UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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

For the transition period from to

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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 ü No .

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

Large accelerated filer: Accelerated filer: Non-accelerated filer: ü Smaller reporting company:

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

The number of shares outstanding of the registrant’s common stock, no par value, as of July 31, 2011 was 21,344,741.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	June 30			December 31
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	11,531		$	27,552
Accounts receivable, net of allowance for doubtful accounts of $4,315 in 2011 and $844 in 2010	222,179			215,941
Refundable income taxes	4,021			1,199
Deferred income taxes	19,224			14,306
Non-trade receivables	2,149			7,347
Prepaid expenses and other current assets	17,470			18,605
Total current assets	276,574			284,950
Property and equipment, net	94,723			96,997
Goodwill	242,852			234,867
Other intangible assets, net	321,070			322,586
Other assets	27,897			30,108
Total assets	$	963,116		$	969,508
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	47,723		$	56,252
Accrued expenses	142,410			127,049
Current portion of long-term debt	9,488			39,195
Current portion of obligations under capital leases	92			92
Accrued income taxes	—			1,404
Total current liabilities	199,713			223,992
Long-term liabilities	32,445			33,712
Long-term debt	365,832			366,884
Obligations under capital leases	385			431
Deferred gains	375			—
Deferred income taxes	110,256			102,076
Total liabilities	709,006			727,095
Shareholder’s equity:
Preferred shares, authorized 1,000,000 shares, no par value, no shares issued and outstanding in 2011 and 2010	—			—
Common stock, no par value, authorized 40,000,000 shares, issued and outstanding 21,344,741 in 2011 and 2010	—			—
Additional paid-in capital	238,126			236,726
Retained earnings	16,124			5,448
Accumulated other comprehensive (loss) income	(54		)	257
Total shareholder’s equity – Res-Care, Inc.	254,196			242,431
Noncontrolling interest	(86		)	(18		)
Total shareholder’s equity	254,110			242,413
Total liabilities and shareholder’s equity	$	963,116		$	969,508

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30						June 30
	SUCCESSOR			PREDECESSOR			SUCCESSOR			PREDECESSOR
	2011			2010			2011			2010

Revenues	$	399,092		$	391,207		$	785,176		$	775,479
Cost of services	300,723			295,432			594,776			587,316
Gross profit	98,369			95,775			190,400			188,163

Operating expenses:
Operational general and administrative	59,588			60,347			116,907			117,788
Corporate general and administrative	14,213			14,747			28,268			30,207
Total operating expenses	73,801			75,094			145,175			147,995

Operating income	24,568			20,681			45,225			40,168

Interest expense, net	10,597			4,865			21,363			9,650
Income before incomes taxes	13,971			15,816			23,862			30,518
Income tax expense	3,977			5,707			7,038			10,862
Income from continuing operations	9,994			10,109			16,824			19,656
Loss from discontinued operations, net of tax	(3,060		)	(675		)	(6,216		)	(886		)
Net income-including noncontrolling interest	6,934			9,434			10,608			18,770
Net loss-noncontrolling interest	(36		)	(41		)	(68		)	(123		)
Net income-ResCare, Inc.	$	6,970		$	9,475		$	10,676		$	18,893

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30
	SUCCESSOR			PREDECESSOR
	2011			2010
Cash flows from operating activities:
Net income-including noncontrolling interest	$	10,608		$	18,770
Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities:
Depreciation and amortization	10,035			12,765
Amortization of discount and deferred debt issuance costs	1,558			868
Share-based compensation	—			1,690
Deferred income taxes, net	2,597			10,672
Excess tax expense from share-based compensation	—			185
Provision for losses on accounts receivable	3,475			3,634
Write down of assets held for sale	1,628			—
Loss (gain) on sale of assets	175			(2		)
Changes in operating assets and liabilities	(1,927		)	(5,733		)
Cash provided by operating activities	28,149			42,849

Cash flows from investing activities:
Purchases of property and equipment	(5,300		)	(4,719		)
Acquisitions of businesses, net of cash acquired	(8,645		)	(14,422		)
Proceeds from sale of assets	322			210
Cash used in investing activities	(13,623		)	(18,931		)

Cash flows from financing activities:
Long-term debt (repayments) borrowings	(31,424		)	536
Short-term borrowings (repayments)-three months or less, net	—			(24,000		)
Payments on obligations under capital lease	(46		)	(48		)
Funds contributed by co-investors	1,400			—
Debt issuance costs	(558		)	(4,469		)
Excess tax expense from share-based compensation	—			(185		)
Employee withholding payments on share-based compensation	—			(879		)
Cash used in financing activities	(30,628		)	(29,045		)

Effect of exchange rate changes on cash and cash equivalents	81			(170		)

Decrease in cash and cash equivalents	(16,021		)	(5,297		)

Cash and cash equivalents at beginning of period	27,552			20,672

Cash and cash equivalents at end of period	$	11,531		$	15,375

Supplemental schedule of non-cash investing and financing activities:
Notes issued in connection with acquisitions	$	665		$	1,962
Forgiveness of management fees and promissory note in connection with an acquisition	$	2,328		$	—

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1. Basis of Presentation

Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, youth with special needs, adults who are experiencing barriers to employment, and older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.

On November 16, 2010, an affiliate of Onex Partners III LP (Purchaser) completed a tender offer to acquire the outstanding shares of ResCare common stock, as further described in Note 2. The acquisition resulted in a new basis of accounting under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations (previously Statement of Financial Accounting Standards No. 141R). This change creates many differences between reporting for ResCare post-acquisition, as successor, and ResCare pre-acquisition, as predecessor. The accompanying condensed consolidated financial statements and the notes to condensed consolidated financial statements reflect separate reporting periods for successor and predecessor where applicable.

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 Form S-4 Registration Statement (File No. 333-173527) filed April 15, 2011.

Reclassification

During 2011, we ceased providing international services within the Workforce Services operating segment. In accordance with Accounting Standards Codification (ASC) 205-20, Discontinued Operations, the closure and sale of the international operations have been accounted for as discontinued operations. Accordingly, the results of our international Workforce Services operations, loss on sale of the business and all exit costs have been classified as discontinued operations, net of taxes, for all periods presented, in the accompanying condensed consolidated statements of income. Additional information regarding discontinued operations can be found in Note 3.

Certain prior year amounts have been reclassified to conform to the current year presentation due to the change in reporting units discussed in Note 9 and for the presentation of gross profit. We have changed the presentation in our condensed consolidated statements of income by reclassifying operational general and administrative expenses, previously classified as facility and program expenses, to Operating expenses. Costs related to the provision of services are now deducted from revenues to arrive at gross profit. This reclassification had no impact to the Operating income line item. All prior period amounts were reclassified to

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conform to this new presentation. Such reclassifications had no material effect on the Company’s previously reported condensed consolidated financial position, results of operations or cash flows.

Segments

Effective January 1, 2011, we changed our reportable operating segments to: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services and (iv) Workforce Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Youth Services consists of our Job Corps centers, a variety of youth programs including foster care, alternative education programs and charter schools. Workforce Services is comprised of job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects. We have presented prior periods to reflect the change in our segments. Further information regarding our segments is included in Note 9.

Note 2. Onex Transaction

On September 6, 2010, Purchaser entered into a share exchange agreement with ResCare, pursuant to which it agreed to acquire all shares of ResCare common stock not already owned by Onex Corporation and its affiliates, including Onex Partners LP (collectively, the Onex Investors), for a purchase price of $13.25 per share on the terms and conditions set forth therein.

In accordance with the share exchange agreement, Purchaser commenced a tender offer to acquire all outstanding shares of ResCare common stock not already held by Purchaser and its affiliates (the Public Shares) on October 7, 2010. On November 16, 2010, the Onex Investors (including Onex Partners III LP) contributed $120.0 million to Purchaser in exchange for Purchaser’s common membership interests and $158.8 million for Purchaser’s preferred membership interests that accrue a preferred return at the rate of 4.8%. The tender offer was consummated on November 16, 2010 (the Stock Tender Offer). Purchaser purchased 21,044,765 Public Shares in the Stock Tender Offer, and, at that time, the Onex Investors beneficially owned 87.4% of the issued and outstanding shares of ResCare’s common stock on an as-converted basis. The change of control occurred on November 16, 2010, which is the acquisition date for accounting purposes.

On December 20, 2010, the ResCare shareholders approved the second-step share exchange transaction (the Share Exchange) in which all Public Shares not acquired in the Stock Tender Offer, excluding shares held by members of our management who agreed to roll-over their existing equity ownership into equity of Onex Rescare Holdings Corp. (Rollover Holders), were to be exchanged for $13.25 per share, without interest.

The following transactions occurred concurrently on December 22, 2010:

· ResCare entered into new senior secured credit facilities, comprised of a new $170 million term loan facility and an amended and restated $275 million revolving credit facility;

· ResCare issued $200 million of unsecured 10.75% Senior Notes due 2019 (Notes) in a private placement under the Securities Act of 1933;

· ResCare repurchased $120 million (approximately 80%) aggregate principal amount of its previously tendered 7.75% Senior Notes due 2013; the remaining $30 million of these Senior Notes that were not repurchased were satisfied and discharged by delivering to the trustee amounts sufficient to pay the applicable redemption price in January 2011;

· The Purchaser completed the previously announced acquisition of all of the publicly held common shares of ResCare through the second-step share exchange transaction, whereby each outstanding share of ResCare common stock not currently held by Onex Investors was exchanged for the right to receive $13.25 in cash ($56.9 million); and

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· The Purchaser redeemed preferred membership interests held by certain of the Onex Investors for an amount equal to the contributions ($158.8 million) made by them in respect of the purchase of such interests plus the accrued preferred return ($0.8 million) on such interests through the redemption date.

Following the Share Exchange, the issuance of the Notes and receipt of required regulatory approvals, Onex Partners LP and the other Onex Investors holding shares of ResCare’s common and preferred stock prior to the commencement of the Stock Tender Offer contributed those shares to Onex Rescare Holdings Corp. (New Holdco) in exchange for shares of New Holdco’s nonvoting common stock. On December 22, 2010, an independent group of co-investors contributed $1.4 million to New Holdco in exchange for shares of New Holdco’s voting common stock. During the first quarter of 2011, New Holdco contributed the $1.4 million to ResCare. In addition, the Onex affiliates holding membership interests ($120.0 million) in Purchaser and the Rollover Holders contributed their interests in such entity to New Holdco in exchange for shares of New Holdco’s voting common stock. Following these contributions, Purchaser was merged into ResCare, with ResCare as the surviving entity. ResCare is now a wholly owned subsidiary of New Holdco, which in turn, is now owned by the Onex Investors, certain co-investors and members of our management team.

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

The Company is currently in the process of finalizing the purchase price allocation with respect to the Onex transaction and must complete: (1) finalization of the third-party valuation report and (2) the allocation of the purchase price to the proper tax jurisdictions, which will allow the Company to complete the final calculation of the deferred income taxes. Therefore, accounts that are considered preliminary as of June 30, 2011, include deferred income taxes, goodwill, other intangible assets, other liabilities, noncontrolling interest and property, plant and equipment.

The preliminary purchase price allocation is as follows:

	Fair Value
	at Nov. 16,
	2010

Cash and cash equivalents	$	15,459
Accounts and notes receivable	266,508
Deferred income taxes	14,896
Prepaid expenses and other current assets	25,985
Property, plant and equipment	96,388
Goodwill	229,931
Other intangible assets	321,249
Other assets	12,079
Total assets acquired	982,495
Current liabilities	191,007
Long-term debt	205,437
Deferred income taxes	100,223
Other long-term liabilities	33,384
Total liabilities assumed	530,051
Net assets acquired	$	452,444

The fair values were estimated by the Company’s management based on independent appraisals, fair values of equivalent properties or analysis of expected future cash flows. The gross contractual amount of accounts and notes receivable at November 16, 2010 was $293.8 million. The Company estimates that $27.3 million of the receivable-related contractual cash flows as of November 16, 2010 are not expected to be collected.

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The following table details the goodwill and identifiable intangible assets acquired in the Onex transaction and their estimated values and expected amortizable lives:

	Fair		Useful Life
	Value		(Years)

Goodwill	$	229,931	Indefinite
Other Intangible assets:
Licenses	227,440		Indefinite
Trade names	63,590		20
Customer relationships	28,160		20
Covenants not to compete	1,480		2
Other	579		5
Total other intangible assets	321,249
Total intangible assets	$	551,180

There were no purchased research and development assets acquired and written-off in connection with the Onex transaction. Approximately $169 million of the goodwill is expected to be deductible for tax purposes.

Note 3. Discontinued Operations

In our Form 10-Q for the quarter ended March 31, 2011, filed May 9, 2011 with the Securities and Exchange Commission, we disclosed that we had incurred costs associated with the closure of our international operations in Germany and the Netherlands. We also disclosed that since we were not awarded any contracts under the Work Programme bidding process, we were considering various strategic alternatives for our international operation in the United Kingdom, which included its sale, liquidation or continuation.

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

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

In connection with the closures of the Netherlands and Germany operations, we recorded charges of $1.5 million in the fourth quarter of 2010 and $1.4 million in the first quarter of 2011. These charges included exit costs for severance and lease obligations, as well as charges for vendor and customer claims. The following table describes the 2011 activity for only the exit cost liability, comprised of severance and lease obligations, as of June 30, 2011:

	Beginning							Ending
	Balance at		Accruals /		Payments /			Balance at
	January 1, 2011		(Reversals)		Other			June 30, 2011
Severance obligations	$	481	$	—	$	(481	)	$	—
Lease terminations	—		831		(831		)	—
Total exit cost liability	$	481	$	831	$	(1,312	)	$	—

We expect no additional charges related to the closure and sale activities noted above. As of June 30, 2011, a liability of $1.1 million remains for the vendor and customer claims associated with the Netherlands and Germany closures.

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Summarized financial information for the discontinued operations is set forth below:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2011			2010			2011			2010
Revenues	$	1,756		$	4,935		$	4,465		$	10,524
Cost of services	2,592			3,981			5,688			7,791

Gross (loss) profit	(836		)	954			(1,223		)	2,733

Operational general and administrative expense	(1,606		)	(1,655		)	(5,107		)	(3,473		)
Other (expense) income (1)	(2,210		)	44			(2,148		)	91
Interest expense, net	(51		)	(71		)	(117		)	(117		)
Loss from discontinued operations, before income taxes	(4,703		)	(728		)	(8,595		)	(766		)
Income tax benefit (expense)	1,643			53			2,379			(120		)
Loss from discontinued operations, net of tax	$	(3,060	)	$	(675	)	$	(6,216	)	$	(886	)

(1) The quarter and six months ended June 30, 2011 includes a $2.2 million charge for adjusting assets and liabilities to their net realizable value due to the sale of the operations in the United Kingdom on July 1, 2011. The balance remaining for 2011 periods, as well as all of the 2010 periods, represents other miscellaneous income.

Note 4. Acquisitions

We completed three acquisitions within our Residential Services segment during the first six months of 2011. Aggregate consideration for these acquisitions was approximately $11.9 million, including $0.7 million of notes issued, cash received of $0.3 million and net forgiveness of management fees and promissory note of $2.3 million. These acquisitions are expected to generate annual revenues of approximately $15.0 million. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.

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

Cash	$	280
Accounts receivable	1,642
Property and equipment	288
Other intangible assets	1,431
Goodwill	8,485
Other assets	34
Liabilities	(242)
Aggregate purchase price	$	11,918

The other intangible assets consist primarily of customer relationships, trade names and covenants not to compete. All intangible assets will be amortized over five years. We expect all of the $8.5 million of goodwill will be deductible for tax purposes.

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Note 5. Goodwill

Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist. The date of our annual impairment test is October 1. A summary of changes to goodwill during the six months ended June 30, 2011 are as follows:

	Residential			ResCare			Youth		Workforce
	Services			HomeCare			Services		Services		Total

Balance at December 31, 2010	$	140,599		$	36,842		$	26,385	$	31,041	$	234,867
Goodwill added through acquisitions	8,485			—			—		—		8,485
Adjustments to previously recorded goodwill (1)	(539		)	(12		)	4		47		(500		)
Balance at June 30, 2011	$	148,545		$	36,830		$	26,389	$	31,088	$	242,852

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

Note 6. Comprehensive Income

The following table sets forth the computation of comprehensive income:

	Three Months Ended June 30						Six Months Ended June 30
	SUCCESSOR			PREDECESSOR			SUCCESSOR			PREDECESSOR
	2011			2010			2011			2010

Net income-Res-Care, Inc.	$	6,970		$	9,475		$	10,676		$	18,893
Foreign currency translation adjustments arising during the period	(405		)	(308		)	(311		)	(1,552		)
Comprehensive income	$	6,565		$	9,167		$	10,365		$	17,341

Note 7. Debt

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

	June 30		December 31
	2011		2010

10.75% senior notes due 2019	$	200,000	$	200,000
Senior secured term loan due 2016, net of discount of $3.1 million at 2011 and $3.4 million at 2010	166,050		166,615
7.75% senior notes due 2013	—		30,535
Senior secured credit facility	—		—
Obligations under capital leases	477		523
Notes payable and other	9,270		8,929
	375,797		406,602
Less current portion	9,580		39,287
	$	366,217	$	367,315

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Note 8. Financial Instruments

At June 30, 2011, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated carrying value because of the short-term nature of these instruments. The fair value of our other financial instruments subject to fair value disclosures are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Long-term debt:
10.75% senior notes	$	200,000	$	214,000	$	200,000	$	206,000
Senior secured term loan	166,050		166,050		166,615		171,615
7.75% Senior Notes	—		—		30,535		31,451
Senior secured credit facility	—		—		—		—
Notes payable and other	9,270		9,228		8,929		8,639

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

Note 9. Segment Information

Effective January 1, 2011, we changed our reportable operating segments to: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services and (iv) Workforce Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Youth Services consists of our Job Corps centers, a variety of youth programs including foster care, alternative education programs and charter schools. Workforce Services is comprised of job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects. We believe the changes in our segments will allow us to serve our customers more efficiently and allow future growth and long-term sustainability. We have presented both periods below to reflect the change in our segments.

The following table sets forth information about our reportable segments:

	Residential		ResCare		Youth		Workforce					Consolidated
	Services		HomeCare		Services		Services		Corporate			Totals
Three months ended June 30:
2011 (Successor)
Revenues(1)	$	212,510	$	79,804	$	46,863	$	59,915	$	—		$	399,092
Operating income (loss) (1) (2)	23,913		5,902		4,212		4,692		(14,151		)	24,568
Total assets	380,837		296,260		102,717		99,783		83,519			963,116
Capital expenditures	1,259		67		56		691		1,146			3,219
Depreciation and amortization (1)	2,692		525		275		323		1,185			5,000

2010 (Predecessor)
Revenues (1)	$	206,668	$	76,019	$	46,286	$	62,234	$	—		$	391,207
Operating income (loss) (1) (2)	22,319		4,525		4,556		3,747		(14,466		)	20,681
Total assets	354,101		245,831		86,388		115,274		56,296			857,890
Capital expenditures	1,262		260		21		253		646			2,442
Depreciation and amortization (1)	1,916		918		500		633		2,139			6,106

Six months ended June 30:
2011 (Successor)
Revenues (1)	$	418,856	$	158,620	$	92,459	$	115,241	$	—		$	785,176
Operating income (loss) (1) (2)	45,930		11,139		7,440		9,084		(28,368		)	45,225
Capital expenditures	2,320		184		100		804		1,892			5,300
Depreciation and amortization (1)	5,299		1,075		563		683		2,344			9,964

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2010 (Predecessor)
Revenues (1)	$	410,629	$	149,013	$	92,812	$	123,025	$	—		$	775,479
Operating income (loss) (1) (2)	44,184		8,214		8,355		9,381		(29,966		)	40,168
Capital expenditures	2,282		398		73		574		1,392			4,719
Depreciation and amortization (1)	3,863		1,738		995		1,298		4,380			12,274

(1) Amounts for Workforce Services and Consolidated Totals have been restated to exclude the effects of the international operations, as the international operations have been discontinued as of June 30, 2011.

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

Note 10. Share-Based Compensation

As described in Note 2, a change of control occurred with the Onex transaction on November 16, 2010. The outstanding stock options were forfeited and all outstanding restricted shares vested immediately and were acquired as part of the share exchange, which was finalized on December 22, 2010. All share-based compensation expense related to the prior share-based incentive plans was recorded in the predecessor period which ended November 15, 2010. There were no new share-based compensation plans initiated immediately after the change of control in the fourth quarter of 2010.

During the second quarter of 2011, executive officers signed new employment contracts that included equity-based incentive compensation which is in the form of options to purchase shares of the Class A common stock of Onex Rescare Holdings Corp., the entity that holds all of the outstanding shares of ResCare.

Under the option plan, initial stock option grants of 1,999 shares were awarded on April 1, 2011, at a $5,000 exercise price. These options have a ten year life. From the initial grant of 1,999 options, 1,666 have a service period of five years and 333 have no service period. Each option incorporated both market conditions to vesting and performance conditions to exercisability and is forfeited upon termination of employment if the relevant conditions have not been met.

We have engaged a valuation company to determine the fair value for each option. This valuation work is not complete as of this date. The fair value of each stock option will be estimated as of the date of grant using Monte Carlo simulation in a numerical option valuation model taking into account the market condition to vesting. The expected volatility of our stock price will be based on historical volatility of a group of our peers over the expected term, adjusted for our leverage. The expected term of the option will be based on expected exercise based on norms of exercise behavior, the vesting conditions of the respective award and the contractual term. Our stock price volatility and the expected option lives are based on management’s best estimates at the time of grant, both of which impact the fair value of the option calculated under the option valuation methodology. Ultimately, the expense that will be recognized will be based on the fair value of the options in conjunction with the achievement of the performance conditions for exercisability.

Based on the performance conditions that require a liquidity event as a condition for exercising the options, no share-based compensation expense will be recorded for these options until such liquidity event occurs. Therefore, no expense was recorded in the second quarter of 2011 for the 1,999 options granted on April 1, 2011.

Note 11. Legal Proceedings

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

In March 2007, a lawsuit was filed in Bernalillo County, New Mexico State Court styled Larry Selk, by and through his legal guardian, Rani Rubio v. Res-Care New Mexico, Inc., Res-Care, Inc., et al. The lawsuit

- 13 -

sought compensatory and punitive damages for negligence, negligence per se, violations of the Unfair Practices Act and violations of the Resident Abuse and Neglect Act. Settlement discussions were unsuccessful and a jury trial commenced on November 9, 2009 on the remaining issue of negligence. The jury returned a verdict of approximately $53.9 million in damages against the Company, consisting of approximately $4.7 million in compensatory damages and $49.2 million in punitive damages, which was entered as a judgment in December 2009. Ruling on various post trial motions, on February 19, 2010, the New Mexico trial court judge reduced the jury award to $15.5 million, consisting of approximately $10.8 million in punitive damages and $4.7 million in compensatory damages. We believe the parent company is not liable for the actions of its subsidiary or its employees and that both the compensatory and punitive amounts awarded are excessive and contradict various United States Supreme Court and New Mexico Supreme Court decisions which would warrant a new trial or, in the alternative, would limit the amount of damages awarded to a significantly lower amount. We, as well as the plaintiffs, have appealed and we will continue to defend this matter vigorously. Ruling on a motion by Plaintiff, on December 15, 2010, the trial court increased the amount of supersedeas bond we previously posted while our appeal is pending from $27.2 million to $72.2 million, an amount which represented the original judgment plus interest. We filed an appeal of the bond increase, and on March 31, 2011, the Court of Appeals ruled in our favor and reversed the trial court. Although we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the amount of the damages awarded, plus accrued interest. If our appeal to obtain a new trial or reduce the amount of the damages does not succeed, it could have a material adverse effect on our financial condition, results of operations and cash flows.

Note 12. Noncontrolling Interest

As of June 30, 2011, ResCare held a 66.7% interest in Rest Assured LLC, a limited liability company comprised of public and private organizations providing remote monitoring services for persons with disabilities and the elderly. The value in the table below is preliminary for the successor period, as the Company is in the process of finalizing the purchase price allocation as described in Note 2. ASC 810, Noncontrolling Interests in Consolidated Financial Statements, (ASC 810) clarifies that noncontrolling interest be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary be recorded as equity transactions if the parent retains its controlling interest in the subsidiary. The statement also requires consolidated net income to include amounts attributable to both the parent and the noncontrolling interest on the face of the income statement. In addition, ASC 810 requires a parent to recognize a gain or loss in net income on the date the parent deconsolidates a subsidiary, or ceases to have a controlling financial interest in a subsidiary. Balances are as follows:

Noncontrolling interest as of December 31, 2010	$	(18	)
Net loss-noncontrolling interest	(68		)
Noncontrolling interest as of June 30, 2011	$	(86	)

Note 13. Impact of Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued new guidance intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and those prepared in accordance with international financial reporting standards. While the new guidance is largely consistent with existing fair value measurement principles, it expands existing disclosure requirements for fair value measurements and makes other amendments which could change how existing fair value measurement guidance is applied. The new guidance will be effective for us beginning with the filing of our Form 10-Q for the three months ending March 31, 2012. We do not expect this new guidance will have a material impact on our financial position, results of operations or cash flows, as it expands existing disclosure requirements.

In June 2011, the FASB issued Accounting Standard Update (ASU) 2011-05 which provides new guidance on the presentation of comprehensive income. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and instead requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with

- 14 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2011

(In thousands)

	SUCCESSOR
			Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	3,504	$	5,804		$	2,223		$	—		$	11,531
Accounts receivable, net	20,508		201,435			236			—			222,179
Refundable income taxes	4,021		—			—			—			4,021
Deferred income taxes	19,224		—			—			—			19,224
Non-trade receivables	819		1,280			50			—			2,149
Prepaid expenses and other current assets	7,585		9,868			17			—			17,470
Total current assets	55,661		218,387			2,526			—			276,574

Property and equipment, net	55,126		39,566			31			—			94,723
Goodwill	229,474		13,378			—			—			242,852
Other intangible assets, net	317,483		3,587			—			—			321,070
Investment in subsidiaries	885,443		41,782			80,267			(1,007,492		)	—
Other assets	24,296		3,567			34			—			27,897
	$	1,567,483	$	320,267		$	82,858		$	(1,007,492	)	$	963,116

LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	20,655	$	26,775		$	293		$	—		$	47,723
Accrued expenses	81,851		59,438			1,121			—			142,410
Current portion of long-term debt	1,700		3,050			4,738			—			9,488
Current portion of obligations under capital leases	2		90			—			—			92
Accrued income taxes	78		—			(78		)	—			—
Total current liabilities	104,286		89,353			6,074			—			199,713

Intercompany	702,195		(696,992		)	(5,203		)	—			—
Long-term liabilities	32,411		34			—			—			32,445
Long-term debt	363,850		1,982			—			—			365,832
Obligations under capital leases	—		385			—			—			385
Deferred gains	375		—			—			—			375
Deferred income taxes	110,256		—			—			—			110,256
Total liabilities	1,313,373		(605,238		)	871			—			709,006

Total shareholder’s equity	254,110		925,505			81,987			(1,007,492		)	254,110
	$	1,567,483	$	320,267		$	82,858		$	(1,007,492	)	$	963,116

- 16 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2010

(In thousands)

	PREDECESSOR
			Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	11,084	$	9,825		$	6,643		$	—		$	27,552
Accounts receivable, net	37,902		175,721			2,318			—			215,941
Refundable income taxes	1,297		—			(98		)	—			1,199
Deferred income taxes	14,234		—			72			—			14,306
Non-trade receivables	5,300		1,541			506			—			7,347
Prepaid expenses and other current assets	8,385		9,495			725			—			18,605
Total current assets	78,202		196,582			10,166			—			284,950

Property and equipment, net	31,345		64,895			757			—			96,997
Goodwill	226,628		8,239			—			—			234,867
Other intangible assets, net	320,316		2,270			—			—			322,586
Investment in subsidiaries	885,443		41,794			80,267			(1,007,504		)	—
Other assets	25,834		4,127			147			—			30,108
	$	1,567,768	$	317,907		$	91,337		$	(1,007,504	)	$	969,508

LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	29,343	$	24,832		$	2,077		$	—		$	56,252
Accrued expenses	68,291		57,649			1,109			—			127,049
Current portion of long-term debt	32,232		3,015			3,948			—			39,195
Current portion of obligations under capital leases	6		86			—			—			92
Accrued income taxes	1,480		—			(76		)	—			1,404
Total current liabilities	131,352		85,582			7,058			—			223,992

Intercompany	695,613		(688,106		)	(7,507		)	—			—
Long-term liabilities	31,511		2,013			188			—			33,712
Long-term debt	364,798		2,086			—			—			366,884
Obligations under capital leases	—		431			—			—			431
Deferred income taxes	102,081		—			(5		)	—			102,076
Total liabilities	1,325,355		(597,994		)	(266		)	—			727,095

Total shareholder’s equity	242,413		915,901			91,603			(1,007,504		)	242,413
	$	1,567,768	$	317,907		$	91,337		$	(1,007,504	)	$	969,508

- 17 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2011

(In thousands)

	SUCCESSOR
				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total

Revenues	$	64,658		$	334,042		$	392		$	—		$	399,092

Operating expenses	69,306			303,675			1,543			—			374,524
Operating (loss) income	(4,648		)	30,367			(1,151		)	—			24,568

Other (income) expenses:
Interest, net	10,607			(6		)	(4		)	—			10,597
Equity in earnings of subsidiaries	(19,035		)	—			—			19,035			—
Total other expenses (income)	(8,428		)	(6		)	(4		)	19,035			10,597

(Loss) income before income taxes	3,780			30,373			(1,147		)	(19,035		)	13,971
Income tax (benefit) expense	(3,154		)	6,734			397			—			3,977
Income from continuing operations	6,934			23,639			(1,544		)	(19,035		)	9,994
Loss from discontinued operations, net of tax	—			—			(3,060		)	—			(3,060		)
Net income (loss) – including noncontrolling interests	6,934			23,639			(4,604		)	(19,035		)	6,934
Net loss – noncontrolling interest	—			(36		)	—			—			(36		)
Net income (loss) – Res-Care, Inc.	$	6,934		$	23,675		$	(4,604	)	$	(19,035	)	$	6,970

- 18 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2011

(In thousands)

	SUCCESSOR
				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total

Revenues	$	127,915		$	656,486		$	775		$	—		$	785,176

Operating expenses	136,308			602,111			1,532			—			739,951
Operating (loss) income	(8,393		)	54,375			(757		)	—			45,225

Other (income) expenses:
Interest, net	21,425			(56		)	(6		)	—			21,363
Equity in earnings of subsidiaries	(31,630		)	—			—			31,630			—
Total other expenses (income)	(10,205		)	(56		)	(6		)	31,630			21,363

Income (loss) before income taxes	1,812			54,431			(751		)	(31,630		)	23,862
Income tax (benefit) expense	(8,796		)	16,056			(222		)	—			7,038
Income (loss) from continuing operations	10,608			38,375			(529		)	(31,630		)	16,824
Loss from discontinued operations, net of tax	—			—			(6,216		)	—			(6,216		)
Net income (loss) – including noncontrolling interests	10,608			38,375			(6,745		)	(31,630		)	10,608
Net loss – noncontrolling interest	—			(68		)	—			—			(68		)
Net income (loss) – Res-Care, Inc.	$	10,608		$	38,443		$	(6,745	)	$	(31,630	)	$	10,676

- 19 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2010

(In thousands)

	PREDECESSOR
				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total

Revenues	$	64,376		$	326,323		$	508		$	—		$	391,207

Operating expenses	71,373			298,882			271			—			370,526
Operating (loss) income	(6,997		)	27,441			237			—			20,681

Other (income) expenses:
Interest, net	4,874			(9		)	—			—			4,865
Equity in earnings of subsidiaries	(16,872		)	—			—			16,872			—
Total other expenses (income)	(11,998		)	(9		)	—			16,872			4,865

Income before income taxes	5,001			27,450			237			(16,872		)	15,816
Income tax (benefit) expense	(4,433		)	10,268			(128		)	—			5,707
Income from continuing operations	9,434			17,182			365			(16,872		)	10,109
Loss from discontinued operations, net of tax	—			—			(675		)	—			(675		)
Net income (loss) – including noncontrolling interests	9,434			17,182			(310		)	(16,872		)	9,434
Net loss – noncontrolling interest	—			(41		)	—			—			(41		)
Net income (loss) – Res-Care, Inc.	$	9,434		$	17,223		$	(310	)	$	(16,872	)	$	9,475

- 20 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2010

(In thousands)

	PREDECESSOR
				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total

Revenues	$	130,567		$	643,948		$	964		$	—		$	775,479

Operating expenses	141,528			593,115			668			—			735,311
Operating (loss) income	(10,961		)	50,833			296			—			40,168

Other (income) expenses:
Interest, net	9,682			(31		)	(1		)	—			9,650
Equity in earnings of subsidiaries	(31,794		)	—			—			31,794			—
Total other expenses (income)	(22,112		)	(31		)	(1		)	31,794			9,650

Income before income taxes	11,151			50,864			297			(31,794		)	30,518
Income tax (benefit) expense	(7,619		)	18,774			(293		)	—			10,862
Income from continuing operations	18,770			32,090			590			(31,794		)	19,656
Loss from discontinued operations, net of tax	—			—			(886		)	—			(886		)
Net income (loss) – including noncontrolling interests	18,770			32,090			(296		)	(31,794		)	18,770
Net loss – noncontrolling interest	—			(81		)	(42		)	—			(123		)
Net income (loss) – Res-Care, Inc.	$	18,770		$	32,171		$	(254	)	$	(31,794	)	$	18,893

- 21 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2011

(In thousands)

	SUCCESSOR
				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total

Operating activities:
Net income – including noncontrolling interest	$	10,608		$	38,375		$	(6,745	)	$	(31,630	)	$	10,608
Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities:
Depreciation and amortization	6,040			3,895			100			—			10,035
Amortization of discount and deferred debt issuance costs on notes	1,558			—			—			—			1,558
Deferred income taxes, net	2,600			—			(3		)	—			2,597
Provision for losses on accounts receivable	3,625			(170		)	20			—			3,475
Write down of assets held for sale	2,808			—			(1,180		)	—			1,628
Loss on sale of assets	—			175			—			—			175
Equity in earnings of subsidiaries	(31,630		)	—			—			31,630			—
Changes in operating assets and liabilities	25,245			(30,193		)	3,021			—			(1,927		)
Cash provided by (used in) operating activities	20,854			12,082			(4,787		)	—			28,149
Investing activities:
Purchases of property and equipment	(26,786		)	21,255			231			—			(5,300		)
Acquisitions of businesses, net of cash acquired	—			(8,645		)	—			—			(8,645		)
Net cash change on sale of business	—			—			(610		)	—			(610		)
Proceeds from sale of assets	—			322			—			—			322
Cash (used in) provided by investing activities	(26,786		)	12,932			231			—			(13,623		)
Financing activities:
Long-term debt (repayments) borrowings	(33,633		)	2,173			36			—			(31,424		)
Short-term borrowings (repayments)–three months or less, net	987			(987		)	—			—			—
Debt issuance costs	(558		)	—			—			—			(558		)
Payments on obligations under capital leases	—			(46		)	—			—			(46		)
Funds contributed by co-investors	1,400			—			—			—			1,400
Net payments relating to intercompany financing	30,156			(30,243		)	87			—			—
Cash provided by (used in) financing activities	(1,648		)	(29,103		)	123			—			(30,628		)
Effect of exchange rate changes on cash and cash equivalents	—			68			13			—			81
(Decrease) increase in cash and cash equivalents	(7,580		)	(4,021		)	(4,420		)	—			(16,021		)

Cash and cash equivalents at beginning of period	11,084			9,825			6,643			—			27,552
Cash and cash equivalents at end of period	$	3,504		$	5,804		$	2,223		$	—		$	11,531

- 22 -

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2010

(In thousands)

	PREDECESSOR
				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total

Operating activities:
Net income (loss) – including noncontrolling interests	$	18,770		$	32,090		$	(296	)	$	(31,794	)	$	18,770
Adjustments to reconcile net income (loss), including noncontrolling interests, to cash provided by operating activities:
Depreciation and amortization	5,496			6,776			493			—			12,765
Amortization of discount and deferred debt issuance costs on notes	868			—			—			—			868
Share-based compensation	1,690			—			—			—			1,690
Deferred income taxes, net	10,670			—			2			—			10,672
Excess tax expense from exercise of stock options	185			—			—			—			185
Provision for losses on accounts receivable	—			3,634			—			—			3,634
Gain on sale of assets	—			(2		)	—			—			(2		)
Equity in earnings of subsidiaries	(31,794		)	—			—			31,794			—
Changes in operating assets and liabilities	110,804			(110,318		)	(6,219		)	—			(5,733		)
Cash provided by (used in) operating activities	116,689			(67,820		)	(6,020		)	—			42,849
Investing activities:
Purchases of property and equipment	(2,210		)	(2,562		)	53			—			(4,719		)
Acquisitions of businesses	—			(14,422		)	—			—			(14,422		)
Proceeds from sale of assets	—			210			—			—			210
Cash (used in) provided by investing activities	(2,210		)	(16,774		)	53			—			(18,931		)
Financing activities:
Long-term debt (repayments) borrowings	(1,426		)	1,962			—			—			536
Short-term repayments–three months or less, net	(22,513		)	(3,152		)	1,665			—			(24,000		)
Payments on obligations under capital leases	—			(48		)	—			—			(48		)
Debt issuance costs	(4,469		)	—			—			—			(4,469		)
Net payments relating to intercompany financing	(86,777		)	87,405			(628		)	—			—
Excess tax expense from share-based compensation	(185		)	—			—			—			(185		)
Employee withholding payments on share-based compensation	(879		)	—			—			—			(879		)
Cash (used in) provided by financing activities	(116,249		)	86,167			1,037			—			(29,045		)
Effect of exchange rate changes on cash and cash equivalents	—			9			(179		)	—			(170		)
(Decrease) increase in cash and cash equivalents	(1,770		)	1,582			(5,109		)	—			(5,297		)
Cash and cash equivalents at beginning of period	6,763			4,655			9,254			—			20,672
Cash and cash equivalents at end of period	$	4,993		$	6,237		$	4,145		$	—		$	15,375

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· ResCare repurchased $120 million (approximately 80%) aggregate principal amount of its 7.75% Senior Notes due 2013 in a tender offer, and the $30 million aggregate principal amount of 7.75% Senior Notes not tendered was satisfied and discharged by delivering to the trustee amounts sufficient to pay the applicable redemption price, plus accrued and unpaid interest up to the January 21, 2011 redemption date;

· Purchaser completed the acquisition of all of the publicly held common shares of ResCare through a second-step share exchange transaction, whereby each outstanding share of ResCare common stock not currently held by Onex Investors or by members of management was exchanged for the right to receive $13.25 in cash (a total of $56.9 million);

· Purchaser redeemed preferred membership interests held by certain of the Onex Investors for an amount equal to the contributions ($158.8 million) made by them in respect of the purchase of such interests plus the accrued preferred return ($0.8 million) on such interests through the redemption date; and

· The holders of equity interests in Purchaser and of ResCare stock contributed those holdings to New Holdco in exchange for New Holdco stock, and Purchaser was merged into ResCare, with ResCare as the surviving entity.

Overview of Our Business

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

Effective January 1, 2011, we changed our reportable operating segments to: (i) Residential Services, (ii) ResCare HomeCare, (iii) Youth Services and (iv) Workforce Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Youth Services consists of our Job Corps centers, a variety of youth programs including foster care, alternative education programs and charter schools. Workforce Services is comprised of job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects. We believe the changes in our segments will allow us to serve our customers more efficiently and allow future growth and long-term sustainability. Further information regarding our segments is included in Note 9 of the Notes to Condensed Consolidated Financial Statements.

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

Reimbursement varies by state and service type, and may be based on a variety of methods including flat-rate, cost-based reimbursement, per person per diem, or unit-of-service basis. Rates are periodically adjusted based upon state budgets or economic conditions and their impact on state budgets. At programs

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Results of Operations

	Three Months Ended						Six Months Ended
	June 30						June 30
	SUCCESSOR			PREDECESSOR			SUCCESSOR			PREDECESSOR
	2011			2010			2011			2010
				(Dollars in thousands)
Revenues:
Residential Services	$	212,510		$	206,668		$	418,856		$	410,629
ResCare HomeCare	79,804			76,019			158,620			149,013
Youth Services	46,863			46,286			92,459			92,812
Workforce Services (1)	59,915			62,234			115,241			123,025
Consolidated	$	399,092		$	391,207		$	785,176		$	775,479

Operating (loss) income:
Residential Services	$	23,913		$	22,319		$	45,930		$	44,184
ResCare HomeCare	5,902			4,525			11,139			8,214
Youth Services	4,212			4,556			7,440			8,355
Workforce Services (1)	4,692			3,747			9,084			9,381
Corporate (2)	(14,151		)	(14,466		)	(28,368		)	(29,966		)
Consolidated	$	24,568		$	20,681		$	45,225		$	40,168

Operating margin:
Residential Services	11.3%			10.8%			11.0%			10.8%
ResCare HomeCare	7.4%			6.0%			7.0%			5.5%
Youth Services	9.0%			9.8%			8.0%			9.0%
Workforce Services (1)	7.8%			6.0%			7.9%			7.6%
Corporate (2)	(3.5%		)	(3.7%		)	(3.6%		)	(3.9%		)
Consolidated	6.2%			5.3%			5.8%			5.2%

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

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

Consolidated

Consolidated revenues for the quarter and six months ended June 30, 2011 increased $7.9 million and $9.7 million, or 2.0% and 1.2%, respectively, from the same periods in 2010. 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, 2011, was $24.6 million compared to $20.7 million for the same period in 2010. Consolidated operating margins were 6.2% and 5.3% for the quarterly periods in 2011 and 2010, respectively. The increase in operating income and margin is primarily due to growth in our ResCare HomeCare segment, improved performance in our Workforce Services segment and no share-based compensation expense for 2011.

Consolidated operating income for the six months ended June 30, 2011 was $45.2 million compared to $40.2 million for the same period in 2010. Consolidated operating margins were 5.8% and 5.2% for the six month periods in 2011 and 2010, respectively.

Net interest expense increased $5.7 million for the second quarter of 2011 and $11.7 million for the six months ended June 30, 2011, compared to the same periods in 2010. The increases were primarily attributable to the increase in long-term debt of $199 million, along with the increase in interest rates arising from the refinancing of debt in December 2010 in which the annual interest rate payable on our outstanding unsecured senior notes increased from 7.75% to 10.75%. Our effective income tax rate for the six months ended June 30, 2011 was 29.5% as compared to 35.6% over the same period in 2010. The 2011 rate was

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favorably impacted by the change in treatment of going private related transaction costs based on an evaluation of the costs completed during the second quarter of 2011.

Residential Services

Residential Services revenues for the quarter and six months ended June 30, 2011 increased $5.8 million and $8.2 million, or 2.8% and 2.0%, respectively, over the same periods in 2010. This increase in revenue is due primarily to a $3.5 million and a $6.8 million increase in our pharmacy business revenue for the quarter and six months ended June 30, 2011, respectively. Operating margin increased from 10.8% in both periods in 2010 to 11.3% and 11.0%, respectively, in 2011. The increase is primarily attributable to savings and efficiencies from our reorganizational efforts, as well as no share-based compensation expense in the first six months of 2011 compared to approximately $0.5 million in the same period in 2010.

ResCare HomeCare

ResCare HomeCare revenues for the quarter and six months ended June 30, 2011 increased $3.8 million and $9.6 million, or 5.0% and 6.4%, respectively, over the same periods in 2010. This increase was due primarily to acquisition growth of $6.5 million and $17.5 million, respectively, which was partially offset by rate and service cuts in certain states of $2.6 million and $8.1 million, respectively. Operating margin increased from 6.0% and 5.5%, respectively, in 2010 to 7.4% and 7.0%, respectively, in 2011, due primarily to growth and no share-based compensation expense in the first six months of 2011 compared to approximately $0.3 million in the same period in 2010.

Youth Services

Youth Services revenues for the quarter ended June 30, 2011 increased $0.6 million, or 1.2%, from the same period of 2010, due primarily to the Job Corps business. Revenues for the six months ended June 30, 2011 decreased $0.4 million due primarily to a reduction in our Residential Youth reporting unit revenues driven by lower census. Operating margin decreased from 9.8% in the second quarter of 2010 to 9.0% in the same period in 2011, and from 9.0% to 8.0% for the six months ended June 30, 2010 and 2011, respectively, due primarily to an inability to reduce costs commensurate with the revenue declines in Residential Youth.

Workforce Services

Workforce Services revenues for the quarter and six months ended June 30, 2011 decreased $2.3 million and $7.8 million, or 3.7% and 6.3%, respectively, from the same periods in 2010, due primarily to the expiration of certain contracts in Texas in the fourth quarter of 2010 and the absence of the American Recovery and Investment Act (ARRA) funding in 2011. Operating margin increased from 6.0% in the second quarter of 2010 to 7.8% in the same period in 2011 and from 7.6% to 7.9% for the six months ended June 30, 2010 and 2011, respectively, due primarily to the absence of lower margin services funded under the federal stimulus program.

Corporate

Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total operating expenses for the second quarter and six months ended June 30, 2011 decreased $0.3 million and $1.6 million, respectively, from the same periods in 2010. The decrease for the six months ended June 30, 2011 is due to decreases in depreciation of $2.0 million, labor costs of $1.1 million and share-based compensation expense of $0.7 million, with an offset of $2.2 million for professional and other services. The decrease in depreciation is due to the valuation of fixed assets as required through purchase price accounting for the Onex transaction described in Note 2 of the Notes to Condensed Consolidated Financial Statements.

Discontinued Operations

The discontinued operations relate to the international Workforce Services segment’s closure of the operations in Germany and the Netherlands in the first quarter of 2011 and the sale of the United Kingdom

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operations on July 1, 2011. Total exit costs of $0.8 million were recorded in the first quarter of 2011. For the sale of the operations in the United Kingdom, we recorded a charge in other expense of $2.2 million in the second quarter of 2011 to adjust assets and liabilities to their net realizable value.

Net loss from discontinued operations was $3.1 million in the second quarter of 2011 and $6.2 million for the six months ended June 30, 2011, compared to $0.7 million and $0.9 million for the same periods of 2010. The net loss from discontinued operations for the six months ended June 30, 2011 includes pretax operational losses of $8.6 million, offset by a tax benefit of $2.4 million.

The net loss from discontinued operations for the six months ended June 30, 2010, includes pretax operational losses of $0.8 million and tax expense of $0.1 million.

Financial Condition, Liquidity and Capital Resources

Total assets decreased $6.4 million, or 1.0%, at June 30, 2011 over balances at December 31, 2010. This was primarily due to a decrease in cash.

Cash and cash equivalents were $11.5 million at June 30, 2011, as compared to $27.6 million at December 31, 2010. Cash provided from operations for the six months ended June 30, 2011 was $28.1 million compared to $42.8 million for the six months ended June 30, 2010.

Net accounts receivable at June 30, 2011 increased to $222.2 million, compared to $215.9 million at December 31, 2010. Days of revenue in net accounts receivable were 47.2 days at June 30, 2011, compared with 49.4 days at December 31, 2010. The improvement in days of revenue is due to increased cash collections of older receivables.

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new programs, and our need for sufficient working capital for general corporate purposes. Since most of our programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flows and borrowings under our revolving credit facility.

Cash used in our investing activities at June 30, 2011 decreased $5.3 million over the same period in 2010 primarily due to investment in acquisitions. We used $14.4 million on business acquisitions during the first six months of 2010 compared to $8.6 million during the same period of 2011.

Our financing activities included a net payment of debt and capital lease obligations of $31.5 million for the first six months of 2011. This compares to a net payment of debt and capital lease obligations of $23.5 million for the same period in 2010. In January 2011 we paid the remainder due of $30.5 million on the 7.75% Senior Notes. In January 2010 we paid $4.4 million in debt issuance costs due to the amendment of our credit facility. During the first quarter of 2011, we received funds of $1.4 million from co-investors through the Onex transaction.

On December 22, 2010, we issued $200 million of 10.75% Senior Notes due January 15, 2019 in a private placement to qualified institutional buyers under the Securities Act of 1933. The 10.75% Senior Notes, which had an issue price of 100% of the principal amount, are unsecured obligations ranking equal to existing and future debt and are subordinate to existing and future secured debt. The effective interest rate for these notes is approximately 10.75%. Proceeds were used to fund $120 million of our tendered 7.75% Senior Notes due October 2013. The remaining $30 million of these Senior Notes that were not repurchased were satisfied and discharged by delivering to the trustee amounts sufficient to pay the applicable redemption price in January 2011. The 7.75% Senior Notes were originally issued on October 3, 2005 for $150 million under a private placement arrangement at an issue price of 99.261%. These securities were unsecured obligations. In addition, proceeds from the $200 million issuance of 10.75% Senior Notes were used to purchase outstanding shares of common stock tendered by our shareholders and for general corporate

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purposes. The 10.75% Senior Notes are jointly, severally, fully and unconditionally guaranteed by our domestic subsidiaries.

On December 22, 2010, we amended our existing senior secured revolving credit facility that originally had been scheduled to mature on July 28, 2013. The aggregate amount available under the revolving credit facility is $275 million until July 28, 2013, after which the revolving credit facility will be extended until December 22, 2015 for the extending revolving credit lenders. The aggregate amount available under the extended revolving credit facility will be $240 million. In addition, $175 million of additional borrowing capacity will be available for use to increase the revolving credit facility, or to increase other certain senior secured indebtedness, subject to certain limitations and conditions in our other debt agreements. The facility will be used primarily for working capital purposes, letters of credit required under our insurance programs and for acquisitions. The amended and restated senior credit facility contains various financial covenants relating to capital expenditures and rentals, and requires us to maintain specified ratios with respect to interest coverage and leverage. The amendment continues to provide for the exclusion of charges incurred in connection with the resolution of the matter described in Note 11 of the Notes to Condensed Consolidated Financial Statements, as well as any non-cash impairment charges, in the calculation of certain financial covenants. The amended and restated senior credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

On December 22, 2010, we issued a $170 million senior secured term loan (the Term Loan) due December 22, 2016, at a discounted price of 98% with realized net proceeds of $166.6 million. Additional capacity of $175 million will be available for use to increase the Term Loan, or to increase the revolving credit facility, subject to certain limitations and conditions in our other debt agreements. The Term Loan was used primarily to repay the $159.6 million of preferred equity plus accrued dividends from Purchaser, to various Onex affiliates related to its acquisition and funding of tendered Company shares on November 16, 2010. The Term Loan contains various financial covenants similar with respect to the amended and restated revolving credit facility. The Term Loan will be an amortizing obligation, with principal payments of 1% of the outstanding Term Loan balance due annually. Pricing for the Term Loan will be variable, at the London Interbank Offer Rate (LIBOR) plus 550 basis points. LIBOR is defined as having a minimum rate of 1.75%. The Term Loan 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, 2011, we had irrevocable standby letters of credit in the principal amount of $68.0 million issued primarily in connection with our insurance programs. As of June 30, 2011, we had $207.0 million available under the amended and restated revolving credit facility. Outstanding balances bear interest at 4.50% over the LIBOR or other bank developed rates at our option. As of June 30, 2011, the weighted average interest rate was 4.75%. Letters of credit had a borrowing rate of 4.625% as of June 30, 2011. The commitment fee on the unused balance was 0.50%. The margin over LIBOR and the commitment fee is determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

We are in compliance with our debt covenants at June 30, 2011, 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 64% through Medicaid reimbursement, 8% 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 2011 or 2010.

Impact of Recently Issued Accounting Pronouncements

See Note 13 of the Notes to Condensed Consolidated Financial Statements.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding the legal proceedings is described in Note 11 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 Form S-4 Registration Statement filed April 15, 2011 and our first quarter 2011 Form 10-Q.

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

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

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

Furthermore, federal, state and local government agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If a government agency does not receive an appropriation sufficient to cover its contractual obligations with us, it may terminate a contract or defer or reduce our reimbursement. Previously appropriated funds could also be reduced or eliminated through subsequent legislation. The loss or reduction of reimbursement under our contracts could have a material adverse effect on our business, financial condition and operating results.

We expect the federal and state governments to continue their efforts to contain growth in Medicaid expenditures, which could adversely affect our revenues and profitability.

We derive a substantial portion of our consolidated revenues from Medicaid reimbursement, primarily through our Residential and HomeCare businesses. Medicaid programs are administered by the applicable states and financed by both state and federal funds. Medicaid spending has increased rapidly in recent years, becoming an increasingly significant component of state budgets. This, combined with slower state revenue growth and other state budget demands, has led both the federal government and many states in which we operate, to institute measures aimed at controlling the growth of Medicaid spending (and in some instances reducing it).

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		PAGE
PART I.	FINANCIAL INFORMATION	NUMBER

Item 1.	Condensed Consolidated Balance Sheets – June 30, 2011 and December 31, 2010	3

	Condensed Consolidated Statements of Income – Three Months Ended June 30, 2011 and 2010; Six Months Ended June 30, 2011 and 2010	4

	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010	5

	Notes to Condensed Consolidated Financial Statements – June 30, 2011	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults upon Senior Securities	33

Item 4.	[Removed and Reserved]	33

Item 5.	Other Information	33

Item 6.	Exhibits	34

SIGNATURES

EXHIBITS

	Exhibit	Description of Exhibit

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

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

	101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

			RES-CARE, INC.
			Registrant



Date:	August 4, 2011	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer



Date:	August 4, 2011	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and Chief Financial Officer


	*		Filed herewith