Document:

exv10w3

Exhibit 10.3

THIRD LOAN MODIFICATION AND FORBEARANCE AGREEMENT

     This Third Loan Modification and Forbearance Agreement (this “Loan Modification Agreement”) is
entered into as of the Third Loan Modification Effective Date, by and between SILICON VALLEY BANK,
a California corporation, with its principal place of business 3003 Tasman Drive, Santa Clara,
California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600,
Broomfield, Colorado 80021 (“Bank”) and ENERGY FOCUS, INC., a Delaware corporation, formerly known
as Fiberstars, Inc., a Delaware corporation, with offices located at 32000 Aurora Road, Solon, Ohio
44139.

1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness
and obligations which may be owing by Borrower to Bank. Borrower is indebted to Bank
pursuant to a loan arrangement dated as of October 27, 2008, evidenced by, among other
documents, a certain Second Amended and Restated Loan and Security Agreement dated as of
October 27, 2008 between Borrower and Bank (the “Original Loan Agreement”), as amended by a
certain First Modification and Forbearance Agreement dated as of January 31, 2009 between
Borrower and Bank (the “First Amendment”), and as further modified by a certain Second Loan
Modification and Forbearance Agreement, dated as of June 12, 2009 (the “Second Amendment”,
and together with the First Amendment and the Original Loan Agreement, and as, may be
further amended from time to time, the “Loan Agreement”). Capitalized terms used but not
otherwise defined herein shall have the same meaning as in the Loan Agreement.

2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the
Collateral as described in the Loan Agreement and as described in a certain Intellectual
Property Security Agreement between borrower and Bank, as ratified and reaffirmed by a
certain Reaffirmation of Intellectual Property Security Agreement dated as of October 27,
2008 between Borrower and Bank (collectively, the “IP Agreement”, and together with any
other collateral security granted to Bank, the “Security Documents”).

     Hereinafter, the Security Documents, together with all other documents evidencing or securing
the Obligations shall be referred to as the “Existing Loan Documents”.

3. ACKNOWLEDGMENT OF DEFAULTS. Borrower acknowledges and agrees that Bank is
currently forbearing from enforcing its rights and remedies pursuant to the First Amendment
and the Second Amendment due to certain Defaults and Events of Default that have occurred
under the Loan Agreement by virtue of Borrower’s failure to comply with the minimum
Tangible Net Worth covenant contained in Section 6.9(a) of the Loan Agreement for the
compliance periods ended on November 30, 2008 and December 31, 2008, January 31, 2009,
February 28, 2009, March 31, 2009, April 30, 2009 (the “Prior Defaults”). In addition,
Borrower failed to comply with the minimum Tangible Net Worth covenant set forth in Section
6.9(a) for the compliance period ended May 31, 2009 (the “Additional Default”, and together
with the Prior Defaults, the “Existing Defaults”).

4. DESCRIPTION OF CHANGE IN TERMS.

	 	A.	 	Modifications to Loan Agreement.

	 	1	 	The Loan Agreement shall be amended by inserting the following new Section 2.5
immediately following Section 2.4 thereof:

“2.5 Interest on Pledged CD; Payment of Interest on Pledged CD; Termination of Pledged
CD.

(a) Interest on Pledged CD. Each Pledged CD shall bear interest at the Pledged
CD Rate. The initial CD Interest Period applicable to the Pledged CDs in connection
with the notice of delivery of Pledged CD will be indicated on the form attached as

 

 

Schedule A hereto. Thereafter, each subsequent CD Interest Period will begin automatically
in seven-day increments until the termination of the Pledged CD in accordance with Section 2.5(c)
hereof.

(b) Payment of Interest on the Pledged CD. Accrued but unpaid interest on the Pledged CD
shall be payable upon the termination of the Pledged CD in accordance with Section 2.5(c) hereof.

(c) Termination of Pledged CD. The Pledged CD will terminate upon the earlier to occur of
(i) the occurrence of an Event of Default (other than the Existing Defaults) and (ii) the Revolving
Line Maturity Date. Upon termination of the Pledged CD, the entire outstanding principal of and
accrued but unpaid interest on the Pledged CD shall be applied to the Obligations pursuant to the
terms of Section 9.4 hereof.

	 	2	 	The Loan Agreement shall be amended by deleting the following text appearing in Section 4.1
thereof in its entirety:

“4.1 Grant of Security Interest. Borrower herby grants Bank to secure the payment and performance
in full of all of the Obligations, a continuing security interest in, and pledges to Bank, the
Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds
and products thereof. Borrower represents, warrants, and covenants that the security interest
granted herein is and shall at all times continue to be a first priority perfected security
interest in the Collateral (subject only to Permitted Liens that may have superior priority to
Bank’s Lien under this Agreement). If Borrower shall acquire a commercial tort claim, Borrower
shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant
to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms
of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank.”

and inserting in lieu thereof the following:

“4.1 Grant a Security Interest

(a) Borrower hereby grants Bank, to secure the payment and performance in full of all of
the Obligations a continuing security interest in, and pledges and assigns to Bank, the
Collateral, wherever located, whether now owned or hereafter acquired or arising, and all
proceeds and products thereof. Borrower represents and warrants that the security interest
granted herein shall be a first priority perfected security interest in the Collateral. If
Borrower shall acquire a commercial tort claim, Borrower shall promptly notify Bank in a
writing signed by Borrower of the general details thereof and grant to Bank in such writing
a security interest therein and in the proceeds thereof, all

 

 

upon the terms of this Agreement, with such writing to be in form and substance satisfactory to
Bank.

(b) Borrower hereby assigns, pledges, delivers, and transfers to Bank, and hereby grants to Bank, a
continuing first priority security interest in and against all right, title and interest of the
following, whether now or hereafter existing or acquired by Borrower, and Pledged CD issued from
time to time and general intangibles arising therefrom or relating thereto; and all documents,
instruments and agreements evidencing the same; and all extensions, renewals, modifications and
replacements of the foregoing; and any interest or other amounts payable in connection therewith,
including, without limitation:

(i) all proceeds of the foregoing (including whatever is receivable or received when any Pledged CD
or proceeds is invested, sold, collected, exchanged, returned, substituted or otherwise disposed
of, whether such disposition is voluntary or involuntary, including rights to payment and return
premiums and insurance proceeds under insurance with respect to any Pledged CD, and all rights to
payment with respect to any cause of action affecting or relating to the Pledged CD); and

(ii) all renewals, replacements and substitutions of items of any Pledged CD.

If this Agreement is terminated. Bank’s Lien in the Collateral shall continue until the Obligations
(other than inchoate indemnity obligations) are repaid in full in cash. The parties to this
Agreement do not intend that Borrower’s delivery of any Pledged CD to Bank as herein provided will
constitute an advance payment of any Obligations or liquidated damages, nor do the parties intend
that any Pledged CD increase the dollar amount of the Obligations.”

	 	3	 	The Loan Agreement shall be amended by deleting the following definitions in Section 13.1 thereof,
each in its entirety:

“Borrowing Base” is seventy-five percent (75%) of Eligible Accounts, as determined by Bank from
Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may
decrease the foregoing percentage in its good faith business judgment based on events, conditions,
contingencies, or risks which, as determined by Bank, may adversely affect the value of the
Collateral.”

and inserting in lieu thereof the following:

“Borrowing Base” is (a) seventy-five percent (75%) of Eligible Accounts, as determined by Bank
from Borrower’s most recent Borrowing Base Certificate plus (b) from the Third Loan Modification
Effective date through and including the Revolving Line Maturity Date, up to One Million Three
Hundred Thousand Dollars ($1,300,000), at all times secured in full by the Pledged

 

 

CD; provided, however, that Bank may decrease the foregoing percentage or
amount in its good faith business judgment based on events, conditions, contingencies, or risks
which, as determined by Bank, may adversely affect the value of the Collateral.

	 	4.	 	The Loan Agreement shall be amended by inserting the following definition in Section 13.1
thereof, in appropriate alphabetical order:

““CD Interest Determination Date” shall mean the date of delivery of a Pledged CD and the date of
the commencement of each CD Interest Period.

“CD Interest Period”  shall mean the period commencing initially on the date of delivery of a
Pledged CD and thereafter on the date immediately following the end of any such initial period or
subsequent period, and ending on the last Business Day of the period ending approximately seven (7)
days thereafter.

“Pledged CD” shall mean any and all certificates of deposit issued to Borrower by Bank, in a
minimum principal amount of not less than One Million Three Hundred Thousand Dollars ($1,300,000),
plus any accrued but unpaid interest thereon.

“Pledged CD Rate” shall mean, for any CD Interest Determination Date, Bank’s prevailing commercial
rate in effect on such date.

“Third Loan Modification Effective Date” is the date indicated on the signature page to the Third
Loan Modification and Forbearance Agreement entered into between Bank and Borrower.”

5. FORBEARANCE BY BANK.

	 	A.	 	In consideration of, among other things, Borrower’s compliance with each and every
term of this Loan Modification Agreement, Bank hereby agrees to forbear from exercising
its rights and remedies against the Borrower as a result of the Existing Defaults until the
earlier to occur of (i) a Default or an Event of Default under the Loan Agreement (with the
sole exception of the Existing Defaults), (ii) the failure of Borrower to promptly,
punctually, or faithfully perform or comply with any term or condition of this Agreement as
and when required, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE,
or (iii) 3:00 pm (Denver, Colorado time) on July 31, 2009 (the period commencing as of the
date of the Third Loan Modification Effective Date and ending on the earlier of (i), (ii)
or (iii) above shall be referred to as the “Forbearance Period”).
	 
	 	B.	 	Borrower hereby acknowledges and agrees that nothing contained in this section or in
any other section of the Loan Modification Agreement shall be deemed or otherwise construed
as a waiver by Bank of the Existing Defaults or any other Default or Event of Default
(whether now existing or hereafter arising) or of any of its rights and remedies pursuant
to the Existing Loan Documents, applicable law or otherwise. This Loan Modification Agreement
shall only constitute an agreement by Bank to forbear from enforcing its rights and
remedies based upon the Existing Defaults upon the terms and conditions set forth herein.
Upon the expiration of the Forbearance

 

 

	 	 	 	Period, the agreement of Bank to forbear as set forth in this Loan Modification Agreement
shall automatically terminate and Bank may immediately commence enforcing its rights and remedies
pursuant to the Existing Loan Documents, applicable law or otherwise, in such order and manner as
Bank may determine appropriate.

6. TERMS OF FORBEARANCE.

	 	A.	 	From and after the execution of this Loan Modification Agreement, Borrower agrees
that Bank shall have no further obligation to make any Advances to Borrower, or to issue
or provide any other extensions of credit of any kind to Borrower (as used herein and in
the Loan Agreement, any Advance, Letter of Credit, FX Forward Contract, amount utilized
for Cash Management Services, or any other extension of credit by Bank for Borrower’s
benefit shall be referred to as a “Credit Extension”). Notwithstanding the foregoing,
during the Forbearance Period and at the request of Borrower, Bank may, in its sole and
absolute discretion, continue to make any Credit Extensions, subject in all events to the
terms and conditions of this Loan Modification Agreement, the Loan Agreement (including
but not limited to, all limitations imposed by the Borrowing Base and the Availability
Amount) and the other Existing Loan Documents. Borrower covenants and agrees that if, in
the sole and absolute discretion of Bank, Bank shall make any Credit Extensions during
the Forbearance Period, such act shall not constitute (i) a waiver of any of the
Existing Defaults, or of any other Default or Event of Default which may now exist or
which may occur after the date of this Loan Modification Agreement under any of the
Existing Loan Documents, or (ii) an agreement on the part of Bank to make any further
extensions of credit of any kind to Borrower at a later date.
	 
	 	B.	 	At all times during the Forbearance Period Borrower shall comply with all terms
and conditions contained in the Loan Agreement and other Loan Documents and shall
continue to remit all regularly scheduled payments (including, without limitation, all
principal, interest, fees, costs and other amounts) which may become due under the
Existing Loan Documents, as and when such payments are due.

7. FEES. Borrower shall pay to Bank a forbearance fee equal to Four Thousand Dollars
($4,000.00), which fee shall be due on the date hereof and shall be deemed fully earned as of
the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred
in connection with the Existing Loan Documents and this Loan Modification Agreement.

8. RATIFICATION OF IP AGREEMENT. Borrower hereby ratifies,
confirms and reaffirms, all and singular, the terms and conditions of the IP
Agreement, and acknowledges, confirms and agrees that said IP Agreement contains
an accurate and complete listing of all Intellectual Property Collateral as
defined in said IP Agreement, which shall remain in full force and effect.
Notwithstanding the terms and conditions of the IP Agreement, the Borrower shall
not register any Copyrights or Mask Works in the United States Copyright Office
unless it: (i) has given at least fifteen (15) days, prior-written notice of Bank
of its intent to register such Copyrights or Mask Works and has provided Bank
with a copy of the application it intends to file with the United States
Copyright Office (excluding exhibits thereto); (ii) executes a security agreement
or such other documents as Bank may reasonably request in order to maintain the
perfection and priority of Bank’s security interest in the Copyrights proposed to
be registered with the United States Copyright Office; and (iii) records such
security documents with the United States Copyright Office contemporaneously with
filing the Copyright application(s) with the United States Copyright Office.
Borrower shall promptly provide to Bank a copy of the Copyright application(s)
filed with the United States Copyright Office, together with evidence of the
recording of the security documents necessary for Bank to maintain the perfection
and priority of its security interest in such Copyrights or Mask Works. Borrower
shall provide written notice to Bank of any application filed by Borrower in the
United States Patent Trademark Office for a patent or to register a trademark or
service mark within thirty (30) days of any such filing.

9. RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby
ratifies, confirms and reaffirms, all and singular, the terms and disclosures
contained in a certain Perfection Certificate dated as of October 27, 2008

 

 

executed by Borrower, and acknowledges, confirms and agrees the disclosures and information
Borrower provided to Bank in the Perfection Certificate have not changed, as of the date hereof.

10. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements
without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in
order to further perfect or protect Bank’s interest in the Collateral, including a notice that any
disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to
violate the rights of the Bank under the Code.

11. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary
to reflect the changes described above.

12. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all
terms and conditions of the Loan Agreement the other Existing Loan Documents and all security or
other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes,
without limitation, the Obligations.

13. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no
offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or
otherwise, and that if
Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank,
whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower
hereby RELEASES Bank from any liability thereunder.

14. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing
Obligations,
Bank is relying upon Borrower’s representations, warranties and agreements, as set forth in the
Existing Loan
Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing
Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to
the existing
Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any
future
modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the
Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of
Existing Loan
Documents, unless the party is expressly released by Bank in writing. No maker will be released
by virtue of this
Loan Modification Agreement.

15. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this Loan
Modification
Agreement, Borrower hereby reaffirms and hereby grants to Bank, a lien, security interest and right
of set off as
security for all Obligations to Bank, whether now existing or hereafter arising upon and against
all deposits, credits,
collateral and property, now or hereafter in the possession, custody, safekeeping or control of
Bank or any entity
under the control of Silicon Valley Bank (including a Bank subsidiary) or in transit to any of them.
At any time
after the occurrence and during the continuance of an Event of Default, without demand or notice,
Bank may set off
the same or any part thereof and apply the same to any liability or obligation of Borrower even
though unmatured
and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO
REQUIRE
BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL
WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT
TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.

16. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties,
unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction
in the State of
California in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement.
NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT
TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE
IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS
AGAINST THE BORROWER OR ITS PROPERTY.

 

 

17. CONFIDENTIALITY. Bank may use confidential information for the development of
databases, reporting
purposes, and market analysis, so long as such confidential information is aggregated and
anonymized prior to
distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately
preceding
sentence shall survive the termination, of the Loan Agreement.

18. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it
shall
have been executed by Borrower and Bank.

[The remainder of this page is intentionally left blank]

 

 

     This Loan Modification Agreement is executed under the laws of the State of California as of the
Third Loan Modification Effective Date.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	BORROWER:	 	BANK:	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	ENERGY FOCUS, INC.	 	SILICON VALLEY BANK	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	By:	 	/s/ Nicholas Berchtold	 	By:	 	/s/ Shane Anderson	 	 
	 	 	 	 	 	 	 	 	 
	 

	 	Name:
	 	Nicholas Berchtold
	 	 	 	Name:
	 	Shane Anderson	 	 
	 

	 	 	 	 
	 	 	 	 	 	 	 	 
	 

	 	Title:
	 	Chief Financial Officer
	 	 	 	Title:
	 	SRM	 	 
	 

	 	 	 	 
	 	 	 	 	 	 	 	 

Third Loan Modification Effective Date: July 22, 2009

[Third Loan Modification and Forbearance Agreement Signature Page]EX-10.3

Exhibit 10.3

2009 INCENTIVE COMPENSATION PLAN

America Service Group Inc.

Overall Compensation Philosophy: America Service Group (ASG) strives to provide an
equitable and market-based compensation program for employees. In addition to a comprehensive
benefit program, ASG compensates employees through competitive base salaries, a merit system and an
incentive compensation plan. Eligible employees include designated executive managers, corporate
managers, corporate employees, division vice presidents, regional vice presidents, regional
directors and health services administrators.

In accordance with the PHS Policy on Medical Autonomy, clinical decisions and actions regarding
health care provided to inmates to meet their serious medical needs are the sole responsibility of
qualified health care professionals. No financial incentives are available to clinicians based
upon medical utilization.

The 2009 Incentive Compensation Plan is designed to foster the accomplishment of several of the key
objectives of the Company set forth at the beginning of the year. Ten goals were established.
Some selection from these ten goals will be used for all positions covered by the 2009 program.

Overall Structure of the Plan

The plan is composed of two parts, each of which work independently of the other (except for the
Company’s Chief Medical Officer):

	 	1)	 	Adjusted EBITDA based bonus (50% of total bonus target as a percent of base pay)

	 	•	 	No bonus paid if corporate Earnings before share-based compensation, interest,
taxes, depreciation, and amortization (Adjusted EBITDA) is 100% of Target or less.
Adjusted EBITDA Target is defined as that amount set forth as Earnings Guidance in
March 2009.
	 
	 	•	 	After bonuses derived from the Other Key Company Goals based bonus are accrued and
the 2009 Adjusted EBITDA Target is reached, 50% of earnings generated above the
Adjusted EBITDA Target will be used to fund this portion of the incentive, to the
maximums as set forth later in this document.
	 
	 	•	 	Payout is subject to Board confirmation of satisfactory balance sheet management.

	 	2)	 	Other Key Company Goals based bonus (50% of total bonus target as a percent of base
pay)

	 	•	 	Pre-selected goals will be used for this part of the incentive program
	 
	 	•	 	For the non-financial objectives, there are two possible levels of achievement under
this portion of the bonus — Minimum achievement to get an award for that portion of
the plan and Target achievement. For the financial objectives, achievement between
Minimum and Target will be interpolated.

Incentive Opportunities by position

2009 targeted payouts (as a percentage of base salary) are outlined as follows:

 

 

	 	 	 	 	 
	 	 	Target as a percent
	Position	 	of base pay
	Executive Management
	 	 	 	 
	President and Chief Executive Officer
	 	 	70	%
	Executive Vice President and Chief Financial Officer
	 	 	60	%
	Chief Administration Officer, Chief Information
Officer, Chief Legal Officer, Chief Medical Officer,
Chief Development Officer, Operating Presidents,
Operations Group Vice Presidents
	 	 	50	%
	 
	 	 	 	 
	Operating Positions
	 	 	 	 
	Division Vice Presidents
	 	 	40	%
	Regional Vice Presidents
	 	 	30	%
	Regional Directors
	 	 	20	%
	Regional Mgrs, Health Service Administrators (HSAs), District
Administrators and Regional Managers
	 	 	15	%
	 
	 	 	 	 
	Corporate Positions
	 	 	 	 
	Corporate Controller, VP-Finance/Asst. Treasurer, VP Provider
Operations, VP Human Resources, VP Project Development
	 	 	35	%
	Corporate Vice Presidents
	 	 	30	%
	Corporate Middle Managers
	 	 	20	%
	Non-Management Corporate Office Employees
	 	 	10	%

 

 

Executive Management (other than CMO)

Positions covered:

	 	•	 	President and Chief Executive Officer
	 
	 	•	 	Executive Vice President and Chief Financial Officer
	 
	 	•	 	Chief Administrative Officer
	 
	 	•	 	Chief Information Officer
	 
	 	•	 	Chief Legal Officer
	 
	 	•	 	Chief Development Officer Operating Presidents
	 
	 	•	 	Operations Group Vice Presidents
	 
	 	1)	 	Adjusted EBITDA based bonus (50% of total bonus target for those positions as a percent
of base pay)

	 	•	 	No bonus paid if corporate Earnings before share-based compensation, interest,
taxes, depreciation, and amortization (Adjusted EBITDA) is 100% of Target or less.
	 
	 	•	 	After bonuses derived from the Other Key Company Goals based bonus are accrued and
the 2009 Adjusted EBITDA Target is reached, 50% of earnings generated above the
Adjusted EBITDA Target will be used for this portion of the incentive funding, to a
maximum of 150% of Target payout*.
	 
	 	•	 	Payout is subject to Board confirmation of satisfactory balance sheet management.

	 	2)	 	Other Key Company Goals based bonus (50% of total bonus target for this position as a
percent of base pay)

	 	•	 	Pre-selected goals will be used for this part of the incentive program, as follows:

	 	 	 
	-    Corporate Net New Revenue

	 	— 10% of target award
	-    Integration of Michigan DOC contract with acceptable clinical,
operational, and financial performance

	 	— 15% of target award
	-    Implementation of Catalyst in Pennsylvania DOC

	 	— 15% of target award
	-    Key individual objective

	 	— 10% of target award

	 	•	 	For Corporate Net New Revenue, the Minimum level is 90% of Goal, and for
achievements between Minimum and Goal, payouts will be interpolated. For the other
measures, there are two possible levels of achievement: a) Minimum achievement to get
an award for that portion of the plan and b) Goal achievement
	 
	 	•	 	The Minimum payout for each level will be 50% of Target Payout for that level. For
example, if the achievement for Corporate Net New Revenue is at Minimum levels, the
payout would be 5% of Target (50% X 10%)

 

			
	*	 	Total Maximum under the plan equals the maximums as indicated for the Adjusted
EBITDA base portion of the plan (150%) plus Target amounts earned under the Other Key
Company Goals based bonus portion of the plan (50%), or 200% of Target

 

 

Corporate Medical Director

Given the unique nature of the Corporate Medical Director job in ensuring the quality of the
delivery of health care by setting standards and monitoring care, the incentive for this position
will not be a function of financial performance, but emphasize the achievement of critical quality
and patient care initiatives. It will work as follows:

	 	•	 	Goals will be as follows:

	 	 	 
	-    Deployment of Telemedicine

	 	— 40% of target award
	-    Integration of Michigan with acceptable clinical,
operational, and financial performance

	 	— 30% of target award
	-    Implementation of Catalyst in Pennsylvania DOC

	 	— 20% of target award
	-    Key individual objective

	 	— 10% of target award

	 	•	 	For each of the measures above, there are three possible levels of achievement: a)
Minimum achievement b) Target achievement, and c) Maximum achievement
	 
	 	•	 	The Minimum payout for each level will be 50% of Target Payout for that level,
Target will be 100% and Maximum will be 200%.

 

 

Corporate Management

Positions covered:

	 	•	 	Corporate Controller, VP-Finance/Asst. Treasurer, VP Provider Operations, VP Human
Resources, VP Project Development
	 
	 	•	 	Corporate Vice Presidents
	 
	 	•	 	Corporate Middle Managers
	 
	 	1)	 	Adjusted EBITDA based bonus (50% of total bonus target for those positions as a percent
of base pay)

	 	•	 	No bonus paid if corporate Earnings before share-based compensation, interest,
taxes, depreciation, and amortization (Adjusted EBITDA) is 100% of Target or less.
	 
	 	•	 	After bonuses derived from the Other Key Company Goals based bonus are accrued and
the 2009 Adjusted EBITDA Target is reached, 50% of earnings generated above the
Adjusted EBITDA Target will be used for this portion of the incentive funding, to a
maximum of 70% of Target payout*.
	 
	 	•	 	Payout is subject to Board confirmation of satisfactory balance sheet management.

	 	2)	 	Other Key Company Goals based bonus (50% of total bonus target for this position as a
percent of base pay)

	 	•	 	Pre-selected goals will be used for this part of the incentive program, as follows:

	 	 	 
	-    Corporate Net New Revenue

	 	— 10% of target award
	-    Integration of Michigan DOC contract with acceptable clinical,
operational, and financial performance

	 	— 15% of target award
	-    Implementation of Catalyst in Pennsylvania DOC

	 	— 15% of target award
	-    Key individual objective

	 	— 10% of target award

	 	•	 	For Corporate Net New Revenue, the Minimum level is 90% of Goal, and for
achievements between Minimum and Goal, payouts will be interpolated. For the other
measures, there are two possible levels of achievement: a) Minimum achievement to get
an award for that portion of the plan and b) Goal achievement
	 
	 	•	 	The Minimum payout for each level will be 50% of Target Payout for that level. For
example, if the achievement for Corporate Net New Revenue is at Minimum levels, the
payout would be 5% of Target (50% X 10%)

 

			
	*	 	Total Maximum under the plan equals the maximums as indicated for the Adjusted
EBITDA base portion of the plan (70%)plus Target amounts earned under the Other Key
Company Goals based bonus portion of the plan (50%), or 120% of Target

 

 

Division VP, Regional VP, Regional Directors, Regional Managers

	 	1)	 	Adjusted EBITDA based bonus (50% of total bonus target for those positions as a percent
of base pay)

	 	•	 	No bonus paid if corporate Earnings before share-based compensation, interest,
taxes, depreciation, and amortization (Adjusted EBITDA) is 100% of Target or less.
	 
	 	•	 	After bonuses derived from the Other Key Company Goals based bonus are accrued and
the 2009 Adjusted EBITDA Target is reached, 50% of earnings generated above the
Adjusted EBITDA Target will be used for this portion of the incentive funding, to a
maximum of 70% of Target payout*
	 
	 	•	 	Payout is subject to Board confirmation of satisfactory balance sheet management

	 	2)	 	Other Key Company Goals based bonus (50% of total bonus target for this position as a
percent of base pay)

	 	•	 	Pre-selected goals will be used for this part of the incentive program, as follows:

	 	 	 
	-    Market Operating Earnings

	 	— 30% of target award
	-    Corporate Net New Revenue

	 	— 10% of target award
	-    Key Individual Objective

	 	— 10% of target award

	 	•	 	For Market Operating Earnings and Corporate Net New Revenue, the Minimum level is
90% of Goal, and for achievements between Minimum and Goal, payouts will be
interpolated. For the Key Individual Objective, there are two possible levels of
achievement: a) Minimum achievement to get an award for that portion of the plan and
b) Goal achievement
	 
	 	•	 	The Minimum payout for each level will be 50% of Target Payout for that level. For
example, if the achievement for Corporate Net New Revenue is at Minimum levels, the
payout would be 5% of Target (50% X 10%)

 

			
	*	 	Total Maximum under the plan equals the maximums as indicated for the Adjusted
EBITDA base portion of the plan (70%) plus Target amounts earned under the Other Key
Company Goals based bonus portion of the plan (50%), or 120% of Target

 

 

HSA

	 	1)	 	Adjusted EBITDA based bonus (50% of total bonus target for those positions as a percent
of base pay)

	 	•	 	No bonus paid if corporate Earnings before share-based compensation, interest,
taxes, depreciation, and amortization (Adjusted EBITDA) is 100% of Target or less.
	 
	 	•	 	After bonuses derived from the Site Operating Earnings based bonus are accrued and
the 2009 Adjusted EBITDA Target is reached, 50% of earnings generated above the
Adjusted EBITDA Target will be used for this portion of the incentive funding, to a
maximum of 70% of Target payout*
	 
	 	•	 	Payout is subject to Board confirmation of satisfactory balance sheet management

	 	2)	 	Other Key Company Goals based bonus (50% of total bonus target for this position as a
percent of base pay)

	 	•	 	Pre-selected goals will be used for this part of the incentive program, as follows:

	 	 	 
	-    Site Operating Earnings

	 	— 50% of target award

	 	•	 	The Minimum level is 90% of Target, and for achievements between Minimum and Target,
payouts will be interpolated.
	 
	 	•	 	The Minimum payout will be 50% of Target Payout for that level, or 25% of the
overall Target bonus (50% X 50%)

 

			
	*	 	Total Maximum under the plan equals the maximums as indicated for the Adjusted
EBITDA base portion of the plan plus Target amounts earned under the Other Key
Company Goals based bonus portion of the plan, or 120% of Target

 

 

For Non-Management Corporate Office Employees — Key Contributor Pool

At the end of the year, those corporate employees who are considered to have made a significant
contribution to the company’s success will be considered for a “key contributor” bonus. When
Adjusted EBITDA Target is exceeded, a pool of up to 10% of underlying base salaries will be funded
and distributed based on the recommendation of individual corporate managers, with the approval of
executive management. Payment requirements for ‘Corporate Management’ positions apply to ‘Key
Contributor Pool’ funding.

 

 

Bonus Payment (applies to all employee categories covered in this Plan)

All incentive compensation payments will be made to the extent of available funding. Eligible
employees must be employed by the company at the time of incentive compensation distribution to be
eligible to receive the incentive compensation amount. The incentive compensation of employees
transferring within the company will be prorated between the sites. The proration is based upon
the total number of months at each site. Employees hired after July 1 will not be eligible for an
incentive compensation payment. The incentive compensation payments for newly hired eligible
employees or employees promoted to bonus eligible positions on July 1 or earlier will be prorated
based on the full calendar months of employment. (For example, an employee hired on April 1 is
eligible for 75% (9/12ths) of the bonus amount earned.) Bonus payments for employees
terminated as a result of a change in control or in connection with death or permanent disability
will also be prorated. The incentive compensation payment checks will be distributed to employees
after applicable annual financial audits are completed and related earnings releases.

The 2009 Incentive Plan Adjusted EBITDA Target is $18,000,000.

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