-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NP8cqQl1gLITBNMxpgE3AhIIny8rwanVozWPIPHcH03gQeHKAd1oCslJXZ2V5Wuy ib1K09vEjInh4RnPWn68IQ== 0000909518-04-000013.txt : 20040107 0000909518-04-000013.hdr.sgml : 20040107 20040107124921 ACCESSION NUMBER: 0000909518-04-000013 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040105 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGELLAN HEALTH SERVICES INC CENTRAL INDEX KEY: 0000019411 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 581076937 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06639 FILM NUMBER: 04512480 BUSINESS ADDRESS: STREET 1: 6950 COLUMBIA GATEWAY STREET 2: STE 400 CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4109531000 FORMER COMPANY: FORMER CONFORMED NAME: CHARTER MEDICAL CORP DATE OF NAME CHANGE: 19920703 8-K/A 1 mv1-6_8ka.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT - January 5, 2004 (Date of Earliest Event Reported) MAGELLAN HEALTH SERVICES, INC. ------------------------------ (Exact name of registrant as specified in its charter) Commission File No. 1-6639 Delaware 58-1076937 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 6950 Columbia Gateway Drive Suite 400 Columbia, Maryland 21046 -------------------------------------- ----- (Address of principal Zip Code executive offices) Registrant's telephone number, including area code: (410) 953-1000 Not Applicable (Former Name or Former Address, if Changed Since Last Report) ================================================================================ ITEM 5. OTHER MATERIAL EVENTS. On January 5, 2004, Magellan Health Services, Inc. filed a Current Report on Form 8-K announcing the consummation of its Chapter 11 plan. Certain of the exhibits to the Form 8-K were incorrect in not reflecting the final forms of the documents as signed. Accordingly, to remedy this clerical error, filed with this Amendment No. 1 are the corrected exhibits. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements Not applicable. (b) Pro Forma Financial Information Not applicable (c) Exhibits. Exhibit No. Description ----------- ----------- 2.4 Stock Purchase Agreement between Magellan Health Services, Inc. and Magellan Holdings LP, dated as of December 18, 2003 2.6 New Aetna Note issued by Magellan Health Services, Inc. to Aetna, Inc. with a final maturity date of December 31, 2005, dated as of January 5, 2004 2.11 Employment Agreement for Steven J. Shulman, dated as of January 5, 2004 2.12 Employment Agreement for Dr. Rene Lerer, dated as of January 5, 2004 2.13 Employment Agreement for Mark S. Demilio, dated as of January 5, 2004 2 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 hereunto duly authorized. MAGELLAN HEALTH SERVICES, INC. By: /s/ Mark S. Demilio ------------------------------------------ Name: Mark S. Demilio Title: Executive Vice President and Chief Financial Officer Dated: January 7, 2004 3 EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- 2.4 Stock Purchase Agreement between Magellan Health Services, Inc. and Magellan Holdings LP, dated as of December 18, 2003 2.6 New Aetna Note issued by Magellan Health Services, Inc. to Aetna, Inc. with a final maturity date of December 31, 2005, dated as of January 5, 2004 2.11 Employment Agreement for Steven J. Shulman, dated as of January 5, 2004 2.12 Employment Agreement for Dr. Rene Lerer, dated as of January 5, 2004 2.13 Employment Agreement for Mark S. Demilio, dated as of January 5, 2004 4 EX-2 3 mv1-6revisedex2_4.txt 2.4 Exhibit 2.4 Magellan Health Services, Inc. MULTIPLE AND VARIABLE VOTE RESTRICTED CONVERTIBLE COMMON STOCK, $.01 Par Value per Share ---------------------------------- STOCK PURCHASE AGREEMENT ---------------------------------- Dated as of December 18, 2003 TABLE OF CONTENTS
Page 1. AUTHORIZATION OF STOCK.............................................................................1 2. SALE AND PURCHASE OF COMMON STOCK; CLOSING.........................................................1 3. CONDITIONS TO CLOSING..............................................................................2 3.1. REPRESENTATIONS AND WARRANTIES...........................................................3 3.2. PERFORMANCE; NO DEFAULT..................................................................3 3.3. COMPLIANCE CERTIFICATES..................................................................3 3.4. CONFIRMATION ORDER; PLAN OF REORGANIZATION...............................................3 3.5. AMENDED CERTIFICATE OF INCORPORATION.....................................................3 3.6. AMENDED BYLAWS...........................................................................3 3.7. REGISTRATION RIGHTS AGREEMENT............................................................3 3.8. INTENTIONALLY OMITTED....................................................................3 3.9. NO ACTIONS PENDING.......................................................................4 3.10. CONSENTS, APPROVALS, ETC.................................................................4 3.11. HART-SCOTT-RODINO........................................................................4 3.12. PROCEEDINGS AND DOCUMENTS................................................................4 3.13. NO MATERIAL ADVERSE CHANGE...............................................................4 3.14. EBITDA AND REVENUE TARGETS...............................................................4 3.15. MINIMUM CASH AVAILABILITY................................................................4 3.16. LIMITATION ON FEES.......................................................................5 3.17. SENIOR CREDIT FACILITY...................................................................5 3.18. NEW AETNA NOTE AND AETNA PURCHASE OPTION.................................................5 3.19. PAYMENT OF EXPENSES AND COMMITMENT FEE...................................................5 4. REPRESENTATIONS AND WARRANTIES.....................................................................5 4.1. ORGANIZATION OF THE COMPANY..............................................................5 4.2. CAPITALIZATION OF THE COMPANY............................................................6 4.3. ORGANIZATION AND CAPITALIZATION OF THE SUBSIDIARIES......................................6 4.4. AUTHORITY; NO CONFLICT...................................................................7 4.5. NO MATERIAL ADVERSE CHANGE...............................................................8 4.6. COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS..........................8 4.7. LEGAL PROCEEDINGS........................................................................8 4.8. BROKERS OR FINDERS.......................................................................9 4.9. DISCLOSURE9 4.10. SEC REPORTS; FINANCIAL STATEMENTS........................................................9 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..................................................11 5.1. ORGANIZATION OF SUCH PURCHASER..........................................................11 5.2. AUTHORITY; NO CONFLICT..................................................................11 i 5.3. SHARES NOT REGISTERED...................................................................11 5.4. ECONOMIC RISK...........................................................................11 5.5. ACQUISITION FOR OWN ACCOUNT.............................................................12 5.6. ABILITY TO PROTECT OWN INTERESTS........................................................12 5.7. ACCREDITED INVESTOR.....................................................................12 5.8. ACCESS TO INFORMATION...................................................................12 5.9. BROKERS OR FINDERS......................................................................12 5.10. LEGAL PROCEEDINGS.......................................................................12 6. REGISTRATION, TRANSFER AND SUBSTITUTION OF CERTIFICATES FOR COMMON STOCK..........................12 6.1. STOCK REGISTER; OWNERSHIP OF STOCK......................................................12 6.2. REPLACEMENT OF CERTIFICATES.............................................................13 6.3. RESTRICTIVE LEGENDS.....................................................................13 6.4. NOTICE OF PROPOSED TRANSFER; OPINIONS OF COUNSEL........................................14 6.5. TERMINATION OF RESTRICTIONS.............................................................14 7. COVENANTS PRIOR TO CLOSING DATE...................................................................14 7.1. ACCESS AND INVESTIGATION................................................................14 7.2. OPERATION OF BUSINESS...................................................................14 7.3. NEGATIVE COVENANTS......................................................................15 7.4. CONSENTS................................................................................16 7.5. REGULATORY APPROVAL.....................................................................16 7.6. REASONABLE BEST EFFORTS.................................................................17 8. TERMINATION.......................................................................................18 8.1. TERMINATION EVENTS......................................................................18 8.2. EFFECT OF TERMINATION EVENTS............................................................18 9. DEFINITIONS.......................................................................................19 9.1. CERTAIN DEFINED TERMS...................................................................19 9.2. ACCOUNTING TERMS........................................................................23 9.3. OTHER PROVISIONS REGARDING DEFINITIONS..................................................24 10. EXPENSES..........................................................................................24 11. COMMITMENT FEE....................................................................................24 12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES........................................................24 13. INDEMNIFICATION...................................................................................25 13.1. INDEMNIFICATION BY THE COMPANY..........................................................25 13.2. LIMITATIONS ON INDEMNIFICATION FOR BREACHES OF REPRESENTATIONS AND WARRANTIES...........25 14. AMENDMENTS AND WAIVERS............................................................................26 15. NOTICES, ETC......................................................................................26 ii 16. PRESS RELEASES....................................................................................26 17. CONFIDENTIAL INFORMATION..........................................................................26 18. MISCELLANEOUS.....................................................................................27 18.1. SUCCESSORS AND ASSIGNS..................................................................27 18.2. ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS......................................27 18.3. PAYMENTS DUE ON NON-BUSINESS DAYS.......................................................28 18.4. SEVERABILITY............................................................................28 18.5. ENTIRE AGREEMENT AND MODIFICATION.......................................................28 18.6. CONSTRUCTION............................................................................28 18.7. COUNTERPARTS............................................................................28 18.8. GOVERNING LAW...........................................................................28 18.9. SUBMISSION TO JURISDICTION..............................................................28 18.10. WAIVER OF TRIAL BY JURY.................................................................29 18.11. SUPPLEMENTATION AND AMENDMENT OF SCHEDULES..............................................29
EXHIBITS Exhibit A - Revenue and EBITDA Projections iii SCHEDULES Schedule 1 Purchasers Schedule 4.3 Organization and Capitalization of the Subsidiaries Schedule 4.4 Authority; No Conflict Schedule 4.6 Compliance with Legal Requirements Schedule 4.7 Legal Proceedings Schedule 4.10 SEC Reports Schedule 5.2 Authority; No Conflict Schedule 7.3(b) Negative Covenants; Employment Agreements iv THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of December 18, 2003, by and among MAGELLAN HEALTH SERVICES, INC., a Delaware corporation (the "Company"), and the entities set forth on Schedule 1 attached hereto (individually, a "Purchaser" and collectively, the "Purchasers"). RECITALS The Company desires to sell and the Purchasers desire to purchase shares of Multiple and Variable Vote Restricted Convertible Common Stock of the Company, par value $.01 per share ("MVS Securities"), for the consideration and on the terms set forth in this Agreement. Certain capitalized terms used in this Agreement are defined in Section 9. Capitalized terms used but not defined herein have the meanings set forth in the Plan. References to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement and references to a "Section" are, unless otherwise specified, to one of the Sections of this Agreement. AGREEMENT The parties, intending to be legally bound, agree as follows: 1. AUTHORIZATION OF STOCK. The Company will authorize the issue and sale of (i) 6,052,632 shares of MVS Securities (the "Definitive Shares"), (ii) up to 6,052,632 shares of MVS Securities to the extent the Equity Offering is not fully subscribed pursuant to Section 9.6 of the Plan (the "Offering Backstop Shares") and (iii) up to 5,111,111 shares of MVS Securities to the extent necessary to fully fund the Partial Cash-Out Election (up to a maximum of $50 million) pursuant to the Plan (the "Partial Cash-Out Shares" and together with the Definitive Shares and the Offering Backstop Shares, the "Shares"). The total number of Offering Backstop Shares and Partial Cash-Out Shares to be authorized by the Company shall be the total number of Offering Backstop Shares and Partial Cash-Out Shares, respectively, which the Purchasers are required to purchase, which shall be determined as provided in the Plan. 2. SALE AND PURCHASE OF COMMON STOCK; CLOSING. (a) The Company agrees to issue and sell to the Purchasers and, subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase from the Company, the respective percentages of the Shares specified opposite such Purchaser's name in Schedule 1 (such percentage a Purchaser's "Share Percentage"). The total numbers of Shares to be purchased by the Purchasers shall be determined as provided in the Plan. The purchase price for the Shares shall be (i) $12.39 per Share or $75,000,000 in the aggregate for the Definitive Shares, (ii) $12.39 per Share or up to $75,000,000 in the aggregate for the Offering Backstop Shares and (iii) $9.78 per Share or up to $50,000,000 in the aggregate for the Partial Cash-Out Shares. (b) The sale of the Definitive Shares and the Offering Backstop Shares to be purchased by the Purchasers shall take place at a closing (the "Closing") at the offices of Weil, Gotshal & Manges, LLP, 767 Fifth Avenue, New York, NY 10153 at 10:00 a.m., New York City time, on the Effective Date, 1 provided that the conditions set forth in Section 3 have been satisfied or waived by a Majority in Interest. At the Closing, the Company will deliver to each Purchaser the Shares to be purchased by such Purchaser in the form of a single certificate (or such greater number of certificates representing such Shares as such Purchaser may request), each dated the date of the Closing and registered in such Purchaser's name (or in the name of such Purchaser's nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price for such Shares. If at the Closing, the Company shall fail to tender to any Purchaser the Shares to be purchased by such Purchaser, as provided above in this Section 2, or any of the conditions specified in Section 3 shall not have been fulfilled to the satisfaction of such Purchaser, such Purchaser shall, at its election and upon written notice to the Company, be relieved of all further obligations under this Agreement. (c) Sales of Partial Cash-Out Shares to be purchased by the Purchasers shall take place at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153 at 10:00 a.m., New York City time, on the later of (i) the Closing Date and (ii) one Business Day prior to the date on which the proceeds of such sales of Partial Cash-Out Shares are required for the making of payments pursuant to the Partial Cash-Out Election (a "Partial Cash-Out Share Closing"). At any Partial Cash-Out Share Closing, each Purchaser shall purchase a number of Partial Cash-Out Shares equal to such Purchaser's Share Percentage of the total number of Partial Cash-Out Shares to be sold at such Partial Cash-Out Share Closing, rounded up to the next whole share; provided, that any fractional portion of a Partial Cash-Out Share which is issued to a Purchaser due to such rounding, and the purchase price therefor, shall be credited toward the number of Partial Cash-Out Shares to be purchased, and the purchase price to be paid therefor, by such Purchaser at the next Partial Cash-Out Share Closing, if any; and provided further, that the aggregate purchase price for Partial Cash-Out Shares purchased by the Purchasers after the Closing Date shall not exceed $5,000,000, in accordance with the Plan. The Company shall give written notice to each Purchaser at least two (2) Business Days prior to the date of a Partial Cash-Out Share Closing, which notice shall state the date on which such Partial Cash-Out Share Closing shall occur, the total number of Partial Cash-Out Shares to be purchased by all Purchasers at such Partial Cash-Out Share Closing and the number of Partial Cash-Out Shares to be purchased by, and the purchase price to be paid by, such Purchaser at such Partial Cash-Out Share Closing. At each Partial Cash-Out Share Closing, the Company will deliver to each Purchaser the Partial Cash-Out Shares to be purchased by such Purchaser in the form of a single certificate (or such greater number of certificates representing such Partial Cash-Out Shares as such Purchaser may request), each dated the date of such Partial Cash-Out Share Closing and registered in such Purchaser's name (or in the name of such Purchaser's nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price for such Partial Cash-Out Shares. If at such Partial Cash-Out Share Closing, the Company shall fail to tender to any Purchaser the Partial Cash-Out Shares to be purchased by such Purchaser, as provided above in this Section 2(c), such Purchaser shall, at its election and upon written notice to the Company, be relieved of all further obligations under this Agreement. 3. CONDITIONS TO CLOSING. Unless waived in writing by a Majority in Interest, the obligation of each Purchaser to purchase and pay for the Shares to be sold to such Purchaser at any Closing is subject to the 2 fulfillment to such Purchaser's satisfaction, prior to or concurrently with such Closing, of the following conditions: 3.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects when made and at the time of the Closing, except to the extent such representations and warranties are made as of a specific date, in which case such representations and warranties shall be true and correct as of such date, and except as affected by the consummation of such transactions. 3.2. PERFORMANCE; NO DEFAULT. The Company shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing. 3.3. COMPLIANCE CERTIFICATES. The Company shall have delivered to the Purchasers a Certificate executed by the Chief Executive Officer and Chief Financial Officer of the Company, dated the date of the Closing, certifying that the conditions specified in Sections 3.1 and 3.2 have been fulfilled. 3.4. CONFIRMATION ORDER; PLAN OF REORGANIZATION. The Confirmation Order shall be in form and substance reasonably satisfactory to the Purchasers, shall have been entered by the Bankruptcy Court and shall be in full force and effect. All conditions to the consummation of the Plan shall have been satisfied or waived by the Purchasers. The Plan as confirmed by the Bankruptcy Court shall be in substantially the form filed with the Bankruptcy Court on or about August 18, 2003, as modified by amendments filed with the Bankruptcy Court on or about September 25, 2003, October 8, 2003 and October 9, 2003. 3.5. AMENDED CERTIFICATE OF INCORPORATION. The Amended Certificate of Incorporation, which shall be substantially in the form set forth in the Plan Supplement, shall have been duly filed under the laws of the State of Delaware, and the Amended Certificate of Incorporation shall be in full force and effect, and shall not have been otherwise amended or modified. 3.6. AMENDED BYLAWS. The Amended Bylaws, which shall be substantially in the form set forth in the Plan Supplement, shall have been duly adopted by the Company under the laws of the State of Delaware, and the Amended Bylaws shall be in full force and effect, and shall not have been otherwise amended or modified. 3.7. REGISTRATION RIGHTS AGREEMENT. Each of the Purchasers shall have received a fully executed counterpart of the Registration Rights Agreement, substantially in the form set forth in the Plan Supplement, such agreement shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived. 3.8. INTENTIONALLY OMITTED. 3 3.9. NO ACTIONS PENDING. There shall be no claim, suit, action, or proceeding by any Governmental Body or any other Person or any other legal or administrative proceeding pending which would restrict the Contemplated Transactions. 3.10. CONSENTS, APPROVALS, ETC. All necessary governmental, regulatory and third party Consents in connection with the Contemplated Transactions, including, without limitation, all insurance-related state regulatory approvals, shall have been obtained and remain in full force and effect 3.11. HART-SCOTT-RODINO. All applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act (the "HSR Act") shall have expired or been terminated early. 3.12. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the Contemplated Transactions and all documents and instruments incident to such transactions shall be satisfactory to each Purchaser and such Purchaser's special counsel, and each Purchaser and such Purchaser's special counsel shall have received all such counterpart originals or certified or other copies of such documents as it or they may reasonably request. 3.13. NO MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change in the business, condition (financial or otherwise), operations, performance or properties of the Company and its direct or indirect subsidiaries, taken as whole, since September 30, 2002; provided, however, that (a) any change reflected in the Company's 10-Q filings for the fiscal quarters ended December 31, 2002 or March 31, 2003 or any other information disclosed to the Purchasers (or known to the Purchasers) on July 14, 2003, and (b) the filing of the Chapter 11 Cases or the consummation of the Plan shall not be deemed a material adverse change. 3.14. EBITDA AND REVENUE TARGETS. As of the end of the month prior to the Effective Date, the Company shall have realized revenues and EBITDA for the period from January 1, 2003 through the end of such month that are no less than the projected revenues and EBITDA set forth in the Company's business plan for fiscal year 2003, in the form attached hereto as Exhibit A, and the Company shall have delivered to the Purchasers on the Effective Date, a statement, which shall be executed by the Chief Executive Officer and Chief Financial Officer of the Company, which shall certify that the Company's actual revenues and EBITDA for the measurement period met or exceeded such projected revenues and EBITDA. 3.15. MINIMUM CASH AVAILABILITY. The Company shall have cash in hand or borrowing availability of at least $20 million as of the Effective Date, after giving effect to $47.5 million of the proceeds of the sale of the Shares but taking into account distributions under the Plan (other than the cash payments used to reduce the New Notes or any payment of cash in lieu of issuing New Common Stock on account of an exercise of the Partial Cash-Out Election by a holder of an Allowed Senior Subordinated Note Claim or an Allowed Other General Unsecured Claim), and the Company shall have delivered to the Purchasers on the Business Day immediately preceding the Effective Date a certificate, executed by the Chief Executive Officer and the Chief Financial 4 Officer of the Company, confirming that the Company projects that it will have cash (or cash equivalents) and/or availability under a revolving or similar credit facility during the period commencing on the Effective Date and continuing for 18 months thereafter in an amount of no less than $20 million. 3.16. LIMITATION ON FEES. Total fees and expenses incurred from and after May 1, 2003, of the legal advisors to the Company, the Official Committee and the existing senior secured lenders' agent related to the Chapter 11 Cases, Healthcare Partners, Inc., Houlihan Lokey, Alvarez & Marsal, Gleacher Partners, LLC and Kekst and Company (such fees and expenses shall specifically exclude the success fee payable to Houlihan Lokey, and any fees payable in respect of any exit financing) shall not exceed $25 million, and the Purchasers shall have received evidence of the foregoing that is reasonably satisfactory to them. 3.17. SENIOR CREDIT FACILITY. Either the New Facilities shall have closed on substantially the terms set forth in the Plan and shall be in full force and effect or the Senior Secured Credit Agreement shall be paid in full in cash with the proceeds of not less than $100,000,000 in loans and $75,000,000 in replacement/backstop letters of credit from an exit facility, the terms of which are as or more favorable to the Company as the New Facilities on the terms set forth in the Plan. 3.18. NEW AETNA NOTE AND AETNA PURCHASE OPTION. The New Aetna Note and the Aetna Amended MSA shall have been executed substantially in the form set forth in the Plan Supplement and shall be in full force and effect. 3.19. PAYMENT OF EXPENSES AND COMMITMENT FEE. The Company shall have paid on or before the Closing the Purchasers' expenses incurred through the Closing Date, in accordance with Section 10 hereof and the remainder of the Commitment Fee, if any, in accordance with Section 11 hereof. The Purchasers may not rely on the failure of any condition set forth in this Section 3 if such failure was caused by the Purchasers' failure to comply with this Agreement. 4. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants that: 4.1. ORGANIZATION OF THE COMPANY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, except where the failure to do so would not be reasonably likely to have a Material Adverse Effect. The Company is duly qualified or registered to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification or registration, except where the failure to do so would not be reasonably likely to have a Material Adverse Effect. 5 4.2. CAPITALIZATION OF THE COMPANY. As of the Effective Date, the authorized capital stock of the Company will consist entirely of 100,000,000 shares of Ordinary Common Stock, 40,000,000 shares of MVS Securities and 10,000,000 shares of Preferred Stock, par value $.01 per share, of which approximately 26,656,989 shares of Ordinary Common Stock, up to approximately 8,448,275 shares of MVS Securities and no shares of Preferred Stock will be issued and outstanding. Except as provided in the Plan, there are no options, warrants, convertible securities or rights that are or may become exercisable or exchangeable for, convertible into, or that otherwise give the holder any right to acquire shares of capital stock of the Company or to receive payments based in whole or in part upon the value of the capital stock of the Company, whether pursuant to a phantom stock plan or otherwise. There are no Contracts relating to the issuance, sale or transfer of any equity securities or other securities of the Company other than as contemplated by the Plan. There are no outstanding Contracts of the Company to repurchase, redeem or otherwise acquire any of its equity securities or other securities other than as contemplated by the Plan. As of the Effective Date, all of the outstanding equity securities of the Company will have been duly authorized and validly issued and are fully paid and nonassessable. As of the Effective Date, none of the outstanding equity securities or other securities of the Company will have been issued in violation of any Legal Requirement. 4.3. ORGANIZATION AND CAPITALIZATION OF THE SUBSIDIARIES. (a) Exhibit 21 of the Company's Transition Report on Form10-K for the transition period from October 1, 2002 to December 31, 2002 sets forth the name, jurisdiction of incorporation or organization (as applicable) and capitalization of each Subsidiary of the Company. Except for the Company's Subsidiaries, and as otherwise described in the Disclosure Statement or the Filed SEC Reports or on Schedule 4.3, the Company does not have any direct or indirect equity interest constituting at least 10% of the voting securities of any corporation, partnership, limited liability company or other Person or business. Except as described in the Disclosure Statement or the Filed SEC Reports, no Magellan Company has any Contract to directly or indirectly acquire any equity or other ownership interest in any Person or business. (b) Each Subsidiary is a corporation, partnership or limited liability company (as applicable), duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization (as applicable), with full corporate, partnership or limited liability company (as applicable) power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, except where the failure to do so would not be reasonably likely to have a Material Adverse Effect. Each Subsidiary is duly qualified or registered to do business as a foreign corporation, partnership, limited liability company (as applicable) and is in good standing under the laws of each jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification or registration, except where the failure to do so would not be reasonably likely to have a Material Adverse Effect. (c) All of the outstanding capital stock or other equity securities of each Subsidiary directly or indirectly owned by any Magellan Company have been duly authorized and validly issued and are fully paid and nonassessable and the applicable Magellan Company has good and marketable title to such capital stock or other equity securities, free and clear of all Encumbrances, except as set forth on Schedule 4.3. Except as set forth in the 6 Disclosure Statement or the Filed SEC Reports or as contemplated by the Plan, there are, and will be on the Closing Date, no options, warrants, convertible securities or rights that are or may become exercisable or exchangeable for, convertible into, or that otherwise give the holder any right to acquire shares of capital stock of any Subsidiary or to receive payments based in whole or in part upon the value of the capital stock of any Magellan Company, whether pursuant to a phantom stock plan or otherwise. There are no Contracts relating to the issuance, sale or transfer of any equity securities or other securities of any Subsidiary. Except as contemplated by the Plan, there are, and will be on the Closing Date, no outstanding Contracts of any Magellan Company to repurchase, redeem or otherwise acquire any equity securities or other securities of any Subsidiary. 4.4. AUTHORITY; NO CONFLICT. (a) At the Closing, the execution, delivery and performance of this Agreement and the Contemplated Transactions will have been duly authorized by all necessary action on the part of the Company. This Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Company has the absolute and unrestricted right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder. (b) Except as set forth in Schedule 4.4 neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will (with or without notice or lapse of time): (i) contravene, conflict with, or result in a violation of (1) any provision of the Organizational Documents of the Magellan Companies, or (2) any resolution adopted by the board of directors (or similar governing body) of any Magellan Company; (ii) contravene, conflict with, or result in a violation of any Legal Requirement or any Order to which any Magellan Company, or any of the assets owned or used by any Magellan Company, may be subject; (iii) contravene, conflict with or result in a violation or breach of any provision of, or give any Person the right to declare a default under or terminate, any Contract; or (iv) result in the imposition or creation of any Encumbrance upon or with respect to any of the assets owned or used by any Magellan Company; except, in the case of clauses (ii), (iii) and (iv) above, where such occurrence would not be reasonably likely to have a Material Adverse Effect. Except for (i) the Confirmation Order, (ii) compliance with the HSR Act, (iii) where the failure to give any notice or obtain any Consent would not be reasonably likely to have a Material Adverse Effect and (iv) as set forth in Schedule 4.4, no Magellan Company is or will be required to give any notice to or obtain any Consent from any Person in connection with the execution and 7 delivery of this Agreement or the consummation or performance of the Contemplated Transactions. 4.5. NO MATERIAL ADVERSE CHANGE. Since September 30, 2002, there has not been any material adverse change in the business, condition (financial or otherwise), operations, performance or properties of the Magellan Companies, taken as whole, and no event has occurred or circumstance exists that may result in such a material adverse change; provided, however, that (a) any change reflected in the Company's 10-Q filings for the fiscal quarters ended December 31, 2002 or March 31, 2003 or any other information disclosed to the Purchasers (or known to the Purchasers) on or before July 14, 2003, and (b) the filing of the Chapter 11 Cases or the consummation of the Plan shall not be deemed a material adverse change. 4.6. COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. Except as set forth in the Filed SEC Reports, the Disclosure Statement or Schedule 4.6: (i) each Magellan Company is, and at all times since January 1, 1999 has been, in substantial compliance with each Legal Requirement that is or was applicable to it or to the conduct or operation of its business or the ownership, possession or use of any of its assets and each Governmental Authorization held by it, except where the failure to do so would not be reasonably likely to have a Material Adverse Effect; and (ii) no Magellan Company has received, at any time since January 1, 1999, any notice or other written communication from any Governmental Body or any other Person regarding (A) any actual, alleged, possible or potential violation of, or failure to comply with, any Legal Requirement or any Governmental Authorization, or (B) any actual, alleged, possible or potential obligation on the part of any Magellan Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature, other than as filed in the Chapter 11 Cases, which violation, failure to comply or obligation would be reasonably likely to have a Material Adverse Effect. 4.7. LEGAL PROCEEDINGS. (a) Except as set forth in the Filed SEC Reports, the Disclosure Statement or Schedule 4.7, there is no pending Proceeding, other than the Chapter 11 Cases: (i) that has been commenced by or against any Magellan Company or that otherwise relates to or may affect the business of, or any of the assets owned or used by, any Magellan Company; (ii) that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions; or 8 (iii) against any director or officer of any of the Magellan Companies pursuant to Section 8A or 20(b) of the Securities Act or Section 21(d) or 21C of the Exchange Act; in each of (i), (ii) or (iii), which, if adversely determined, would be reasonably likely to have a Material Adverse Effect. (b) The Proceedings set forth in the Filed SEC Reports, the Disclosure Statement or Schedule 4.7 will not have a Material Adverse Effect. 4.8. BROKERS OR FINDERS. Except as set forth in the Filed SEC Reports or the Disclosure Statement, neither any Magellan Company nor any of their respective agents has incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement or the Contemplated Transactions. 4.9. DISCLOSURE. All written information and other materials concerning the Magellan Companies and the Plan (the "Information") which has been, or is hereafter, prepared by, or on behalf of, the Company and delivered to any Purchaser, including, without limitation, the Disclosure Statement, is, or when delivered will be, when considered as a whole, complete and correct in all material respects and does not, or will not when delivered, contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which such statement has been made and (ii) to the extent that any such Information contains projections, such projections were prepared in good faith on the basis of (A) assumptions, methods and tests which were believed by the Company to be reasonable and (B) information believed by the Company to have been accurate based upon the information available to the Company, in each case, at the time such projections were furnished to such Purchaser. 4.10. SEC REPORTS; FINANCIAL STATEMENTS. (a) The Company has on a timely basis (taking into account extensions) filed all forms, reports and documents required to be filed by it with the SEC since September 30, 2000. Schedule 4.10 lists and the Company has made available to the Purchasers copies in the form filed with the SEC of all of the following, except to the extent available in full without redaction on the SEC's web site through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR") two days prior to the date of this Agreement: (i) the Company's Annual Reports on Form 10-K for each fiscal year of the Company beginning since September 30, 2000 and the Company's Transition Report on Form 10-K for the transition period from October 1, 2002 to December 31, 2002, (ii) its Quarterly Reports on Form 10-Q for each of the first three fiscal quarters in each of the fiscal years of the Company referred to in clause (i) above, (iii) all proxy statements relating to the Company's meetings of stockholders (whether annual or special) held, and all information statements relating to stockholder consents, since the beginning of the first fiscal year referred to in clause (i) above, (iv) its Current Reports on Form 8-K filed since the beginning of the first fiscal year referred to in clause (i) above, (v) all other forms, reports, registration statements and other documents (other than preliminary materials if the corresponding definitive materials have been provided to the Purchasers 9 pursuant to, or are available through EDGAR as contemplated by, this Section 4.10) filed by the Company with the SEC since the beginning of the first fiscal year referred to in clause (i) above (the forms, reports, registration statements and other documents referred to in clauses (i), (ii), (iii), (iv) and (v) above, whether or not available through EDGAR, are, collectively, the "SEC Reports" and, to the extent available in full without redaction on the SEC's web site through EDGAR two days prior to the date of this Agreement, are, collectively, the "Filed SEC Reports"), (vi) all certifications and statements required by (x) the SEC's Order dated June 27, 2002 pursuant to Section 21(a)(1) of the Exchange Act (File No. 4-460), (y) Rule 13a-14 or 15d-14 under the Exchange Act, or (z) 18 U.S.C. ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002) with respect to any report referred to in clause (i) or (ii) above (collectively, the "Certifications"), and (vii) all comment letters received by the Company from the Staff of the SEC since January 1, 2003 and all responses to such comment letters by or on behalf of the Company. The SEC Reports (x) were or will be prepared in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (y) did not at the time they were filed with the SEC, or will not at the time they are filed with the SEC, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The Certifications are each true and correct. No Subsidiary of the Company is or has been required to file any form, report, registration statement or other document with the SEC. The Magellan Companies maintain disclosure controls and procedures required by Rule 13a-15 or 15d-15 under the Exchange Act; such controls and procedures are effective to ensure that all material information concerning the Magellan Companies is made known on a timely basis to the individuals responsible for the preparation of the Company's filings with the SEC and other public disclosure documents. As used in this Section 4.10, the term "file" shall be broadly construed to include any manner in which a document or information is furnished, supplied or otherwise made available to the SEC (regardless of whether public or confidential). (b) The financial statements of the Company and its subsidiaries included in the SEC Reports (including the related notes) complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto (including, without limitation, Regulation S-X), have been prepared in accordance with GAAP (except, in the case of unaudited statements, to the extent permitted by Regulation S-X for Quarterly Reports on Form 10-Q) applied on a consistent basis during the periods and at the dates involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial condition of the Company and its subsidiaries at the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to notes and normal year-end audit adjustments that were not material in amount or effect). The Company has delivered to the Purchasers copies of the documentation creating or governing, all securitization transactions and "off-balance sheet arrangements" (as defined in Item 303(c) of Regulation S-K of the SEC) effected by the Company or its subsidiaries since September 30, 2000. No financial statements of any Person other than the Magellan Companies are required by GAAP to be included in the consolidated financial statements of the Company. 10 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser, severally and not jointly, hereby represents and warrants as follows: 5.1. ORGANIZATION OF SUCH PURCHASER. In the event such Purchaser is a corporation, partnership or limited liability company, such Purchaser is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization (as applicable), with full corporate, partnership or limited liability company (as applicable) power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use and to perform all its obligations under any Contract to which it is a party. 5.2. AUTHORITY; NO CONFLICT. (a) The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of such Purchaser. This Agreement constitutes the legal, valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms. Such Purchaser has the absolute and unrestricted right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder. (b) Except as set forth in Schedule 5.2, the execution and delivery of this Agreement will not, directly or indirectly (with or without notice or lapse of time): (i) contravene, conflict with, or result in a violation of (1) any provision of the Organizational Documents of such Purchaser, if applicable, or (2) any resolution adopted by the board of directors (or similar governing body) or the stockholders of such Purchaser; or (ii) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which such Purchaser, or any of the assets owned or used by such Purchaser, may be subject. Except as set forth in Schedule 5.2 and except for Consents which have been obtained and notices which have been given, such Purchaser is not and will not be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery by such Purchaser of this Agreement. 5.3. SHARES NOT REGISTERED. Such Purchaser understands that the Shares have not been registered under the Securities Act. Such Purchaser also understands that the Common Stock is being offered and sold pursuant to an exemption from registration contained in the Securities Act, based in part upon such Purchaser's representations contained in this Agreement and cannot be sold unless subsequently registered under the Securities Act or an exemption is available. 5.4. ECONOMIC RISK. Such Purchaser understands that this is a highly speculative investment with a substantial risk of loss of such Purchaser's entire investment. Such Purchaser is in a position to bear the 11 economic risk of such loss. Such Purchaser understands that it has no registration rights with respect to the Shares except as provided in the Registration Rights Agreement. Such Purchaser also understands that, even if available, such exemption may not allow it to transfer all or any portion of the Shares, if any, under the circumstances, in the amount or at the times it might propose. 5.5. ACQUISITION FOR OWN ACCOUNT. Such Purchaser is acquiring the Shares for its own account for investment and not with a present view toward distribution as such term is defined in Section 2(a)(11) of the Securities Act. 5.6. ABILITY TO PROTECT OWN INTERESTS. Such Purchaser represents that by reason of its business or financial experience, or the business and financial experience of its management, it has the capacity to protect its own interests in connection with the Contemplated Transactions. Such Purchaser was not formed for the specific purpose of consummating this transaction. 5.7. ACCREDITED INVESTOR. Such Purchaser represents that it is an "accredited investor" as that term is defined in Regulation D promulgated under the Securities Act. 5.8. ACCESS TO INFORMATION. Such Purchaser has been given access to all Company documents, records, and other information, has received physical delivery of all those which it has requested, and has had adequate opportunity to ask questions of, and receive answers from, the Company's officers, employees, agents, accountants, and representatives concerning the Company's business, operations, financial condition, assets, liabilities, and all other matters relevant to its investment in the Shares. 5.9. BROKERS OR FINDERS. Such Purchaser has not, and its agents have not, incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement, for which the Company may be liable. 5.10. LEGAL PROCEEDINGS. Except as filed in the Chapter 11 Cases, there is no pending Proceeding against such Purchaser that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the transactions contemplated by this Agreement, which, if adversely determined, would be reasonably likely to have a Material Adverse Effect on the ability of such Purchaser to consummate the transactions contemplated by this Agreement. 6. REGISTRATION, TRANSFER AND SUBSTITUTION OF CERTIFICATES FOR COMMON STOCK. 6.1. STOCK REGISTER; OWNERSHIP OF STOCK. (a) The Company will keep at its principal office, or will cause its registrar to keep at such registrar's principal office a register in which the Company will provide for the registration of the MVS Securities and the registration of transfers of the MVS Securities. The Company may treat the Person in whose name any of the Shares are registered on such register as the owner thereof and the Company shall not 12 be affected by any notice to the contrary. All references in this Agreement to a "holder" of any MVS Securities shall mean the Person in whose name such MVS Securities are at the time registered on such register. (b) Upon the surrender of any certificate for MVS Securities, properly endorsed, for registration of transfer or for conversion at the office of the Company or the Company's registrar maintained pursuant to subdivision (a) of this Section 6.1, the Company at its expense will (subject to compliance with Section 6.2, if applicable) execute and deliver to or upon the order of the holder thereof (i) a new certificate or certificates for the same aggregate number of shares of less the number of shares of MVS Securities being converted, if any, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, and/or (ii) a certificate or certificates for the number of shares of Ordinary Common Stock to be issued upon conversion of the MVS Securities so surrendered. 6.2. REPLACEMENT OF CERTIFICATES. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any certificate representing shares of MVS Securities or Ordinary Common Stock issued upon the conversion of shares of MVS Securities and, in the case of any such loss, theft or destruction of any certificate representing shares of MVS Securities or Ordinary Common Stock issued upon the conversion of shares of MVS Securities, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or, in the case of any such mutilation, upon surrender of such certificate representing shares of MVS Securities or Ordinary Common Stock issued upon the conversion of shares of MVS Securities for cancellation at the office of the Company or the Company's registrar maintained pursuant to subdivision (a) of Section 6.1, the Company at its expense will execute and deliver, in lieu thereof, a new certificate representing shares of MVS Securities or Ordinary Common Stock of like tenor. 6.3. RESTRICTIVE LEGENDS. Except as otherwise permitted by this Section 6, each certificate for MVS Securities (including each certificate for MVS Securities issued upon the transfer of any certificate for MVS Securities) shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares represented by this Certificate and any shares of Ordinary Common Stock issuable upon conversion of any such shares have not been registered under the Securities Act of 1933 and may not be transferred in the absence of such registration or an exemption therefrom under such Act." Except as otherwise permitted by this Section 6, each certificate for Ordinary Common Stock issued upon the conversion of any of the MVS Securities, and each certificate issued upon the transfer of any such Ordinary Common Stock, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933 and may not be transferred in the absence of such registration or an exemption therefrom under such Act." 13 6.4. NOTICE OF PROPOSED TRANSFER; OPINIONS OF COUNSEL. Prior to any transfer of any Restricted Securities which are not registered under an effective registration statement under the Securities Act, the holder thereof will give written notice to the Company of such holder's intention to effect such transfer and to comply in all other respects with this Section 6.4. Each such notice shall describe the manner and circumstances of the proposed transfer and shall be accompanied by an opinion of counsel for such holder reasonably satisfactory to the Company that the proposed transfer may be effected without registration of such shares of Restricted Securities under the Securities Act. Such holder shall thereupon be entitled to transfer such shares in accordance with the terms of the notice delivered by such holder to the Company. Each certificate representing such shares issued upon or in connection with such transfer shall bear the restrictive legends required by Section 6.3, unless the related restrictions on transfer shall have ceased and terminated as to such shares pursuant to Section 6.5. 6.5. TERMINATION OF RESTRICTIONS. The restrictions imposed by this Section 6 upon the transferability of Restricted Securities shall cease and terminate as to any particular Restricted Securities (a) when such securities shall have been effectively registered under the Securities Act, or (b) when, in the opinion of counsel for the holder thereof, reasonably satisfactory to the Company, such restrictions are no longer required in order to insure compliance with the Securities Act. Whenever such restrictions shall cease and terminate as to any Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense (other than applicable transfer taxes, if any), new certificates for such securities of like tenor not bearing the applicable legends required by Section 6.3. 7. COVENANTS PRIOR TO CLOSING DATE. 7.1. ACCESS AND INVESTIGATION. Between the date of this Agreement and the Closing Date, the Company will, and will cause each Magellan Company and their respective Representatives to, (a) afford the Purchasers and their Representatives reasonable access to each Magellan Company's properties, Contracts, books and records and other documents and data, (b) furnish the Purchasers and their Representatives with copies of all such Contracts, books and records, and other existing documents and data as the Purchasers or their Representatives may reasonably request, (c) furnish the Purchasers and/or their Representatives with such additional financial, operating and other data and information as any Purchaser or any of their Representatives may reasonably request and (d) make available to the Purchasers and their Representatives, upon reasonable advance notice and during normal business hours, the officers of each Magellan Company as the Purchasers and/or their Representatives may reasonably request; provided, that such availability shall not interfere with the normal operations of such Magellan Company. 7.2. OPERATION OF BUSINESS. Between the date of this Agreement and the Effective Date, the Company will, and will cause each Magellan Company to: (a) conduct the business of the Magellan Companies only in the Ordinary Course of Business and in compliance with all Legal Requirements; and 14 (b) use their commercially reasonable best efforts to preserve intact the Magellan Companies' business and the current business organization of the Magellan Companies, keep available the services of the current officers, employees and agents of the Magellan Companies, and maintain the relations and goodwill with suppliers, customers, landlords, creditors, employees, agents and others having business relationships with the Magellan Companies. 7.3. NEGATIVE COVENANTS. Except as otherwise expressly permitted by this Agreement or as contemplated by the Plan or the Confirmation Order, between the date of this Agreement and the Effective Date, the Company will not, and will cause each Magellan Company not to, without the prior consent of a Majority in Interest (which, in the case of paragraph (f) below, shall not be unreasonably withheld in connection with the settlement of claims related to the Chapter 11 Cases): (a) amend the Organizational Documents of any Magellan Company; (b) except in the Ordinary Course of Business (including pursuant to the Key Employee Retention Plan, the Short-Term Incentive Plan, merit-based salary increases effected as of November 15, 2003, and the adoption of the New Management Incentive Plan), and pursuant to the employment agreements set forth in Schedule 7.3(b), pay or increase any bonuses, salaries, or other compensation to any stockholder, director, officer, or employee or enter into any employment, severance or similar Contract with any director, officer or employee; (c) except in the Ordinary Course of Business, adopt, amend or increase the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement or other employee benefit plan for or with any employees of any Magellan Company; (d) except in the Ordinary Course of Business (including entering into Contracts with customers in the Ordinary Course of Business), enter into or terminate (i) any license, joint venture, credit, or similar agreement, or (ii) any Contract or transaction involving a total remaining commitment by or to any Magellan Company of at least $10,000,000; (e) sell (other than sales or other dispositions of equipment deemed surplus, obsolete or no longer necessary to the business of any Magellan Company), lease or otherwise dispose of any material asset or property of any Magellan Company or mortgage, pledge or impose any Encumbrance on any material asset or property of any Magellan Company; (f) cancel or waive any claims or rights with a value to any Magellan Company in excess of $5,000,000; (g) materially change the accounting, actuarial, reserving, underwriting or claims administration or servicing policies, practices or procedures, standards, methods, assumptions or principles of the Magellan Companies; (h) make any capital expenditure commitment other than capital expenditure commitments not in excess of $25,000,000 in the aggregate; 15 (i) pay, discharge or satisfy any Company Indebtedness other than the payment, discharge or satisfaction of such Company Indebtedness upon maturity or when otherwise due, or pursuant to the Plan, other than Company Indebtedness not in excess of $10,000,000 in the aggregate; (j) incur any Company Indebtedness in excess of $10,000,000 in the aggregate; (k) settle any litigation on a basis that provides for material liability to any Magellan Company after the Effective Date, that imposes any material restrictions on any Magellan Company after the Effective Date or that includes a finding or admission of any violation of any Legal Requirement or violation of the rights of any Person by any Magellan Company or that may have an effect on other claims that might be made against any Magellan Company; (l) organize any subsidiary (other than a wholly-owned subsidiary) or acquire any material interest in any Person or any material equity or ownership interest in any business; or (m) enter into any agreement to do any of the foregoing. 7.4. CONSENTS. Each Purchaser and the Company shall use (and the Company shall cause its Subsidiaries to use) their commercially reasonable best efforts to obtain at the earliest practicable date all consents and approvals required to consummate the Contemplated Transactions, including, without limitation, the consents and approvals identified in Schedules 4.4 and 5.2 or otherwise required as a condition to Closing pursuant to Section 3.10 or 3.11. 7.5. REGULATORY APPROVAL. (a) Each of the Purchasers and the Company (if necessary) shall (a) make or cause to be made all filings required of each of them or any of their respective Subsidiaries or Affiliates under the HSR Act or other Antitrust Laws with respect to the Contemplated Transactions as promptly as practicable and, in any event, within ten (10) Business Days after the date of this Agreement in the case of all filings required under the HSR Act and within four (4) weeks in the case of all other filings required by other Antitrust Laws, (b) comply at the earliest practicable date with any request under the HSR Act or other Antitrust Laws for additional information, documents, or other materials received by each of them or any of their respective Subsidiaries from the FTC, the Antitrust Division or any other Governmental Body in respect of such filings or such transactions, and (c) cooperate with each other in connection with any such filing and in connection with resolving any investigation or other inquiry of any of the FTC, the Antitrust Division or other Governmental Body under any Antitrust Laws with respect to any such filing or any such transaction. Each such party shall use its commercially reasonable best efforts to furnish to each other all information required for any application or other filing to be made pursuant to any applicable law in connection with the Contemplated Transactions. Each such party shall promptly inform the other parties hereto of any oral communication with, and provide copies of written communications with, any Governmental Body regarding any such 16 filings or any such transaction. No party hereto shall independently participate in any formal meeting with any Governmental Body in respect of any such filings, investigation, or other inquiry without giving the other parties hereto prior notice of the meeting and, to the extent permitted by such Governmental Body, the opportunity to attend and/or participate. Subject to applicable law, the parties hereto will consult and cooperate with one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto relating to proceedings under the HSR Act or other Antitrust Laws. Any party may, as it deems advisable and necessary, reasonably designate any competitively sensitive material provided to the other parties under this Section 7.5 as "outside counsel only." Such materials and the information contained therein shall be given only to the outside legal counsel of the recipient and will not be disclosed by such outside counsel to employees, officers, or directors of the recipient, unless express written permission is obtained in advance from the source of the materials; (b) Each of the Purchasers and the Company shall use its commercially reasonable best efforts to resolve such objections, if any, as may be asserted by any Governmental Body with respect to the Contemplated Transactions under the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other United States federal or state or foreign statutes, rules, regulations, orders, decrees, administrative or judicial doctrines or other laws that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (collectively, the "Antitrust Laws"). In connection therewith, if any Proceeding is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as in violation of any Antitrust Law, each of the Purchasers and the Company shall cooperate and use its commercially reasonable best efforts to contest and resist any such Proceeding, and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction or other order whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents, or restricts consummation of the Contemplated Transactions, including by pursuing all available avenues of administrative and judicial appeal and all available legislative action, unless, by mutual agreement, the Purchasers and the Company decide that litigation is not in their respective best interests. Each of the Purchasers and the Company shall use its commercially reasonable best efforts to take such action as may be required to cause the expiration of the notice periods under the HSR Act or other Antitrust Laws with respect to such transactions as promptly as possible after the execution of this Agreement. In connection with and without limiting the foregoing, each of the Purchasers and the Company agrees to use its commercially reasonable best efforts to take promptly any and all steps necessary to avoid or eliminate each and every impediment under any Antitrust Laws that may be asserted by any Federal, state and local and non-United States antitrust or competition authority, so as to enable the parties to close the Contemplated Transactions as expeditiously as possible. Notwithstanding anything to the contrary contained herein, no Purchaser (or its "ultimate parent entity") shall be required to dispose of any assets or any portion of its business or make any change to its business, expend any material funds (other than filing fees) or incur any other material burden in order to comply with this Section 7.5. 7.6. REASONABLE BEST EFFORTS. Between the date of this Agreement and the Closing Date, the parties hereto will use their commercially reasonable best efforts to cause the conditions in Section 3 to be satisfied. 17 8. TERMINATION. 8.1. TERMINATION EVENTS. This Agreement may terminate upon the occurrence of any of the following events (each a "Termination Event"): (i) the mutual consent of the Company and a Majority in Interest; (ii) the Confirmation Order shall not have been entered by the Bankruptcy Court on or before November 15, 2003; (iii) the Effective Date shall not have occurred on or before January 31, 2004; (iv) a trustee, responsible officer, or an examiner with powers beyond the duty to investigate and report, as set forth in subclauses (3) and (4) of clause (a) of Section 1106 of the Bankruptcy Code shall have been appointed under Section 1104 or 105 of the Bankruptcy Code for service in the Chapter 11 Cases; (v) the Chapter 11 Cases shall have been converted to cases under Chapter 7 of the Bankruptcy Code; (vi) the Company shall have breached any material provision of this Agreement and (A) a Majority in Interest shall have provided written notice to the Company that (1) the Company has breached a material provision of this Agreement and (2) sets forth the provisions of this Agreement that have been breached; provided that the Company hereby agrees to waive the requirement (if any) that the Automatic Stay be lifted in connection with giving such notice (and not to object to any Purchaser seeking to lift the Automatic Stay in connection with giving such notice, if necessary), and (B) a ten (10) day cure period with respect to such breach shall have occurred and such breach shall remain uncured; (vii) the failure or nonoccurrence of any condition set forth in Section 3; (viii) the Plan is modified to provide for any terms that are materially adverse to the Purchasers or are materially inconsistent with the terms and provisions of the Plan or this Agreement; or (ix) the Company (i) submits an additional or further amended plan of reorganization or liquidation that is materially adverse to the Purchasers or is materially inconsistent with the terms and provisions of the Plan or this Agreement or (ii) moves to withdraw or withdraws the Plan. 8.2. EFFECT OF TERMINATION EVENTS. This Agreement shall terminate automatically without the act of any party to this Agreement upon the occurrence of any of the Termination Events, unless (x) the occurrence of such Termination Event is waived in writing within five (5) business days of its 18 occurrence by a Majority in Interest. Notwithstanding the foregoing, the provisions of Sections 10, 11, 13, 16 and 17 shall survive any termination of this Agreement. 9. DEFINITIONS. 9.1. CERTAIN DEFINED TERMS. As used in this Agreement the following terms have the following respective meanings: Affiliate: With reference to any Person, a spouse of such Person, any relative (by blood, adoption or marriage) of such Person within the second degree, any director, officer or employee of such Person or any of its Affiliates, any other Person of which such Person is a member, director, officer or employee, and any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. Amended Commitment Letter: The Amended Funding Commitment Letter dated July 14, 2003 from Onex Corporation to the Company. Amended Term Sheet: The Term Sheet accompanying the Amended Commitment Letter. Antitrust Laws: As defined in Section 7.5(b) of this Agreement. Automatic Stay: The automatic stay in effect pursuant to Section 362 of the Bankruptcy Code. Balance Sheet: The audited consolidated balance sheet of the Company and its Subsidiaries at December 31, 2002. Business Day: A day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. Capitalized Lease Obligations: An obligation to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real and/or personal property which obligation is required to be classified and accounted for as a capital lease on a balance sheet prepared in accordance with GAAP, and for purposes hereof the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP. Certifications: As defined in Section 4.10 of this Agreement. Chapter 11 Cases: The Chapter 11 Cases jointly administered as Case No. 03-40515 (PCB) in the United States Bankruptcy Court for the Southern District of New York, In re Magellan Health Services, et al., Debtors. Closing: As defined in Section 2 of this Agreement. Closing Date: The date of the Closing. 19 Commitment Letter: The Funding Commitment Letter dated as of May 27, 2003 from Onex Corporation to the Company. Company: As defined in the introduction to this Agreement, and refers to both the Company as the parent debtor or debtor in possession, and as reorganized as of the Effective Date in accordance with the Plan, as the context requires. Company Indebtedness: (i) all obligations of the Magellan Companies for borrowed money, (ii) all obligations of the Magellan Companies evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of the Magellan Companies to pay the deferred purchase price of property or services, except current trade accounts payable arising in the Ordinary Course of Business, (iv) all of the Magellan Companies' Capitalized Lease Obligations and (v) all obligations of the Magellan Companies to reimburse or repay any bank or other Person in respect of amounts paid or available to be drawn under a letter of credit or banker's acceptance (each such obligation to be valued at the face amount of such instrument). Consent: Any approval, consent, ratification, waiver or other authorization (including any Governmental Authorization). Contemplated Transactions: All of the transactions contemplated by this Agreement and the Plan. Contract: Any written agreement, contract, obligation, promise or undertaking that is legally binding. Definitive Shares: As defined in Section 1 of this Agreement. EBITDA: Earnings before interest, taxes, depreciation and amortization, determined in accordance with GAAP, consistently applied. EDGAR: As defined in Section 4.10 of this Agreement. Encumbrance: Any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership. Exchange Act: The Securities Exchange Act of 1934, as amended. Filed SEC Reports: As defined in Section 4.10 of this Agreement. GAAP: Generally accepted accounting principles set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and in statements by the Financial Accounting Standards Board or in such other statement by such other entity as may be approved by a significant segment of the accounting profession; and the requisite that such principles be applied on a consistent basis shall mean that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. 20 Governmental Authorization: Any material approval, consent, license, permit, waiver or other authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement. Governmental Body: Any: (a) nation, state, county, city, town, village, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature. HSR Act: As defined in Section 3.11 of this Agreement. Indemnified Party: As defined in Section 13 of this Agreement. Indemnity Claim: As defined in Section 13 of this Agreement. Key Employee Retention Plan: The Company's key employee retention plan for the year ended December 31, 2003, adopted subsequent to the Commencement Date. Legal Requirement: Any federal, state, local, municipal, foreign, international, multinational or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute or treaty. Magellan Companies: The Company and the Subsidiaries. Majority in Interest: At any time, the holders (or prior to the Effective Date, Persons who have agreed to become holders) of a majority, by voting power, of the outstanding Shares and the outstanding shares of Ordinary Common Stock issued upon conversion of any Shares, taken together as a single class. Material Adverse Effect: means (i) a material adverse effect on the business, condition (financial or otherwise), operations, performance or properties of the Company and its Subsidiaries (taken as a whole) or (ii) a material adverse effect on the ability of the Company to consummate the Contemplated Transactions. MVS Securities: As defined in the Recitals. Offering Backstop Shares: As defined in Section 1 of this Agreement. 21 Order: Any award, decision, injunction, judgment, order, ruling, subpoena or verdict entered, issued, made, or rendered by any court, administrative agency or other Governmental Body or by any arbitrator. Ordinary Common Stock: The Ordinary Common Stock of the Company, par value $.01 per share, from and after the Effective Date. Ordinary Course of Business: An action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if: (a) such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; (b) such action is not required to be authorized by (i) if such action was taken on or after the Petition Date, the Bankruptcy Court and (ii) if such action was taken prior to the Petition Date, the board of directors of such Person (or by any Person or group of Persons exercising similar authority); and (c) such action is similar in nature and magnitude to actions customarily taken, without any authorization by the board of directors (or by any Person or group of Persons exercising similar authority), in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business, of comparable size in terms of revenue, and similarly closely-held in terms of stock ownership, as such Person. Organizational Documents: (a) the articles or certificate of incorporation and the by-laws or code of regulations of a corporation; (b) the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (d) the operating or limited liability company agreement and the certificate of formation of a limited liability company; (e) any charter, joint venture agreement or similar document adopted or filed in connection with the creation, formation or organization of a Person; and (f) any amendment to any of the foregoing. Partial Cash-Out Share Closing. As defined in Section 2(c) of this Agreement. Partial Cash-Out Shares: As defined in Section 1 of this Agreement. Petition Date: March 11, 2003. Person: An individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization or a government or any department or agency thereof. Plan: The Debtors' Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, as filed in the Chapter 11 Cases on or about August 18, 2003, as modified by amendments filed with the Bankruptcy Court on or about September 25, 2003, October 8, 2003 and October 9, 2003. 22 Proceeding: Any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Body or arbitrator. Purchaser(s). As defined in the introduction to this Agreement. Representative: With respect to a particular Person, any director, officer, employee, agent, consultant, advisor or other representative of such Person, including legal counsel, accountants and financial advisors. Restricted Securities: All of the following: (a) any shares of MVS Securities which are evidenced by a certificate or certificates bearing the applicable legend or legends referred to in Section 6.3, (b) any shares of Ordinary Common Stock which have been issued upon the conversion of any of the MVS Securities and which are evidenced by a certificate or certificates bearing the applicable legend or legends referred to in Section 6.3 and (c) unless the context otherwise requires, any shares of Ordinary Common Stock which are at the time issuable upon the conversion of MVS Securities and which, when so issued, will be evidenced by a certificate or certificates bearing the applicable legend or legends referred to in Section 6.3. SEC: The U.S. Securities and Exchange Commission. SEC Reports: As defined in Section 4.10 of this Agreement. Securities Act: The Securities Act of 1933, as amended. Share Percentage. As defined in Section 2(a) of this Agreement. Shares: As defined in Section 1 of this Agreement. Short-Term Incentive Plan: The Company's Short-Term Incentive Plan for 2003. Subsidiary: With respect to any Person (the "Owner"), any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred), are held by the Owner or one or more of its Subsidiaries. Termination Event. As defined in Section 8.1 of this Agreement. Term Sheet: The Term Sheet accompanying the Commitment Letter. Any of the above-defined terms may, unless the context otherwise requires, be used in the singular or plural depending on the reference. 9.2. ACCOUNTING TERMS. As used in this Agreement, and in any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined in Section 9.1 and accounting terms 23 partly defined in said Section 9.1 to the extent not defined, shall have the respective meanings given to them under GAAP. 9.3. OTHER PROVISIONS REGARDING DEFINITIONS. (a) Capitalized terms used but not defined herein have the meanings set forth in the Plan. (b) Unless otherwise defined therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate, report or other document made or delivered pursuant to this Agreement. (c) The words "hereof", "herein", and "hereunder and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. 10. EXPENSES. The Company shall reimburse the Purchasers for all reasonable and documented out-of-pocket expenses incurred by the Purchasers after February 14, 2003 directly related to the negotiation, preparation, execution and delivery of this Agreement, the Commitment Letter, the Amended Commitment Letter, the Term Sheet, and the Amended Term Sheet with respect to the Contemplated Transactions and any and all definitive documentation or other acts relating hereto or thereto, including, but not limited to, the actual reasonable fees and expenses of counsel, accountants and/or consultants to the Purchasers and the fees and expenses incurred by the Purchasers in connection with any due diligence (including fees and expenses payable to consultants); provided that such expenses shall not exceed $1,200,000, plus any expenses incurred in connection with obtaining the necessary state regulatory approvals in connection with the Contemplated Transactions. 11. COMMITMENT FEE. As a commitment fee for entering into the Amended Commitment Letter and causing certain of its Affiliates to enter into this Agreement, Onex Corporation , the parent company of certain of the Purchasers, is entitled to receive a fee (the "Commitment Fee") equal to 1.75% of the aggregate purchase price for all of the Shares purchased by all of the Purchasers. Pursuant to the terms of the Amended Commitment Letter and the Amended Term Sheet, Onex Corporation has previously received an initial payment of $1,750,000.00 (the "Initial Installment") of the Commitment Fee. Other than pursuant to the last sentence of this Section 11, the remainder of the Commitment Fee (up to $1,750,000.00) shall be payable solely upon the Closing, and shall be paid on the Closing Date if the Closing occurs. In the event the Closing occurs and the total Commitment Fee calculated based upon the actual amount of the aggregate purchase price for all of the Shares by all of the Purchasers is less than $1,750,000.00, then Onex Corporation will pay to the Company on the Closing Date the difference between $1,750,000.00 and the actual amount of the Commitment Fee. Except as set forth in the previous sentence, the Initial Installment shall be non-refundable, regardless of whether the Closing occurs. At each partial Cash-Out Share Closing, Onex Corporation shall receive as payment of the Commitment Fee an amount equal to 1.75% of the aggregate purchase price for the Shares purchased by all of the Purchasers at each such Partial Cash-Out Share Closing. 12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Company to the Purchasers in connection with the Contemplated Transactions shall survive the execution and delivery of this Agreement, any investigation at any time made by any Purchaser or on any Purchaser's behalf, the purchase of the Shares by the Purchasers under this Agreement and any conversion of any of the MVS Securities or any disposition of 24 any shares of MVS Securities or Ordinary Common Stock issued upon conversion of any of the MVS Securities. All statements contained in any certificate or other instrument delivered by or on behalf of the Company to any of the Purchasers or their Representatives pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. For the avoidance of doubt, this Agreement shall be assumed by the Company pursuant to Section 8.1 of the Plan. 13. INDEMNIFICATION. 13.1. INDEMNIFICATION BY THE COMPANY. Excluding any Indemnity Claim (as defined herein) arising solely from an Indemnified Party's (as defined herein) breach of this Agreement or breach of any other agreements between an Indemnified Party and the Company, the Company agrees to indemnify and hold harmless the Purchasers and their Affiliates, directors, officers, partners, members, employees, agents and assignees (including Affiliates thereof) (each an "Indemnified Party") from and against any and all losses, claims, damages (including, without limitation, diminution in value of the Shares), liabilities or other expenses to which such Indemnified Party may become subject, insofar as such losses, claims, damages, liabilities (or actions or other proceedings commenced or threatened in respect thereof) or other expenses arise out of or in any way relate to or result from this Agreement, the Amended Commitment Letter or the Amended Term Sheet, including, without limitation, as a result of any breach by the Company of any representation, warranty, covenant or agreement contained herein or therein, or in any way arise from any use or intended use of this Agreement, the Amended Commitment Letter, the Amended Term Sheet or the proceeds of the purchase of the Shares, and the Company agrees to reimburse (on an as-incurred monthly basis) each Indemnified Party for any legal or other expenses incurred in connection with investigating, defending or participating in any such loss, claim, damage, liability or action or other proceeding (whether or not such Indemnified Party is a party to any action or proceeding out of which indemnified expenses arise), but excluding therefrom all expenses, losses, claims, damages and liabilities that are finally determined in a non-appealable decision of a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party (each, an "Indemnity Claim"). In the event of any litigation or dispute involving this Agreement, the Amended Commitment Letter and/or the Amended Term Sheet, the Purchasers shall not be responsible or liable to the Company or any other Person for any special, indirect, consequential, incidental or punitive damages. The obligations of the Company under this Section 13 shall remain effective whether or not any of the Contemplated Transactions are consummated and notwithstanding any termination of this Agreement and shall be binding upon the Company, and any successor-in-interest to the Company, in the event that the Plan or any alternative plan of reorganization of the Company is consummated. 13.2. LIMITATIONS ON INDEMNIFICATION FOR BREACHES OF REPRESENTATIONS AND WARRANTIES. (a) Notwithstanding anything herein to the contrary, any Indemnified Party must give written notice to the Company, in reasonable detail, prior to the expiration of the second anniversary of the Closing Date, of any claim for indemnification pursuant to Section 13.1 as a result of any breach by the Company of any representation or warranty. Any claim for indemnification pursuant to Section 13.1 as a result of any breach by the Company of any 25 representation or warranty, which claim is not made by an Indemnified Party on or prior to that date will be irrevocably and unconditionally released and waived. (b) No representation or warranty of the Company or any Purchaser contained herein shall be deemed untrue or incorrect, and none of the Company or any Purchaser shall be deemed to have breached a representation or warranty, as a consequence of the existence of any fact, circumstance or event (a) which is disclosed in response to another representation or warranty contained in this Agreement, to the extent the applicability of such disclosure to such other representation and warranty is reasonably apparent on the face of such disclosure, or (b) of which Robert LeBlanc or Michael Kahan is actually aware, without any duty to investigate, as of the Closing Date. 14. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or modified and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and a Majority in Interest. 15. NOTICES, ETC. Except as otherwise provided in this Agreement, notices and other communications under this Agreement shall be in writing and shall be delivered, mailed by first-class mail, postage pre-paid or sent by facsimile, addressed, (a) if to a Purchaser, at the address set forth in Schedule 1 or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to the Company at 6950 Columbia Gateway Drive, Columbia, MD 21046, Attn: Megan Arthur, Esq., Corporate Executive Vice President and General Counsel, Fax: (410) 953-4715, with a copy to Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, Attn: Stephen Karotkin, Esq., Fax: (212) 310-8007, or at such other address, or to the attention of such other officer, as the Company shall have furnished to each Purchaser in writing. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (ii) if sent by facsimile, when sent and receipt is telephonically confirmed or (iii) if given by any other means (including, without limitation, by air courier), when delivered at the address specified above. 16. PRESS RELEASES. The Company shall not issue any press release that references any Purchaser or the purchase of the Shares without the consent of such Purchaser, which consent shall not be unreasonably withheld; provided, however, that if the Company has provided such Purchaser with a copy of the press release, and such Purchaser has not responded within four (4) Business Day hours, the Company may proceed with issuance of the press release. 17. CONFIDENTIAL INFORMATION. For the purposes of this Section 17, "Confidential Information" means information delivered to any Purchaser by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature, whether in oral, written, graphic, model or machine readable form, provided that such term does not include information that (a) was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such Purchaser or any person acting on behalf thereof, or (c) otherwise becomes known to such Purchaser other than through disclosure by the Company or 26 any Subsidiary or any other Person in violation of a confidentiality obligation to the Company known to such Purchaser. For a period of three (3) years following the date of this Agreement, each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by it in good faith to protect confidential information of third parties delivered to it, provided that the Purchasers may deliver or disclose Confidential Information to (i) their respective directors, officers, employees, agents, accountants, attorneys, partners, members and Affiliates (to the extent such disclosure reasonably relates to the administration or evaluation of the investment represented by the Shares purchased by such Purchaser) who have agreed to hold confidential the Confidential Information, (ii) the financial advisors and other professional advisors to such Purchaser who are instructed and have agreed to hold confidential the Confidential Information, (iii) any Person from which such Purchaser offers to purchase any security of the Company, to the extent required by law, (iv) any federal or state regulatory authority having jurisdiction over such Purchaser, to the extent required by law or (v) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement of or for the protection of the rights and remedies under this Agreement. The provisions of this Section 17 shall expire upon the Closing. Notwithstanding the foregoing, each party to the transaction (and each employee, representative, or other agent of each such party) may disclose to any and all Persons, without limitations of any kind, the tax treatment and tax structure of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to the party relating to such tax treatment and tax structure; provided, however, that the foregoing permission to disclose the tax treatment and tax structure does not permit the disclosure of any information that is not relevant to understanding the tax treatment or tax structure of the transaction; provided, further, however, that the tax treatment and tax structure shall be kept confidential to the extent necessary to comply with federal or state securities laws. In addition, no party is subject to any restriction concerning its consulting with its tax advisers regarding the tax treatment or tax structure of the transaction at any time. 18. MISCELLANEOUS. 18.1. SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of shares of MVS Securities or Ordinary Common Stock into which the shares of MVS Securities have been converted) whether so expressed or not. 18.2. ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. No party may assign any of its rights under this Agreement without the prior consent of the other parties, which will not be unreasonably withheld; provided, however, that any Purchaser may assign its rights to purchase all or any portion of the Shares to any other Purchaser or any Affiliate of any Purchaser without the consent of the Company. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of the parties. Except as set forth in Section 13 with respect to Indemnified Parties, nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this 27 Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. Except as set forth in Section 13 with respect to Indemnified Parties, this Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. 18.3. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Shares to the contrary notwithstanding, any payment on any Shares that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the amount payable on such next succeeding Business Day. 18.4. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 18.5. ENTIRE AGREEMENT AND MODIFICATION. Except as set forth herein, this Agreement supersedes all prior agreements between the parties with respect to its subject matter, including, without limitation, the Commitment Letter, the Amended Commitment Letter, the Term Sheet and the Amended Term Sheet and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 18.6. CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 18.7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 18.8. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York, without giving effect to the conflicts of law principles thereof. 18.9. SUBMISSION TO JURISDICTION. Each party of this Agreement irrevocably consents and agrees that any legal action or proceeding with respect to this Agreement and any action for enforcement of any judgment in respect thereof will be brought, (i) if prior to the Effective Date, in the Bankruptcy Court and (ii) if on or after the Effective Date, in the courts of 28 the State of New York, County of New York or, if it has or can acquire jurisdiction, the United States District Court for the Southern District of New York, and, by execution and delivery of this Agreement, each party of this Agreement hereby submits to and accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and appellate courts from any appeal thereof. Each party to this Agreement further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the delivery of copies thereof in the manner set forth in Section 15. Each party to this Agreement hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing in this Section shall be deemed to constitute a submission to jurisdiction, consent or waiver with respect to any matter not specifically referred to herein. 18.10. WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING HEREUNDER. 18.11. SUPPLEMENTATION AND AMENDMENT OF SCHEDULES. From time to time prior to the Closing, the Company shall have the right to supplement or amend the Schedules with respect to any matter hereafter arising or discovered after the delivery of the Schedules pursuant to this Agreement. No such supplement or amendment shall have any effect on the satisfaction of the condition to closing set forth in Section 3.1 or on the truth or correctness of the representation and warranty set forth in Section 4.9; provided, however, if the Closing shall occur, then Purchaser shall be deemed to have waived any right or claim pursuant to the terms of this Agreement or otherwise, including pursuant to Section 13 hereof, with respect to any and all matters disclosed pursuant to any such supplement or amendment at or prior to the Closing except for any right or claim, pursuant to Section 13 or otherwise, arising out of or as a result of any breach of any representation or warranty set forth in Section 4.9, which representation and warranty shall be made without effect to any such supplement or amendment. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 29 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. MAGELLAN HEALTH SERVICES, INC. By: ---------------------------------- Title [Additional signature page follows] PURCHASER: MAGELLAN HOLDINGS LP By: Onex Partners LP, its General Partner By: Onex Partners GP LP, its General Partner By: Onex Partners GP Inc., its General Partner By: ----------------------------- Title By: ----------------------------- Title Schedule 1 Purchasers Magellan Holdings LP 100% c/o Onex Investment Corp. 712 Fifth Avenue New York, New York 10019 Schedule 5.2 Authority; No Conflict None EXHIBIT A REVENUE AND EBITDA PROJECTIONS Month End Cumulative Cumulative EBITDA (in Revenue millions) (in millions) 01/31/03 $10.5 $ 134.1 02/28/03 22.4 266.1 03/31/03 32.0 400.1 04/30/03 41.8 533.3 05/31/03 50.7 665.1 06/30/03 61.2 796.2 07/31/03 73.6 927.0 08/31/03 85.4 1,057.6 09/30/03 96.5 1,187.3 10/31/03 109.0 1,318.5 11/30/03 121.4 1,449.7 12/31/03 133.8 1,580.8 EX-2 4 mv1-6revisedex2_6.txt 2.6 Exhibit 2.6 PROMISSORY NOTE U.S. $48,915,205 New York, New York January 5, 2004 FOR VALUE RECEIVED, the undersigned, MAGELLAN HEALTH SERVICES, INC., a Delaware corporation (the "COMPANY"), hereby promises to pay to the order of AETNA INC., a Pennsylvania corporation ("AETNA") (Aetna being the "PAYEE"), the principal amount of FORTY EIGHT MILLION NINE HUNDRED AND FIFTEEN THOUSAND TWO HUNDRED AND FIVE U.S. DOLLARS] (U.S. $48,915,205) on the Maturity Date (as defined below). Both principal and interest hereunder are payable in lawful money of the United States of America to the Payee at its principal place of business at 151 Farmington Avenue, Hartford, CT 06156, Attention L. Edward Shaw, Jr., General Counsel, with a copy also sent to the attention of Alfred P. Quirk, Jr., Vice President and Treasurer, or at such other place as the Payee may designate from time to time in writing (such principal place of business or other place being the "PAYMENT PLACE"), in cash or other immediately available funds. Unless otherwise defined in the text of this Note, capitalized terms used herein shall have the meaning ascribed to such terms in Section 17. SECTION 1. Interest. (a) The Company hereby promises to pay interest on the unpaid principal amount of this Note from January 5, 2004 until the Maturity Date, in cash or other immediately available funds, at the Applicable Rate, payable as set forth in Section 1(b) and computed on the basis of a year of 365/366 days for the actual number of days elapsed (including the first day but excluding the last day). (b) Interest accruing pursuant to Section 1(a) of this Note shall be payable as set forth in this Section 1(b): (i) Interest accruing pursuant to Section 1(a) on the unpaid principal amount of this Note from and after the date hereof shall be payable in arrears on each Interest Payment Date, in cash or other immediately available funds, to the Payee at the Payment Place. (ii) On each date on which any principal amount of this Note shall be paid, the Company shall pay to the Payee at the Payment Place accrued interest on the amount of such principal so paid, in cash or other immediately available funds. (iii) If any Interest Payment Date, Maturity Date or other date fixed for payment hereunder is not a Business Day, such payment date shall be extended to the next succeeding Business Day, and during any such extension, interest on the unpaid principal amount of this Note shall accrue and be payable at the Applicable Rate as set forth in Section 1(a). SECTION 2. Term. The Maturity Date of this Note shall be the Initial Maturity Date unless either of the two following conditions shall apply: (a) in the event that the term of the Aetna Services Agreement is extended for the "Extension Term" (as such term is defined in the Aetna Services Agreement) pursuant to the terms and conditions set forth in Section 9.A of the Aetna Services Agreement, then the Maturity Date shall be the Final Maturity Date and the mandatory prepayment described in Section 3(a) of this Note shall be payable; and (b) in the event that (i) the Purchase Option is exercised pursuant to the terms and conditions set forth in Section 7.B of the Aetna Services Agreement and (ii) the purchase contemplated by the Purchase Option is consummated on the terms and conditions set forth in the Asset Purchase Agreement, then the Maturity Date shall be the Early Maturity Date. SECTION 3. Payment of Principal; Mandatory Prepayment. (a) Scheduled Payment. On the applicable Maturity Date, the Company shall pay to the Payee, in cash or other immediately available funds, the entire unpaid principal amount of this Note, plus all accrued and unpaid interest thereon. In the event the term of the Aetna Services Agreement is extended for the "Extension Term" (as such term is defined in the Aetna Services Agreement) pursuant to the terms and conditions set forth in Section 9.A of the Aetna Services Agreement, then the Company shall pay to the Payee, as a mandatory prepayment, on the date that would otherwise have been the Initial Maturity Date, an amount equal to 50% of the original principal amount of this Note, plus all accrued and unpaid interest thereon. (b) Optional Prepayment. (i) The Company may, at any time and from time to time, without premium or penalty, prepay all or a portion of the unpaid principal amount of this Note, together with unpaid accrued interest on the amount so prepaid to the date chosen for prepayment, payable in cash or other immediately available funds. (ii) Any prepayment under clause (i) above made prior to the Maturity Date shall be deemed credited against principal and interest payments outstanding as of such prepayment date pursuant to the terms hereof (applied first to the payment of interest and then to the payment of principal). (iii) In the event the Company is required to make a mandatory prepayment under subsection (a) above, any prepayment under clause (i) above made prior to such scheduled mandatory prepayment shall be deemed credited against the amount of such mandatory prepayment. (c) Replacement Note. In the event that the Company shall prepay less than all of the outstanding principal amount of this Note, the Company shall, at 2 the request of the Payee, deliver to the Payee upon such prepayment a replacement Note representing the remaining outstanding principal amount of this Note. SECTION 4. General Provisions Regarding Payments. The Company will pay all amounts due hereunder free and clear of and without reduction for any taxes, levies, imposts, deductions, withholding or charges and without set-off or counterclaim (other than as provided in Section 15). The Company hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. SECTION 5. Representations and Warranties. The Company represents and warrants to the Payee as of the date hereof that (i) the Company is a duly organized and existing corporation and is duly authorized to enter into, deliver and perform this Note, which constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, (ii) neither the making of this Note nor the performance by the Company of its obligations hereunder will violate any provision of law or any agreement, indenture, note or other instrument binding upon the Company or any of its Subsidiaries or the Company's certificate of incorporation or by-laws or other constitutional documents or give cause for acceleration of any indebtedness of the Company or any of its Subsidiaries (iii) no authority from or approval by any governmental body, commission or agency is required in connection with the making or validity of and the execution, delivery and performance of this Note, (iv) there are no actions, suits or proceedings pending against or, to the knowledge of the Company, threatened against or affecting, the Company or any of its Subsidiaries, in any court or before or by any governmental department, agency or instrumentality, an adverse decision in which could materially and adversely affect the financial condition, business or operations of the Company or the ability of the Company to perform its obligations under this Note and (v) the Company and each of its Subsidiaries is in compliance in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities. SECTION 6. Events of Default. (a) For purposes of this Note, an "Event of Default" shall be deemed to have occurred upon: (i) any failure by the Company to pay (by delivery of cash or other immediately available funds) all or any portion of principal under this Note when the same shall be due and payable in accordance with the terms hereof, whether on the Maturity Date, by acceleration or otherwise; or (ii) any failure by the Company to pay (by delivery of cash or other immediately available funds) all or any portion of any interest under this Note when the same shall be due and payable, which failure continues unremedied for a period of three Business Days; or (iii) (A) the filing by the Company of a voluntary petition seeking liquidation, reorganization, arrangement, dissolution or readjustment, in any form, of its debts under Title 11 3 of the United States Code (or corresponding provisions of future laws) or any other applicable state, federal or foreign bankruptcy, insolvency or similar law, or the filing by the Company of an answer consenting to or acquiescing in any such petition, (B) the making by the Company of any assignment for the benefit of its creditors, (C) the filing of (x) an involuntary petition against the Company under Title 11 of the United States Code, or any other applicable bankruptcy, insolvency or similar law (or corresponding provisions of future laws), (y) an application for the appointment of a custodian, receiver, trustee or other similar official for the Company for all or a substantial part of the assets of the Company or (z) an involuntary petition against the Company seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, dissolution, relief or composition of the Company or any of the Company's debts under any other federal or state or foreign insolvency or similar law, provided that any such filing referred to in this clause (C) shall not have been vacated, set aside or stayed within a 60 day period from the date thereof, (D) the entry against the Company of a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect or (E) any corporate board of director or shareholder action to effect or in furtherance of any of the foregoing; (iv) except in accordance with the terms thereof, for any reason any Collateral Document ceases to be in full force and effect or any Lien intended to be created thereby ceases to be or is not valid and perfected; or, except in accordance with the terms thereof, any Lien in favor or made for the benefit of the Payee contemplated by any Collateral Document, shall, at any time, be invalidated or otherwise cease to be in full force and effect; (v) any representation or warranty made by the Company in this Note shall prove to have been incorrect in any material respect when made; or (vi) there is an Event of Default under the Senior Secured Credit Agreement and the lenders or the agent on behalf of the lenders have caused, with the giving of notice if required, the Company's obligations thereunder to become due and payable prior to its stated maturity. (b) Upon the occurrence and during the continuance of any Event of Default described in Section 6(a) other than in clause (iii) thereof, the Payee may, by written notice to the Company and the administrative agent under the Senior Secured Credit Agreement, declare all or any portion of the unpaid principal amount of this Note and all interest accrued thereon to be due and payable immediately, provided that if there are any amounts outstanding under the Senior Secured Credit Agreement at such time, such declaration shall become effective upon the first to occur of the acceleration of the Senior Secured 4 Credit Agreement and five Business days after such notice is received by such administrative agent. Upon the occurrence of any Event of Default described in clause (iii) of Section 6(a), the unpaid principal amount of this Note and all interest accrued thereon shall automatically become due and payable, without any action or notice by the Payee. Demand, presentment, protest and notice of non-payment, or any other notice or demand whatsoever, are hereby waived by the Company. All payments made following an Event of Default and all proceeds of Collateral received by the Payee in respect of this Note shall be applied first to the payment of all expenses owing to the Payee hereunder, second to interest and last to the original principal amount of this Note. SECTION 7. Collateral. The obligations of the Company under this Note are secured and guaranteed as provided in the Collateral Documents executed in connection herewith, and reference is made to such documents for the terms and conditions governing the collateral security for, and guarantee of, the obligations of the Company hereunder. SECTION 8. Waiver or Alteration. None of the provisions hereof may be waived, altered or amended, except by a written instrument signed by the Payee and the Company. In the case of any waiver, the Company and the Payee shall be restored to their former respective positions and rights hereunder, and any Event of Default waived shall be deemed to be cured and not continuing, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon except to the extent expressly provided in such waiver. SECTION 9. Remedies Cumulative. No failure to exercise or delay in exercising any right, remedy, power or privilege hereunder or under the Collateral Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under the Collateral Documents preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges provided herein and in the Collateral Documents are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. SECTION 10. Notices. Any notices or other communications required or permitted hereunder shall be given in writing and personally delivered with receipt acknowledged or mailed, postage prepaid, via registered mail, return receipt requested, if to the Payee, at its address first set forth above or any other address notified in writing by the Payee to the Company, and if to the Company, at its address at 6950 Columbia Gateway Drive, Columbia, MD 21046, Attention: General Counsel, with a copy to Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, Attention: Robert L. Messineo, Esq., Telecopier: 212-310-8007, or any other address notified in writing by the Company to the Payee. Any notice given in conformity with the foregoing shall be deemed given when personally delivered or upon the date of delivery specified in the registered mail receipt. SECTION 11. Governing Law; Jurisdiction. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of New York as in effect from time to time, without giving effect to any choice of laws 5 or conflict of laws principles thereof (other than Section 5-1401 of the General Obligations Law). The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Note. The company irrevocably waives, to the fullest extent permitted by law, any objection which the Company may now or hereafter have to the laying of the venue of any such proceeding brought in such court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Note. SECTION 12. Severability. If any provision of this Note is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and the remaining provisions hereof shall be liberally construed in favor of the holder hereof in order to effectuate the provisions hereof and the invalidity of any provision hereof in any jurisdiction shall not affect the validity or enforceability of any other provision in any other jurisdiction, including the State of New York. SECTION 13. Successors and Assigns; Transferability. This Note shall be binding upon the Company and its successors and assigns and is for the benefit of the Payee and its successors and assigns, except that the Company may not assign or otherwise transfer its rights or obligations under this Note. The Payee may at any time and from time to time without the consent of the Company assign all or any portion of its rights under this Note to one or more affiliates of the Payee. SECTION 14. Replacement of Note. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and the Company's receipt of an indemnity agreement of the Payee reasonably satisfactory to the Company, the Company will, at the expense of the Payee, execute and deliver, in lieu thereof, a new Note of like terms. SECTION 15. Right of Set-off. In the event that (i) the Purchase Option is exercised pursuant to the terms and conditions set forth in Section 7.B of the Aetna Services Agreement and (ii) the purchase contemplated by the Purchase Option is consummated, then the Company shall, at the Closing, set-off the "Purchase Price" and the "Closing Network Adjustment" (each term as defined in the Asset Purchase Agreement) payable by Payee to the Company under Section 2.07(a) of the Asset Purchase Agreement, against the principal amount of this Note plus all accrued but unpaid interest thereon. SECTION 16. Expenses; Indemnity. The Company shall pay (i) all reasonable out-of pocket expenses of the Payee in connection with the preparation of this Note, any waiver or consent hereunder or any amendment hereof or any Event of Default or alleged Event of Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of pocket expenses incurred by the Payee, including (without duplication) the reasonable fees and disbursements 6 of outside counsel in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. Without limitation of the foregoing, the Company agrees to indemnify the Payee, its affiliates and the respective directors, officers, agents and employees of the foregoing (each, an "INDEMNITEE") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and reasonable expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel and settlement costs, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Note; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence, recklessness or willful misconduct. SECTION 17. Definitions. (a) For purposes of this Note, the following terms have the following meanings: "AETNA" shall have the meaning ascribed to such term in the first paragraph of this Note. "AETNA SERVICES AGREEMENT" shall mean the Master Service Agreement dated as of August 5, 1997 by and among Aetna, the Company and a Subsidiary of the Company, as amended from time to time prior to the date hereof (including without limitation by the Second Amendment thereto dated as of March 11, 2003 and the Third Amendment thereto dated as of January __, 2004) and as such agreement may be further amended, supplemented or modified from time to time. "APPLICABLE RATE" shall mean the sum of (i) the higher of (x) the Prime Lending Rate at such time and (y) 1/2 of 1% in excess of the overnight Federal Funds Rate at such time plus (ii) 3.25% plus (iii) solely in the case of overdue amounts of principal or interest, 2.0%. "ASSET PURCHASE AGREEMENT" shall mean an agreement between the Company and the Payee substantially in the form of Exhibit D to the Aetna Services Agreement. "BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in New York are authorized or required by law to close. "CLOSING" shall have the meaning ascribed to such term in the Asset Purchase Agreement. "COLLATERAL" shall have the meaning ascribed to such term in the respective Collateral Documents. 7 "COLLATERAL DOCUMENTS" shall mean the Security Agreement, Pledge Agreement and Subsidiaries Guaranty, each dated as of January 5, 2004, made by the Company and certain of its Subsidiaries in favor of Deutsche Bank Trust Company America, as collateral agent (or any successor collateral agent), the Subordinated Guaranty, dated as of January 5, 2004, made by those Subsidiaries of the Company party thereto in favor of Aetna, and all other security agreements, guarantees, mortgages, deeds of trust, collateral assignments and other agreements or conveyances at any time delivered to the Payee to create or evidence Liens to secure the obligations of the Company hereunder, as the same may be amended, modified or supplemented from time to time. "COMPANY" shall have the meaning ascribed to such term in the first paragraph of this Note. "EARLY MATURITY DATE" shall mean the date of the Closing. "FEDERAL FUNDS RATE" shall mean, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York (or, if such rate is not so published for any day which is a Business Day, the next preceding Business day on which it is published). "FINAL MATURITY DATE" shall mean December 31, 2006. "INITIAL MATURITY DATE" shall mean December 31, 2005. "INTEREST PAYMENT DATE" shall mean the last day of each March, June, September and December, commencing on first such date after the date hereof. "LIEN" shall mean any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of any asset, whether now owned or hereafter acquired, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. "MATURITY DATE" shall mean the Initial Maturity Date, the Final Maturity Date or the Early Maturity Date as the case may be. "NOTE" means this Note. 8 "PAYEE" shall have the meaning ascribed to such term in the first paragraph of this Note. "PAYMENT PLACE" shall have the meaning ascribed to such term in the first paragraph of this Note. "PRIME LENDING RATE" shall mean the rate which Deutsche Bank AG, New York Branch, announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer by Deutsche Bank AG, New York Branch, which may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "PURCHASE OPTION" shall have the meaning set forth in the Aetna Services Agreement. "SENIOR SECURED CREDIT AGREEMENT" shall mean the Credit Agreement, dated as of January 5, 2004, among the Company, the lenders party thereto in their capacities as lenders thereunder and Deutsche Bank Trust Company Americas, as administrative agent, together with the related documents thereto (including, without limitation, any notes, guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder or adding Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "SUBSIDIARY" shall mean any person or entity of which at least a majority of the capital stock or other equity interests (including partnership interests) having ordinary voting power for the election of directors or other governing body of such person or entity is owned or controlled by the Company, directly or indirectly through one or more subsidiaries. (b) Unless otherwise provided herein, (i) the word "from" shall mean from and including and (ii) the words "to" or "until" shall mean to and until but excluding. (c) All references to "Sections" in this Note shall be to Sections of this Note unless otherwise specifically provided. 9 SECTION 18. Descriptive Headings. The descriptive headings of this Note are inserted for convenience only and do not constitute a part of this Note. [Remainder of Page Intentionally Left Blank] 10 MAGELLAN HEALTH SERVICES, INC. By: -------------------------------------- Name: Title: EX-2 5 jd1-6ex2_11.txt 2.11 Exhibit 2.11 EXECUTION COPY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and between Steven J. Shulman ("Executive") and Magellan Health Services, Inc. on behalf of itself and its subsidiaries and affiliates (collectively referred to herein as the "Company" or "Employer"). WHEREAS, Employer desires to continue to obtain the services of Executive and Executive desires to continue to render services to Employer; and WHEREAS, Employer and Executive desire to set forth the terms and conditions of Executive's employment with Employer under this Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and agreements contained in this Agreement, the parties agree as follows: STATEMENT OF AGREEMENT ---------------------- 1. EMPLOYMENT. Employer agrees to employ Executive, and Executive accepts such employment in accordance with the terms of this Agreement (provided, however, that the payments to be made under Section 4(b) and 4(c)(iii) intended to be exempt from Section 162(m) of the Internal Revenue Code of 1986, as amended, are subject to approval by the Company's shareholders), for a term of three years from the date of the Company's emergence from bankruptcy (the "Operative Date"). Thereafter, this Agreement shall automatically renew for twelve (12) month periods, unless sooner terminated as provided herein. If either party desires not to renew the Agreement, they must provide the other party with written notice of their intent not to renew the Agreement at least six (6) months prior to the next renewal date. Employer's notice of intent not to renew the Agreement shall be deemed to be a termination without Cause (as defined below) occurring immediately prior to the expiration of the term of this Agreement and the provisions of Section 6(d) or 6(e), as applicable, shall apply. 2. POSITION AND DUTIES OF EXECUTIVE; LOCATION OF EMPLOYMENT. (a) Executive will serve as Chairman and Chief Executive Officer and member of the board of directors of the Company (as constituted following the Operative Date) (the "Board"). Executive shall (i) report, as Chief Executive Officer, directly to the Board and (ii) have such duties and responsibilities typical of, and consistent with, the positions of Chairman and Chief Executive Officer in a public company the size and nature of the Company. The non-employee members of the Board will appoint a lead director who will meet regularly with the Chairman/Chief Executive Officer regarding major corporate strategies and policies, chair Board meetings in the absence of the Chairman, arrange for and chair meetings of non-management directors and perform such other functions as may from time to time be performed generally by lead directors of public companies the size and nature of the Company. Executive agrees to serve in such position, until the expiration of the term or such time as Executive's employment with Employer is terminated pursuant to this Agreement. (b) Executive shall perform his duties at the Company's principal executive offices to be located in Avon, Connecticut, or within 30 miles thereof, at which shall be based Executive, each of the executives reporting directly to Executive and certain other employees of the Company (subject to existing arrangements with Mark Demilio) (the "Offices"). 3. TIME DEVOTED. Executive will devote his or her full business time and energy to the business affairs and interests of Employer, and will use his or her best efforts and abilities to promote Employer's interests. Executive agrees that he or she will diligently endeavor to perform services contemplated by this Agreement in a manner consistent with his or her position and in accordance with the policies established by the Employer. Notwithstanding the foregoing, Executive shall be entitled to serve as a member of the board of directors of a reasonable number of companies in which Internet Healthcare Group has invested and 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. COMPENSATION. (a) Base Salary. Employer will pay Executive a base salary in the amount of $1,000,000 per year ("Base Salary"), with annual review for increase by the Board or a duly authorized committee thereof, it being understood that any such increase shall be at the discretion of the Board or a duly authorized committee thereof, which amount will be paid in semi-monthly intervals, less appropriate withholdings for federal and state taxes and other deductions authorized by Executive. (b) Bonus. Executive shall be entitled to an annual target bonus opportunity of 100% of Base Salary ("Target Bonus"). The applicable performance targets for each year shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with 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 performance criteria upon which such Performance Targets are based shall be one or more of the performance criteria set forth in the Company's Management Incentive Plan. 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% 120% 200% 2 The Board or a duly authorized committee thereof may, in its sole discretion, authorize the Company to pay to Executive additional bonus amounts. The portion of Target Bonus earned by 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). The Target Bonus or applicable percentage thereof, if any, for a given year shall be earned on December 31 of such year and, except as specifically set forth in Sections 6(c)(ii) and (iii), 6(d)(ii) and (iii) and 6(e)(ii) and (iii), Executive shall not be entitled to any payment of Target Bonus, or a percentage thereof, for a given year if he is not employed on December 31 of such year. (c) Sign-On Arrangements (i) Stock Grant. The Company shall grant to Executive on the Operative Date 83,752 shares of common stock (the "Signing Bonus Shares"). 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) Executive's termination of employment. The Company shall make a cash payment to Executive within 10 business days of the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon the highest applicable marginal rate for Connecticut residents performing services in that state and net of the maximum reduction in federal income taxes attributable to the deduction of such state and local taxes), Executive is left with an amount equal to (i) the aggregate federal, state and local taxes on the Signing Bonus Shares less (ii) an amount equal to the product of (A) 15% plus the highest marginal long-term capital gains rate in Connecticut for residents performing services in that state times (B) the difference between the closing price of common stock on the Operative Date over $11.94 times (C) the number of Signing Bonus Shares (such amount in clause (ii), the "Signing Bonus Shares Capital Gains Amount"). In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Signing Bonus Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) exceed the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Company shall make an additional payment to the Executive such that Executive is left with an amount, together with the amount paid to him in accordance with the third sentence of this Section 4(c)(i), equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of the receipt of the 3 Signing Bonus Shares, less the Signing Bonus Shares Capital Gains Amount. In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Signing Bonus Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) are less than the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Executive shall pay to the Company an amount such that the Executive is left with an amount equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of receipt of the Signing Bonus Shares, less the Signing Bonus Shares Capital Gains Amount. (ii) Stock Purchase. Executive shall purchase on the Operative Date for $1,000,000 in cash 83,752 shares of common stock (the "Purchased Shares"). The Purchased 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) Executive's termination of employment. The Company shall make a cash payment to Executive within 10 business days of the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon the highest applicable marginal rate for Connecticut residents performing services in that state and net of the maximum reduction in federal income taxes attributable to the deduction of such state and local taxes), Executive is left with an amount equal to (i) the aggregate federal, state and local taxes on the Purchased Shares less (ii) an amount equal to the product of (A) 15% plus the highest marginal long-term capital gains rate in Connecticut for residents performing services in that state times (B) the difference between the closing price of common stock on the Operative Date over $11.94 times (C) the number of Purchased Shares (such amount in clause (ii), the "Purchased Shares Capital Gains Amount"). In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Purchased Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) exceed the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Company shall make an additional payment to the Executive such that Executive is left with an amount, together with the amount paid to him in accordance with the third sentence of this Section 4(c)(i), equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of the receipt of the Purchased Shares, less the Purchased Shares Capital Gains Amount. In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Purchased Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) are less than the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Executive shall pay to the Company an amount such that the Executive is left with an amount equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of receipt of the Purchased Shares, less the Purchased Shares Capital Gains Amount. (iii) Stock Options. The Company shall grant to Executive on the Operative Date options to purchase Magellan's common stock covering 1,445,511 shares with a ten-year term as follows: 4 (A) A tranche of options for 413,002 shares with an exercise price equal to $11.94 per 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 $11.94 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 Agreement regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (B) Another tranche of options for 619,505 shares with an exercise price of $10.43 per share 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 $11.94 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 Agreement regarding termination of employment, such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. 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. (C) Another tranche of options for 413,004 shares with an exercise price equal to $11.94 per share shall become vested and exercisable as to one third of the shares on each Vesting Date. The Company shall register the shares acquired by Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. (d) Benefits. Executive shall be 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 5 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 Executive of no less than three times Executive's Base Salary, 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 Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. (e) Other Long Term Incentives. Executive shall be 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. (f) Deferred Compensation Plan. For so long as the Company sponsors a deferred compensation plan approved by the Board on or after the Operative Date. Executive shall be entitled to participate in any such qualified or non-qualified deferred compensation plan with the Company contributing an amount equal to 11% of Executive's Base Salary or, if greater, such amount as is provided to other senior executives, on terms no less favorable a basis than is made available to other senior executives of the Company, 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. (g) Perquisites. Executive shall be 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 shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax services, financial planning, and car allowances in the aggregate of no less than $27,000 per annum, a personal membership in a country club at a reasonable cost and health club in the vicinity of the Offices, and 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. 5. EXPENSES. During the term of this Agreement, Employer will reimburse Executive promptly for all reasonable and appropriate travel, entertainment, parking, business meetings and similar expenditures in pursuance and furtherance of Employer's business and all licensing and professional organization dues and fees and all other expenses reimbursable to employees generally pursuant to the Company's policies upon receipt of reasonably supporting documentation as required by Employer's policies applicable to its employees generally. In addition, Executive shall be entitled to reimbursement for 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. 6 6. TERMINATION. (a) Termination Due to Resignation. Executive may resign his or her employment at any time by giving 90 days written notice of resignation to Employer. Except as otherwise set forth in this Agreement, Executive's employment, and Executive's right to receive compensation and benefits from Employer, will terminate upon the effective date of Executive's termination. If Executive resigns pursuant to this Section 6(a), Employer's only remaining financial obligation to Executive under this Agreement will be to pay: (i) any earned but unpaid Base Salary through the date of termination, (ii) 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 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 other amounts earned, accrued or owing to Executive but not yet paid, and (iv) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. (b) Termination with Cause. Except as otherwise set forth in this Section 6(b), Executive's employment, and Executive's right to receive compensation and benefits from Employer, may be terminated for Cause at the discretion of Employer under the following circumstances: (i) Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by Executive; (iii)(A) material breach of Section 8(b), (c) or (d) of this Agreement or (B) a willful and material breach of Section 8(a) of this Agreement; (iv) a willful and material violation by Executive of the Company's written policies and procedures that are legal and ethical, have been made available to 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 Executive relating to the performance of his duties for the Company; or 7 (v) willful failure to comply with direction of 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) are action 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 Chairman or Chief Executive Officer 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. Each of clauses (i) through (v) are independent of others and the fact that Executive may not be terminated for Cause under any one of such clauses shall have no bearing on whether he may be terminated for Cause under any other such clauses. For purposes of clauses (iii) and (iv)(but not clause(v)), 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 to the contrary notwithstanding, Executive's employment shall not be terminated for "Cause," within the meaning of clauses (ii) through (v) above, unless 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), Executive has an opportunity to be heard before the Board and after such hearing, the Board gives Executive written notice confirming that in the judgment of a majority of the members of the Board that, for so long as the Company has or is required by law to have two such directors, includes at least two directors who are independent for purposes of the listing requirements of the principal securities exchange (including, for this purpose, the Nasdaq Stock Market) on which the Company's securities are listed (or, in the event the Company's securities are no longer listed on any such securities exchange, the listing requirements of the last such exchange on which the Company's securities were listed) "Cause" for terminating Executive's employment on the basis set forth in the original notice exists. 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 this Agreement. If an arbitrator or arbitrators determine that the basis of Cause did not exist, then Executive's termination of employment shall be treated as a termination without Cause. If Executive's employment is terminated pursuant to this Section 6(b), (A) Employer's only remaining financial obligation to Executive under this Agreement will be to pay: (i) any earned but unpaid Base Salary through the date of termination, (ii) any other amounts earned, accrued or owing to Executive but not yet paid, and (iii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate and (B) all stock options shall terminate immediately upon the date of termination. 8 (c) Automatic Termination. This Agreement will terminate automatically upon the death or Disability of Executive. "Disability" shall mean 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 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 doctor who shall be the approved medical doctor for this purpose. If Executive's employment is terminated pursuant to this Section 6(c), Executive (or in the event of his death, his estate or other legal representative) will receive: (i) Base Salary through the end of the month in which termination occurs; (ii) An amount equal to the product of the Target Bonus for the year in which termination occurs and a fraction, the numerator of which is the number of elapsed days in such year of termination up to and including the date of termination and the denominator of which is 365 (366 in the case of a leap year)("pro rata Target Bonus"), payable in a single installment immediately after termination; (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any other amounts earned, accrued or owing to Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. (d) Termination Without Cause By The Company or With Good Reason By Executive. Employer may terminate this Agreement and Executive's employment without Cause at any time. If Employer terminates this Agreement without Cause, or if Executive terminates this Agreement and Executive's employment with Good Reason, Executive shall (unless Section 6(e) is applicable) receive: 9 (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; (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for three 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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this three-year post-termination exercise period; (v) continued participation for 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 Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of 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 Executive reimburses the Company for such premiums); (vii) any other amounts earned, accrued or owing to Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. 10 For purposes of this Agreement "Good Reason" shall mean termination by 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 Executive's then current Base Salary, the Target Bonus opportunity (i.e., 100% of Base Salary) or, to the extent as would constitute a breach of this Agreement, any other compensation to which Executive is entitled under this Agreement, other than a reduction in the right to participate in a deferred compensation plan if such reduction is applicable to all senior executives; (ii) a material diminution in Executive's positions, duties or authorities (including any removal of Executive from any position set forth in Section 2 above, or any failure to elect or re-elect Executive as Chairman of the Board) or interference with 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 Chairman of the Board or as Chief Executive Officer (including any action by the Board or one or more members thereof to give direction to other employees of the Company with the intent of undermining, or in a manner that, by itself or in combination with other actions described in this parenthetical in clause (ii), could reasonably be expected to materially undermine, Executive's authority, provided that no action taken by (A) the Board or one or more members thereof in accordance with any requirement of law or regulation or the listing standards of NASDAQ or other securities exchange on which the Company's securities are listed or (B) the Board as a whole or a duly authorized committee of the Board as a whole, in accordance with generally accepted principles of sound corporate governance for public companies of the size and nature of the Company, shall constitute "Good Reason"); (iii) the assignment to Executive of duties which are materially inconsistent with his duties or which materially impair Executive's ability to function as Chairman or as Chief Executive Officer of the Company; (iv) a change in the reporting structure so that Executive reports to someone other than the Board; (v) requiring Executive to relocate, or the relocation of the Offices, to a location that is more than 30 miles from Avon, Connecticut; (vi) a breach by the Company of any material provision of this 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 11 (viii) for any reason by Executive during the 30-day period immediately following the six-month anniversary of a Change in Control (whether or not Executive consented to such Change in Control); provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after Executive gives the Company notice thereof. (e) Termination Without Cause By the Company or With Good Reason By Executive In Connection With, Or Within Three Years After, A Change in Control. If Employer terminates this Agreement and Executive's employment without Cause, or if Executive terminates this Agreement and his employment with Good Reason, in connection with a Change in Control (as defined below)(whether before or at the time of such Change in Control) or within three years after a Change in Control, Executive shall receive, in lieu of the amounts and benefits described in Section 6(d): (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) 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for three 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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this three-year post-termination exercise period; provided that this clause (iv) shall apply to stock options that vested upon the Change in Control as provided in Section 7 below only if such options will receive more favorable treatment under this clause; (v) continued participation for Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for three years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of Executive's date of termination; 12 (vi) at his election, continuation of his life insurance and/or long-term disability coverage by the Company for up to three years following termination (provided Executive reimburses the Company for such premiums); (vii) any other amounts earned, accrued or owing to Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. For purposes of this Agreement "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 the Operative 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; 13 (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, (A) "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, (B) "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, (C) "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, and (D) the "Minimum Hold Condition" has the meaning set forth in the Company's Certificate of Incorporation. (f) Effect of Termination. Except as otherwise provided for in this Section 6, upon termination of this Agreement, all rights and obligations under this Agreement will cease except for the rights and obligations under the last sentence of Section 1, this Section 6 and Sections 7, 8, 9 and 10; and all procedural and remedial provisions of this Agreement. (g) No Mitigation; No Offset. In the event of a termination of employment (including non-renewal of the term by the Company), Executive shall be under no obligation to seek other employment, and there shall be no offset against any 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 Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 14 7. CHANGE IN CONTROL PROTECTION. (a) Treatment of Equity. There shall be full vesting immediately prior to a Change in Control that occurs prior to the termination of Executive's employment for any reason of all outstanding equity awards (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 Inventive 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 a Change in Control that occurs prior to the termination of Executive's employment for any reason. (b) Tax Gross-Up. The following provisions shall apply with respect to any excise tax imposed under Section 4999 of the Internal Revenue Code as amended (the "Code"), (the "Excise Tax"): (i) If any of the payments or benefits received or to be received by Executive in connection with a Change in Control or Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person (the "Total Payments")) will be subject to the Excise Tax, the Company shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after payment of (a) the Excise Tax, if any, on the Total Payments and (b) any Excise Tax and income tax due in respect of the Gross-Up Payment, shall equal the Total Payments. Such payment shall be made in a single lump sum within 10 days following the date a determination that only such payment is required. (ii) For purposes of determining whether any of the Total Payments will be subject to Excise Tax and the amount of such Excise Tax, (i) any Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the Company and reasonably acceptable to Executive, such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, and all "excess parachute payments" (within the meaning of Section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax unless, in the opinion of such tax counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code), or are otherwise not subject to the Excise Tax, and (ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and employment taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the date of termination of employment (or such other time as hereinafter described), net of the maximum reduction in federal income or employment taxes which could be obtained from deduction of such state and local taxes. 15 In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive's employment (or such other time as is hereinafter described), Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the applicable federal rate, as defined in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Executive's employment (or such other time as is hereinafter described) (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest at the applicable federal rate, penalties or additions payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 8. PROTECTION OF CONFIDENTIAL INFORMATION/NON-COMPETITION/NON-SOLICITATION. Executive covenants and agrees as follows: (a)(i) Confidential Information: During Employer's employment of Executive and following the termination of Executive's employment for any reason, Executive will not use or disclose, directly or indirectly, for any reason whatsoever or in any way, other than at the direction of Employer during the course of Executive's employment or after receipt of the prior written consent of Employer, any Confidential Information (as hereinafter defined) of Employer or its controlled subsidiaries or affiliates, that comes into his or her knowledge during his or her employment by Employer (the "Confidential Information"). The obligation not to use or disclose any Confidential Information will not apply to any Confidential Information that (i) is or becomes public knowledge through no fault of Executive, and that may be utilized by the public without any direct or indirect obligation to Employer, but the termination of the obligation for non-use or nondisclosure by reason of such information becoming public will extend only from the date such information becomes public knowledge or (ii) is obligated to be produced under order of a court of competent jurisdiction or a valid administrative, congressional, or other subpoena, civil investigative demand or similar process; PROVIDED, HOWEVER, that upon issuance of any such order, subpoena, demand or other process, Executive shall promptly notify the Employer and shall provide the Employer with an opportunity (if then available) to contest and cooperate with the Employer to contest, in each case, at the Employer's expense, the propriety of such order or subpoena (or to arrange for appropriate safeguards against any further disclosure by the court or administrative or congressional body seeking to compel disclosure of such Confidential Information). The above will be without prejudice to any additional rights or remedies of Employer under any state or federal law protecting trade secrets or other information. 16 (a)(ii) Trade Secrets. Executive shall hold in confidence all Trade Secrets of Employer, its direct and indirect subsidiaries, and/or its customers that came into his or her knowledge during his or her employment by Employer and shall not disclose, publish or make use of at any time after the date hereof such Trade Secrets, other than at the direction of Employer, for as long as the information remains a Trade Secret. (a)(iii) For purposes of this Agreement, the following definitions apply: "Confidential Information" means any data or information, other than Trade Secrets, that is valuable to Employer and not generally known to the public or to competitors of Employer. "Trade Secret" means information including, but not limited to, any technical or non-technical data, know-how, software, formula, pattern, compilation, program, device, method, technique, plan, blueprint, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers or other information similar to any of the foregoing, which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (a)(iv) Interpretation. The restrictions stated in paragraphs 8(a)(i) and 8(a)(ii) are in addition to and not in lieu of protections afforded to trade secrets and confidential information under applicable state law. Nothing in this Agreement is intended to or shall be interpreted as diminishing or otherwise limiting Employer's right under applicable state law to protect its trade secrets and confidential information. (b) Non-Competition. (i) Executive covenants and agrees that 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, he or she will not directly or indirectly engage in or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, associated with or in any manner connected with, lend Executive's name or any similar name to, lend Executive's credit to, or render services or advice to any business 17 that provides or sells or attempts to provide or sell behavioral managed care services, in the United States or any other geographic location in which Employer or a controlled subsidiary or affiliate of Employer then sells or provides behavioral managed care services, other than Internet Healthcare Group, Digital, Lumenos, RealMed, CPA2Biz, Navimedix, and iKnowMed, unless waived in writing by Employer in its sole discretion. Executive recognizes that the above restriction is reasonable and necessary to protect the interest of the Employer and its controlled subsidiaries and affiliates, which are engaged in the provision, or sale of behavioral managed care services. The foregoing shall not be deemed to prohibit Executive's association with a company if an immaterial portion of such company's revenues is attributable to operations directly competitive with the Company (provided Executive is not employed within those directly competitive operations). Further, nothing contained in this Section 8(b)(i) shall restrict Executive from making any investments in any corporation or other business enterprise whose outstanding capital stock or other equity interests are listed or admitted to unlisted trading privileges on a national securities exchange or included for quotation through an inter-dealer quotation system of a registered national securities association, provided that such investment (i) represents less than five percent (5%) of the aggregate outstanding capital stock or other equity interests of such corporation, partnership or business enterprise and (ii) does not otherwise provide Executive or any affiliate of Executive with the right or power (whether or not exercised) to influence, direct or cause the direction of the management, policies and/or affairs of any business or enterprise which is or might directly or indirectly compete with any business operations or activities of Company or any of its subsidiaries. 18 (ii) During the period following Executive's termination from his or her employment with Employer for which Executive is subject to the restrictions set forth in Section 8(b)(i), Executive may submit a written request to Employer outlining a proposed employment or other employment opportunity that Executive is considering. Employer will review such request and make a determination, in its sole discretion, as to whether the opportunity would constitute a breach of the non-competition covenant. (c) Non-Solicitation. To protect the goodwill of Employer and its controlled subsidiaries and affiliates, or the customers of Employer and its controlled subsidiaries and affiliates, Executive agrees that, during his employment and 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, he or she will not, without the prior written permission of Employer, directly or indirectly, for himself or herself or on behalf of any other person or entity, solicit, divert away, take away or attempt to solicit or take away any Customer of Employer for purposes of providing or selling services that are offered by Employer or a controlled subsidiary or affiliate of Employer. For purposes of this Section 8(c), "Customer" means any individual or entity to whom Employer or its controlled subsidiaries or affiliates has provided, or contracted to provide, services during the twelve months prior to the termination of his or her employment. (d) Solicitation of Employees. During Employer's employment of Executive and 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, Executive will not, and will not assist any other person or entity to, directly or indirectly, solicit for employment or consultation any employee of Employer or any of its controlled subsidiaries or affiliates who was employed with Employer or its controlled subsidiaries or affiliates within the one year period immediately prior to Executive's termination, or in any manner knowingly induce or attempt to induce any such employee to terminate his or her employment with Employer. 9. WORK MADE FOR HIRE. Executive agrees that any written program materials, protocols, research papers, other writings (including those in electronic format), as well as improvements, inventions, new techniques, programs or products (the "Work") made or developed by Executive within or after normal working hours relating to the business or activities of Employer or any of its subsidiaries, shall be deemed to have been made or developed by Executive solely for the benefit of Employer and will be considered "work made for hire" within the meaning of the United States Copyright Act, Title 17, United States Code, which vests all copyright interest in and to the Work in the Employer. In the event, however, that any court of competent jurisdiction finally declares 19 that the Work is not or was not a work made for hire as agreed, Executive agrees to assign, convey, and transfer to the Employer all right, title and interest Executive may presently have or may have or be deemed to have in and to any such Work and in the copyright of such work, including but not limited to, all rights of reproduction, distribution, publication, public performance, public display and preparation of derivative works, and all rights of ownership and possession of the original fixation of the Work and any and all copies, without payment of any consideration by Employer, except as set forth in this Agreement. Additionally, Executive agrees to execute any documents necessary for Employer to record and/or perfect its ownership of the Work and the applicable copyright. 10. PROPERTY OF EMPLOYER. Executive agrees that, upon the termination of Executive's employment with Employer, Executive will immediately surrender to Employer all property, equipment, funds, lists, books, records and other materials of Employer or its controlled subsidiaries or affiliates in the possession of or provided to Executive. 11. GOVERNING LAW. This Agreement and all issues relating to the validity, interpretation, and performance will be governed by, interpreted, and enforced under the laws of the State of Connecticut. 12. REMEDIES. An actual or threatened violation by Executive of the covenants and obligations set forth in Sections 8, 9 and 10 will cause irreparable harm to Employer or its controlled subsidiaries or affiliates and the remedy at law for any such violation will be inadequate. Executive agrees, therefore, that Employer or its controlled subsidiaries or affiliates will be entitled to appropriate equitable relief, including, but not limited to, a temporary restraining order and a preliminary injunction, without the necessity of posting a bond. 13. ARBITRATION. Except for an action for injunctive relief as described in Section 12, any disputes or controversies arising under this Agreement will be settled by arbitration in Hartford, Connecticut, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The determination and findings of such arbitrators will be final and binding on all parties and may be enforced, if necessary, in any court of competent jurisdiction. The costs and expenses of the arbitration shall be paid for by Employer, but each party shall pay its own attorney's fees and other litigation costs. - ------ Executive's Initials 13. NOTICES. Any notice or request required or permitted to be given to any party will be given in writing and, excepting personal delivery, will be given at the address set forth below or at such other address as such party may designate by written notice to the other party to this Agreement: 20 To Executive: Steven J. Shulman 39 Hazen Drive Avon, Connecticut 06001 Tel. (860) 677-1823 Fax (860) 677-0731 To Employer: Magellan Health Services, Inc. 6950 Columbia Gateway Drive Columbia, Maryland 21046 Attention: General Counsel and Lead Director Each notice given in accordance with this Section will be deemed to have been given, if personally delivered, on the date personally delivered; if delivered by facsimile transmission, when sent and confirmation of receipt is received; or, if mailed, on the third day following the day on which it is deposited in the United States mail, certified or registered mail, return receipt requested, with postage prepaid, to the address last given in accordance with this Section. 14. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and should not be construed or interpreted to restrict or modify any of the terms or provisions of this Agreement. 15. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision will be fully severable and this Agreement and each separate provision will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. In addition, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically, as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable, to the extent such reformation is allowable under applicable law. 16. BINDING EFFECT. This Agreement will be binding upon and shall inure to the benefit of each party and each party's respective successors, heirs and legal representatives. This Agreement may not be assigned by Executive to any other person or entity but may be assigned by Employer to any subsidiary or affiliate of Employer or to any successor to or transferee of all, or any part, of the stock or assets of Employer. 17. EMPLOYER POLICIES, REGULATIONS, AND GUIDELINES FOR EMPLOYEES. Employer may issue policies, rules, regulations, guidelines, procedures or other material, whether in the form of handbooks, memoranda, or otherwise, relating to its Executives. These materials are general guidelines for Executive's information and will not be construed to alter, modify, or amend this Agreement for any purpose whatsoever. 21 18. INDEMNIFICATION. The Company shall indemnify Executive to the fullest extent permitted by the laws of State of Delaware and the Company shall obtain and maintain directors and officers liability insurance in an amount not less than $50 million. 20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties with respect to its subject matter and supersedes all prior agreements and understandings, whether written or oral, relating to its subject matter, unless expressly provided otherwise within this Agreement. No amendment or modification of this Agreement, will be valid unless made in writing and signed by each of the parties. No representations, inducements, or agreements have been made to induce either Executive or Employer to enter into this Agreement, which are not expressly set forth within this Agreement. Executive and Employer acknowledge and agree that Employer's controlled subsidiaries and affiliates are express third party beneficiaries of this Agreement. [signatures follow] 22 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 5th day of January, 2004. MAGELLAN HEALTH SERVICES, INC. "Executive" "Employer" By: - -------------------------------- ------------------------------------- Name: Title: Lead Director By: - ------------------------------------- ------------------------------------- Name: Title: 23 EX-2 6 jd1-6ex2_12.txt 2.12 Exhibit 2.12 EXECUTION COPY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and between Rene Lerer ("Executive") and Magellan Health Services, Inc. on behalf of itself and its subsidiaries and affiliates (collectively referred to herein as the "Company" or "Employer"). WHEREAS, Employer desires to continue to obtain the services of Executive and Executive desires to continue to render services to Employer; and WHEREAS, Employer and Executive desire to set forth the terms and conditions of Executive's employment with Employer under this Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and agreements contained in this Agreement, the parties agree as follows: STATEMENT OF AGREEMENT ---------------------- 1. EMPLOYMENT. Employer agrees to employ Executive, and Executive accepts such employment in accordance with the terms of this Agreement (provided, however, that the payments to be made under Section 4(b) and 4(c)(iii) intended to be exempt from Section 162(m) of the Internal Revenue Code of 1986, as amended, are subject to approval by the Company's shareholders), for a term of three years from the date of the Company's emergence from bankruptcy (the "Operative Date"). Thereafter, this Agreement shall automatically renew for twelve (12) month periods, unless sooner terminated as provided herein. If either party desires not to renew the Agreement, they must provide the other party with written notice of their intent not to renew the Agreement at least six (6) months prior to the next renewal date. Employer's notice of intent not to renew the Agreement shall be deemed to be a termination without Cause (as defined below) occurring immediately prior to the expiration of the term of this Agreement and the provisions of Section 6(d) or 6(e), as applicable, shall apply. 2. POSITION AND DUTIES OF EXECUTIVE; LOCATION OF EMPLOYMENT. (a) Executive will serve as President and Chief Operating Officer and member of the board of directors of the Company (as constituted following the Operative Date) (the "Board"). 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. Executive agrees to serve in such position, until the expiration of the term or such time as Executive's employment with Employer is terminated pursuant to this Agreement. (b) Executive shall perform his duties at the Company's principal executive offices to be located in Avon, Connecticut, or within 30 miles thereof, at which shall be based Executive and a substantial portion of the employees reporting directly to Chief Executive Officer (the "Offices"). 3. TIME DEVOTED. Executive will devote his or her full business time and energy to the business affairs and interests of Employer, and will use his or her best efforts and abilities to promote Employer's interests. Executive agrees that he or she will diligently endeavor to perform services contemplated by this Agreement in a manner consistent with his or her position and in accordance with the policies established by the Employer. Notwithstanding the foregoing, Executive shall be entitled to serve as a member of the board of directors of a reasonable number of companies in which Internet Healthcare Group has invested and 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. COMPENSATION. (a) Base Salary. Employer will pay Executive a base salary in the amount of $600,000 per year ("Base Salary"), with annual review for increase by the Chief Executive Officer, subject to approval by the Board or a duly authorized committee thereof, which amount will be paid in semi-monthly intervals, less appropriate withholdings for federal and state taxes and other deductions authorized by Executive. (b) Bonus. Executive shall be entitled to an annual target bonus opportunity of 75% of Base Salary ("Target Bonus"). The applicable performance targets for each year shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with 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 performance criteria upon which such Performance Targets are based shall be one or more of the performance criteria set forth in the Company's Management Incentive Plan. 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% The Chief Executive Officer may, in his sole discretion, authorize the Company to pay Executive additional bonus amounts, subject to approval by the Board or a duly authorized committee thereof. The portion of Target Bonus earned by 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). The Target Bonus or applicable percentage thereof, if any, for a given year shall be earned on December 31 of such year and, except as specifically set forth in Sections 6(c)(ii) and (iii), 6(d)(ii) and (iii) and 6(e)(ii) and (iii), Executive shall not be entitled to any payment of Target Bonus, or a percentage thereof, for a given year if he is not employed on December 31 of such year. 2 (c) Sign-On Arrangements (i) Stock Grant. The Company shall grant to Executive on the Operative Date 50,251 shares of common stock (the "Signing Bonus Shares"). 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) Executive's termination of employment. The Company shall make a cash payment to Executive within 10 business days of the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon the highest applicable marginal rate for Connecticut residents performing services in that state and net of the maximum reduction in federal income taxes attributable to the deduction of such state and local taxes), Executive is left with an amount equal to (i) the aggregate federal, state and local taxes on the Signing Bonus Shares less (ii) an amount equal to the product of (A) 15% plus the highest marginal long-term capital gains rate in Connecticut for residents performing services in that state times (B) the difference between the closing price of common stock on the Operative Date over $11.94 times (C) the number of Signing Bonus Shares (such amount in clause (ii), the "Signing Bonus Shares Capital Gains Amount"). In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Signing Bonus Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) exceed the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Company shall make an additional payment to the Executive such that Executive is left with an amount, together with the amount paid to him in accordance with the third sentence of this Section 4(c)(i), equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of the receipt of the Signing Bonus Shares, less the Signing Bonus Shares Capital Gains Amount. In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Signing Bonus Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) are less than the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Executive shall pay to the Company an amount such that the Executive is left with an amount equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of receipt of the Signing Bonus Shares, less the Signing Bonus Shares Capital Gains Amount. (ii) INTENTIONALLY OMITTED (iii) Stock Options. The Company shall grant to Executive on the Operative Date options to purchase Magellan's common stock covering 867,307 shares with a ten-year term as follows: 3 (A) A tranche of options for 247,802 shares with an exercise price equal to $11.94 per 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 $11.94 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 Agreement regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (B) Another tranche of options for 371,703 shares with an exercise price of $10.43 per share 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 $11.94 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 Agreement regarding termination of employment, such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. 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. (C) Another tranche of options for 247,802 shares with an exercise price equal to $11.94 per share shall become vested and exercisable as to one third of the shares on each Vesting Date. The Company shall register the shares acquired by Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. (d) Benefits. Executive shall be 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 Executive of no less than three times Executive's Base Salary, 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 Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. 4 (e) Other Long Term Incentives. Executive shall be 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. (f) Deferred Compensation Plan. For so long as the Company sponsors a deferred compensation plan approved by the Board on or after the Operative Date, Executive shall be entitled to participate in any such qualified or non-qualified deferred compensation plan with the Company contributing an amount equal to 11% of Executive's Base Salary or, if greater, such amount as is provided to other senior executives, on terms no less favorable a basis than is made available to other senior executives of the Company, 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. (g) Perquisites. Executive shall be entitled to perquisites at least as favorable as those provided other similarly-situated, senior-level executives of the Company (not including the Chairman and Chief Executive Officer), it being understood that this provision shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax services, financial planning, and car allowances in the aggregate of no less than $16,200 per annum, a personal membership in a country club at a reasonable cost and a health club. The Company agrees to take reasonable actions to minimize any tax liability of Executive related to the perquisites made available hereunder. 5. EXPENSES. During the term of this Agreement, Employer will reimburse Executive promptly for all reasonable and appropriate travel, entertainment, parking, business meetings and similar expenditures in pursuance and furtherance of Employer's business and all licensing and professional organization dues and fees and all other expenses reimbursable to employees generally pursuant to the Company's policies upon receipt of reasonably supporting documentation as required by Employer's policies applicable to its employees generally. In addition, Executive shall be entitled to reimbursement for 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. 5 6. TERMINATION. (a) Termination Due to Resignation. Executive may resign his or her employment at any time by giving 90 days written notice of resignation to Employer. Except as otherwise set forth in this Agreement, Executive's employment, and Executive's right to receive compensation and benefits from Employer, will terminate upon the effective date of Executive's termination. If Executive resigns pursuant to this Section 6(a), Employer's only remaining financial obligation to Executive under this Agreement will be to pay: (i) any earned but unpaid Base Salary through the date of termination, (ii) 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 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 other amounts earned, accrued or owing to Executive but not yet paid, and (iv) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. (b) Termination with Cause. Except as otherwise set forth in this Section 6(b), Executive's employment, and Executive's right to receive compensation and benefits from Employer, may be terminated for Cause at the discretion of Employer under the following circumstances: (i) Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by Executive; (iii) (A) material breach of Section 8(b), (c) or (d) of this Agreement or (B) a willful and material breach of Section 8(a) of this Agreement; (iv) a willful and material violation by Executive of the Company's written policies and procedures that are legal and ethical, have been made available to 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 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) are action 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. 6 Each of clauses (i) through (v) are independent of others and the fact that Executive may not be terminated for Cause under any one of such clauses shall have no bearing on whether he may be terminated for Cause under any other such clauses. For purposes of clauses (iii) and (iv)(but not clause(v)), 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 to the contrary notwithstanding, Executive's employment shall not be terminated for "Cause," within the meaning of clauses (ii) through (v) above, unless 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), Executive has an opportunity to be heard before the Board and after such hearing, the Board gives Executive written notice confirming that in the judgment of a majority of the members of the Board that, for so long as the Company has or is required by law to have two such directors, includes at least two directors who are independent for purposes of the listing requirements of the principal securities exchange (including, for this purpose, the Nasdaq Stock Market) on which the Company's securities are listed (or, in the event the Company's securities are no longer listed on any such securities exchange, the listing requirements of the last such exchange on which the Company's securities were listed) "Cause" for terminating Executive's employment on the basis set forth in the original notice exists. 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 this Agreement. If an arbitrator or arbitrators determine that the basis of Cause did not exist, then Executive's termination of employment shall be treated as a termination without Cause. If Executive's employment is terminated pursuant to this Section 6(b), (A) Employer's only remaining financial obligation to Executive under this Agreement will be to pay: (i) any earned but unpaid Base Salary through the date of termination, (ii) any other amounts earned, accrued or owing to Executive but not yet paid, and (iii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate and (B) all stock options shall terminate immediately upon the date of termination. (c) Automatic Termination. This Agreement will terminate automatically upon the death or Disability of Executive. "Disability" shall mean 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 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 doctor who shall be the approved medical doctor for this purpose. If Executive's employment is terminated pursuant to this Section 6(c), Executive (or in the event of his death, his estate or other legal representative) will receive: 7 (i) Base Salary through the end of the month in which termination occurs; (ii) An amount equal to the product of the Target Bonus for the year in which termination occurs and a fraction, the numerator of which is the number of elapsed days in such year of termination up to and including the date of termination and the denominator of which is 365 (366 in the case of a leap year)("pro rata Target Bonus"), payable in a single installment immediately after termination; (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any other amounts earned, accrued or owing to Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. (d) Termination Without Cause By The Company or With Good Reason By Executive. Employer may terminate this Agreement and Executive's employment without Cause at any time. If Employer terminates this Agreement without Cause, or if Executive terminates this Agreement and Executive's employment with Good Reason, Executive shall (unless Section 6(e) is applicable) receive: (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; 8 (iii) 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) continued participation for 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 Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of 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 Executive reimburses the Company for such premiums); (vii) any other amounts earned, accrued or owing to Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. For purposes of this Agreement "Good Reason" shall mean termination by 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 Executive's then current Base Salary, the Target Bonus opportunity (i.e., 75% of Base Salary) or, to the extent as would constitute a breach of this Agreement, any other compensation to which Executive is entitled under this Agreement, other than a reduction in the right to participate in a deferred compensation plan if such reduction is applicable to all senior executives; (ii) a material diminution in Executive's positions, duties or authorities (including any removal of 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 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; 9 (iii) the assignment to Executive of duties which are materially inconsistent with his duties or which materially impair Executive's ability to function as President, Chief Operating Officer of the Company or as director; (iv) a change in the reporting structure so that Executive reports to someone other than the Chief Executive Officer (or an interim chief executive officer) or, in the absence of employment of a Chief Executive Officer, to the Board for a period of not more than 90 consecutive days; (v) requiring Executive to relocate, or the relocation of the Offices, to a location that is more than 30 miles from Avon, Connecticut; (vi) a breach by the Company of any material provision of this 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 Executive during the 30-day period immediately following the six-month anniversary of a Change in Control (whether or not Executive consented to such Change in Control); provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after Executive gives the Company notice thereof. (e) Termination Without Cause By the Company or With Good Reason By Executive In Connection With, Or Within Three Years After, A Change in Control. If Employer terminates this Agreement and Executive's employment without Cause, or if Executive terminates this Agreement and his employment with Good Reason, in connection with a Change in Control (as defined below)(whether before or at the time of such Change in Control) or within three years after a Change in Control, Executive shall receive, in lieu of the amounts and benefits described in Section 6(d): (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) 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; 10 (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; provided that this clause (iv) shall apply to stock options that vested upon the Change in Control as provided in Section 7 below only if such options will receive more favorable treatment under this clause; (v) continued participation for Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for three years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of 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 three years following termination (provided Executive reimburses the Company for such premiums); (vii) any other amounts earned, accrued or owing to Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. For purposes of this Agreement "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 the Operative 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; 11 (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of the Company's assets; (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, (A) "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, (B) "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, (C) "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, and (D) the "Minimum Hold Condition" has the meaning set forth in the Company's Certificate of Incorporation. (f) Effect of Termination. Except as otherwise provided for in this Section 6, upon termination of this Agreement, all rights and obligations under this Agreement will cease except for the rights and obligations under the last sentence of Section 1, this Section 6 and Sections 7, 8, 9 and 10; and all procedural and remedial provisions of this Agreement. (g) No Mitigation; No Offset. In the event of termination of employment (including non-renewal of the term by the Company), Executive shall be under no obligation to seek other employment, and there shall be no offset against any 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 Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 12 7. CHANGE IN CONTROL PROTECTION. (a) Treatment of Equity. There shall be full vesting immediately prior to a Change in Control that occurs prior to the termination of Executive's employment for any reason of all outstanding equity awards (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 Inventive 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 a Change in Control that occurs prior to the termination of Executive's employment for any reason. (b) Tax Gross-Up. The following provisions shall apply with respect to any excise tax imposed under Section 4999 of the Internal Revenue Code as amended (the "Code"), (the "Excise Tax"): (i) If any of the payments or benefits received or to be received by Executive in connection with a Change in Control or Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person (the "Total Payments")) will be subject to the Excise Tax, the Company shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after payment of (a) the Excise Tax, if any, on the Total Payments and (b) any Excise Tax and income tax due in respect of the Gross-Up Payment, shall equal the Total Payments. Such payment shall be made in a single lump sum within 10 days following the date a determination that only such payment is required. (ii) For purposes of determining whether any of the Total Payments will be subject to Excise Tax and the amount of such Excise Tax, (i) any Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the Company and reasonably acceptable to Executive, such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, and all "excess parachute payments" (within the meaning of Section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax unless, in the opinion of such tax counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code), or are otherwise not subject to the Excise Tax, and (ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) of the Code. For purposes of determining the 13 amount of the Gross-Up Payment, Executive shall be deemed to pay federal income and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and employment taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the date of termination of employment (or such other time as hereinafter described), net of the maximum reduction in federal income or employment taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive's employment (or such other time as is hereinafter described), Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the applicable federal rate, as defined in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Executive's employment (or such other time as is hereinafter described) (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest at the applicable federal rate, penalties or additions payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 8. PROTECTION OF CONFIDENTIAL INFORMATION/NON-COMPETITION/NON-SOLICITATION. Executive covenants and agrees as follows: (a)(i) Confidential Information: During Employer's employment of Executive and following the termination of Executive's employment for any reason, Executive will not use or disclose, directly or indirectly, for any reason whatsoever or in any way, other than at the direction of Employer during the course of Executive's employment or after receipt of the prior written consent of Employer, any Confidential Information (as hereinafter defined) of Employer or its controlled subsidiaries or affiliates, that comes into his or her knowledge during his or her employment by Employer (the "Confidential Information"). The obligation not to use or disclose any Confidential Information will not apply to any Confidential Information that (i) is or becomes public knowledge through no fault of Executive, and that may be utilized by the public without any direct or indirect obligation to Employer, but the termination of the obligation for non-use or nondisclosure by reason of such information becoming public will extend only from the date such information becomes public knowledge or (ii) is obligated to be produced under order of a court of competent jurisdiction or a valid administrative, congressional, or other subpoena, civil investigative demand or similar process; PROVIDED, HOWEVER, that upon issuance of any such order, subpoena, demand or other process, Executive shall promptly notify the Employer and shall provide the Employer with an opportunity (if then available) to contest and cooperate with 14 the Employer to contest, in each case, at the Employer's expense, the propriety of such order or subpoena (or to arrange for appropriate safeguards against any further disclosure by the court or administrative or congressional body seeking to compel disclosure of such Confidential Information). The above will be without prejudice to any additional rights or remedies of Employer under any state or federal law protecting trade secrets or other information. (a)(ii) Trade Secrets. Executive shall hold in confidence all Trade Secrets of Employer, its direct and indirect subsidiaries, and/or its customers that came into his or her knowledge during his or her employment by Employer and shall not disclose, publish or make use of at any time after the date hereof such Trade Secrets, other than at the direction of Employer, for as long as the information remains a Trade Secret. (a)(iii) For purposes of this Agreement, the following definitions apply: "Confidential Information" means any data or information, other than Trade Secrets, that is valuable to Employer and not generally known to the public or to competitors of Employer. "Trade Secret" means information including, but not limited to, any technical or non-technical data, know-how, software, formula, pattern, compilation, program, device, method, technique, plan, blueprint, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers or other information similar to any of the foregoing, which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (a)(iv) Interpretation. The restrictions stated in paragraphs 8(a)(i) and 8(a)(ii) are in addition to and not in lieu of protections afforded to trade secrets and confidential information under applicable state law. Nothing in this Agreement is intended to or shall be interpreted as diminishing or otherwise limiting Employer's right under applicable state law to protect its trade secrets and confidential information. (b) Non-Competition. (i) Executive covenants and agrees that 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, he or she will not directly or indirectly engage in or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, associated with or in any manner connected with, lend Executive's name or any similar name to, lend Executive's 15 credit to, or render services or advice to any business that provides or sells or attempts to provide or sell behavioral managed care services, in the United States or any other geographic location in which Employer or a controlled subsidiary or affiliate of Employer then sells or provides behavioral managed care services, other than Internet Healthcare Group, Digital, Lumenos, RealMed, CPA2Biz, Navimedix, and iKnowMed, unless waived in writing by Employer in its sole discretion. Executive recognizes that the above restriction is reasonable and necessary to protect the interest of the Employer and its controlled subsidiaries and affiliates, which are engaged in the provision, or sale of behavioral managed care services. The foregoing shall not be deemed to prohibit Executive's association with a company if an immaterial portion of such company's revenues is attributable to operations directly competitive with the Company (provided Executive is not employed within those directly competitive operations). Further, nothing contained in this Section 8(b)(i) shall restrict Executive from making any investments in any corporation or other business enterprise whose outstanding capital stock or other equity interests are listed or admitted to unlisted trading privileges on a national securities exchange or included for quotation through an inter-dealer quotation system of a registered national securities association, provided that such investment (i) represents less than five percent (5%) of the aggregate outstanding capital stock or other equity interests of such corporation, partnership or business enterprise and (ii) does not otherwise provide Executive or any affiliate of Executive with the right or power (whether or not exercised) to influence, direct or cause the direction of the management, policies and/or affairs of any business or enterprise which is or might directly or indirectly compete with any business operations or activities of Company or any of its subsidiaries. (ii) During the period following Executive's termination from his or her employment with Employer for which Executive is subject to the restrictions set forth in Section 8(b)(i), Executive may submit a written request to Employer outlining a proposed employment or other employment opportunity that Executive is considering. Employer will review such request and make a determination, in its sole discretion, as to whether the opportunity would constitute a breach of the non-competition covenant. 16 (c) Non-Solicitation. To protect the goodwill of Employer and its controlled subsidiaries and affiliates, or the customers of Employer and its controlled subsidiaries and affiliates, Executive agrees that, during his employment and 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, he or she will not, without the prior written permission of Employer, directly or indirectly, for himself or herself or on behalf of any other person or entity, solicit, divert away, take away or attempt to solicit or take away any Customer of Employer for purposes of providing or selling services that are offered by Employer or a controlled subsidiary or affiliate of Employer. For purposes of this Section 8(c), "Customer" means any individual or entity to whom Employer or its controlled subsidiaries or affiliates has provided, or contracted to provide, services during the twelve months prior to the termination of his or her employment. (d) Solicitation of Employees. During Employer's employment of Executive and 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, Executive will not, and will not assist any other person or entity to, directly or indirectly, solicit for employment or consultation any employee of Employer or any of its controlled subsidiaries or affiliates who was employed with Employer or its controlled subsidiaries or affiliates within the one year period immediately prior to Executive's termination, or in any manner knowingly induce or attempt to induce any such employee to terminate his or her employment with Employer. 9. WORK MADE FOR HIRE. Executive agrees that any written program materials, protocols, research papers, other writings (including those in electronic format), as well as improvements, inventions, new techniques, programs or products (the "Work") made or developed by Executive within or after normal working hours relating to the business or activities of Employer or any of its subsidiaries, shall be deemed to have been made or developed by Executive solely for the benefit of Employer and will be considered "work made for hire" within the meaning of the United States Copyright Act, Title 17, United States Code, which vests all copyright interest in and to the Work in the Employer. In the event, however, that any court of competent jurisdiction finally declares that the Work is not or was not a work made for hire as agreed, Executive agrees to assign, convey, and transfer to the Employer all right, title and interest Executive may presently have or may have or be deemed to have in and to any such Work and in the copyright of such work, including but not limited to, all rights of reproduction, distribution, publication, public performance, public display and preparation of derivative works, and all rights of ownership and possession of the original fixation of the Work and any and all copies, without payment of any consideration by Employer, except as set forth in this Agreement. Additionally, Executive agrees to execute any documents necessary for Employer to record and/or perfect its ownership of the Work and the applicable copyright. 17 10. PROPERTY OF EMPLOYER. Executive agrees that, upon the termination of Executive's employment with Employer, Executive will immediately surrender to Employer all property, equipment, funds, lists, books, records and other materials of Employer or its controlled subsidiaries or affiliates in the possession of or provided to Executive. 11. GOVERNING LAW. This Agreement and all issues relating to the validity, interpretation, and performance will be governed by, interpreted, and enforced under the laws of the State of Connecticut. 12. REMEDIES. An actual or threatened violation by Executive of the covenants and obligations set forth in Sections 8, 9 and 10 will cause irreparable harm to Employer or its controlled subsidiaries or affiliates and the remedy at law for any such violation will be inadequate. Executive agrees, therefore, that Employer or its controlled subsidiaries or affiliates will be entitled to appropriate equitable relief, including, but not limited to, a temporary restraining order and a preliminary injunction, without the necessity of posting a bond. 13. ARBITRATION. Except for an action for injunctive relief as described in Section 12, any disputes or controversies arising under this Agreement will be settled by arbitration in Hartford, Connecticut, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The determination and findings of such arbitrators will be final and binding on all parties and may be enforced, if necessary, in any court of competent jurisdiction. The costs and expenses of the arbitration shall be paid for by Employer, but each party shall pay its own attorney's fees and other litigation costs. - ------ Executive's Initials 14. NOTICES. Any notice or request required or permitted to be given to any party will be given in writing and, excepting personal delivery, will be given at the address set forth below or at such other address as such party may designate by written notice to the other party to this Agreement: To Executive: Rene Lerer 29 Saint Andrews Drive Avon, CT 06001 Tel: (860) 673-8702 To Employer: Magellan Health Services, Inc. 6950 Columbia Gateway Drive Columbia, Maryland 21046 Attention: General Counsel 18 Each notice given in accordance with this Section will be deemed to have been given, if personally delivered, on the date personally delivered; if delivered by facsimile transmission, when sent and confirmation of receipt is received; or, if mailed, on the third day following the day on which it is deposited in the United States mail, certified or registered mail, return receipt requested, with postage prepaid, to the address last given in accordance with this Section. 15. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and should not be construed or interpreted to restrict or modify any of the terms or provisions of this Agreement. 16. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision will be fully severable and this Agreement and each separate provision will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. In addition, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically, as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable, to the extent such reformation is allowable under applicable law. 17. BINDING EFFECT. This Agreement will be binding upon and shall inure to the benefit of each party and each party's respective successors, heirs and legal representatives. This Agreement may not be assigned by Executive to any other person or entity but may be assigned by Employer to any subsidiary or affiliate of Employer or to any successor to or transferee of all, or any part, of the stock or assets of Employer. 18. EMPLOYER POLICIES, REGULATIONS, AND GUIDELINES FOR EMPLOYEES. Employer may issue policies, rules, regulations, guidelines, procedures or other material, whether in the form of handbooks, memoranda, or otherwise, relating to its Executives. These materials are general guidelines for Executive's information and will not be construed to alter, modify, or amend this Agreement for any purpose whatsoever. 19. INDEMNIFICATION. The Company shall indemnify Executive to the fullest extent permitted by the laws of State of Delaware and the Company shall obtain and maintain directors and officers liability insurance in an amount not less than $50 million. 20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties with respect to its subject matter and supersedes all prior agreements and understandings, whether written or oral, relating to its subject matter, unless expressly provided otherwise within this Agreement. No amendment or modification of this Agreement, will be valid unless made in writing and signed by each of the parties. No representations, inducements, or agreements have been made to induce either Executive or Employer to enter into this Agreement, which are not expressly set forth within this Agreement. Executive and Employer acknowledge and agree that Employer's controlled subsidiaries and affiliates are express third party beneficiaries of this Agreement. [signatures follow] 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 5th day of Jnauary, 2004. MAGELLAN HEALTH SERVICES, INC. "Executive" "Employer" By: - ------------------------------ -------------------------------------- Name: Title: Lead Director By: - ----------------------------- ---------------------------------------- Name: Title: 20 EX-2 7 mv1-6newex2_13.txt 2.13 Exhibit 2.13 EXECUTION COPY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and between Mark S. Demilio ("Executive") and Magellan Health Services, Inc. on behalf of itself and its subsidiaries and affiliates (collectively referred to herein as the "Company" or "Employer"). WHEREAS, Employer desires to continue to obtain the services of Executive and Executive desires to continue to render services to Employer; and WHEREAS, Employer and Executive desire to set forth the terms and conditions of Executive's employment with Employer under this Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and agreements contained in this Agreement, the parties agree as follows: STATEMENT OF AGREEMENT 1. EMPLOYMENT. Employer agrees to employ Executive, and Executive accepts such employment in accordance with the terms of this Agreement (provided, however that the payments to be made under Section 4(b) and 4(c)(iii) that are intended to be exempt from Section 162(m) of the Internal Revenue Code of 1986, as amended, are subject to approval by the Company's shareholders), for a term of three years from the date of the Company's emergence from bankruptcy (the "Operative Date"). Thereafter, this Agreement shall automatically renew for twelve (12) month periods, unless sooner terminated as provided herein. If either party desires not to renew the Agreement, they must provide the other party with written notice of their intent not to renew the Agreement at least six (6) months prior to the next renewal date. Employer's notice of intent not to renew the Agreement shall be deemed to be a termination without Cause (as defined below) occurring immediately prior to the expiration of the term of this Agreement and the provisions of Section 6(d) or 6(e), as applicable, shall apply. 2. POSITION AND DUTIES OF EXECUTIVE; LOCATION OF EMPLOYMENT. (a) Executive will serve as Executive Vice President, Chief Financial Officer of the Company. Executive shall (i) report directly to the Chief Executive Officer and (ii) have such duties and responsibilities typical of, and consistent with, the positions of Executive Vice President, Chief Financial Officer in a public company the size and nature of the Company. Executive agrees to serve in such position, until the expiration of the term or such time as Executive's employment with Employer is terminated pursuant to this Agreement. (b) The Executive shall perform his duties at the Company's principal executive offices to be located in Avon, Connecticut, or within 30 miles thereof, at which shall be based Executive and a substantial portion of the employees reporting directly to Chief Executive Officer (the "Offices"), it being understood that the Executive will work in Maryland to the extent his availability is not needed in Connecticut. EMPLOYMENT AGREEMENT Mark S. Demilio 3. TIME DEVOTED. Executive will devote his or her full business time and energy to the business affairs and interests of Employer, and will use his or her best efforts and abilities to promote Employer's interests. Executive agrees that he or she will diligently endeavor to perform services contemplated by this Agreement in a manner consistent with his or her position and in accordance with the policies established by the Employer. Notwithstanding the foregoing, Executive shall be entitled to (i) with prior approval of the board of directors of the Company (the "Board"), serve on the boards of directors of a reasonable number of other companies, (ii) serve on civic or charitable boards and (iii) 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. COMPENSATION. (a) Base Salary. Employer will pay Executive a base salary in the amount of $500,000 per year ("Base Salary"), with annual review for increase by the Chief Executive Officer, subject to approval by the Board or a duly authorized committee thereof, which amount will be paid in semi-monthly intervals, less appropriate withholdings for federal and state taxes and other deductions authorized by Executive. (b) Bonus. Executive shall be entitled to an annual target bonus opportunity of 60% of Base Salary ("Target Bonus"). The applicable performance targets for each year shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with 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 performance criteria upon which such Performance Targets are based shall be one or more of the performance criteria set forth in the Company's Management Incentive Plan. 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% The Chief Executive Officer may, in his sole discretion, authorize the Company to pay Executive additional bonus amounts, subject to approval by the Board or a duly authorized committee thereof. The portion of Target Bonus earned by 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). The Target Bonus or applicable percentage thereof, if any, for a given year shall be earned on December 31 of such year and, except as specifically set forth in Sections 6(c)(ii) and (iii), 6(d)(ii) and (iii) and 2 EMPLOYMENT AGREEMENT Mark S. Demilio 6(e)(ii) and (iii), Executive shall not be entitled to any payment of Target Bonus, or a percentage thereof, for a given year if he is not employed on December 31 of such year. (c) Sign-On Arrangements (i) Stock Grant. The Company shall grant to Executive on the Operative Date 33,501 shares of common stock (the "Signing Bonus Shares"). 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) Executive's termination of employment. The Company shall make a cash payment to Executive within 10 business days of the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon the highest applicable marginal rate for a resident of Baltimore County, Maryland performing services in Connecticut and net of the maximum reduction in federal income taxes attributable to the deduction of such state and local taxes), Executive is left with an amount equal to (i) the aggregate federal, state and local taxes on the Signing Bonus Shares less (ii) an amount equal to the product of (A) 15% plus the highest marginal long-term capital gains rate for a resident of Baltimore County, Maryland performing services in Connecticut times (B) the difference between the closing price of common stock on the Operative Date over $11.94 times (C) the number of Signing Bonus Shares (such amount in clause (ii), the "Signing Bonus Shares Capital Gains Amount"). In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Signing Bonus Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) exceed the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Company shall make an additional payment to the Executive such that Executive is left with an amount, together with the amount paid to him in accordance with the third sentence of this Section 4(c)(i), equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of the receipt of the Signing Bonus Shares, less the Signing Bonus Shares Capital Gains Amount. In the event that the federal, state and local taxes (net of any reduction in federal income taxes attributable to the deduction of such state and local taxes) actually paid by Executive in excess of the Signing Bonus Shares Capital Gains Amount resulting from any payment under this Section 4(c)(i) are less than the amount paid to him by the Company in accordance with the third sentence of this Section 4(c)(i) at the time of the grant, the Executive shall pay to the Company an amount such that the Executive is left with an amount equal to the aggregate federal, state and local taxes actually paid by the Executive as a result of receipt of the Signing Bonus Shares, less the Signing Bonus Shares Capital Gains Amount. (ii) INTENTIONALLY OMITTED (iii) Stock Options. The Company shall grant to Executive on the Operative Date options to purchase Magellan's common stock covering 578,204 shares with a ten-year term as follows: 3 EMPLOYMENT AGREEMENT Mark S. Demilio (A) A tranche of options for 165,201 shares with an exercise price equal to $11.94 per 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 $11.94 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 Agreement regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (B) Another tranche of options for 247,802 shares with an exercise price of $10.43 per share 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 $11.94 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 Agreement regarding termination of employment, such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. 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. (C) Another tranche of options for 165,201 shares with an exercise price equal to $11.94 per share shall become vested and exercisable as to one third of the shares on each Vesting Date. The Company shall register the shares acquired by Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. (d) Benefits. Executive shall be 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 Executive of no less than three times Executive's Base Salary, Executive shall be permitted to purchase at his own expense additional 4 EMPLOYMENT AGREEMENT Mark S. Demilio 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 Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. (e) Other Long Term Incentives. Executive shall be 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. (f) Deferred Compensation Plan. For so long as the Company sponsors a deferred compensation plan approved by the Board on or after the Operative Date, Executive shall be entitled to participate in any such qualified or non-qualified deferred compensation plan with the Company contributing an amount equal to 11% of Executive's Base Salary or, if greater, such amount as is provided to other senior executives, on terms no less favorable a basis than is made available to other senior executives of the Company, 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. (g) Perquisites. Executive shall be entitled to perquisites at least as favorable as those provided other similarly-situated, senior-level executives of the Company (not including the Chairman and Chief Executive Officer), it being understood that this provision shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax services, financial planning, and car allowances in the aggregate of no less than $10,800 per annum, a personal membership in a country club at a reasonable cost and a health club. The Company agrees to take reasonable actions to minimize any tax liability of Executive related to the perquisites made available hereunder. 5. EXPENSES. During the term of this Agreement, Employer will reimburse Executive promptly for all reasonable and appropriate travel (including travel between Maryland and Connecticut), reasonable living expenses for maintaining an apartment or hotel room in Connecticut, entertainment, parking, business meetings and similar expenditures in pursuance and furtherance of Employer's business and all licensing and professional organization dues and fees and all other expenses reimbursable to employees generally pursuant to the Company's policies upon receipt of reasonably supporting documentation as required by Employer's policies applicable to its employees generally. In addition, Executive shall be entitled to reimbursement for 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. 5 EMPLOYMENT AGREEMENT Mark S. Demilio 6. TERMINATION. (a) Termination Due to Resignation. Executive may resign his or her employment at any time by giving 90 days written notice of resignation to Employer. Except as otherwise set forth in this Agreement, Executive's employment, and Executive's right to receive compensation and benefits from Employer, will terminate upon the effective date of Executive's termination. If Executive resigns pursuant to this Section 6(a), Employer's only remaining financial obligation to Executive under this Agreement will be to pay: (i) any earned but unpaid Base Salary through the date of termination, (ii) 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 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 other amounts earned, accrued or owing to Executive but not yet paid, and (iv) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. (b) Termination with Cause. Except as otherwise set forth in this Section 6(b), Executive's employment, and Executive's right to receive compensation and benefits from Employer, may be terminated for Cause at the discretion of Employer under the following circumstances: (i) Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by Executive; (iii) (A) material breach of Section 8(b), (c) or (d) of this Agreement or (B) a willful and material breach of Section 8(a) of this Agreement; (iv) a willful and material violation by Executive of the Company's written policies and procedures that are legal and ethical, have been made available to 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 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) are action 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 6 EMPLOYMENT AGREEMENT Mark S. Demilio policies or procedures) are consistent with the duties and role of an Executive Vice President, Chief Financial Officer 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. Each of clauses (i) through (v) are independent of others and the fact that Executive may not be terminated for Cause under any one of such clauses shall have no bearing on whether he may be terminated for Cause under any other such clauses. For purposes of clauses (iii) and (iv)(but not clause(v)), 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 to the contrary notwithstanding, Executive's employment shall not be terminated for "Cause," within the meaning of clauses (ii) through (v) above, unless 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), Executive has an opportunity to be heard before the Board and after such hearing, the Board gives Executive written notice confirming that in the judgment of a majority of the members of the Board that, for so long as the Company has or is required by law to have two such directors, includes at least two directors who are independent for purposes of the listing requirements of the principal securities exchange (including, for this purpose, the Nasdaq Stock Market) on which the Company's securities are listed (or, in the event the Company's securities are no longer listed on any such securities exchange, the listing requirements of the last such exchange on which the Company's securities were listed) "Cause" for terminating Executive's employment on the basis set forth in the original notice exists. 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 this Agreement. If an arbitrator or arbitrators determine that the basis of Cause did not exist, then Executive's termination of employment shall be treated as a termination without Cause. If Executive's employment is terminated pursuant to this Section 6(b), (A) Employer's only remaining financial obligation to Executive under this Agreement will be to pay: (i) any earned but unpaid Base Salary through the date of termination, (ii) any other amounts earned, accrued or owing to Executive but not yet paid, and (iii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate and (B) all stock options shall terminate immediately upon the date of termination. (c) Automatic Termination. This Agreement will terminate automatically upon the death or Disability of Executive. "Disability" shall mean 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 Executive. If the 7 EMPLOYMENT AGREEMENT Mark S. Demilio parties cannot agree on a medical doctor, each party shall select a medical doctor and the two doctors shall select a third doctor who shall be the approved medical doctor for this purpose. If Executive's employment is terminated pursuant to this Section 6(c), Executive (or in the event of his death, his estate or other legal representative) will receive: (i) Base Salary through the end of the month in which termination occurs; (ii) An amount equal to the product of the Target Bonus for the year in which termination occurs and a fraction, the numerator of which is the number of elapsed days in such year of termination up to and including the date of termination and the denominator of which is 365 (366 in the case of a leap year)("pro rata Target Bonus"), payable in a single installment immediately after termination; (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any other amounts earned, accrued or owing to Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. (d) Termination Without Cause By The Company or With Good Reason By Executive. Employer may terminate this Agreement and Executive's employment without Cause at any time. If Employer terminates this Agreement without Cause, or if Executive terminates this Agreement and Executive's employment with Good Reason, Executive shall (unless Section 6(e) is applicable) receive: (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; 8 EMPLOYMENT AGREEMENT Mark S. Demilio (iii) 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) continued participation for 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 Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of 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 Executive reimburses the Company for such premiums); (vii) any other amounts earned, accrued or owing to Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. For purposes of this Agreement "Good Reason" shall mean termination by 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 Executive's then current Base Salary, the Target Bonus opportunity (i.e., 60% of Base Salary) or, to the extent as would constitute a breach of this Agreement, any other compensation to which Executive is entitled under this Agreement, other than a reduction in the right to participate in a deferred compensation plan if such reduction is applicable to all senior executives; (ii) a material diminution in Executive's positions, duties or authorities (including any removal of Executive from any position set forth in Section 2 above) or interference with 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 Executive Vice President, Chief Financial Officer; (iii) the assignment to Executive of duties which are materially inconsistent with his duties or which materially impair 9 EMPLOYMENT AGREEMENT Mark S. Demilio Executive's ability to function as Executive Vice President, Chief Financial Officer of the Company; (iv) a change in the reporting structure so that Executive reports to someone other than the Chief Executive Officer (or an interim chief executive officer) or, in the absence of employment of a Chief Executive Officer, to the Board for a period of not more than 90 consecutive days; (v) requiring the Executive to relocate his personal residence from Sparks, Maryland, or the relocation of the Offices, to a location that is more than 30 miles from both Avon, Connecticut and Columbia, Maryland; provided that if Steven J. Shulman is then serving as Chief Executive Officer, a relocation of the Offices to a location that is within 30 miles of an airport having a scheduled flight of sixty-five minutes or less from Baltimore Washington International Airport shall not be "Good Reason"; (vi) a breach by the Company of any material provision of this 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 Executive during the 30-day period immediately following the six-month anniversary of a Change in Control (whether or not Executive consented to such Change in Control); provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after Executive gives the Company notice thereof. (e) Termination Without Cause By the Company or With Good Reason By Executive In Connection With, Or Within Three Years After, A Change in Control. If Employer terminates this Agreement and Executive's employment without Cause, or if Executive terminates this Agreement and his employment with Good Reason, in connection with a Change in Control (as defined below)(whether before or at the time of such Change in Control) or within three years after a Change in Control, Executive shall receive, in lieu of the amounts and benefits described in Section 6(d) (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; 10 EMPLOYMENT AGREEMENT Mark S. Demilio (iii) 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (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 not become exercisable until and unless the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; provided that this clause (iv) shall apply to stock options that vested upon the Change in Control as provided in Section 7 below only if such options will receive more favorable treatment under this clause; (v) continued participation for Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for three years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of 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 three years following termination (provided Executive reimburses the Company for such premiums); (vii) any other amounts earned, accrued or owing to Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that are payable in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. For purposes of this Agreement "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); 11 EMPLOYMENT AGREEMENT Mark S. Demilio (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 the Operative 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; (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, (A) "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, (B) "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, (C) "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, and (D) the "Minimum Hold Condition" has the meaning set forth in the Company's Certificate of Incorporation. (f) Effect of Termination. Except as otherwise provided for in this Section 6, upon termination of this Agreement, all rights and obligations under this Agreement will cease except for the rights and obligations under the last sentence of Section 1, this Section 6 and Sections 7, 8, 9 and 10; and all procedural and remedial provisions of this Agreement. 12 EMPLOYMENT AGREEMENT Mark S. Demilio (g) No Mitigation; No Offset. In the event of a termination of employment (including non-renewal of the term by the Company), Executive shall be under no obligation to seek other employment, and there shall be no offset against any 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 Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 7. CHANGE IN CONTROL PROTECTION. (a) Treatment of Equity. There shall be full vesting immediately prior to a Change in Control that occurs prior to the termination of Executive's employment for any reason of all outstanding equity awards (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 Inventive 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 a Change in Control that occurs prior to the termination of Executive's employment for any reason. (b) Tax Gross-Up. The following provisions shall apply with respect to any excise tax imposed under Section 4999 of the Internal Revenue Code as amended (the "Code"), (the "Excise Tax"): (i) If any of the payments or benefits received or to be received by Executive in connection with a Change in Control or Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person (the "Total Payments")) will be subject to the Excise Tax, the Company shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after payment of (a) the Excise Tax, if any, on the Total Payments and (b) any Excise Tax and income tax due in respect of the Gross-Up Payment, shall equal the Total Payments. Such payment shall be made in a single lump sum within 10 days following the date a determination that only such payment is required. (ii) For purposes of determining whether any of the Total Payments will be subject to Excise Tax and the amount of such Excise Tax, (i) any Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the Company and reasonably acceptable to Executive, such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, and all "excess parachute payments" 13 EMPLOYMENT AGREEMENT Mark S. Demilio (within the meaning of Section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax unless, in the opinion of such tax counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code), or are otherwise not subject to the Excise Tax, and (ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and employment taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the date of termination of employment (or such other time as hereinafter described), net of the maximum reduction in federal income or employment taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive's employment (or such other time as is hereinafter described), Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the applicable federal rate, as defined in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Executive's employment (or such other time as is hereinafter described) (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest at the applicable federal rate, penalties or additions payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 8. PROTECTION OF CONFIDENTIAL INFORMATION/NON-COMPETITION/ NON-SOLICITATION. Executive covenants and agrees as follows: (a)(i) Confidential Information: During Employer's employment of Executive and following the termination of Executive's employment for any reason, Executive will not use or disclose, directly or indirectly, for any reason whatsoever or in any way, other than at the direction of Employer during the course of Executive's employment or after receipt of the prior written consent of Employer, any Confidential Information (as hereinafter defined) of Employer or its controlled subsidiaries or affiliates, that comes into his or her knowledge during his or her employment by Employer (the "Confidential Information"). The obligation not to use or disclose any Confidential Information will not apply to any Confidential Information that (i) is or becomes public knowledge through no fault of Executive, and that may be utilized by the public without any direct or indirect obligation to Employer, but the termination of the obligation for non-use or nondisclosure by reason of such 14 EMPLOYMENT AGREEMENT Mark S. Demilio information becoming public will extend only from the date such information becomes public knowledge or (ii) is obligated to be produced under order of a court of competent jurisdiction or a valid administrative, congressional, or other subpoena, civil investigative demand or similar process; PROVIDED, HOWEVER, that upon issuance of any such order, subpoena, demand or other process, Executive shall promptly notify the Employer and shall provide the Employer with an opportunity (if then available) to contest and cooperate with the Employer to contest, in each case, at the Employer's expense, the propriety of such order or subpoena (or to arrange for appropriate safeguards against any further disclosure by the court or administrative or congressional body seeking to compel disclosure of such Confidential Information). The above will be without prejudice to any additional rights or remedies of Employer under any state or federal law protecting trade secrets or other information. (a)(ii) Trade Secrets. Executive shall hold in confidence all Trade Secrets of Employer, its direct and indirect subsidiaries, and/or its customers that came into his or her knowledge during his or her employment by Employer and shall not disclose, publish or make use of at any time after the date hereof such Trade Secrets, other than at the direction of Employer, for as long as the information remains a Trade Secret. (a)(iii) For purposes of this Agreement, the following definitions apply: "Confidential Information" means any data or information, other than Trade Secrets, that is valuable to Employer and not generally known to the public or to competitors of Employer. "Trade Secret" means information including, but not limited to, any technical or non-technical data, know-how, software, formula, pattern, compilation, program, device, method, technique, plan, blueprint, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers or other information similar to any of the foregoing, which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (a)(iv) Interpretation. The restrictions stated in paragraphs 8(a)(i) and 8(a)(ii) are in addition to and not in lieu of protections afforded to trade secrets and confidential information under applicable state law. Nothing in this Agreement is intended to or shall be interpreted as diminishing or otherwise limiting Employer's right under applicable state law to protect its trade secrets and confidential information. (b) Non-Competition. (i) Executive covenants and agrees that 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 Executive's voluntary termination of employment without 15 EMPLOYMENT AGREEMENT Mark S. Demilio Good Reason or his termination of employment for Cause, he or she will not directly or indirectly engage in or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, associated with or in any manner connected with, lend Executive's name or any similar name to, lend Executive's credit to or render services or advice to any business that provides or sells or attempts to provide or sell behavioral managed care services, in the United States or any other geographic location in which Employer or a controlled subsidiary or affiliate of Employer then sells or provides behavioral managed care services unless waived in writing by Employer in its sole discretion. Executive recognizes that the above restriction is reasonable and necessary to protect the interest of the Employer and its controlled subsidiaries and affiliates, which are engaged in the provision, or sale of behavioral managed care services. The foregoing shall not be deemed to prohibit Executive's association with a company if an immaterial portion of such company's revenues is attributable to operations directly competitive with the Company (provided Executive is not employed within those directly competitive operations). Further, nothing contained in this Section 8(b)(i) shall restrict Executive from making any investments in any corporation or other business enterprise whose outstanding capital stock or other equity interests are listed or admitted to unlisted trading privileges on a national securities exchange or included for quotation through an inter-dealer quotation system of a registered national securities association, provided that such investment (i) represents less than five percent (5%) of the aggregate outstanding capital stock or other equity interests of such corporation, partnership or business enterprise and (ii) does not otherwise provide Executive or any affiliate of Executive with the right or power (whether or not exercised) to influence, direct or cause the direction of the management, policies and/or affairs of any business or enterprise which is or might directly or indirectly compete with any business operations or activities of Company or any of its subsidiaries. (ii) During the period following Executive's termination from his or her employment with Employer for which Executive is subject to the restrictions set forth in Section 8(b)(i), Executive may submit a written request to Employer outlining a proposed employment or other employment opportunity that Executive is considering. Employer will review such request and make a determination, in its sole 16 EMPLOYMENT AGREEMENT Mark S. Demilio discretion, as to whether the opportunity would constitute a breach of the non-competition covenant. (c) Non-Solicitation. To protect the goodwill of Employer and its controlled subsidiaries and affiliates, or the customers of Employer and its controlled subsidiaries and affiliates, Executive agrees that, during his employment and 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, he or she will not, without the prior written permission of Employer, directly or indirectly, for himself or herself or on behalf of any other person or entity, solicit, divert away, take away or attempt to solicit or take away any Customer of Employer for purposes of providing or selling services that are offered by Employer or a controlled subsidiary or affiliate of Employer. For purposes of this Section 8(c), "Customer" means any individual or entity to whom Employer or its controlled subsidiaries or affiliates has provided, or contracted to provide, services during the twelve months prior to the termination of his or her employment. (d) Solicitation of Employees. During Employer's employment of Executive and 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 Executive's voluntary termination of employment without Good Reason or his termination of employment for Cause, Executive will not, and will not assist any other person or entity to, directly or indirectly, solicit for employment or consultation, any employee of Employer or any of its controlled subsidiaries or affiliates who was employed with Employer or its controlled subsidiaries or affiliates within the one year period immediately prior to Executive's termination, or in any manner knowingly induce or attempt to induce any such employee to terminate his or her employment with Employer. 9. WORK MADE FOR HIRE. Executive agrees that any written program materials, protocols, research papers, other writings (including those in electronic format), as well as improvements, inventions, new techniques, programs or products (the "Work") made or developed by Executive within or after normal working hours relating to the business or activities of Employer or any of its subsidiaries, shall be deemed to have been made or developed by Executive solely for the benefit of Employer and will be considered "work made for hire" within the meaning of the United States Copyright Act, Title 17, United States Code, which vests all copyright interest in and to the Work in the Employer. In the event, however, that any court of competent jurisdiction finally declares that the Work is not or was not a work made for hire as agreed, Executive agrees to assign, convey, and transfer to the Employer all right, title and interest Executive may presently have or may have or be deemed to have in and to any such Work and in the copyright of such work, including but not limited to, all rights of reproduction, distribution, publication, public performance, public display and preparation of derivative works, and all rights of ownership and possession of the original fixation of the Work and any and all copies, without payment of any consideration by Employer, except as set forth in this Agreement. Additionally, Executive agrees to execute any documents necessary for Employer to record and/or perfect its ownership of the Work and the applicable copyright. 17 EMPLOYMENT AGREEMENT Mark S. Demilio 10. PROPERTY OF EMPLOYER. Executive agrees that, upon the termination of Executive's employment with Employer, Executive will immediately surrender to Employer all property, equipment, funds, lists, books, records and other materials of Employer or its controlled subsidiaries or affiliates in the possession of or provided to Executive. 11. GOVERNING LAW. This Agreement and all issues relating to the validity, interpretation, and performance will be governed by, interpreted, and enforced under the laws of the State of Connecticut. 12. REMEDIES. An actual or threatened violation by Executive of the covenants and obligations set forth in Sections 8, 9 and 10 will cause irreparable harm to Employer or its controlled subsidiaries or affiliates and the remedy at law for any such violation will be inadequate. Executive agrees, therefore, that Employer or its controlled subsidiaries or affiliates will be entitled to appropriate equitable relief, including, but not limited to, a temporary restraining order and a preliminary injunction, without the necessity of posting a bond. 13. ARBITRATION. Except for an action for injunctive relief as described in Section 12, any disputes or controversies arising under this Agreement will be settled by arbitration in Hartford, Connecticut, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The determination and findings of such arbitrators will be final and binding on all parties and may be enforced, if necessary, in any court of competent jurisdiction. The costs and expenses of the arbitration shall be paid for by Employer, but each party shall pay its own attorney's fees and other litigation costs. - ------ Executive's Initials 13. NOTICES. Any notice or request required or permitted to be given to any party will be given in writing and, excepting personal delivery, will be given at the address set forth below or at such other address as such party may designate by written notice to the other party to this Agreement: To Executive: Mark S. Demilio 104 Sagewood Court Sparks, Maryland 21152 Tel. (410) 472-2237 Fax (410) 472-2238 To Employer: Magellan Health Services, Inc. 6950 Columbia Gateway Drive Columbia, Maryland 21046 Attention: General Counsel 18 EMPLOYMENT AGREEMENT Mark S. Demilio Each notice given in accordance with this Section will be deemed to have been given, if personally delivered, on the date personally delivered; if delivered by facsimile transmission, when sent and confirmation of receipt is received; or, if mailed, on the third day following the day on which it is deposited in the United States mail, certified or registered mail, return receipt requested, with postage prepaid, to the address last given in accordance with this Section. 14. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and should not be construed or interpreted to restrict or modify any of the terms or provisions of this Agreement. 15. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision will be fully severable and this Agreement and each separate provision will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. In addition, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically, as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable, to the extent such reformation is allowable under applicable law. 16. BINDING EFFECT. This Agreement will be binding upon and shall inure to the benefit of each party and each party's respective successors, heirs and legal representatives. This Agreement may not be assigned by Executive to any other person or entity but may be assigned by Employer to any subsidiary or affiliate of Employer or to any successor to or transferee of all, or any part, of the stock or assets of Employer. 17. EMPLOYER POLICIES, REGULATIONS, AND GUIDELINES FOR EMPLOYEES. Employer may issue policies, rules, regulations, guidelines, procedures or other material, whether in the form of handbooks, memoranda, or otherwise, relating to its Executives. These materials are general guidelines for Executive's information and will not be construed to alter, modify, or amend this Agreement for any purpose whatsoever. 18. WAIVER OF CLAIMS AGAINST EMPLOYER AND TERMINATION OF EXISTING EMPLOYMENT AGREEMENT. Executive hereby waives any claim (other than any claim arising under this Agreement) he may have against Employer (whether such claim is asserted or unasserted, fixed or contingent, or liquidated or unliquidated), including any claim he may have relating to Employer's assumption or rejection of Executive's existing employment agreement with Employer, which agreement is hereby terminated and superseded by this Agreement. To the extent Executive has filed one or more proofs of claim with the bankruptcy court, Executive agrees to take affirmative steps to withdraw any and all of such claims. 19 EMPLOYMENT AGREEMENT Mark S. Demilio 19. INDEMNIFICATION. The Company shall indemnify Executive to the fullest extent permitted by the laws of State of Delaware and the Company shall obtain and maintain directors and officers liability insurance in an amount not less than $50 million. 20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties with respect to its subject matter and supersedes all prior agreements and understandings, whether written or oral, relating to its subject matter, unless expressly provided otherwise within this Agreement. No amendment or modification of this Agreement, will be valid unless made in writing and signed by each of the parties. No representations, inducements, or agreements have been made to induce either Executive or Employer to enter into this Agreement, which are not expressly set forth within this Agreement. Executive and Employer acknowledge and agree that Employer's controlled subsidiaries and affiliates are express third party beneficiaries of this Agreement. [signatures follow] 20 EMPLOYMENT AGREEMENT Mark S. Demilio IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 5th day of January, 2004. MAGELLAN HEALTH SERVICES, INC. "Executive" "Employer" By: - ------------------------------------ ------------------------------- Name: Title: Name: Title: Lead Director 21 -----END PRIVACY-ENHANCED MESSAGE-----