EX-2 7 jd10-8_lerer.txt 2.6 Exhibit 2.6 SUMMARY OF KEY TERMS FOR PROPOSED EMPLOYMENT AGREEMENT BETWEEN RENE LERER (THE "EXECUTIVE") AND MAGELLAN HEALTH SERVICES, INC. (THE "COMPANY") 1. Term: Three years from the date of the Company's emergence from bankruptcy (the "Operative Date"), with automatic renewals for successive one year terms subject to 6 month written notice of non-renewal by either party to the other. 2. Position; Duties: President and Chief Operating Officer and member ---------------- of the board of directors of the Company (as constituted following the Operative Date) (the "Board"). (1) Executive shall (i) report, as President and Chief Operating Officer, directly to the Chief Executive Officer and (ii) have such duties and responsibilities typical of, and consistent with, the positions of President and Chief Operating Officer in a public company the size and nature of the Company. 3. Other Activities: Entitled to serve as a member of the board of ---------------- directors of a reasonable number companies in which Internet Healthcare Group has invested. Entitled to (i) serve on the boards of directors of companies on which Executive serves as of the Operative Date, (ii) with the prior approval of the Board, serve on the boards of directors of a reasonable number of other companies, (iii) serve on civic or charitable boards and (iv) manage his personal and family investments, to the extent such activities do not materially interfere with the performance of his duties for the Company. 4. Place of Performance Avon, Connecticut shall be location of the -------------------- principal executive offices of the Company, at which shall be based the Executive, each of the executives reporting directly to the Chief Executive Officer and certain other employees of the Company (the "Offices"). --------------------------- (1) Note, by-laws must be conformed to permit Executive to serve as President and not as Chief Executive Officer. 1 5. Base Salary: $600,000 per year, with annual review for ----------- increase. 6. Annual Bonus: Entitled to an annual target bonus opportunity of ------------ 75% of Base Salary ("Target Bonus"). Commencing with the calendar year 2004, the applicable performance targets shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with the Executive (the "Performance Targets"); provided that (i) the Performance Targets established with respect to the Target Bonus shall not be less favorable than the corporate performance targets applicable to other bonus eligible executives of the Company and (ii) the other terms and conditions applicable to the Target Bonus shall not be less favorable than those established for other bonus eligible executives of the Company. The Executive shall earn the applicable portion of the Target Bonus based on the achievement of the Performance Targets, as follows: % Achievement of % of Performance Targets Target Bonus Earned ------------------- ------------------- 80% 0% 100% 100% 2 The portion of Target Bonus earned by the Executive shall be determined on a straight line interpolated basis for Performance Target achievement between the percentages set forth above. Payments of any annual bonus shall be made no later than the March 31 of the year following the year in which such bonus is earned (e.g., by March 31, 2005 for the bonus earned for 2004). Notwithstanding the foregoing, the bonus, if any, earned for 2004 shall be increased by the percentage equal to the number of days from the Operative Date to December 31, 2003 divided by 365. 7. Sign-on Arrangements: -------------------- a. Stock The Company shall grant to the Executive on the Operative Date the number of shares of common stock (the "Signing Bonus Shares") that have an aggregate value of $600,000 based upon the weighted average per share cost of the shares purchased by Onex and its Affiliates on the Operative Date (the "Average Price Per Share").(2) The Signing Bonus Shares shall be fully vested on the Operative Date, but may not be transferred until the earlier of (i) the first anniversary of the Operative Date and (ii) the Executive's termination of employment. The Company shall make a cash payment to the Executive on the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon reasonable and appropriate assumptions to be set forth in the definitive agreement), the Executive is left with an amount equal to the aggregate federal, state and local taxes on the Signing Bonus Shares. b. INTENTIONALLY LEFT BLANK c. Stock Options Options covering 377,090 shares (3) with a ten-year term will be granted to the Executive on the Operative Date as follows: A tranche of options for 107,740 shares (4) with an exercise price equal to the Average Price Per ---------------------------- (2) The Average Price Per Share will include all shares that are to be purchased by Onex or its Affiliates under the Plan of Reorganization determined as of the Operative Date, regardless of whether the purchase of such shares has closed. (3) Amount to equal 2.10% of common equity on a diluted basis (i.e., outstanding plus assumed issuance of 15% of common equity to management). Current assumption is 15,263,158 shares outstanding and 2,693,499 shares to management. (4) Amount to equal 0.60% of common equity on a diluted basis (See footnote 3, above). 3 Share shall become vested as to one third of the shares on each of the first three anniversaries of the Operative Date (each, a "Vesting Date"). Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 16% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (6) Another tranche of options for 161,610 shares (7) with an exercise price of $24 (8) shall become vested as to one third of the shares on each Vesting Date. Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 10% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (9) Shares acquired upon exercise of the options described in this paragraph shall not be transferable until the earlier of (i) the third anniversary of the Operative Date or (ii) Executive's termination of employment. Another tranche of options for 107,740 shares (10) with an exercise price equal to the Average Price Per Share shall become vested and exercisable as to one third of the shares on each Vesting Date. --------------------------------- (6) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options. (7) Amount to equal 0.90% of common equity on a diluted basis (See footnote 3, above). (8) Based on $240,000,000 pre-money equity valuation. Current assumption is 10,000,000 shares pre-money. (9) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options.. (10) Amount to equal 0.60% of common equity on a diluted basis (See footnote 3, above). 4 d. Miscellaneous The Company shall register the shares acquired by the Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. 8. Other Long-Term --------------- Incentives: Entitled to participate in the long-term incentive ---------- programs of the Company including those contained in the Management Incentive Plan, on a basis that are at least as favorable as awards to other similarly-situated, senior-level executives of the Company, it being understood that the Board may modify or terminate any long-term incentive plan established by the Company; provided that no such amendment or termination may adversely affect any outstanding long-term incentive awards of Executive. 9. Employee Benefits: Entitled to participate in the employee welfare ----------------- benefit programs of the Company on a basis at least as favorable as other similarly-situated, senior-level executives of the Company; provided that (i) subject to the obligations set forth in clause (ii) below, the Board may modify or terminate any employee welfare benefit program established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination and (ii) in any event, the Company shall provide at its cost life insurance benefits to the Executive of no less than three times the Executive's Base Salary, the Executive shall be permitted to purchase at his own expense additional life insurance coverage in an amount no less than three times his Base Salary, and the Company shall provide long-term disability coverage equal to no less than 60% of the Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. 5 10. Deferred Compensation Plan: Executive shall be entitled to -------------------------- participate in any qualified or non-qualified deferred compensation plan of the Company on no less favorable a basis (including, without limitation, the right to receive Company contributions) than is made available to other senior executives of the Company (excluding the Chief Executive Officer), it being understood that the Board may modify or terminate any deferred compensation plan established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination. 11. Perquisites: Entitled to perquisites at least as ----------- favorable as those provided other similarly-situated, senior-level executives of the Company, it being understood that this provision of Executive's Agreement shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax and financial allowance of no less than $15,000 per annum, a personal membership in a country club and health club in the vicinity of the Offices, a car allowance of no less than $1,000 per month, first- or business class air travel (including for Executive's spouse when appropriate for business purposes) and an annual physical. The Company agrees to take reasonable actions to minimize any tax liability of Executive related to the perquisites made available hereunder. 12. Business Expense ---------------- Reimbursement: Entitled to reimbursement for all ------------- appropriate business expenses; also entitled to reimbursement of the reasonable costs associated with the negotiation and preparation of his employment and other arrangements with the Company to the extent not exceeding $50,000. 13. Termination of Employment: In the event the Executive's employment ------------------------- terminates, the Executive (or in the event of his death, his estate or other legal representative) shall be entitled to the following: a. Without Cause or for Good Reason: (i) Base Salary through the date of termination; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; (iii) 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; 6 (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years after termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this three-year post-termination exercise period; (v) continued participation for the Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for two years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on the Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of the Executive's date of termination; (vi) at his election, continuation of his life insurance and/or long-term disability coverage by the Company for up to two years following termination (provided the Executive reimburses the Company for such premiums); (vii) any amounts earned, accrued or owing to the Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate; and (ix) non-renewal of employment term at the election of the Company shall be treated as a termination without Cause occurring immediately prior to the expiration of the contract term. b. Death or Disability: (i) Base Salary through the end of the month in which termination occurs; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; 7 (iii) in the case of a termination due to Executive's Disability, a lump-sum cash payment equal to two times the sum of (a) Base Salary plus (b) Target Bonus; provided that this payment shall not be made if Executive is eligible at the time of the termination of his employment for long-term disability benefits under the Company's long-term disability program; (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years following termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any amounts earned, accrued or owing to the Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. c. For Cause or Voluntary: (i) Base Salary through the date of termination; (ii) upon a termination of employment for Cause, all stock options shall terminate immediately upon the date of termination and, upon a voluntarily termination of employment by the Executive (other than for Good Reason or Disability), all vested stock options shall remain exercisable until the later of (A) 90 days following the date of termination or (B) the 45th day following the first day on or after the date of termination on which the Executive is not subject to a trading "blackout" imposed by the Company and may sell the shares acquired upon option exercise without violation of Rule 10b-5 under the Securities Exchange Act of 1934; (iii) any amounts earned, accrued or owing to the Executive but not yet paid; and 8 (iv) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. d. Termination Without Cause or for Good Reason in Connection With or Within Three Years After, a Change in Control: Unless such termination is for Good Reason pursuant to clause (viii) of the definition thereof, all the payments and benefits provided , in the case of a Termination without Cause or for Good Reason in Section 13.a above, with the following exceptions: (i) clause (iii) of Section 13.a shall be 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (ii) clause (iv) of Section 13.a shall apply to stock options that vested upon the Change in Control as provided in Section 14 below only if such options will receive more favorable treatment under clause (iv) of Section 13.a; (iii) clause (v) and (vi) of Section 13.a shall be modified to replace "two years" with "three years" in each place it appears; and (iv) clause (ix) of Section 13.a shall be replaced with the following: "non-renewal of employment term at the election of the Company during the Change in Control protection period shall be treated as a termination without Cause pursuant to this Section 13.d immediately prior to the expiration of the employment term." e. No Mitigation; No Offset: In the event of any termination of employment (including non-renewal of the term by the Company), the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due him under the agreement on account of any remuneration attributable to any subsequent employer or claims asserted by the Company or any affiliate, but the Company shall not be obligated to provide medical, dental or hospitalization insurance following the Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 9 f. Non-Competition; Non-Solicitation: For any period during which Base Salary is continued (or in respect of which it is paid in a lump sum), or for one year after the Executive's voluntary termination of employment without Good Reason or his termination for Cause. (12) 14. Change in Control Protections: a. Treatment of Equity: Full vesting immediately prior to a Change in Control of all outstanding equity (including, but not limited to, stock options), with all vested stock options to remain exercisable for the remainder of their terms; provided that options held by Executive shall be cashed out in connection with a Change in Control if (i) required by the terms of the Management Incentive Plan and (ii) all other options issued by the Company are cashed out in connection with such Change in Control. Options that are not exercisable because the applicable performance hurdle has not been satisfied shall become exercisable immediately prior to the Change in Control. b. 280G Gross-Up: Full excise tax gross-up. 15. Dispute Settlements: Arbitration in accordance with the ------------------- Commercial Arbitration Rules of the American Arbitration Association. The venue for any such proceedings shall be in Hartford, Connecticut. 16. Applicable Law: Connecticut. -------------- 17. Indemnification: Appropriate indemnification provisions, --------------- including, but not limited to, indemnification pursuant to the Company's corporate governance documents or, if greater, applicable law. Insurance pursuant to a Company-purchased directors' and officers' liability insurance and umbrella insurance in an amount no less than $50 million. 18. Definitions: See Attachment A. ----------- ---------------------------- (12) Definition of competitive activity to be narrowly defined and shall not prohibit association with a company if an immaterial portion of its revenues is attributable to operations directly competitive with the Company (provided the Executive is not employed within those directly competitive operations). 10 ATTACHMENT A DEFINITIONS ----------- "CAUSE" shall mean: (i) the Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by the Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by the Executive; (iii) (A) material breach of the non-competition/non-solicitation covenants set forth in the employment agreement or (B) a willful and material breach of the confidentiality provisions set forth in the employment agreement; (iv) a willful and material violation by the Executive of the Company's written policies and procedures that are legal and ethical, have been made available to the Executive and relate to the performance of his duties for the Company (provided that the Company has not failed to terminate other employees for comparable violations), or willful gross misconduct by the Executive relating to the performance of his duties for the Company; or (v) willful failure to comply with direction of the Chief Executive Officer or the Board or any duly authorized committee thereof (including any written policies or procedures promulgated by those bodies), provided that (A) such directions (or policies or procedures) of the Board or such committee are actions of the Board or a duly authorized committee thereof within the meaning of Section 141 of the General Corporation Law of the State of Delaware (or any comparable provision of applicable law), (B) the existence of such directions (or policies or procedures) is known by Executive or such directions (or policies or procedures) have been communicated to Executive, (C) such directions (or policies or procedures) are consistent with the duties and role of a President, Chief Operating Officer or a director of a company the nature and size of the Company and (D) such directions (or policies or procedures) do not require actions that are illegal or unethical. For purposes of clauses (iii) and (iv), no act or failure to act shall be deemed to be "willful" if Executive reasonably believed in good faith that such act or failure to act was in, or not opposed to, the best interests of the Company. Anything notwithstanding to the 11 contrary, the Executive's employment shall not be terminated for "Cause," within the meaning of clauses (ii) through (v) above, unless the Executive has been given written notice by the Board stating the basis for such termination and, in the case of clauses (iii) through (v) above, he is also given fifteen (15) days to cure the neglect or conduct that is the basis of any such claim and, if he fails to cure such conduct, or such conduct cannot be cured (and also for any purported termination for Cause under clause (ii) above), the Executive has an opportunity to be heard before the Board and after such hearing, the Board gives the Executive written notice confirming that in the judgment of a majority of the members of the Board that includes at least two directors who are independent for purposes of the listing requirements of the securities exchange on which the Company's securities are listed "Cause" for terminating the Executive's employment on the basis set forth in the original notice exists. The Executive's communication to the Board of his disagreement with decisions made by the Board and the reasons for that disagreement shall not constitute "Cause" provided that he does not engage in conduct constituting Cause as set forth in clause (v) above. Any termination for Cause shall be subject to de novo review in accordance with the arbitration provisions of the employment agreement. If an arbitrator or arbitrators determine that the basis for Cause did not exist, then the Executive's termination of employment shall be treated as a termination without Cause. "CHANGE IN CONTROL" shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes after the Operative Date a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of 30% or more of the Voting Stock of the Company; provided that this clause (i) shall not be operative during the period the Minimum Hold Condition is satisfied (it being understood that a Change in Control will occur at the time the Minimum Hold Condition is not satisfied (the "Requisite Time") if (A) a person becomes the beneficial owner of 30% or more of the Voting Stock during the period in which the Minimum Hold Condition is satisfied and (B) that person is the beneficial owner of 30% or more of the Voting Stock at the Requisite Time); (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the Operative Date and the Minimum Hold Condition is not satisfied at the time; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors, or who became a director at a time the Minimum Hold Condition was satisfied, shall be considered to be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of the Company's assets; 12 (iv) all or substantially all of the assets of the Company are disposed of pursuant to a merger, consolidation, share exchange, reorganization or other transaction unless the shareholders of the Company immediately prior to such merger, consolidation, share exchange, reorganization or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock or other ownership interests of the Company, a majority of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company; or (v) the Company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company who were not Affiliates of the Company prior to the relevant transaction in exchange for stock of such other company). For purposes of the Change in Control definition, "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified and "Voting Stock" shall mean any capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation and reference to a percentage of Voting Stock shall refer to such percentage of the votes of such Voting Stock. "DISABILITY" shall mean the Executive's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities for a period of 180 consecutive days as determined by a medical doctor selected by the Company and the Executive. If the parties cannot agree on a medical doctor, each party shall select a medical doctor and the two doctors shall select a third who shall be the approved medical doctor for this purpose. "GOOD REASON" shall mean termination by the Executive of his employment after written notice to the Company following the occurrence of any of the following events without his consent: (i) a reduction in the Executive's then current Base Salary or the Target Bonus opportunity (i.e., 100% of Base Salary); 13 (ii) a material diminution in the Executive's positions, duties or authorities (including any removal of the Executive from any position set forth in Section 2 above, or any failure to elect or re-elect the Executive as a member of the Board) or interference with the Executive's carrying out his duties or exercising his authority so that he is unable to carry out his duties or exercise his authority as President, Chief Operating Officer or director; (iii) the assignment to the Executive of duties which are materially inconsistent with his duties or which materially impair the Executive's ability to function as President or as Chief Operating Officer of the Company or as a director; (iv) a change in the reporting structure so that the Executive reports to someone other than the Chief Executive Officer; (v) requiring the Executive to relocate, or the relocation of the Offices, to a location that is more than 50 miles from Avon, Connecticut; (vi) a breach by the Company of any material provision of the Executive's employment agreement; (vii) the failure of the Company to obtain the assumption in writing of its obligation to perform this agreement by any successor to all or substantially all of the assets of the Company within 15 days after a merger, consolidation, sale or similar transaction; or (viii) for any reason by the Executive during the 30-day period following the six-month anniversary of a Change in Control (whether or not the Executive consented to such Change in Control), provided that the Executive's termination of employment pursuant to this clause (viii) shall be treated as termination for Good Reason pursuant to Section 13.a above; provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after the Executive gives the Company notice thereof. 14