10-Q

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 September 30, 2008

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 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 October 31, 2008 was 29,440,438.

INDEX

RES-CARE, INC. AND SUBSIDIARIES

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – September 30, 2008 and December 31, 2007
	Condensed Consolidated Statements of Income – Three Months Ended September 30, 2008 and 2007; Nine Months Ended September 30, 2008 and 2007
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2008 and 2007
	Notes to Condensed Consolidated Financial Statements – September 30, 2008
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 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)

	September 30			December 31
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	14,321		$	10,809
Accounts receivable, net of allowance for doubtful accounts of $19,167 in 2008 and $15,831 in 2007	220,214			206,529
Refundable income taxes	1,702			2,465
Deferred income taxes	23,389			17,959
Non-trade receivables	6,190			9,445
Prepaid expenses and other current assets	13,870			12,365
Total current assets	279,686			259,572
Property and equipment, net	84,066			83,336
Goodwill	468,105			443,623
Other intangible assets, net	43,486			32,412
Other assets	15,845			15,600
Total assets	$	891,188		$	834,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	52,922		$	54,650
Accrued expenses	110,055			90,496
Current portion of long-term debt	2,839			3,238
Current portion of obligations under capital leases	77			82
Accrued income taxes	1,209			1,559
Total current liabilities	167,102			150,025
Long-term liabilities	33,766			33,465
Long-term debt	230,454			219,681
Obligations under capital leases	579			810
Deferred gains	4,227			4,479
Deferred income taxes	26,092			19,212
Total liabilities	462,220			427,672
Minority interests	381			2
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 2008 and 2007	46,609			46,609
Common stock, no par value, authorized 40,000,000 shares, issued 29,877,342 in 2008 and 29,779,435 in 2007, outstanding 29,440,879 in 2008 and 29,161,293 in 2007	50,531			50,412
Additional paid-in capital	90,530			86,079
Retained earnings	243,454			221,574
Accumulated other comprehensive (loss) income	(2,537		)	2,195
Total shareholders’ equity	428,587			406,869
Total liabilities and shareholders’ equity	$	891,188		$	834,543

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						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
Revenues	$	387,923		$	364,598		$	1,148,700		$	1,066,116
Facility and program expenses	350,165			328,622			1,056,102			961,235
Facility and program contribution	37,758			35,976			92,598			104,881
Corporate general and administrative expenses	15,085			13,127			44,342			40,190
Operating income	22,673			22,849			48,256			64,691
Interest expense, net	4,531			4,659			13,628			14,031
Income from continuing operations before income taxes	18,142			18,190			34,628			50,660
Income tax expense	6,514			6,667			12,469			18,567
Income from continuing operations	11,628			11,523			22,159			32,093
Loss from discontinued operations, net of tax	(122		)	(136		)	(279		)	(398		)
Net income	11,506			11,387			21,880			31,695
Net income attributable to preferred shareholders	1,650			1,637			3,149			4,571
Net income attributable to common shareholders	$	9,856		$	9,750		$	18,731		$	27,124
Basic earnings (loss) per common share:
From continuing operations	$	0.35		$	0.34		$	0.67		$	0.97
From discontinued operations	(0.00		)	(0.00		)	(0.01		)	(0.01		)
Basic earnings per common share	$	0.35		$	0.34		$	0.66		$	0.96
Diluted earnings (loss) per common share:
From continuing operations	$	0.35		$	0.34		$	0.66		$	0.96
From discontinued operations	(0.01		)	(0.00		)	(0.01		)	(0.01		)
Diluted earnings per common share	$	0.34		$	0.34		$	0.65		$	0.95
Weighted average number of common shares:
Basic	28,553			28,337			28,425			28,185
Diluted	28,747			28,648			28,617			28,538

See accompanying notes to condensed consolidated financial statements.

3

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30
	2008			2007
Cash flows from operating activities:
Net income	$	21,880		$	31,695
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	16,454			14,654
Impairment charge	—			332
Amortization of discount and deferred debt issuance costs on notes	891			806
Share-based compensation	3,577			5,361
Deferred income taxes, net	1,450			2,528
Excess tax benefit from share-based compensation	(1,049		)	(1,724		)
Provision for losses on accounts receivable	5,221			4,581
Loss on sale of assets	11			110
Changes in operating assets and liabilities	(1,111		)	8,632
Cash provided by operating activities	47,324			66,975
Cash flows from investing activities:
Purchases of property and equipment	(14,150		)	(16,220		)
Acquisitions of businesses	(38,979		)	(33,444		)
Proceeds from sale of assets	571			534
Cash used in investing activities	(52,558		)	(49,130		)
Cash flows from financing activities:
Long-term debt repayments	(1,589		)	(58,966		)
Borrowings of long-term debt	—			40,000
Short-term borrowings – three months or less, net	10,000			—
Payments on obligations under capital lease	(57		)	(174		)
Proceeds from sale and leaseback transactions	—			1,669
Debt issuance costs	(118		)	—
Excess tax benefit from share-based compensation	1,049			1,724
Proceeds received from exercise of stock options	1,339			2,144
Employee withholding payments on share-based compensation	(1,446		)	—
Cash provided by (used in) financing activities	9,178			(13,603		)
Effect of exchange rate changes on cash and cash equivalents	(432		)	—
Increase in cash and cash equivalents	3,512			4,242
Cash and cash equivalents at beginning of period	10,809			5,541
Cash and cash equivalents at end of period	$	14,321		$	9,783

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.

For further information refer to the consolidated financial statements and footnotes thereto in our annual report on Form 10-K for the year ended December 31, 2007.

Note 2.Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation.

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Note 3.Acquisitions

We completed fourteen acquisitions during the first nine months of 2008. Aggregate consideration for these acquisitions was approximately $40.8 million, including $1.8 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $57.7 million. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.

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

Property and equipment	$	419
Other intangibles	6,360
Goodwill	33,963
Other assets	94
Liabilities assumed	(73		)
Aggregate purchase price	$	40,763

The allocations of purchase price are preliminary and will be subjected to further analysis. The other intangible assets will be amortized up to ten years and consist primarily of customer relationships, covenants not to compete and company name valuation.

Note 4.Goodwill

A summary of changes to goodwill during the nine months ended September 30, 2008 is as follows:

			Job Corps		Employment
	Community		Training		Training
	Services		Services		Services		Other (2)			Total
Balance at December 31, 2007	$	332,482	$	7,589	$	60,457	$	43,095		$	443,623
Goodwill added through acquisitions	32,887		—		—		1,076			33,963
Purchase price allocation adjustments	—		—		—		(8,779		)	(8,779		)
Other adjustments to previously recorded goodwill (1)	2,147		—		—		(2,849		)	(702		)
Balance at September 30, 2008	$	367,516	$	7,589	$	60,457	$	32,543		$	468,105

(1)Adjustments to previously recorded goodwill primarily relate to earn-out payments, translation adjustments and other purchase price adjustments. Earn-out payments are generally determined at specific future dates based on the terms of the purchase agreement.

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

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Note 5.Comprehensive Income

The following table sets forth the computation of comprehensive income:

	Three Months Ended					Nine Months Ended
	September 30					September 30
	2008			2007		2008			2007
Net income	$	11,506		$	11,387	$	21,880		$	31,695
Foreign currency translation adjustments arising during the period	(3,369		)	381		(4,732		)	908
Comprehensive income	$	8,137		$	11,768	$	17,148		$	32,603

Note 6.Debt

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

	Sept. 30		Dec. 31
	2008		2007
7.75% senior notes due 2013, net of discount of approximately $0.7 million and $0.8 million in 2008 and 2007, respectively	$	149,307	$	149,203
Senior secured credit facility	79,300		69,300
Obligations under capital leases	656		892
Notes payable and other	4,686		4,416
	233,949		223,811
Less current portion	2,916		3,320
	$	231,033	$	220,491

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Note 7.Earnings Per Share

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

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
Income from continuing operations	$	11,628		$	11,523		$	22,159		$	32,093
Attributable to preferred shareholders	1,667			1,657			3,189			4,629
Attributable to common shareholders	$	9,961		$	9,866		$	18,970		$	27,464
Loss from discontinued operations, net of tax	$	(122	)	$	(136	)	$	(279	)	$	(398	)
Attributable to preferred shareholders	(17		)	(20		)	(40		)	(58		)
Attributable to common shareholders	$	(105	)	$	(116	)	$	(239	)	$	(340	)
Net income	$	11,506		$	11,387		$	21,880		$	31,695
Attributable to preferred shareholders	1,650			1,637			3,149			4,571
Attributable to common shareholders	$	9,856		$	9,750		$	18,731		$	27,124
Weighted average number of common shares used in basic earnings per common share	28,553			28,337			28,425			28,185
Effect of dilutive securities:
Stock options	79			246			97			263
Restricted stock	115			65			95			90
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per common share	28,747			28,648			28,617			28,538
Basic earnings (loss) per common share:
From continuing operations	$	0.35		$	0.34		$	0.67		$	0.97
From discontinued operations	(0.00		)	(0.00		)	(0.01		)	(0.01		)
Basic earnings per common share	$	0.35		$	0.34		$	0.66		$	0.96
Diluted earnings (loss) per common share:
From continuing operations	$	0.35		$	0.34		$	0.66		$	0.96
From discontinued operations	(0.01		)	(0.00		)	(0.01		)	(0.01		)
Diluted earnings per common share	$	0.34		$	0.34		$	0.65		$	0.95

There were no average shares excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2008 and 2007.

8

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 September 30:
2008
Revenues (2)	$	282,619	$	39,952	$	55,140	$	10,212		$	387,923
Operating income (2)	30,185		2,974		5,229		(15,715		)	22,673
Total assets	607,724		30,960		133,873		118,631			891,188
Capital expenditures	3,080		—		382		1,305			4,767
Depreciation and amortization (2)	2,506		—		613		2,491			5,610
2007
Revenues (2)	$	270,354	$	40,074	$	50,904	$	3,266		$	364,598
Operating income (2)	27,674		2,896		6,001		(13,722		)	22,849
Total assets	538,580		31,833		136,321		74,213			780,947
Capital expenditures	2,468		—		296		2,296			5,060
Depreciation and amortization (2)	2,586		—		492		2,026			5,104
Nine months ended September 30:
2008
Revenues (2)	$	825,219	$	122,270	$	166,641	$	34,570		$	1,148,700
Operating income (2) (3)	64,709		8,836		17,439		(42,728		)	48,256
Capital expenditures	6,571		—		767		6,812			14,150
Depreciation and amortization (2)	7,214		—		1,684		7,548			16,446
2007
Revenues (2)	$	781,856	$	122,626	$	147,087	$	14,547		$	1,066,116
Operating income (2)	82,164		8,705		13,436		(39,614		)	64,691
Capital expenditures	7,285		—		807		8,128			16,220
Depreciation and amortization (2)	7,391		—		1,494		5,745			14,630

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

(2)Amounts for both Community Services and the Consolidated Totals have been restated to exclude the operations of Washington, D.C. and New Mexico, which were discontinued effective March 31, 2006 and October 31, 2006, respectively.

(3)Nine months ended September 30, 2008 includes a $24.4 million charge related to the resolution of three separate legal matters and the ongoing proceedings of another case within our CSG segment.

Note 9.Share-Based Compensation

A summary of changes to outstanding shares during the nine months ended September 30, 2008 follows:

			Restricted Stock
			Performance-		Service-
	Options		Based		Based
Outstanding at December 31, 2007	551		394		435
Grants	—		9		190
Exercised/issued	(182	)	(67	)	(121	)
Forfeited/cancelled	(10	)	—		(24	)
Outstanding at September 30, 2008	359		336		480

9

Total share-based compensation expense by type of award was as follows:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008		2007
Stock options	$	—	$	16	$	—	$	49
Restricted stock, service-based	868		683		2,239		2,940
Restricted stock, performance-based	476		290		1,338		2,372
Total share-based compensation expense	1,344		989		3,577		5,361
Tax effect	523		385		1,391		2,086
Share-based compensation expense, net of tax	$	821	$	604	$	2,186	$	3,275

Note 10.            Legal Proceedings

From time to time, we, or a provider with whom we have a management agreement, become a party to legal and/or administrative proceedings that, in the event of unfavorable outcomes, may adversely affect revenues and period to period comparisons.

In January 2007, the U.S. Court of Appeals for the Seventh Circuit reversed a Summary Judgment we had received from the U.S. District Court, Southern District of Indiana, in Omega Healthcare Investors, Inc. v. Res-Care Health Services, Inc. In the case, Omega was initially seeking $3.7 million for breach of contract in the closing of a facility in 1999 located in Lexington, Kentucky. The Court of Appeals issued a ruling granting judgment for Omega and remanded the proceedings to the District Court to establish the actual amount of damages. A Petition for Writ of Certiorari filed with the U.S. Supreme Court in April 2007, was denied. Trial commenced in June 2008 on the issue of damages only and the jury returned a verdict of $6.0 million which was entered as a judgment in August. We believe the amount awarded by the jury is excessive and contradicts various rulings of the Court before and during trial which limited the amount of damages the jury could have awarded to a significantly lower amount. Omega has also sought unspecified pre-judgment interest, attorneys’ fees and costs, which we have challenged. We filed various post-trial motions which the Court heard in early November 2008.  We are awaiting the Court’s rulings and will appeal if necessary. We have made a provision in our condensed consolidated financial statements for the final adjudication of this matter. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.

As reported in our Form 10-Q for the quarter ended June 30, 2008, during the second quarter we recorded a pretax charge of $24.4 million to income in connection with the resolution of three legal matters and the ongoing legal proceedings described in the preceding paragraph. ResCare or its affiliates are also parties to various other 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.

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Note 11.            Impact of Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 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. The partial adoption of SFAS 157 did not have a material effect on the condensed consolidated financial statements. We are currently evaluating the provisions for nonfinancial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS 159). SFAS 159 provides entities with the option to report selected financial assets and liabilities at fair value. Business entities adopting SFAS 159 will report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. We did not elect the fair value option for any of our existing financial instruments as of September 30, 2008, and we have not determined whether or not we will elect this option for financial instruments which may be acquired in the future.

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. SFAS 141R is effective for us beginning January 1, 2009, and will apply prospectively to business combinations completed on or after that date.

In April 2008, the FASB issued FSP 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 must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. We do not expect the adoption of this statement to have a material impact on our consolidated financial position, results of operations or cash flows.

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In December 2007, the FASB issued 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. SFAS 160 is effective for us beginning January 1, 2009, and will apply prospectively, except for the presentation of disclosure requirements, which must be applied retrospectively. We do not expect the adoption of SFAS 160 will have a material impact on our consolidated financial position, results of operations or cash flows.

Note 12.            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.

12

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	(2,999	)	$	8,837		$	8,483		$	—		$	14,321
Accounts receivable, net	38,130			177,392			4,692			—			220,214
Refundable income taxes	1,354			—			348			—			1,702
Deferred income taxes	23,380			—			9			—			23,389
Non-trade receivables	680			5,004			4,468			(3,962		)	6,190
Prepaid expenses and other current assets	8,055			5,670			145			—			13,870
Total current assets	68,600			196,903			18,145			(3,962		)	279,686
Property and equipment, net	37,558			45,920			588			—			84,066
Goodwill	85,778			350,374			31,953			—			468,105
Other intangible assets, net	4,165			31,555			7,766			—			43,486
Investment in subsidiaries	615,630			—			—			(615,630		)	—
Other assets	10,686			5,026			133			—			15,845
	$	822,417		$	629,778		$	58,585		$	(619,592	)	$	891,188
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	26,611		$	23,691		$	2,620		$	—		$	52,922
Accrued expenses	51,833			57,379			843			—			110,055
Current portion of long-term debt	(1,358		)	2,840			5,319			(3,962		)	2,839
Current portion of obligations under capital leases	13			64			—			—			77
Accrued income taxes	798			—			411			—			1,209
Total current liabilities	77,897			83,974			9,193			(3,962		)	167,102
Intercompany	28,196			(72,949		)	44,753			—			—
Long-term liabilities	31,263			2,203			300			—			33,766
Long-term debt	228,607			1,847			—			—			230,454
Obligations under capital leases	23			556			—			—			579
Deferred gains	1,747			2,480			—			—			4,227
Deferred income taxes	26,097			—			(5		)	—			26,092
Total liabilities	393,830			18,111			54,241			(3,962		)	462,220
Minority interests	—			381			—			—			381
Total shareholders’ equity	428,587			611,286			4,344			(615,630		)	428,587
	$	822,417		$	629,778		$	58,585		$	(619,592	)	$	891,188

13

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2007

(In thousands)

				Guarantor		Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries		Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	1,379		$	3,724	$	5,706		$	—		$	10,809
Accounts receivable, net	39,989			162,420		4,120			—			206,529
Refundable income taxes	2,026			—		439			—			2,465
Deferred income taxes	17,959			—		—			—			17,959
Non-trade receivables	542			8,835		68			—			9,445
Prepaid expenses and other current assets	6,894			5,161		310			—			12,365
Total current assets	68,789			180,140		10,643			—			259,572
Property and equipment, net	36,884			45,827		625			—			83,336
Goodwill	85,699			313,954		43,970			—			443,623
Other intangible assets, net	4,576			27,836		—			—			32,412
Investment in subsidiaries	492,487			—		—			(492,487		)	—
Other assets	11,210			4,290		100			—			15,600
	$	699,645		$	572,047	$	55,338		$	(492,487	)	$	834,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	32,863		$	18,615	$	3,172		$	—		$	54,650
Accrued expenses	44,897			44,550		1,049			—			90,496
Current portion of long-term debt	271			2,967		—			—			3,238
Current portion of obligations under capital leases	13			69		—			—			82
Accrued income taxes	1,146			—		413			—			1,559
Total current liabilities	79,190			66,201		4,634			—			150,025
Intercompany	(57,476		)	14,501		42,975			—			—
Long-term liabilities	31,721			1,744		—			—			33,465
Long-term debt	218,503			1,178		—			—			219,681
Obligations under capital leases	34			776		—			—			810
Deferred gains	1,587			2,892		—			—			4,479
Deferred income taxes	19,217			—		(5		)	—			19,212
Total liabilities	292,776			87,292		47,604			—			427,672
Minority interests	—			2		—			—			2
Total shareholders’ equity	406,869			484,753		7,734			(492,487		)	406,869
	$	699,645		$	572,047	$	55,338		$	(492,487	)	$	834,543

14

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	73,669		$	307,172		$	7,082		$	—		$	387,923
Operating expenses	75,038			283,324			6,888			—			365,250
Operating (loss) income	(1,369		)	23,848			194			—			22,673
Other (income) expenses:
Interest, net	4,576			5			(50		)	—			4,531
Equity in earnings of subsidiaries	(15,348		)	—			—			15,348			—
Total other (income) expenses	(10,772		)	5			(50		)	15,348			4,531
Income from continuing operations, before income taxes	9,403			23,843			244			(15,348		)	18,142
Income tax (benefit) expense	(2,103		)	8,531			86			—			6,514
Income from continuing operations	11,506			15,312			158			(15,348		)	11,628
Loss from discontinued operations, net of tax	—			(122		)	—			—			(122		)
Net income	$	11,506		$	15,190		$	158		$	(15,348	)	$	11,506

15

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	222,337		$	903,364		$	22,999		$	—		$	1,148,700
Operating expenses	248,790			830,150			21,504			—			1,100,444
Operating (loss) income	(26,453		)	73,214			1,495			—			48,256
Other (income) expenses:
Interest, net	13,790			(54		)	(108		)	—			13,628
Equity in earnings of subsidiaries	(47,632		)	—			—			47,632			—
Total other (income) expenses	(33,842		)	(54		)	(108		)	47,632			13,628
Income from continuing operations, before income taxes	7,389			73,268			1,603			(47,632		)	34,628
Income tax (benefit) expense	(14,491		)	26,383			577			—			12,469
Income from continuing operations	21,880			46,885			1,026			(47,632		)	22,159
Loss from discontinued operations, net of tax	—			(279		)	—			—			(279		)
Net income	$	21,880		$	46,606		$	1,026		$	(47,632	)	$	21,880

16

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2007

(In thousands)

				Guarantor			Non-Guarantor					Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries		Eliminations			Total
Revenues	$	72,500		$	290,986		$	1,112	$	—		$	364,598
Operating expenses	76,078			264,686			985		—			341,749
Operating (loss) income	(3,578		)	26,300			127		—			22,849
Other (income) expenses:
Interest, net	(737		)	5,320			76		—			4,659
Equity in earnings of subsidiaries	(13,187		)	—			—		13,187			—
Total other expenses	(13,924		)	5,320			76		13,187			4,659
Income from continuing operations, before income taxes	10,346			20,980			51		(13,187		)	18,190
Income tax (benefit) expense	(1,041		)	7,689			19		—			6,667
Income from continuing operations	11,387			13,291			32		(13,187		)	11,523
Loss from discontinued operations, net of tax	—			(136		)	—		—			(136		)
Net income	$	11,387		$	13,155		$	32	$	(13,187	)	$	11,387

17

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2007

(In thousands)

				Guarantor			Non-Guarantor					Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries		Eliminations			Total
Revenues	$	216,908		$	846,359		$	2,849	$	—		$	1,066,116
Operating expenses	223,092			775,883			2,450		—			1,001,425
Operating (loss) income	(6,184		)	70,476			399		—			64,691
Other (income) expenses:
Interest, net	3,483			10,407			141		—			14,031
Equity in earnings of subsidiaries	(37,819		)	—			—		37,819			—
Total other expenses	(34,336		)	10,407			141		37,819			14,031
Income from continuing operations, before income taxes	28,152			60,069			258		(37,819		)	50,660
Income tax (benefit) expense	(3,543		)	22,015			95		—			18,567
Income from continuing operations	31,695			38,054			163		(37,819		)	32,093
Loss from discontinued operations, net of tax	—			(398		)	—		—			(398		)
Net income	$	31,695		$	37,656		$	163	$	(37,819	)	$	31,695

18

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income	$	21,880		$	46,606		$	1,026		$	(47,632	)	$	21,880
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	7,949			8,017			488			—			16,454
Amortization of discount and deferred debt issuance costs on notes	891			—			—			—			891
Share-based compensation	3,577			—			—			—			3,577
Deferred income tax expense	1,459			—			(9		)	—			1,450
Excess tax benefit from share-based compensation	(1,049		)	—			—			—			(1,049		)
Provision for losses on accounts receivable	—			5,221			—			—			5,221
Loss on sale of assets	—			11			—			—			11
Equity in earnings of subsidiaries	(47,632		)	—			—			47,632			—
Changes in operating assets and liabilities	82,983			(89,024		)	968			3,962			(1,111		)
Cash provided by (used in) operating activities	70,058			(29,169		)	2,473			3,962			47,324
Investing activities:
Purchases of property and equipment	(8,213		)	(5,770		)	(167		)	—			(14,150		)
Acquisitions of businesses	—			(38,979		)	—			—			(38,979		)
Proceeds from sale of assets	—			571			—			—			571
Cash used in investing activities	(8,213		)	(44,178		)	(167		)	—			(52,558		)
Financing activities:
Long-term debt repayments	(1,589		)	—			—			—			(1,589		)
Short-term borrowings (repayments) – three months or less, net	10,053			(1,410		)	5,319			(3,962		)	10,000
Payments on obligations under capital leases, net	—			(57		)	—			—			(57		)
Debt issuance costs	(118		)	—			—			—			(118		)
Net payments relating to intercompany financing	(75,511		)	79,927			(4,416		)	—			—
Excess tax benefit from share-based compensation	1,049			—			—			—			1,049
Proceeds received from exercise of stock options	1,339			—			—			—			1,339
Employee withholding payments on share-based compensation	(1,446		)	—			—			—			(1,446		)
Cash (used in) provided by financing activities	(66,223		)	78,460			903			(3,962		)	9,178
Effect of exchange rate on cash and cash equivalents	—			—			(432		)	—			(432		)
(Decrease) increase in cash and cash equivalents	(4,378		)	5,113			2,777			—			3,512
Cash and cash equivalents at beginning of period	1,379			3,724			5,706			—			10,809
Cash and cash equivalents at end of period	$	(2,999	)	$	8,837		$	8,483		$	—		$	14,321

19

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2007

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income	$	31,695		$	37,656		$	163		$	(37,819	)	$	31,695
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	6,908			7,729			17			—			14,654
Impairment charge	—			332			—			—			332
Amortization of discount and deferred debt issuance costs on notes	806			—			—			—			806
Share-based compensation	5,361			—			—			—			5,361
Deferred income tax expense	2,529			—			(1		)	—			2,528
Excess tax benefit from share-based compensation	(1,724		)	—			—			—			(1,724		)
Provision for losses on accounts receivable	—			4,581			—			—			4,581
Loss on sale of assets	—			110			—			—			110
Equity in earnings of subsidiaries	(37,819		)	—			—			37,819			—
Changes in operating assets and liabilities	98,510			(87,198		)	(2,680		)	—			8,632
Cash provided by (used in) operating activities	106,266			(36,790		)	(2,501		)	—			66,975
Investing activities:
Purchases of property and equipment	(8,364		)	(7,846		)	(10		)	—			(16,220		)
Acquisitions of businesses	—			(33,444		)	—			—			(33,444		)
Proceeds from sale of assets	—			534			—			—			534
Cash used in investing activities	(8,364		)	(40,756		)	(10		)	—			(49,130		)
Financing activities:
Long-term debt repayments	(55,918		)	(3,048		)	—			—			(58,966		)
Borrowings of long-term debt	40,000			—			—			—			40,000
Short-term borrowings – three months or less, net	—			—			—			—			—
Payments on obligations under capital leases	—			(174		)	—			—			(174		)
Proceeds from sale and leaseback transactions	—			1,669			—			—			1,669
Net payments relating to intercompany financing	(80,853		)	79,559			1,294			—			—
Excess tax benefit from share-based compensation	1,724			—			—			—			1,724
Proceeds received from exercise of stock options	2,144			—			—			—			2,144
Cash (used in) provided by financing activities	(92,903		)	78,006			1,294			—			(13,603		)
Increase (decrease) in cash and cash equivalents	4,999			460			(1,217		)	—			4,242
Cash and cash equivalents at beginning of period	2,196			26			3,319			—			5,541
Cash and cash equivalents at end of period	$	7,195		$	486		$	2,102		$	—		9,783

20

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

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”, “targeted”, 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 2007 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.

The following Management’s Discussion and Analysis (MD&A) section 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.

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 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.

21

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

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.

Our growing ResCare HomeCare business, also in the Community Services segment, offers personalized services to seniors and individuals of all ages, physical conditions and cognitive abilities recovering from illness, injury, surgery, living with a chronic disability or dealing with the natural process of aging. We provide professional nursing, personal care and support, homemaking, respite and other services in the home, the hospital or long-term care facilities to augment the institutional care. Reimbursement can be through insurance, contracts with hospitals and/or long-term care facilities or private pay from the individuals and their families receiving the care. 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 domestic job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Employment Training Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct facility and program costs related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services.

Additionally, we operate international job training and placement agencies that assist disadvantaged job seekers in the U.K., Germany and Netherlands, as well as domestic charter and alternative education schools.

22

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 2007 Annual Report on Form 10-K. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first nine months of 2008, there were no material changes in the critical accounting policies and assumptions.

23

Results of Operations

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(Dollars in thousands)
Revenues:
Community Services (1)	$	282,619		$	270,354		$	825,219		$	781,856
Job Corps Training Services	39,952			40,074			122,270			122,626
Employment Training Services	55,140			50,904			166,641			147,087
Other (3)	10,212			3,266			34,570			14,547
Consolidated	$	387,923		$	364,598		$	1,148,700		$	1,066,116
Operating income:
Community Services (1) (2)	$	30,185		$	27,674		$	64,709		$	82,164
Job Corps Training Services	2,974			2,896			8,836			8,705
Employment Training Services	5,229			6,001			17,439			13,436
Other (3) (4)	(685		)	(487		)	1,715			990
Total Operating Expenses (5)	(15,030		)	(13,235		)	(44,443		)	(40,604		)
Consolidated	$	22,673		$	22,849		$	48,256		$	64,691
Operating margin:
Community Services (1) (2)	10.7		%	10.2		%	7.8		%	10.5		%
Job Corps Training Services	7.4		%	7.2		%	7.2		%	7.1		%
Employment Training Services	9.5		%	11.8		%	10.5		%	9.1		%
Other (3) (4)	(6.7		)%	(14.9		)%	5.0		%	6.8		%
Total Operating Expenses (5)	(3.9		)%	(3.6		)%	(3.9		)%	(3.8		)%
Consolidated	5.8		%	6.3		%	4.2		%	6.1		%

(1)Excludes results for Washington, D.C. and New Mexico, which were reclassified to discontinued operations for all periods presented.

(2)Nine months ended September 30, 2008 includes a $24.4 million charge related to the resolution of three separate legal matters and the ongoing proceedings of another case within our CSG segment.

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

(4)Nine months ended September 30, 2007 includes a $0.3 million goodwill impairment charge related to our charter schools.

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

Consolidated

Consolidated revenues for the quarter and nine months ended September 30, 2008 increased 6.4% and 7.7%, respectively, over the same periods in 2007. These increases were primarily related to acquisitions in the Community Services and Other segments, as well as new contracts in the Employment Training Services segment. Revenues are more fully described in the segment discussions.

Consolidated operating income for the quarter ended September 30, 2008, was $22.7 million compared to $22.8 million over the same period in 2007. Consolidated operating margins were 5.8% and 6.3% for the quarterly periods in 2008 and 2007, respectively, due primarily to lower operating margins in the Employment Training Services segment, as well as higher corporate general and administrative expenses.

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Consolidated operating income for the nine months ended September 30, 2008 was $48.3 million compared to $64.7 million for the same period in 2007. Consolidated operating margins were 4.2% and 6.1% for the nine month periods in 2008 and 2007, respectively. The reductions in 2008 operating income and margins were primarily related to the second quarter 2008 $24.4 million legal charge, but were favorably offset by $1.8 million in lower share-based compensation expense. The legal charge reduced 2008 operating margins by 2.1 percentage points. Operating income is more fully described in the segment discussions.

Net interest expense decreased $0.1 million for the third quarter and $0.4 million for the nine months ended September 30, 2008, compared to the same periods in 2007. The decreases were attributable to lower rates. Our effective income tax rate for the nine months ended September 30, 2008 was 36.0% as compared to 36.7% over the same period in 2007. The decrease in the effective rate was due primarily to the legal charge.

Community Services

Community Services revenues for the quarter and nine months ended September 30, 2008 increased by 4.5% and 5.5%, respectively over the same periods in 2007. These increases were due primarily to acquisition growth, which were partially offset by softness in the HomeCare business. Operating margin increased from 10.2% in the third quarter of 2007 to 10.7% in the same period in 2008 and decreased from 10.5% to 7.8% for the nine months ended September 30, 2007 compared to 2008. The third quarter increase in operating margin was primarily due to $2.3 million in lower insurance costs and the integration of Kelly Home Care Services, which were partially offset by higher fuel and utility costs. The reduction in the year-to-date operating margin was primarily due to the second quarter 2008 $24.4 million legal charge, which was partially offset by expense control. The legal charge reduced operating margin for the nine months ended September 30, 2008 by 3.0 percentage points.

Job Corps Training Services

Job Corps Training Services revenues remained consistent for the quarter and nine months ended September 30, 2008 and 2007. Operating margin increased from 7.2% in the third quarter of 2007 to 7.4% in the same period in 2008 and increased from 7.1% in the nine months ended September 30, 2007 to 7.2% for the same period in 2008.

Employment Training Services

Employment Training Services revenues increased 8.3% in the quarter and 13.3% in the nine months ended September 30, 2008 over the same periods in 2007, due primarily to the ramping up of the Arizona and Indiana contracts and new contracts in Texas, Arkansas and South Carolina, which were partially offset by lost contracts in Florida due to the state taking services in-house. Operating margin decreased from 11.8% in the third quarter of 2007 to 9.5% in the same period in 2008, due primarily to the timing of performance incentives. Operating margin increased from 9.1% in the nine months ended September 30, 2007 to 10.5% for the first nine months of 2008, due primarily to improvements in performance in the New York City Back to Work contract, incentives received in certain programs, and the ramping up of the Arizona and Indiana contracts, which were partially offset by lost contracts in Florida.

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Other

Included in Other is our international job training and placement agencies, as well as a portion of our business dedicated to operating domestic charter and alternative education schools. Revenues increased from $3.3 million in the 2007 third quarter to $10.2 million in the same period in 2008 and from $14.5 million for the nine month period ended September 30, 2007 to $34.6 million in the same period in 2008. This increase was primarily related to the late 2007 acquisitions in international job training and placement agency business. International revenues related to these acquisitions were approximately $6.1 million and $20.3 million for the quarter and nine months ended September 30, 2008, respectively. Operating margin improved from (14.9%) in the third quarter ended September 30, 2007 to (6.7%) in the comparable period in 2008, and decreased from 6.8% in the nine months ended September 30, 2007 to 5.0% in the 2008 nine month period. The lower margin for the nine months ended September 30, 2008 reporting period is due primarily to the low operating income in the international business, which is caused by slower than anticipated revenue growth and higher than anticipated integration costs.

Total Operating Expenses

Total operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total operating expenses increased 13.6% and 9.5% for the quarter and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. These increases were due primarily to higher information technology department costs, as well as increases associated with revenue growth, which were partially offset by lower share-based compensation expense.

Financial Condition, Liquidity and Capital Resources

Total assets increased 6.8% in 2008 over balances at December 31, 2007. This increase was primarily due to growth from acquisitions. Goodwill and other intangible assets increased $35.6 million from December 31, 2007, primarily as a result of the acquisitions completed during the first nine months of 2008.

Cash and cash equivalents were $14.3 million at September 30, 2008, as compared to $10.8 million at December 31, 2007. The increase in cash and cash equivalents is primarily related to proceeds from short-term borrowings needed for working capital purposes. Cash provided from operations for the nine months ended September 30, 2008 was $47.3 million compared to $67.0 million for the nine months ended September 30, 2007. The decrease in cash provided from operations was primarily related to lower net income due principally to the $24.4 million legal charge from the second quarter 2008.

Net accounts receivable at September 30, 2008 increased to $220.2 million, compared to $206.5 million at December 31, 2007 due primarily to acquisition-related growth. Days of revenue in net accounts receivable were 50.4 days at September 30, 2008 compared with 49.0 days at December 31, 2007.

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

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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 expect to begin negotiating new renewal terms for our $250 million senior secured revolving credit facility during the second half of 2009 and may face significant rate and pricing increases 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 limitations in providing capital and we may see a significant change in lender participation as a result.

Capital expenditures were consistent with our historical experience. We invested $14.2 million during the first nine months of 2008 on purchases of property and equipment. We also used $39.0 million on acquisitions.

Our financing activities included a net borrowing on the revolver of $10.0 million, offset by payments of debt and capital lease obligations of $1.6 million for the first nine months of 2008. This compares to net borrowings on the revolver of $40.0 million, offset by payments of debt and capital lease obligations of $59.0 million for the same period in 2007. Stock option exercise activity resulted in $1.3 million in proceeds for the 2008 period versus $2.1 million in 2007.

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 September 30, 2008, we had $116.5 million available under the revolver with an outstanding balance of $79.3 million. Outstanding balances bear interest at 1.38% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of September 30, 2008, the weighted average interest rate was 4.71%. As of September 30, 2008, we had irrevocable standby letters of credit in the principal amount of $54.2 million issued primarily in connection with our insurance programs. Letters of credit had a borrowing rate of 1.38% as of September 30, 2008. The commitment fee on the unused balance was 0.3%. 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 September 30, 2008 and although the $24.4 million legal charge recorded in the second quarter 2008 negatively impacted the calculation of certain bank covenants, we believe we will continue to be in compliance with our debt covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon the maintenance of continued profitability and/or reductions of amounts borrowed under the facility, and continued cash collections.

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Operating funding sources are approximately 60% through Medicaid reimbursement, 11% from the DOL and 29% from other payors. We believe our sources of funds through operations and available through the credit facility described above will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

We had no significant off-balance sheet transactions or interests in 2008 or 2007.

Impact of Recently Issued Accounting Pronouncements

See Note 11 of the Notes to Condensed Consolidated Financial Statements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rates

While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate or foreign currency exposures. Our senior secured credit facility, which has an interest rate based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $79.3 million as of September 30, 2008 and $69.3 million as of December 31, 2007. 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 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

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internal control over financial reporting during the quarter ended September 30, 2008 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 10 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 2007 Annual Report on Form 10-K and our 2008 Quarterly Reports on Form 10-Q.

Our inability to maintain and renew our existing contracts and to obtain additional contracts would adversely affect our revenues.

Each of our operating segments derives a substantial amount of revenue from contracts with government agencies. They also have contracts with non-governmental entities. Our contracts are generally in effect for a specific term, and our ability to renew or retain them depends on our operating performance and reputation, as well as other factors over which we have less or no control. We may not be successful in obtaining, renewing or retaining contracts to operate Job Corps or Employment Training centers. Our Job Corps contracts are re-bid, regardless of operating performance, at least every five years and our Employment Training Services contracts are typically re-bid every one or two years. Government contracts of the operations we acquire may be subject to termination upon such an event, and our ability to retain them may be affected by the performance of prior operators. Changes in the market for services and contracts, including increasing competition, transition costs or costs to implement awarded contracts, could adversely affect the timing and/or viability of future development activities. Additionally, many of our contracts are subject to state or federal government procurement rules and procedures. Changes in procurement policies that may be adopted by one or more of these agencies could also adversely affect our ability to obtain and retain these contracts. Although we have a good track record, we can give no assurance these contracts will be renewed.

Changes in economic conditions could adversely affect our business.

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 or increase service levels. We expect to begin negotiating new renewal terms for our $250 million senior secured revolving credit facility during 2009 and may face less favorable terms over those in place currently. Additionally, some members of our bank lending group, due to pressure from the financial crisis, may have limitations in providing capital and we may see a significant change in lender participation or credit availability as a result. Additionally, the financial crisis may contribute to conditions that impact the timing and outcome of our goodwill impairment analysis.

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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)			Purchased as Part of	That May Yet Be
	Total Number of	Average Price Paid		Publicly Announced	Purchased under the
	Shares Purchased	per Share		Plans or Programs	Plans or Programs
July 1-31, 2008	509	$	18.19	N/A	N/A

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

Item 5.Other Information

From time to time executive officers and directors of ResCare may adopt non-discretionary, written trading plans that comply with SEC Rule 10b5-1, which provides executives with a method to monetize their equity-based compensation in an automatic and non-discretionary manner over time. The trading plans adopted by our executives must comply with our compensation and trading policies, and applicable laws and regulations. Consistent with ResCare’s philosophy of open communication with our shareholders, we post information about any trading plans of our executive officers and directors in effect from time to time on our corporate website.

Item 6.Exhibits

(a) Exhibits

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

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SIGNATURES

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

			RES-CARE, INC.
			Registrant
Date:	November 6, 2008	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	November 6, 2008	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and
			Chief Financial Officer

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, Ralph G. Gronefeld, Jr., certify that:

1.I have reviewed this report on Form 10-Q of Res-Care, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 6, 2008	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer

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EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, David W. Miles, certify that:

1.I have reviewed this report on Form 10-Q of Res-Care, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 6, 2008	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and
			Chief Financial Officer

1

EX-32

EXHIBIT 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)

In connection with the Quarterly Report of Res-Care, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),  the undersigned, the Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 6, 2008	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	November 6, 2008	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and
			Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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