Exhibit 10.1

 

[HNT Letterhead]

 

July 2, 2004

 

Via Overnight Mail

 

Mr. Jeff Folick

[Address]

[Address]

 

Dear Jeff:

 

As you know, Health Net, Inc. (the “Company”) is in the process of searching for
a new Chief Operating Officer. The Company has agreed to offer you an incentive
package (the “Incentive Package”), on the terms and conditions set forth below,
to motivate you to remain on as Executive Vice President, Regional Health Plans
& Specialty Companies and to produce the best results possible while the Company
undertakes this search. Therefore, this letter reflects the discussions and the
agreements reached between you and the Company to amend the May 22, 2002 letter
setting forth the terms and conditions of your employment by the Company (the
“Agreement”). Capitalized terms used, but not otherwise defined herein, shall
have the meaning ascribed to such terms in the Agreement.

 

Accordingly, in conformance with Section 17 of the Agreement, you and the
Company hereby agree and acknowledge that Section 9 of the Agreement is amended
to add the following subsection (h):

 

“(h) If you are employed with the Company on December 31, 2004, and have not
been offered or have been offered and not accepted the position of Chief
Operating Officer of the Company, then you will have the option, exercisable by
notifying the Company in writing no later than January 31, 2005, to terminate
your employment with the Company effective sixty (60) days following the date of
such notice (the “Effective Date”), and to receive the incentive package
described below in lieu of any other payments or benefits under Section 9 of the
Agreement (the “Incentive Package”), provided that you sign and do not revoke a
Waiver and Release of Claims in the form attached hereto as Exhibit A, and a
Restrictive Covenant Agreement in the form attached hereto as Exhibit B, both of
which are incorporated into this Agreement by reference, and subject to the
other terms and conditions set forth below:

 

  (1) Cash Payment; Benefits. You will receive (i) a lump sum cash payment equal
to two times (2x) your Base Salary in

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effect immediately prior to the Effective Date and (ii) the continuation of your
medical, dental and vision benefits for you and your dependents for up to six
(6) months following the Effective Date, and (iii) after expiration of such six
(6) month benefits continuation period, the premium payments for continuation,
under COBRA, of your medical, dental and vision benefits (as maintained for your
benefit immediately prior to the Effective Date) for you and your dependents for
up to eighteen (18) months, provided that you properly elect to continue those
benefits under COBRA, and provided further that your eligibility for benefits
continuation and/or COBRA premium payments will expire immediately upon your
accepting employment with another employer offering comparable benefits. The
lump sum payment referred to in clause (i) above will be paid within thirty (30)
days following the Effective Date.

 

  (2) Bonus Opportunity. You will be eligible for two separate bonus awards in
lieu of participation in the Company’s 2004 Management Incentive Plan (“2004
MIP”), provided that the following performance conditions are met:

 

  (A) You will be paid a bonus award of either (i) $432,000 (which, for the
avoidance of doubt, is equal to the amount of your current 2004 MIP target
opportunity) if the Company’s Northeast Division achieves $54,000,000 in Pre-Tax
Income (defined below) for fiscal year 2004, or (ii) $216,000 if the Company’s
Northeast Division achieves Pre-Tax Income of $49,000,000 for fiscal year 2004
(the “Northeast Division Bonus”). Achievement of 2004 Pre-Tax Income goals for
the Company’s Northeast Division will be determined following completion of the
audit of the Company’s 2004 consolidated financial statements.

 

  • “Pre-Tax Income” shall mean the amount set forth in the line item “Income
(loss) before income taxes” in the Company’s Everybody Information System
(“EIS”) for the Northeast Division. “Income (loss) before income taxes” is
calculated as follows: Total Revenue (as defined below) less Total Expenses (as
defined below).

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  • “Total Revenue” shall mean the following revenues, if any, for the Northeast
Division: Health Plan Premiums, Government Contracts, Other Income and
Investment Income, in each case as set forth in the EIS for the Northeast
Division.

 

  • “Total Expenses” shall mean the following expenses, if any, for the
Northeast Division: Health Plan Services, Government Contracts, General and
Administrative, Selling Costs, Depreciation, Amortization and Interest, in each
case as set forth in the EIS for the Northeast Division.

 

The Northeast Division Bonus shall be payable in a lump sum payment in March
2005 if the above-referenced performance conditions are met.

 

  (B) Subject to subsection (h)(3) below, if the Company’s Northeast Division
achieves $54,000,000 in Pre-Tax Income for fiscal year 2004, then you will be
paid an additional bonus award in an amount equal to (i) 50,000 multiplied by
(ii) the closing sales price of the Company’s common stock on the New York Stock
Exchange on the date that is three (3) calendar days following the public
release of the Company’s earnings for the first quarter of 2005 less $23.72 (the
closing sales price of the Company’s common stock on May 4, 2004) (the
“Equity-Based Bonus”). In the event that the third calendar day following the
announcement of earnings for the first quarter of 2005 is not a trading day,
then the Company shall use the closing sales price of the common stock on the
next business day for purposes of clause (ii) above. As an example, if the
closing price of the Company’s common stock is $30.00 on the third (3rd)
calendar day following the date the Company publicly announces earnings for the
first quarter of 2005, then the Equity-Based Bonus would be $314,000 ($30.00 -
$23.72 times 50,000). The Equity-Based Bonus shall be payable within thirty (30)
days of the date on which the Company releases its earnings for the first
quarter of 2005.

 

  (3) Stock Options. Your timely election to terminate your employment pursuant
to this Section 9(h) will be treated the same as a termination by the Company
without Cause

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(as defined in the Agreement) for purposes of your ability to exercise your
Stock Options under your Stock Option Agreements. Accordingly, as of the
Effective Date, you will have ninety (90) days to exercise any outstanding,
vested Stock Options. You and the Company acknowledge and agree that Exhibit C
attached hereto accurately reflects the current status of the Stock Options
granted to you by the Company. You further acknowledge and agree that, in the
event that any portion of your Stock Options subject to performance-based
acceleration under the applicable Stock Option Agreement accelerates prior to
the Effective Date, then you shall not be eligible to receive the Equity-Based
Bonus.

 

You and the Company further agree and acknowledge that, in conformance with
Section 17 of the Agreement, each of the sections of the Agreement listed below
is hereby amended and restated, as follows:

 

The first sentence of Section 6.E is amended and replaced with the following
sentence: “Except as otherwise provided in Section 9(h) of this Agreement, you
will also be eligible to participate in the Health Net, Inc. Executive Incentive
Plan (also known as the Management Incentive Plan, or “MIP”) in accordance with
the terms of the MIP, which provides you with a target opportunity to earn up to
80% of your Base Salary as an annual bonus, prorated from your date of hire for
the first year, as additional compensation, according to the terms of the actual
MIP documents.” The remainder of Section 6.E. of the Agreement remains
unchanged.

 

Section 7 of the Agreement is hereby amended to add the following sentence at
the end thereof: “Notwithstanding anything to the contrary herein or in the
Stock Option Plan or any Stock Option Agreement between you and the Company, in
the event you elect the Incentive Package, you agree not to exercise any of your
vested Stock Options until after your employment by the Company has terminated.”

 

Section 9(c) of the Agreement is hereby amended and replaced with the following:
“In the event that your employment is voluntarily terminated by you at any time
before December 31, 2004 (except as the result of your timely election to
receive the Incentive Package pursuant to subsection (h), or for Good Reason
within two (2) years after a Change in Control of Health Net, Inc.), then you
shall not be eligible to receive any payments set forth in this Section 9.”

 

Section 14 of the Agreement is hereby amended to add the following subsection
(e) at the end thereof: “If you have timely elected the Incentive Package and
entered into the Restrictive Covenant Agreement attached hereto as Exhibit C,
and provided that your employment has not been terminated by the Company for
Cause on or before the Effective Date, then this Section 14 shall be of no
further force or effect and the terms of the Restrictive Covenant Agreement
shall govern.”

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If you have timely elected the Incentive Package and your employment is
thereafter terminated by the Company without Cause (as defined in the Agreement)
before the Effective Date, then you will remain eligible to receive the
Incentive Package subject to the terms and conditions set forth above. The
Incentive Package is in lieu of any other severance benefits under the Agreement
or any other agreement between you and the Company, or under any Company policy
or program, and in lieu of your participation in the 2004 MIP. If your
employment is terminated for Cause before the Effective Date, then you will not
be eligible to receive the Incentive Package.

 

In the event that you do not timely elect the Incentive Package, then you and
the Company acknowledge and agree that you will remain subject to the terms and
conditions of the Agreement, including, but not limited to, participation in the
2004 MIP, a Change in Control severance benefit (as defined in the Agreement),
and acceleration in vesting of your Stock Options based on completion of a
“Change in Control” transaction (as defined in the Stock Option Plan and Stock
Option Agreement), provided that all of the terms and conditions of such
benefits set forth in such documents are met.

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Except as expressly provided in this letter, the terms and conditions of the
Agreement (including, without limitation, the at-will employment term) shall
remain in full force and effect. Please confirm your agreement with and
acceptance of these terms by signing one copy of this letter and returning it to
me. The other copy is for your records. If you have any questions or there is
any matter addressed in this letter that you wish to discuss further, please do
not hesitate to contact me.

 

Sincerely,

 

/s/ Jay M. Gellert

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Jay M. Gellert

President and Chief Executive Officer

 

I agree to the amendments to the terms of my letter agreement of May 22, 2002 as
set forth in this letter.

 

/s/ Jeff Folick

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Jeff Folick

 

Date: July 6, 2004