,213		132,709		141,350			887,180
Capital expenditures	1,717		—		178		3,519			5,414
Depreciation and amortization	2,336		—		604		2,667			5,607
Six months ended June 30:
2009
Revenues	$	572,050	$	81,412	$	114,290	$	28,338		$	796,090
Operating income	56,857		6,106		7,602		(29,837		)	40,728
Capital expenditures	4,474		—		660		2,117			7,251
Depreciation and amortization	5,483		—		1,222		6,449			13,154
2008
Revenues	$	542,600	$	82,318	$	111,501	$	24,358		$	760,777
Operating income (2)	34,524		5,862		12,210		(27,013		)	25,583
Capital expenditures	3,491		—		385		5,507			9,383
Depreciation and amortization	4,715		—		1,071		5,057			10,843

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

(2)Three months and six months ended June 30, 2008 includes a $24.4 million charge related to four legal matters within our Community Services segment. See Note 10 in our Form 10-Q for the period ended June 30, 2008 for further discussion.

8

Note 9.                  Legal Proceedings

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

Note 10.                Impact of Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2 which defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted SFAS 157 at the beginning of 2009 for nonfinancial assets and liabilities, which include goodwill and intangibles. The adoption of SFAS 157 did not have a material impact on our condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), replacing SFAS No. 141, Business Combinations (SFAS 141). SFAS 141R retains the fundamental requirements of purchase method accounting for acquisitions as set forth previously in SFAS 141. However, this statement defines the acquirer as the entity that obtains control of a business in the business combination, thus broadening the scope of SFAS 141 which applied only to business combinations in which control was obtained through transfer of consideration. SFAS 141R also requires several changes in the way assets and liabilities are recognized and measured in purchase accounting including expensing acquisition-related costs as incurred, recognizing assets and liabilities arising from contractual contingencies at the acquisition date, and capitalizing in-process research and development. SFAS 141R also requires the acquirer to recognize a gain in earnings for bargain purchases, or the excess of the fair value of net assets over the consideration transferred plus any noncontrolling interest in the acquiree, a departure from the concept of “negative goodwill” previously recognized under SFAS 141. We adopted SFAS 141R effective January 1, 2009. This statement will apply prospectively to business combinations completed on or after that date. Thus far, SFAS 141R has not had a material impact to our condensed consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other U.S. GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives and the disclosure requirements must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must also be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The adoption of FSP 142-3 did not have a material impact on our condensed consolidated financial statements.

9

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166). The new standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact of SFAS 166.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of General Accepted Accounting Principles (SFAS 168). This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and established only two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the Codification) will become the source of authoritative, nongovernmental U.S. GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative U.S. GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We will begin to use the new guidelines and numbering system prescribed by the Codification when referring to U.S. GAAP in the third quarter of 2009. As the Codification was not intended to change or alter existing U.S. GAAP, it will not have any impact on our condensed consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position (FSP) 107-1, Interim Disclosures about Fair Value of Financial Instruments, (FSP 107-1). FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. This FSP also amends APB Option No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods beginning after June 15, 2009. We adopted the provisions of FSP 107-1 on June 30, 2009. See Note 6 for information related to the fair value of our financial instruments.

Note 11.                Subsidiary Guarantors

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

10

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2009

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	(4,412	)	$	9,955		$	10,070		$	—		$	15,613
Accounts receivable, net	44,052			182,771			3,430			—			230,253
Refundable income taxes	4,747			—			16						4,763
Deferred income taxes	23,341			—			8			—			23,349
Non-trade receivables	1,145			4,832			81			—			6,058
Prepaid expenses and other current assets	5,885			7,009			315			—			13,209
Total current assets	74,758			204,567			13,920			—			293,245
Property and equipment, net	35,786			46,379			606			—			82,771
Goodwill	93,481			363,107			29,396			—			485,984
Other intangible assets, net	7,807			34,329			5,312			—			47,448
Investment in subsidiaries	697,018			41,794			80,255			(819,067		)	—
Other assets	10,195			4,306			188			—			14,689
	$	919,045		$	694,482		$	129,677		$	(819,067	)	$	924,137
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	25,628		$	23,504		$	2,162		$	—		$	51,294
Accrued expenses	45,760			55,548			207			—			101,515
Current portion of long-term debt	—			1,659			—			—			1,659
Current portion of obligations under capital leases	14			82			—			—			96
Accrued income taxes	894			—			207			—			1,101
Total current liabilities	72,296			80,793			2,576			—			155,665
Intercompany	84,122			(89,250		)	5,128			—			—
Long-term liabilities	34,253			1,736			250			—			36,239
Long-term debt	230,011			1,243			—			—			231,254
Obligations under capital leases	12			551			—			—			563
Deferred gains	1,433			2,069			—			—			3,502
Deferred income taxes	35,980			—			(4		)	—			35,976
Total liabilities	458,107			(2,858		)	7,950			—			463,199
Total shareholders’ equity	460,938			697,340			121,727			(819,067		)	460,938
	$	919,045		$	694,482		$	129,677		$	(819,067	)	$	924,137

11

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2008

(In thousands)

				Guarantor		Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries		Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	146		$	4,048	$	9,400		$	—		$	13,594
Accounts receivable, net	50,172			177,149		3,655			—			230,976
Refundable income taxes	2,222			—		(441		)	—			1,781
Deferred income taxes	22,694			—		8			—			22,702
Non-trade receivables	475			3,710		(164		)	—			4,021
Prepaid expenses and other current assets	12,102			6,060		247			—			18,409
Total current assets	87,811			190,967		12,705			—			291,483
Property and equipment, net	38,195			45,410		552			—			84,157
Goodwill	94,785			353,474		27,937			—			476,196
Other intangible assets	6,876			32,880		6,229			—			45,985
Investment in subsidiaries	572,440			41,741		80,228			(694,409		)	—
Other assets	10,614			5,246		462			—			16,322
	$	810,721		$	669,718	$	128,113		$	(694,409	)	$	914,143
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	26,623		$	19,205	$	3,388		$	—		$	49,216
Accrued expenses	49,565			53,450		505			—			103,520
Current portion of long-term debt	—			2,008		—			—			2,008
Current portion of obligations under capital leases	13			65		—			—			78
Accrued income taxes	849			—		250			—			1,099
Total current liabilities	77,050			74,728		4,143			—			155,921
Intercompany	(18,190		)	12,286		5,904			—			—
Long-term liabilities	29,799			1,559		238			—			31,596
Long-term debt	253,142			1,685		—			—			254,827
Obligations under capital leases	19			540		—			—			559
Deferred gains	1,623			2,343		—			—			3,966
Deferred income taxes	30,401			—		(4		)	—			30,397
Total liabilities	373,844			93,141		10,281			—			477,266
Total shareholders’ equity	436,877			576,577		117,832			(694,409		)	436,877
	$	810,721		$	669,718	$	128,113		$	(694,409	)	$	914,143

12

 RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2009

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	77,739		$	321,665		$	5,859		$	—		$	405,263
Operating expenses	88,570			293,958			5,370			—			387,898
Operating (loss) income	(10,831		)	27,707			489			—			17,365
Other (income) expenses:
Interest, net	4,159			(15		)	36			—			4,180
Equity in earnings of subsidiaries	(17,624		)	—			—			17,624			—
Total other (income) expenses	(13,465		)	(15		)	36			17,624			4,180
Income (loss) from continuing operations, before income taxes	2,634			27,722			453			(17,624		)	13,185
Income tax (benefit) expense	(5,574		)	10,391			160			—			4,977
Income (loss) from continuing operations	8,208			17,331			293			(17,624		)	8,208
Net income (loss) — including noncontrolling interests	8,208			17,331			293			(17,624		)	8,208
Net loss — noncontrolling interests	—			(35		)	(100		)	—			(135		)
Net income (loss) — Res-Care, Inc.	$	8,208		$	17,366		$	393		$	(17,624	)	$	8,343

13

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2009

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	154,582		$	630,760		$	10,748		$	—		$	796,090
Operating expenses	164,647			578,827			11,888			—			755,362
Operating (loss) income	(10,065		)	51,933			(1,140		)	—			40,728
Other (income) expenses:
Interest, net	8,513			(33		)	23			—			8,503
Equity in earnings of subsidiaries	(31,970		)	—			—			31,970			—
Total other (income) expenses	(23,457		)	(33		)	23			31,970			8,503
Income (loss) from continuing operations, before income taxes	13,392			51,966			(1,163		)	(31,970		)	32,225
Income tax (benefit) expense	(6,887		)	19,264			(431		)	—			11,946
Income (loss) from continuing operations	20,279			32,702			(732		)	(31,970		)	20,279
Net income (loss) — including noncontrolling interests	20,279			32,702			(732		)	(31,970		)	20,279
Net loss — noncontrolling interests	—			(73		)	(346		)	—			(419		)
Net income (loss) — Res-Care, Inc.	$	20,279		$	32,775		$	(386	)	$	(31,970	)	$	20,698

14

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	74,197		$	303,102		$	8,079		$	—		$	385,378
Operating expenses	99,829			276,258			7,357			—			383,444
Operating (loss) income	(25,632		)	26,844			722			—			1,934
Other (income) expenses:
Interest, net	4,541			(21		)	(17		)	—			4,503
Equity in earnings of subsidiaries	(17,618		)	—			—			17,618			—
Total other (income) expenses	(13,077		)	(21		)	(17		)	17,618			4,503
Income (loss) from continuing operations, before income taxes	(12,555		)	26,865			739			(17,618		)	(2,569		)
Income tax (benefit) expense	(10,883		)	9,618			265			—			(1,000		)
(Loss) income from continuing operations	(1,672		)	17,247			474			(17,618		)	(1,569		)
Loss from discontinued operations, net of tax	—			(103		)	—			—			(103		)
Net (loss) income	$	(1,672	)	$	17,144		$	474		$	(17,618	)	$	(1,672	)

15

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	148,668		$	596,192		$	15,917		$	—		$	760,777
Operating expenses	173,752			546,826			14,616			—			735,194
Operating (loss) income	(25,084		)	49,366			1,301			—			25,583
Other (income) expenses:
Interest, net	9,214			(59		)	(58		)	—			9,097
Equity in earnings of subsidiaries	(32,284		)	—			—			32,284			—
Total other (income) expenses	(23,070		)	(59		)	(58		)	32,284			9,097
(Loss) income from continuing operations, before income taxes	(2,014		)	49,425			1,359			(32,284		)	16,486
Income tax (benefit) expense	(12,388		)	17,852			491			—			5,955
Income from continuing operations	10,374			31,573			868			(32,284		)	10,531
Loss from discontinued operations, net of tax	—			(157		)	—			—			(157		)
Net income (loss)	$	10,374		$	31,416		$	868		$	(32,284	)	$	10,374

16

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2009

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income (loss) — including noncontrolling interests	$	20,279		$	32,702		$	(732	)	$	(31,970	)	$	20,279
Adjustments to reconcile net income, including noncontrolling interests, to cash provided by (used in) operating activities:
Depreciation and amortization	5,806			6,094			1,254			—			13,154
Amortization of discount and deferred debt issuance costs on notes	606			—			—			—			606
Share-based compensation	2,488			—			—			—			2,488
Deferred income tax expense	4,932			—			—			—			4,932
Provision for losses on accounts receivable	3,927			—			—			—			3,927
Gain on purchase of business	—			(559		)	—			—			(559		)
Loss on sale of assets	—			53			—			—			53
Equity in earnings of subsidiaries	(31,970		)	—			—			31,970			—
Changes in operating assets and liabilities	108,974			(102,191		)	(4,844		)	—			1,939
Cash provided by (used in) operating activities	115,042			(63,901		)	(4,322		)	—			46,819
Investing activities:
Purchases of property and equipment	(2,898		)	(4,198		)	(155		)	—			(7,251		)
Acquisitions of businesses	—			(12,723		)	—			—			(12,723		)
Proceeds from sale of assets	—			146			—			—			146
Cash used in investing activities	(2,898		)	(16,775		)	(155		)	—			(19,828		)
Financing activities:
Long-term debt (repayments) borrowings	(2,208		)	777			—			—			(1,431		)
Short-term repayments — three months or less, net	(20,928		)	(2,272		)	—			—			(23,200		)
Payments on obligations under capital leases, net	—			(46		)	—			—			(46		)
Debt issuance costs	(36		)	—			—			—			(36		)
Net payments relating to intercompany financing	(92,608		)	88,008			4,600			—			—
Proceeds received from exercise of stock options	360			—			—			—			360
Employee withholding payments on share-based compensation	(1,282		)	—			—			—			(1,282		)
Cash (used in) provided by financing activities	(116,702		)	86,467			4,600			—			(25,635		)
Effect of exchange rate changes on cash and cash equivalents	—			116			547			—			663
(Decrease) increase in cash and cash equivalents	(4,558		)	5,907			670			—			2,019
Cash and cash equivalents at beginning of period	146			4,048			9,400			—			13,594
Cash and cash equivalents at end of period	$	(4,412	)	$	9,955		$	10,070		$	—		$	15,613

17

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income	$	10,374		$	31,416		$	868		$	(32,284	)	$	10,374
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	5,253			5,201			389			—			10,843
Amortization of discount and deferred debt issuance costs on notes	592			—			—			—			592
Share-based compensation	2,233			—			—			—			2,233
Deferred income tax expense	(1,987		)	—			(10		)	—			(1,997		)
Excess tax benefit from share-based compensation	(851		)	—			—			—			(851		)
Provision for losses on accounts receivable	—			3,519			—			—			3,519
Gain on sale of assets	—			(49		)	—			—			(49		)
Equity in earnings of subsidiaries	(32,284		)	—			—			32,284			—
Changes in operating assets and liabilities	101,867			(96,142		)	(2,670		)	3,962			7,017
Cash provided by (used in) operating activities	85,197			(56,055		)	(1,423		)	3,962			31,681
Investing activities:
Purchases of property and equipment	(5,984		)	(3,242		)	(157		)	—			(9,383		)
Acquisitions of businesses	—			(20,840		)	—			—			(20,840		)
Proceeds from sale of assets	—			535			—			—			535
Cash used in investing activities	(5,984		)	(23,547		)	(157		)	—			(29,688		)
Financing activities:
Long-term debt repayments	(1,789		)	—			—			—			(1,789		)
Borrowings of long-term debt	—			—			—			—			—
Short-term borrowings (repayments) — three months or less, net	9,787			(1,851		)	6,026			(3,962		)	10,000
Payments on obligations under capital leases, net	—			(39		)	—			—			(39		)
Debt issuance costs	(98		)	—			—			—			(98		)
Net payments relating to intercompany financing	(81,851		)	82,864			(1,013		)	—			—
Excess tax benefit from share-based compensation	851			—			—			—			851
Proceeds received from exercise of stock options	962			—			—			—			962
Employee withholding payments on share-based compensation	(1,442		)	—			—			—			(1,442		)
Cash (used in) provided by financing activities	(73,580		)	80,974			5,013			(3,962		)	8,445
Effect of exchange rate changes on cash and cash equivalents	—			(40		)	—			—			(40		)
Increase in cash and cash equivalents	5,633			1,332			3,433			—			10,398
Cash and cash equivalents at beginning of period	1,379			3,724			5,706			—			10,809
Cash and cash equivalents at end of period	$	7,012		$	5,056		$	9,139		$	—		$	21,207

18

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

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

Preliminary Note Regarding Forward-Looking Statements

Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make such forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial items; (2) statements of plans and objectives of ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as “believes”, “anticipates”, “expects”, “intends”, “plans”, “targets”, and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in the “Risk Factors” section in Part II, Item 1A of this Report and in our 2008 Annual Report on Form 10-K. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.

Overview of Our Business

We recognize 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 and transportation to the elderly in their own homes. Additionally, we provide services to welfare recipients, young people and people who have been laid off or have special barriers to employment, to transition into the workforce and become productive employees.

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

Revenues for our Community Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies, private pay home care and management contracts with not-for-profit or other providers that contract with state government agencies. Our services include activities of daily living, functional and vocational skills training, socialization, 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.

19

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

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

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

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.

States continue to evaluate the impact of the federal stimulus plan on their budgets for human services. In general, we believe the stimulus will be advantageous to the states. We are actively working with state governments and at the federal level, and will continue to monitor developments. ResCare may also benefit from opportunities for additional services and contracts as a result of the stimulus plan.

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 2008 Annual Report on Form 10-K. Management has discussed the development,

20

selection, and application of our critical accounting policies with our Audit Committee. During the first six months of 2009, there were no material changes in the critical accounting policies and assumptions.

Results of Operations

	Three Months Ended						Six Months Ended
	June 30						June 30
	2009			2008			2009			2008
	(Dollars in thousands)
Revenues:
Community Services	$	290,627		$	273,728		$	572,050		$	542,600
Job Corps Training Services	40,825			40,623			81,412			82,318
Employment Training Services	59,224			58,426			114,290			111,501
Other (2)	14,587			12,601			28,338			24,358
Consolidated	$	405,263		$	385,378		$	796,090		$	760,777
Operating income:
Community Services (1)	$	24,750		$	4,941		$	56,857		$	34,524
Job Corps Training Services	2,930			2,777			6,106			5,862
Employment Training Services	2,999			7,292			7,602			12,210
Other (2)	1,666			1,565			785			2,400
Total Operating Expenses (3)	(14,980		)	(14,641		)	(30,622		)	(29,413		)
Consolidated	$	17,365		$	1,934		$	40,728		$	25,583
Operating margin:
Community Services (1)	8.5		%	1.8		%	9.9		%	6.4		%
Job Corps Training Services	7.2		%	6.8		%	7.5		%	7.1		%
Employment Training Services	5.1		%	12.5		%	6.7		%	11.0		%
Other (2)	11.4		%	12.4		%	2.8		%	9.9		%
Total Operating Expenses (3)	(3.7		)%	(3.8		)%	(3.8		)%	(3.9		)%
Consolidated	4.3		%	0.5		%	5.1		%	3.4		%

(1)	Three months and six months ended June 30, 2008 includes a $24.4 million charge related to four legal matters within our Community Services segment. See Note 10 in our Form 10-Q for the period ended June 30, 2008 for further discussion.
(2)	Represents our international job training and placement agencies, as well as our charter and alternative education schools.
(3)	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, 2009 increased $19.9 million and $35.3 million, or 5.2% and 4.6%, respectively, over the same periods in 2008. These increases were primarily related to acquisitions in the Community Services segment, new contracts in the Employment Training Services segment and a December 2008 school acquisition included in Other. 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, 2009, was $17.4 million compared to $1.9 million over the same period in 2008. The increase in operating income was primarily due to the $24.4 million charge recorded in 2008 to resolve four legal matters and 2009 acquisition growth in the Community Services segment, offset by increased incremental insurance costs

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in 2009 totaling $11.8 million. Consolidated operating margins were 4.3% and 0.5% for the quarterly periods in 2009 and 2008, respectively, with improvement for the current year margin due primarily to the 2008 legal charge and acquisition growth, offset by increased insurance costs.

Consolidated operating income for the six months ended June 30, 2009 was $40.7 million compared to $25.6 million for the same period in 2008. Consolidated operating margins were 5.1% and 3.4% for the six month periods in 2009 and 2008, respectively. The increases in 2009 operating income and margins were primarily related to the $24.4 million legal charge and 2009 acquisition growth, offset by an incremental increase of $11.0 million in 2009 insurance costs.

Net interest expense decreased $0.3 million for the second quarter and $0.6 million for the six months ended June 30, 2009, compared to the same periods in 2008. The decreases were attributable to lower rates. Our effective income tax rate for the six months ended June 30, 2009 was 37.1% as compared to 36.1% over the same period in 2008. The increase in the effective rate was primarily due to the 2008 legal charge and the international operations, offset by an increase in insurance costs.

Community Services

Community Services revenues for the quarter and six months ended June 30, 2009 increased by $16.9 million and $29.5 million, or 6.2% and 5.4%, respectively, over the same periods in 2008. These increases were due primarily to acquisition growth in the HomeCare and residential businesses. Operating margin increased from 1.8% in the second quarter of 2008 to 8.5% in the same period in 2009 and from 6.4% to 9.9% for the six months ended June 30, 2008, and 2009, due primarily to the 2008 legal charge and 2009 acquisition and organic growth of approximately $3.5 million for the quarter and $4.6 million for the six months ended, offset by an incremental increase in 2009 insurance costs totaling $9.2 million for the quarter and $8.8 million for the six months ended.

Job Corps Training Services

Job Corps Training Services revenues for the quarter remained consistent with 2008. The six months ended June 30, 2009 decreased $0.9 million, or 1.1%, from the same periods in 2008 primarily due to decreased spending. Operating margin increased from 6.8% in the second quarter of 2008 to 7.2% in the same period in 2009 and increased from 7.1% to 7.5% for the six months ended June 30, 2008 as compared to June 30, 2009, primarily due to a reduction in general and administrative expenses related to travel and professional services. In January 2009, we were informed the contract to operate the Pittsburgh Job Corps center had been awarded to another operator through the re-bidding process. Annual revenues for this contract were approximately $17 million. Our contract expired on June 30, 2009. We were informed in April 2009 the contract to operate the Treasure Island Job Corps center had been awarded to another operator through the re-bidding process. Annual revenues were approximately $17 million. Our contract expired on May 31, 2009.

Employment Training Services

Employment Training Services revenues increased $0.8 million and $2.8 million, or 1.4% and 2.5%, respectively, in the quarter and six months ended June 30, 2009 over the same periods in 2008, due primarily to the Indiana contract and the addition of new contracts. These were partially offset by lost contracts in Florida due to the state taking services in-house during 2008 and the timing of performance incentives. Operating margin decreased from 12.5% in the second quarter of 2008 to 5.1% in the same period in 2009 and decreased from 11.0% in the six months ended June 30, 2008 to 6.7% in the same period in 2009 due to increased current year expenses incurred in connection with our contracts in New York and Indiana, and an additional $1.1 million in insurance costs.

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Other

A portion of our business is dedicated to alternative education and international job training and placement agencies. Revenues increased from $12.6 million in the second quarter of 2008 to $14.6 million in the same period in 2009 and from $24.4 million for the six month period ended June 30, 2008 to $28.3 million in the same period in 2009, primarily due to an acquisition completed in December 2008. Operating income increased from $1.6 million in the second quarter of 2008 to $1.7 million for the same period in 2009. Operating income decreased from $2.4 million in the six months ended June 30, 2008 to $0.8 million in the 2009 six month period due to out-of-period adjustments within the international business totaling $1.8 million related to foreign exchange losses and amortization on intangible assets, offset by current quarter foreign exchange gains of $0.4 million.

Total Operating Expenses

Total operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total operating expenses were consistent with the 2008 quarter. The increase of $1.2 million, or 4.1%, for the six months ended June 30, 2009, compared to the same period in 2008 is principally due to increased wages and employee benefits totaling $1.1 million.

Financial Condition, Liquidity and Capital Resources

Total assets increased $10.0 million, or 1.1%, in 2009 over balances at December 31, 2008. This was primarily due to the $9.5 million increase in goodwill due to 2009 acquisitions.

Cash and cash equivalents were $15.6 million at June 30, 2009, as compared to $13.6 million at December 31, 2008. Cash provided from operations for the six months ended June 30, 2009 was $46.8 million compared to $31.7 million for the six months ended June 30, 2008. The increase is primarily due to the increase in net income and change in deferred income taxes.

Net accounts receivable at June 30, 2009 decreased to $230.3 million, compared to $231.0 million at December 31, 2008. Due to strong cash collections, days of revenue in net accounts receivable decreased 1.9 days to 49.2 days at June 30, 2009 compared with 51.1 days at December 31, 2008.

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

The capital markets remain under duress due to the ongoing financial crisis and may impede our ability to expand and grow our business if credit conditions remain tight or our access to these markets becomes limited. State budgetary pressures from the financial crisis may put further pressure on reimbursement rates and limit our ability to receive rate increases. We are negotiating new terms for our $250 million senior secured revolving credit facility and may face significant rate and pricing increases when the refinancing is completed, as well as more restrictive debt covenants over the terms in place currently. Some members of our bank lending group, due to pressure from the financial crisis, may have more limited lending capacity than reflected in the current credit facility or may not have the ability to participate in a new credit facility. We may see a significant change in lender participation as a result or credit availability as a result.

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Capital expenditures were consistent with our historical experience. We invested $7.3 million during the first six months of 2009 on purchases of property and equipment as compared to $9.4 million during the same period in 2008. We also used $12.7 million on six acquisitions during the first six months of 2009 compared to $20.8 million on nine acquisitions during the same period in 2008.

Our financing activities included a net payment of debt and capital lease obligations of $24.7 million for the first six months of 2009. This compares to a net borrowing of $10.0 million, offset by a net payment of debt and capital lease obligations of $1.8 million for the same period in 2008. Stock option exercise activity resulted in $0.4 million in proceeds for the 2009 period versus $1.0 million in 2008.

The 2007 amendment to our senior secured revolving credit facility increased our borrowing capacity by $50 million to a total of $250 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $300 million. The credit facility expires on October 3, 2010 and will be used primarily for working capital purposes, letters of credit required under our insurance programs and for acquisitions. The credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

As of June 30, 2009, we had $117.5 million available under the revolver with an outstanding balance of $80.6 million. Outstanding balances bear interest at 1.375% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of June 30, 2009, the weighted average interest rate was 2.02%. As of June 30, 2009, we had irrevocable standby letters of credit in the principal amount of $51.9 million issued primarily in connection with our insurance programs. Subsequent to June 30, 2009, and in conjunction with the renewal of our insurance programs on July 1, 2009, we have increased our letters of credit outstanding by $10.0 million for a total issued and undrawn amount of $61.9 million. Letters of credit had a borrowing rate of 1.50% as of June 30, 2009. The commitment fee on the unused balance was 0.30%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

The credit facility contains various financial covenants relating to net worth, capital expenditures and rentals and requires us to maintain specified ratios with respect to our interest and leverage. We are in compliance with our debt covenants as of June 30, 2009 and we believe we will continue to be in compliance with our bank covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

Operating funding sources were approximately 62% through Medicaid reimbursement, 10% from the DOL and 28% 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 2009 or 2008.

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 and foreign currency exchange rates.

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Interest Rates

While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate or foreign currency exposures. Our senior secured credit facility, which has an interest rate based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $80.6 million as of June 30, 2009 and $103.8 million as of December 31, 2008. A 100 basis point movement in the interest rate would result in an approximate $0.8 million annualized effect on interest expense and cash flows.

Foreign Currency Exchange Risk

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

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

ResCare’s management, under the supervision and with the participation of the Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined by Rules 13a-15(e) and 15(d)-15(e) under the Securities and Exchange Act of 1934, 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. There were no changes in ResCare’s internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Limitations on the Effectiveness of Controls

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

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PART II.OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

The following sets forth changes from the risk factors previously disclosed in our 2008 Annual Report on Form 10-K and first quarter 2009 Form 10-Q.

If the fair values of our reporting units decline, we may have to record a material non-cash charge to earnings from impairment of our goodwill.

At June 30, 2009, we had approximately $486.0 million of goodwill recorded. We expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing basis, we evaluate whether the carrying value of our goodwill is impaired, based on estimates of the fair values of our reporting units. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.

The current turmoil in the financial markets and weakness in macroeconomic conditions globally continue to be challenging, and we cannot be certain of the duration of these conditions and their potential impact on our stock price performance. If a further decline in our market capitalization and other factors result in the decline in the fair value of one or more of our reporting units, it would become reasonably likely that a goodwill impairment assessment would be necessary before the next annual review in the fourth quarter of 2009 and might result in an impairment of goodwill.

For our 2008 annual impairment test, our Employment Training Services and International reporting units had fair values that exceeded their respective carrying values by only 4-6%. These reporting units have goodwill balances at June 30, 2009 of $62 million and $25 million, respectively. While the operating results for the six months ended June 30, 2009 for these two reporting units were below our expectations, we do not consider this to be a triggering event at this time. However, if the operating results of these reporting units continue to be below our expectations, we may test for goodwill impairment which could result in a charge against earnings prior to the annual test in the fourth quarter of 2009.

When we are a subcontractor, we can be adversely affected by, but unable to control or influence, disputes arising between the principal parties to the contract.

Occasionally, we may be engaged as a subcontractor to provide services to the prime contractor’s customers. We currently have this relationship in our Job Corps, International and Employment Training Services businesses. As a subcontractor, we may not be able to influence or control issues that arise between the prime contractor and its customer. Disputes between the prime contractor and its customer could result in a customer terminating the contract, which could negatively impact our operating results.

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

Unregistered Sales of Equity Securities  None

Issuer Repurchases of Securities:

					Maximum Number (or
					Approximate Dollar
				Total Number of Shares	Value) of Shares
	(1)	Average Price		Purchased as Part of	That May Yet Be
	Total Number of	Paid		Publicly Announced	Purchased under the
	Shares Purchased	per Share		Plans or Programs	Plans or Programs
April 1-30, 2009	2,560	$	14.72	N/A	N/A
May 1-31, 2009	240	15.07		N/A	N/A
June 1-30, 2009	47,975	14.38		N/A	N/A
	50,775	$	14.40	N/A	N/A

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

Item 4.Submission of Matters to a Vote of Security Holders

(a)On June 26, 2009, ResCare held its regular annual meeting of shareholders in Louisville, Kentucky. The common and preferred shareholders present at the meeting, in person or by proxy, were entitled to cast 33,241,021 shares on a common-share equivalent basis, or 97.1% of the 34,239,347 votes that all eligible shareholders were entitled to cast.

(b)At the annual meeting, the following two directors were elected to serve as directors for three year terms.

NAME	VOTES FOR	VOTES WITHHELD
James H. Bloem	32,614,534	626,487
Steven S. Reed	23,770,737	9,470,284

(c)The Company’s shareholders also ratified the appointment of KPMG LLP as independent auditors for ResCare for the 2009 fiscal year.

Votes for	32,952,847
Votes against	275,426
Votes abstaining	12,748

(d)As provided under ResCare’s Article of Incorporation, the preferred shareholders unanimously elected Ralph G. Gronefeld, Jr. to a three year term on our board. The preferred shareholders have the right to elect two directors.

Item 5.Other Information

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

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

On August 4, 2009, Paul G. Dunn submitted his resignation as president of ResCare’s Employment Training Services segment, effective September 3, 2009.

Item 6.Exhibits

(a) Exhibits

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

31.2Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.

32.Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			RES-CARE, INC.
			Registrant
Date:	August 7, 2009	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	August 7, 2009	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and Chief Financial Officer

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