Document:

Exhibit 10.11

 

Exhibit 10.11

TANDEM HEALTH CAKE, INC. AND ITS SUBSIDIARIES

1998 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN

(as amended through May 4, 2005)

          Section 1. Purpose. The purpose of the Tandem Health Care, Inc. and its Subsidiaries 1998
Stock Option and Restricted Stock Purchase Plan (the “Plan”) is to promote the interests of Tandem
Health Care, Inc., a Pennsylvania corporation (the “Company”), and any Subsidiary thereof and the
interests of the Company’s stockholders by providing an opportunity to selected employees, officers
and directors of the Company or any Subsidiary thereof as of the date of the adoption of the Plan
or at any time thereafter to purchase Common Stock of the Company. By encouraging such stock
ownership, the Company seeks to attract, retain and motivate such employees and other persons and
to encourage such employees and other persons to devote their best efforts to the business and
financial success of the Company. It is intended that this purpose will be effected by the granting
of “non-qualified stock options” and/or “incentive stock options” to acquire the Common Stock of
the Company and/or by the granting of rights to purchase the Common Stock of the Company on a
“restricted stock” basis. Under the Plan, the Committee shall have the authority (in its sole
discretion) to grant “incentive stock options” within the meaning of Section 422(b) of the Code,
“non-qualified stock options” as described in Treasury Regulation Section 1.83-7 or any successor
regulation thereto, or “restricted stock” awards.

          Section 2. Definitions. For purposes of the Plan, the following terms used herein
shall have the following meanings, unless a different meaning is clearly required by the context:

          2.1. “Award” shall mean an award of the right to purchase Common Stock granted under the
provisions of Section 7 of the Plan.

          2.2. “Board of Directors” shall mean the Board of Directors of the Company.

          2.3. “Code” shall mean the Internal Revenue Code of 1986, as amended.

          2.4. “Committee” shall mean the committee of the Board of Directors referred to in Section 5
hereof; provided, that if no such committee is appointed by the Board of Directors, the Board of
Directors shall have all of the authority and obligations of the Committee under the Plan.

          2.5. “Common Stock” shall mean the Common Stock, $.01 par value, of the
Company.

 

 

          2.6. “Employee” shall mean (i) with respect to an ISO, any person, including, without
limitation, an officer or director of the Company, who, at the time an ISO is granted to such
person hereunder, is employed on a full-time basis by the Company or any Parent or Subsidiary of
the Company, and (ii) with respect to a Non-Qualified Option and/or an Award, any person employed
by, or performing services for, the Company or any Parent or Subsidiary of the Company, including,
without limitation, directors and officers.

          2.7. “ISO” shall mean an Option granted to a Participant pursuant to the Plan that constitutes
and shall be treated as an “incentive stock option” as defined in Section 422(b) of the Code.

          2.8. “Non-Qualified Option” shall mean an Option granted to a Participant pursuant to the Plan
that is intended to be, and qualifies as, a “non-qualified stock option” as described in Treasury
Regulation Section 1.83-7 or any successor regulation thereto and that shall not constitute or be
treated as an ISO.

          2.9. “Option” shall mean any ISO or Non-Qualified Option granted to an Employee pursuant
to the Plan.

          2.10. “Participant” shall mean any Employee to whom an Award and/or an Option is granted under
the Plan.

          2.11. “Parent” of the Company shall have the meaning set forth in Section 424(e) of the Code.

          2.12. “Subsidiary” of the Company shall have the meaning set forth in Section 424(f) of
the Code.

          Section 3. Eligibility. Awards and/or Options may be granted to any Employee. The
Committee shall have the sole authority to select the persons to whom
Awards and/or Options are to
be granted hereunder, and to determine whether a person is to be granted a Non-Qualified Option, an
ISO or an Award or any combination thereof. No person shall have any right to participate in the
Plan. Any person selected by the Committee for participation during any one period will not by
virtue of such participation have the right to be selected as a Participant for any other period.

          Section 4. Common Stock Subject to the Plan.

          4.1. Number of Shares. The total number of shares of Common Stock for which Options
and/or Awards may be granted under the Plan shall not exceed in the aggregate

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               2,045,000 shares of Common Stock (subject to adjustment as provided in Section 8 hereof).

          4.2. Reissuance. The shares of Common Stock that may be subject to Options and/or
Awards granted under the Plan may be either authorized and unissued shares or shares reacquired at
any time and now or hereafter held as treasury stock as the Committee may determine. In the event
that any outstanding Option expires or is terminated for any reason, the shares allocable to the
unexercised portion of such Option may again be subject to an Option and/or Award granted under the
Plan. If any shares of Common Stock issued or sold pursuant to an Award or the exercise of an
Option shall have been repurchased by the Company, then such shares may again be subject to an
Option and/or Award granted under the Plan.

          4.3. Special ISO Limitations.

          (a) The aggregate fair market value (determined as of the date an ISO is granted) of the
shares of Common Stock with respect to which ISOs are exercisable for the first time by an Employee
during any calendar year (under all incentive stock option plans of the Company or any Parent or
Subsidiary of the Company) shall not exceed $100,000.

          (b) No ISO shall be granted to an Employee who, at the time the ISO is granted, owns (actually
or constructively under the provisions of Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company or any Parent or
Subsidiary of the Company, unless (i) the option price is at least 110% of the fair market value
(determined as of the time the ISO is granted) of the shares of Common Stock subject to the ISO and
(ii) the ISO by its terms is not exercisable more than five years from the date it is granted.

          4.4. Limitations Not Applicable to Non-Qualified Options or Awards. Notwithstanding
any other provision of the Plan, the provisions of Sections 4.3(a) and (b) shall not apply, nor
shall be construed to apply, to any Non-Qualified Option or Award granted under the Plan.

          Section 5. Administration of the Plan.

          5.1. Administration. The Plan shall be administered by a committee of the Board of Directors
(the “Committee”) established by the Board of Directors and consisting of no less than three
persons. All members of the Committee shall be “disinterested persons” within the meaning of Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The
Committee shall be appointed from time to time by, and shall serve at the pleasure of, the Board of
Directors.

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          5.2. Grant of Options/Awards.

          (a) Options. The Committee shall have the sole authority and discretion under the Plan (i) to
select the Employees who are to be granted Options hereunder; (ii) to designate whether any Option
to be granted hereunder is to be an ISO or a Non-Qualified Option; (iii) to establish the number of
shares of Common Stock that may be subject to each Option; (iv) to determine the time and the
conditions subject to which Options may be exercised in whole or in part; (v) to determine the
amount (not less than the par value per share) and the form of the consideration that may be used
to purchase shares of Common Stock upon exercise of any Option (including, without limitation, the
circumstances under which issued and outstanding shares of Common Stock owned by a Participant may
be used by the Participant to exercise an Option);
(vi) to impose restrictions and/or conditions with respect to shares of Common Stock acquired upon
exercise of an Option; (vii) to determine the circumstances under which shares of Common Stock
acquired upon exercise of any Option may be subject to repurchase by the Company; (viii) to
determine the circumstances and conditions subject to which shares acquired upon exercise of an
Option may be sold or otherwise transferred, including, without limitation, the circumstances and
conditions subject to which a proposed sale of shares of Common Stock acquired upon exercise of an
Option may be subject to the Company’s right of first refusal (as well as the terms and conditions
of any such-right of first refusal); (ix) to establish a vesting provision for any Option relating
to the time when (or the circumstances under which) the Option may be exercised by a Participant,
including, without limitation, vesting provisions that may be contingent upon (A) the Company’s
meeting specified financial goals, (B) a change of control of the Company or (C) the occurrence of
other specified events; (x) to accelerate the time when outstanding Options may be exercised,
provided, however, that any ISOs shall be deemed “accelerated” within the meaning of
Section 424(h) of the Code; and (xi) to establish any other terms, restrictions and/or conditions
applicable to any Option not inconsistent with the provisions of the Plan. Notwithstanding
anything in the Plan to the contrary, in no event shall any Option granted to any director or
officer of the Company who is subject to Section 16 of the Exchange Act become exercisable, in
whole or in part, prior to the date that is six months after the date such Option is granted to
such director or officer.

          (b) Awards. The Committee shall have the sole authority and discretion under
the Plan (i) to select the Employees who are to be granted Awards hereunder; (ii) to determine the
amount to be paid by a Participant to acquire shares of Common Stock pursuant to an Award, which
amount may be equal to, more than, or less than 100% of the fair market value of such shares on
the date the Award is granted (but in no event less than the par value of such shares);
(iii) to determine the time or times and the conditions subject to which Awards may be made; (iv)
to determine the time or times and the conditions subject to which the shares of Common Stock
subject to an Award are to become vested and no longer subject to repurchase by the Company; (v)
to establish transfer restrictions and the terms and conditions on which any such transfer
restrictions with respect to shares of Common Stock acquired pursuant to an Award shall lapse;
(vi) to establish vesting provisions with respect to any shares of Common Stock subject to an
Award, including, without limitation, vesting provisions which may be contingent upon (A) the

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Company’s meeting specified financial goals, (B) a change of control of the Company or (C)
the occurrence of other specified events; (vii) to determine the circumstances under which shares
of Common Stock acquired pursuant to an Award may be subject to repurchase by the Company; (viii)
to determine the circumstances and conditions subject to which any shares of Common Stock acquired
pursuant to an Award may be sold or otherwise transferred, including, without limitation, the
circumstances and conditions subject to which a proposed sale of shares of Common Stock acquired
pursuant to an Award may be subject to the Company’s right of first refusal (as well as the terms
and conditions of any such right of first refusal); (ix) to
determine the form of consideration
that may be used to purchase shares of Common Stock pursuant to an Award (including, without
limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a
Participant may be used by the Participant to purchase the Common Stock subject to an Award); (x)
to accelerate the time at which any or all restrictions imposed with respect to any shares of
Common Stock subject to an Award will lapse; and (xi) to establish any other terms, restrictions
and/or conditions applicable to any Award not inconsistent with the provisions of the Plan.

          5.3. Interpretation. The Committee shall be authorized to interpret the Plan and may, from
time to time, adopt such rules and regulations, not inconsistent with the provisions of the Plan,
as it may deem advisable to carry out the purposes of the Plan.

          5.4. Finality, The interpretation and construction by the Committee of any provision
of the Plan, any Option and/or Award granted hereunder or any agreement evidencing any such Option
and/or Award shall be final and conclusive upon all parties.

          5.5. Expenses. Etc, All expenses and liabilities incurred by the Committee in the
administration of the Plan shall be borne by the Company. The Committee may employ attorney
consultants, accountants or other persons in connection with the administration of the Plan, The
Company, and its officers and directors, shall be entitled to rely upon the advice, opinions or
valuations of any such persons. No member of the Committee shall be liable for any action,
determination or interpretation taken or made in good faith with
respect to the Plan or any Option
and/or Award granted hereunder.

          Section 6. Terms and Conditions of Options.

          6.1. ISOs. The terms and conditions of each ISO granted under the Plan shall be
specified by the Committee and shall be set forth in an ISO agreement
between the Company and the
Participant in such form as the Committee shall approve. The terms and conditions of each ISO shall
be such that each ISO issued hereunder shall constitute and shall be treated as an “incentive stock
option” as defined in Section 422(b) of the Code. The terms and conditions of any ISO granted
hereunder need not be identical to those of any other ISO granted hereunder.

          The terms and conditions of each ISO shall include the following:

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          (a) The
option price shall be fixed by the Committee but shall in no event be less than 100% (or 110% in
the case of an Employee referred to in Section 4.3(b) hereof) of the fair market value of the shares of
Common Stock subject to the ISO on the date the ISO is granted. For purposes of the Plan, the fair market value per share of Common Stock as of any day
shall mean the average of the closing prices of sales of shares of Common Stock on all national
securities exchanges on which the Common Stock may at the time be listed or, if there shall have
been no sales on any such day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day the Common Stock shall not be so listed, the
average of the representative bid and asked prices quoted in the NASDAQ system as of 3:30 p.m., New
York time, on such day, or, if on any day the Common Stock shall not be quoted in the NASDAQ
system, the average of the high and low bid and asked prices on such day in the over-the-counter
market as reported by National Quotation Bureau Incorporated, or any similar successor
organization. If at any time the Common Stock is not listed on any national securities exchange or
quoted in the NASDAQ system or the over-the-counter market, the fair market value of the shares of
Common Stock subject to an Option on the date the ISO is granted shall be the fair market value
thereof determined in good faith by the Board of Directors.

          (b) ISOs, by their terms, shall not be transferable otherwise than by will or the laws of
descent and distribution, and, during a Participant’s lifetime, an ISO shall be exercisable only by
the Participant.

          (c) The Committee shall fix the term of all ISOs granted pursuant to the Plan (including,
without limitation, the date on which such ISO shall expire and terminate); provided,
however, that such term shall in no event exceed ten years from the date on which such ISO is
granted (or, in the case of an ISO granted to an Employee referred to in Section 4.3(b) hereof,
such term shall in no event exceed five years from the date on which such ISO is granted). Each ISO
shall be exercisable in such amount or amounts, under such conditions and at such times or
intervals or in such installments as shall be determined by the Committee in its sole discretion;
provided, however., that in no event shall any ISO granted to any director or officer of
the Company who is subject to Section 16 of the Exchange-Act become exercisable, in whole or in
part, prior to the date that is six months after the date such ISO is granted to such director or
officer.

          (d) To the extent that the Company or any Parent or Subsidiary of the Company is required to
withhold any Federal, state or local taxes in respect of any compensation income realized by any
Participant as a result of any “disqualifying disposition” of any shares of Common Stock acquired
upon exercise of an ISO granted hereunder, the Company shall deduct from any payments of any kind
otherwise due to such Participant the aggregate amount of such Federal, state or local taxes
required to be so withheld or, if such payments are insufficient to satisfy such Federal, state or
local taxes, such Participant will be required to pay to the Company, or make other arrangements
satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such
taxes. All matters with respect to the total amount of taxes to be withheld in respect of any such
compensation income shall be determined by the Board of

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Directors, in its sole discretion.

          (e) In the sole discretion of the Committee the terms and conditions of any ISO may (but
need not) include any of the following provisions:

     (i) In the event a Participant shall cease to be employed by the Company or any Parent
or Subsidiary of the Company on a full-time basis for any reason other than as a result of
his death or “disability” (within the meaning of Section 22(e)(3) of the Code), the
unexercised portion of any ISO held by such Participant at that time may only be exercised
within one month after the date on which the Participant ceased to be so employed, and only
to the extent that the Participant could have otherwise exercised such ISO as of the date on
which he ceased to be so employed.

     (ii) In the event a Participant shall cease to be employed by the Company or any Parent
or Subsidiary of the Company on a full-time basis by reason of his “disability” (within the
meaning of Section 22(e)(3) of the Code), the unexercised portion of any ISO held by such
Participant at that time may only be exercised within one year after the date on which the
Participant ceased to be so employed, and only to the extent that the Participant could have
otherwise exercised such ISO as of the date on which he ceased to be so employed.

     (iii) In the event a Participant shall die while in the employ of the Company or a
Parent or Subsidiary of the Company (or within a period of one month after ceasing to be an
Employee for any reason other than his “disability” (within the meaning of Section 22(e)(3)
of the Code) or within a period of one year after ceasing to be an Employee by reason of
such “disability”), the unexercised portion of any ISO held by such Participant at the time
of his death may only be exercised within one year after the date of such Participant’s
death, and only to the extent that the Participant could have otherwise exercised such ISO
at the time of his death. In such event, such ISO may be exercised by
the executor or administrator of the Participant’s estate or by any person or persons who
shall have acquired the ISO directly from the Participant by bequest or inheritance.

          6.2. Non-Qualified Options. The terms and conditions of each Non-Qualified Option
granted under the Plan shall be specified by the Committee, in its sole discretion, and shall be
set forth in a written option agreement between the Company and the Participant in such form as the
Committee shall approve. The terms and conditions of each Non-Qualified Option will be such (and
each Non-Qualified Option Agreement shall expressly so state) that each Non-Qualified Option issued
hereunder shall not constitute nor be treated as an “incentive stock option” as defined in Section
422(b) of the Code, but will be a “non-qualified stock option” for Federal, state and local income
tax purposes. The terms and conditions of any Non-Qualified Option granted hereunder need not be
identical to those of any other Non-Qualified Option granted hereunder.

          The terms and conditions of each Non-Qualified Option Agreement shall include

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the following:

          (a) The option (exercise) price shall be fixed by the Committee and may be equal to,
more than or less than 100% of the fair market value of the shares of Common Stock subject to
the Non-Qualified Option on the date such Non-Qualified Option is granted.

          (b) The Committee shall fix the term of all Non-Qualified Options granted pursuant to
the Plan (including, without limitation, the date on which such Non-Qualified Option shall
expire and terminate). Such term may be more than ten years from the date on which such
Non-Qualified Option is granted. Each Non-Qualified Option shall be exercisable in such
amount or amounts, under such conditions (including, without limitation, provisions governing
the rights to exercise such Non-Qualified Option), and at such times or intervals or in such
installments as shall be determined by the Committee in its sole discretion;
provided, however, that in no event shall any Non-Qualified Option granted to any
director or officer of the Company who is subject to Section 16 of the Exchange Act become
exercisable, in whole or in part, prior to the date that is six months after the date such
Non-Qualified Option is granted to such director or officer.

          (c) Non-Qualified Options shall not be transferable otherwise than by will or the laws
of descent and distribution, and during a Participant’s lifetime a Non-Qualified Option shall
be exercisable only by the Participant.

          (d) To the extent that the Company is required to withhold any Federal, state or local
taxes in respect of any compensation income realized by any Participant in respect of a
Non-Qualified Option granted hereunder or in respect of any shares of Common Stock acquired
upon exercise of a Non-Qualified Option, the Company shall deduct from any payments of any
kind otherwise due to such Participant the aggregate amount of such Federal, state or local
taxes required to be so withheld or, if such payments are insufficient to satisfy such
Federal, state or local taxes, or if no such payments are due or to become due to such
Participant, then, such Participant will be required to pay to the Company, or make other
arrangements satisfactory to the Company regarding payment to the Company of, the
aggregate-amount of any such taxes. All matters with respect to the total amount of taxes to
be withheld in respect of any such compensation income shall be determined by the Board of
Directors, in its sole discretion.

          7. Terms and Conditions of Awards. The terms and conditions of each Award
granted under the Plan shall be specified by the Committee, in its sole discretion, and shall
be set forth in a written agreement between the Participant and the Company, in such form as
the Committee shall approve. The terms and provisions of any Award granted hereunder need not
be identical to those of any other Award granted hereunder.

          The terms and conditions of each Award shall include the following:

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          (a) The amount to be paid by a Participant to acquire the shares of Common Stock pursuant
to an Award shall be fixed by the Committee and may be equal to, more than or less than 100% of the
fair market value of the shares of Common Stock subject to the Award on the date the Award is
granted (but in no event less than the par value of such shares).

          (b) Each Award shall contain such vesting provisions, such transfer restrictions and such
other restrictions and conditions as the Committee, in its sole discretion, may determine,
including, without limitation, the circumstances under which the Company shall have the right and
option to repurchase shares of Common Stock acquired pursuant to an Award.

          (c) Stock certificates representing Common Stock acquired pursuant to an Award shall bear a
legend referring to any restrictions imposed on such Stock and such other matters as the Committee
may determine.

          (d) To the extent that the Company is required to withhold any Federal, state or local taxes
in respect of any compensation income realized by the Participant in respect of an Award granted
hereunder, in respect of any shares acquired pursuant to an Award, or in respect of the vesting of
any such shares of Common Stock, then the Company shall deduct from any payments of any kind
otherwise due to such Participant the aggregate amount of such Federal, state or local taxes
required to be so withheld, or if such payments are insufficient to satisfy such Federal, state or
local taxes, or if no such payments are due or to become due to such Participant, then such
Participant will be required to pay to the Company, or make other arrangements satisfactory to the
Company regarding payment to the Company of, the aggregate amount of any such taxes. All matters
with respect to the total amount of taxes to be withheld in respect of any such compensation income
shall be determined by the Committee, in its sole discretion.

          Section 8. Adjustments. (a) In the event that, after the adoption of the Plan by the
Board of Directors, the outstanding shares of the Company’s Common Stock shall be increased or
decreased or changed into or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another entity through reorganization, merger- or consolidation,
recapitalization, reclassification, stock split, split-up, combination or exchange of shares or
declaration of any dividends payable in Common Stock, the Board of Directors shall appropriately
adjust (i) the number of shares of Common Stock (and the option price per share) subject to the
unexercised portion of any outstanding Option (to the nearest possible full share); provided,
however, that the limitations of Section 424 of the Code shall apply with respect to
adjustments made to ISOs, (ii) the number of shares of Common Stock to be acquired pursuant to an
Award which have not become vested, and (iii) the number of shares of Common Stock for which
Options and/or Awards may be granted under the Plan, as set forth in Section 4.1 hereof, and such
adjustments shall be effective and binding for all purposes of the Plan.

          (b) If any capital reorganization or reclassification of the capital stock of the Company or
any consolidation or merger of the Company with another entity, or the sale of all or substantially
all its assets to another entity, shall be effected in such a way that holders of

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Common Stock shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then each holder of an Option shall thereafter have the right to
purchase, upon the exercise of the Option in accordance with the terms and conditions
specified in the option agreement governing such Option and in lieu of the shares of Common
Stock immediately theretofore receivable upon the exercise of such Option, such shares of
stock, securities or assets (including, without limitation, cash) as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such Common Stock immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger or sale not taken place.

          Section 9. Effect of the Plan on Employment Relationship. Neither the Plan nor
any Option and/or Award granted hereunder to a Participant shall be construed as conferring
upon such Participant any right to continue in the employ of (or otherwise provide services
to) the Company or any Subsidiary or Parent thereof, or limit in any respect the right of the
Company or any Subsidiary or Parent thereof to terminate such Participant’s employment or
other relationship with the Company or any Subsidiary or Parent, as the case may be, at any
time.

          Section 10. Amendment of the Plan. The Board of Directors may amend the Plan from
time to time as it deems desirable; provided, however, that, without the approval of
the holders of a majority of the outstanding capital stock of the Company entitled to vote
thereon or consent thereto, the Board of Directors may not amend the Plan (i) to increase
(except for increases due to adjustments in accordance with Section 8 hereof) the aggregate
number of shares of Common Stock for which Options and/or Awards may be granted hereunder,
(ii) to decrease the minimum exercise price specified by the Plan in respect of ISOs or (iii)
to change the class of Employees eligible to receive ISOs under the Plan.

          Section 11. Termination of the Plan. The Board of Directors may terminate the Plant at any
time. Unless the shall theretofore have been terminated by the Board of Directors, the Plan
shall terminate ten years after the date of its initial adoption by the Board of Directors. No
Option and/or Award may be granted hereunder after termination of the Plan. The termination or
amendment of the Plan shall not alter or impair any rights of obligations under any Option
and/or Award theretofore granted under the Plan.

          Section 12. Effective Date of the Plan. The Plan shall be effective as of April
28,1998, the date on which the Plan was adopted by the Board of Directors and approved by the
stockholders of the Company.

* * * * *

10Exhibit 10.14

 

Exhibit 10.14

EMPLOYMENT AGREEMENT

          EMPLOYMENT AGREEMENT dated as of March 25, 1998 by and between TANDEM HEALTH CARE, INC., a
Pennsylvania corporation (the “Company”), and Lawrence R. Deering (the “Employee”).

W I T N E S S E T H:

          WHEREAS the Company desires to induce the Employee to enter into employment with the Company
for the period provided in this Agreement, and the Employee is willing to accept such employment
with the Company on a full-time basis, all in accordance with the terms and conditions set forth
below;

          NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants
contained herein, the parties hereto hereby covenant and agree as follows:

          1. Employment. (a) The Company hereby agrees to employ the Employee, and the
Employee hereby agrees to accept such employment with the Company, beginning on the date hereof and
continuing for the period set forth in Section 2 hereof, all upon the terms and conditions
hereinafter set forth.

          (b) The Employee affirms and represents that he is under no obligation to any former employer
or other party which is in any way inconsistent with, or which imposes any restriction upon, the
Employee’s acceptance of employment hereunder with the Company, the employment of the Employee by
the Company, or the Employee’s undertakings under this Agreement.

          2. Term of Employment. (a) Unless earlier terminated as provided in this Agreement,
the term of the Employee’s employment under this Agreement shall be for a period beginning on the
date hereof and ending on March 31, 2003 (the “Initial Term”).

          (b) The term of the Employee’s employment under this Agreement shall be automatically renewed
for additional one-year terms (each a “Renewal Term”) upon the expiration of the Initial Term or
any Renewal Term unless the Company or the Employee delivers to the other, at least six months
prior to the expiration of the Initial Term or the then current Renewal Term, as the case may be, a
written notice specifying that the term of the Employee’s employment will not be renewed at the end
of the Initial Term or such Renewal term, as the case may be. The period from the date hereof until
March 31, 2003 or, in the event that the Employee’s employment hereunder is earlier terminated as
provided herein or renewed as provided in this Section 2(b), such shorter or longer period, as the
case may be, is hereinafter called the “Employment Term.”

 

 

          3. Duties. The Employee shall be employed as the Chairman and Chief Executive Officer
of the Company, shall faithfully and competently perform such duties as are specified in the
By-laws of the Company or such other duties reasonably related to Employee’s position as the Board
of Directors of the Company shall from time to time determine. The Employee shall perform his
duties principally at the office of the Company to be established in Pittsburgh, Pennsylvania, with
such travel to such other locations from time to time as the Board of Directors of the Company may
reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors of
the Company, and except during vacation periods and reasonable periods of absence due to sickness,
personal injury or other disability, the Employee shall devote his full time throughout the
Employment Term to the services required of him hereunder. The Employee shall render his services
exclusively to the Company and its subsidiaries during the Employment Term and shall use his best
efforts, judgment and energy to improve and advance the business and interests of the Company and
its subsidiaries in a manner consistent with the duties of his position. During the Employment
Term, the Employee shall not serve on the board of directors of any corporation or other entity
other than the boards of directors of the Company and such other corporations or entities approved
by the Board of Directors of the Company.

          4. Compensation. (a) Salary. The Company shall pay the Employee a base salary
at the annual rate of Two Hundred and Fifty Thousand Dollars ($250,000) (said amount, together with
any increases thereto as may be determined from time to time by the Board of Directors of the
Company in its sole discretion, being hereinafter referred to as “Salary”). Any Salary payable
hereunder shall be paid in regular intervals in accordance with the Company’s payroll practices
from time to time in effect.

          (b) Bonus. The Employee shall receive bonus compensation from the Company in respect
of each fiscal year (or portion thereof) occurring during the Employment Term in amounts equal to
up to 50% of the Employee’s Salary as may be determined by the Board of Directors of the Company in
its sole discretion on the basis of performance-based criteria to be established in good faith from
time to time by the Board of Directors in its sole discretion.

          5. Benefits. During the Employment Term, the Employee shall:

     (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing
plans that may be provided by the Company for its senior executive employees in accordance with the
provisions of any such plans, as the same may be in effect from time to time;

     (ii) be eligible to participate and to have his “dependents” (as that term may be defined
under the applicable plans of the Company) participate in any medical and health plans or other
employee welfare benefit plans that may be provided by the Company for its senior executive
employees in accordance with the provisions of any such plans, as the same may be in effect from
time to time;

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     (iii) be entitled to have the Company pay the insurance premiums for group life
insurance for the Employee providing for not less than $500,000 in death benefits;

     (iv) be entitled to annual paid vacation in accordance with the Company policy that may be
applicable to senior executive employees from time to time;

     (v) be entitled to sick leave, sick pay and disability benefits in accordance with any Company
policy that may be applicable to senior executive employees from time to time;

     (vi) be entitled to reimbursement for all reasonable and customary business-related travel
expenses, membership in appropriate professional organizations and such other reasonable and
necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties
hereunder in accordance with the Company’s policies applicable thereto;

     (vii) be entitled to reimbursement for reasonable and necessary moving expenses and associated
costs of up to $100,000.00 incurred by the Employee in relocating or having relocated his residence
to the metropolitan area of Pittsburgh, Pennsylvania;

     (viii) be entitled to have the Company make lease payments and related costs (other than fuel
costs) on a vehicle of Employee’s choosing in an amount not to exceed $1,500.00 per month including
maintenance, for use by the Employee during the Employment Term, and to carry appropriate insurance
coverage for said vehicle and Employee; and

     (ix) be entitled to be reimbursed for the related expenses advanced by Employee up to the
amount of $250,000.00 in connection with the negotiation of certain acquisition agreements prior to
the date hereof, it being understood such reimbursement will be obtained upon the consummation by
the Company of the acquisition of the Cheswick, Pennsylvania facility and the acquisitions
contemplated by those Asset Purchase Agreements between the Company (or its subsidiaries), on the
one hand, and each of Florida Health Facilities Corp. (of Lee County), Florida Health Facilities
Corp. Polk County, Florida Health Facilities Corp. (of Palm Beach County), Florida Health
Facilities Corp. (of Indian River County) and Sunbelt Care Center, Inc., on the other hand.

           6. Inventions and Confidential Information. The Employee hereby covenants,
agrees and acknowledges as follows:

     (a) The Company is engaged in a continuous program of research, design, development,
production, marketing and servicing with respect to its businesses and that as part of the
Employee’s employment by the Company the Employee may make new contributions and inventions
of value to the Company.

     (b) The Employee’s employment hereunder creates a relationship of confidence and trust
between the Employee and the Company with respect to certain confidential

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information pertaining to the business of the Company and its Affiliates (as hereinafter defined)
or pertaining to the business of any client or customer of the Company or its Affiliates which may
be made known to the Employee by the Company or any of its Affiliates or by any client or customer
of the Company or any of its Affiliates or learned by the Employee during the period of his
employment by the Company.

     (c) The Company possesses and will continue to possess information that has been created,
discovered or developed by, or otherwise become known to it (including, without limitation,
information created, discovered or developed by, or made known to, the Employee during the period
of his employment or arising out of his employment) or in which property rights have been or may be
assigned or otherwise conveyed to the Company, which information has commercial value in the
business in which the Company is engaged and is treated by the Company as confidential.

     (d) Any and all inventions, products, discoveries, improvements, processes, marketing and
service methods or techniques, formulae, styles, data bases, computer programs (whether in source
code or object code), know-how, strategies and data, whether or not patentable or registrable under
copyright or similar statutes, made, developed or created by the Employee (whether at the request
or suggestion of the Company, any of its Affiliates, or otherwise, whether alone or in conjunction
with others, and whether during regular hours of work or otherwise) during the period of his
employment by the Company which may pertain to the business, products, or processes of the Company
or any of its Affiliates (collectively, hereinafter referred to as “Inventions”), shall be the
Company’s exclusive property, and the Employee will promptly execute and/or deliver to an
appropriate executive officer of the Company, upon request and without any additional compensation
therefor, all papers, drawings, models, data, documents and other material pertaining to or in any
way relating to any Inventions made, developed or created by him as aforesaid. For the purposes of
this Agreement, the term “Affiliate” or “Affiliates” shall mean any corporation or other entity (i)
which owns the Company in whole or in part, or which controls the Company directly or indirectly,
whether through common control or otherwise, (ii) which is owned by the Company in whole or in
part, or which is controlled, directly or indirectly, by the Company or (iii) which is under the
common control, directly or indirectly, of the Company and any person or entity.

     (e) The Employee will keep confidential and will hold for the Company’s sole benefit any
Invention which is to be the exclusive property of the Company under this Section 6 for which no
patent, copyright, trademark or other right or protection is issued.

     (f) The Employee also agrees that he will not without the prior written consent of an
appropriate executive officer of the Company (i) use for his benefit or disclose at any time during
his employment by the Company, or thereafter, except to the extent required by the performance by
him of his duties as an employee of the Company, any information obtained or developed by him while
in the employ of the Company with respect to any

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Inventions or with respect to any customers, clients, suppliers, products, employees,
financial affairs, or methods of design, distribution, marketing, service, procurement or
manufacture of the Company or any of its Affiliates, or any confidential matter, except
information which at the time is generally known to the public other than as a result of
disclosure by him not permitted hereunder, or (ii) take with him upon leaving the employ of
the Company any document or paper relating to any of the foregoing or any physical property
of the Company or any of its Affiliates.

     (g) The Employee acknowledges and agrees that a remedy at law for any breach or
threatened breach of the provisions of this Section 6 would be inadequate and, therefore,
agrees that the Company and its Affiliates shall be entitled to injunctive relief in
addition to any other available rights and remedies in case of any such breach or threatened
breach; provided, however, that nothing contained herein shall be construed as
prohibiting the Company or any of its Affiliates from pursuing any other rights and remedies
available for any such breach or threatened breach.

     (h) The Employee agrees that upon termination of his employment by the Company for any
reason, the Employee shall forthwith return to the Company all documents and other property
in his possession belonging to the Company or any of its Affiliates.

     (i) Without limiting the generality of Section 10 hereof, the Employee hereby expressly
agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee’s
heirs, successors and legal representatives.

            7. Termination. (a) The Employee’s employment hereunder shall be
terminated upon the occurrence of any of the following:

   (i) death of the Employee;

   (ii) termination of the Employee’s employment hereunder by the Employee for “good
reason,” such termination to take effect immediately upon written notice from the Employee
to the Company;

   (iii) termination of the Employee’s employment hereunder by the Employee at any time
(other than for “good reason” pursuant to clause (ii) above) for any reason whatsoever
(including, without limitation, resignation or retirement);

   (iv) termination of the Employee’s employment hereunder by the Company because of the
Employee’s inability to perform his duties on account of disability or incapacity for a
period of one hundred eighty (180) or more days, whether or not consecutive, occurring
within any period of twelve (12) consecutive months;

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   (v) termination of the Employee’s employment hereunder by the Company at any time “for
cause,” such termination to take effect immediately upon written notice from the Company to
the Employee;

   (vi) termination of the Employee’s employment by the Company for any reason (except for
clauses (iv) and (v) above) due to a Change of Control (as herein defined) or during a
twelve-month period following a Change of Control; it being understood that the Employee
will be deemed to have been terminated under this clause (vi) if the successor entity
following a Change of Control (A) causes any material change in the terms of Employee’s
employment as set forth in this Agreement or (B) reassigns the Employee’s principal place of
employment in excess of 25 miles from the principal place of Employee’s employment; or

   (vii) termination of the Employee’s employment hereunder by the Company at any time
other than pursuant to clauses (i), (iv), (v) or (vi) above.

The following actions, failures or events by or affecting the Employee shall constitute “good
reason” for termination within the meaning of clause (ii) above: (1) a material change in the
nature or scope of the Employee’s title, authority, status, power, function, duties or
responsibilities, or reporting relationships that is adverse to those existing before such change,
or (2) a failure by the Company or any subsidiary or affiliate of the Company to comply with any
material term or provision hereof, which failure is not cured within 30 days after notice of such
failure is provided by the Employee to the Company. The following actions, failures or events by or
affecting the Employee shall constitute “cause” for termination within the meaning of clause (v)
above: (1) conviction of the Employee of having committed a felony, (2) acts of dishonesty or moral

turpitude by the Employee that are materially detrimental to the Company and/or its affiliates, (3)
intentional acts or omissions by the Employee that in fact materially damage the business of the
Company and/or any affiliate of the Company, (4) gross negligence by the Employee in the
performance of, or willful disregard by the Employee of, his obligations hereunder, or (5) failure
by the Employee to obey the reasonable and lawful directions of the Board of Directors that are
consistent with the provisions of this Agreement.

          (b) For purposes of this Agreement “Change of Control” means (1) the sale, lease or transfer,
whether direct or indirect, of all or substantially all of the assets of the Company and its
subsidiaries, taken as a whole, in one transaction or a series of related transactions, to any
person or persons, corporation, or other entity, or (2) the acquisition of beneficial ownership by
any person or persons (other than Behrman Capital II, L.P. or any of its affiliates), in a single
transaction or a series of related transactions, of voting stock of the Company representing more
than 50% of the voting power of all outstanding shares of such voting stock, whether by way of
merger or consolidation or otherwise, other than by way of a public offering of equity securities
of the Company.

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          (c) In the event that the Employee’s employment is terminated pursuant to clause (ii) or
clause (vii) of Section 7(a) above, the Company shall pay to the Employee, as severance pay or
liquidated damages or both, an amount equal to the Employee’s current level of Salary and benefits
(excluding vehicle benefit) for a twelve-month period (the “Payment Period”), and in no event shall
the amount paid be less than the amount of Salary and benefits received during the twelve-month
period immediately preceding Employee’s termination. All amounts required to be paid to the
Employee pursuant to this Section 7(c) shall be paid on such dates and in such increments during
the Payment Period as would be the case for payments of Salary made during the same period.

          (d) In the event that the Employee’s employment is terminated pursuant to clause (vi) of
Section 7(a) above, the Company shall pay to the Employee, as severance pay or liquidated damages
or both, an amount equal to the Employee’s current level of Salary and benefits (excluding vehicle
benefits) for a twenty-four-month period (the “Payment Period”), but in no event shall the amount
paid be less than two times the amount of Salary and benefits received during the twelve-month
period immediately preceding Employee’s termination. All amounts required to be paid to the
Employee pursuant to this Section 7(d) shall be paid on such dates and in such increments during
the Payment Period as would be the case for payments of Salary made during the same period.

          (e) Notwithstanding anything to the contrary expressed or implied herein, neither the Company
(nor any of its Affiliates) shall be obligated to make any payments to the Employee or on his
behalf of whatever kind or nature by reason of the Employee’s cessation of employment (including,
without limitation, by reason of termination of the Employee’s employment by the Company for
“cause”), other than (i) such amounts, if any, of his Salary and bonus as shall have accrued and
remained unpaid as of the date of said cessation, (ii) such other amounts which may be then
otherwise payable to the Employee from the Company’s benefits plans or reimbursement policies, if
any, and (iii) as set forth in Section 7(c) or (d) above.

          (f) No interest shall accrue on or be paid with respect to any portion of any payments
hereunder.

          8. Non-Assignability. (a) Neither this Agreement nor any right or interest
hereunder shall be assignable by the Employee, his beneficiaries, or legal representatives without
the Company’s prior written consent provided, however, that nothing in this Section 8(a)
shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder
upon his death or incapacity. Notwithstanding the foregoing, this Agreement and any right or
interest of the Company hereunder shall not be assignable by the Company to any of its direct or
indirect subsidiaries without the consent of the Employee. The Company shall remain liable for the
payment of all amounts payable to the Employee hereunder should Employee grant his consent.

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          (b) Except as required by law, no right to receive payments under this Agreement shall be
subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and
of no effect.

          9.  Competition. During the Employee’s employment by the Company and, except as
provided in the last undesignated paragraph of this Section 9, during the two-year period following
the termination of the Employee’s employment hereunder for any reason whatsoever:

     (a) the Employee will not make any statement or perform any act intended to advance an
interest of any existing or prospective competitor of the Company or any of its Affiliates
that will or may injure an interest of the Company or any of its Affiliates in its
relationship and dealings with existing or Potential Customers or Clients, or solicit or
encourage any other employee of the Company or any of its Affiliates to do any act that is
disloyal to the Company or any of its Affiliates or inconsistent with the interest of the
Company or any of its Affiliate’s interests or in violation of any provision of this
Agreement. (For purposes of this Paragraph 9, the term “Potential Customers or Clients” is
defined as those customers or clients who were contacted within the year preceding
Employee’s termination of employment);

     (b) the Employee will not make any statement or do any act intended to cause any
existing or Potential Customers or Clients of the Company or any of its Affiliates to make
use of the services or purchase the products of any competitive business in which the
Employee has or expects to acquire a proprietary interest or in which the Employee is or
expects to be made an employee, officer or director, if such services or products in any way
compete with the services or products sold or provided or expected to be sold or provided by
the Company or any of its Affiliates to any existing or potential customer or client;

     (c) the Employee will not directly or indirectly (as a director, officer, employee,
manager, consultant, independent contractor, advisor or otherwise) engage in competition
with, or own any interest in, perform any services for, participate in or be connected with
(i) any business or organization which engages in competition with the Company or any of its
Affiliates within a radius of 20 miles of any location where any business is presently
carried on by the Company or any of its Affiliates, or (ii) any business or organization
which engages in competition with the Company or any of its Affiliates within a radius of 20
miles of any location where any business shall be hereafter, during the period of the
Employee’s employment by the Company, carried on by the Company or any of its Affiliates, if
such business is then being carried on by the Company or any of its Affiliates in such
geographical area; and

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     (d) the Employee will not directly or indirectly solicit for employment, or advise or
recommend to any other person that they employ or solicit for employment, any employee of
the Company or any of its Affiliates.

          For purposes of this Section 9, a person or entity (including, without limitation, the
Employee) shall be deemed to be a competitor of the Company or any of its Affiliates, or a person
or entity (including, without limitation, the Employee) shall be deemed to be engaging in
competition with the Company or any of its Affiliates, only if such person or entity in any way
conducts, operates, carries out or engages in (i) the business of providing post-acute care
services or (ii) such other business or businesses as the Company may in the future conduct in such
geographical area or areas as such business or businesses are conducted by the Company.

          The Company acknowledges that this Section 9 shall not be deemed to prohibit the Employee from
owning not more than 5% of the total issued and outstanding stock of a corporation as long as such
entities are not otherwise deemed to be competitors of the Company or any of its Affiliates as
provided in this Section 9.

          In connection with the foregoing provisions of this Section 9, the Employee represents that
his experience, capabilities and circumstances are such that such provisions will not prevent him
from earning a livelihood. The Employee further agrees that the limitations set forth in this
Section 9 (including, without limitation, any time or territorial limitations) are reasonable and
properly required for the adequate protection of the businesses of the Company and its Affiliates.
It is understood and agreed that the covenants made by the Employee in this Section 9 (and in
Section 6 hereof) shall survive the expiration or termination of this Agreement.

          For purposes of this Section 9, proprietary interest in a business is ownership, whether
through direct or indirect stock holdings or otherwise, of one percent (1%) or more of such
business.

          The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach
of the provisions of this Section 9 would be inadequate and, therefore, agrees that the Company and
any of its Affiliates shall be entitled to injunctive relief in addition to any other available
rights and remedies in cases of any such breach or threatened breach; provided, however,
that nothing contained herein shall be construed as prohibiting the Company or any of its
Affiliates from pursuing any other rights and remedies available for any such breach or threatened
breach.

          In the event that the Employee’s employment is terminated pursuant to clauses (ii) or (vii)
of Section 7(a) above, the covenants and agreements of the Employee under this Section 9 shall
terminate at the end of the twelve-month period following such termination.

9

 

          10. Binding Effect. Without limiting or diminishing the effect of Section 8 hereof,
this Agreement shall inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors, legal representatives and permitted assigns.

          11. Notices. Any notice required or permitted to be given under this Agreement shall
be sufficient if in writing and either delivered in person or sent by first class certified or
registered mail, postage prepaid, if to the Company, at the Company’s principal place of business,
and if to the Employee, at his home address most recently filed with the Company, or to such other
address or addresses as either party shall have designated in writing to the other party hereto.

          12. Law Governing. This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania.

          13. Severability. The Employee agrees that in the event that any court of competent
jurisdiction shall finally hold that any provision of Section 6 or 9 hereof is void or constitutes
an unreasonable restriction against the Employee, the provisions of such Section 6 or 9 shall not
be rendered void but shall apply with respect to such extent as such court may judicially determine
constitutes a reasonable restriction under the circumstances. If any part of this Agreement other
than Section 6 or 9 is held by a court of competent jurisdiction to be invalid, illegible or
incapable of being enforced in whole or in part by reason of any rule of law or public policy, such
part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the
particular legal proceedings in question and all other covenants and provisions of this Agreement
shall in every other respect continue in full force and effect and no covenant or provision shall
be deemed dependent upon any other covenant or provision.

          14. Waiver. Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall
any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a
waiver or relinquishment of such right or power at any other time or times.

          15. Entire Agreement; Modifications. This Agreement constitutes the entire and final
expression of the agreement of the parties with respect to the subject matter hereof and supersedes
all prior agreements, oral and written, between the parties hereto with respect to the subject
matter hereof, including without limitation the Employment Agreement, dated October 1, 1997 between
the Company and the Employee. This Agreement may be modified or amended only by an instrument in
writing signed by both parties hereto.

          16. Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same
instrument.

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          IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this
Agreement as of the day and year first above written.

	 	 	 	 	 
	 	TANDEM HEALTH CARE, INC.

 	 
	 	By:  	/s/ Joseph D. Conte
 	 
	 	 	Joseph D. Conte 	 
	 	 	 	 
	 
	 	 	 
	 	
/s/ Lawrence R. Deering 	 
	 	Lawrence R. Deering 	 
	 	 	 

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