Exhibit 10.8

 

ROTECH HEALTHCARE INC.

SENIOR MANAGEMENT INCENTIVE PLAN

(2005—2007)

 

Section 1. Establishment of Plan. Rotech Healthcare Inc., a Delaware corporation
(the “Company”), hereby establishes this Rotech Healthcare Inc. Senior
Management Incentive Plan (the “Plan”). The Plan shall become effective as of
January 1, 2005 (the “Effective Date”).

 

Section 2. Purpose of Plan. The purpose of the Plan is to benefit the
shareholders of the Company by providing a multi-year incentive and reward
compensation program for a limited group of the Company’s key executive senior
management employees whose contributions, services and decisions are expected to
have a long-term impact on the success of the Company’s business operations.

 

Section 3. Administration.

 

3.1 The Committee. The Compensation Committee of the Company’s Board of
Directors (the “Committee”) shall administer the Plan.

 

3.2 Meetings. The Committee shall meet at such times and places as it may
determine. The Committee shall act by a vote of the majority of the members of
the Committee then in office and the acts of such majority at any meeting or
acts reduced to and approved in writing by a majority of the members of the
Committee shall be the valid acts of the Committee.

 

3.3 Authority. Subject to the provisions of Section 8, the Committee shall have
full and final power and authority, subject to the provisions of the Plan, to
interpret the provisions of the Plan, to supervise the administration of the
Plan, to promulgate rules and regulations and to take all actions in connection
with or relating to the Plan as it deems necessary. Any determination or action
of the Committee shall be final, conclusive and binding upon all employees
participating in the Plan (each, a “Participant” and collectively, the
“Participants”) and their respective heirs, executors and assigns.

 

Section 4. Eligibility. Those employees of the Company having the following
titles shall be the Participants in the Plan—Chief Executive Officer, Chief
Operating Officer, Chief Information Officer, Chief Financial Officer, Chief
Sales Officer, Chief Legal Officer, Chief Purchasing Officer, Chief Contracts
Officer, Chief Development Officer, Chief Clinical Officer, Chief Compliance
Officer, Divisional Director of Operations, Divisional Director of Sales. The
Participants as of the Effective Date are set forth in Exhibit A to the Plan.
Further, any additional or substitute Participants selected to participate in
the Plan at a later date shall be added to a revised Exhibit A.

 

Section 5. Plan Awards.

 

5.1 Definitions. The following terms shall have the following meanings for
purposes of this Section 5:

 

(a) “Average Company EBITDA” shall mean the average Company EBITDA for the
Company’s 2005, 2006 and 2007 fiscal years.

 

1

--------------------------------------------------------------------------------

(b) “Average Company EBITDA Threshold” shall mean the Average Company EBITDA,
expressed as a percentage, as determined by the Committee as of the Effective
Date.

 

(c) “Change of Control” shall mean (x) a change in the ownership of the Company,
(y) a change in the effective control of the Company, or (z) a change in the
ownership of a substantial portion of the assets of the Company. For purposes of
this Section 5.1(c):

 

            (i) a “change in the ownership of the Company” shall occur on the
date on which any one person, or more than one person acting as a group,
acquires ownership of stock of the Company that, together with stock held by
such person or group, constitutes more than fifty percent (50%) of the total
fair market value or total voting power of the stock of the Company; provided,
however, that if any one person or more than one person acting as a group, shall
be considered to own more than fifty percent (50%) of the total fair market
value or total voting power of the stock of the Company, the acquisition of
additional stock by the same person or persons shall not be considered to cause
a change in the ownership of the Company (or to cause a change in the effective
control of the Company for purposes of clause (ii) of this Section 5.1(c)).
However, notwithstanding the foregoing, an increase in the percentage of stock
of the Company owned by any one person, or persons acting as a group, as a
result of a transaction in which the Company acquires its stock in exchange for
property, shall be treated as an acquisition of stock of the Company for
purposes hereof;

 

            (ii) a “change in the effective control of the Company” shall occur
on the date on which either:

 

            (A) any one person, or more than one person acting as a group,
acquires (or has acquired during the twelve (12) month period ending on the date
of the most recent acquisition by such person or persons) ownership of stock of
the Company possessing thirty-five percent (35%) or more of the total voting
power of the stock of the Company; or

 

            (B) a majority of the members of the Company’s Board of Directors is
replaced during any twelve (12) month period by directors whose appointment or
election is not endorsed by a majority of the members of the Company’s Board of
Directors prior to the date of the appointment or election; and

 

2

--------------------------------------------------------------------------------

            (iii) a “change in the ownership of a substantial portion of the
Company’s assets” shall occur on the date on which any one person, or more than
one person acting as a group, acquires (or has acquired during the twelve (12)
month period ending on the date of the most recent acquisition by such person or
persons) assets from the Company that have a total gross fair market value equal
to or greater than forty percent (40%) of the total gross fair market value of
all of the assets of the Company immediately prior to such acquisition or
acquisitions. For purposes of this clause (iii) of this Section 5.1(d), “gross
fair market value” shall mean the value of the assets of the Company, or the
value of the assets being disposed of, determined without regard to any
liabilities associated with such assets. Notwithstanding the foregoing, a
transfer of assets by the Company shall not be treated as a change of ownership
of such assets if the assets are transferred to (A) a shareholder of the Company
(immediately before the asset transfer) in exchange for or with respect to its
stock, (B) an entity, fifty percent (50%) or more of the total value or voting
power of which is owned, directly or indirectly, by the Company, (C) a person,
or more than one person action as a group, that owns, directly or indirectly,
fifty percent (50%) or more of the total value or voting power of all of the
outstanding stock of the Company, or (D) an entity, as least fifty percent (50%)
of the total value or voting power of which is owned, directly or indirectly, by
a person described in clause (C) of this paragraph (iii).

 

For purposes of this Section 5.1(c), (x) persons shall not be considered to be
acting as a group solely because they purchase or own stock of the Company at
the same time, or as a result of the same public offering, and (y) persons shall
be considered to be acting as a group if they are owners of stock of the Company
at a time when the Company enters into a merger, consolidation, purchase or
acquisition of stock, or similar business transaction, with the Company.

 

(d) “Combined Company Revenue” shall mean the aggregate Company Revenue for the
Company’s 2005, 2006 and 2007 fiscal years.

 

(e) “Combined Company Revenue Threshold” shall mean Combined Company Revenue of
greater than the specified dollar amount determined by the Committee as of the
Effective Date.

 

(f) “Company EBITDA” shall mean the earnings of the Company from continuing
operations before interest, income taxes, depreciation and amortization, as set
forth in the Company’s periodic reports filed with the Securities and Exchange
Commission for the Company’s applicable fiscal year, and specifically excluding
compensatory stock options—related expenses and any and all other noncash
accounting charges.

 

3

--------------------------------------------------------------------------------

(g) “Company Revenue” shall mean the net revenue of the Company, as set forth in
the Company’s quarterly and/or annual financial statements for the Company’s
applicable fiscal year.

 

(h) “Government Reimbursement” shall mean payments received directly from any
government entities for the provision of healthcare products and services
including, but not limited to, Medicare, State Medicaid programs (including
Medicare Managed Care Plans providing services to such programs), Veterans
Administration and Tricare, for the Company’s applicable fiscal year.

 

(i) “Participation Date” shall mean, for any Participant whose first date of
participation in the Plan follows the Effective Date, such first date of
participation in the Plan.

 

5.2 Calculation of Plan Benefit. By no later than February 15, 2008, the
Committee shall determine the Combined Company Revenue and the Average Company
EBITDA. Except as otherwise provided in Section 6, no Award shall be made under
the Plan unless the Combined Company Revenue exceeds the Combined Company
Revenue Threshold. In calculating the Combined Company Revenue and the Average
Company EBITDA, the Company Revenue and Company EBITDA amounts shall
periodically be increased or decreased, as applicable, by the Company’s Chief
Financial Officer (the “CFO”), to reflect changes in Government Reimbursement.
Upon taking such action, the CFO shall promptly notify the Participants in
writing of any such applicable revision.

 

5.3 Determination of Three-Year Awards. If the Combined Company Revenue
Threshold is met, each Participant shall, subject to the next following
sentence, receive an award under the Plan (“Award”) equal to that number of
fully vested shares of the Company’s Common Stock, which shares shall not be
subject to any restrictions imposed by the Company, shall have been registered
by the Company utilizing Form S-8 for purposes of the Securities Act of 1933,
and shall have an aggregate value equal to the Participant’s annualized rate of
base salary from the Company as in effect on February 15, 2008. Notwithstanding
anything to the contrary contained in this Section 5 but expressly subject to
the provisions of Section 6, should the (a) Average Company EBITDA Threshold not
be met, each Participant’s otherwise calculated Award shall be reduced by twenty
percent (20%), and (b)(i) Average Company EBITDA be less than the specified
percentage determined by the Committee as of the Effective Date, or (ii)
Combined Company Revenue (irrespective of changes in Government Reimbursement)
be less than the specified dollar amount determined by the Committee as of the
Effective Date, no Award shall be made under the Plan. In calculating the value
of a share of the Company’s Common Stock for this purpose, one-third of each
Award shall be respectively based on the value of a share of the Company’s
Common Stock on each of January 1, 2005, 2006 and 2007, utilizing the
Participant’s base salary in effect on January 1, 2008. The Committee shall
determine the amount of each Participant’s Award pursuant to Section 5.2 and
this Section 5.3, and shall proportionately prorate the Award of any Participant
who was not participating in the Plan on the Effective Date, on the basis of
such Participant’s Participation Date.

 

4

--------------------------------------------------------------------------------

5.4 Change of Control Payment. Notwithstanding anything to the contrary
contained in the Plan, upon the occurrence of a Change of Control on or prior to
February 1, 2008, no Awards shall be made under the Plan, and each Participant
who, subject to the exceptions contained in Section 6.2, is in the employ of the
Company on any date which is within the ninety (90) day period ending on the
date on which a Change of Control occurs (“Change of Control Date”), shall
instead receive, concurrent with the closing of the transaction constituting the
Change of Control, a lump sum cash payment equal to the amount of such
Participant’s then base salary from the Company for the period commencing on the
later of the Effective Date or the Participant’s Participation Date, and ending
on the Change of Control Date, but calculated for such entire period on the
basis of such Participant’s annualized rate of base salary from the Company as
in effect immediately prior to the Change of Control Date (a “Change of Control
Payment”).

 

    Section 6. Payments.

 

6.1 Continued Employment Requirement. No Participant shall receive an Award or a
Change of Control Payment under the Plan unless he or she is in the employ of
the Company, and has one of the titles set forth in Section 4, in each case as
of the earlier of February 15, 2008, or any date which is within the ninety (90)
day period ending on the Change of Control Date; provided, however, that such
period shall be increased to the extent necessary for the Company to obtain all
required regulatory approvals in connection with a contemplated Change of
Control.

 

6.2 Effect of Termination.

 

6.2.1 Death or Disability. If a Participant dies or becomes “disabled” (i.e.,
becomes entitled to receive benefits under the Company’s long-term disability
plan) (“Disabled”) prior to the earlier of a Change of Control Date or February
15, 2008, such Participant or his or her Beneficiary or estate, as the case may
be, shall receive a lump sum cash payment equal to the amount of such
Participant’s base salary from the Company for the period commencing on the
later of the Effective Date or the Participant’s Participation Date, and ending
on the date of the Participant’s death or the date on which the Participant
becomes Disabled, as applicable. For purposes of calculating such payment, the
Participant’s base salary in effect immediately prior to his or her death or
becoming Disabled shall be utilized.

 

6.2.2 Termination for Cause. In the event the Company terminates a Participant’s
employment with the Company for “Cause” prior to the earlier of a Change of
Control Date or February 15, 2008, such Participant shall forfeit all of his or
her entitlements under the Plan to any then unpaid Award or Change of Control
Payment. For purposes of this Section 6.2.2, the term “Cause” shall mean (a) for
a Participant who is a party to an employment agreement with the Company, which
agreement provides for a definition of “Cause” therein, “Cause” shall have the
same meaning as provided for in such employment agreement, or (b) for a
Participant who is not a party to such an employment agreement with the Company,
“Cause” shall mean the earliest to occur of any of the following:

 

(i) a Participant’s gross neglect of or willful failure to perform his or her
material duties with the Company, which neglect or failure shall continue for a
period of two (2) days after receipt by the Participant of written notice from
the Company directing such Participant to perform his or her material duties;

 

5

--------------------------------------------------------------------------------

(ii) a Participant’s willful engaging in conduct which is materially injurious
to the Company or any subsidiary, which injury shall not have been remedied
within two (2) days after receipt by the Participant of written notice from the
Company of the injury caused by such conduct;

 

(iii) a Participant’s theft or misappropriation of funds of the Company or any
subsidiary;

 

(iv) a Participant’s conviction of, or plea of nolo contendere to, a felony or a
misdemeanor involving moral turpitude; or

 

(v) a Participant’s causing the Company to violate a local, state or federal law
where such violation is materially injurious to the Company.

 

6.2.3 Resignation without Good Reason. In the event of a Participant’s
resignation of his or her employment with the Company without “Good Reason” (as
defined in Section 6.2.4), in either case prior to the earlier of a Change of
Control Date or February 15, 2008, the Participant shall forfeit all of his or
her entitlements under the Plan to any then unpaid Award or Change of Control
Payment.

 

6.2.4 Termination without Cause, “No Fault” Termination or Resignation with Good
Reason. Notwithstanding anything to the contrary contained in Section 6.1, any
Participant who is a party to an employment-related agreement with the Company,
which agreement provides for severance benefits to be payable upon termination
of the Participant’s employment with the Company (i) by the Company without
Cause, (ii) pursuant to a “No Fault” termination by the Company or (iii)
pursuant to the Participant’s resignation for “Good Reason,” and whose
employment with the Company is terminated by the Company without Cause, pursuant
to a “No Fault” termination by the Company or who resigns his or her employment
with the Company for Good Reason, in any such case prior to the earlier of a
Change of Control Date or February 15, 2008, such Participant shall receive a
lump sum cash payment equal to the amount of the Participant’s base salary from
the Company for the period commencing on the later of the Effective Date or the
Participant’s Participation Date, and ending on the date of the Participant’s
termination of employment. For purposes of calculating such payment, the
Participant’s base salary in effect immediately prior to his or her termination
date shall be utilized. For purposes of this Section 6.2.4, (x) a Participant
shall have the right to resign for “Good Reason” solely where the circumstances
of the Participant’s resignation shall meet the standards under the definition
of “Good Reason” contained in the Participant’s employment-related agreement, or
(y) a Participant shall be deemed to have been terminated by the Company
pursuant to a “No Fault” termination solely where the circumstances of the
Participant’s termination by the Company shall meet the standards for a “No
Fault” termination under the Participant’s employment agreement. A participant
who is not a party to such an employment-related agreement referred to above in
this Section 6.2.4 shall receive no benefit hereunder upon such Participant’s
termination by the Company without Cause, “No Fault Termination” or resignation
for Good Reason.

 

6

--------------------------------------------------------------------------------

6.3 Form and Timing of Payments. All Awards, except for Change of Control
Payments and payments made pursuant to Sections 6.2.1 or 6.2.4, if any, shall be
paid in the form of fully unencumbered vested shares of the Company’s Common
Stock, which shares shall not be subject to any restrictions imposed by the
Company and shall have been registered by the Company utilizing Form S-8 for
purposes of the Securities Act of 1933. Subject to the requirements of this
Section 6, including but not limited to the requirements of Section 6.5, (a)
shares to be issued on account of Awards payable pursuant to Section 5.3 shall
be issued within the earliest of (i) ten (10) days of the date on which the
amounts of such Awards are determined, or (ii) ten (10) days of the date of the
Participant’s termination of employment with the Company, or (iii) February 29,
2008, and (b) Change of Control Payments payable pursuant to Section 5.4 and
payments made pursuant to Sections 6.2.1 or 6.2.4 shall be paid in a lump sum
cash payment. Change of Control Payments shall be made concurrent with the
closing of the transaction constituting the Change of Control, and payments made
pursuant to Sections 6.2.1 or 6.2.4 shall be paid within ten (10) days of the
date of the Participant’s death, becoming Disabled or other termination of
employment with the Company, as applicable.

 

6.4 Withholding and Other Tax Matters. The Company shall include all Awards, or
Change of Control Payments, as applicable, in determining each Participant’s
compensation for services rendered and shall reflect the value of the Award or
Change of Control Payment, as applicable, on such Participant’s W-2 form. The
Company shall withhold all taxes from Awards or Change of Control Payments made
under the Plan as required by applicable federal, state and local income tax
laws.

 

6.5 Delay of Awards/Payments to Participants who are Key Employees.
Notwithstanding anything in the Plan to the contrary, the distribution of stock
or payment of cash under the Plan to a Participant who is a “key employee”
(within the meaning of Section 416(i)(1) of the Internal Revenue Code of 1986,
as amended) shall be deferred for a period of six (6) months and one (1) day.

 

Section 7. Beneficiaries. Designation of beneficiaries to receive an Award or
Change of Control Payment under the Plan subsequent to the death of a
Participant shall be made in writing and filed with the Committee in the form
attached hereto as Exhibit B or in such other form and manner as the Committee
may from time to time prescribe. Beneficiary designations may be changed by a
Participant in the same manner at any time prior to death, and may thereafter be
designated or changed by a surviving beneficiary eligible to receive an Award or
Change of Control Payment hereunder unless a successor beneficiary to such
surviving beneficiary has been designated by the Participant or prior
beneficiary. If a Participant or beneficiary eligible to receive an Award or
Change of Control Payment under the Plan dies without a surviving beneficiary
having been designated, or with his or her estate or a trust designated as
beneficiary, such Participant’s or beneficiary’s Award or Change of Control
Payment, as applicable, shall be distributed to the legal representative of his
or her estate, or to the trustees of any such trust, within ten (10) days of the
date of his or her death.

 

7

--------------------------------------------------------------------------------

Section 8. Amendment and Termination of Plan. The Committee, in its sole
discretion, at any time, may adopt such written amendments to or modifications
of the Plan as it may deem advisable; provided, however, that no such amendment
or modification shall deprive any Participant of any right or benefit to which
he had previously become entitled under the Plan. The Company, in its sole
discretion, may terminate the Plan as of the end of any fiscal year of the
Company after December 31, 2008; provided, however, that such termination shall
not deprive any Participant of any right or unpaid Award or Change of Control
Payment to which he or she had previously become entitled under the Plan.

 

Section 9. No Employment Rights Created. Nothing herein is intended or shall be
interpreted to give any Participant the right to be employed, reemployed or
continue to be employed by the Company.

 

Section 10. No Trust Created. Neither the provisions of the Plan nor any action
taken by the Company or the Committee pursuant to the provisions of the Plan
shall be deemed to create any trust, express or implied, or any fiduciary
relationship between and among the Company, the Committee, any member of the
Committee or any Participant.

 

Section 11. Non-Alienation of Benefits. No right, Award or Change of Control
Payment under the Plan shall be subject to anticipation, transfer, sale,
assignment, pledge, encumbrance, charge, levy, attachment or execution of a
judgment of any kind. No right, Award or Change of Control Payment under the
Plan shall in any manner be liable for or subject to the debts, contract
liabilities or torts of any Participant.

 

Section 12. Applicable State Law. All questions pertaining to the Plan shall be
determined under the laws of the State of New York.

 

Section 13. Effect of Employment Agreement. Notwithstanding the provisions of
any employment agreement between the Company and a Participant that provide that
the severance benefits payable by the Company to a Participant thereunder shall
be the sole severance benefits payable by the Company thereto, the Company
hereby acknowledges and agrees that any applicable benefit, award or payment
payable to a Participant hereunder shall be made pursuant to the terms hereof,
regardless of any such provisions in such Participant’s employment agreement
with the Company.

 

8