form 10-q - rescare€¦ · form 10-q (mark one) [x] quarterly report pursuant to section 13 or...

Table of Contents

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 March 31, 2014

or

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

For the transition period from to

Commission File Number: 0-20372

(Exact name of registrant as specified in its charter)

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 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 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: 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 . The number of shares outstanding of the registrant’s common stock, no par value, as of April 30, 2014 was 21,344,741.

RES-CARE, INC.

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)

Table of Contents

INDEX

RES-CARE, INC. AND SUBSIDIARIES

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PAGEPART I. FINANCIAL INFORMATION NUMBER Item 1. Condensed Consolidated Balance Sheets – March 31, 2014 and and December 31, 2013 3

Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2014 and 2013 4

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2014 and 2013 5

Notes to Condensed Consolidated Financial Statements – March 31, 2014 6 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24 Item 3. Defaults upon Senior Securities 24 Item 4. Mine Safety Disclosures 24 Item 5. Other Information 24 Item 6. Exhibits 26 SIGNATURES EXHIBITS

Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements


CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

- 3 -

March 31 December 31 2014

2013

ASSETS

Current assets:

Cash and cash equivalents $ 32,463

$ 29,997

Accounts receivable, net of allowance for doubtful accounts of $14,091 in 2014 and $11,900 in 2013 253,675 241,873

Deferred income taxes 23,143

19,811

Non-trade receivables 5,587

6,852

Prepaid expenses and other current assets 17,772 19,578

Total current assets 332,640

318,111

Property and equipment, net 100,983 101,021

Goodwill 308,491

308,350

Other intangible assets, net 331,777

333,613

Other assets 24,636 25,182

Total assets $1,098,527

$ 1,086,277

LIABILITIES AND SHAREHOLDER’S EQUITY

Current liabilities:

Trade accounts payable $ 35,674

$ 34,089

Accrued expenses 123,858

120,803

Current portion of long-term debt 16,728

14,291

Current portion of obligations under capital leases 6,504 6,516

Accrued income taxes 2,871

—

Total current liabilities 185,635 175,699

Long-term liabilities 40,280

39,143

Long-term debt 340,925

345,506

Obligations under capital leases 14,214 13,724


116,084

Total liabilities 697,526

690,156

Commitments and contingencies —

—

Shareholder’s equity:

Common stock, no par value, authorized 40,000,000 shares, issued and outstanding 21,344,741 in 2014 and 2013

— —Additional paid-in capital

247,522

247,053

Retained earnings 154,292 149,617

Accumulated other comprehensive loss (813)

(549)

Total shareholder’s equity – Res-Care, Inc. 401,001 396,121

Noncontrolling interest —

—

Total shareholder’s equity 401,001 396,121

Total liabilities and shareholder’s equity $1,098,527

$ 1,086,277

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)

(Unaudited)


- 4 -

Three Months Ended

March 31

2014

2013

Revenues

$ 421,483 $ 389,454Cost of services

317,598 294,343Gross profit

103,885

95,111

Operating expenses:

Operational general and administrative

59,710

55,036

Corporate general and administrative 27,960

18,877

Total operating expenses 87,670

73,913

Operating income

16,215

21,198

Interest expense, net

8,074

8,537

Income before income taxes 8,141

12,661

Income tax expense 3,466

1,365

Net income 4,675

11,296

Net loss-noncontrolling interest —

(36)

Net income-Res-Care, Inc. 4,675 11,332

Other comprehensive income:

Foreign currency translation adjustments (264)

(191)

Comprehensive income attributable to Res-Care, Inc. $ 4,411

$ 11,141

Total comprehensive income

$ 4,411 $ 11,105

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

(Unaudited)


- 5 -

Three Months Ended

March 31

2014

2013

Cash flows from operating activities:

Net income

$ 4,675

$ 11,296

Adjustments to reconcile net income to cash provided by

operating activities:

Depreciation and amortization 8,955

8,195

Amortization of discount and deferred debt issuance costs 870 870

Share-based compensation 469

704

Deferred income taxes, net (2,944) 1,964

Provision for losses on accounts receivable 2,604

1,818

Loss on sale of assets 38

102

Changes in operating assets and liabilities (3,073)

(15,779)

Cash provided by operating activities 11,594

9,170

Cash flows from investing activities:

Purchases of property and equipment (4,563)

(4,103)

Acquisitions of businesses, net of cash acquired (543) (7)

Proceeds from sale of assets 103

81

Cash used in investing activities (5,003) (4,029)

Cash flows from financing activities:

Long-term debt repayments (2,205) (6,904)

Payments on obligations under capital lease (1,832)

(1,594)

Debt issuance costs —

(8)

Cash used in financing activities (4,037)

(8,506)

Effect of exchange rate changes on cash and cash equivalents

(88)

(66)

Increase (decrease) in cash and cash equivalents

2,466 (3,431) Cash and cash equivalents at beginning of period

29,997

50,134

Cash and cash equivalents at end of period

$ 32,463

$ 46,703

Supplemental schedule of non-cash investing and financing activities:

Capital lease obligations 2,310 476

Notes issued in connection with acquisition 60

—

Purchases of property and equipment in accounts payable 119

—

Table of Contents


Notes to Condensed Consolidated Financial Statements (In thousands)

(Unaudited)

Note 1. Basis of Presentation Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, youth with special needs, adults who are experiencing barriers to employment, and older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries. The accompanying condensed consolidated financial statements of ResCare have been prepared in accordance with Article 10 of Regulation S-X and do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive annual financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial condition and results of operations for the interim periods have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. For further information refer to the consolidated financial statements and footnotes thereto in our 2013 Annual Report on Form 10-K filed February 18, 2014. Segments Effective July 1, 2013, we made certain changes within our business lines to meet our future growth objectives. Some of the components and structure within certain reportable segments changed and our Youth Services segment’s name changed to Education and Training Services. The majority of our Residential Youth reporting unit moved from the Education and Training Services segment to the Residential Services segment. We also moved a small operation from our ResCare HomeCare segment to our Education and Training Services segment. Therefore, as of July 1, 2013, our reportable segments are: (i) Residential Services, (ii) ResCare HomeCare, (iii) Education and Training Services, (iv) Workforce Services and (v) Pharmacy Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Education and Training Services consists of our Job Corps centers, alternative education programs, charter schools, training for professionals working with children, training for potential foster and adoptive parents and other individual and family counseling and instruction. Workforce Services is comprised of our domestic job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects. Pharmacy Services is a limited, closed-door pharmacy business focused on serving individuals with intellectual and developmental disabilities. 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 prior periods to reflect the change in our segments. Further information regarding our segments is included in Note 7.

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Table of Contents

Reclassification Certain shared services related expenses have been reclassified from operational general and administrative expense to corporate general and administrative expense effective January 1, 2014. These shared services include quality, human resources, government relations and certain accounting and finance oversight functions, as well as the business centers for our operations. Prior periods have been reclassified for comparability. Certain immaterial reclassifications have been made to prior year amounts to conform to 2014 presentation. Note 2. Acquisitions We completed one acquisition within our ResCare HomeCare segment during the first three months of 2014. Aggregate consideration for this acquisition was approximately $0.6 million, including $0.1 million of notes issued. The operating results of the acquisition are included in the condensed consolidated financial statements from the date of acquisition. Proforma results and other disclosure have not been included as the acquisitions are considered immaterial, individually and in aggregate to the three month periods ended March 31, 2014. The preliminary aggregate purchase price for these acquisitions was allocated as follows:

The other intangible assets consist of a customer relationship and a covenant not to compete. All intangible assets will be amortized over five to twenty years. We expect all of the $0.2 million of goodwill will be deductible for tax purposes. Note 3. Goodwill Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist. The date of our annual impairment test is October 1. A summary of changes to goodwill during the three months ended March 31, 2014 is as follows:

Primarily relates to foreign currency translation adjustments.

For our October 1, 2013 annual impairment test, all reporting units passed Step One. The ResCare HomeCare reporting unit passed Step One with a fair value that exceeded its carrying value by a 7 percent margin. Inability to meet projected results utilized in the annual impairment test could lead to a potential impairment in the future.

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Other intangible assets

$ 414

Goodwill

186

Other assets 3Aggregate purchase price

$ 603

Education

Residential ResCare & Training Workforce

Pharmacy

Services

HomeCare

Services

Services Services

Total

Balance at January 1, 2014

Goodwill $ 182,446

$ 73,547

$ 15,311

$ 32,720 $ 4,326

$ 308,350

Goodwill added through acquisitions —

186

—

— —

186

Other (45)

—

—

— —

(45)

Balance at March 31, 2014 $ 182,401

$ 73,733

$ 15,311

$ 32,720 $ 4,326

$ 308,491

(1)

(1)

Table of Contents

Note 4. Debt Long-term debt and obligations under capital leases consist of the following:

On April 25, 2014, we entered into an amended and restated senior secured credit facility (the “2014 Credit Agreement”) in an aggregate principal amount of $650 million, which replaced our 2012 senior secured credit facility and the related term loan A. The 2014 Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $200 million, a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $250 million, and a Delayed-Draw Term Loan A (the “DDTL”) in an aggregate amount of $200 million. At closing, proceeds from the new Term Loan A and Revolving Facility were used to (i) refinance the prior revolver and term loan A, (ii) fund a distribution to shareholders of approximately $130 million, and (iii) fund related transaction fees and expenses, and (iv) used for working capital and other general corporate purposes permitted under the 2014 Credit Agreement, including certain acquisitions and investments. The Term Loan A, the Revolving Facility and the DDTL (if drawn upon) each mature on April 25, 2019. The Term Loan A will amortize in an aggregate annual amount equal to a percentage of the original principal amount of the Term Loan A beginning September 30, 2014 as follows: (i) 5% during each of the first two years after funding, (ii) 7.5% during the third year after funding, (iii) 10% during the fourth year after funding and, (iv) 12.5% during the final year of the term. The balance of the Term Loan A is payable at maturity. Pricing for the Term Loan A, Revolving Facility and the DDTL (if drawn upon) will be variable, at the London Interbank Offer Rate (LIBOR) plus 225 basis points. LIBOR is defined as having no minimum rate. The DDTL may be drawn within 12 months from the closing date to call the 10.75% senior unsecured notes due 2019 (which are callable on January 15,2015) and other uses allowed in the 2014 Credit Agreement. The 2014 Credit Agreement also provides that, upon satisfaction of certain conditions, the Company may increase the aggregate principal amount of loans outstanding thereunder by up to $175 million, subject to receipt of additional lending commitments for such loans. The loans and other obligations under the 2014 Credit Agreement are (i) guaranteed by Onex Rescare Holdings Corp. (“Holdings”) and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Company, Holdings and substantially all of its subsidiaries (subject to certain exceptions and limitations). The 2014 Credit Agreement contains financial covenants which require us to maintain specific ratios with respect to interest coverage and leverage. This agreement provides for the exclusion of charges incurred with the resolution of certain named legal proceedings, as well as any non-cash impairment charges, in the calculation of certain financial covenants. Our obligations under capital leases are $20.7 million as of March 31, 2014, due primarily to vehicle capital leases. The current portion of these lease obligations was $6.5 million. Note 5. Income Taxes The effective tax rate was 42.6% and 10.8% for the three months ended March 31, 2014 and 2013, respectively. The 2014 rate was negatively impacted by the expiration of jobs tax credits (not renewed for 2014), while the 2013 rate was favorably impacted by the renewal of jobs tax credits. On January 2, 2013, legislation was enacted that reinstated the jobs credit provisions retroactive to January 1, 2012. The three months ended March 31, 2013 includes the current quarter’s jobs tax credit impact and $3.3 million related to 2012 and prior periods’ jobs tax credit impact.

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March 31

December 31

2014 2013

10.75% senior notes due 2019

$ 200,000

$ 200,000

Senior secured Term Loan A due 2017

155,326

157,513

Senior secured credit facility — —Obligations under capital leases

20,718

20,240

Notes payable and other

2,327

2,284

378,371

380,037

Less current portion 23,232 20,807

$ 355,139

$ 359,230

Table of Contents

Note 6. Financial Instruments At March 31, 2014 and December 31, 2013, 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:

We estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available to us (Level 2). Note 7. Segment Information The following table sets forth information about our reportable segments:

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

Note 8. Legal Proceedings ResCare, or its affiliates, are parties to various legal and/or administrative proceedings arising out of the operation of our programs and arising in the ordinary course of business. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. . The pre-tax charges recorded in connection with legal matters, including settlement of a case involving communication practices, increased by $10.5 million during the three months ended March 31, 2014, compared to the same period in 2013. In December 2009, a lawsuit was filed in the County of Contra Costa in the Superior Court of the State of California styled Gloria Nelson, et al v. ResCare, Inc., et al. The lawsuit is a wage/hour class-action lawsuit and is scheduled for trial in October 2014. The case was mediated in January 2014, but the parties failed to reach a settlement. We plan to file a motion to decertify the class within the near future. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. While we do not believe the ultimate liability, if any, for these proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our financial condition, results of operations or cash flows or may affect our reputation, it is reasonably possible they could.

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March 31, 2014 December 31, 2013

Carrying

Fair Carrying

Fair

Amount

Value Amount

Value

Long-term debt:

10.75% senior notes

$ 200,000

$ 222,500 $ 200,000

$ 223,500

Senior secured Term Loan A 155,326 155,326 157,513 157,513

Senior secured Revolving Facility

—

— —

—

Notes payable and other 2,327 2,263 2,284 2,200

Education

Residential ResCare & Training Workforce Pharmacy

Services

HomeCare

Services

Services

Services Corporate

Total

Three months ended March 31:

2014

Revenues $ 233,832 $ 93,579 $ 34,124 $ 39,807 $ 20,141

$ — $ 421,483Operating income (loss)

28,095

7,672

2,821

3,733

1,748 (27,854)

16,215

Total assets 630,252

190,793

51,286

86,277

20,217 119,702

1,098,527

Capital expenditures 2,554

190

4

120

86 1,609

4,563


803

145

378

39 2,084

8,955

2013

Revenues $ 212,527 $ 87,432 $ 34,490 $ 39,818 $ 15,187

$ — $ 389,454Operating income (loss)

26,212 6,705 2,656 3,796 1,028 (19,199) 21,198

Total assets 595,927 174,202 52,868 82,332 17,113

118,770 1,041,212Capital expenditures

1,670

218

33

15

169 1,998

4,103


569

135

278

32 2,095

8,195

(1)

(1)

(1)

Table of Contents Note 9. Noncontrolling Interest Effective October 1, 2013, ResCare acquired the 33.3% interest in Rest Assured LLC that was held by an unrelated party for no cash compensation. Prior to this transaction, ResCare held a 66.7% interest in Rest Assured LLC, a limited liability company comprised of public and private organizations providing remote monitoring services for persons with disabilities and the elderly. ASC 810, Noncontrolling Interests in Consolidated Financial Statements, (ASC 810) clarifies that a noncontrolling interest must be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary must 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:

Note 10. Impact of Recently Issued Accounting Pronouncements We do not believe there are any new accounting pronouncements that have been issued that might have a material impact on our condensed consolidated financial position or results of operations. Note 11. Subsidiary Guarantors The Senior Notes are jointly, severally, fully and unconditionally guaranteed, subject to certain automatic customary release provisions, by our 100% owned U.S. subsidiaries. There are no restrictions on our ability to obtain funds from our U.S. subsidiaries by dividends or other means. The following are condensed consolidating financial statements of our company, including the guarantors. This information is provided pursuant to Rule 3 — 10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Senior Notes. The following condensed consolidating financial statements present the balance sheet, statement of comprehensive income and cash flows of (i) Res-Care, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries, (iii) the non-guarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for our company on a consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying condensed consolidated financial statements. In connection with the preparation of our condensed consolidated financial statements for the first quarter of 2014, we made certain immaterial adjustments to our condensed consolidating statement of cash flows for the three month period ended March 31, 2013, to reflect the proper classification of cash flows related to intercompany transactions in which the parent company made direct payments and collected direct receipts on behalf of certain guarantor and non-guarantor subsidiaries. We will also make similar adjustments to our condensed consolidating statements of cash flows for comparative periods presented in future filings. This condensed consolidating financial information is provided in connection with outstanding senior notes that are fully and unconditionally guaranteed by a group of our subsidiaries.

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Noncontrolling interest as of December 31, 2012

$ (99)Net loss-noncontrolling interest

(110)Acquisition of remaining noncontrolling interest 209

Noncontrolling interest as of December 31, 2013 $ —

Table of Contents

These adjustments did not affect the assets available to the group of subsidiaries guaranteeing our senior notes; did not change the net increase or decrease in cash and cash equivalents for the parent company, the issuer, the guarantor subsidiaries or the non-guarantor subsidiaries; and had no impact on consolidated amounts. The substantial majority of these adjustments for the three months ended March 31, 2013 had the effect of a) decreasing the parent company’s net cash inflows from operating activities and increasing the parent company’s net cash inflows from financing activities by $34.7 million, b) decreasing the guarantors’ net cash outflows from operating activities and decreasing the guarantors’ net cash inflows from financing activities by $35.1 million and c) decreasing the non-guarantors’ net cash inflows from operating activities and decreasing the non-guarantors’ net cash outflows from financing activities by $0.4 million.

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Table of Contents


CONDENSED CONSOLIDATING BALANCE SHEET March 31, 2014 (In thousands)

- 12 -

Guarantor Non-Guarantor Consolidated

ResCare, Inc. Subsidiaries Subsidiaries

Eliminations Total

ASSETS

Current assets:


$ 2,580

$ 746 $ —

$ 32,463

Accounts receivable, net 29,025

224,503

147 —

253,675


—

— —

23,143


1,562

23 —

5,587

Prepaid expenses and other current assets 7,675 10,072 25

— 17,772Total current assets

92,982

238,717

941 —

332,640

Property and equipment, net

50,692

50,259

32 —

100,983

Goodwill 303,607

27

4,857 —

308,491

Other intangible assets, net 296,319 35,458 —

— 331,777Intercompany

— 693,805 68,514 (762,319) —

Investment in subsidiaries 1,001,009

37,911

— (1,038,920) —

Other assets 17,930

6,706

— —

24,636

$ 1,762,539

$ 1,062,883

$ 74,344 $ (1,801,239) $ 1,098,527




$ 12,897

$ 20 $ —

$ 35,674


58,990

644 —

123,858


1,415

— —

16,728

Current portion of obligations under capital leases —

6,504

— —

6,504

Accrued income taxes 2,871 — —

— 2,871Total current liabilities

105,165

79,806

664 —

185,635

Intercompany

760,225

—

— (760,225) —


617

— —

40,280

Long-term debt 340,013 912 —

— 340,925Obligations under capital leases

— 14,214 — — 14,214


—

— —

116,472

Total liabilities 1,361,538

95,549

664 (760,225) 697,526

Preferred shares

— — — — —

Common stock —

—

— —

—

Additional paid-in capital 247,522

478,422

122,050 (600,472) 247,522

Retained earnings 154,292

488,930

(47,180) (441,750) 154,292

Accumulated other comprehensive (loss) income (813) (18) (1,190) 1,208 (813)

Total shareholder’s equity-Res-Care, Inc. 401,001

967,334

73,680 (1,041,014) 401,001

Noncontrolling interest

— — —

Total shareholder’s equity

401,001

967,334

73,680 (1,041,014) 401,001

$ 1,762,539

$ 1,062,883

$ 74,344 $ (1,801,239) $ 1,098,527

Table of Contents


CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2013

(In thousands)

- 13 -


ResCare, Inc. Subsidiaries Subsidiaries

Eliminations Total

ASSETS

Current assets:


$ 2,860

$ 802 $ —

$ 29,997

Accounts receivable, net 25,953

215,864

56 —

241,873


—

— —

19,811


2,237

23 —

6,852

Prepaid expenses and other current assets 10,793 8,765 20

— 19,578Total current assets

87,484

229,726

901 —

318,111

Property and equipment, net

50,854

50,160

7 —

101,021

Goodwill 303,270

27

5,053 —

308,350

Other intangible assets, net 297,535 36,078 —

— 333,613Intercompany

— 695,097 68,427 (763,524) —

Investment in subsidiaries 990,793

37,913

— (1,028,706) —

Other assets 18,746

6,436

— —

25,182

$ 1,748,682

$ 1,055,437

$ 74,388 $ (1,792,230) $ 1,086,277




$ 16,210

$ 28 $ —

$ 34,089


58,950

678 —

120,803


1,166

— —

14,291

Current portion of obligations under capital leases —

6,516

— —

6,516

Accrued income taxes — — —

— —Total current liabilities

92,151

82,842

706 —

175,699

Intercompany

761,430

—

— (761,430) —


635

— —

39,143

Long-term debt 344,388 1,118 —

— 345,506Obligations under capital leases

— 13,724 — — 13,724


—

— —

116,084

Total liabilities 1,352,561

98,319

706 (761,430) 690,156

Common stock

— — — — —

Additional paid-in capital 247,053

478,422

121,814 (600,236) 247,053

Retained earnings 149,617

478,714

(47,178) (431,536) 149,617

Accumulated other comprehensive (loss) income (549) (18) (954) 972 (549)

Total shareholder’s equity-Res-Care, Inc. 396,121

957,118

73,682 (1,030,800) 396,121

Noncontrolling interest

—

—

— —

—

Total shareholder’s equity 396,121

957,118

73,682 (1,030,800) 396,121

$ 1,748,682

$ 1,055,437

$ 74,388 $ (1,792,230) $ 1,086,277

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CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME Three Months Ended March 31, 2014

(In thousands)

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Guarantor

Non-Guarantor

Consolidated

ResCare, Inc.

Subsidiaries

Subsidiaries Eliminations

Total

Revenues

$ 62,136 $ 358,950 $ 397 $ — $ 421,483

Operating expenses

64,048

340,818

402 —

405,268

Operating (loss) income

(1,912) 18,132 (5) — 16,215 Other expenses (income):

Interest, net

7,732

343

(1) —

8,074

Equity in earnings of subsidiaries (10,214) —

— 10,214

—

Total other (income) expenses (2,482) 343

(1) 10,214

8,074

Income (loss) before income taxes

570

17,789

(4) (10,214) 8,141

Income tax (benefit) expense (4,105) 7,573

(2) —

3,466

Net income (loss)

4,675

10,216

(2) (10,214) 4,675

Net loss-noncontrolling interest

—

—

— —

—

Net income (loss)-Res-Care, Inc. 4,675

10,216

(2) (10,214) 4,675

Other comprehensive income (loss):

Foreign currently translation adjustments (264) — (264) 264 (264)

Comprehensive income (loss) attributable to Res-Care, Inc.

$ 4,411

$ 10,216

$ (266) $ (9,950) $ 4,411

Total comprehensive income $ 4,411 $ 10,216 $ (266) $ (9,950) $ 4,411

Table of Contents


CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME Three Months Ended March 31, 2013

(In thousands)

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ResCare, Inc.

Subsidiaries


Total

Revenues

$ 60,452

$ 328,250

$ 752 $ —

$ 389,454

Operating expenses

65,177

302,247

832 —

368,256

Operating (loss) income

(4,725)

26,003

(80) —

21,198

Other expenses (income):

Interest, net

8,295 185 57 — 8,537

Equity in earnings of subsidiaries (16,215)

(143)

— 16,358

—

Total other (income) expenses (7,920) 42 57

16,358 8,537 (Loss) income before income taxes

3,195

25,961

(137) (16,358)

12,661

Income tax (benefit) expense (8,137) 9,553 (51)

— 1,365 Net income (loss)

11,332

16,408

(86) (16,358)

11,296

Net loss-noncontrolling interest

—

—

(36) —

(36)

Net income (loss)-Res-Care, Inc. 11,332

16,408

(50) (16,358)

11,332

Other comprehensive income (loss):

Foreign currently translation adjustments (191) — (191)

191 (191)Comprehensive income (loss) attributable to Res-

Care, Inc. $ 11,141

$ 16,408

$ (241) $ (16,167)

$ 11,141

Total comprehensive income

$ 11,141

$ 16,408

$ (277) $ (16,167)

$ 11,105

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Three Months Ended March 31, 2014

(In thousands)

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ResCare, Inc.

Subsidiaries


Total

Operating activities:

Net income (loss) $ 4,675 $ 10,216 $ (2) $ (10,214) $ 4,675

Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities

3,771

(7,216) 150 10,214

6,919

Cash provided by (used in) operating activities 8,446 3,000 148

— 11,594Investing activities:

Purchases of property and equipment (2,251) (2,283) (29) —

(4,563)

Acquisitions of businesses, net of cash acquired — (543) —

— (543)Proceeds from sale of assets

— 103 — — 103

Cash used in investing activities (2,251) (2,723) (29) — (5,003)

Financing activities:

Long-term debt borrowings (2,188) (17) —

—

(2,205)Payments on obligations under capital leases

— (1,832) — — (1,832)

Debt issuance costs —

—

—

—

—

Net payments relating to intercompany financing (1,205) 1,292

(87) —

—

Cash (used in) provided by financing activities (3,393) (557) (87) — (4,037)

Effect of exchange rate changes on cash and cash equivalents

—

—

(88) —

(88)(Decrease) increase in cash and cash equivalents

2,802

(280) (56) —

2,466

Cash and cash equivalents at beginning of period 26,335

2,860

802 —

29,997

Cash and cash equivalents at end of period $ 29,137

$ 2,580

$ 746 $ —

$ 32,463

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Three Months Ended March 31, 2013

(In thousands)

- 17 -


ResCare, Inc.

Subsidiaries


Total

Operating activities:

Net income (loss) $ 11,332 $ 16,408 $ (86) $ (16,358) $ 11,296

Adjustments to reconcile net income, including noncontrolling interest, to cash provided by operating activities

(17,748) (1,085) 349 16,358 (2,126)

Cash provided by (used in) operating activities (6,416) 15,323

263 —

9,170

Investing activities:

Purchases of property and equipment (2,075) (2,006) (22) —

(4,103)

Acquisitions of businesses, net of cash acquired —

(7) —

—

(7)Proceeds from sale of assets

— 81 — — 81

Cash used in investing activities (2,075) (1,932) (22) —

(4,029)Financing activities:

Long-term debt borrowings

(6,550) (150) (204) —

(6,904)Payments on obligations under capital leases

—

(1,594) — —

(1,594)

Debt issuance costs (8) — —

— (8)Net payments relating to intercompany financing

12,755 (12,668) (87) — —Cash (used in) provided by financing activities

6,197

(14,412) (291) —

(8,506)Effect of exchange rate changes on cash and cash equivalents

—

(66) — —

(66)(Decrease) increase in cash and cash equivalents

(2,294) (1,087) (50) —

(3,431)Cash and cash equivalents at beginning of period

42,633

4,795

2,706 —

50,134

Cash and cash equivalents at end of period $ 40,339

$ 3,708

$ 2,656 $ —

$ 46,703

Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand ResCare’s financial performance and condition. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in MD&A to “ResCare”, “Company”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries. Preliminary Note Regarding Forward-Looking Statements Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make such forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, capital structure and other financial items; (2) statements of plans and objectives of ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as “believes”, “anticipates”, “expects”, “intends”, “plans”, “targets”, and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K and in Part II, Item 1A of this Report. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made. Overview of Our Business We receive revenues primarily from the delivery of residential, training, educational and support services to various populations with special needs. Our programs include an array of services provided in both residential and non-residential settings for adults and youths with intellectual, cognitive or other developmental disabilities, and youths who have special educational or support needs, are from disadvantaged backgrounds, or have severe emotional disorders, including some who have entered the juvenile justice system. We also offer, through drop-in or live-in services, personal care, meal preparation, housekeeping, transportation and some skilled nursing care to the elderly in their own homes. Additionally, we provide services to transition welfare recipients, young people and people who have been laid off or have special barriers to employment into the workforce and become productive employees. Our reportable segments are: (i) Residential Services, (ii) ResCare HomeCare, (iii) Education and Training Services, (iv) Workforce Services and (v) Pharmacy Services. Residential Services primarily includes services for individuals with intellectual, cognitive or other developmental disabilities in our community home settings. ResCare HomeCare primarily includes periodic in-home care services to the elderly, as well as persons with disabilities. Education and Training Services consists of our Job Corps centers, alternative education programs, charter schools, training for professionals working with children, training for potential foster and adoptive parents and other individual and family counseling and instruction. Workforce Services is comprised of our domestic job training and placement programs that assist welfare recipients and disadvantaged job seekers in finding employment and improving their career prospects. Pharmacy Services is a limited, closed-door pharmacy business focused on serving individuals with cognitive, intellectual and developmental disabilities. We evaluate performance based on profit or loss from operations before corporate expenses and other income, interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of

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Table of Contents

significant accounting policies. Intersegment revenues and transfers are not significant. Further information regarding our segments is included in Notes 1 and 7 of the Notes to Consolidated Financial Statements.

Revenues for our Residential Services operations are derived primarily from state Medicaid programs and other government agencies and from management contracts with private operators, generally not for profit providers, who contract with state government agencies and are reimbursed under the Medicaid programs. Our services include social, functional and vocational skills training, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. 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 based on published fee schedules. Rates are periodically adjusted based upon state budgets or economic conditions and their impact on state budgets. At programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. For programs where we operate pursuant to management contracts, the management fee is negotiated with the provider of record. Revenues for our HomeCare services are derived primarily from state Medicaid programs, Medicare, other governmental programs, commercial insurance programs and private pay agreements. We provide a range of services, both skilled and non-skilled, primarily for older people in their homes. These services are provided on an as needed basis and are reimbursed on a unit of service basis. We also provide these in-home services to seniors on a private pay basis. We are concentrating growth efforts in the home care private pay business to further diversify our revenue streams. We operate vocational training centers under the federal Job Corps program administered by the Department of Labor (DOL) through our Education and Training Services operations. Under Job Corps contracts, we are reimbursed for direct costs of services related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. All of such amounts are reflected as revenue, and all such direct costs are reflected as cost of services. Final determination of amounts due under Job Corps contracts is subject to audit and review by the DOL, and renewals and extension of Job Corps contracts are based in part on performance reviews. We operate job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Workforce Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct costs of services related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services. Revenues for our Pharmacy Services operations are derived primarily from the Federal Medicare Part D plan, State Medicaid programs and other third-party payors. Revenue is recognized in the period pharmaceutical medications are shipped or at the time consultant pharmacist services are rendered. Outlook We provide a variety of vital human services and derive a significant portion of our revenue from state and federal government sources. Despite cost containment efforts, many states are dealing with budget deficits or shortfalls as a result of recent economic conditions, including their Medicaid budgets that fund a significant portion of the services we provide.

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Table of Contents

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 2013 Annual Report on Form 10-K filed February 18, 2014. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first quarter of 2014, there were no material changes in the critical accounting policies and assumptions. Results of Operations

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 ended March 31, 2014 increased $32.0 million, or 8.2%, from the same period in 2013. Revenues are more fully described in the segment discussions.

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Three Months Ended

March 31

2014

2013

(Dollars in thousands)

Revenues:

Residential Services $ 233,832 $ 212,527ResCare HomeCare

93,579

87,432

Education & Training Services 34,124 34,490Workforce Services

39,807

39,818

Pharmacy Services

20,141

15,187

Consolidated $ 421,483 $ 389,454Operating income:

Residential Services

$ 28,095

$ 26,212

ResCare HomeCare

7,672

6,705

Education & Training Services

2,821

2,656

Workforce Services 3,733 3,796Pharmacy Services

1,748

1,028

Corporate

(27,854) (19,199)

Consolidated

$ 16,215

$ 21,198

Operating margin:

Residential Services

12.0% 12.3%

ResCare HomeCare 8.2% 7.7%Education & training Services

8.3% 7.7%

Workforce Services 9.4% 9.5%Pharmacy Services

8.7% 6.8%

Corporate

(6.6%) (4.9%)

Consolidated

3.8% 5.4%

(1)

(1)

(1)

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Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended March 31, 2014, was $16.2 million compared to operating income of $21.2 million from the same period in 2013. Consolidated operating margins were 3.8% and 5.4% for the quarterly periods in 2014 and 2013, respectively. The decrease in operating income and margin resulted primarily from higher corporate legal expenses in 2014 related to the settlement or development of various legal matters. Net interest expense decreased $0.5 million for the first quarter of 2014 compared to the same period in 2013. The decrease was due primarily to lower letters of credit. Our effective income tax rate for the three months ended March 31, 2014 was 42.6% as compared to 10.8% over the same period in 2013. The 2014 rate was negatively impacted by the expiration of jobs tax credits (not renewed for 2014), while the 2013 rate was favorably impacted by the renewal of jobs tax credits. Due to the retroactive application of the tax credit to January 1, 2012, our effective tax rate for the first quarter of 2013 reflects not only the first quarter impact, but also $3.3 million related to 2012 and prior periods. Residential Services Residential Services revenues for the quarter ended March 31, 2014 increased $21.3 million, or 10.0%, over the same period in 2013. This increase was due primarily to acquisitions of $16.4 million, organic growth of $5.5 million and favorable rate/system changes in certain states of $1.9 million, which were partially offset by decreased census of $2.5 million in certain states. Operating margin was 12.0% for the quarter ended March 31, 2014 compared to 12.3% for the same period in 2013. ResCare HomeCare ResCare HomeCare revenues for the quarter ended March 31, 2014 increased $6.1 million, or 7.0%, over the same period in 2013. This increase was due primarily to acquisition growth of $5.5 million, organic growth of $1.2 million and rate/system changes of $0.5 million in certain states.. Operating margin increased from 7.7% in 2013 to 8.2% in 2014, due to effective cost management. Education & Training Services Education & Training Services revenues for the quarter ended March 31, 2014 decreased $0.4 million, or 1.1%, from the same period of 2013, due primarily to lower revenues in our Job Corps business. Operating margin was 8.3% in the first quarter of 2014 and 7.7% for the same period in 2013. Workforce Services Workforce Services revenues for the quarter ended March 31, 2014 were flat compared to the same period in 2013. Operating margin were slightly down from 9.5% in the first quarter of 2013 to 9.4% in the same period in 2014. Pharmacy Services Pharmacy Services revenues for the quarter ended March 31, 2014 increased $5.0 million, or 32.6%, from the same period in 2013, due primarily to organic growth in California, Kentucky and Texas. Operating margin increased from 6.8% in the first quarter of 2013 to 8.7% in the same period in 2014 due primarily to lower cost of goods sold in certain states. Corporate Total corporate operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total expenses in the first quarter of 2014 increased $8.7 million compared to the first quarter of 2013 due primarily to an increase in legal expenses.

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Financial Condition, Liquidity and Capital Resources Total assets increased $12.3 million, or 1.1%, at March 31, 2014 over balances at December 31, 2013. Cash and cash equivalents were $32.5 million at March 31, 2014, as compared to $30.0 million at December 31, 2013. Cash provided by operations for the three months ended March 31, 2014 was $11.6 million compared to $9.2 million for the three months ended March 31, 2013. Net accounts receivable at March 31, 2014 increased to $253.7 million, compared to $241.9 million at December 31, 2013. Days of revenue in net accounts receivable were 51 days at March 31, 2014, compared with 50 days at December 31, 2013. Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new programs, and our need for sufficient working capital for general corporate purposes. Since most of our programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flows and borrowings under our revolving credit facility, and expect that this will continue for at least the next twelve months. Cash used in investing activities at March 31, 2014 increased $1.0 million over the same period in 2013 primarily due to there being no significant business acquisitions during the first three months of 2013 compared to $0.5 million during the same period of 2014. Our financing activities included a net payment of debt and capital lease obligations of $4.0 million for the first three months of 2014. This compares to a net payment of debt and capital lease obligations of $8.5 million for the same period in 2013. In addition to quarterly principal and seller note payments made in the three months ended March 31, 2013, we made an additional required $4.3 million principal payment resulting from the annual Excess Cash Flow calculation, which is part of our financial covenants discussed below. On 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 10.75% senior notes are jointly, severally, fully and unconditionally guaranteed by our domestic subsidiaries. On April 25, 2014, we entered into an amended and restated senior secured credit facility (the “2014 Credit Agreement”) in an aggregate principal amount of $650 million, which replaced our 2012 senior secured credit facility and the related term loan A. The 2014 Credit Agreement consists of a Term Loan A (the “Term Loan A”) in an aggregate principal amount of $200 million, a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $250 million, and a Delayed-Draw Term Loan A (the “DDTL”) in an aggregate amount of $200 million. At closing, proceeds from the new Term Loan A and Revolving Facility were used to (i) refinance the prior revolver and term loan A, (ii) fund a distribution to shareholders of approximately $130 million, and (iii) fund related transaction fees and expenses, and (iv) used for working capital and other general corporate purposes permitted under the 2014 Credit Agreement, including certain acquisitions and investments. The Term Loan A, the Revolving Facility and the DDTL (if drawn upon) each mature on April 25, 2019. The Term Loan A will amortize in an aggregate annual amount equal to a percentage of the original principal amount of the Term Loan A beginning September 30, 2014 as follows: (i) 5% during each of the first two years after funding, (ii) 7.5% during the third year after funding, (iii) 10% during the fourth year after funding and, (iv) 12.5% during the final year of the term. The balance of the Term Loan A is payable at maturity. Pricing for the Term Loan A, Revolving Facility and the DDTL (if drawn upon) will be variable, at the London Interbank Offer Rate (LIBOR) plus 225 basis points. LIBOR is defined as having no minimum rate. The DDTL may be drawn within 12 months from the closing date to call the 10.75% senior unsecured notes due 2019 (which are callable on January 15,2015) and other uses allowed in the 2014 Credit Agreement. The 2014 Credit Agreement also provides that, upon satisfaction of certain conditions, the Company may increase the aggregate principal amount of loans outstanding thereunder by up to $175 million, subject to receipt of additional lending commitments for such loans. The loans and other obligations under the 2014 Credit Agreement are (i) guaranteed by Onex Rescare Holdings Corp. (“Holdings”) and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Company, Holdings and substantially all of its subsidiaries (subject to certain exceptions and limitations). The 2014 Credit Agreement contains financial covenants which require us to maintain specific ratios with respect to interest coverage and leverage. This agreement provides for the exclusion of charges incurred with the resolution of certain named legal proceedings, as well as any non-cash impairment charges, in the calculation of certain financial covenants.

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Our obligations under capital leases are $20.7 million and $20.2 million as of March 31, 2014 and December 31,2013, respectively. These primarily relate to vehicle capital leases. The current portion of these lease obligations was $6.5 million as of March 31, 2014 and December 31, 2013. As of March 31, 2014, we had irrevocable standby letters of credit in the principal amount of $43.3 million issued primarily in connection with our insurance programs. As of March 31, 2014, we had $156.7 million available under the amended and restated revolving credit facility, with no outstanding balance. Outstanding balances bear interest at 2.75% over the LIBOR or other bank developed rates at our option. As of March 31, 2014, the weighted average interest rate was not applicable as there were no outstanding borrowings. Letters of credit had a borrowing rate of 2.88% as of March 31, 2014. 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 March 31, 2014, and we believe we will continue to be in compliance with these covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections. Operating funding sources were approximately 68% through Medicaid reimbursement,7% from the DOL and 25% 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 2014 or 2013. Impact of Recently Issued Accounting Pronouncements See Note 10 of the Notes to Condensed Consolidated Financial Statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in interest rates. While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate exposures. Our senior secured term loan and senior secured credit facility, which have interest rates based on margins over LIBOR or prime, tiered based upon leverage calculations, had no outstanding borrowings as of March 31, 2014 and December 31, 2013. 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

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Table of Contents

concluded that ResCare’s disclosure controls and procedures are effective in timely making known to them material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act. There were no changes in ResCare’s internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. Limitations on the Effectiveness of Controls A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple errors or mistakes, and that controls can be circumvented by the acts of individuals or groups. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding the legal proceedings is provided in Note 8 to the condensed consolidated financial statements set forth in Part I of this report and incorporated by reference into this Part II, Item 1. Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in our 2013 Annual Report on Form 10-K filed February 18, 2014. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information On May 6, 2014, Res-Care, Inc. entered into a new employment agreement with Steven S. Reed, the Company’s Chief Legal Officer and Corporate Secretary. The agreement supersedes Mr. Reed’s prior employment agreement. The material terms of the new employment agreement are set forth below: Term:

May 1, 2014 to May 1, 2019. Automatically renews for successive one-year terms unless earlier terminated as provided in the employment agreement.

Base Salary:

$295,000, which may be adjusted from time to time for changes in Mr. Reed’s duties or for market conditions Cash incentive compensation:

Up to 170% of base salary paid annually, subject to both company and individual performance goals.

Threshold necessary to earn any incentive compensation: 90% of budgeted EBITDA.

Maximum percentage of base salary based on Company performance: 140%Company performance criterion: Budgeted EBITDA

Maximum percentage of base salary based on individual performance criteria established by the Board of Directors: 30%

Benefits:

Mr. Reed will participate in all employee benefit plans provided by the Company for which he is eligible. Termination

If the employment agreement is terminated without cause by ResCare or if ResCare elects not to renew the employment agreement, Mr. Reed would be entitled to receive an amount equal to twice his then current base salary, as well as any earned but unpaid incentive bonus for any calendar year ending before or at termination.

If Mr. Reed dies or elects not to renew the employment agreement at the end of its term, he would receive his salary through the date of termination or death and would be entitled to receive any earned but unpaid incentive bonus for a calendar year ending before or at termination.

If Mr. Reed voluntarily terminates his employment, he would receive his salary through the date of termination

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and would not be entitled to receive any earned but unpaid incentive bonus for a calendar year ending before or at termination.

If Mr. Reed becomes disabled during the term of the agreement, then after he has exhausted any paid time off, he will continue to receive his base salary until the earlier of the termination of the agreement due to disability as provided in the agreement, or the commencement of disability benefits under the Company’s benefit plan. In addition, if the disability benefits do not equal 100% of base salary, Mr. Reed would receive the difference between his base salary and the disability payment until the agreement terminates due to disability. He would also receive any earned but unpaid incentive bonus for a calendar year ending before termination.

If employment is terminated by ResCare without cause within two years after a change of control (as defined in the employment agreement), Mr. Reed would be entitled to receive a lump sum payment equal to two times his then current base salary. He would also be entitled to receive any earned but unpaid incentive bonus for a calendar year ending

Table of Contents

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before or at termination, plus a pro-rated incentive bonus for the period of the current calendar year ending on the date of termination.

“Cause” is defined as personal dishonesty, intentional misconduct, breach of fiduciary duty involving personal profit, conviction of, or plea of nolo contender to, any law, rule or regulation (other than traffic violations or similar offenses) or breach of any provision of the employment agreement.

Restrictive Covenants:

Mr. Reed agrees not to compete with ResCare during his employment and for 12 months after termination of his employment, and not to encourage employees to leave ResCare. He also agrees to maintain confidentiality of Company information and not to disparage the Company or its employees.

Table of Contents

Item 6. Exhibits

__________________________

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Exhibit Description of Exhibit

10.1

$650,000,000 Credit Agreement dated as of April 25, 2014 (incorporated by reference by Exhibit 10.1 to Form 8-K filed May 1, 2014).

10.2 Employment Agreement between Res-Care, Inc. and Steven S. Reed dated May 6, 2014.

* 31.1

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

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended. * 32

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

* 101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

*

Filed herewith

Table of Contents

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.

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RES-CARE, INC.

Registrant Date: May 9, 2014

By: /s/ Ralph G. Gronefeld, Jr.

Ralph G. Gronefeld, Jr.

President and Chief Executive Officer Date: May 9, 2014

By: /s/ D. Ross Davison

D. Ross Davison

Chief Financial Officer

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Employment Agreement”) is made as of May 1, 2014,between RES-CARE, INC., a Kentucky corporation (the “Company”), and Steven S. Reed (the “Employee”).

RECITALS:

WHEREAS, the Company and Employee previously entered into that certain Employment Agreement

effective April 15, 2013, as amended (the “Prior Agreement”); WHEREAS, the initial term of the Prior Agreement is scheduled to expire on December 31, 2015; WHEREAS, the Company wishes to offer the Employee a new long-term employment agreement which

will supersede the Prior Agreement; and WHEREAS, the Company and the Employee have reached agreement on the terms and conditions of

such agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the

parties agree as follows:

1. Employment and Term. The Company hereby employs the Employee, and the Employee accepts such employment, upon the terms and conditions herein set forth for an initial term commencingeffective May 1, 2014 (the “Commencement Date”), and ending on May 1, 2019, subject to earlier terminationonly in accordance with the express provisions of this Employment Agreement (“Initial Term”). This Employment Agreement shall be automatically extended for successive periods of one (1) year each (the“Additional Term(s)”) on the same terms and conditions unless not less than sixty (60) days prior to the last day of the Initial Term or the then effective Additional Term, as applicable, either the Company or Employee giveswritten notice to the other of such party’s intent to not so extend the Term. The Initial Term and any effective Additional Terms shall be collectively referred to as the “Term.” For purposes of this amended Employment Agreement, the term “Execution Date” shall mean the later of (i) the date this amended Employment Agreement is signed by the Employee and (ii) the date this amended Employment Agreement is signed on behalf of theCompany.

2. Duties.

(a) Employment as Chief Legal Officer & Corporate Secretary. During the Term, the

Employee shall serve as the Chief Legal Officer & Corporate Secretary of the Company and itssubsidiaries. During the Term, subject to the supervision and control of

the President and Chief Executive Officer of the Company (the “President”), or his designee, the Employee shall have the responsibility for and oversight of the corporate legal functions of theCompany and its subsidiaries. The Employee shall perform such additional duties as may be prescribedfrom time to time by the President or his designee, including without limitation, serving as an officer ordirector of the Company, if elected to such positions, without any additional salary or compensation. The Employee shall serve as a member of the Resource Center’s Leadership Team and a “named executive officer” for the purpose of the Company’s public filings under the securities laws. As such, Employee acknowledges and accepts responsibility, with other “named executive officers” of the Company and other officers and employees of the Company, to ensure the Company’s public filings adequately satisfy all disclosure requirements. In addition, Employee acknowledges that Employee’s biography, qualifications and compensation will be disclosed in such public filings.

(b) Time and Effort. The Employee shall devote Employee’s best efforts on a full time basis and all of Employee’s business time, energies and talents exclusively to the business of the Company and to no other business during the Term; provided, however, that subject to the restrictions in Section 7hereof, the Employee may (i) invest Employee’s personal assets in such form or manner as will notrequire Employee’s services in the operation of the affairs of the entities in which such investments aremade and (ii) subject to satisfactory performance of the duties described in Section 2(a) hereof, devotesuch time as may be reasonably required for Employee to continue to maintain Employee’s current level of participation in various civic and charitable activities.

(c) Employee Certification of Eligibility. Not less frequently than annually and upon thetermination of the Employee’s employment hereunder for any reason other than Employee’s death, the Employee shall execute and deliver to the President and/or any other authorized officer designated bythe Company a certificate (ResCare Annual Employment Re-Certification Eligibility Form) confirming, to the best of the Employee’s knowledge, that the Employee remains eligible for employment with theCompany. This same certificate will certify that the Employee has complied with applicable laws,regulations and Company policies regarding the provision of services to clients and billings to its payingagencies, Company policies on training, Drug and Alcohol-Free Program, Prohibition of Harassment, Affirmative Action Equal Employment Opportunity and Violence in the Workplace. This statementshall state that the Employee is not aware of any such violation by other employees, independentcontractors, vendors, or other individuals performing services for the Company and its subsidiaries thatthey did not report as appropriate.

3. Compensation and Benefits.

(a) Base Salary. The Company shall pay to the Employee during the Term an annual salary

(the “Base Salary”), which shall, beginning on the effective date of this amended EmploymentAgreement, be $295,000. The Base Salary shall be due and payable in substantially equal semi-monthly installments or in such other installments as may be necessary to comport with the Company’s normal pay periods for all employees. The Base Salary may be adjusted for increases from time to time forchanges in the Employee’s responsibilities or for market conditions.

(b) Incentive Plan. During the Term, the Employee shall be eligible for incentivecompensation in accordance with the Res-Care, Inc. Non-Equity Incentive Plan (the “Incentive Plan”). Shortly after the beginning of each calendar year, the Company’s Board of Directors will establish a target of earnings before taxes, interest, depreciation and amortization of the Company and itssubsidiaries on a consolidated basis, determined in accordance with generally accepted accountingprinciples consistently applied (“EBITDA”), for such calendar year (the “Annual EBITDA Target”). In no event shall Employee earn any amount under the Incentive Plan for any calendar year during theTerm unless the actual Company EBITDA for such calendar year equals or exceeds ninety percent(90%) of the Annual EBITDA Target for such calendar year. For all purposes of this EmploymentAgreement, in determining the actual EBITDA of the Company and its subsidiaries for each calendaryear, the Talent Management Committee of the Board of Directors (the “Talent Management Committee”) may make such good faith adjustments to EBITDA as it determines in its sole discretion are appropriate to reflect non-recurring or unusual items, including, without limitation, to give effect on a pro forma basis to any acquisition of stock or assets of other persons by the Company or a subsidiarythereof. The target amount payable under the Incentive Plan to Employee for each full calendar yearduring the Term shall equal the Base Salary actually paid to the Employee for such calendar yearmultiplied by the sum of the Approved Professional Performance Percentage and the ApprovedCompany Performance Percentage (as determined below) for such calendar year. The maximum percentage of the Approved Professional Performance Percentage for Employee shall bethirty percent (30%). The Approved Company Performance Percentage shall be a target of seventypercent (70%) with a range of zero percent (0%) to two hundred percent (200%). Thus making theoverall range of payment zero percent (0%) to one hundred-seventy percent (170%) of Base Salary. The Company portion is earned as follows:

• Actual EBITDA 95%-99% of budget 10% for each point up to 50% of eligible incentive earned (example 95% budget = 10% incentive, 96%=20% etc.)

• Actual EBITDA 100% of budget 100% of eligible incentive earned • Actual EBITDA over budget 5% incentive for each point up to a maximum 200% of eligible

incentive award (example 101% of budget = 105% incentive, 102% = 110% etc., 120% ofbudget and above = 200% incentive)

Not later than March 15 of each calendar year, the Talent Management Committee shall establish theprofessional performance criteria for Employee for such calendar year to be used in calculating theApproved Professional Performance Percentage. The Approved Professional Performance Percentagefor each calendar year during the Term shall be equal to (A) thirty percent (30%) multiplied by (B) theratio of the number of professional performance criteria satisfied by Employee for the calendar year tothe total number of professional performance criteria for the calendar year. However, notwithstandinganything in this Employment Agreement to the contrary, the Approved Professional PerformancePercentage shall be zero unless the actual Company EBITDA for the respective calendar year equals orexceeds ninety percent (90%) of the Annual EBITDA Target for such calendar year. Any annual incentive earned by the Employee under the Incentive Plan for any calendar year during theTerm shall be paid by the Company in cash to the Employee in the year following the year for which itis earned, and not later than the later of (x) seventy-four (74) days after the end of the applicable calendar year or (y) the date of delivery to the Company of the audited consolidated financial statementsof the Company and its subsidiaries for such calendar year, provided that Employee remains employedthrough December 31 of the year for which the incentive bonus is earned. Any amounts earned by theEmployee under the Incentive Plan shall be hereinafter referred to as the “Incentive Bonus.”

(c) Non-Equity Incentive Plan and/or Stock Option Plan. At the discretion of the Company, the Employee may be eligible for participation in a non-equity incentive plan and/or a stock option plan while employed by the Company. If eligible, the Employee will be notified by the Supervising Officerand participation in such plans will be governed not by this Agreement but by separate plan documents.

(d) Participation in Benefit Plans. During the Term, Employee shall be entitled to participate in all employee benefit plans and programs (including but not limited to paid time off policies,retirement and profit sharing plans, health insurance, etc.) provided by the Company under which theEmployee is eligible in accordance with the terms of such plans and programs, subject to all applicableand customary waiting and vesting periods. As of the Commencement Date, Employee shall be creditedwith 160 hours of paid time off (PTO). The Company reserves the right to amend, modify or terminatein their entirety any of such programs and plans.

(e) Out-of-Pocket Expenses. The Company shall promptly pay the ordinary, necessary andreasonable expenses incurred by the Employee in the performance of the Employee’s duties hereunder (or if such expenses are paid directly by the Employee shall promptly reimburse Employee for suchpayment), consistent with the reimbursement policies adopted by the Company from time to time andsubject to the prior written approval by the President. Any reimbursements made under this Section 3(e)will be paid no later than the last day of the Employee’s taxable year following the taxable year in which the expense is incurred.

(f) Withholding of Taxes; Income Tax Treatment. If, upon the payment of any

compensation or benefit to the Employee under this Employment Agreement (including, withoutlimitation, in connection with the grant of any stock options or payment of any bonus or benefit), theCompany determines in its discretion that it is required to withhold or provide for the payment in anymanner of taxes, including but not limited to, federal income or social security taxes, state income taxesor local income taxes, the Employee agrees that the Company may satisfy such requirement by:

(i) withholding an amount necessary to satisfy such withholding requirement from

the Employee’s compensation or benefit; or

(ii) conditioning the payment or transfer of such compensation or benefit upon the Employee’s payment to the Company of an amount sufficient to satisfy such withholdingrequirement.

The Employee agrees that Employee will treat all of the amounts payable pursuant to this EmploymentAgreement as compensation for income tax purposes. 4. Termination. The Employee’s employment hereunder may be terminated under this

Employment Agreement as follows, subject to the Employee’s rights pursuant to Section 5 hereof:

(a) Death. The Employee’s employment hereunder shall terminate upon Employee’s death.

(b) Disability. The Employee’s employment shall terminate hereunder at the earlier of(i) immediately upon the Company’s determination (conveyed by a Notice of Termination (as defined inparagraph (f) of this Section 4)) that the Employee is permanently disabled, and (ii) the Employee’s absence from Employee’s duties hereunder for 180 days. “Permanent disability” for purposes of this Employment Agreement shall mean the onset of a physical or mental disability which prevents theEmployee from performing the essential functions of the Employee’s duties hereunder, which is expected to continue for 180 days or more, subject to any reasonable accommodation required by stateand/or federal disability anti-discrimination laws, including, but not limited to, the Americans With Disabilities Act of 1990, as amended.

(c) Cause. The Company may terminate the Employee’s employment hereunder for Cause. For purposes of this Employment Agreement, the Company shall have “Cause” to terminate the Employee’s employment because of the Employee’s personal dishonesty, intentional misconduct, breach of fiduciary duty involving personal profit, substantial failure to perform Employee’s duties hereunder, conviction of, or plea of nolo contendere to, any law, rule or regulation (other than traffic violations or similar offenses) or breach of any provision of this Employment Agreement.

(d) Without Cause. The Company may terminate the Employee’s employment under this Employment Agreement at any time without Cause (as defined in

paragraph (c) of this Section 4) by delivery of a Notice of Termination specifying a date of terminationat least thirty (30) days following delivery of such notice.

(e) Voluntary Termination. By not less than thirty (30) days prior written notice to thePresident, Employee may voluntarily terminate Employee’s employment hereunder.

(f) Notice of Termination. Any termination of the Employee’s employment by the Company during the Term pursuant to paragraphs (b), (c) or (d) of this Section 4 shall be communicated by aNotice of Termination from the Company to the Employee. Any termination of the Employee’s employment by the Employee during the Term pursuant to paragraph (e) of this Section 4 shall becommunicated by a Notice of Termination from Employee to the Company. For purposes of thisEmployment Agreement, a “Notice of Termination” shall mean a written notice which shall indicate thespecific termination provision in this Employment Agreement relied upon and in the case of anytermination for Cause shall set forth in reasonable detail the facts and circumstances claimed to providea basis for termination of the Employee’s employment.

(g) Date of Termination. The “Date of Termination” shall, for purposes of this Employment Agreement, mean: (i) if the Employee’s employment is terminated by Employee’s death, the date of Employee’s death; (ii) if the Employee’s employment is terminated on account of disability pursuant toSection 4(b) above, thirty (30) days after Notice of Termination is given (provided that the Employeeshall not, during such 30-day period, have returned to the performance of Employee’s duties on a full-time basis), (iii) if the Employee’s employment is terminated by the Company for Cause pursuant to Section 4(c) above, the date specified in the Notice of Termination, (iv) if the Employee’s employment is terminated by the Company without Cause, pursuant to Section 4(d) above, the date specified in theNotice of Termination, (v) if the Employee’s employment is terminated voluntarily pursuant to Section 4(e) above, the date specified in the Notice of Termination, and (vi) if the Employee’s employment is terminated by reason of an election by either party not to extend the Term, the last day ofthe then effective Term.

Provided that, for purposes of the timing of payments triggered by the Date of Termination underSection 5, Date of Termination shall not be considered to have occurred until the date the Employee andthe Company reasonably anticipate that (i) Employee will not perform any further services for theCompany or any other entity considered a single employer with the Company under Section 414(b) or(c) of the Internal Revenue Code of 1986, as amended (“Code”) (but substituting fifty percent (50%) for eighty percent (80%) in the application thereof) (the “Employer Group”), or (ii) the level of bona fide services Employee will perform for the Employer Group after that date will permanently decrease to lessthan fifty percent (50%) of the average level of bona fide services performed over the previous thirty-six (36) months (or if shorter over the duration of service). For this purpose, service performed as anemployee or as an independent contractor is counted, except that service as a member of the board ofdirectors of an Employer Group entity is not counted unless termination benefits under

this Employment Agreement are aggregated for purposes of Section 409A of the Code with benefitsunder any other Employer Group plan or agreement in which Employee also participates as a director. Employee will not be treated as having a termination of Employee’s employment while Employee is on military leave, sick leave or other bona fide leave of absence if the leave does not exceed six (6) monthsor, if longer, the period during which Employee has a reemployment right under statute or contract. If abona fide leave of absence extends beyond six (6) months, Employee’s employment will be considered to terminate on the first day after the end of such six (6) month period, or on the day after Employee’s statutory or contractual reemployment right lapses, if later. The Company will determine whenEmployee’s Date of Termination occurs based on all relevant facts and circumstances, in accordancewith Treasury Regulation Section 1.409A-1(h). 5. Compensation Upon Termination or During Disability; Change of Control.

(a) Death. If the Employee’s employment shall be terminated by reason of Employee’s death

during the Term, the Employee shall continue to receive installments of Employee’s then current Base Salary until the date of Employee’s death, shall receive any earned but unpaid Incentive Bonus for any calendar year ending prior to the date of Employee’s death.

(b) Disability. During any period of disability and prior to termination pursuant to Section 4(b) by reason of disability, Employee shall be compensated as provided in this paragraph (b). Duringany waiting period prior to receiving short or long-term disability payments, Employee shall be requiredto use available Paid Time Off (“PTO”). Once Employee has met the waiting period to receive short-term disability payments, Employee shall continue to be paid Employee’s then current Base Salary until short-term disability payments to Employee commence under any plan or program then provided andfunded by the Company. If the benefits payable under any such disability plan or program do notprovide 100% replacement of the Employee’s installments of Base Salary during such period, Employeeshall be paid at regular payroll intervals the difference between the periodic installments of Employee’s then current Base Salary that would have otherwise been payable and the disability benefit paid fromsuch disability plan or program. Upon termination pursuant to Section 4(b) hereof, the above provisionsof this paragraph (b) shall no longer apply and Employee shall be entitled to any earned but unpaidIncentive Bonus for any calendar year ended prior to the date Employee’s period of disability commenced.

(c) Expiration of Term. If the Employee’s employment shall be terminated by reason of expiration of the Term by reason of Employee’s election not to extend the Term, the Employee shall continue to receive installments of his then current Base Salary until the Date of Termination and shallalso be entitled to receive any earned but unpaid Incentive Bonus for the last calendar year of the Term. If the Employee’s employment shall be terminated by reason of expiration of the Term by reason of the Company’s election not to extend the Term, the Employee shall continue to receive installments of histhen current Base Salary until the Date of Termination and for twenty-four (24)

months thereafter and shall also be entitled to receive any earned but unpaid Incentive Bonus for lastcalendar year of the Term.

(d) Without Cause. Subject to Section 5(i), if the Employee’s employment is terminatedwithout Cause and paragraph (f) of this Section 5 shall not be applicable, the Employee shall receive anamount equal to twice his then current Base Salary which amount shall be payable in a lump sum nolater than seventy-four (74) days after Employee’s Date of Termination. The Employee shall also be entitled to receive any earned but unpaid Incentive Bonus for any calendar year ending prior to the Dateof Termination.

(e) Voluntary Termination. If the Employee’s employment shall be terminated pursuant to Section 4(e) hereof, the Employee shall continue to receive installments of Employee’s then current Base Salary until the Date of Termination and the Employee shall not be entitled to receive any thenunpaid Incentive Bonus (other than any earned but unpaid Incentive Bonus for any calendar year endingprior to the date Employee gives Notice of Termination), and shall not be entitled to any severancepayment of any nature.

(f) Change of Control. Subject to Section 5(i), if a Change of Control (as defined below) has occurred with respect to the Company and within two (2) years after the occurrence of such Change ofControl, the Employee’s employment shall be terminated by the Company without Cause, thenEmployee shall be entitled to receive a lump sum payment equal to the Employee’s then current Base Salary multiplied by two (2). The Employee shall also be entitled to receive any earned but unpaidIncentive Bonus for any calendar year ending prior to the Date of Termination and, subject to Section 5(i), a pro-rated Incentive Bonus for the current calendar year for the period ending on the Date ofTermination. For purposes of this paragraph (f), “Change of Control” means (i) an event or series of events which have the effect of any “person” as such term is used in Section 13(d) and 14(d) of theExchange Act, other than (x) Onex Corporation, Onex Partners III LP or any of their respective affiliates(as defined in Rule 12b-2 under the Exchange Act) or any group including any of the foregoing and (y)any trustee or other fiduciary holding securities of the Company under any employee benefit plan of theCompany, becoming the “beneficial owner” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combinedvoting power of the Company’s then outstanding capital stock; (ii) any merger, consolidation, shareexchange, recapitalization or other transaction in which any person other than Onex Corporation, OnexPartners III LP or any of the respective affiliates or any group including any of the foregoing becomesthe beneficial owner of securities of the Company representing fifty percent (50%) or more of thecombined voting power of the Company’s then outstanding capital stock; (iii) all or substantially all of the business of the Company is disposed of pursuant to a partial or complete liquidation, sale of assets,or otherwise. Such lump sum payment will be paid to the Employee not later than seventy-four (74) days after Employee’s Date of Termination.

(g) No Further Obligations after Payment. After all payments, if any, have been made to the

Employee pursuant to the applicable provisions of paragraphs (a) through (f) of this Section 5, theCompany shall have no further obligations to the Employee under this Employment Agreement otherthan the provision of any employee benefit plan required to be continued under applicable law or by itsterms.

(h) Payment of Incentive Bonus. If Employee will be paid an earned but unpaid IncentiveBonus for any calendar year ending prior to Employee’s Date of Termination under the above provisions of this Section 5, the Incentive Bonus for the prior calendar year will be paid at the normal time as paidto employees whose employment has not terminated. If Employee is due a pro-rated Incentive Bonus for the calendar year in which Employee’s Date of Termination occurs, the pro-rated bonus for the year of the Date of Termination shall be paid in the calendar year after year the Date of Termination occurs, andat the normal payment timing for Incentive Bonus payments, and such pro-rata bonus shall be based onwhether the actual performance measures for such Incentive Bonus period were met at the normal timefor measuring such performance measures.

(i) General Release of Claims. Employee’s right to receive payment under Section 5(d) or 5(f) above is expressly conditioned on Employee’s execution and nonrevocation of a general release, in form and substance acceptable to the Company, of all claims or other causes of actions against theCompany, its affiliates, and their directors, officers, employees, and agents. The release must beexecuted and delivered to the Company on or before the date set by the Company, which may be no laterthan 60 days following Employee’s Date of Termination, and the release will be delivered to Employeeat least 21 days before the deadline set for its return. Payments will begin after Employee executes therelease and the release is no longer subject to revocation. Payments will be made on the dates specifiedin Section 5(d) or 5(f), as applicable, and will terminate if Employee violates any of the restrictivecovenants contained in Section 7 of this Agreement. Any payments that are delayed due to the releaserequirement will be paid as soon as administratively practical following receipt of the release and lapseof any applicable revocation period; provided that payments may in no event be made later thanMarch 15 of the calendar year following Employee’s Date of Termination. If Employee does not return the signed release by the date set by the Company, he will forfeit all rights to payment under Section 5(d) or 5(f), as applicable. Installment payments will be treated as a series of separate payments. 6. Duties Upon Termination. Upon the termination of Employee’s employment hereunder for any

reason whatsoever (including but not limited to the failure of the parties hereto to agree to the extension of thisEmployment Agreement pursuant to Section 1 hereof), Employee shall promptly (a) comply with Employee’s obligation to deliver an executed exit interview document as provided in accordance with Company policy, and(b) return to the Company any property of the Company or its subsidiaries then in Employee’s possession or control, including without limitation, any Confidential Information (as defined in Section 7(d)(iii) hereof) andwhether or not constituting Confidential Information, any technical data, performance information and reports,sales or marketing plans, documents or other records, and

any manuals, drawings, tape recordings, computer programs, discs, and any other physical representations ofany other information relating to the Company, its subsidiaries or affiliates or to the Business (as defined inSection 7(d)(iv) hereof) of the Company. Employee hereby acknowledges that any and all of such documents,items, physical representations and information are and shall remain at all times the exclusive property of theCompany.

7. Restrictive Covenants.

(a) Acknowledgments. Employee acknowledges that (i) Employee’s services hereunder are of a special, unique and extraordinary character and that Employee’s position with the Company places Employee in a position of confidence and trust with the operations of the Company, its subsidiaries andaffiliates (collectively, the “Res-Care Companies”) and allows Employee access to Confidential Information, (ii) the Company has provided Employee with a unique opportunity as Chief Legal Officer& Corporate Secretary of the Company, (iii) the nature and periods of the restrictions imposed by thecovenants contained in this Section 7 are fair, reasonable and necessary to protect and preserve for theCompany the benefits of Employee’s employment hereunder, (iv) the Res-Care Companies would sustain great and irreparable loss and damage if Employee were to breach any of such covenants, (v) theRes-Care Companies conduct and are aggressively pursuing the conduct of their business actively in andthroughout the entire Territory (as defined in paragraph (d)(ii) of this Section 7), and (vi) the Territory isreasonably sized because the current Business of the Res-Care Companies is conducted throughout such geographical area, the Res-Care Companies are aggressively pursuing expansion and new operations throughout such geographic area and the Res-Care Companies require the entire Territory for profitableoperations.

(b) Confidentiality and Non-disparagement Covenants. Having acknowledged the foregoing, Employee covenants that without limitation as to time, (i) commencing on the Commencement Date,Employee will not directly or indirectly disclose or use or otherwise exploit for Employee’s own benefit, or the benefit of any other Person (as defined in paragraph (d)(v) of this Section 7), except as may benecessary in the performance of Employee’s duties hereunder, any Confidential Information, and (ii) commencing on the Date of Termination, Employee will not disparage or comment negatively aboutany of the Res-Care Companies, or their respective officers, directors, employees, policies or practices, and Employee will not discourage anyone from doing business with any of the Res-Care Companies and will not encourage anyone to withdraw their employment with any of the Res-Care Companies.

(c) Covenants. Having acknowledged the statements in Section 7(a) hereof, Employee covenants and agrees with the Res-Care Companies that Employee will not, directly or indirectly, from the Commencement Date until the Date of Termination, and for a period of twelve (12) monthsthereafter, directly or indirectly (i) offer employment to, hire, solicit, divert or appropriate to Employeeor any other Person, any business or services (similar in nature to the Business) of any Person who wasan employee or an agent of any of the Res-Care Companies at any time during the last twelve (12) months of Employee’s employment hereunder; or (ii) own, manage, operate, join, control, assist,

participate in or be connected with, directly or indirectly, as an officer, director, shareholder, partner,proprietor, employee, agent, consultant, independent contractor or otherwise, any Person which is, at thetime, directly or indirectly, engaged in the Business of the Res-Care Companies within the Territory. The Employee further agrees that from the Commencement Date until the Date of Termination,Employee will not undertake any planning for or organization of any business activity that would be competitive with the Business. Notwithstanding the foregoing, Employee agrees that if thisEmployment Agreement shall be terminated by reason of expiration of the Term (irrespective of whichparty elected not to extend the Term), the covenants in this paragraph (c) shall survive the expirationthereof until twelve (12) months after the last day of employment of Employee by any Res-Care Company. Nothing in this paragraph (c) shall prohibit or restrict Employee’s right to practice as an attorney or the provision of legal services to any Person, whether in private practice, for an employer, orotherwise.

(d) Definitions. For purposes of this Employment Agreement:

(i) For purposes of this Section 7, “termination of Employee’s employment” shall include any termination pursuant to paragraphs (b), (c), (d) and (e) of Section 4 hereof, thetermination of such Employee’s employment by reason of the failure of the parties hereto to agree to the extension of this Agreement pursuant to Section 1 hereof or the voluntarytermination of Employee’s employment hereunder.

(ii) The “Territory” shall mean the fifty (50) states of the United States, the UnitedStates Virgin Islands, Puerto Rico, all of the Provinces of Canada, all of the countries of theEuropean Union, Switzerland and Norway.

(iii) “Confidential Information” shall mean any business information relating to the Res-Care Companies or to the Business (whether or not constituting a trade secret), which hasbeen or is treated by any of the Res-Care Companies as proprietary and confidential and which is not generally known or ascertainable through proper means. Without limiting the generality ofthe foregoing, so long as such information is not generally known or ascertainable by propermeans and is treated by the Res-Care Companies as proprietary and confidential, ConfidentialInformation shall include the following information regarding any of the Res-Care Companies:

(1) any patent, patent application, copyright, trademark, trade name, service mark,service name, “know-how” or trade secrets;

(2) customer lists and information relating to (i) any client of any of the Res-Care

Companies or (ii) any client of the operations of any other Person for whichoperations any of the Res-Care Companies provides management services;

(3) supplier lists, pricing policies, consulting contracts and competitive bid

information; (4) records, compliance and/or operational methods and Company policies and

procedures, including manuals and forms; (5) marketing data, plans and strategies; (6) business acquisition, development, expansion or capital investment plan or

activities; (7) software and any other confidential technical programs; (8) personnel information, employee payroll and benefits data; (9) accounts receivable and accounts payable; (10) other financial information, including financial statements, budgets, projections,

earnings and any unpublished financial information; and (11) correspondence and communications with outside parties.

(iv) The “Business” of the Res-Care Companies shall mean the business of providing

training or job placement services as provided in the Company’s Workforce Services and Youth Services Segments, youth treatment or services, home care or periodic services to the elderly,services to persons with mental retardation and other developmental disabilities, including butnot limited to persons who have been dually diagnosed, services to persons with acquired braininjuries, or providing management and/or consulting services to third parties relating to any ofthe foregoing.

(v) The term “Person” shall mean an individual, a partnership, an association, a corporation, a trust, an unincorporated organization, or any other business entity or enterprise. (e) Injunctive Relief, Invalidity of any Provision. Employee acknowledges that Employee’s

breach of any covenant contained in this Section 7 will result in irreparable injury to the Res-Care Companies and that the remedy at law of such parties for such a breach will be inadequate. Accordingly, Employee agrees and consents that each of the Res-Care Companies in addition to all other remedies available to them at law and in equity, shall be entitled to seek both preliminary and permanentinjunctions to prevent and/or halt a breach or threatened breach by Employee of any covenant containedin this Section 7. If any provision of this Section 7 is invalid in part or in whole, it shall be deemed tohave been amended, whether as to time, area covered, or otherwise, as and

to the extent required for its validity under applicable law and, as so amended, shall be enforceable. Theparties further agree to execute all documents necessary to evidence such amendment.

(f) Advice to Future Employers. If Employee, in the future, seeks or is offered employmentby any other Person, Employee shall provide a copy of this Section 7 to the prospective employer priorto accepting employment with that prospective employer. 8. Entire Agreement; Modification; Waiver. This Employment Agreement constitutes the entire

agreement between the parties pertaining to the subject matter contained in it and supersedes all prior andcontemporaneous agreements, representations, and understandings of the parties. No supplement, modification,or amendment of this Employment Agreement shall be binding unless executed in writing by all parties hereto(other than as provided in the next to last sentence of Section 7(e) hereof). No waiver of any of the provisionsof this Employment Agreement will be deemed, or will constitute, a waiver of any other provision, whether ornot similar, nor will any waiver constitute a continuing waiver. No waiver will be binding unless executed inwriting by the party making the waiver.

9. Successors and Assigns; Assignment. This Employment Agreement shall be binding on, and

inure to the benefit of, the parties hereto and their respective heirs, executors, legal representatives, successorsand assigns; provided, however, that this Employment Agreement is intended to be personal to the Employeeand the rights and obligations of the Employee hereunder may not be assigned or transferred by Employee.

10. Notices. All notices, requests, demands and other communications required or permitted to be

given or made under this Employment Agreement, or any other agreement executed in connection therewith,shall be in writing and shall be deemed to have been given on the date of delivery personally or upon deposit inthe United States mail postage prepaid by registered or certified mail, return receipt requested, to theappropriate party or parties at the following addresses (or at such other address as shall hereafter be designatedby any party to the other parties by notice given in accordance with this Section):

To the Company:

Res-Care, Inc. 9901 Linn Station Road Louisville, Kentucky 40223 Attn: Ralph G. Gronefeld, Jr.

President and Chief Executive Officer

To the Employee: Steven S. Reed 1512 Polo Fields Ct. Louisville, KY 40245

11. Execution in Counterparts. This Employment Agreement may be executed in multiple

counterparts, each of which shall be deemed an original, but all of which together shall constitute one and thesame document.

12. Further Assurances. The parties each hereby agree to execute and deliver all of the agreements,

documents and instruments required to be executed and delivered by them in this Employment Agreement andto execute and deliver such additional instruments and documents and to take such additional actions as mayreasonably be required from time to time in order to effectuate the transactions contemplated by thisEmployment Agreement.

13. Severability of Provisions. The invalidity or unenforceability of any particular provision of this

Employment Agreement shall not affect the other provisions hereof and this Employment Agreement shall beconstrued in all respects as if such invalid or unenforceable provisions were omitted.

14. Governing Law; Jurisdiction; Venue. This Employment Agreement is executed and delivered

in, and shall be governed by, enforced and interpreted in accordance with the laws of, the Commonwealth ofKentucky. The parties hereto agree that the federal or state courts located in Kentucky shall have the exclusivejurisdiction with regard to any litigation relating to this Employment Agreement and that venue shall be properonly in Jefferson County, Kentucky, the location of the principal office of the Company.

15. Tense; Captions. In construing this Employment Agreement, whenever appropriate, the

singular tense shall also be deemed to mean the plural, and vice versa, and the captions contained in thisEmployment Agreement shall be ignored.

16. Survival. The provisions of Sections 5, 6 and 7 hereof shall survive the termination, for any

reason, of this Employment Agreement, in accordance with their terms. 17. Six Month Delay. Notwithstanding anything herein to the contrary, if the Employee is a

“specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) (or any successor thereto) on Employee’s Date of Termination, any severance payment that is in excess of the amount that qualifies as separation pay under Treasury Regulation Section 1.409A-1(b)(9), or that does not qualify as separation pay,shall not begin to be paid until six (6) months after Employee’s Date of Termination. The Company shall determine, consistent with any guidance issued under Section 409A of the Code, the portion of severancepayments that are required to be delayed, if any.

18. 409A Compliance. The Employee and the Company agree and confirm that this Employment

Agreement is intended by both parties to provide for compensation that is either exempt from or compliant withSection 409A of the Code . This Employment Agreement shall be interpreted, construed, and administered inaccordance with this agreed intent, provided that the Company does not promise or warrant any tax treatment ofcompensation hereunder. Employee is responsible for obtaining advice regarding all questions to federal, state,or local income, estate, payroll, or other tax consequences arising from participation herein. This

Employment Agreement shall not be amended or terminated in a manner that would accelerate or delaypayment of any deferred compensation (within the meaning of Section 409A) except as permitted underTreasury Regulations under Section 409A of the Code.

[The remainder of this page is intentionally blank – signatures begin on next page.]

IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the dates

set forth below.

RES-CARE, INC. Date: May 6, 2014




/s/ Steven S. Reed

Steven S. Reed

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent functions):

(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.

- 27 -

Date: May 9, 2014



President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, D. Ross Davison, 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent functions):

(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.

- 28 -

Date: May 9, 2014


D. Ross Davison


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 March 31, 2014 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.

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.

- 29 -

Date: May 9, 2014





D. Ross Davison


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