EX-10.1



 




Exhibit 10.1



EMPLOYMENT AGREEMENT




     This EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into to be effective as of
November 13, 2007 (the “Effective Date”) by and between National Medical Health Card Systems, Inc.,
a Delaware corporation (“NMHC”) and Stuart Diamond a resident of New York (“Executive”). Certain
capitalized terms used in this Agreement are defined in Section 9 hereof.



RECITAL




     WHEREAS, Executive is employed as the Chief Financial Officer of NMHC;



     WHEREAS, NMHC and Executive wish to document the terms of the employment of Executive in such
capacity;



     WHEREAS, NMHC and Executive currently are parties to certain agreements relating to their
employment relationship as described on Exhibit “A” attached hereto (the “Preexisting
Agreements”), which NMHC and Executive desire to terminate in their entirety and replace with this
Agreement.



     WHEREAS, Executive has represented to NMHC and NMHC has relied on Executive’s representation
that the execution of this Agreement by Executive, and the provision of services by Executive to
NMHC as contemplated in this Agreement, will not conflict with, or cause Executive or any other
Person to be in breach of (i) any other contract to which Executive is a party or (ii) any duty
which Executive may owe to any other Person.



AGREEMENT




     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:



     1. Duties; Disclosure of Information.



          1.1 Duties. During the term of this Agreement (including all renewal periods, if any,
the “Term”), Executive agrees to be employed by and to serve NMHC as Chief Financial Officer and
NMHC agrees to employ and retain Executive in such capacity subject to the provisions of this
Agreement. Executive shall have such duties and responsibilities as are customarily assigned to
individuals serving in such positions, as the same may be described in NMHC’s bylaws, as the same
may be amended from time to time, and such other duties consistent with Executive’s titles and
positions as the Board of Directors of NMHC (the “Board”) shall from time to time lawfully direct.
Executive shall devote substantially all of Executive’s business time, energy, and skill to the
business of NMHC and the other NMHC Entities. Executive shall at all times act in a manner
consistent with, and otherwise comply with, any and all codes of business conduct and ethics of
NMHC and all insider trading policies of NMHC, as the same may be adopted or amended from time to
time and provided to Executive in




 









 




writing. Executive will promote the goodwill of NMHC among its customers, shareholders,
employees, vendors, and the general public.




          1.2 Disclosure of Competitively Sensitive Information. Executive acknowledges that
NMHC has disclosed to Executive various Confidential Information. During the Term, NMHC shall
disclose to Executive various additional Confidential Information, including without limitation
pricing and marketing information and strategies being used and contemplated to be used by NMHC
Entities, and human resources information. Executive acknowledges and agrees that all Confidential
Information which may have been previously disclosed to him belongs to NMHC and, in consideration
of the promises contained herein, Executive disclaims any interest in the Confidential Information.




     2. Term and Termination.



          2.1 Term. Subject to Section 2.2, the term of employment of Executive by NMHC
pursuant to this Agreement shall be one (1) year commencing on the Effective Date and shall
thereafter automatically renew for successive additional one-year terms unless either party
provides the other with written notice of its intent not to renew this Agreement at least ninety
(90) days prior to the end of the Term (including any renewal term, as applicable) unless
terminated earlier pursuant to the provisions of this Agreement.




          2.2 Termination of Employment.




               2.2.1 Termination For Cause. “Termination For Cause” shall mean the termination by
NMHC of Executive’s employment with NMHC as the result of (i) the failure of Executive
substantially to perform Executive’s duties hereunder; (ii) Executive’s engaging in misconduct that
has caused or is reasonably expected by the Board to cause material injury to NMHC or all NMHC
Entities taken as a whole; (iii) Executive’s violation of any material policy of NMHC, including
without limitation insider trading, harassment and discrimination policies, copies of which have
been provided to Executive in writing; (iv) Executive’s indictment or conviction of, or entering a
plea of guilty or nolo contendere to, a crime that constitutes a felony; or (v) the material breach
by Executive of any of Executive’s obligations hereunder or under any other written agreement or
covenant with NMHC or any NMHC Entity, in each case in clauses (i), (ii), (iii) and (v) after
receipt of written notice from NMHC specifying the grounds for Termination for Cause and (only in
the event that the nature of the grounds, in the good faith opinion of the Board, are not related
to any willful misconduct or dishonesty of Executive and otherwise are able to be cured) failure by
Executive to cure such breach within fifteen (15) days from receipt of notice. Executive’s
inability to perform Executive’s obligations under this Agreement despite Executive’s best efforts
as a result of being Permanently Disabled shall not result in a Termination For Cause. Upon any
Termination For Cause, Executive shall be paid the Accrued Obligations within three (3) business
days following the effective date of termination but shall not be paid any severance compensation.
Any other accrued benefits provided under employee benefit programs maintained by NMHC, including
qualified and nonqualified programs, shall be payable according to their terms.



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               2.2.2 Termination Other Than For Cause. “Termination Other Than For Cause” shall mean
(i) termination by NMHC of Executive’s employment with NMHC (for any reason other than a
Termination For Cause, Termination by Reason of Death, Termination by Reason of Incapacity, or a
refusal by NMHC to renew the Term of this Agreement following the expiration of the initial or any
renewal term as set forth in Section 2.1), or (ii) termination by Executive upon constructive
termination of Executive’s employment with NMHC by reason of (A) a reduction in Executive’s Base
Salary; (B) a Material Diminution; (C) a requirement by NMHC that Executive change the office to
which Executive is primarily assigned to a location that is outside the Office Area; (D) a change
by NMHC of its reimbursement policy for travel and living expenses (compared to such policy as in
effect on the Effective Date) that would have a material negative impact on reimbursement payments
to Executive in respect of the travel obligations required of Executive by NMHC; or (E) NMHC’s
continued material breach of this Agreement (other than based on circumstances that could
constitute a Material Diminution) after, in each case, receipt of written notice from Executive
specifying the basis for such constructive termination and failure by NMHC to cure within fifteen
(15) days from receipt of such notice. Termination Other Than For Cause may be effected by NMHC at
any time by providing Executive with written notice of such termination by NMHC. The termination
shall be effective as of the date of the notice or such later date as may be determined by NMHC.
Executive may effect a Termination Other Than For Cause upon written notice to NMHC at any time
specifying any of the conditions for constructive termination set forth in clause (ii) above
(including without limitation the expiration of the cure period) have been met; provided, however,
that during the six (6) month period following a Change in Control, Executive may not effect a
Termination Other Than For Cause based upon a Material Diminution. Upon any Termination Other Than
For Cause, Executive shall be paid (i) within three (3) business days following the effective date
of termination the amount of the Accrued Obligations; and (ii) (subject to Section 2.2.8) the
Severance Compensation. Any other accrued benefits provided under employee benefit programs
maintained by NMHC, including qualified and nonqualified programs, shall be payable according to
their terms.



               2.2.3 Executive Voluntary Termination. “Executive Voluntary Termination” shall mean
termination by Executive of Executive’s employment with NMHC for any reason other than Termination
Other Than For Cause, Termination by Reason of Death or Termination by Reason of Incapacity.
Executive Voluntary Termination may be effected by Executive at any time by providing NMHC with
written or oral notice of such termination. The termination shall be effective as of the date of
the notice. In the event of an Executive Voluntary Termination, Executive shall be paid within
three (3) business days following the effective date of termination the amount of the Accrued
Obligations but shall not be paid any severance compensation. Any other accrued benefits provided
under employee benefit programs maintained by NMHC, including qualified and nonqualified programs,
shall be payable according to their terms.



               2.2.4 Termination by Reason of Incapacity. If, during the Term, Executive shall
become Permanently Disabled, NMHC may terminate Executive’s employment with NMHC effective on the
earliest date permitted under applicable law, if any, and such termination shall be deemed
“Termination by Reason of Incapacity”. Upon termination of



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employment under this Section, Executive shall be paid (i) within three (3) business days
following the effective date of termination the amount of the Accrued Obligations; and (ii)
(subject to Section 2.2.8) an amount equal to the difference of (A) the Severance Compensation less
(B) the Prorated Disability Benefit Amount. As used herein, “Prorated Disability Benefit Amount”
means an amount equal to the product of (i) any payment or payments payable to Executive during the
twelve (12) month period following the time of termination under any long-term disability policy
multiplied by (ii) the percentage of the premiums under such policy that were paid by NMHC. Any
other accrued benefits provided under employee benefit programs maintained by NMHC, including
qualified and nonqualified programs, shall be payable according to their terms.




               2.2.5 Termination by Reason of Death. In the event of Executive’s death during the
Term (“Termination by Reason of Death”), Executive’s employment with NMHC shall be deemed to have
terminated as of the date on which Executive’s death occurs, and the estate of Executive shall be
paid (i) within fifteen (15) days following the effective date of termination, the amount of the
Accrued Obligations; and (ii) an amount equal to the difference of (A) the Severance Compensation
less (B) the Prorated Death Benefit Amount. As used herein, “Prorated Death Benefit Amount” means
an amount equal to the product of (i) any payment or payments payable to Executive’s beneficiaries
under any life insurance policy multiplied by (ii) the percentage of the premiums under such policy
that were paid by NMHC. Any other accrued benefits provided under employee benefit programs
maintained by NMHC, including qualified and nonqualified programs, shall be payable according to
their terms.



               2.2.6 Termination Upon Expiration of Agreement. In the event that NMHC refuses for
any reason to extend the Term of this Agreement by giving written notice at least ninety (90) days
prior to the initial or any renewal period as set forth in Section 2.1, Executive shall be paid (i)
within three (3) business days following the effective date of termination the amount of the
Accrued Obligations; and (ii) (subject to Section 2.2.8) the Severance Compensation. Any other
accrued benefits provided under employee benefit programs maintained by NMHC, including qualified
and nonqualified programs, shall be payable according to their terms. In the event that Executive
refuses for any reason (except as otherwise provided herein) to extend the Term of this Agreement
by giving written notice at least ninety (90) days prior to the initial or any renewal period as
set forth in Section 2.1, the expiration of this Agreement shall be deemed an Executive Voluntary
Termination.



               2.2.7 Termination of Relationship with Affiliated Entities. Unless agreed by NMHC (or
another NMHC Entity) and Executive in a separate written agreement (other than corporate minutes,
resolutions, charter documents, bylaws, or partnership agreements), upon the termination of
Executive’s employment with NMHC for any reason, Executive shall tender a written resignation (in
form and substance reasonably acceptable to NMHC) of any positions Executive may have with NMHC and
any and all other NMHC Entities.



               2.2.8 Conditions to Payment; Sole Remedy. Except in the case of a Termination by
Reason of Death, Executive shall not be entitled to receive any Severance



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Compensation or Change in Control Compensation unless Executive shall have executed and
delivered to NMHC (i) a release substantially in the form attached hereto as Exhibit “B”
(the “Release”) within ten (10) business days following the date of termination of Executive’s
employment and all revocation and waiting periods applicable to such Release have expired and (ii)
a written resignation as contemplated in Section 2.2.7. In addition, in the event that Executive
breaches any of the restrictive covenants set forth in Section 4 at any time, NMHC shall be
entitled to discontinue any Severance Compensation (provided, however, that if it is finally
determined by a court of competent jurisdiction or an arbitrator that NMHC asserted in bad faith
that Executive breached any of the restrictive covenants set forth in Section 4, the payments of
the Severance Compensation shall be extended for two months for each calendar month that payments
were delayed, with the intent and effect that Executive shall be paid double for each delayed
month). The Severance Compensation (or Change in Control Compensation, as applicable) to be paid
to Executive shall, except as expressly provided in the proviso in the immediately preceding
sentence, represent the sole and exclusive remedy of Executive in connection with the termination
of Executive’s employment and this Agreement upon a Termination Other Than for Cause, a Termination
by Reason of Incapacity, a Termination by Reason of Death, or a refusal by NMHC to extend the Term
of this Agreement.




               2.2.9 Timing of Severance Payments. 



                    2.2.9.1 Generally. Unless otherwise required to be delayed pursuant to Section
2.2.9.2 below, the Severance Compensation shall be paid in equal installments over a period of
twelve (12) months from the date of termination of employment in accordance with NMHC’s normal
payroll policies.



                    2.2.9.2 Limitations. If Executive is a “specified employee” within the meaning of
Section 409A of the Code and the final regulations thereunder (“Section 409A”) at the time of
Executive’s termination, and the Severance Compensation to be paid to Executive pursuant to this
Agreement will not be paid in full by March 15 of the year following the year in which termination
of Executive’s employment occurs, then only that portion of such Severance Compensation which does
not exceed the Section 409A Limit may be paid within the first six (6) months following termination
of Executive’s employment in accordance with the payment schedule set forth in Section 2.2.9.1
above. Any portion of such Severance Compensation in excess of the Section 409A Limit shall accrue
and, to the extent such portion of the Severance Compensation would otherwise have been payable
within the first six (6) months following termination of Executive’s employment pursuant to Section
2.2.9.1 above, will become payable on the date that is six (6) months and one (1) day following the
date of Executive’s termination of employment (such payment, the “Catch-Up Payment”). All
subsequent Severance Compensation, if any, will be payable as provided in Section 2.2.9.1 of this
Agreement. It is the intent of this provision to comply with the requirements of Section 409A, and
any ambiguities herein will be interpreted to so comply. For purposes of this Agreement, the
“Section 409A Limit” means the lesser of two (2) times: (i) the Executive’s annualized
compensation based upon the Executive’s annual rate of pay (unless otherwise defined by applicable
guidance issued by the IRS after the date of this Agreement, “annual rate of pay” shall include
Base Salary and bonus compensation, adjusted for any increase during that year that was expected to
continue



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indefinitely had Executive’s employment not terminated) to Executive during NMHC’s taxable
year preceding NMHC’s taxable year during which termination of employment occurs, or (ii) the
maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17)
of the Code for the year in which Executive’s employment is terminated. Notwithstanding the
foregoing, (i) any payment that would not be considered a deferral of compensation for purposes of
Section 409A shall be made at the time scheduled for payment without regard to the six (6) month
delay referred to above, and (ii) except for the Catch-Up Payment, if any, under no circumstances
shall Executive be entitled to receive payments in any pay period exceeding the pro rata portion of
the Severance Compensation that otherwise would be payable in such pay period under Section
2.2.9.1. Each periodic payment of Severance Compensation shall be considered a separate payment
for purposes of Section 409A.




     3. Salary, Benefits, Bonus and Equity.



          3.1 Base Salary. As payment for the services to be rendered by Executive as provided
in Section 1 and subject to the terms and conditions of Section 2, NMHC agrees to pay to Executive
a “Base Salary” at the rate of $300,000 per annum. The Board shall review Executive’s Base Salary
annually during the period of Executive’s employment hereunder and, in its sole discretion, may
increase (but not at any time decrease) such Base Salary from time to time based upon the
Executive’s performance, the financial condition of NMHC, salaries of executives in similar
positions at other comparable companies in the industry, and such other factors as the Board shall
consider relevant. The Base Salary shall be payable in accordance with the then-current payroll
policies of NMHC. Any failure to pay Base Salary in accordance with the terms of this Section 3.1
shall be considered a material breach of this Agreement.




          3.2 Bonuses. Executive shall be eligible to receive a bonus each year (with a target
amount equal to fifty percent (50%) of Executive’s Base Salary) as may be determined from time to
time by the Board, with the actual amount (if any) of any such bonus to be determined in the sole
discretion of the Board. The Board is under no obligation to declare, and NMHC is under no
obligation to pay, any bonus to Executive under the terms of this Agreement or otherwise. If after
the Effective Date, Executive and NMHC enter into a written agreement or plan executed by both NMHC
and Executive that governs bonus arrangements, and the provisions thereof conflict with this
Section 3.2, the terms of such other written agreement or plan shall supersede this Section 3.2.




          3.3 Additional Benefits. During the Term (or thereafter, to the extent expressly
provided herein), Executive shall be entitled to the following fringe benefits:




               3.3.1 Benefits and Vacation. Executive shall be entitled to participate in such
profit sharing, pension, retirement, deferred compensation, savings, life, medical, dental,
disability and other welfare benefit plans maintained by NMHC in accordance with the terms thereof,
as the same may be amended and in effect from time to time, as are now generally available or later
made generally available to executive officers of NMHC. A termination or expiration of this
Agreement for any reason or for no reason shall not affect any rights which Executive may have
pursuant to any agreement, policy, plan, program or arrangement of NMHC providing Executive
benefits (including under any stock option agreement or bonus plan or



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similar agreements which may exist), which rights shall be governed by the terms thereof.
Executive shall be entitled to 22 days paid vacation each calendar year (prorated for partial
years). Accrued vacation not taken in any applicable period shall not be carried forward or used
in any subsequent period.




               3.3.2 Reimbursement for Expenses. NMHC shall reimburse Executive for reasonable and
properly documented out-of-pocket business and/or entertainment expenses incurred by Executive in
connection with Executive’s duties under this Agreement. Any such expenses shall be submitted by
Executive to NMHC on a periodic basis and will be paid in accordance with the then-current NMHC
policies and procedures.



               3.3.3 Change in Control Compensation; Transition Period Obligations.



                    3.3.3.1 Change in Control Compensation. In the event that (i) a Change in Control
occurs during the Term and (ii) Executive’s employment with NMHC terminates at any time within two
(2) years following the occurrence of the Change in Control pursuant to a Permitted Termination
Event, then in lieu of any Severance Compensation then owed or that otherwise may be owed in the
future to Executive under this Agreement, NMHC shall pay Executive both (A) the Accrued Obligations
within three (3) business days after the termination of Executive’s employment and (B) subject to
Section 2.2.8, the Change in Control Compensation within three (3) business days after all
revocation and waiting periods applicable to the Release have expired. In the interest of clarity,
NMHC and Executive agree that, following the occurrence of a Change in Control and a payment of the
Change in Control Compensation to Executive, the provisions of this Agreement requiring payment of
Severance Compensation to Executive shall automatically be deemed null and void and shall not apply
with respect to any termination of Executive’s employment (whether such termination is effected in
connection with the Change in Control or at any time in the future following the Change in
Control), and under no circumstances shall NMHC ever be obligated to pay Executive both Change in
Control Compensation and Severance Compensation.



                    3.3.3.2 Transition Period Obligations. Executive agrees to remain an employee of NMHC
to provide transition and other services for a period of six (6) months following the occurrence of
a Change in Control (such six (6) month period, the “Transition Period”) as requested by NMHC. The
parties agree that NMHC will incur damages in the event that (i) a Change in Control occurs during
the Term and (ii) Executive’s employment with NMHC terminates at any time during the Transition
Period for any reason other than a Permitted Termination Event. The amount of damages to be
sustained by NMHC are uncertain and would be difficult to ascertain. Therefore, in the event that
(i) a Change in Control occurs during the Term and (ii) Executive’s employment with NMHC terminates
at any time during the Transition Period for any reason other than a Permitted Termination Event,
then Executive shall pay to NMHC, within two (2) business days following the date of termination,
the Transition Period Default Payment. As used herein, the “Transition Period Default Payment”
means an amount equal to thirty percent (30%) of the Accelerated Restricted Stock Value. As used
herein, “Accelerated Restricted Stock Value” means an amount equal to the value (computed using the
value per share of NMHC Common Stock at the effective time of the Change in Control) of the



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number of shares of Common Stock granted to Executive under the Restricted Stock Agreement
between NMHC and Executive dated November 13, 2007 with respect to which lapsing of restrictions
and vesting accelerated pursuant to the Change in Control. The parties believe that payment of the
Transition Period Default Payment is the reasonable estimate of the loss of revenues, costs of
recruiting a replacement for Executive to provide transition services following a Change in
Control, and related expenses and is reasonable compensation to NMHC for these damages. Executive
promises to pay, and NMHC agrees to accept, the Transition Period Default Payment as liquidated
damages, and not as a penalty, if Executive’s employment shall terminate at any time during the
Transition Period for any reason other than a Permitted Termination Event. NMHC may setoff any
amount to which it may be entitled under this Section against amounts otherwise payable to
Executive to the extent permitted by Treasury Regulation Section 1.409A-3(j)(4)(xiii). The
exercise of such right of setoff by NMHC in good faith, whether or not ultimately determined to be
justified, will not constitute an event of default under this Agreement or any other agreement
between NMHC and Executive. Neither the exercise of nor the failure to exercise such right of
setoff will constitute an election of remedies or limit NMHC in any manner in the enforcement of
any other remedies that may be available to it.




                    3.3.3.3 Successor Entities. As used in this Section 3.3.3, “NMHC” shall be deemed to
include NMHC’s successor in interest, as applicable.



                    3.3.3.4 Recruiting Firms. In the event the Executive’s employment is terminated at
any time during the Transition Period for a Permitted Termination Event, NMHC shall, upon the
written request of Executive: (i) waive, by written notice to the applicable recruiting firms, any
restrictions contained in NMHC’s contracts with such recruiting firms that otherwise would restrict
any recruiting firm then under contract with NMHC from providing services to the Executive or
otherwise contacting the Executive for other positions and (ii) thereafter refrain from entering
into any contract with a recruiting firm which would contractually restrict the recruiting firm
from providing services to the Executive or otherwise contacting the Executive for other positions.
Notwithstanding the foregoing, nothing in this Section shall be construed to terminate, modify or
diminish the restrictive covenants contained in Section 4.



               3.3.4 Section 280G Gross-Up.



                    3.3.4.1 Generally. Anything in this Agreement or any other plan, arrangement or
agreement with NMHC (collectively, Executive’s “Employment Related Agreements”) to the contrary
notwithstanding, in the event Executive shall become entitled to payments and/or benefits provided
by any Employment Related Agreement or any other amounts in the “nature of compensation” (whether
pursuant to the terms of any Employment Related Agreement or any other plan, arrangement or
agreement with NMHC, any Person whose actions result in a change of ownership or effective control
of NMHC covered by Section 280G(b)(2) of the Code or any Person affiliated with NMHC or such
Person) as a result of such change in ownership or effective control of NMHC (a “Payment”), which
Payments would subject the Executive to the excise tax imposed by Section 4999 of the Code or any
similar tax that may hereafter be imposed (the “Excise Tax”), NMHC will pay to Executive an
additional amount



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(the “Gross-Up Payment”), such that the net amount retained by Executive with respect to such
Payments, after deduction of any Excise Tax (including any penalties and interest thereon) on the
Payments and any Federal, state and local income tax, payroll tax, and Excise Tax on the Gross-Up
Payment provided for by this Section 3.3.4, but before deduction for any Federal, state or
local income or employment tax withholding on such Payments, will be equal to the amount of the
Payments, together with an amount equal to the product of any deductions disallowed to Executive
for Federal, state, or local income tax purposes because of the inclusion of the Gross-Up Payment
in Executive’s adjusted gross income multiplied by the highest applicable marginal rate of Federal,
state, or local income taxation, respectively, for the calendar year in which the Gross-Up Payment
is to be made. The Gross-Up Payment is intended to place the Executive in the same position he
would have been in if the Excise Tax did not apply.




                    3.3.4.2 Determination of Amount. Subject to the provisions of Section 3.3.4.3, all
determinations required to be made under this Agreement, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by an accounting firm (the “Accounting Firm”), which
shall provide detailed supporting calculations both to NMHC and the Executive within 15 business
days of the receipt of notice from the Executive that there has been or the Executive reasonably
believes there may have been a Payment, or such earlier time as is requested by NMHC. The
Accounting Firm shall be jointly selected by NMHC and the Executive and shall not, during the two
years preceding the date of its selection, have acted in any way on behalf of NMHC or its
affiliated companies. If NMHC and the Executive cannot agree on the firm to serve as the Accounting
Firm, then NMHC and the Executive shall each select an accounting firm and those two firms shall
jointly select an accounting firm to serve as the Accounting Firm. All fees and expenses of the
Accounting Firm shall be borne solely by NMHC. Any Gross-Up Payment, as determined pursuant to this
Agreement, shall be paid by NMHC to the Executive as provided in Section 3.3.4.6. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion of its determination. Any determination by the Accounting Firm
shall be binding upon NMHC and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments that will not have been made by NMHC should have been made
(the “Underpayment”), consistent with the calculations required to be made hereunder. In the event
that NMHC exhausts its remedies pursuant to Section 3.3.4.3 and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be paid by NMHC to or for the
benefit of the Executive, together with interest at the rate provided in section 1274(b)(2)(B) of
the Code, at the time provided in Section 3.3.4.6.



                    3.3.4.3 IRS Claims. The Executive shall notify NMHC in writing of any claim by the
IRS that, if successful, would require the payment by NMHC of a Gross-Up Payment. Such notification
shall be given as soon as practicable, but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise NMHC of the nature of such claim and the date
on which such claim is requested to be paid. The failure of the Executive to give the notice
provided in the immediately preceding sentence by the date



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specified therein shall not affect NMHC’s obligations hereunder except to the extent NMHC is
prejudiced thereby. The Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which Executive gives such notice to NMHC (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due). If NMHC notifies
the Executive in writing prior to the expiration of such period that it desires to contest such
claim, the Executive shall:




                    (a) give NMHC any information reasonably requested by NMHC relating to such claim,



                    (b) take such action in connection with contesting such claim as NMHC shall reasonably request
in writing from time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by NMHC,



                    (c) cooperate with NMHC in good faith in order effectively to contest such claim, and



                    (d) permit NMHC to participate in any proceedings relating to such claim; provided,
however, that NMHC shall bear and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 3.3.4.3, NMHC shall
control all proceedings taken in connection with such contest and, at its sole option, may pursue
or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as NMHC shall determine;
provided, however, that if NMHC directs the Executive to pay such claim and sue for a refund, NMHC
shall advance the amount of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided the Executive
shall not be required by NMHC to agree to any extension of the statute of limitations relating to
the payment of taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due unless such extension is limited solely to such contested amount.
Furthermore, NMHC’s control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the IRS or any other taxing authority.



                    3.3.4.4 Refunds. If, after the receipt by the Executive of an amount advanced by NMHC
pursuant to Section 3.3.4.3 hereof, the Executive becomes entitled to receive any refund with
respect to such amount, the Executive shall (subject to NMHC’s



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complying with the requirements of Section 3.3.4.3 hereof) promptly pay to NMHC the amount of
such refund (together with any interest paid or credited thereon after taxes applicable thereto).
If, after the receipt by the Executive of an amount advanced by NMHC pursuant to Section 3.3.4.3
hereof, a determination is made that the Executive shall not be entitled to any refund with respect
to such amount and NMHC does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.




                    3.3.4.5 Redetermination. If, pursuant to regulations issued under Section 280G or
4999 of the Code, NMHC and the Executive were required to make a preliminary determination of the
amount of an excess parachute payment and thereafter a redetermination of the Excise Tax is
required under the applicable regulations, the parties shall request the Accounting Firm to make
such redetermination. If as a result of such redetermination an additional Gross-Up Payment is
required, the amount thereof, together with interest at the rate provided in section 1274(b)(2)(B)
of the Code, shall be paid by NMHC to the Executive at the time provided in Section 3.3.4.6. If the
redetermination of the Excise Tax results in a reduction of the Excise Tax, the Executive shall
take such steps as NMHC may reasonably direct in order to obtain a refund of the excess Excise Tax
paid. If NMHC determines that any suit or proceeding is necessary or advisable in order to obtain
such refund, the provisions of Section 3.3.4.3 hereof relating to the contesting of a claim shall
apply to the claim for such refund, including, without limitation, the provisions concerning legal
representation, cooperation by the Executive, participation by NMHC in the proceedings and
indemnification and payment of fees and expenses by NMHC. Upon receipt of any such refund, the
Executive shall promptly pay the amount of such refund to NMHC. If the amount of the income taxes
otherwise payable by the Executive in respect of the year in which the Executive makes such payment
to NMHC is reduced as a result of such payment, the Executive shall, no later than the filing of
his income tax return in respect of such year, pay the amount of such tax benefit to NMHC. In the
event there is a subsequent redetermination of the Executive’s income taxes resulting in a
reduction of such tax benefit, NMHC shall, promptly after receipt of notice of such reduction, pay
to the Executive the amount of such reduction. If NMHC objects to the calculation or recalculation
of the tax benefit, as described in the preceding two sentences, the Accounting Firm shall make the
final determination of the appropriate amount. The Executive shall not be obligated to pay to NMHC
the amount of any further tax benefits that may be realized by Executive as a result of paying to
NMHC the amount of the initial tax benefit.



                    3.3.4.6 Timing of Payments. The Gross-Up Payment (or portion thereof) provided for in
this Section 3.3.4 will be paid to Executive on the day of the payment of the Payments that give
rise to the Excise Tax; provided, however, that if the amount of such Gross-Up Payment (or portion
thereof) cannot be finally determined on or before the date on which payment is due, NMHC will pay
to Executive by such date an amount estimated in good faith by the Accounting Firm to be the
minimum amount of such Gross-Up Payment and will pay the remainder of such Gross-Up Payment
(together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the
amount thereof can be determined, but in no event later than forty-five (45) days after payment of
the Payments that give rise to the Excise



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Tax. Further, in the event that on the day of the Payments (or the forty-five (45) day period
following such payments) no Gross-Up Payment is determined by the Accounting Firm to be due and it
is subsequently determined that a Gross-Up Payment is owing to Executive or in the event that the
initial Gross-Up Payment was too little and additional Gross-Up Payments are subsequently
determined to be payable to Executive pursuant to Section 3.3.4.5 above, such Gross-Up
Payment or additional Gross-Up Payment amount will be paid by NMHC to Executive at the earlier of
(i) the date that the Gross-Up Payment or additional Gross-Up Payment amount is determined by the
Accounting Firm to be payable to Executive or (ii) the date that such Excise Tax amounts are
finally determined and assessed by the Internal Revenue Service, but no later than thirty (30) days
following the date of such determination or assessment, as applicable. The payment provisions of
this Section 3.3.4 shall be administered in compliance with the requirements of Treasury Regulation
Section 1.409a-3(i)(1)(v).




               3.3.5. Prescription Drug Benefit. In the event that upon the termination of this
Agreement or thereafter during the COBRA Period NMHC has opted out of providing prescription drug
benefit coverage as part of its health insurance benefits provided to employees, NMHC shall cause
its health insurance provider to provide such benefits under the COBRA benefits provided to
Executive and, if such Executive shall be entitled to Severance Compensation or Change in Control
Compensation, the cost thereof shall be paid for by NMHC for the duration of the COBRA Period.



     4. Protection of NMHC.



          4.1 Non-Competition. Executive acknowledges that, in addition to Executive’s access
to and possession of Confidential Information, during the Term Executive will acquire valuable
experience and special training regarding the business of NMHC and the other NMHC Entities.
Executive further acknowledges that, as part of this Agreement, NMHC is employing Executive to
protect and enhance the goodwill of NMHC with its employees, shareholders, customers, vendors and
the general public. Executive further acknowledges and agrees that the knowledge, experience, and
training Executive will acquire would enable Executive to injure NMHC or another NMHC Entity,
including their respective interests in the Confidential Information and goodwill, if Executive
were to engage in any business that is competitive with the business of NMHC or any other NMHC
Entity. Therefore, ancillary to the otherwise enforceable agreements set forth in this Agreement,
Executive shall not, at any time during the Term and for the twelve (12) consecutive months
immediately after the termination or expiration of Executive’s employment, directly or indirectly
(as an employee, employer, consultant, agent, principal, partner, shareholder, officer, director,
or manager or in any other individual or representative capacity), engage in, invest in, solicit
NMHC customers for the benefit of, provide other assistance to, or participate in any business that
is in competition with the business of, any NMHC Entity anywhere in the United States.
Notwithstanding the foregoing, Executive shall not be prohibited, however, from (i) owning, as a
passive investor, less than one percent (1%) of the publicly traded stock of any corporation
engaged in a business competitive with that of any NMHC Entity or (ii) being an employee,
consultant, manager or otherwise providing services to a company which owns or operates a division
or subsidiary providing pharmacy benefit management services, so long as Executive does not
directly or



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indirectly assist with any aspect of such pharmacy benefit management services function.
Executive represents that the enforcement of the restriction in this Section would not be unduly
burdensome to Executive and that, in order to induce NMHC to enter into this Agreement (which
contains various benefits to Executive and obligations of NMHC with respect to Executive’s
employment), Executive is willing and able to find employment after the date of termination or
expiration of Executive’s employment with NMHC in other business or geographical areas not
prohibited by this Section.




          4.2 Nonsolicitation. Ancillary to the otherwise enforceable agreements set forth in
this Agreement, Executive agrees that, for a period of one (1) year subsequent to the termination
or expiration of Executive’s employment with NMHC, whether such termination or expiration occurs at
the insistence of Executive or NMHC for any reason, Executive shall not recruit, hire, or attempt
to recruit or hire, directly or by assisting others in any way, any other employees of any NMHC
Entity, nor shall Executive contact or communicate with any other employees of any NMHC Entity for
the purpose of inducing other employees to terminate their employment with any NMHC Entity. For
purposes of this covenant, “other employees of any NMHC Entity” shall refer to employees who are
employed by any NMHC Entity at the time of the attempted recruiting or hiring.




          4.3 Confidential Information and Trade Secrets. Executive recognizes and acknowledges
that the Confidential Information constitutes valuable, special and unique assets. Except as
required to perform Executive’s duties as an executive of NMHC, until such time as they cease to be
Confidential Information through no act of Executive in violation of this Agreement, except as may
be required by applicable law or process issued in connection with a judicial or administrative
proceeding, Executive will not use or disclose any Confidential Information. Upon the request of
NMHC and, in any event, upon the termination or expiration of Executive’s employment for any
reason, Executive will surrender to NMHC (i) all memoranda, notes, records, drawings, manuals or
other documents pertaining to the business of any and all NMHC Entities (including all copies
and/or reproductions thereof) and (ii) all materials involving any Confidential Information.




          4.4 Preservation of NMHC Property. Executive acknowledges that from time to time in
the course of employment with NMHC, Executive has had the opportunity to inspect and use certain
property of NMHC and the NMHC Entities, both tangible and intangible, including but not limited to
files, records, documents, drawings, specifications, lists, equipment, graphics, designs, and
similar items relating to the business of the NMHC Entities. Executive acknowledges and agrees
that all such property, including but not limited to any and all copies thereof, whether prepared
by Executive or otherwise in the possession of Executive, are and shall remain the exclusive
property of NMHC or the applicable NMHC Entity, that Executive shall have no right or proprietary
interest in such property and that Executive will safeguard and return to NMHC all such property
upon the earlier of (i) NMHC’s request and (ii) the termination or expiration of Executive’s
employment with NMHC.




          4.5 Assignment of Inventions to NMHC. All computer software, compilations, programs,
improvements, inventions, notes, copyrightable works, and



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opportunities for additional business, made, fixed, conceived, or acquired by Executive that
relate to the business of one or more NMHC Entities during the Term are exclusively owned by NMHC,
are NMHC’s works for hire, and fully assigned to NMHC including without limitation all rights to
renewals, extensions, causes of action, reproduce, prepare derivative works, distribute, display,
perform, transfer, make, use and sell and may never be copied, used, or disclosed without NMHC’s
express written consent. Executive will sign on request any documents affirming the same for any
particular item.




          4.6 Remedies.




               4.6.1 Remedies Generally. Executive acknowledges that Executive’s breach of any
restrictive covenant contained in Sections 4.1, 4.2 or 4.3 of this Agreement will result in
irreparable injury to NMHC and that NMHC’s remedies at law for such a breach will be inadequate.
Accordingly, Executive agrees and consents that NMHC, in addition to all other remedies available
at law and in equity, shall be entitled to both preliminary and permanent injunctions to prevent
and/or halt a breach or threatened breach by Executive of any restrictive covenant contained
herein. Executive waives the requirement of any bond for the issuance of any such injunctive
relief. Executive agrees not to bring or institute an action for declaratory judgment concerning
the enforceability of Sections 4.1, 4.2 or 4.3 of this Agreement. Executive further acknowledges
and agrees that the promises contained in Sections 4.1, 4.2 and 4.3 are ancillary to the otherwise
enforceable promises contained herein and are reasonable and valid. Executive hereby knowingly and
irrevocably waives all defenses to the strict enforcement of the promises contained in Sections
4.1, 4.2 and 4.3, subject to the provisions of Section 4.9 below.



               4.6.2 Disgorgement. In the event that Executive materially violates any of the
restrictive covenants contained in Sections 4.1, 4.2 or 4.3, then, in addition to any other rights
and remedies that NMHC may have (including the right to an injunction against further violations),
Executive shall account for any and all revenue, compensation, income, gains and/or profits
received or receivable, directly or indirectly, by Executive arising out of or relating to any such
violation (“Disgorgement Amounts”) and pay to NMHC on demand made by NMHC at any time and from time
to time an aggregate amount equal to the greater of: (i) the Disgorgement Amounts or (ii) all
monetary damages actually suffered by NMHC as a result of such violation.



          4.7 Acknowledgment. Executive acknowledges and agrees that the restrictions set forth
above are ancillary to an otherwise enforceable agreement and supported by independent valuable
consideration. Executive further acknowledges and agrees that the limitations as to time,
geographical area, and scope of activity to be restrained by the restrictions set forth above are
reasonable and acceptable to Executive, and do not impose any greater restraint than is reasonably
necessary to protect the goodwill and other business interests of NMHC.




          4.8 Reformation and Severance. If a judicial determination is made that any of the
provisions of the above restriction constitutes an unreasonable or otherwise unenforceable
restriction against Executive, it shall be rendered void only to the extent that such judicial
determination finds such provisions to be unreasonable or otherwise unenforceable. In this regard,
the parties hereby agree that any judicial authority construing this Agreement shall be



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empowered to sever any portion of the prohibited business activity from the coverage of this
restriction and to apply the restriction to the remaining portion of the business activities not so
severed by such judicial authority. Moreover, notwithstanding the fact that any provisions of this
restriction are determined by a court not to be specifically enforceable through injunctive relief,
NMHC shall nevertheless be entitled to seek to recover monetary damages as a result of the breach
of any provision which is not reformed by a court. The time period during which the restrictions
shall apply shall be tolled and suspended as to Executive for a period equal to the aggregate
quantity of time during which Executive violates such prohibitions in any respect, but any such
tolling period shall not exceed an additional twelve (12) months.




          4.9 Covenants are Independent Elements. The parties acknowledge that the restrictive
covenants contained in this Section 4 are essential independent elements of this Agreement and
that, but for Executive agreeing to comply with them, NMHC would not employ or continue to employ
Executive. Accordingly, the existence or assertion of any claim by Executive against NMHC, whether
based on this Agreement or otherwise, shall not operate as a defense to NMHC’s enforcement of the
restrictive covenants in this Section 4. An alleged or actual breach of the Agreement by NMHC will
not be a defense to enforcement of the provisions of this Section 4 or other obligations of
Executive to NMHC. The covenants in this Section 4 will remain in full force and effect whether
Executive is terminated by NMHC for any reason or voluntarily resigns. Notwithstanding anything to
the contrary contained in this Agreement, in the event that (i) NMHC shall fail to timely make any
payment of Severance Compensation or Change in Control Compensation due hereunder; (ii) there is no
good faith dispute regarding whether such payment is owed; and (iii) such failure is not cured
within ten (10) days after receipt by NMHC of written notice of such failure from Executive, then
the restrictions set forth in Sections 4.1 and 4.2 shall no longer be binding on Executive and NMHC
acknowledges and agrees that, in such event, it shall not be relieved of its obligations to pay the
Severance Compensation or Change in Control Compensation due hereunder and Executive shall have the
right to pursue all applicable remedies to obtain payment of all amounts due hereunder,
notwithstanding the non-binding nature of the provisions of Section 4.1 and 4.2.




          4.10 Notice to Subsequent Employers. Executive agrees that, prior to commencing any
new employment in a business competitive with that of any NMHC Entity within twelve (12) months
after the termination of this Agreement, Executive will furnish the new employer with a copy of
Sections 4.1 through 4.10 of this Agreement. Executive also agrees that NMHC may advise any new or
prospective employer of the existence and terms of this Agreement and furnish the employer with a
copy of the portions of this Agreement containing this Section 4.




     5. Disclosure of Investments. Commencing upon Executive’s execution of this Agreement
and at all times during the Term, Executive shall keep the Board informed in writing of the nature
and extent of Executive’s investments, stock or other ownership holdings, or retention as a
director, advisor or any similar interest in any business or enterprise similar to the business of
any NMHC Entity; provided, however, that Executive shall not be required to
disclose any such investments or stock or ownership holdings that constitute less than 1% of such
entity’s total obligations or total voting power.



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     6. Indemnification. NMHC and Executive have entered into a separate written agreement
providing for the indemnification of Executive. Nothing contained in this Agreement shall be
deemed to limit NMHC’s obligations or diminish Executive’s rights under, or otherwise affect, such
agreement to indemnify Executive.



     7. Termination of Preexisting Agreements. The Preexisting Agreements are hereby
terminated for all purposes and Executive hereby releases NMHC and other NMHC Entities from any and
all claims Executive otherwise may have relating to any of the Preexisting Agreements or based on
any promise or assurance of compensation, including without limitation any promise of equity or
other compensation, except to the extent provided in this Agreement or described on Exhibit
“C” attached hereto. All of the stock option, restricted stock, or other agreements, promises,
assurances or arrangements which may entitle Executive to compensation based on any class of
capital stock or other security of NMHC are listed in their entirety on Exhibit “C”
attached hereto and copies thereof have been provided to Executive. Executive hereby represents to
NMHC that, except for (i) this Agreement; (ii) those agreements, promises, assurances or
understandings expressly set forth on Exhibit “A” attached hereto, which shall terminate
pursuant to this Section 7 upon execution of this Agreement; and (iii) those agreements, promises,
assurances or understandings expressly set forth on Exhibit “C” attached hereto, which
shall survive the making of this Agreement, there are no agreements, promises, assurances or
understandings, written or oral, relating to Executive’s employment or compensation. In the
interest of clarity, notwithstanding the foregoing or anything to the contrary contained in this
Agreement or Exhibit “A”, NMHC’s general policies (and Executive’s obligations to comply
with them) shall remain in effect and continue to apply to Executive.



     8. Miscellaneous.



          8.1 Waiver. The waiver of the breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach of the same or other provision hereof.




          8.2 Entire Agreement; Modifications. Except as otherwise provided herein, this
Agreement represents the sole, entire, and complete understanding among the parties with respect to
the subject matter hereof, and this Agreement supersedes any and all prior understandings,
agreements, plans and negotiations, whether written or oral, with respect to the subject matter
hereof, including without limitation any understandings, agreements or obligations respecting any
past or future compensation, bonuses, reimbursements or other payments to Executive from any NMHC
Entity. All modifications to the Agreement must be in writing and signed by both Executive and
NMHC.




          8.3 Notices. All notices and other communications under this Agreement shall be in
writing and shall be given by facsimile or first class mail, certified or registered with return
receipt requested, and shall be deemed to have been duly given three business days after mailing or
one business day after transmission of a facsimile (with confirmation of receipt) to the respective
persons named below:




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	 	If to NMHC:
	 	National Medical Health Card Systems, Inc.
	 

	 	 	 	26 Harbor Park Drive
	 

	 	 	 	Port Washington, NY 11050
	 

	 	 	 	Attn: Chief Executive Officer
	 
	 	 	 	 
	 

	 	With a copy to:
	 	Jackson Walker L.L.P.
	 

	 	 	 	901 Main Street, Suite 6000
	 

	 	 	 	Dallas, Texas 75202
	 

	 	 	 	Fax: (214) 953-5822
	 

	 	 	 	Attn: Michael E. Taten
	 
	 	 	 	 
	 

	 	If to Executive:
	 	Notices to Executive shall be given at the most recent
	 

	 	 	 	address of Executive on NMHC’s records
	 
	 	 	 	 
	 

	 	with a copy to:
	 	Jacobs & Dembert, P.A.
	 

	 	 	 	One South Street — Suite 1910
	 

	 	 	 	Baltimore, Maryland 21202
	 

	 	 	 	Fax: (410) 752-8105
	 

	 	 	 	Attn: James S. Jacobs, Esquire





Any party may change such party’s address for notices by notice duly given pursuant to this
Section.




          8.4 Headings; Interpretation. The Section headings herein are intended for reference
and shall not by themselves determine the construction or interpretation of this Agreement.
Reference to any gender in this Agreement shall be deemed to include each other gender.




          8.5 Governing Law; Disputes; Venue. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York. Any controversy or claim arising out of or
relating to this Agreement, the breach thereof,  and any other dispute between the parties hereto
(whether grounded in contract, tort, statute, law or equity), shall be settled by arbitration,
before one impartial arbitrator, administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered
in any court having jurisdiction thereof. The arbitration shall take place (at the option of the
filing party) in New York, New York, unless the parties mutually agree to another location. The
arbitrator shall award attorneys’ fees and other costs of the arbitration, including the fees and
expenses of the arbitrator, to the prevailing party, as determined by the arbitrator. No party is
precluded by this arbitration clause from seeking and obtaining injunctive or other temporary,
preliminary or emergency relief from a court of competent jurisdiction, and the election to do so
by a party shall not be construed as a waiver of such party’s right to compel arbitration.




          8.6 Severability. Should any court of competent jurisdiction determine that any
provision of this Agreement is illegal or unenforceable to any extent, such provision shall be



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enforced to the extent permissible and all other provisions of this Agreement shall continue
to be enforceable to the extent possible.




          8.7 Counterparts. This Agreement may be executed in one or more counterparts, all of
which taken together shall constitute one and the same Agreement.




          8.8 Assignment. Neither this Agreement nor any duties or obligations hereunder may be
assigned by either party without the other party’s prior written consent; provided, however, that
NMHC may assign this Agreement to either (i) another NMHC Entity (provided, however, that such
assignment shall not relieve NMHC of its obligations hereunder) or (ii) a Person acquiring
substantially all of the assets of NMHC on a consolidated basis if such acquisition would
constitute a Change in Control.




          8.9 Powers of Board. Any discretion, power or obligation accorded to the Board with
respect to this Agreement may be exercised or satisfied by action of any duly appointed committee
of the Board.




          8.10 Withholding. All compensation and benefits payable to Executive hereunder shall
be reduced by all federal, state, local and other withholdings and similar taxes and payments
required by applicable law.




          8.11 Tax Matters. This Agreement is intended to comply with the requirements of
Section 409A to avoid the consequences of plan failures as set forth in Code Section 409A(a)(1).
Any terms of the Agreement that conflict with such guidance shall be null and void, subject to the
next sentence. To the extent necessary or advisable, the parties agree to amend the Agreement to
modify any conflicting provisions and to add such other provisions as are required to fully comply
with the applicable provisions of Section 409A and any other legislative or regulatory requirements
applicable to the Agreement, such that the modified and additional provisions shall preserve to the
maximum extent possible the benefits and obligations intended by the parties hereunder.




          8.12 Representation. The Executive acknowledges that (i) Executive has obtained the
advice of Executive’s own independent legal, tax and financial counsel in choosing to enter into
this Agreement and (ii) none of the General Counsel of NMHC, Jackson Walker L.L.P., or any other
legal counsel of NMHC represents the interests of the Executive in any way.




     9. Definitions. As used in this Agreement, the following terms have the following
meanings:



   “Accelerated Restricted Stock Value” has the meaning set forth in Section 3.3.3.2.



   “Accounting Firm” has the meaning set forth in Section 3.3.4.2.



   “Accrued Obligations” means all accrued but unpaid salary, accrued but unpaid vacation, sick
leave, and similar pay (all determined in accordance with NMHC’s policies then in effect),



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any appropriate business expenses incurred by Executive in connection with Executive’s duties
hereunder, any other amounts payable under Section 3.3.2 which are accrued and unpaid.




   “Agreement” has the meaning set forth in the introductory paragraph of this Employment
Agreement.



   “Approved Person” means (1) an employee benefit plan of any NMHC Entity (or a trustee or other
fiduciary holding securities for such a plan), or (2) a corporation or other entity owned, directly
or indirectly, by the owners of NMHC in substantially the same proportions as their ownership of
NMHC, or (3) a Person not less than a majority of whose voting securities are beneficially owned by
NMHC after giving effect to the transaction, or (4) one or more of New Mountain Capital, L.L.C.,
New Mountain Partners, L.P., New Mountain Affiliated Investors, L.P., and their respective
affiliates.



   “Base Salary” has the meaning set forth in Section 3.1.



   “Board” has the meaning set forth in Section 1.1.



   “Catch-up Payment” has the meaning set forth in Section 2.2.9.2.



   A “Change in Control” shall be deemed to have occurred if, after the date of this Agreement:




     (A) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) (other than an Approved Person)
becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of a majority of the then outstanding voting equity of NMHC (“Voting
Equity”); or




     (B) NMHC merges or consolidates with any other corporation or other entity other than
an Approved Person, in each case other than a merger or consolidation which results in the
Voting Equity of NMHC outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of the surviving
entity) at least a majority of the combined voting power of the voting securities of NMHC or
such surviving entity outstanding immediately after such merger or consolidation; or




     (C) NMHC sells or disposes of all or substantially all of NMHC’s assets in one
transaction or a series of related transactions to any Person or Persons other than one or
more Approved Persons; or




     (D) NMHC files a periodic or current report or proxy statement with the SEC disclosing
that a “change in control” (as such term is used in Item 5.01 of Form 8-K promulgated by the
SEC) of NMHC has occurred; or




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     (E) If, as a result of nominations made by a person or group other than the Board,
individuals who prior to such nominations constitute the Directors of NMHC cease for any
reason to constitute at least a majority thereof within the two year period following such
nominations.



     “Change in Control Compensation” means a lump sum payment in an amount equal to 150% of
Executive’s annual Base Salary (at the highest rate in effect during the period beginning six
months immediately prior to the effective date of the Change in Control through the date of
termination). In addition, as part of the Change in Control Compensation, NMHC also shall pay (in
periodic installments until the end of the COBRA Period) (i) COBRA payments in respect of the
continuation of health benefits for Executive, Executive’s spouse and Executive’s children and (ii)
payments to fund dental coverage for Executive, Executive’s spouse and Executive’s children
comparable to the dental coverage that they would have received if Executive had continued as an
employee of NMHC.



     “COBRA Period” means the period of time commencing on the date Executive’s employment with
NMHC terminates and ending on the earlier of (i) the first anniversary of the termination of this
Agreement or (ii) the date that Executive is eligible to be covered under a comparable or more
favorable health plan of another Person).



     “Code” means the Internal Revenue Code of 1986, as amended.



     “Confidential Information” means any data or information of any NMHC Entity that is important,
competitively sensitive, and not generally known by the public, including, but not limited to, the
business plans, customer lists, training manuals, proprietary software, product or service
development plans, bidding and pricing procedures, market plans and strategies, projections,
internal performance statistics, financial data, confidential personnel information concerning
employees of any NMHC Entity, operational or administrative plans, policy manuals, and terms and
conditions of contracts and agreements. The term “Confidential Information” shall not apply to
information which is (i) already in Executive’s possession (unless such information was obtained by
Executive from a NMHC Entity); (ii) received by Executive from a third party with, to Executive’s
knowledge, no restriction on disclosure, (iii) required to be disclosed by any applicable law or by
process issued in connection with a proceeding of a court of competent jurisdiction, or (iv)
generally available to the public on or at any time following the Effective Date other than as a
result of disclosure by Executive.



     “Disgorgement Amount” has the meaning set forth in Section 4.6.2.



     “Effective Date” has the meaning set forth in the introductory paragraph of this Agreement.



     “Employment Related Agreements” has the meaning set forth in Section 3.3.4.1.



     “Excise Tax” has the meaning set forth in Section 3.3.4.1.



     “Executive” has the meaning set forth in the introductory paragraph of this Agreement.



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     “Executive Voluntary Termination” has the meaning set forth in Section 2.2.3.



     “Gross-Up Payment” has the meaning set forth in Section 3.3.4.1.



     “IRS” means the Internal Revenue Service.



     “Material Diminution” means a material diminution by NMHC of Executive’s duties, powers,
authority, functions or responsibilities without Executive’s consent, such that Executive is left
with such duties, powers, authority, functions and responsibilities (when viewed in the aggregate)
that are materially diminished compared to both (i) those duties, powers, authority, functions and
responsibilities conferred upon Executive at the Effective Date and (ii) those duties, powers,
authority, functions and responsibilities that are most typically conferred upon individuals having
the same title as Executive with companies having revenues comparable to NMHC on a consolidated
basis (based on the revenues of NMHC on a consolidated basis at the time of determination). In
addition, a material diminution by NMHC of Executive’s title without Executive’s consent also shall
constitute a “Material Diminution” for purposes of this Agreement. In the interest of clarity,
none of the following shall constitute a basis for a “Material Diminution”: (i) any change in any
of the products or services offered by any or all NMHC Entities; (ii) the termination of any
employee or group of employees, whether or not such employees report to Executive; (iii) any change
in the markets to which any or all NMHC Entities promote or sell their products or services; or
(iv) any other change affecting NMHC or its business or operations generally.



     “NMHC” has the meaning set forth in the introductory paragraph of this Agreement.



     “NMHC Entities” refers to all of NMHC, all of NMHC’s direct and indirect subsidiaries, and all
other entities directly or indirectly controlled by NMHC. As of the Effective Date, the NMHC
Entities consist of NMHC and each other entity described on Exhibit 21.1 to NMHC’s Annual Report on
Form 10-K as filed with the SEC on September 13, 2007.



     “Office Area” means the geographical area within a 25 mile radius of Executive’s primary
residence as of the Effective Date (unless as of the Effective Date Executive resides more than 25
miles from the NMHC office to which Executive is primarily assigned as of the Effective Date, in
which case the Office Area shall be the United States of America).



     “Payment” has the meaning set forth in Section 3.3.4.1.



     Executive shall be deemed to be “Permanently Disabled” if Executive is (i) collecting
long-term disability payments under a long-term disability plan established for the benefit of
NMHC’s employees or executives generally or a reasonably similar plan or (ii) if, and only if, no
such long-term disability plan is in effect at the time of determination, an independent physician
selected by NMHC and reasonably acceptable to Executive makes a written determination that
Executive is unable to perform Executive’s obligations under this Agreement, despite Executive’s
best efforts, by reason of any medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected to last for a continuing period
of not less than 12 months. The determination of any selected independent



- 21 -









 




physician is final and
binding on the parties and shall be made after taking into account such competent medical evidence
as shall be presented to the independent physician by Executive and/or NMHC or by any physician or
group of physicians or other competent medical experts employed by Executive and/or NMHC to advise
such independent physician.




     “Permitted Termination Event” means termination of Executive’s employment pursuant to a
Termination by Reason of Death, a Termination by Reason of Incapacity, a refusal by NMHC to extend
the Term of this Agreement as set forth in Section 2.1 or a Termination Other Than For Cause
(provided, however, that Executive shall not be permitted to effect a Termination Other Than For
Cause based upon a Material Diminution until six (6) months after the occurrence of a Change in
Control).



     “Person” means any individual, corporation, partnership, limited liability company,
association, trust or other entity or organization.



     “Preexisting Agreements” has the meaning set forth in the Recitals to this Agreement.



     “Prorated Death Benefit Amount” has the meaning set forth in Section 2.2.5.



     “Prorated Disability Benefit Amount” has the meaning set forth in Section 2.2.4.



     “Release” has the meaning set forth in Section 2.2.8.



     “SEC” means the Securities and Exchange Commission.



     “Section 409A” has the meaning set forth in Section 2.2.9.2.



     “Section 409A Limit” has the meaning set forth in Section 2.2.9.2.



     “Severance Compensation” means an amount equal to 100% of Executive’s annual Base Salary (at
the highest rate in effect for the six month period immediately prior to the date of termination).
In addition, NMHC also shall pay (until the end of the COBRA Period) (i) COBRA payments in respect
of the continuation of health benefits for Executive, Executive’s spouse and Executive’s children
and (ii) payments to fund dental coverage for Executive, Executive’s spouse and Executive’s
children comparable to the dental coverage that they would have received if Executive had continued
as an employee of NMHC.



     “Term” has the meaning set forth in Section 1.1.



     “Termination by Reason of Death” has the meaning set forth in Section 2.2.5.



     “Termination by Reason of Incapacity” has the meaning set forth in Section 2.2.4.



     “Termination For Cause” has the meaning set forth in Section 2.2.1.



     “Termination Other Than For Cause” has the meaning set forth in Section 2.2.2.



- 22 -









 





     “Transition Period” has the meaning set forth in Section 3.3.3.2.



     “Transition Period Default Payment” has the meaning set forth in Section 3.3.3.2.



     “Underpayment” has the meaning set forth in Section 3.3.4.2.



[Remainder of Page Intentionally Left Blank]




- 23 -









 








     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.



	 	 	 	 	 
	 	NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

 	 
	 	By:  	/s/ Thomas W. Erickson
 	 
	 	 	Thomas W. Erickson, its President and Chief 	 
	 	 	Executive Officer 	 
	 



	 	 	 	 	 
	 	EXECUTIVE

 	 
	 	/s/ Stuart Diamond
 	 
	 	Stuart Diamond, individually 	 
	 	 	 



- 24 -









 






	 	 	 	 	 



EXHIBIT “A”

LIST OF PREEXISTING AGREEMENTS





     ►



     ►



     ► Any other agreement, promise, assurance or understanding, written or oral, relating to
Executive’s employment or compensation, other than as explicitly set forth elsewhere in the body of
this Agreement or as described on Exhibit “C” attached to this Agreement.



- 25 -









 





EXHIBIT “B”




FORM OF RELEASE




[See attached]




1









 








GENERAL RELEASE




     THIS
GENERAL RELEASE (this “Release”) dated as
of the
                    
day of                     ,                      (the “Effective Date”), is
executed by and between Stuart Diamond (“Executive”) and National Medical Health Card Systems, Inc.
(“NMHC”).



     WHEREAS, Executive’s employment with NMHC has terminated pursuant to that certain Employment
Agreement dated to be effective as of                     , 2007 (the “Employment Agreement”);



     NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, Executive hereby
agrees as follows:



     1. Termination of Employment. Executive’s employment with NMHC has terminated
pursuant to Section ___ [fill in applicable section] of the Employment Agreement effective as of
the Effective Date. To the extent he continues to hold any such positions or directorships,
Executive hereby resigns all positions and directorships he holds with NMHC and any and all of
NMHC’s subsidiaries and affiliates.



     2. Release. Executive hereby irrevocably and unconditionally releases and forever
discharges NMHC, its respective subsidiaries and other affiliates and their respective agents,
employees, representatives, officers, directors, stockholders, trustees and attorneys, past and
present, and the heirs, successors and assigns of all of the foregoing (collectively, the “Released
Parties”) from any and all debts, liabilities, claims, demands, actions or causes of action, suits,
judgments or controversies of any kind whatsoever (except as set forth below) arising from
Executive’s relationship (including without limitation as a stockholder) to, employment with or
service as an employee, officer, director, or manager of NMHC or its subsidiaries and affiliates
(collectively, the “Claims”) against the Released Parties, that now exist or that may arise in the
future out of any matter, transaction or event occurring prior to or on the Effective Date,
including without limitation, any claims of breach of contract or for severance or other
termination pay (except as set forth in Section 3 below), or claims of harassment or discrimination
(for example, on the basis of age, sex, race, handicap, disability, religion, color or national
origin) under any federal, state or local law, rule or regulation, including, but not limited to
the Age Discrimination in Employment Act of 1967, 29 U.S.C. §621, et seq. Except
as set forth below, Executive further agrees not to file or bring any claim, suit, civil action,
complaint, arbitration or administrative action (any of the foregoing, an “Action”) in any city,
state or federal court or agency or arbitration tribunal with respect to any Claim against any of
the Released Parties or (except as may be required by law) assist any other person or entity with
any Action against any of the Released Parties. Notwithstanding anything to the contrary contained
in this Release, Executive does not release any of the Released Parties and shall not be prohibited
from filing or bringing an Action with respect to any right Executive otherwise may have now or in
the future to (i) receive distributions or dividends made in respect of NMHC’s capital stock; (ii)
be indemnified by NMHC under the Certificate of Incorporation or Bylaws of NMHC (as the same are
currently in effect), any resolution adopted by the Board of Directors of NMHC, or any other
separate written agreement or instrument requiring NMHC to indemnify Executive; (iii)



2









 




make workers’
compensation claims; (iv) receive Accrued Obligations; (v) receive Severance Compensation or the
Change in Control Compensation, as applicable; (vi) exercise rights under stock options and other
equity-based compensation to the extent such rights were vested prior to the Effective Date (which
stock options or other equity-based compensation shall be governed by the terms and provisions of
the applicable written agreement(s) or instrument(s) and/or the applicable NMHC plan); or (vii)
enjoy vested benefits payable under retirement and other employee benefit plans covering Executive
(which benefits shall be governed by the terms and provisions of the applicable plan).




     3. Severance or Change in Control Compensation. In consideration of Executive’s
execution of this Release and Executive’s promise to comply with the covenants in Section 4 of the
Employment Agreement, Executive shall be entitled to receive from NMHC the Severance Compensation
or the Change in Control Compensation, as applicable, under the Employment Agreement. Executive
acknowledges that no other promise or agreements of any kind have been made to Executive or with
Executive by any person or entity whatsoever to cause Executive to sign this Release. Executive
further acknowledges and agrees that the Severance Compensation or the Change in Control
Compensation, as applicable, together with any other payments or benefits that may be due under the
terms of the Employment Agreement, shall constitute full accord and satisfaction of all
obligations, including without limitation any and all severance obligations, in connection with
Executive’s employment. Executive would not be entitled to receive the Severance Compensation or
the Change in Control Compensation, as applicable, but for Executive’s execution of this Release.
Executive hereby affirms that he continues to be bound by his obligations under Section 4 of the
Employment Agreement that by their terms survive the termination of Executive’s employment.



     4. Disclaimer of Liability. Executive acknowledges that this Release shall not in any
way be construed as an admission by any of the Released Parties of any wrongful or illegal act
against Executive or any other person, and that the Released Parties expressly disclaim any
liability of any nature whatsoever arising from or related to the subject of this Release.



     5. COMPETENCY. EXECUTIVE ACKNOWLEDGES THE FOLLOWING:




	 	a.	 	THAT HE FULLY COMPREHENDS AND UNDERSTANDS ALL OF THE TERMS OF
THIS AGREEMENT AND THEIR LEGAL EFFECTS;
	 
	 	b.	 	THAT HE IS COMPETENT TO EXECUTE THIS AGREEMENT;
	 
	 	c.	 	THAT IT IS EXECUTED KNOWINGLY AND VOLUNTARILY AND WITHOUT
RELIANCE UPON ANY STATEMENT OR REPRESENTATION OF ANY RELEASED PARTY OR ITS
REPRESENTATIVES;
	 
	 	d.	 	THAT HE HAS BEEN ADVISED IN WRITING TO CONSULT WITH AN ATTORNEY
BEFORE EXECUTING THIS AGREEMENT AND THAT HE HAS HAD THE OPPORTUNITY TO CONSULT
WITH AN ATTORNEY OF HIS CHOICE REGARDING THIS AGREEMENT;




3









 






	 	e.	 	THAT EXECUTIVE DOES NOT WAIVE RIGHTS OR CLAIMS THAT MAY ARISE
AFTER THE DATE THIS AGREEMENT IS EXECUTED;
	 
	 	f.	 	THAT EXECUTIVE WAIVES RIGHTS OR CLAIMS UNDER THIS AGREEMENT
ONLY IN EXCHANGE FOR CONSIDERATION IN ADDITION TO ANYTHING OF VALUE TO WHICH
THE EXECUTIVE WAS ALREADY ENTITLED;
	 
	 	g.	 	[THAT HE HAS BEEN PROVIDED THE MATERIALS REGARDING THE CLASS,
UNIT, OR GROUP OF INDIVIDUALS ELIGIBLE FOR THIS COMPENSATION AND THE TIME
LIMITS APPLICABLE TO SUCH PROGRAM;] [This clause to be included if required by
or advisable under applicable law.]
	 
	 	h.	 	[THAT HE HAS BEEN PROVIDED THE JOB TITLES AND AGES OF ALL
INDIVIDUALS ELIGIBLE OR SELECTED FOR THE PROGRAM AND THE AGES OF ALL
INDIVIDUALS IN THE SAME JOB CLASSIFICATION OR ORGANIZATIONAL UNIT WHO ARE NOT
ELIGIBLE OR SELECTED FOR THE PROGRAM;] [This clause to be included if required
by or advisable under applicable law.]
	 
	 	i.	 	THAT HE HAS HAD A PERIOD OF AT LEAST 21 DAYS [or 45 days, if
required by or advisable under applicable law] WITHIN WHICH TO CONSIDER THIS
AGREEMENT;
	 
	 	j.	 	THAT FOR A PERIOD OF SEVEN DAYS FOLLOWING THE EXECUTION OF THIS
AGREEMENT, EXECUTIVE MAY REVOKE THIS AGREEMENT AND IT SHALL NOT BECOME
EFFECTIVE OR ENFORCEABLE UNTIL THE SEVEN-DAY PERIOD HAS EXPIRED OR SUCH LATER
DATE AS PROVIDED FOR HEREIN.





     6. Parties in Interest. This Release is for the benefit of the Released Parties and
shall be binding upon Executive and his representatives and heirs.



     7. Amendment. This Release may not be clarified, modified, changed or amended except
in writing and signed by Executive and NMHC or a successor-in-interest of NMHC.



     8. Non-disparagement. Executive agrees that he will refrain from speaking ill of or
making any disparaging comment about NMHC or NMHC’s management, other employees or contractors,
following the termination of his employment except as may be necessary to enforce his rights under
this Release, enforce claims arising after the Effective Date and not released in this Release, or
defend a legal action brought against Executive by any of the Released Parties. NMHC agrees that
it will refrain from speaking ill of or making any disparaging comment about Executive following
the termination of Executive’s employment except (i) as may be necessary to enforce its rights
under this Release, to enforce a claim or defend a legal action or (ii) as may



4









 




be necessary or
desirable, as determined by NMHC in its sole and absolute discretion, to comply with its
obligations under applicable securities laws.




     9. Enforcement of Laws. Nothing in this Release affects the rights and
responsibilities of the Equal Employment Opportunity Commission (the “Commission”) to enforce the
anti-discrimination laws, and this waiver does not affect Executive’s right to file a charge or
participate in an investigation or proceeding with the Commission. Likewise, nothing in this
Release shall prevent Executive from any action to challenge the validity of Executive’s release of
claims under the Age Discrimination in Employment Act. However, Executive waives any rights or
claims, known or unknown, to participate in any recovery under any proceeding or investigation by
the Commission or any state or local commission concerned with the enforcement of
anti-discrimination laws.



     10. Severability. If any provision of this Release is held to be illegal, invalid or
unenforceable under present or future laws, such provision shall be fully severable and this
Release shall be construed and enforced as if such illegal, invalid or unenforceable provision
never comprised a part hereof; and the remaining provisions hereof shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable provision, and there
shall be added automatically as part of this Release a provision as similar in its terms to such
illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.



     11. Defined Terms. All capitalized terms used but not otherwise defined in this
Release are used with the same meaning specified in the Employment Agreement.



[Signatures appear on next page.]




5









 








     IN WITNESS WHEREOF, Executive has executed this Release as of the day and year first above
written.



	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	EXECUTIVE	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 	 	Stuart Diamond, individually	 	 
	 
	 	 	 	 	 	 
	 	 	NATIONAL MEDICAL HEALTH CARD	 	 
	 	 	SYSTEMS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	                         , its authorized representative	 	 






6









 






EXHIBIT “C”




EXISTING EQUITY COMPENSATION ARRANGEMENTS AND OTHER

AGREEMENTS INTENDED TO SURVIVE





	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	No. of	 	Exercise Price
	Name	 	Type of Award	 	Date	 	Shares	 	(if Options)
	Stuart Diamond

	 	Stock Option
	 	1/20/06
	 	 	11,134	 	 	$	30.16	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Stock Option
	 	1/27/2006
	 	 	12,900	 	 	$	31.00	 
	 

	 	Stock Option
	 	1/27/2006
	 	 	62,100	 	 	$	31.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Stock Option
	 	9/7/2006
	 	 	21,560	 	 	$	15.20	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Restricted Stock
	 	2/3/2006
	 	 	2,670	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Restricted Stock
	 	9/6/2007
	 	 	5,930	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Restricted Stock
	 	11/13/2007
	 	 	46,000	 	 	 	 	 





Indemnification Agreement dated October ___, 2007 between the Executive and NMHC.



To the extent the Executive has accrued but not used flexible time off (“FTO”) as of December 31,
2007, that FTO will carry forward into the calendar year 2008 and will expire on June 30, 2008.