10-Q

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, 2002
	or
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _______________ to _______________

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

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

10140 Linn Station Road	40223-3813
Louisville, Kentucky	(Zip Code)
(Address of principal executive offices)

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

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

The number of shares outstanding of the registrant’s common stock, no par value, as of April 30, 2002, was 24,414,686.

TABLE OF CONTENTS

INDEX
PART I. FINANCIAL INFORMATION
	ITEM 1. Unaudited Financial Statements
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit 10.1-Employment Agreement Dated 2-6-2001
Exhibit 10.2-Employment Agreement

INDEX

RES-CARE, INC. AND SUBSIDIARIES

		PAGE
PART I.	FINANCIAL INFORMATION	NUMBER
Item 1.	Unaudited Financial Statements
	Condensed Consolidated Balance Sheets – March 31, 2002      and December 31, 2001	2
	Condensed Consolidated Statements of Income –      Three months ended March 31, 2002 and 2001	3
	Condensed Consolidated Statements of Cash Flows –      Three months ended March 31, 2002 and 2001	4
	Notes to Condensed Consolidated Financial Statements –      March 31, 2002	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and      Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	19
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 6.	Exhibits and Reports on Form 8-K	22
SIGNATURES

1

PART I. FINANCIAL INFORMATION

ITEM 1. Unaudited Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

			March 31		December 31
			2002		2001
ASSETS
Current assets:
	Cash and cash equivalents		$	58,844	$	58,997
	Accounts and notes receivable, net			139,268		132,181
	Refundable income taxes			—		698
	Deferred income taxes			22,583		22,583
	Prepaid expenses and other current assets			14,989		12,459
		Total current assets		235,684		226,918
Property and equipment, net				59,171		58,779
Excess of acquisition cost over net assets acquired, net				213,208		209,413
Other assets				31,581		39,826
			$	539,644	$	534,936
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Trade accounts payable		$	23,708	$	31,731
	Current portion of long-term debt			2,199		1,697
	Accrued expenses			60,716		50,613
	Accrued income taxes			539		—
		Total current liabilities		87,162		84,041
Long-term liabilities				7,133		7,481
Long-term debt				267,417		268,014
Deferred income taxes				1,271		1,271
		Total liabilities		362,983		360,807
Commitments and contingencies
Shareholders’ equity:
	Preferred shares			—		—
	Common stock			47,882		47,870
	Additional paid-in capital			29,355		29,280
	Retained earnings			99,424		96,979
		Total shareholders’ equity		176,661		174,129
			$	539,644	$	534,936

See accompanying notes to unaudited condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

			Three Months Ended
			March 31
			2002			2001
Revenues			$	226,410		$	219,723
Facility and program expenses				204,438			199,303
Facility and program contribution				21,972			20,420
Operating expenses (income):
	Corporate general and administrative			8,924			7,615
	Depreciation and amortization			3,173			5,417
	Special charges			—			1,729
	Other (income) expense			(74	)		5
		Total operating expenses		12,023			14,766
Operating income				9,949			5,654
Interest expense, net				6,037			4,979
Income before income taxes				3,912			675
Income tax expense				1,467			311
Net income			$	2,445		$	364
Basic earnings per share			$	0.10		$	0.01
Diluted earnings per share			$	0.10		$	0.01
Weighted average number of common shares:
	Basic			24,389			24,334
	Diluted			24,731			24,384

See accompanying notes to unaudited condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

			Three Months Ended
			March 31
			2002			2001
Cash provided by (used in) operating activities			$	3,014		$	(5,434	)
Cash flows from investing activities:
	Purchases of property and equipment			(2,839	)		(1,779	)
	Acquisitions of businesses, net of cash acquired			(100	)		—
	Proceeds from sales of assets			62			—
		Cash used in investing activities		(2,877	)		(1,779	)
Cash flows from financing activities:
	Net repayments under credit facility with banks			—			(14,619	)
	Repayments of long-term debt			(377	)		(1,519	)
	Proceeds received from exercise of stock options			87			239
		Cash used in financing activities		(290	)		(15,899	)
Decrease in cash and cash equivalents			$	(153	)	$	(23,112	)

See accompanying notes to unaudited condensed consolidated financial statements.

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Res-Care, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
March 31, 2002
(Unaudited)

NOTE 1. Basis of Presentation

     Res-Care, Inc. is primarily engaged in the delivery of residential, training, educational and support services to various populations with special needs, including persons with mental retardation and other developmental disabilities and at-risk and troubled youth. All references in these financial statements to “ResCare,” “we,” “us,” or “our” mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries.

     The accompanying unaudited condensed consolidated financial statements of ResCare have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial condition and results of operations for the interim periods have been included. Operating results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

     For further information, refer to the consolidated financial statements and footnotes thereto in our annual report on Form 10-K for the year ended December 31, 2001.

NOTE 2. Long-term Debt

     Long-term debt consists of the following:

		March 31		December 31
		2002		2001
		(In thousands)
10.625% senior notes due 2008		$	150,000	$	150,000
6% convertible subordinated notes due 2004, net of unamortized discount of $1,109 and $1,213 in 2002 and 2001			96,251		96,147
5.9% convertible subordinated notes due 2005			15,613		15,613
Obligations under capital leases			4,323		4,501
Notes payable and other			3,429		3,450
			269,616		269,711
	Less current portion		2,199		1,697
		$	267,417	$	268,014

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     On March 22, 2002, we completed an amendment to our $80 million credit facility with a group of banks. The amendment takes into account certain fourth quarter 2001 charges in calculating the financial covenants and includes other changes in determining the borrowing base and the definition of eligible accounts receivable for that determination. Interest rates on borrowings under the facility and the standby letters of credit remain unchanged as a result of this amendment. As a result of the amendment, we are in compliance with our debt covenants as of March 31, 2002.

NOTE 3. Earnings Per Share

     The following table sets forth the computation of basic and diluted earnings per share:

		Three Months Ended
		March 31
		2002		2001
		(In thousands, except per share data)
Income attributable to shareholders for basic and diluted earnings per share		$	2,445	$	364
Weighted average number of common shares used in basic earnings per share			24,389		24,334
Effect of dilutive securities:
	Stock options		342		50
Weighted average number of common shares and dilutive potential common shares in diluted earnings per share			24,731		24,384
Basic earnings per share		$	0.10	$	0.01
Diluted earnings per share		$	0.10	$	0.01

     The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented:

	Three Months Ended
	March 31
	2002		2001
	(In thousands)
Convertible subordinated notes		5,781		6,574
Stock options		1,895		1,670

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NOTE 4. Segment Information

     The following table sets forth information about our reportable segments. During 2001, we disclosed information for two reportable operating segments, comprised of disabilities services and youth services. Effective January 1, 2002, in connection with changes in our management structure, the youth services division was split into two segments: (i) training services (consisting of the Job Corps operations) and (ii) youth services (consisting of all other youth services programs), which were brought under the direction of individual presidents. The information for prior periods presented has been restated to reflect this change.

	Disabilities		Training		Youth		All			Consolidated
	Services		Services		Services		Other			Totals
Quarter ended March 31:	(In thousands)
2002
Revenues	$	177,841	$	35,075	$	13,494	$	—		$	226,410
Segment profit(1)		15,156		3,711		792		(9,710	)		9,949
2001
Revenues	$	171,132	$	33,466	$	15,125	$	—		$	219,723
Segment profit(1)(2)		10,052		3,520		550		(8,468	)		5,654

(1)	All Other segment profit is comprised of corporate general and administrative expenses and corporate depreciation and amortization.
(2)	Disabilities services segment profit for the quarter ended March 31, 2001 includes a special charge of approximately $1.6 million related to the cessation of certain operations in Tennessee.

Note 5. Recently Adopted Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (Statement) No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. We adopted the provisions of Statement 141 upon its issuance in July 2001 and the provisions of Statement 142 effective January 1, 2002.

     As of January 1, 2002, we had unamortized goodwill in the amount of approximately $209 million, which will be subject to the transition provisions of Statements 141 and 142. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to perform the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the second quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the second quarter of 2002. We have not yet determined what the effect of these tests will be on our earnings and financial position.

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     A reconciliation of net income and diluted earnings per share for the three months ended March 31, 2001, as if we had ceased amortizing goodwill and indefinite-lived intangible assets according to Statement 142 effective January 1, 2001, follows:

			Diluted
	Net		Earnings
	Income		per Share
(In thousands, except per share data)
As reported	$	364	$	0.01
Goodwill amortization, net of tax		1,316		0.05
As adjusted	$	1,680	$	0.06

     In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of the previous Statement. Statement 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirements in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. We adopted Statement 144 effective January 1, 2002. The adoption of Statement 144 did not have a significant impact on our results of operations or financial condition.

NOTE 6. Contingencies

     In July 2000, American International Specialty Lines Insurance Company, or AISL, filed a Complaint for Declaratory Judgment against us and certain of our subsidiaries in the U.S. District Court for the Southern District of Texas, Houston Division. In the Complaint, AISL sought a declaration of what insurance coverage was available to ResCare in Cause No. 299291-401; In re: Estate of Trenia Wright, Deceased, et al. v. Res-Care, Inc., et al., which was filed in Probate Court No. 1 of Harris County, Texas (the Lawsuit). After the filing, we entered into an agreement with AISL whereby the claims in the Lawsuit were covered under the insurance policies issued by AISL. AISL thereafter settled the Lawsuit for $9 million. It is our position that the Lawsuit initiated coverage under policies of insurance in more than one policy year, thus affording adequate coverage to settle the Lawsuit within coverage and policy limits and that AISL waived any applicable exclusions for punitive damages. On November 23, 2001, a summary judgment was granted in favor of AISL, which was reduced to a final judgment on February 26, 2002. On March 8, 2002, we filed a motion for new trial and to alter judgment which is pending before the trial judge. In our opinion, after consulting with outside trial counsel and special counsel engaged to review the decision, substantial grounds exist for a successful appeal. We have not made any provision in our consolidated financial statements for any potential liability that may result from final adjudication of this matter. We do not believe it is probable that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

     In October 2000, ResCare and one of our subsidiaries, Res-Care Florida, Inc., f/k/a Normal Life Florida, Inc., entered into an agreement with AISL to resolve through binding arbitration a dispute as to the amount of coverage available to settle a lawsuit that had previously been filed in Pinellas County Circuit Court, Florida and subsequently settled after we entered into the agreement. AISL contends that a portion of the settlement reached was comprised of punitive damages and, therefore, not the responsibility

8

of AISL. It is our position that the settlement was an amount that a reasonable and prudent insurer would pay for the actual damages alleged and that AISL had opportunities to settle all claims within available coverage limits. Binding arbitration was held on January 15 and 16, 2002, and on February 14, 2002, a decision was entered in our favor stating that the underlying settlement was within the coverage limits of our policy and also awarding us attorney fees and costs.

     On September 2, 2001, in a case styled Nellie Lake, Individually as an Heir-at-Law of Christina Zellner, deceased; and as Personal Representative of the Estate of Christina Zellner v. Res-Care, Inc., et al., in the U.S. District Court of the District of Kansas at Wichita, a jury awarded noneconomic damages to Ms. Lake in the amount of $100,000, the statutory maximum, as well as $5,000 for economic loss. In addition, the jury awarded the Estate of Christina Zellner $5,000 of noneconomic damages and issued an advisory opinion recommending an award of $2.5 million in punitive damages. The judge, however, was not required to award the amount of punitive damages recommended by the jury and on February 4, 2002, entered a punitive damage judgment in the amount of $1 million. Based on the advice of counsel, we appealed the award of punitive damages, based on numerous appealable errors at trial. Based on the advice of counsel, we believe any damages resulting from this matter are covered by insurance and, accordingly, we have not made any provision in our consolidated financial statements for any potential liability that may result from final adjudication of this matter. We do not believe it is probable that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

     In September 1997, a lawsuit, styled Cause No. 98-00740, Nancy Chesser v. Normal Life of Texas, Inc., and Normal Life, Inc. District Court of Travis County, Texas was filed against a Texas facility operated by the former owners of Normal Life, Inc. and Normal Life of North Texas, Inc., one of our subsidiaries, asserting causes of action for negligence, intentional infliction of emotional distress and retaliation regarding the discharge of residents of the facility. In May 2000, a judgment was entered in favor of the plaintiff awarding the plaintiff damages, prejudgment interest and attorneys’ fees totaling $4.8 million. In October 2000, ResCare and AISL entered into an agreement whereby any settlement reached in Chesser and a related lawsuit also filed in the District Court of Travis County, Texas would not be dispositive of whether the claims in those suits were covered under the policies issued by AISL. AISL thereafter settled the suits and filed a Complaint for Declaratory Judgment against Normal Life of North Texas, Inc. and Normal Life, Inc. in the U.S. District Court for the Northern District of Texas, Dallas Division. In the Complaint, AISL seeks a declaration of what insurance coverage is available to ResCare in the lawsuits. It is our position that the lawsuits initiated coverage under the primary policies of insurance, thus affording adequate coverage to settle the lawsuits within coverage and policy limits. The trial of this declaratory judgment action previously scheduled for trial in March 2002 has been postponed with no new trial date set. We do not believe it is probable that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

     In addition, we are a party to various other legal and/or administrative proceedings arising out of the operation of our facilities and programs and arising in the ordinary course of business. We believe that, generally, these claims are without merit. Further, many of such claims may be covered by insurance. We do not believe the results of these proceedings or claims, individually or in the aggregate, will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

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

Overview

     Res-Care, Inc. receives revenues primarily from the delivery of residential, training, educational and support services to populations with special needs. All references in this Quarterly Report on Form 10-Q to “ResCare,” “we,” “our,” or “us” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries. We have three reportable operating segments: (i) disabilities services, (ii) youth services and (iii) training services. Further information regarding each of these segments, including the disclosure of required segment financial information, is included in Note 4 of the Notes to Consolidated Financial Statements. Effective in the first quarter of 2002, with a restructuring within the youth services division and the appointment of a separate president for the Job Corps unit and one for the other youth services business unit, we split the youth services reporting segment into two segments: (i) training services (consisting of Job Corps operations) and (ii) youth services (consisting of other youth services operations). Accordingly, beginning in 2002, we have three reportable segments.

Significant Developments in 2002

     On March 22, 2002, we completed an amendment to our credit facility with a group of banks. The amendment takes into account certain fourth quarter 2001 charges in calculating the financial covenants and includes other changes in determining the borrowing base and the definition of eligible accounts receivable for that determination. Interest rates on borrowings under the facility and the standby letters of credit remain unchanged as a result of this amendment. As a result of the amendment, we are in compliance with our debt covenants as of March 31, 2002.

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Results of Operations

		Three Months Ended
		March 31
		2002			2001
		(In thousands)
Revenues
	Disabilities Services	$	177,841		$	171,132
	Training Services		35,075			33,466
	Youth Services		13,494			15,125
	Consolidated	$	226,410		$	219,723
Segment Profit as % of Revenue:
	Disabilities Services		8.5	%		5.9	%
	Training Services		10.6	%		10.5	%
	Youth Services		5.9	%		3.6	%
Labor Cost as % of Revenue:
	Disabilities Services		62.8	%		63.1	%
	Training Services		52.0	%		48.6	%
	Youth Services		57.5	%		58.8	%
	Consolidated		62.9	%		62.5	%
EBITDA(1):
	Disabilities Services	$	17,223		$	14,322
	Training Services		3,711			3,593
	Youth Services		1,113			961
	Corporate and Other		(8,925	)		(7,805	)
	Consolidated	$	13,122		$	11,071
EBITDAR(1):
	Disabilities Services	$	23,909		$	20,495
	Training Services		3,773			3,638
	Youth Services		1,828			1,653
	Corporate and Other		(8,614	)		(7,493	)
	Consolidated	$	20,896		$	18,293

⁽¹⁾ EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. EBITDAR is defined as EBITDA before facility rent. EBITDA and EBITDAR are commonly used as analytical indicators within the health care industry, and also serve as measures of leverage capacity and debt service ability. EBITDA and EBITDAR should not be considered as measures of financial performance under accounting principles generally accepted in the United States of America, and the items excluded from EBITDA and EBITDAR are significant components in understanding and assessing financial performance. EBITDA and EBITDAR should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDA and EBITDAR are not measurements determined in accordance with accounting principles generally accepted in the United States of America and are thus susceptible to varying calculations, EBITDA and EBITDAR as presented may not be comparable to other similarly titled measures of other companies.

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     Consolidated revenues increased 3% for the first quarter of 2002 compared to 2001, due primarily to rate increases in various states coupled with a growth in census and increased services in our periodic services business unit. Revenues for 2001 include approximately $2.2 million related to certain operations in Tennessee which we exited in March 2001.

     Our operating results for the first quarter of 2002 as compared to the same period of 2001 were negatively impacted by increased insurance costs. Consolidated labor costs for the first quarter are up slightly from the year-earlier period due principally to increased costs in our training services division. However, our initiative to deploy the time and attendance system is showing preliminary positive results. Although consolidated labor costs increased, labor costs within the disabilities division improved quarter over quarter due to improved management of worked hours.

     The consolidated results for the first three months of 2001 were negatively impacted by certain special charges. Operating income for the first three months of 2001 included a charge of $1.6 million related to the write-off of certain assets and costs associated with the cessation of certain operations in Tennessee, and the write-off of $134,000 in deferred debt issuance costs resulting from a previous credit agreement.

     As a percentage of total revenues, corporate general and administrative expenses for the first quarter of 2002 were 3.9% compared to 3.5% in 2001. This relative increase was due primarily to expanding the management infrastructure at the end of the first quarter of 2001 and increased legal expenses. The change in management structure includes the addition of positions within the division for persons with disabilities and president of the division for youth services.

     Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (Statement) No. 142 and are no longer amortizing goodwill. Net income for the three months ended March 31, 2001 includes goodwill amortization of $2.0 million, ($1.3 million, net of tax, or $0.05 per share).

     Net interest expense increased to $6.0 million in the first quarter of 2002 compared to $5.0 million for the same period in 2001. This increase resulted primarily from the issuance of the $150 million senior notes in November 2001, which was used in part to reduce borrowings under our previous credit facility, combined with a higher average interest rate in 2002 (9.0%) compared with 2001 (7.5%).

     Our effective income tax rates were 37.5% and 46.1% for the first quarter of 2002 and 2001, respectively. The lower estimated annual rate of 37.5% in 2002 is primarily a result of the elimination of nondeductible goodwill amortization.

     Disabilities Services

     Results for the disabilities services segment for the first quarter of 2002 as compared to the same period in 2001 were impacted by the revenue growth and favorable labor trends described above. Revenues increased by 4% for the first quarter of 2002 compared to the same period in 2001, due primarily to rate adjustments and the expansion of existing programs. Segment profit, EBITDA and EBITDAR for the quarter were positively impacted by improved labor costs as a percent of revenue and other controllable expenses.

     During the first quarter of 2002, we completed a transaction to acquire certain operations we had previously operated under a management contract. Consideration for the acquisition totaled approximately $10 million, including $9.9 million of debt forgiven and $100,000 in cash. As a result of the transaction,

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we recorded trade accounts receivable with a fair value of approximately $4.7 million and goodwill of approximately $3.8 million, as well as other assets and liabilities.

     Training Services

     Training services revenues increased by 5% for the first quarter of 2002 compared to the same period in 2001, primarily from improved census at many of our centers. This also resulted in increases in segment profit, EBITDA and EBITDAR for the first quarter of 2002 compared to 2001.

     Youth Services

     Youth services revenues decreased 11% for the first quarter of 2002 compared to the same period in 2001, primarily from reduced census at certain operations and the closure of an operation in Puerto Rico. This decrease in revenues, offset somewhat by operating efficiencies, resulted in declined EBITDA and EBITDAR, while segment profit as a percent of revenue increased.

Financial Condition

     Total assets remained stable over the quarter, with variances in several accounts. Net accounts receivable and goodwill increased approximately $7.1 million, and $3.8 million, respectively, principally as a result of the amounts recorded in the acquisition during the quarter. Additionally, other assets decreased as a result of the forgiveness of long-term receivables in connection with the acquisition.

     Accrued expenses increased due primarily to the timing of interest payments on the senior notes and convertible notes.

Liquidity and Capital Resources

     For the quarter ended March 31, 2002, cash provided by operating activities was $3.0 million compared to cash used of $5.4 million for the same period of 2001. This increase was primarily related to higher profitability and increased accruals for interest and insurance reserves in 2002 as compared to 2001. Additionally, the higher operating cash flow is a result of an increase in accounts receivable during the first quarter of 2002 that was approximately $4 million less than the increase during the same period in 2001. The cash flow increase was offset to some extent by a decrease in accounts payable in 2002 which was higher than that of 2001 principally due to timing of payments.

     For the quarter ended March 31, 2002, cash used in investing activities was $2.9 million compared to $1.8 million in the same period of 2001, due principally to increased maintenance capital expenditures.

     For the quarter ended March 31, 2002, cash used in financing activities was $0.3 million compared to $15.9 million in the same period of 2001. The first quarter of 2001 included the use of proceeds from sale and leaseback transactions to pay down our revolving credit facility.

     Days revenue in accounts receivable were 55 days at March 31, 2002, compared to 53 days at December 31, 2001. Accounts receivable were $139.3 million and $132.2 million at March 31, 2002 and December 31, 2001, respectively. Approximately $4.7 million of the increase in the balance is attributable to the first quarter 2002 acquisition described previously. We continue to expand implementation of a comprehensive accounts receivable/billing system, which is expected to facilitate improvements in collections. Approximately 96% of our disabilities services operations are currently utilizing the new system with the remainder of the targeted operations expected to be completed by June 30, 2002.

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     Our capital requirements relate primarily to the working capital needed for general corporate purposes and our plans to expand through the development of new facilities and programs. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flow and utilization of our credit facility. Cash requirements for the acquisition of new business operations have generally been funded through a combination of these sources, as well as the issuance of long-term obligations and common stock.

     On November 15, 2001, we completed the issuance of $150 million of 10.625% senior notes due November 2008. The senior notes contain certain covenants restricting our ability to incur additional indebtedness (including the maintenance of a specified leverage ratio), pay dividends, enter into certain mergers, enter into sale and leaseback transactions and sell or otherwise dispose of assets. Additionally, the agreement places limits on the allowable amount of judgments or orders for the payment of money by a court of law or administrative agency.

     In November 2001, we entered into an $80 million secured credit facility with a bank group. As of March 31, 2002, we had no borrowings under the facility. There are outstanding letters-of-credit of approximately $29.7 million. Therefore, as of March 31, 2002, in addition to cash and cash equivalents of $58.8 million, we had approximately $50.3 million available under the credit facility. The credit facility expires in September 2004. The facility also contains various financial covenants relating to indebtedness, capital expenditures, acquisitions and dividends and requires us to maintain specified ratios with respect to fixed charge coverage, leverage, cash flow from operations and net worth. Additionally, the agreement places limits on the allowable amount of judgments or orders for the payment of money by a court of law. Our ability to achieve the thresholds provided for in the financial covenants is largely dependent upon the maintenance of continued profitability and/or reductions of amounts borrowed under the facility.

     We believe cash generated from operations and amounts remaining available under our credit facility will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

Contractual Obligations and Commitments

     Information concerning our contractual obligations and commercial commitments as of March 31, 2002 follows (in thousands):

Contractual Obligations			Payments due by Period
				Less than 1						After 5
	Total			year		1 – 3 years		4 – 5 years		years
Long-Term Debt	$	265,293		$	1,065	$	114,111	$	34	$	150,083
Capital Lease Obligations		4,323			1,134		1,077		568		1,544
Operating Leases		154,055			19,280		40,584		28,626		65,565
Total Contractual Cash Obligations	$	423,671		$	21,479	$	155,772	$	29,228	$	217,192

Other Commercial Commitments			Amount of Commitments Expiration Per Period
	Total Amounts			Less than 1						After 5
	Committed			year		1 – 3 years		4 – 5 years		years
Standby Letters of Credit	$	29,707		$	29,707		—		—		—

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Critical Accounting Policies

     Refer to Page 27 of our Annual Report on Form 10-K for the year ended December 31, 2001 for a description of our critical accounting policies.

Certain Risk Factors

     As part of our strategy to achieve higher internal growth in 2002, we enhanced our management structure during 2001 and are implementing other administrative initiatives. Our historical growth in revenues and earnings per share has been directly related to increases in the number of individuals served in each of our operating segments. This growth has depended largely on acquisitions of other businesses or facilities, the acquisition of management contract rights to operate facilities, the award of contracts to open new facilities or start new operations or to assume management of facilities previously operated by governmental agencies or other organizations, and the extension or renewal of contracts previously awarded to us. Our future revenues will depend primarily upon our ability to maintain, expand and renew existing service contracts and existing leases, and to a lesser extent upon our ability to obtain additional contracts to provide services to the special needs populations we serve, whether through awards in response to requests for proposals for new programs, in connection with facilities being privatized by governmental agencies, or by acquisitions that meet our criteria. Changes in the market for services and contracts, including increasing competition, transition costs or costs to implement awarded contracts, could adversely affect the timing and/or viability of future development activities. Additionally, many of our contracts are subject to state or federal government procurement rules and procedures; changes in procurement policies that may be adopted by one or more of these agencies could also adversely affect our ability to obtain and retain these contracts.

     Our revenues and operating profitability depend on our ability to maintain our existing reimbursement levels, to obtain periodic increases in reimbursement rates to meet higher costs and demands for more services, and to receive timely payment from applicable government agencies. If we do not receive or cannot negotiate increases in reimbursement rates at approximately the same time as our costs of providing services increase, our revenues and profitability could be adversely affected. Changes in how federal and state government agencies operate programs can also affect our operating results and financial condition. Government reimbursement, group home credentialing, developmental disabilities client Medicaid eligibility and service authorization procedures are often complicated and burdensome. Delays in timely payment can result from inability or problems in securing necessary eligibility documentation or in delivering service authorization paperwork between agencies. These reimbursement and procedural issues occasionally cause us to have to resubmit claims several times before payment is remitted and are primarily responsible for our aged receivables. Changes in the manner in which state agencies set reimbursement rates, interpret program policies and procedures, and review and audit billings and costs could also affect our business, results of operations, financial condition and our ability to meet obligations under our indebtedness.

     Our cost structure and ultimate operating profitability are directly related to our labor costs. Labor costs may be adversely affected by a variety of factors, including limited availability of qualified personnel in each geographic area, local competitive forces, the effective utilization of our labor force, changes in minimum wages or other direct personnel costs, strikes or work stoppages by employees represented by labor unions, and changes in client services models, such as the trends toward supported living and managed care. The difficulty experienced in hiring direct service staff in certain markets from time to time has resulted in higher labor costs in some of our operating units. These include costs associated with increased overtime, recruitment and retention, training programs, and use of temporary staffing personnel and outside clinical consultants.

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     Additionally, the maintenance and expansion of our operations depend on the continuation of trends toward downsizing, privatization and consolidation and our ability to tailor our services to meet the specific needs of the populations we serve. Our success in a changing operational environment is subject to a variety of political, economic, social and legal pressures. Such pressures include a desire of governmental agencies to reduce costs and increase levels of services; federal, state and local budgetary constraints; and actions brought by advocacy groups and the courts to change existing service delivery systems. Material changes resulting from these trends and pressures could adversely affect the demand for and reimbursement of our services, our operating flexibility and ultimately our revenues and profitability. Media coverage of the health care industry, including operators of facilities and programs for persons with mental retardation and other developmental disabilities, has from time to time included reports critical of the current trend toward privatization and of the operation of certain of these facilities and programs. Adverse media coverage about providers of these services could lead to increased regulatory scrutiny in some areas, and could adversely affect our revenues and profitability by, among other things, adversely affecting our ability to obtain or retain contracts, discouraging government agencies from privatizing facilities and programs; increasing regulation and resulting compliance costs; or discouraging clients from using our services.

     In recent years, changes in the market for insurance, particularly for professional and general liability coverage, have made it more difficult to obtain insurance coverage at reasonable rates. As a result, our insurance program for 2002 and 2001 provides for higher deductibles, lower claims limits and higher self-insurance retention levels than in previous years. The professional and general liability coverage provides for a $250,000 deductible per occurrence, and claims limits of $4.8 million per occurrence up to a $6 million annual aggregate limit. Our previous program generally provided coverage after a deductible of $10,000 per occurrence and claims limits of $1 million per occurrence up to a $3 million annual aggregate limit, plus varying amounts of excess coverage. Our workers’ compensation coverage provides for a $500,000 deductible per occurrence, and claims up to statutory limits, as compared to a $250,000 deductible per occurrence under the previous policy. We utilize historical data to estimate our reserves for our insurance programs. If losses on asserted claims exceed the current insurance coverage and accrued reserves, our business, results of operations, financial condition and ability to meet obligations under our indebtedness could be adversely affected.

     The collection of accounts receivable is among our most significant management challenges and requires continual focus and involvement by members of our senior management team. Many of our accounts receivable controls have previously been managed through manual procedures, so we have expended significant effort and resources to implement a new accounts receivable/billing system. The limitations of state information systems and procedures, such as the inability to receive documentation or disperse funds electronically, may limit the benefits we derive from our new systems. We must maintain or improve our controls and procedures for managing our accounts receivable billing and collection activities if we are to collect our accounts receivable on a timely basis. An inability to do so could adversely affect our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness.

     Our financial results depend on timely billing of payor agencies, effectively managing collections, and efficiently utilizing our personnel to manage labor costs. We have almost completed a new comprehensive billing and collections system and an automated time and attendance system that we believe will improve our management of these functions, improve our collections experience, and reduce our operating expenses. Our financial results and condition may be adversely affected if we do not realize the anticipated benefits from our investment in these new systems or if we encounter delays or errors during implementation.

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     Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations and maintain compliance with various financial covenants contained in our debt arrangements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. If we do not generate sufficient cash flow from operations to satisfy our debt obligations and maintain covenant compliance, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We can provide no assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. Our inability to generate sufficient cash flow to satisfy our debt obligations, maintain covenant compliance or refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations under our indebtedness.

     We must comply with comprehensive government regulation of our business, including statutes, regulations and policies governing the licensing of our facilities, the quality of our service, the revenues we receive for our services, and reimbursement for the cost of our services. If we fail to comply with these laws, we can lose contracts and revenues, thereby harming our financial results. State and federal regulatory agencies have broad discretionary powers over the administration and enforcement of laws and regulations that govern our operations. A material violation of a law or regulation could subject us to fines and penalties and in some circumstances could disqualify some or all of the facilities and programs under our control from future participation in Medicaid or other government programs. Furthermore, future regulation or legislation affecting our programs may require us to change our operations significantly or incur increased costs.

     Our success in obtaining new contracts and renewals of our existing contracts depends upon maintaining our reputation as a quality service provider among governmental authorities, advocacy groups for persons with developmental disabilities and their families, and the public. We also rely on government entities to refer clients to our facilities and programs. Negative publicity, changes in public perception, the actions of consumers under our care or investigations with respect to our industry, operations or policies could increase government scrutiny, increase compliance costs, hinder our ability to obtain or retain contracts, reduce referrals, discourage privatization of facilities and programs, and discourage clients from using our services. Any of these events could have a material adverse effect on our financial results and condition.

     Our management of residential, training, educational and support programs for our clients exposes us to potential claims or litigation by our clients or other persons for wrongful death, personal injury or other damages resulting from contact with our facilities, programs, personnel or other clients. Regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our programs and facilities and seeking to impose monetary penalties on us. We could be required to pay substantial amounts of money in damages or penalties arising from these legal proceedings and some awards of damages or penalties may not be covered by any insurance. If our third-party insurance coverage and self-insurance reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness.

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     We derive virtually all of our revenues from federal, state and local government agencies, including state Medicaid programs. Our revenues, therefore, are determined by the size of the governmental appropriations for the services we provide. Budgetary pressures, as well as economic, industry, political and other factors, could influence governments not to increase (and possibly to decrease) appropriations for these services, which could reduce our margins materially. Future federal or state initiatives could institute managed care programs for persons we serve or otherwise make material changes to the Medicaid program as it now exists. Federal, state and local government agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If a government agency does not receive an appropriation sufficient to cover their contractual obligations with us, they may terminate a contract or defer or reduce our reimbursement. The loss or reduction of reimbursement under our contracts in states where we have significant operations could have a material adverse effect on our operations.

Impact of Recently Issued Accounting Standards

     In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, we are required to capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Statement 143 is effective for fiscal years beginning after June 15, 2002, and we will adopt it effective January 1, 2003. We have not yet determined the impact Statement 143 will have on our results of operations or financial condition.

     Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q for a discussion of recently adopted accounting pronouncements.

Forward-Looking Statements

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

     Forward-looking statements involve risks and uncertainties which 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 “Certain Risk Factors” section above. 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.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

     While we are exposed to changes in interest rates as a result of our outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate exposure. At March 31, 2002, we had variable rate debt outstanding of approximately $2.1 million as compared to $2.4 million outstanding at December 31, 2001. Accordingly, we do not presently believe we have material exposure to market risk. Our exposure to market risk may change as we utilize our credit facility in 2002.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     In July 2000, American International Specialty Lines Insurance Company, or AISL, filed a Complaint for Declaratory Judgment against us and certain of our subsidiaries in the U.S. District Court for the Southern District of Texas, Houston Division. In the Complaint, AISL sought a declaration of what insurance coverage was available to ResCare in Cause No. 299291-401; In re: Estate of Trenia Wright, Deceased, et al. v. Res-Care, Inc., et al., which was filed in Probate Court No. 1 of Harris County, Texas (the Lawsuit). After the filing, we entered into an agreement with AISL whereby the claims in the Lawsuit were covered under the insurance policies issued by AISL. AISL thereafter settled the Lawsuit for $9 million. It is our position that the Lawsuit initiated coverage under policies of insurance in more than one policy year, thus affording adequate coverage to settle the Lawsuit within coverage and policy limits and that AISL waived any applicable exclusions for punitive damages. On November 23, 2001, a summary judgment was granted in favor of AISL, which was reduced to a final judgment on February 26, 2002. On March 8, 2002, we filed a motion for new trial and to alter judgment which is pending before the trial judge. In our opinion, after consulting with outside trial counsel and special counsel engaged to review the decision, substantial grounds exist for a successful appeal. We have not made any provision in our consolidated financial statements for any potential liability that may result from final adjudication of this matter. We do not believe it is probable that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

     In October 2000, ResCare and one of our subsidiaries, Res-Care Florida, Inc., f/k/a Normal Life Florida, Inc., entered into an agreement with AISL to resolve through binding arbitration a dispute as to the amount of coverage available to settle a lawsuit that had previously been filed in Pinellas County Circuit Court, Florida and subsequently settled after we entered into the agreement. AISL contends that a portion of the settlement reached was comprised of punitive damages and, therefore, not the responsibility of AISL. It is our position that the settlement was an amount that a reasonable and prudent insurer would pay for the actual damages alleged and that AISL had opportunities to settle all claims within available coverage limits. Binding arbitration was held on January 15 and 16, 2002, and on February 14, 2002, a decision was entered in our favor stating that the underlying settlement was within the coverage limits of our policy and also awarding us attorney fees and costs.

     On September 2, 2001, in a case styled Nellie Lake, Individually as an Heir-at-Law of Christina Zellner, deceased; and as Personal Representative of the Estate of Christina Zellner v. Res-Care, Inc., et al., in the U.S. District Court of the District of Kansas at Wichita, a jury awarded noneconomic damages to Ms. Lake in the amount of $100,000, the statutory maximum, as well as $5,000 for economic loss. In addition, the jury awarded the Estate of Christina Zellner $5,000 of noneconomic damages and issued an advisory opinion recommending an award of $2.5 million in punitive damages. The judge, however, was not required to award the amount of punitive damages recommended by the jury and on February 4, 2002, entered a punitive damage judgment in the amount of $1 million. Based on the advice of counsel, we appealed the award of punitive damages, based on numerous appealable errors at trial. Based on the advice of counsel, we believe any damages resulting from this matter are covered by insurance and, accordingly, we have not made any provision in our consolidated financial statements for any potential liability that may result from final adjudication of this matter. We do not believe it is probable that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

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     In September 1997, a lawsuit, styled Cause No. 98-00740, Nancy Chesser v. Normal Life of Texas, Inc., and Normal Life, Inc. District Court of Travis County, Texas was filed against a Texas facility operated by the former owners of Normal Life, Inc. and Normal Life of North Texas, Inc., one of our subsidiaries, asserting causes of action for negligence, intentional infliction of emotional distress and retaliation regarding the discharge of residents of the facility. In May 2000, a judgment was entered in favor of the plaintiff awarding the plaintiff damages, prejudgment interest and attorneys’ fees totaling $4.8 million. In October 2000, ResCare and AISL entered into an agreement whereby any settlement reached in Chesser and a related lawsuit also filed in the District Court of Travis County, Texas would not be dispositive of whether the claims in those suits were covered under the policies issued by AISL. AISL thereafter settled the suits and filed a Complaint for Declaratory Judgment against Normal Life of North Texas, Inc. and Normal Life, Inc. in the U.S. District Court for the Northern District of Texas, Dallas Division. In the Complaint, AISL seeks a declaration of what insurance coverage is available to ResCare in the lawsuits. It is our position that the lawsuits initiated coverage under the primary policies of insurance, thus affording adequate coverage to settle the lawsuits within coverage and policy limits. The trial of this declaratory judgment action previously scheduled for trial in March 2002 has been postponed with no new trial date set. We do not believe it is probable that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

     In addition, we are a party to various other legal and/or administrative proceedings arising out of the operation of our facilities and programs and arising in the ordinary course of business. We believe that, generally, these claims are without merit. Further, many of such claims may be covered by insurance. We do not believe the results of these proceedings or claims, individually or in the aggregate, will have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

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Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	10.1	Letter Agreement dated March 8, 2002 terminating Jeffrey M. Cross’ Employment Agreement.
	10.2	Employment Agreement between Res-Care, Inc. and William J Ballard dated January 13, 2002.

(b)	Reports on Form 8-K:
	On March 6, 2002, we filed a Current Report on Form 8-K announcing our financial results for the fourth quarter and the year ended December 31, 2001.
	On May 3, 2002, we filed a Current Report on Form 8-K announcing our financial results for the first quarter ended March 31, 2002.

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SIGNATURES

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

RES-CARE, INC. Registrant
Date:     May 15, 2002	By: /s/	Ronald G. Geary Ronald G. Geary Chairman, President and Chief Executive Officer
Date:     May 15, 2002	By: /s/	L. Bryan Shaul L. Bryan Shaul Executive Vice President of Finance & Administration and Chief Financial Officer

23 EX-10.1 3 l94447aex10-1.txt EXHIBIT 10.1-EMPLOYMENT AGREEMENT DATED 2-6-2001 EXHIBIT 10.1 RES-CARE, INC. 10140 LINN STATION ROAD LOUISVILLE, KENTUCKY 40223 (502) 394-2100 March 8, 2002 Jeffrey M. Cross 2810 Belknap Beach Road Prospect, Kentucky 40059 RE: EMPLOYMENT AGREEMENT DATED FEBRUARY 6, 2001 Dear Jeff: Reference is hereby made to that certain Employment Agreement dated February 6, 2001 between Res-Care, Inc. (the "Company") and you ("Cross"), as amended by that certain letter agreement dated December 31, 2001 (collectively, the "Employment Agreement"). Capitalized terms not specifically defined herein shall have the meanings given to them in the Employment Agreement. The parties hereto desire to provide for the mutual termination of the Employment Agreement and Cross' employment with the Company. This letter agreement shall set forth the parties' agreements with regard to such matters. The parties hereby agree as follows: 1. The Employment Agreement and Cross' employment with the Company shall terminate effective as of March 31, 2002. Such termination is by mutual consent of the parties. The terms and conditions of such termination and Cross' compensation and obligations in connection with the same shall be governed by this letter agreement. Section 5 of the Employment Agreement shall not be applicable to such termination and no provision of the Employment Agreement shall survive its termination, notwithstanding the provisions of Section 16 of the Employment Agreement to the contrary. 2. Effective March 31, 2002, Cross hereby resigns as an officer, director, Leadership Team member, management committee member and/or manager of all of the Res-Care Companies (as defined in paragraph 11(a) hereof). Contemporaneously herewith, Cross shall execute the resignation letter attached hereto as Exhibit A. Between March 9, 2002 and March 31, 2002, the Employee shall be generally available to the Company and its personnel at the Company's reasonable request to provide assistance and information regarding the operations of the Company's Division for Persons with Disabilities prior to the date hereof and regarding the transition of Jeffrey M. Cross March 8, 2002 Page 2 management of the Company's Division for Persons with Disabilities. Except as requested by an officer of the Company, after March 8, 2002, the Employee will not enter the offices of the Company or otherwise represent or take any actions on behalf of any of the Res-Care Companies. Not later than April 2, 2002, Cross shall execute and deliver to the Chairman and/or any officer designated by the Chairman a certificate of Cross' level of compliance and Cross' knowledge of the Company's level of compliance with applicable laws, regulations and Company policies regarding the provision of services to clients and billings to its paying agencies. Cross further specifically acknowledges that he is aware that it is the Company's policy that all employees immediately report to their supervisor, other management personnel, or the appropriate state and federal authorities, any activity which is, was, or may be in violation of state or federal laws or the Company's policies and procedures. Cross hereby represents that sufficient opportunities were made available to him to make such report(s), and that he has never knowingly witnessed or been a party to any activity in violation of federal or state laws while employed at the Company. Further, he agrees that he has observed no violations of Company policies or procedures except to the extent that he may have already reported the same to the Company in writing. 3. Not later than March 31, 2002, Cross shall return to the Company any property of the Company or its subsidiaries then in Cross' possession or control, including without limitation, any Confidential Information (as defined in paragraph 11(d)(ii) hereof) and whether 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 of any other information relating to the Company, its subsidiaries or affiliates or to the Business (as defined in paragraph 11(d)(iii) hereof) of the Company. Cross 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 the Company. Notwithstanding the preceding provisions of this paragraph 3 to the contrary, the Company acknowledges that the tangible personal property described in Exhibit B attached hereto shall be retained by Cross and the Company assigns and transfers to Cross any rights it has in such property. Cross represents that none of such property contains any Confidential Information, except for any Confidential Information that will be deleted as provided in the next sentence. Cross agrees that prior to March 31, 2002, he will cooperate with the Company's Information Technology Department to delete any Confidential Information from the electronic devices included in the list set forth on Exhibit B. 4. Cross acknowledges and agrees that no Operational Incentive has been earned by him for any calendar quarter during the Term. Cross agrees that all of the options granted pursuant to Section 3(d) of the Employment Agreement, other than the options that vested on March 8, 2001 and the options that will vest on March 8, 2002, are not vested and shall expire and lapse as of March 31, 2002. Cross agrees that he shall not exercise any of such options and shall not sell any shares of common stock of the Company until the third trading day after the press release described in Jeffrey M. Cross March 8, 2002 Page 3 paragraph 7 hereof is issued. Cross agrees that except for any amounts payable hereunder or Cross' accrued and unused vacation or paid time off as of March 31, 2002, Cross shall be entitled to no severance or other payment of any nature in connection with the termination of his employment. The amount of Cross' accrued and unused vacation or paid time off shall be paid to Cross (subject to applicable withholding) not later than April 15, 2002. 5. Prior to March 31, 2002, the Chairman will execute and deliver to Cross a reference letter in the form attached as Exhibit C. In addition, prior to such date, the Chairman will provide to Cross a list of prospective employment opportunities for Cross known to the Chairman. 6. To the extent that the Company has not previously paid such amount, the Company shall reimburse Cross for his tuition for his participation in the Masters of Business Administration Program at Vanderbilt University for the current semester and his reasonable travel expenses in connection with his attendance at such program in Nashville, Tennessee for the remaining four (4) weekend sessions to be completed by April 30, 2002. No reimbursements will be made for any sessions of such program or Cross' participation in such program after April 30, 2002. Such reimbursement shall be in amounts consistent with the prior reimbursements under Section 3(e)(iii) of the Employment Agreement. Not later than March 8, 2002, Cross shall submit to the Chairman any requests for reimbursement by the Company of expenses of Cross allowable under Section 3(f) of the Employment Agreement. 7. Cross acknowledges that the Company is obligated to issue a press release announcing the termination of Cross' employment and the Employment Agreement on or around March 29, 2002. Not later than five (5) days prior to the proposed issuance of such press release, the Chairman shall provide Cross with a draft of the same and shall permit Cross to provide his input into such press release and shall negotiate in good faith any requested changes by Cross. The final version of such press release that shall be issued shall be subject to the Company's approval. The Company agrees that Cross may send a brief letter, in the form of Exhibit D attached hereto, to the Vice Presidents of the Company's Division for Persons with Disabilities expressing appreciation for their support and acknowledging his departure. 8. Should Cross elect to exercise his option to continue his health care benefits currently provided by the Company following the termination of his employment, the Company will reimburse Cross for his payment to the Company of the monthly premiums (and any administrative charge paid by Cross to the Company) for such coverage for the period April 1, 2002 through December 31, 2002. Such reimbursement shall be made within five (5) after submission of a written request for reimbursement by Cross to the Chairman. The continuation of such health care benefits after December 31, 2002 shall be at Cross' sole expense. The COBRA election, as regulated by ERISA, shall begin at March 31, 2002, Cross' last date of official employment. Jeffrey M. Cross March 8, 2002 Page 4 9. On the date of the expiration of the Revocation Period (as defined in paragraph 17 hereof), Cross shall execute and deliver to the Company a promissory note in the form attached hereto as Exhibit E (the "Substitute Note") and the loan agreement in the form attached hereto as Exhibit F (the "Substitute Loan Agreement"). The Substitute Note shall be in the principal amount equal to the then aggregate principal balance of any accrued and unpaid interest on the Existing Note and the Additional Note and shall be a replacement for the Existing Note and the Additional Note. Contemporaneously with the delivery by Cross of the Substitute Note and the Substitute Loan Agreement, the Existing Note and the Additional Note shall be cancelled and the Existing Loan Agreement and the Additional Loan Agreement shall be terminated. 10. Provided Cross complies with his obligations in paragraph 11 hereof, on April 15, 2002 and on the fifteenth (15th) day of each of the next nine (9) calendar months thereafter, the Company shall pay to Cross the sum of $18,000 by Company check. The Substitute Note shall provide that provided Cross complies with his obligations in paragraph 11 hereof, on the fifteenth (15th) day of each calendar month, commencing on February 15, 2003, and ending on September 15, 2003, the outstanding principal balance of the Substitute Note shall be reduced by one-eighth of its principal balance and the aggregate amount of interest accrued but unpaid on such amount of principal reduction shall be reduced and forgiven by the Company. The Substitute Note shall provide that in the event of Cross' death, the entire remaining principal balance and all accrued and unpaid interest on the Substitute Note shall be forgiven by the Company and deemed paid. All of the amounts paid and principal and interest forgiven as described in this paragraph 10 shall be considered consideration for Cross' covenants in paragraph 11 hereof. Prepayment of the Substitute Note shall not affect or alter Cross' obligations under paragraph 11 hereof. 11. Cross hereby agrees that the following covenants shall be applicable to him commencing April 1, 2002: (a) Cross acknowledges that (i) his services under the Employment Agreement were of a special, unique and extraordinary character and that his position with the Company placed him in a position of confidence and trust with the operations of the Company, its subsidiaries and affiliates (collectively, the "Res-Care Companies") and allowed him access to Confidential Information, (ii) the Company provided Employee with a unique opportunity as the President of the Company's Division for Persons with Disabilities, (iii) the nature and periods of the restrictions imposed by the covenants contained in this paragraph 11 are fair, reasonable and necessary to protect and preserve for the Company the benefits of Cross' employment under the Employment Agreement, (iv) the Res-Care Companies would sustain great and irreparable loss and damage if Cross were to breach any of such covenants, (v) the Res-Care Companies conduct and are aggressively pursuing the conduct of their business actively in and throughout the entire Territory (as defined in subparagraph (d)(i) of this paragraph 11), and (vi) the Territory is reasonably sized because the current Business of the Jeffrey M. Cross March 8, 2002 Page 5 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 profitable operations. (b) Having acknowledged the foregoing, Cross covenants that without limitation as to time, (i) he will not directly or indirectly disclose or use or otherwise exploit for his own benefit, or the benefit of any other Person (as defined in subparagraph (d)(iv) of this paragraph 11), any Confidential Information, and (ii) he will not disparage or comment negatively about any of the Res-Care Companies, or their respective officers, directors, employees, policies or practices, and he 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) Having acknowledged the statements in paragraph 11(a) hereof, Cross covenants and agrees with the Res-Care Companies that he will not, directly or indirectly, from April 1, 2002 through September 30, 2003, directly or indirectly (i) offer employment to, hire, solicit, divert or appropriate to himself or any other Person, any business or services (similar in nature to the Business) of any person who was an employee or an agent of any of the Res-Care Companies at any time during the last twelve (12) months of Cross' employment under the Employment Agreement; 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 the time, directly or indirectly, engaged in the Business of the Res-Care Companies within the Territory. Cross further agrees that during such period, he will not undertake any planning for or organization of any business activity that would be competitive with the Business. (d) For purposes of this letter agreement: (i) The "Territory" shall mean the forty-eight (48) contiguous states of the United States, the United States Virgin Islands, Puerto Rico and all of the Provinces of Canada. (ii) "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 has been 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 of the foregoing, so long as such information is not generally known or ascertainable by proper means and is Jeffrey M. Cross March 8, 2002 Page 6 treated by the Res-Care Companies as proprietary and confidential, Confidential Information 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 which operations any of the Res-Care Companies provides management services; (3) supplier lists, pricing policies, consulting contracts and competitive bid information; (4) records, 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. (iii) The "Business" of the Res-Care Companies shall mean the business of providing youth treatment or services, services to persons with mental retardation and other developmental disabilities, including but not limited to persons who have been dually diagnosed, services to persons with acquired brain injuries, training services, Jeffrey M. Cross March 8, 2002 Page 7 or providing management and/or consulting services to third parties relating to the foregoing. (iv) 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) Cross acknowledges that his breach of any covenant contained in this paragraph 11 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, Cross 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 permanent injunctions to prevent and/or halt a breach or threatened breach by Cross of any covenant contained in this paragraph 11. If any provision of this paragraph 11 is invalid in part or in whole, it shall be deemed to have 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. The parties further agree to execute all documents necessary to evidence such amendment. (f) If Cross, in the future, seeks or is offered employment by any other Person, he shall provide a copy of this paragraph 11 to the prospective employer prior to accepting employment with that prospective employer. 12. The Company, for itself and all of the other Res-Care Companies, and for their successors, affiliates, employees, officers, directors and assigns, hereby fully and completely release, acquit and forever discharge Cross, Cross' heirs, successors, assigns, and legal representatives (collectively, the "Cross Indemnitees"), from all claims, liabilities, demands and causes of action which they may have or claim to have against the Cross Indemnitees, known or unknown; however, this release does not waive any claims based upon fraud, gross misrepresentation or illegal conduct and does not waive any rights or claims which may arise after the date that this letter agreement is signed by the parties and does not release Cross' obligations under this letter agreement, the Substitute Note or the Substitute Loan Agreement or affect the Company's rights under such documents. 13. Cross, for himself and his heirs, successors, assigns, and legal representatives, hereby fully and completely releases, acquits and forever discharges the Company and all of the other Res-Care Companies, as well as the employees, officers and directors of any of them (collectively, the "Company Parties") from all claims, liabilities, demands and causes of action which Cross may have or claim to have against the Company Parties. This includes but is not limited to a release of any rights or claims that Cross may have under the Age Discrimination in Employment Act, which Jeffrey M. Cross March 8, 2002 Page 8 prohibits age discrimination in employment; Title VII of the Civil Rights Act of 1964, which prohibits discrimination in employment based on race, color, national origin, religion or sex; the Equal Pay Act, which prohibits paying males and females unequal pay for equal work; the Americans with Disabilities Act, and any other federal, state or local laws or regulations. This also includes a release by Cross of any contract, tort or wrongful discharge claims. This release covers claims that are both known and unknown. This release does not waive any rights or claims which might arise after the date that this letter agreement is signed by the parties and does not release the obligations of the Company under this letter agreement, the Substitute Note or the Substitute Loan Agreement, or affect Cross' rights under such documents, as modified herein. This letter agreement also does not waive any rights or claims, if any, that Cross may have to Cross' vested stock options (other than the options which have not vested as of March 31, 2002), which options shall be governed by, and exercisable for a limited period of time after March 31, 2002 in accordance with, the terms of the Stock Plan and any Award Agreement (as defined in the Stock Plan) applicable thereto, or any rights or claims, if any, that Cross may have to 401k plan or pension benefits under the Company's retirement plans. This letter agreement does not waive the right to file a charge with or participate in any investigation conducted by the Equal Employment Opportunity Commission (the "EEOC") but Cross agrees that he does waive his right, if any, to any monetary recovery if the EEOC pursues any claim on his behalf. 14. Cross agrees never to make any claim or institute any suit, complaint, proceeding, grievance or action of any sort in any court, administrative agency or tribunal arising from his employment with the Company or any other occurrence prior to his signing this letter agreement. Cross hereby waives any right to recover any relief as a result of any claims or proceedings made on his behalf. 15. Cross acknowledges that he has been given a period of at least twenty-one (21) days to review and consider this letter agreement before signing it. Cross further acknowledges that he had the opportunity to use as much of the twenty-one (21) day period as he wished prior to signing. 16. Cross acknowledges that he has been advised by the Company that this letter agreement is a binding legal document. Cross acknowledges that the Company advised him to consult with an attorney, which he has done, before signing this letter agreement. 17. Cross understands that he may revoke this letter agreement within seven (7) days after he signed it (the "Revocation Period") and that this letter agreement is not effective until this revocation period has passed. To revoke this letter agreement, Cross must deliver a written notice of revocation to Ronald G. Geary, Chairman, President and Chief Executive Officer, Res-Care, Inc. at 10140 Linn Station Road, Louisville, Kentucky 40223, by no later than the close of business on the seventh day after he signed this letter agreement. Cross understands that if he revokes this letter agreement, it shall not be effective or enforceable. Jeffrey M. Cross March 8, 2002 Page 9 18. The parties agree that this letter agreement, together with the Substitute Note and the Substitute Loan Agreement, set forth the entire agreement between Cross and the Company. Cross acknowledges that the Company has not made any promises to him other than in this letter agreement, and that no amendment may be made to this letter agreement unless in writing and signed by Cross and the Company. Cross acknowledges that he has not been coerced or intimidated or threatened in any way and that he signs this letter agreement knowingly and voluntarily. 19. The invalidity or unenforceability of any particular provision of this letter agreement shall not affect the other provisions hereof and this letter agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 20. This letter agreement is executed and delivered in, and shall be governed by, enforced and interpreted in accordance with the laws of, the Commonwealth of Kentucky. The parties hereto agree that the federal or state courts located in Kentucky shall have the exclusive jurisdiction with regard to any litigation relating to this letter agreement and that venue shall be proper only in Jefferson County, Kentucky, the location of the principal office of the Company and current residence of Cross. If the foregoing accurately reflects your understanding of the agreement of the parties, please sign both originals of this letter agreement and return an original to the undersigned. Sincerely, Ronald G. Geary Chairman, President and Chief Executive Officer I ACKNOWLEDGE AND REPRESENT TO THE COMPANY THAT I HAVE CAREFULLY READ THIS LETTER AGREEMENT. I UNDERSTAND IT AND HAVE NO QUESTIONS ABOUT WHAT IT MEANS. I HAVE NOT BEEN FORCED OR INTIMIDATED IN ANY WAY TO SIGN IT, AND I AM KNOWINGLY AND VOLUNTARILY ENTERING INTO IT. Jeffrey M. Cross March 8, 2002 Page 10 I ACKNOWLEDGE THAT I HAVE CONSULTED WITH AN ATTORNEY BEFORE SIGNING THIS AGREEMENT. ----------------------------------------------- Jeffrey M. Cross Dated: ----------------------------------------- EX-10.2 4 l94447aex10-2.txt EXHIBIT 10.2-EMPLOYMENT AGREEMENT Exhibit 10.2 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Employment Agreement") is dated this 13th day of January, 2002, between RES-CARE, INC., a Kentucky corporation (the "Company"), and WILLIAM J BALLARD (the "Employee"). RECITALS: WHEREAS, the Company desires to reorganize its Division for Youth Services with the result that such Division will include the Company's wholly owned subsidiary Youthtrack, Inc. and the Company's Alternative Youth Services Operations and the Company will create a new Division for Training Services that will include the Company's Job Corps Operations and other training services operations; WHEREAS, the Employee has extensive experience in the management of operations providing youth services and treatment, both adjudicated and nonadjudicated; WHEREAS, the Company desires to offer to Employee the opportunity to serve as the President of the newly reorganized Division for Youth Services and the Employee desires to accept such position; and WHEREAS, the Company and the Employee desire to execute this Employment Agreement to set forth the terms and conditions of Employee's employment by the Company and agreeing to be bound by the terms hereof. 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 commencing effective January 14, 2002 (the "Commencement Date"), and ending on December 31, 2004, subject to earlier termination only in accordance with the express provisions of this Employment Agreement ("Initial Term"). At the option of the Company and with the consent of the Employee, this Employment Agreement may be extended for successive periods of one (1) year each (the "Additional Term(s)") on the same terms and conditions. The Company's option to extend this Employment Agreement for any Additional Term shall be exercisable by written notice to Employee no later than sixty (60) days prior to the end of the Initial Term or any then effective Additional Term. The Initial Term and any effective Additional Terms shall be collectively referred to as the "Term." 2. DUTIES. (a) EMPLOYMENT AS PRESIDENT OF DIVISION FOR YOUTH SERVICES. During the Term, the Employee shall serve as the President of the Division of Youth Services of the Company. The Employee shall, subject to the supervision and control of the Chairman, President and Chief Executive Officer of the Company ("Chairman") and the Board of Directors of the Company (the "Board"), perform such duties and exercise such powers over and with regard to the management of the Company's Division for Youth Services as may be prescribed from time to time by the Chairman, including, without limitation, serving as a member of the ResCare Resource Center Leadership Team and serving as an officer or director of one or more subsidiaries or affiliates of the Company, if elected to such positions, without any further salary or other compensation. As reorganized, the Company's Division for Youth Services will include the Company's wholly owned subsidiary Youthtrack, Inc. and the Company's Alternative Youth Services Operations. (b) TIME AND EFFORT. The Employee shall devote his best efforts and all of his business time, energies and talents exclusively to the business of the Company and to no other business during the Term of this Employment Agreement; provided, however, that subject to the restrictions in Section 7 hereof, the Employee may (i) invest his personal assets in such form or manner as will not require his services in the operation of the affairs of the entities in which such investments are made; (ii) subject to satisfactory performance of the duties described in Section 2(a) hereof, devote such time as may be reasonably required for him to continue to maintain his current level of participation in various civic and charitable activities; and (iii) continue to serve as a director of Setech, Inc., and with the prior approval of the Chairman, may serve on one other outside board of directors. The Employee agrees that none of such activities will detract from his ability to perform his duties hereunder and none of the activities of any of such entities will involve the provision of services competitive with those offered by any of the Res-Care Companies (as defined in Section 7(a) hereof). (c) EMPLOYEE CERTIFICATION OF ELIGIBILITY. Not less frequently than annually and upon the termination of the Employee's employment hereunder for any reason other than Employee's death, the Employee shall execute and deliver to the Chairman and/or any other authorized officer designated by the 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 the Company. 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 paying agencies, Company policies on training, Drug and Alcohol-Free Program, Prohibition of Harassment, Affirmative Action Equal Employment Opportunity and Violence in the Workplace. This statement shall state that the Employee is not aware of any such violation by other employees, independent contractors, vendors, or other individuals performing services for the Company and its subsidiaries that they did not report as appropriate. 2 3. COMPENSATION AND BENEFITS. (a) BASE SALARY. The Company shall pay to the Employee during the Term an annual salary (the "Base Salary"), which initially shall be $200,000. The Base Salary shall be due and payable in substantially equal bi-weekly installments or in such other installments as may be necessary to comport with the Company's normal pay periods for all employees. Provided that this Employment Agreement or Employee's employment hereunder shall not have been terminated for any reason, the Base Salary shall be increased, effective as of the first day of each January, commencing January 1, 2003, by the greater of (x) five percent (5%) or (y) the percentage by which the Consumer Price Index for all Urban Consumers (CPI-U), All-Items, 1982-1984=100, as published by the Bureau of Labor Statistics (the "CPI"), established for the month of December immediately preceding the date on which the adjustment is to be made exceeds the CPI published for the month of December of the immediately preceding year. If the Bureau of Labor Statistics suspends or terminates its publication of the CPI, the parties agree that a reasonably comparable price index shall be substituted for the CPI. (b) INCENTIVE PROGRAM. During the Term, the Employee shall be eligible for incentive compensation in accordance with a written incentive program mutually established by the Chairman and the Employee on an annual basis (the "Incentive Program"). The Incentive Program shall provide that sixty-five percent (65%) of the maximum incentive that may be earned by the Employee shall be based on goals mutually established by the Chairman and the Employee relating to the performance (financial, compliance and otherwise) of the Division for Youth Services and thirty-five percent (35%) of the maximum incentive that may be earned by the Employee shall be based on the financial performance of the Company and its subsidiaries as a whole. All incentive payments under the Incentive Program shall be determined annually, and shall be calculated by reference to the incentive percentage earned by the Employee multiplied by the Base Salary actually paid to the Employee for the calendar year for which the incentive is determined. The maximum percentage of the Employee's Base Salary that the Employee may earn under the Incentive Program shall be forty percent (40%) of the Base Salary actually paid to the Employee for the calendar year for which the incentive is determined. Any annual incentive earned by the Employee for any calendar year shall be paid by the Company to the Employee not later than sixty (60) days after the end of such calendar year. Any amounts earned by the Employee under the Incentive Program shall be hereinafter referred to as the "Performance Incentive." (c) 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 vacation, sick and other time off policies, retirement and profit sharing plans, health insurance, etc.) provided by the Company under which the Employee is eligible in accordance with the terms of such plans and programs. The Company reserves the right to amend, modify or terminate in their entirety any of such programs and plans. The 3 Company shall reimburse the Employee for the amount paid by him for health insurance premiums for Cobra coverage under his former employer's health insurance plan for the period from the Commencement Date and the date Employee is eligible for coverage under the Company's health insurance plan. The Employee shall submit requests for such reimbursement monthly. (d) STOCK OPTION GRANT. As an inducement for the execution of this Employment Agreement by the Employee, on the Commencement Date, the Employee shall be granted options to purchase 50,000 shares of Company common stock. Such stock options shall be granted pursuant to and, to the extent not expressly inconsistent herewith, governed by the Company stock option plan that is applicable to its managerial employees (the "Stock Plan"). Twenty-five percent (25%) of such stock options shall vest and be exercisable on the Commencement Date. Provided the Employee shall continue to be employed hereunder, twenty-five percent (25%) of such stock options shall vest and be exercisable on December 31, 2002, December 31, 2003 and December 31, 2004 (with such number of shares to be adjusted in accordance with the terms of the Stock Plan for stock splits, stock dividends, recapitalizations and the like). Any stock options that shall not be vested at the effective date of termination of the Employee's employment hereunder shall expire and any vested options shall expire in accordance with the terms of the Stock Plan. Such options shall have an exercise price based upon the closing sale price of Company common stock as reported on the Nasdaq National Market on the Commencement Date (or if the Commencement Date is not a trading date for the Company common stock, on the immediately preceding trading date). (e) OUT-OF-POCKET EXPENSES. The Company shall promptly pay the ordinary, necessary and reasonable 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 him for such payment), consistent with the reimbursement policies adopted by the Company from time to time and subject to the prior written approval by the Chairman. (f) OFFICE AT RESIDENCE. The Company acknowledges that certain of the services of Employee that do not require meetings at offices of the Company or travel may be rendered by Employee from an office located at his residence (the "Home Office"). At the request of the Employee, the Company will furnish to Employee for his use at the Home Office during the Term a personal computer and printer and reimburse Employee for the reasonable cost of the installation of the same, and reimburse Employee for the monthly cost of a dedicated telephone line to such Home Office. All of the assets so furnished to Employee shall remain the Company's property. The Company shall not be required to furnish to Employee an administrative assistant at such Home Office, but shall provide Employee the assistance of an administrative assistant from a pool of administrative assistants and shall provide the use of an office when the Employee is at the ResCare Resource Center. Employee's travel schedule shall be established in the discretion of the Chairman. 4 (g) WITHHOLDING OF TAXES; INCOME TAX TREATMENT. If, upon the payment of any compensation or benefit to the Employee under this Employment Agreement (including, without limitation, in connection with the exercise of any option and the reduction and forgiveness of any portion of the Loan), the Company determines in its discretion that it is required to withhold or provide for the payment in any manner of taxes, including but not limited to, federal income or social security taxes, state income taxes or 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 withholding requirement. The Employee agrees that he will treat all of the amounts payable pursuant to this Employment Agreement 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 his 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 in paragraph (f) of this Section 4)) that the Employee is permanently disabled, and (ii) the Employee's absence from his 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 the Employee 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 state and/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 immediately terminate the Employee's employment hereunder for Cause by delivering to the Employee a Notice of Termination so indicating. 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, 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. 5 (d) WITHOUT CAUSE. The Company shall have the right to 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 termination at least thirty (30) days following delivery of such notice. (e) VOLUNTARY TERMINATION. By not less than thirty (30) days prior written notice to the Chairman, Employee may voluntarily terminate his 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 a Notice of Termination to the Employee. For purposes of this Employment Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Employment Agreement relied upon and in the case of any termination for Cause shall set forth in reasonable detail the facts and circumstances claimed to provide a 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 his death, the date of his death; (ii) if the Employee's employment is terminated on account of disability pursuant to Section 4(b) above, thirty (30) days after Notice of Termination is given (provided that the Employee shall not, during such 30-day period, have returned to the performance of his 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 the Notice of Termination, (v) if the Employee's employment is terminated voluntarily pursuant to Section 4(e) above, the date specified in the written notice delivered by the Employee to the Company as provided in Section 4(e) above, 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 of the then effective Term. 5. COMPENSATION UPON TERMINATION OR DURING DISABILITY. (a) DEATH. If the Employee's employment is terminated by reason of his death during the Term, the Employee shall continue to receive installments of his then current Base Salary until the date of his death, shall receive any earned but unpaid Performance Incentive for any calendar year ending prior to the date of his death. (b) DISABILITY. If the Employee's employment is terminated by reason of his disability during the Term, the Employee shall continue to receive installments of his then current Base Salary while actively at work and until the earlier of (i) the date of termination in accordance with Section 4(b) of this Employment Agreement or (ii) the date that short or long-term disability payments to the Employee commence under any plan or program then provided and funded by the Company. If the Employee's 6 installments of Base Salary cease by reason of clause (ii) of the preceding sentence but the benefits payable under any such disability plan or program do not provide 100% replacement of the Employee's installments of Base Salary during such period, the Employee shall be paid at regular payroll intervals until the provisions of clause (i) of the preceding sentence becomes effective, an amount equal to the difference between the periodic installments of his then current Base Salary that would have otherwise been payable and the disability benefit paid from such disability plan or program. In the event of any such termination, the Employee shall also receive any earned but unpaid Performance Incentive for any calendar year prior to the Date of Termination. Upon termination due to death prior to a termination as specified in the preceding provisions of this paragraph (b), the payment provisions of this paragraph (b) shall no longer apply and Section 5(a) above shall apply. (c) CAUSE. If the Employee's employment is terminated for Cause, the Employee shall continue to receive installments of his then current Base Salary only through the Date of Termination and the Employee shall not be entitled to receive any Performance Incentive (other than any earned but unpaid Performance Incentive for any prior calendar year), and Employee shall not be eligible for any severance payment of any nature. (d) WITHOUT CAUSE. If the Employee's employment is terminated without Cause, the Employee shall continue to receive installments of his then current Base Salary until the Date of Termination and for one (1) year thereafter and shall also be entitled to receive any earned but unpaid Performance Incentive for any calendar year ending prior to the Date of Termination. (e) EXPIRATION OF TERM. If the Employee's employment shall be terminated by reason of expiration of the Term, the Employee shall continue to receive installments of his then current Base Salary until the Date of Termination and shall also be entitled to receive any earned but unpaid Performance Incentive for any calendar year ending prior to the Date of Termination. (f) VOLUNTARY TERMINATION. If the Employee's employment shall be terminated pursuant to Section 4(e) hereof, the Employee shall continue to receive installments of his then current Base Salary until the Date of Termination and the Employee shall not be entitled to receive any Performance Incentive (other than any earned but unpaid Performance Incentive for any calendar year ending prior to the Date of Termination), and Employee shall not be entitled to any severance payment of any nature. (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, the Company shall have no further obligations to the Employee under this Employment Agreement other than the provision of any employee benefit plan required to be continued under applicable law or by its terms. 7 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 this Employment Agreement pursuant to Section 1 hereof), Employee shall promptly (a) comply with his 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 of the property described in Section 3(f) hereof and any Confidential Information (as defined in Section 7(d)(iii) hereof) and whether 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 of any other information relating to the Company, its subsidiaries or affiliates or to the Business (as defined in Section 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 the Company. 7. RESTRICTIVE COVENANTS. (a) ACKNOWLEDGMENTS. Employee acknowledges that (i) his services hereunder are of a special, unique and extraordinary character and that his position with the Company places him in a position of confidence and trust with the operations of the Company, its subsidiaries and affiliates (collectively, the "Res-Care Companies") and allows him access to Confidential Information, (ii) the Company has provided Employee with a unique opportunity as the Company's President of the Division for Youth Services, (iii) the nature and periods of the restrictions imposed by the covenants contained in this Section 7 are fair, reasonable and necessary to protect and preserve for the Company 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) the Res-Care Companies conduct and are aggressively pursuing the conduct of their business actively in and throughout the entire Territory (as defined in paragraph (d)(ii) of this Section 7), and (vi) the Territory is reasonably 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 profitable operations. (b) CONFIDENTIALITY AND NON-DISPARAGEMENT COVENANTS. Having acknowledged the foregoing, Employee covenants that without limitation as to time, (i) commencing on the Commencement Date, he will not directly or indirectly disclose or use or otherwise exploit for his own benefit, or the benefit of any other Person (as defined in paragraph (d)(v) of this Section 7), except as may be necessary in the performance of his duties hereunder, any Confidential Information, and (ii) commencing on the Date of Termination, he will not disparage or comment negatively about any of the Res-Care Companies, or their respective officers, directors, employees, policies or practices, and he will not discourage anyone from doing business with any of the Res-Care Companies and 8 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 he will not, directly or indirectly, from the Commencement Date until the Date of Termination, and for a period of eighteen (18) months thereafter, directly or indirectly (i) offer employment to, hire, solicit, divert or appropriate to himself or any other Person, any business or services (similar in nature to the Business) of any person who was an 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 the time, 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, he will not undertake any planning for or organization of any business activity that would be competitive with the Business. (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, the termination 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 voluntary termination of Employee's employment hereunder. (ii) The "Territory" shall mean the forty-eight (48) contiguous states of the United States, the United States Virgin Islands, Puerto Rico and all of the Provinces of Canada. (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 has been 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 of the foregoing, so long as such information is not generally known or ascertainable by proper means and is treated by the Res-Care Companies as proprietary and confidential, Confidential Information 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; 9 (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 which operations any of the Res-Care Companies provides management services; (3) supplier lists, pricing policies, consulting contracts and competitive bid information; (4) records, 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 youth treatment or services, services to persons with mental retardation and other developmental disabilities, including but not limited to persons who have been dually diagnosed, services to persons with acquired brain injuries, training services, or providing management and/or consulting services to third parties relating to the 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 his 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 permanent injunctions to prevent and/or halt 10 a breach or threatened breach by Employee of any covenant contained in this Section 7. If any provision of this Section 7 is invalid in part or in whole, it shall be deemed to have 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. The parties 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 employment by any other Person, he shall provide a copy of this Section 7 to the prospective employer prior to 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 them and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties, including but not limited to the Prior Agreement. No supplement, modification, or amendment of this Employment Agreement shall be binding unless executed in writing by all parties hereto (other than by reason of the prospective modification of the Incentive Program by the Company or as provided in the next to last sentence of Section 7(e) hereof). No waiver of any of the provisions of this Employment Agreement will be deemed, or will constitute, a waiver of any other provision, whether or not similar, nor will any waiver constitute a continuing waiver. No waiver will be binding unless executed in writing 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, successors and assigns; provided, however, that this Employment Agreement is intended to be personal to the Employee and the rights and obligations of the Employee hereunder may not be assigned or transferred by him. 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 in the United States mail postage prepaid by registered or certified mail, return receipt requested, to the appropriate party or parties at the following addresses (or at such other address as shall hereafter be designated by any party to the other parties by notice given in accordance with this Section): To the Company: -------------- ResCare, Inc. 10140 Linn Station Road Louisville, Kentucky 40223 Attn: Ronald G. Geary, Chairman, President and Chief Executive Officer 11 To the Employee: --------------- William J Ballard 206 Concord Park West Nashville, Tennessee 37205 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 the same 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 and to execute and deliver such additional instruments and documents and to take such additional actions as may reasonably be required from time to time in order to effectuate the transactions contemplated by this Employment 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 be construed 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 of Kentucky. The parties hereto agree that the federal or state courts located in Kentucky shall have the exclusive jurisdiction with regard to any litigation relating to this Employment Agreement and that venue shall be proper only 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 this Employment Agreement shall be ignored. 16. NO CONFLICT; INDEMNIFICATION. Employee represents, warrants and covenants to the Company that the execution of this Employment Agreement and the performance by Employee of services for the Company as contemplated herein will not violate any agreement or covenant to which the Employee is a party or is bound, including but not limited to his any agreement with Children's Comprehensive Services, Inc. The representations, warranties and covenants in this Section 16 are a material condition to the execution of this Employment Agreement and the obligations of the Company herein. During the Term, Employee will perform his services hereunder in a manner that does not violate any such agreement, including any confidentiality covenants contained therein. Employee agrees to indemnify and hold harmless the Res-Care Companies from any breach of the representations, warranties and covenants in this Section 16. 12 17. SURVIVAL. The provisions of Sections 5, 6, 7 and 16 hereof shall survive the termination, for any reason, of this Employment Agreement, in accordance with their terms. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement on the day and year set forth above. RES-CARE, INC. By: ------------------------------------------------ Ronald G. Geary Chairman, President and Chief Executive Officer --------------------------------------------------- William J Ballard 13 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1
                                 RES-CARE, INC.
                             10140 LINN STATION ROAD
                           LOUISVILLE, KENTUCKY 40223
                                 (502) 394-2100



                                  March 8, 2002




Jeffrey M. Cross
2810 Belknap Beach Road
Prospect, Kentucky 40059

         RE:      EMPLOYMENT AGREEMENT DATED FEBRUARY 6, 2001

Dear Jeff:

         Reference is hereby made to that certain Employment Agreement dated
February 6, 2001 between Res-Care, Inc. (the "Company") and you ("Cross"), as
amended by that certain letter agreement dated December 31, 2001 (collectively,
the "Employment Agreement"). Capitalized terms not specifically defined herein
shall have the meanings given to them in the Employment Agreement. The parties
hereto desire to provide for the mutual termination of the Employment Agreement
and Cross' employment with the Company. This letter agreement shall set forth
the parties' agreements with regard to such matters. The parties hereby agree as
follows:

         1. The Employment Agreement and Cross' employment with the Company
shall terminate effective as of March 31, 2002. Such termination is by mutual
consent of the parties. The terms and conditions of such termination and Cross'
compensation and obligations in connection with the same shall be governed by
this letter agreement. Section 5 of the Employment Agreement shall not be
applicable to such termination and no provision of the Employment Agreement
shall survive its termination, notwithstanding the provisions of Section 16 of
the Employment Agreement to the contrary.

         2. Effective March 31, 2002, Cross hereby resigns as an officer,
director, Leadership Team member, management committee member and/or manager of
all of the Res-Care Companies (as defined in paragraph 11(a) hereof).
Contemporaneously herewith, Cross shall execute the resignation letter attached
hereto as Exhibit A. Between March 9, 2002 and March 31, 2002, the Employee
shall be generally available to the Company and its personnel at the Company's
reasonable request to provide assistance and information regarding the
operations of the Company's Division for Persons with Disabilities prior to the
date hereof and regarding the transition of





Jeffrey M. Cross
March 8, 2002
Page 2

management of the Company's Division for Persons with Disabilities. Except as
requested by an officer of the Company, after March 8, 2002, the Employee will
not enter the offices of the Company or otherwise represent or take any actions
on behalf of any of the Res-Care Companies. Not later than April 2, 2002, Cross
shall execute and deliver to the Chairman and/or any officer designated by the
Chairman a certificate of Cross' level of compliance and Cross' knowledge of the
Company's level of compliance with applicable laws, regulations and Company
policies regarding the provision of services to clients and billings to its
paying agencies. Cross further specifically acknowledges that he is aware that
it is the Company's policy that all employees immediately report to their
supervisor, other management personnel, or the appropriate state and federal
authorities, any activity which is, was, or may be in violation of state or
federal laws or the Company's policies and procedures. Cross hereby represents
that sufficient opportunities were made available to him to make such report(s),
and that he has never knowingly witnessed or been a party to any activity in
violation of federal or state laws while employed at the Company. Further, he
agrees that he has observed no violations of Company policies or procedures
except to the extent that he may have already reported the same to the Company
in writing.

         3. Not later than March 31, 2002, Cross shall return to the Company any
property of the Company or its subsidiaries then in Cross' possession or
control, including without limitation, any Confidential Information (as defined
in paragraph 11(d)(ii) hereof) and whether 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 of
any other information relating to the Company, its subsidiaries or affiliates or
to the Business (as defined in paragraph 11(d)(iii) hereof) of the Company.
Cross 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 the Company. Notwithstanding the preceding provisions of this
paragraph 3 to the contrary, the Company acknowledges that the tangible personal
property described in Exhibit B attached hereto shall be retained by Cross and
the Company assigns and transfers to Cross any rights it has in such property.
Cross represents that none of such property contains any Confidential
Information, except for any Confidential Information that will be deleted as
provided in the next sentence. Cross agrees that prior to March 31, 2002, he
will cooperate with the Company's Information Technology Department to delete
any Confidential Information from the electronic devices included in the list
set forth on Exhibit B.

         4. Cross acknowledges and agrees that no Operational Incentive has been
earned by him for any calendar quarter during the Term. Cross agrees that all of
the options granted pursuant to Section 3(d) of the Employment Agreement, other
than the options that vested on March 8, 2001 and the options that will vest on
March 8, 2002, are not vested and shall expire and lapse as of March 31, 2002.
Cross agrees that he shall not exercise any of such options and shall not sell
any shares of common stock of the Company until the third trading day after the
press release described in






Jeffrey M. Cross
March 8, 2002
Page 3

paragraph 7 hereof is issued. Cross agrees that except for any amounts payable
hereunder or Cross' accrued and unused vacation or paid time off as of March 31,
2002, Cross shall be entitled to no severance or other payment of any nature in
connection with the termination of his employment. The amount of Cross' accrued
and unused vacation or paid time off shall be paid to Cross (subject to
applicable withholding) not later than April 15, 2002.

         5. Prior to March 31, 2002, the Chairman will execute and deliver to
Cross a reference letter in the form attached as Exhibit C. In addition, prior
to such date, the Chairman will provide to Cross a list of prospective
employment opportunities for Cross known to the Chairman.

         6. To the extent that the Company has not previously paid such amount,
the Company shall reimburse Cross for his tuition for his participation in the
Masters of Business Administration Program at Vanderbilt University for the
current semester and his reasonable travel expenses in connection with his
attendance at such program in Nashville, Tennessee for the remaining four (4)
weekend sessions to be completed by April 30, 2002. No reimbursements will be
made for any sessions of such program or Cross' participation in such program
after April 30, 2002. Such reimbursement shall be in amounts consistent with the
prior reimbursements under Section 3(e)(iii) of the Employment Agreement. Not
later than March 8, 2002, Cross shall submit to the Chairman any requests for
reimbursement by the Company of expenses of Cross allowable under Section 3(f)
of the Employment Agreement.

         7. Cross acknowledges that the Company is obligated to issue a press
release announcing the termination of Cross' employment and the Employment
Agreement on or around March 29, 2002. Not later than five (5) days prior to the
proposed issuance of such press release, the Chairman shall provide Cross with a
draft of the same and shall permit Cross to provide his input into such press
release and shall negotiate in good faith any requested changes by Cross. The
final version of such press release that shall be issued shall be subject to the
Company's approval. The Company agrees that Cross may send a brief letter, in
the form of Exhibit D attached hereto, to the Vice Presidents of the Company's
Division for Persons with Disabilities expressing appreciation for their support
and acknowledging his departure.

         8. Should Cross elect to exercise his option to continue his health
care benefits currently provided by the Company following the termination of his
employment, the Company will reimburse Cross for his payment to the Company of
the monthly premiums (and any administrative charge paid by Cross to the
Company) for such coverage for the period April 1, 2002 through December 31,
2002. Such reimbursement shall be made within five (5) after submission of a
written request for reimbursement by Cross to the Chairman. The continuation of
such health care benefits after December 31, 2002 shall be at Cross' sole
expense. The COBRA election, as regulated by ERISA, shall begin at March 31,
2002, Cross' last date of official employment.





Jeffrey M. Cross
March 8, 2002
Page 4

         9. On the date of the expiration of the Revocation Period (as defined
in paragraph 17 hereof), Cross shall execute and deliver to the Company a
promissory note in the form attached hereto as Exhibit E (the "Substitute Note")
and the loan agreement in the form attached hereto as Exhibit F (the "Substitute
Loan Agreement"). The Substitute Note shall be in the principal amount equal to
the then aggregate principal balance of any accrued and unpaid interest on the
Existing Note and the Additional Note and shall be a replacement for the
Existing Note and the Additional Note. Contemporaneously with the delivery by
Cross of the Substitute Note and the Substitute Loan Agreement, the Existing
Note and the Additional Note shall be cancelled and the Existing Loan Agreement
and the Additional Loan Agreement shall be terminated.

         10. Provided Cross complies with his obligations in paragraph 11
hereof, on April 15, 2002 and on the fifteenth (15th) day of each of the next
nine (9) calendar months thereafter, the Company shall pay to Cross the sum of
$18,000 by Company check. The Substitute Note shall provide that provided Cross
complies with his obligations in paragraph 11 hereof, on the fifteenth (15th)
day of each calendar month, commencing on February 15, 2003, and ending on
September 15, 2003, the outstanding principal balance of the Substitute Note
shall be reduced by one-eighth of its principal balance and the aggregate amount
of interest accrued but unpaid on such amount of principal reduction shall be
reduced and forgiven by the Company. The Substitute Note shall provide that in
the event of Cross' death, the entire remaining principal balance and all
accrued and unpaid interest on the Substitute Note shall be forgiven by the
Company and deemed paid. All of the amounts paid and principal and interest
forgiven as described in this paragraph 10 shall be considered consideration for
Cross' covenants in paragraph 11 hereof. Prepayment of the Substitute Note shall
not affect or alter Cross' obligations under paragraph 11 hereof.

         11. Cross hereby agrees that the following covenants shall be
applicable to him commencing April 1, 2002:

                  (a) Cross acknowledges that (i) his services under the
         Employment Agreement were of a special, unique and extraordinary
         character and that his position with the Company placed him in a
         position of confidence and trust with the operations of the Company,
         its subsidiaries and affiliates (collectively, the "Res-Care
         Companies") and allowed him access to Confidential Information, (ii)
         the Company provided Employee with a unique opportunity as the
         President of the Company's Division for Persons with Disabilities,
         (iii) the nature and periods of the restrictions imposed by the
         covenants contained in this paragraph 11 are fair, reasonable and
         necessary to protect and preserve for the Company the benefits of
         Cross' employment under the Employment Agreement, (iv) the Res-Care
         Companies would sustain great and irreparable loss and damage if Cross
         were to breach any of such covenants, (v) the Res-Care Companies
         conduct and are aggressively pursuing the conduct of their business
         actively in and throughout the entire Territory (as defined in
         subparagraph (d)(i) of this paragraph 11), and (vi) the Territory is
         reasonably sized because the current Business of the






Jeffrey M. Cross
March 8, 2002
Page 5

         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 profitable operations.

                  (b) Having acknowledged the foregoing, Cross covenants that
         without limitation as to time, (i) he will not directly or indirectly
         disclose or use or otherwise exploit for his own benefit, or the
         benefit of any other Person (as defined in subparagraph (d)(iv) of this
         paragraph 11), any Confidential Information, and (ii) he will not
         disparage or comment negatively about any of the Res-Care Companies, or
         their respective officers, directors, employees, policies or practices,
         and he 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) Having acknowledged the statements in paragraph 11(a)
         hereof, Cross covenants and agrees with the Res-Care Companies that he
         will not, directly or indirectly, from April 1, 2002 through September
         30, 2003, directly or indirectly (i) offer employment to, hire,
         solicit, divert or appropriate to himself or any other Person, any
         business or services (similar in nature to the Business) of any person
         who was an employee or an agent of any of the Res-Care Companies at any
         time during the last twelve (12) months of Cross' employment under the
         Employment Agreement; 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 the time, directly or indirectly, engaged in the Business
         of the Res-Care Companies within the Territory. Cross further agrees
         that during such period, he will not undertake any planning for or
         organization of any business activity that would be competitive with
         the Business.

                  (d) For purposes of this letter agreement:

                           (i) The "Territory" shall mean the forty-eight (48)
                  contiguous states of the United States, the United States
                  Virgin Islands, Puerto Rico and all of the Provinces of
                  Canada.

                           (ii) "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 has been 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 of the foregoing, so long as such information
                  is not generally known or ascertainable by proper means and is



Jeffrey M. Cross
March 8, 2002
Page 6

                  treated by the Res-Care Companies as proprietary and
                  confidential, Confidential Information 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 which
                                    operations any of the Res-Care Companies
                                    provides management services;

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

                           (4)      records, 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.

                           (iii) The "Business" of the Res-Care Companies shall
                  mean the business of providing youth treatment or services,
                  services to persons with mental retardation and other
                  developmental disabilities, including but not limited to
                  persons who have been dually diagnosed, services to persons
                  with acquired brain injuries, training services,






Jeffrey M. Cross
March 8, 2002
Page 7

                  or providing management and/or consulting services to third
                  parties relating to the foregoing.

                           (iv) 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) Cross acknowledges that his breach of any covenant
         contained in this paragraph 11 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, Cross 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 permanent injunctions to prevent and/or halt a breach
         or threatened breach by Cross of any covenant contained in this
         paragraph 11. If any provision of this paragraph 11 is invalid in part
         or in whole, it shall be deemed to have 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.
         The parties further agree to execute all documents necessary to
         evidence such amendment.

                  (f) If Cross, in the future, seeks or is offered employment by
         any other Person, he shall provide a copy of this paragraph 11 to the
         prospective employer prior to accepting employment with that
         prospective employer.

         12. The Company, for itself and all of the other Res-Care Companies,
and for their successors, affiliates, employees, officers, directors and
assigns, hereby fully and completely release, acquit and forever discharge
Cross, Cross' heirs, successors, assigns, and legal representatives
(collectively, the "Cross Indemnitees"), from all claims, liabilities, demands
and causes of action which they may have or claim to have against the Cross
Indemnitees, known or unknown; however, this release does not waive any claims
based upon fraud, gross misrepresentation or illegal conduct and does not waive
any rights or claims which may arise after the date that this letter agreement
is signed by the parties and does not release Cross' obligations under this
letter agreement, the Substitute Note or the Substitute Loan Agreement or affect
the Company's rights under such documents.

         13. Cross, for himself and his heirs, successors, assigns, and legal
representatives, hereby fully and completely releases, acquits and forever
discharges the Company and all of the other Res-Care Companies, as well as the
employees, officers and directors of any of them (collectively, the "Company
Parties") from all claims, liabilities, demands and causes of action which Cross
may have or claim to have against the Company Parties. This includes but is not
limited to a release of any rights or claims that Cross may have under the Age
Discrimination in Employment Act, which






Jeffrey M. Cross
March 8, 2002
Page 8

prohibits age discrimination in employment; Title VII of the Civil Rights Act of
1964, which prohibits discrimination in employment based on race, color,
national origin, religion or sex; the Equal Pay Act, which prohibits paying
males and females unequal pay for equal work; the Americans with Disabilities
Act, and any other federal, state or local laws or regulations. This also
includes a release by Cross of any contract, tort or wrongful discharge claims.
This release covers claims that are both known and unknown. This release does
not waive any rights or claims which might arise after the date that this letter
agreement is signed by the parties and does not release the obligations of the
Company under this letter agreement, the Substitute Note or the Substitute Loan
Agreement, or affect Cross' rights under such documents, as modified herein.
This letter agreement also does not waive any rights or claims, if any, that
Cross may have to Cross' vested stock options (other than the options which have
not vested as of March 31, 2002), which options shall be governed by, and
exercisable for a limited period of time after March 31, 2002 in accordance
with, the terms of the Stock Plan and any Award Agreement (as defined in the
Stock Plan) applicable thereto, or any rights or claims, if any, that Cross may
have to 401k plan or pension benefits under the Company's retirement plans. This
letter agreement does not waive the right to file a charge with or participate
in any investigation conducted by the Equal Employment Opportunity Commission
(the "EEOC") but Cross agrees that he does waive his right, if any, to any
monetary recovery if the EEOC pursues any claim on his behalf.

         14. Cross agrees never to make any claim or institute any suit,
complaint, proceeding, grievance or action of any sort in any court,
administrative agency or tribunal arising from his employment with the Company
or any other occurrence prior to his signing this letter agreement. Cross hereby
waives any right to recover any relief as a result of any claims or proceedings
made on his behalf.

         15. Cross acknowledges that he has been given a period of at least
twenty-one (21) days to review and consider this letter agreement before signing
it. Cross further acknowledges that he had the opportunity to use as much of the
twenty-one (21) day period as he wished prior to signing.

         16. Cross acknowledges that he has been advised by the Company that
this letter agreement is a binding legal document. Cross acknowledges that the
Company advised him to consult with an attorney, which he has done, before
signing this letter agreement.

         17. Cross understands that he may revoke this letter agreement within
seven (7) days after he signed it (the "Revocation Period") and that this letter
agreement is not effective until this revocation period has passed. To revoke
this letter agreement, Cross must deliver a written notice of revocation to
Ronald G. Geary, Chairman, President and Chief Executive Officer, Res-Care, Inc.
at 10140 Linn Station Road, Louisville, Kentucky 40223, by no later than the
close of business on the seventh day after he signed this letter agreement.
Cross understands that if he revokes this letter agreement, it shall not be
effective or enforceable.



Jeffrey M. Cross
March 8, 2002
Page 9

         18. The parties agree that this letter agreement, together with the
Substitute Note and the Substitute Loan Agreement, set forth the entire
agreement between Cross and the Company. Cross acknowledges that the Company has
not made any promises to him other than in this letter agreement, and that no
amendment may be made to this letter agreement unless in writing and signed by
Cross and the Company. Cross acknowledges that he has not been coerced or
intimidated or threatened in any way and that he signs this letter agreement
knowingly and voluntarily.

         19. The invalidity or unenforceability of any particular provision of
this letter agreement shall not affect the other provisions hereof and this
letter agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.

         20. This letter agreement is executed and delivered in, and shall be
governed by, enforced and interpreted in accordance with the laws of, the
Commonwealth of Kentucky. The parties hereto agree that the federal or state
courts located in Kentucky shall have the exclusive jurisdiction with regard to
any litigation relating to this letter agreement and that venue shall be proper
only in Jefferson County, Kentucky, the location of the principal office of the
Company and current residence of Cross.

         If the foregoing accurately reflects your understanding of the
agreement of the parties, please sign both originals of this letter agreement
and return an original to the undersigned.

                                        Sincerely,




                                        Ronald G. Geary
                                        Chairman, President and Chief Executive
                                        Officer





I ACKNOWLEDGE AND REPRESENT TO THE COMPANY THAT I HAVE CAREFULLY READ THIS
LETTER AGREEMENT. I UNDERSTAND IT AND HAVE NO QUESTIONS ABOUT WHAT IT MEANS. I
HAVE NOT BEEN FORCED OR INTIMIDATED IN ANY WAY TO SIGN IT, AND I AM KNOWINGLY
AND VOLUNTARILY ENTERING INTO IT.




Jeffrey M. Cross
March 8, 2002
Page 10



I ACKNOWLEDGE THAT I HAVE CONSULTED WITH AN ATTORNEY BEFORE SIGNING THIS
AGREEMENT.





                                -----------------------------------------------
                                Jeffrey M. Cross

                                Dated:
                                      -----------------------------------------

EX-10.2

                                                                    Exhibit 10.2
                              EMPLOYMENT AGREEMENT
                              --------------------


         THIS EMPLOYMENT AGREEMENT ("Employment Agreement") is dated this 13th
day of January, 2002, between RES-CARE, INC., a Kentucky corporation (the
"Company"), and WILLIAM J BALLARD (the "Employee").

         RECITALS:

         WHEREAS, the Company desires to reorganize its Division for Youth
Services with the result that such Division will include the Company's wholly
owned subsidiary Youthtrack, Inc. and the Company's Alternative Youth Services
Operations and the Company will create a new Division for Training Services that
will include the Company's Job Corps Operations and other training services
operations;

         WHEREAS, the Employee has extensive experience in the management of
operations providing youth services and treatment, both adjudicated and
nonadjudicated;

         WHEREAS, the Company desires to offer to Employee the opportunity to
serve as the President of the newly reorganized Division for Youth Services and
the Employee desires to accept such position; and

         WHEREAS, the Company and the Employee desire to execute this Employment
Agreement to set forth the terms and conditions of Employee's employment by the
Company and agreeing to be bound by the terms hereof.

         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 commencing effective January 14, 2002 (the
"Commencement Date"), and ending on December 31, 2004, subject to earlier
termination only in accordance with the express provisions of this Employment
Agreement ("Initial Term"). At the option of the Company and with the consent of
the Employee, this Employment Agreement may be extended for successive periods
of one (1) year each (the "Additional Term(s)") on the same terms and
conditions. The Company's option to extend this Employment Agreement for any
Additional Term shall be exercisable by written notice to Employee no later than
sixty (60) days prior to the end of the Initial Term or any then effective
Additional Term. The Initial Term and any effective Additional Terms shall be
collectively referred to as the "Term."

         2. DUTIES.



                  (a) EMPLOYMENT AS PRESIDENT OF DIVISION FOR YOUTH SERVICES.
         During the Term, the Employee shall serve as the President of the
         Division of Youth Services of the Company. The Employee shall, subject
         to the supervision and control of the Chairman, President and Chief
         Executive Officer of the Company ("Chairman") and the Board of
         Directors of the Company (the "Board"), perform such duties and
         exercise such powers over and with regard to the management of the
         Company's Division for Youth Services as may be prescribed from time to
         time by the Chairman, including, without limitation, serving as a
         member of the ResCare Resource Center Leadership Team and serving as an
         officer or director of one or more subsidiaries or affiliates of the
         Company, if elected to such positions, without any further salary or
         other compensation. As reorganized, the Company's Division for Youth
         Services will include the Company's wholly owned subsidiary Youthtrack,
         Inc. and the Company's Alternative Youth Services Operations.

                  (b) TIME AND EFFORT. The Employee shall devote his best
         efforts and all of his business time, energies and talents exclusively
         to the business of the Company and to no other business during the Term
         of this Employment Agreement; provided, however, that subject to the
         restrictions in Section 7 hereof, the Employee may (i) invest his
         personal assets in such form or manner as will not require his services
         in the operation of the affairs of the entities in which such
         investments are made; (ii) subject to satisfactory performance of the
         duties described in Section 2(a) hereof, devote such time as may be
         reasonably required for him to continue to maintain his current level
         of participation in various civic and charitable activities; and (iii)
         continue to serve as a director of Setech, Inc., and with the prior
         approval of the Chairman, may serve on one other outside board of
         directors. The Employee agrees that none of such activities will
         detract from his ability to perform his duties hereunder and none of
         the activities of any of such entities will involve the provision of
         services competitive with those offered by any of the Res-Care
         Companies (as defined in Section 7(a) hereof).

                  (c) EMPLOYEE CERTIFICATION OF ELIGIBILITY. Not less frequently
         than annually and upon the termination of the Employee's employment
         hereunder for any reason other than Employee's death, the Employee
         shall execute and deliver to the Chairman and/or any other authorized
         officer designated by the 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 the Company. 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 paying agencies, Company policies on training, Drug and
         Alcohol-Free Program, Prohibition of Harassment, Affirmative Action
         Equal Employment Opportunity and Violence in the Workplace. This
         statement shall state that the Employee is not aware of any such
         violation by other employees, independent contractors, vendors, or
         other individuals performing services for the Company and its
         subsidiaries that they did not report as appropriate.


                                       2


         3.       COMPENSATION AND BENEFITS.

                  (a) BASE SALARY. The Company shall pay to the Employee during
         the Term an annual salary (the "Base Salary"), which initially shall be
         $200,000. The Base Salary shall be due and payable in substantially
         equal bi-weekly installments or in such other installments as may be
         necessary to comport with the Company's normal pay periods for all
         employees.

                  Provided that this Employment Agreement or Employee's
         employment hereunder shall not have been terminated for any reason, the
         Base Salary shall be increased, effective as of the first day of each
         January, commencing January 1, 2003, by the greater of (x) five percent
         (5%) or (y) the percentage by which the Consumer Price Index for all
         Urban Consumers (CPI-U), All-Items, 1982-1984=100, as published by the
         Bureau of Labor Statistics (the "CPI"), established for the month of
         December immediately preceding the date on which the adjustment is to
         be made exceeds the CPI published for the month of December of the
         immediately preceding year. If the Bureau of Labor Statistics suspends
         or terminates its publication of the CPI, the parties agree that a
         reasonably comparable price index shall be substituted for the CPI.

                  (b) INCENTIVE PROGRAM. During the Term, the Employee shall be
         eligible for incentive compensation in accordance with a written
         incentive program mutually established by the Chairman and the Employee
         on an annual basis (the "Incentive Program"). The Incentive Program
         shall provide that sixty-five percent (65%) of the maximum incentive
         that may be earned by the Employee shall be based on goals mutually
         established by the Chairman and the Employee relating to the
         performance (financial, compliance and otherwise) of the Division for
         Youth Services and thirty-five percent (35%) of the maximum incentive
         that may be earned by the Employee shall be based on the financial
         performance of the Company and its subsidiaries as a whole. All
         incentive payments under the Incentive Program shall be determined
         annually, and shall be calculated by reference to the incentive
         percentage earned by the Employee multiplied by the Base Salary
         actually paid to the Employee for the calendar year for which the
         incentive is determined. The maximum percentage of the Employee's Base
         Salary that the Employee may earn under the Incentive Program shall be
         forty percent (40%) of the Base Salary actually paid to the Employee
         for the calendar year for which the incentive is determined. Any annual
         incentive earned by the Employee for any calendar year shall be paid by
         the Company to the Employee not later than sixty (60) days after the
         end of such calendar year. Any amounts earned by the Employee under the
         Incentive Program shall be hereinafter referred to as the "Performance
         Incentive."

                  (c) 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 vacation, sick and other time
         off policies, retirement and profit sharing plans, health insurance,
         etc.) provided by the Company under which the Employee is eligible in
         accordance with the terms of such plans and programs. The Company
         reserves the right to amend, modify or terminate in their entirety any
         of such programs and plans. The




                                       3


         Company shall reimburse the Employee for the amount paid by him for
         health insurance premiums for Cobra coverage under his former
         employer's health insurance plan for the period from the Commencement
         Date and the date Employee is eligible for coverage under the Company's
         health insurance plan. The Employee shall submit requests for such
         reimbursement monthly.

                  (d) STOCK OPTION GRANT. As an inducement for the execution of
         this Employment Agreement by the Employee, on the Commencement Date,
         the Employee shall be granted options to purchase 50,000 shares of
         Company common stock. Such stock options shall be granted pursuant to
         and, to the extent not expressly inconsistent herewith, governed by the
         Company stock option plan that is applicable to its managerial
         employees (the "Stock Plan"). Twenty-five percent (25%) of such stock
         options shall vest and be exercisable on the Commencement Date.
         Provided the Employee shall continue to be employed hereunder,
         twenty-five percent (25%) of such stock options shall vest and be
         exercisable on December 31, 2002, December 31, 2003 and December 31,
         2004 (with such number of shares to be adjusted in accordance with the
         terms of the Stock Plan for stock splits, stock dividends,
         recapitalizations and the like). Any stock options that shall not be
         vested at the effective date of termination of the Employee's
         employment hereunder shall expire and any vested options shall expire
         in accordance with the terms of the Stock Plan. Such options shall have
         an exercise price based upon the closing sale price of Company common
         stock as reported on the Nasdaq National Market on the Commencement
         Date (or if the Commencement Date is not a trading date for the Company
         common stock, on the immediately preceding trading date).

                  (e) OUT-OF-POCKET EXPENSES. The Company shall promptly pay the
         ordinary, necessary and reasonable 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 him for such
         payment), consistent with the reimbursement policies adopted by the
         Company from time to time and subject to the prior written approval by
         the Chairman.

                  (f) OFFICE AT RESIDENCE. The Company acknowledges that certain
         of the services of Employee that do not require meetings at offices of
         the Company or travel may be rendered by Employee from an office
         located at his residence (the "Home Office"). At the request of the
         Employee, the Company will furnish to Employee for his use at the Home
         Office during the Term a personal computer and printer and reimburse
         Employee for the reasonable cost of the installation of the same, and
         reimburse Employee for the monthly cost of a dedicated telephone line
         to such Home Office. All of the assets so furnished to Employee shall
         remain the Company's property. The Company shall not be required to
         furnish to Employee an administrative assistant at such Home Office,
         but shall provide Employee the assistance of an administrative
         assistant from a pool of administrative assistants and shall provide
         the use of an office when the Employee is at the ResCare Resource
         Center. Employee's travel schedule shall be established in the
         discretion of the Chairman.


                                       4


                  (g) WITHHOLDING OF TAXES; INCOME TAX TREATMENT. If, upon the
         payment of any compensation or benefit to the Employee under this
         Employment Agreement (including, without limitation, in connection with
         the exercise of any option and the reduction and forgiveness of any
         portion of the Loan), the Company determines in its discretion that it
         is required to withhold or provide for the payment in any manner of
         taxes, including but not limited to, federal income or social security
         taxes, state income taxes or 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 withholding
                  requirement.

         The Employee agrees that he will treat all of the amounts payable
         pursuant to this Employment Agreement 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 his 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 in
         paragraph (f) of this Section 4)) that the Employee is permanently
         disabled, and (ii) the Employee's absence from his 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 the Employee 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 state
         and/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 immediately terminate the
         Employee's employment hereunder for Cause by delivering to the Employee
         a Notice of Termination so indicating. 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,
         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.




                                       5


                  (d) WITHOUT CAUSE. The Company shall have the right to
         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 termination
         at least thirty (30) days following delivery of such notice.

                  (e) VOLUNTARY TERMINATION. By not less than thirty (30) days
         prior written notice to the Chairman, Employee may voluntarily
         terminate his 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 a Notice of
         Termination to the Employee. For purposes of this Employment Agreement,
         a "Notice of Termination" shall mean a written notice which shall
         indicate the specific termination provision in this Employment
         Agreement relied upon and in the case of any termination for Cause
         shall set forth in reasonable detail the facts and circumstances
         claimed to provide a 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 his death, the date of his death; (ii) if
         the Employee's employment is terminated on account of disability
         pursuant to Section 4(b) above, thirty (30) days after Notice of
         Termination is given (provided that the Employee shall not, during such
         30-day period, have returned to the performance of his 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 the Notice of Termination,
         (v) if the Employee's employment is terminated voluntarily pursuant to
         Section 4(e) above, the date specified in the written notice delivered
         by the Employee to the Company as provided in Section 4(e) above, 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 of the
         then effective Term.

         5.       COMPENSATION UPON TERMINATION OR DURING DISABILITY.

                  (a) DEATH. If the Employee's employment is terminated by
         reason of his death during the Term, the Employee shall continue to
         receive installments of his then current Base Salary until the date of
         his death, shall receive any earned but unpaid Performance Incentive
         for any calendar year ending prior to the date of his death.

                  (b) DISABILITY. If the Employee's employment is terminated by
         reason of his disability during the Term, the Employee shall continue
         to receive installments of his then current Base Salary while actively
         at work and until the earlier of (i) the date of termination in
         accordance with Section 4(b) of this Employment Agreement or (ii) the
         date that short or long-term disability payments to the Employee
         commence under any plan or program then provided and funded by the
         Company. If the Employee's



                                       6


         installments of Base Salary cease by reason of clause (ii) of the
         preceding sentence but the benefits payable under any such disability
         plan or program do not provide 100% replacement of the Employee's
         installments of Base Salary during such period, the Employee shall be
         paid at regular payroll intervals until the provisions of clause (i) of
         the preceding sentence becomes effective, an amount equal to the
         difference between the periodic installments of his then current Base
         Salary that would have otherwise been payable and the disability
         benefit paid from such disability plan or program. In the event of any
         such termination, the Employee shall also receive any earned but unpaid
         Performance Incentive for any calendar year prior to the Date of
         Termination. Upon termination due to death prior to a termination as
         specified in the preceding provisions of this paragraph (b), the
         payment provisions of this paragraph (b) shall no longer apply and
         Section 5(a) above shall apply.

                  (c) CAUSE. If the Employee's employment is terminated for
         Cause, the Employee shall continue to receive installments of his then
         current Base Salary only through the Date of Termination and the
         Employee shall not be entitled to receive any Performance Incentive
         (other than any earned but unpaid Performance Incentive for any prior
         calendar year), and Employee shall not be eligible for any severance
         payment of any nature.

                  (d) WITHOUT CAUSE. If the Employee's employment is terminated
         without Cause, the Employee shall continue to receive installments of
         his then current Base Salary until the Date of Termination and for one
         (1) year thereafter and shall also be entitled to receive any earned
         but unpaid Performance Incentive for any calendar year ending prior to
         the Date of Termination.

                  (e) EXPIRATION OF TERM. If the Employee's employment shall be
         terminated by reason of expiration of the Term, the Employee shall
         continue to receive installments of his then current Base Salary until
         the Date of Termination and shall also be entitled to receive any
         earned but unpaid Performance Incentive for any calendar year ending
         prior to the Date of Termination.

                  (f) VOLUNTARY TERMINATION. If the Employee's employment shall
         be terminated pursuant to Section 4(e) hereof, the Employee shall
         continue to receive installments of his then current Base Salary until
         the Date of Termination and the Employee shall not be entitled to
         receive any Performance Incentive (other than any earned but unpaid
         Performance Incentive for any calendar year ending prior to the Date of
         Termination), and Employee shall not be entitled to any severance
         payment of any nature.

                  (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, the Company
         shall have no further obligations to the Employee under this Employment
         Agreement other than the provision of any employee benefit plan
         required to be continued under applicable law or by its terms.



                                       7


         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 this Employment
Agreement pursuant to Section 1 hereof), Employee shall promptly (a) comply with
his 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 of the property described in Section 3(f)
hereof and any Confidential Information (as defined in Section 7(d)(iii) hereof)
and whether 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 of any other information relating
to the Company, its subsidiaries or affiliates or to the Business (as defined in
Section 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 the Company.

         7.       RESTRICTIVE COVENANTS.

                  (a) ACKNOWLEDGMENTS. Employee acknowledges that (i) his
         services hereunder are of a special, unique and extraordinary character
         and that his position with the Company places him in a position of
         confidence and trust with the operations of the Company, its
         subsidiaries and affiliates (collectively, the "Res-Care Companies")
         and allows him access to Confidential Information, (ii) the Company has
         provided Employee with a unique opportunity as the Company's President
         of the Division for Youth Services, (iii) the nature and periods of the
         restrictions imposed by the covenants contained in this Section 7 are
         fair, reasonable and necessary to protect and preserve for the Company
         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) the Res-Care
         Companies conduct and are aggressively pursuing the conduct of their
         business actively in and throughout the entire Territory (as defined in
         paragraph (d)(ii) of this Section 7), and (vi) the Territory is
         reasonably 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 profitable operations.

                  (b) CONFIDENTIALITY AND NON-DISPARAGEMENT COVENANTS. Having
         acknowledged the foregoing, Employee covenants that without limitation
         as to time, (i) commencing on the Commencement Date, he will not
         directly or indirectly disclose or use or otherwise exploit for his own
         benefit, or the benefit of any other Person (as defined in paragraph
         (d)(v) of this Section 7), except as may be necessary in the
         performance of his duties hereunder, any Confidential Information, and
         (ii) commencing on the Date of Termination, he will not disparage or
         comment negatively about any of the Res-Care Companies, or their
         respective officers, directors, employees, policies or practices, and
         he will not discourage anyone from doing business with any of the
         Res-Care Companies and




                                       8


         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 he will not, directly or indirectly, from the Commencement Date
         until the Date of Termination, and for a period of eighteen (18) months
         thereafter, directly or indirectly (i) offer employment to, hire,
         solicit, divert or appropriate to himself or any other Person, any
         business or services (similar in nature to the Business) of any person
         who was an 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 the time, 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, he will
         not undertake any planning for or organization of any business activity
         that would be competitive with the Business.

                  (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, the
                  termination 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 voluntary
                  termination of Employee's employment hereunder.

                           (ii) The "Territory" shall mean the forty-eight (48)
                  contiguous states of the United States, the United States
                  Virgin Islands, Puerto Rico and all of the Provinces of
                  Canada.

                           (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 has been 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 of the foregoing, so long as such information
                  is not generally known or ascertainable by proper means and is
                  treated by the Res-Care Companies as proprietary and
                  confidential, Confidential Information 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;




                                       9


                                    (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 which operations
                                             any of the Res-Care Companies
                                             provides management services;

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

                                    (4)      records, 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 youth treatment or services,
                  services to persons with mental retardation and other
                  developmental disabilities, including but not limited to
                  persons who have been dually diagnosed, services to persons
                  with acquired brain injuries, training services, or providing
                  management and/or consulting services to third parties
                  relating to the 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 his 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 permanent
         injunctions to prevent and/or halt






                                       10


         a breach or threatened breach by Employee of any covenant contained in
         this Section 7. If any provision of this Section 7 is invalid in part
         or in whole, it shall be deemed to have 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.
         The parties 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 employment by any other Person, he shall provide a
         copy of this Section 7 to the prospective employer prior to 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 them and supersedes all prior and contemporaneous
agreements, representations, and understandings of the parties, including but
not limited to the Prior Agreement. No supplement, modification, or amendment of
this Employment Agreement shall be binding unless executed in writing by all
parties hereto (other than by reason of the prospective modification of the
Incentive Program by the Company or as provided in the next to last sentence of
Section 7(e) hereof). No waiver of any of the provisions of this Employment
Agreement will be deemed, or will constitute, a waiver of any other provision,
whether or not similar, nor will any waiver constitute a continuing waiver. No
waiver will be binding unless executed in writing 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, successors and assigns;
provided, however, that this Employment Agreement is intended to be personal to
the Employee and the rights and obligations of the Employee hereunder may not be
assigned or transferred by him.

         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 in the United States mail postage prepaid by registered or certified
mail, return receipt requested, to the appropriate party or parties at the
following addresses (or at such other address as shall hereafter be designated
by any party to the other parties by notice given in accordance with this
Section):

                  To the Company:
                  --------------

                  ResCare, Inc.
                  10140 Linn Station Road
                  Louisville, Kentucky 40223
                  Attn:    Ronald G. Geary,
                           Chairman, President and Chief Executive Officer





                                       11


                  To the Employee:
                  ---------------

                  William J Ballard
                  206 Concord Park West
                  Nashville, Tennessee 37205

         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 the same 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 and to execute and deliver
such additional instruments and documents and to take such additional actions as
may reasonably be required from time to time in order to effectuate the
transactions contemplated by this Employment 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 be construed 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 of Kentucky. The parties hereto
agree that the federal or state courts located in Kentucky shall have the
exclusive jurisdiction with regard to any litigation relating to this Employment
Agreement and that venue shall be proper only 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 this Employment Agreement shall be
ignored.

         16. NO CONFLICT; INDEMNIFICATION. Employee represents, warrants and
covenants to the Company that the execution of this Employment Agreement and the
performance by Employee of services for the Company as contemplated herein will
not violate any agreement or covenant to which the Employee is a party or is
bound, including but not limited to his any agreement with Children's
Comprehensive Services, Inc. The representations, warranties and covenants in
this Section 16 are a material condition to the execution of this Employment
Agreement and the obligations of the Company herein. During the Term, Employee
will perform his services hereunder in a manner that does not violate any such
agreement, including any confidentiality covenants contained therein. Employee
agrees to indemnify and hold harmless the Res-Care Companies from any breach of
the representations, warranties and covenants in this Section 16.



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         17. SURVIVAL. The provisions of Sections 5, 6, 7 and 16 hereof shall
survive the termination, for any reason, of this Employment Agreement, in
accordance with their terms.

         IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on the day and year set forth above.

                           RES-CARE, INC.


                           By:
                              ------------------------------------------------
                                    Ronald G. Geary
                                    Chairman, President and Chief Executive
                                    Officer



                           ---------------------------------------------------
                           William J Ballard











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