Document:

Exhibit 10.1

 

Property Lease Contract

Lessor: Zhejiang Letong Communication Equipment Co., Ltd.

Lessee: UTStarcom Telecom Co., Ltd.

Contract No.:

Date: March 7, 2011

 

Property Lease Contract

Lessor: Zhejiang Letong Communication Equipment Co., Ltd. (hereinafter referred to as “Party A”)

Company Address: No. 1576, Chunbo Road, Bingjiang District, Hangzhou, Zhejiang Province, China

Legal Representative: Xiangguang SHI (Chairman of Board)

Contact Address: No. 1576, Chunbo Road, Bingjiang District, Hangzhou, Zhejiang Province, China

Tel: 0571-87717777 Fax: 0571-87717777

 

Lessee: UTStarcom Telecom Co., Ltd. (hereinafter referred to as “Party B”)

Company Address: No. 368 Liuhe Road, Bingjiang District, Hangzhou, Zhejiang Province, China

Legal Representative: Yanya Sheng

Contact Address: No. 368 Liuhe Road, Bingjiang District, Hangzhou, Zhejiang Province, China

Tel: 0571-81920000 Fax: 0571-81925987

 

This contract (“Contract”) is entered into by and between the Parties hereto in good faith in accordance with the Contract Law of the People’s Republic of China and relevant laws and regulations.

 

CONTRACT

 

I. Basic Information on the Property for Lease

 

1.1         The property for lease (“Property”) is located in the Building 2 and 3 of Letong Tech Park at No. 1576 Chunbo Road, Bingjiang District, Hangzhou, Zhejiang Province.  The Parties will separately enter into a property management service agreement in connection with the property services, which will be attached hereto as an appendix.

 

1.2         Property’s Building Area

 

Building 2 has a building area of 14176.73 square meters, a public area of 1630.48 square meters and a lease area of 15807.21 square meters. (See Appendix 1 for details).

 

Building 3’s building area and public area add up to 17175.4 square meters.  The building area and public area are subject to the measurements acceptable to the house administration bureau.

 

II. Purpose and Nature of the Use

 

2.1 The Property will be leased by Party B as a research and development center.

 

2.2 Party B undertakes that it will not change the purpose agreed above without Party A’s written consent or conduct illegal activities during the lease term.

 

III. Lease Term and Rent Commencement Date

 

3.1 The lease term is from March 7, 2011 to July 15, 2016.  Party A shall deliver the Building 2 and 3 to Party B on the date hereof.  Upon delivery of the Property, Party B shall enter into a property delivery and acceptance form in writing with Party A.  Party B’s signing of such property delivery and acceptance form shall not constitute Party B’s acknowledgement of the Property’s compliance with the infrastructure conditions and requisite basic conditions required in the memorandum.

 

 

3.2 Rent-Free Period:  A rent-free period starting from the date of actual delivery and acceptance and ending July 15, 2011 is available to Party B.  If, following the date of actual delivery and acceptance, the preconditions required for delivery have not been met as per the agreed schedule in accordance with the infrastructure conditions and requisite basic conditions required in the memorandum, the rent-free period agreed to by Party A above shall be extended as provided in Section 5.1 below.  Party B shall have the right to, in its sole discretion, elect to (i) terminate this Contract, in which case Party A shall refund the deposit in full and pay an additional amount of RMB2 million as liquidated damages; or (ii) continue to perform this Contract, in which case, Party A shall bear the portion of lease cost due to any third party for the extended period that is above the rent agreed hereunder and incurred as a result of Party B’s failure to move in the Property as scheduled due to Party A’s delay in meeting the delivery conditions under the memorandum.  During the rent-free period, Party B is not required to pay Party A the rent for the Property, but shall pay 50% of the property management fee for the agreed total lease area for such period.

 

3.3 The rent commencement date: the day when the rent-free period expires (i.e. July 16, 2011) shall be the rent commencement date.

 

3.4 Upon expiration of the lease term, if Party B needs to renew the Contract, it shall notify Party A in writing three months in advance.  Under the same terms, Party B shall have the priority to lease the Property.  Before the Parties enter into a renewed contract, Party A shall have the right to, by giving Party B notice and with Party B’s consent, show its clients around the Property at any reasonable time during the last three months of the lease term.  If Party B cannot enjoy the priority to lease because of Party A, Party A shall indemnify Party B for its losses.

 

IV. Rent Payment and Deposit

 

4.1 The daily rent for the Property is calculated per every square meter of the building area plus the public area (“Lease Area”) as follows:

 

The Lease Area of Building 2 is 15,807.21 square meters, with a rent of RMB1.1 per day per square meter.  The yearly rent (a year=365 days) shall be RMB 6,346,594.82, i.e. six million three hundred forty-six thousand five hundred ninety four yuan eighty two fen.

 

The Lease Area of Building 3 is 17,175.4 square meters, with a rent of RMB1.45 per day per square meter.  The yearly rent (a year=365 days) shall be RMB 9,090,080.45, i.e. nine million ninety thousand and eighty yuan forty-five fen.

 

During the term of this Contract, Party B shall comply with the administrative regulations of the Park which have been acknowledged and agreed to by the Parties.  If Party A incurs losses due to any failure to comply with such regulations, Party A shall have the right to deduct such losses from the deposit upon the Parties’ written confirmation.

 

4.2 During the lease term, the rent shall remain unchanged for the first three years and increase 9% annually from the fourth year.  The rent after the increase shall equal to (1+9%) x the rent income for the previous year.

 

4.3 Upon execution of this Contract, Party B shall pay Party A an amount of RMB 3,000,000 (three million) as the deposit for leasing the Property (“Deposit”).  The deposit in the amount of RMB 600,000 (six hundred thousand) as agreed in the letter of intent between Party A and Party B shall offset such Deposit.  Party A shall refund the Deposit without interest within 20 days after the lease is terminated, the utility bills are paid, and the Property is properly returned.  Party B shall pay the balance of the Deposit to Party A within 20 working days after the date of this Contract.   Party A shall issue a receipt to Party B upon receiving the Deposit.  Party B shall pay Party A the rent for the first quarter upon receipt of Party A’s invoice 15 days prior to the expiration of the rent-free period.  Subsequently, Party B shall pay Party B a lump sum as the rent for each quarter 10 days prior to the beginning of such quarter.  Party B shall pay liquidated damages equivalent to 0.1% of any overdue rent for every seven days past due.

 

4.4 Party B shall remit the amount due to the following account of Party A:

Beneficiary Bank: Agricultural Bank of China Hangzhou Gaoxin Sub-branch

Account Name: Zhejiang Letong Communication Equipment Co., Ltd.

Account Number: 19-045301040006073

Tax Number: 33010077083970X

 

 

Party A shall promptly notify Party B of any change to Party A’s account; otherwise, any liabilities arising thereof shall be solely borne by Party A.

 

V. Ancillary Facilities of the Property

 

5.1 Party A shall complete the construction of basic ancillary facilities and meet the basic conditions for delivery at the time agreed in the memorandum attached hereto.  If the delivery is delayed because of Party A, an extended rent-free period shall be granted to Party B and the length of such extended period shall equal to that of the delayed period.

 

5.2 The Parties shall separately enter into a property management service agreement with the property management agency of this Property and agree on the property management fee.

 

5.3 Electricity: an expanded 4000KV industrial power capacity is available (the cost of 1,000KV shall be borne by Party A; for the rest 3,000KV, 30% and 70% of the cost shall be borne by Party A and Party B respectively).  By mutual agreement, Party A shall be responsible for installing a standalone electric meter for Party B, and Party B agrees that the electric charges incurred (including the initial meter charges) shall be collected per kilo watt-hour in accordance with the national standards.

 

5.4 Water: Party A shall be responsible for installing a standalone water meter for Party B and Party B agrees that the water charges incurred shall be collected per ton in accordance with the national standards.  The normal difference between the reading of Letong’s main meter and that of all sub-meters shall be shared reasonably by the Parties by mutual agreement.

 

5.5 Central Air-conditioning System: Party A shall be responsible for maintaining, servicing and cleaning the central air-conditioning system.  Party B is not required to bear any air-conditioning charges, but shall only pay electric charges incurred from using the air-conditioner as provided in Section 5.3.

 

5.6 Telephone: Party B shall be responsible for applying for telephone lines and the charges incurred.  If Party A’s support is required, Party A undertakes to provide support to facilitate Party B’s office requirements.

 

5.7 Broadband Connection (or ADSL): Party B shall be responsible for applying for the broadband connection and the charges incurred.  If Party A’s support is required, Party A undertakes to provide support to facilitate Party B’s office requirements.

 

5.8 All water and electric charges actually incurred by Party B after the delivery of the Property shall be paid to Party A within 15 days upon receipt of the utility bills settlement statement.  For electric charges, a formal tax invoice will be provided; for water charges, a formal tax receipt will be provided.  If the water or electricity supply is terminated because of Party A, Party B shall have the right not to pay the rent for the period during which the water or electricity supply is not available.   If any losses occur to Party B’s production or operation, Party A shall compensate Party B for such losses.

 

Party B shall bear the liquidated damages for late payment of the water or electric charges it incurs.  If any liabilities or losses occur as a result of the termination of water or electricity supply due to the aforementioned late payment, such liabilities or losses shall be borne by Party B.

 

5.9 Party A agrees to provide Party B with 15 underground parking spaces and 15 above-ground parking spaces for free.  Party B shall pay RMB 100/month for any additional underground parking space and RMB 150/month for any additional above-ground parking space for its motor vehicles.  The parking spaces for non-motor vehicles are free.  Party A shall ensure that 500 parking spaces for non-motor vehicles (bicycles and electric vehicles) and 400 parking spaces for motor vehicles (including 124 underground ones and 190 above-ground ones) are available to Party B.  If the parking spaces are not enough, the Parties shall jointly apply to the relevant department for more spaces.

 

 

VI. Fitting-out of the Property

 

6.1 Upon execution of this Contract by the Parties, Party B may carry out fitting-out works subject to relevant provisions in this Section.

 

6.2 Party A agrees that Party B may carry out fitting-out works for the Property for the purpose agreed hereunder.  The fitting-out works shall not damage the main structure of the Property and the fitting-out plan shall be reviewed and approved by Party A in writing and submitted to relevant authorities for examination and approval before the fitting-out works are carried out.  Subject to the mandatory provisions of the State, Party A shall review and approve the plan within two days.

 

6.3 All costs incurred during the fitting-out works shall be borne equally by Party A and Party B as provided in the memorandum as attached.

 

6.4 Upon completion of the fitting-out works by Party B and acceptance of the works by relevant authorities, relevant materials shall be filed with Party A, including the completion-related materials and drawings.

 

6.5 Party B shall be liable for any disputes, claims, actions, arbitrations and other issues arising out of Party B’s fitting-out works and shall bear any losses incurred by Party A as a result.  Party A shall be liable for any disputes, claims, actions, arbitrations and other issues arising out of Party A’s fitting-out works and shall bear any losses incurred by Party B as a result.

 

VII. Requirements for Use and Maintenance of the Property

 

7.1 During the lease term, Party A shall check and repair the Property and the ancillary facilities provided upon commencement of the lease once every half year.  Party B shall provide active support and shall not obstruct the repairs.  The costs for regular major repairs shall be borne by Party A.  If Party B finds any part of the Property that requires Party A’s repairs, Party A shall, within 24 hours upon receipt of Party B’s notice, send personnel to carry out repairs.  If Party B cannot use the Property because of the repairs or severe damages to the Property, Party B shall be exempt from rent for relevant part of the Property until the repairs are done.

 

7.2 Party B shall be responsible for the regular repairs of the fixtures and facilities it adds to the Property.  The costs for such repairs shall be borne by Party B.

 

7.3 All losses and repair costs incurred for the Property and related equipment due to Party B’s improper use shall be borne by Party B.

 

7.4 During the lease term, if any government department requires rectification and improvement of the part of the Property for which Party B carries out fitting-out works, Party B shall make changes to the fitting-out works as required and bear all liabilities and costs incurred from such changes.

 

VIII. Sublease

 

Without prejudice to the interests of Party A or other lessees and subject to the purpose of this Property, Party B may sublease part of the Property or have such part used by any other person with 30 day’s notice to Party A.  All liabilities arising during the sublease shall be borne by Party B.  The sublease term shall not exceed the lease term hereunder.

 

IX. Safety Responsibility

 

Party B and Party A shall be jointly responsible for fire control and security, managing and keeping inflammable, explosive and toxic materials properly, furnishing firefighting equipment (in addition to those required to be installed by Party A)according to relevant regulations, and using electricity properly.

 

X. Return of Property

 

10.1 Party B shall return the Property within 10 days of expiration of the lease term.  If Party B fails to return the Property within such period without Party A’s consent, Party B shall pay Party A an amount equal to twice of the

 

 

daily rent for the area of the Property actually possessed each day from the day when Party B is required to return the Property to the day when Party B actually return the Property.  During such period, Party B shall cooperate with Party A if Party A shows a prospective lessee around the Property.

 

10.2 Before returning the Property, Party B shall clean up the Property.  The Property shall be in usable condition when it is returned.  Both Parties shall settle their own costs.

 

10.3 Upon expiration of this Contract, or Party B’s early withdrawal from the Property or termination of the lease according to law, Party B is not required to reinstate the Property, and may remove its own facilities from the Property.  However, Party B shall not dismantle any embedded fixtures as such dismantle may damage the Property.  For any decorations irremovable from the Property, if the lease is terminated due to Party A’s breach of contract, Party A shall indemnify Party B as per the residual value or present value (subject to evaluation) of such decorations; if the lease is terminated due to Party B’s breach of contract, Party A shall not indemnify Party B as per the residual value of such decorations; instead, if Party A agrees to utilize such decorations, Party A shall compensate Party B appropriately as per the present value of such decorations; if the lease is terminated due to force majeure or any changes of circumstances, the Parties shall jointly bear the residual value.  Upon expiration of the Contract, for any irremovable but useful part of the Property, if Party A agrees to utilize such part, Party A shall compensate Party B appropriately as per the present value of such part by mutual agreement.

 

10.4 Upon termination of this Contract, Party B shall remove all of its properties from the Property within 10 working days.  If Party B fails to do so within such period, Party A shall have the right to remove such properties at Party B’s expense.

 

10.5 If the registered place set forth on Party B’s business license is where the Property is located, Party B shall complete the procedures for changing or cancelling the registered place within 60 days upon termination of this Contract.  If Party B fails to do so within such period causing losses to Party A, such losses shall be borne by Party B.

 

10.6 Upon termination of this Contract, and after Party B fulfills its obligations provided in Section 10.1, 10.2 and 10.4 and completes the procedures for cancelling the telephone line, broadband connection and other utility services, Party A shall refund the Deposit to Party B without interest.

 

XI. Liability to Third Parties and Damages

 

During the performance of this Contract, in the event of any third party’s claim, litigation, arbitration and other disputes against Party A due to Party B and/or its sub-lessee’s reason or act, any costs incurred by Party A as a result, including without limitation any indemnification/compensation, attorney’s fees, litigation fees, investigation fees, etc., shall be borne by Party B, provided such costs shall not exceed Party B’s income from subleasing all or part of the Property for the past 12 months.

 

XII. Force Majeure

 

Upon effectiveness of this Contract, if all or part of the obligations hereunder cannot be performed because of any force majeure event, the obligated party may be exempt from such obligations, provided that the obligated party shall promptly notify the other party in writing as of the date of such force majeure event and produce relevant supporting documents within 30 days.

 

XIII. Conditions for Amending or Terminating the Contract

 

13.1 During the lease term, Party B may, by three months’ notice to Party A, increase or reduce the leased area according to its business development needs.  In case of reduction of leased area, Party B shall pay Party A an indemnity of three months’ rent for the reduced leased area for Party A’s vacancy loss.

 

13.2 During the lease term, this Contract shall be terminated unconditionally under any of the following circumstances, neither party shall be liable to the other party for breach of contract, and the rent shall be settled on a daily basis.

 

 

13.2.1 Any force majeure event provided in Section 12 hereof occurs;

 

13.2.2 The Property is confiscated by the government for public interests in accordance with the law;

 

13.2.3 The Property is included in the buildings to be removed for government or urban construction needs in accordance with the law;

 

13.2.4 Party A and Party B mutually agree to the termination of this Contract and that neither party shall be liable to the other party.

 

13.2.5 Any other circumstances as provided by laws and regulations.

 

In the confiscation and removal mentioned above, Party A shall promptly notify Party B upon confirmation by the government.  If Party A fails to do so, Party A shall not be exempted from its obligations under either of such circumstances.  Party A shall compensate Party B for the fitting-out, re-location and other costs incurred by Party B with the compensation received by Party A.

 

13.3 Party A shall have the right to terminate this Contract and claim against Party B for breach of contract under any of the following circumstances:

 

13.3.1 Party B delays paying the rent for thirty days without due cause and fails to pay the rent after receiving Party A’s written notice of such delay;

 

13.3.2 Party B uses the Property for any illegal purpose or conducts any illegal activities in the Property;

 

13.3.3 Party B breaches firefighting regulations and does not begin to rectify such breach within 15 working days after the fire department issues a rectification notice;

 

13.3.4 Any other circumstance that is attributable to Party B, in which Party A is permitted by laws and regulations to recover the Property.

 

13.4 Party B shall have the right to terminate this Contract or not to pay the relevant rent or request an extension of the rent-free period under any of the following circumstances,  and hold Party A liable for breach of contract and require Party A to indemnify Party B against the consequential losses, including without limitation refunding the Deposit, paying additional liquidated damages in the amount of RMB 2 million and making up the deficiency if such amount is not sufficient to cover the losses:

 

13.4.1 The Property delivered by Party A does not conform to the provisions hereof or the matters agreed in Appendix 2 — Memorandum have not been completed on time, which affects Party B’s operation or production.

 

13.4.2 The Property delivered by Party A has any defect, which threatens Party B’s safety;

 

13.4.3 Party A does not assume the repairing obligation in violation of the provisions hereof, causing Party B’s inability to continue to use the Property.

 

13.4.4 Party A fails to provide the materials required for filing with the fire and environmental protection departments and a delay of over fifteen days or failure to pass the examination as well as the inspection and acceptance for fire prevention and environmental protection due to any other cause attributable to Party A, causing Party B’s inability to conduct research, development or production normally; however, Party A shall not be liable for any failure to pass the above-mentioned examination, inspection and acceptance caused by Party B.

 

13.4.5 Any third party claims the Property, leading to Party B’s inability to use the Property;

 

13.4.6 The Property is confiscated by the competent authority or there is any dispute over the title of the Property;

 

 

13.4.7 Any other circumstance attributable to Party A that affects Party B’s normal research, development or production.

 

XIV. Other Responsibilities of the Parties to Be Specified

 

14.1 Party A’s Responsibilities

 

14.1.1 Party A shall undertake that the title of the Property is clear and free of any dispute, that the Property is safe and compliant with the provisions for fire prevention and other mandatory provisions.  In the event of any property loss or personal injury to Party B due to the Property’s safety liability caused by Party A, Party A shall assume such liability.  If Party A is not entitled to lease the Property or the title of the Property is not clear, Party B shall have the right to terminate this Contract with no liability for all damages.  In such case, Party A shall refund the Deposit in full and pay Party B an amount of RMB 2 million as liquidated damages.  If such amount is not sufficient to cover Party B’s losses, Party A shall make up the deficiency.

 

14.1.2 Party A shall assist Party B in applying for the business license and the relevant application procedures required for the fitting-out works, and provide all required documents, drawings, technical data, etc.

 

14.1.3 During the lease term, if the title of the Property changes, Party A shall notify Party B and ensure Party B’s right to continued lease.  This Contract shall be valid to the assignee of the Property and all rights and obligations hereunder shall remain unchanged.  If Party B cannot continue to lease the Property due to such change, Party A shall indemnify Party B for the losses incurred, refund the Deposit and pay another amount of RMB 2 million as liquidated damages.

 

14.1.4 Party A shall pay any administrative taxes and fees arising out of the lease; if any charges that are not listed herein but related to the Property are imposed by relevant government departments, the responsible party shall bear such charges.

 

14.1.5 During the term of this Contract, in the event of any merger, acquisition, insolvency, bankruptcy, liquidation relating to Party A or any auction of the Property or any frozen property or any other circumstance that may affect Party A’s rights and obligations or Party B’s rights hereunder, Party A shall notify Party B in advance or notify Party B immediately upon occurrence of such circumstances, and shall ensure Party B’s rights hereunder are not affected by such circumstances.  If this Contract cannot be performed under any of the above-mentioned circumstances, Party A shall refund the Deposit in full and pay an amount of RMB 2 million as liquidated damages, and indemnify Party B for additional charges based on the reasonable rent paid by Party B for another property of similar type during the term of this Contract.

 

14.2 Party B’s Responsibilities

 

14.2.1 Party B shall use the Property as agreed hereunder, and undertake that all business activities conducted within the Property are in compliance with Chinese laws and regulations.

 

14.2.2 Party B undertakes to pay the rent, property service fee and other charges required to be paid under this Contract within the term as agreed hereunder.

 

14.2.3 Party B shall use the Property properly and ensure the Property is well maintained.

 

14.2.4 Party B shall comply with the administration provisions of Party A’s property management department.  The entrance and exit of Party B’s vehicles shall be in compliance with the property management department’s parking administration and arrangements.

 

14.2.5 Party B’s relevant business activities within the Property shall be in compliance with the State’s relevant provisions.

 

 

XV. Liability for Breach

 

15.1 Except as required by law or under this Contract, if Party B vacates the Property prior to the expiration of the lease term, Party B shall terminate this contract upon a six-month notice to Party A, pay Party A an amount of RMB 2 million as liquidated damages (such amount to be deducted directly from the Deposit) and indemnify Party A against any losses.  If the Deposit has any balance after such amount of liquidated damages is deducted, Party A shall return such balance to Party B.

 

15.2 If either Party breaches the Contract during the lease term, the breaching Party shall pay liquidated damages to the non-breaching Party as agreed hereunder.

 

15.3 If Party A terminates this Contract except as required by law or as agreed hereunder, Party A shall notify Party B six months in advance.  After Party B agrees to such termination and returns the Property to Party A promptly, Party A shall refund the Deposit in full without interest, pay an additional amount of RMB 2 million to Party B, and indemnify Party B against any losses.

 

15.4 Under this Contract, either Party’s aggregate indemnity to the other Party shall not exceed six months’ rent (any losses relating to the fitting-out works against which Party B shall be indemnified and which are caused by Party B’s inability to continue to lease the Property as agreed hereunder due to Party A’s breach of contract or the Property’s assignment to a third party (such losses shall be evaluated and determined by a third party appointed by both Parties and the evaluated residual value shall be depreciated over five years) and  any additional charges based on the reasonable rent paid by Party B for another property of similar type during the term of this Contract are not included in this limit).

 

XVI. Contact Information

 

Both Parties shall use the addresses expressly first above written as their contact addresses.  In case of any change to such addresses, the Party related to such change shall notify the other Party promptly; otherwise, the first Party shall assume any liability arising.  If the sending Party sends a mail to the receiving Party’s address listed above, it shall be deemed the mail is delivered.  After Party B moves into the Property as agreed hereunder, Party B’s address shall be the address of the Property.  Party A shall deliver relevant notices to Party B’s administrative division.  All written communications between the Parties shall be sent by EMS (or courier).

 

XVII. Dispute Resolution

 

Any disputes arising during the performance of this Contract shall be settled by the Parties through consultations; if no agreement can be reached through consultations, a suit may be filed with a people’s court in the jurisdiction where the Property is located.

 

XVIII. Effectiveness and Miscellaneous

 

18.1 This Contract shall become effective after it is signed and sealed by the Parties.

 

18.2 Everything involved in this Contract shall be treated as trade secrets.  Both Parties are obligated to keep such trade secrets confidential and shall not disclose relevant information to third parties for any reason; otherwise, the disclosing Party shall indemnify the other Party against all loses arising out of such disclosure.

 

18.3 If any provisions hereof are held invalid or illegal, but the force and effect of the remaining provisions are not affected in accordance with the law, the Parties shall continue to perform such remaining provisions.

 

18.4 Anything not covered herein shall be complemented by the Parties by amendments.  If there is any inconsistency between the amendments and this Contract, the amendments shall control.

 

18.5 This Contract is made out in four counterparts.  The Parties shall hold one counterpart each; and the lease and registration departments shall also keep one counterpart each.

 

Appendix 1: Schedule of UTStarcom’s Leased Area in Building 2

Appendix 2: Memorandum

Appendix 3: Requirements for the Reconstruction of UTStarcom’s Cafeteria

Appendix 4: Property Management Service Agreement

 

 

[Signature Page]

 

The Parties:

 

	
Party A’s Seal:
    	
Party B’s Seal:
    
	
Zhejiang Letong Communication   Equipment Co., Ltd.
    	
UTStarcom Telecom Co., Ltd.
    
	
 
    	
 
    
	
Legal Representative/Head:
    	
Legal Representative/Head:
    
	
 
    	
 
    
	
March 7, 2011
    	
March 7, 2011Exhibit 10.3

 

EMPLOYMENT AGREEMENT

 

 

THIS EMPLOYMENT AGREEMENT (“Employment Agreement”) is executed as of the Execution Date (as defined in Section 1 below) but made effective as of January 1, 2011, between RES-CARE, INC., a Kentucky corporation (the “Company”), and RALPH G. GRONEFELD, JR. (the “Employee”).

 

RECITALS:

 

WHEREAS, the Company and Employee previously entered into that certain Employment Agreement effective as of July 1, 2006, as amended (the “Prior Agreement”);

 

WHEREAS, the Company wishes to offer the Employee a new long-term employment agreement which will supersede the Prior Agreement; and

 

WHEREAS, the Company and the Employee have reached agreement on the terms and conditions of such agreement.

 

AGREEMENT:

 

NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the parties agree as follows:

 

1.         Employment and Term.  The Company hereby employs the Employee, and the Employee accepts such employment, upon the terms and conditions herein set forth for an initial term commencing effective January 1, 2011 (the “Commencement Date”), and ending on December 31, 2015, subject to earlier termination only in accordance with the express provisions of this Employment Agreement (“Initial Term”).  This Employment Agreement shall be automatically extended for successive periods of one (1) year each (the “Additional Term(s)”) on the same terms and conditions unless not less than sixty (60) days prior to the last day of the Initial Term or the then effective Additional Term, as applicable, either the Company or Employee gives written notice to the other of such party’s intent to not so extend the Term.  The Initial Term and any effective Additional Terms shall be collectively referred to as the “Term.”  For purposes of this Employment Agreement, the term “Execution Date” shall mean the later of (i) the date this Employment Agreement is signed by the Employee and (ii) the date this Employment Agreement is signed on behalf of the Company.

 

2.         Duties.

 

(a)        Employment as President and Chief Executive Officer of the Company.  During the Term, the Employee shall serve as the President and Chief Executive Officer of the Company.  During the Term, subject to the supervision and control of the Board of Directors of the Company (the “Board”), the Employee shall have the responsibility for management and oversight of the Company, its subsidiaries and all of the operations of

 

 

the Company and its subsidiaries and shall perform such additional duties as may be prescribed from time to time by the Board, including, without limitation, serving as an officer or director of the Company and/or one or more subsidiaries or affiliates of the Company, if elected to such positions, without any additional salary or other compensation. The Employee shall serve as a member of the Resource Center’s Leadership Team and may be a “named executive officer” for purposes of the Company’s public filings under the securities laws.  As such, Employee acknowledges and accepts responsibility, with the other “named executive officers” of the Company and other officers and employees of the Company, to ensure the Company’s public filings adequately satisfy all disclosure requirements.  In addition, Employee acknowledges that Employee’s biography, qualifications and compensation will be disclosed in such public filings.

 

(b)        Time and Effort.  The Employee shall devote his best efforts on a full-time basis and all of his business time, energies and talents exclusively to the business of the Company and to no other business during the Term of this Employment Agreement; provided, however, that subject to the restrictions in Section 7 hereof, the Employee may (i) invest his personal assets in such form or manner as will not require his services in the operation of the affairs of the entities in which such investments are made, (ii) subject to satisfactory performance of the duties described in Section 2(a) hereof, devote such time as may be reasonably required for him to continue to maintain his current level of participation in various civic and charitable activities, and (iii) subject to satisfactory performance of the duties described in paragraph 2(a) of this Employment Agreement, devote such time as may be reasonably required for him to serve as a director on various non-profit boards of directors.  Any service by Employee during the Term on any for-profit boards of directors shall be subject to the prior approval of the Board.

 

(c)        Employee Certification of Eligibility.  Not less frequently than annually and upon the termination of the Employee’s employment hereunder for any reason other than Employee’s death, the Employee shall execute and deliver to the Chairman of the Board (the “Chairman”) and/or any other authorized officer designated by the Company a certificate (ResCare Annual Employment Re-Certification Eligibility Form) confirming, to the best of the Employee’s knowledge, that the Employee remains eligible for employment with the Company.  This same certificate will certify that the Employee has complied with applicable laws, regulations and Company policies regarding the provision of services to clients and billings to its paying agencies, Company policies on training, Drug and Alcohol-Free Program, Prohibition of Harassment, Affirmative Action Equal Employment Opportunity and Violence in the Workplace.  This statement shall state that the Employee is not aware of any such violation by other employees, independent contractors, vendors, or other individuals performing services for the Company and its subsidiaries that they did not report as appropriate.

 

2

 

3.         Compensation and Benefits.

 

(a)        Base Salary.  The Company shall pay to the Employee during the Term an annual salary (the “Base Salary”), which initially shall be $440,000.  The Base Salary shall be due and payable in substantially equal bi-weekly installments or in such other installments as may be necessary to comport with the Company’s normal pay periods for all employees.  The Base Salary may be adjusted from time to time for changes in the Employee’s responsibilities or for market conditions.

 

(b)        Incentive Plan.  During the Term, the Employee shall be eligible for incentive compensation in accordance with the Res-Care, Inc. Non-Equity Incentive Plan (the “Incentive Plan”).  Shortly after the beginning of each calendar year, the Company’s Board of Directors will establish a target of earnings before taxes, interest, depreciation and amortization of the Company and its subsidiaries on a consolidated basis, determined in accordance with generally accepted accounting principles consistently applied (“EBITDA”), for such calendar year (the “Annual EBITDA Target”).  In no event shall Employee earn any amount under the Incentive Plan for any calendar year during the Term unless the actual Company EBITDA for such calendar year equals or exceeds ninety percent (90%) of the Annual EBITDA Target for such calendar year.  For all purposes of this Employment Agreement, in determining the actual EBITDA of the Company and its subsidiaries for each calendar year, the Executive Compensation Committee of the Board of Directors (the “Compensation Committee”) may make such good faith adjustments to EBITDA as it determines in its sole discretion are appropriate to reflect non-recurring or unusual items, including, without limitation, to give effect on a pro forma basis to any acquisition of stock or assets of other persons by the Company or a subsidiary thereof. The amount payable under the Incentive Plan to Employee for each full calendar year during the Term shall equal the Base Salary actually paid to the Employee for such calendar year multiplied by the sum of the Approved Professional Performance Percentage and the Approved Company Performance Percentage (as determined below) for such calendar year.  The maximum percentage of the Approved Professional Performance Percentage for Employee shall be thirty percent (30%) and the maximum percentage of the Approved Company Performance Percentage shall be seventy percent (70%).  The sum of the Approved Professional Performance Percentage and the Approved Company Performance Percentage for each calendar year shall be referred to herein as the “Incentive Percentage.”  For each calendar year the maximum Incentive Percentage shall be one hundred percent (100%).

 

(i)         Not later than March 15 of each calendar year, the Compensation Committee shall establish the professional performance criteria for Employee for such calendar year to be used in calculating the Approved Professional Performance Percentage.  The professional performance criteria for Employee for the calendar year 2011 are set forth on Exhibit A attached hereto.  The Approved Professional Performance Percentage for each calendar year during the Term shall be equal to (A) thirty percent (30%) multiplied by (B) the ratio of the number of professional performance criteria satisfied by Employee for the calendar year to

 

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the total number of professional performance criteria for the calendar year. However, notwithstanding anything in this Employment Agreement to the contrary, the Approved Professional Performance Percentage shall be zero unless the actual Company EBITDA for the respective calendar year equals or exceeds ninety percent (90%) of the Annual EBITDA Target for such calendar year.

 

(ii)        If the Company and its subsidiaries meet or exceed the Annual EBITDA Target for a calendar year, the Approved Company Performance Percentage for such calendar year shall be seventy percent (70%).  Notwithstanding anything in this Employment Agreement to the contrary, the Approved Company Performance Percentage shall be zero unless the actual Company EBITDA for the respective calendar year equals or exceeds the Annual EBITDA Target for such calendar year.

 

After any target or percentage described in this paragraph (b) has been established by the Company’s Board of Directors or Compensation Committee, as applicable, for any calendar year, such target or percentage shall not be increased or decreased for such calendar year for purposes of this paragraph (b) or for purposes of paragraph (c) of this Section 3.  Any annual incentive earned by the Employee under the Incentive Plan for any calendar year during the Term shall be paid by the Company in cash to the Employee in the year following the year for which it is earned, and not later than the later of (x) seventy-four (74) days after the end of the applicable calendar year or (y) the date of date of delivery to the Company of the audited consolidated financial statements of the Company and its subsidiaries for such calendar year, provided that Employee remains employed through December 31 of the year for which the incentive bonus is earned.  Any amounts earned by the Employee under the Incentive Plan shall be hereinafter referred to as the “Incentive Bonus.”

 

(c)        Grant of Stock Options.

 

(i)         Primary Grant.  As an inducement for the execution of this Employment Agreement by the Employee, on the date of approval by the Compensation Committee, which date shall not be more than sixty (60) days after the Execution Date (the “Grant Date”), the Employee shall be granted options to purchase seven hundred fourteen (714) shares of the Class A common stock, $0.01 par value per share, of Onex Rescare Holdings Corp., a Delaware corporation and the parent corporation of the Company (“Onex Rescare”).  Such stock options (the “Primary Options’) shall be granted pursuant to and, to the extent not expressly inconsistent herewith, governed by the Onex Rescare Holdings Corp. Stock Option Plan (the “Stock Plan”) and the Nonstatutory Stock Option Agreement in the form attached hereto as Exhibit B.  Provided the Employee shall continue to be employed hereunder, twenty percent (20%) of the Primary Options shall vest and be exercisable on each of the first five (5) anniversaries of the Grant Date (with such number of shares to be adjusted in accordance with the terms of the Stock Plan for stock splits, stock dividends,

 

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recapitalizations and the like).  Any Primary Options that shall not be vested at the effective date of termination of the Employee’s employment hereunder shall expire and any vested Primary Options shall expire in accordance with the terms of the Stock Plan.  The Primary Options shall have an exercise price equal to $5,000 per share.

 

(ii)        Extra Grant.  As a further inducement for the execution of this Employment Agreement by the Employee, on the Grant Date, the Employee shall be granted options to purchase ninety-five (95) shares of the Class A common stock, $0.01 par value per share, of Onex Rescare.  Such stock options (the “Extra Options”) shall be granted pursuant to and, to the extent not expressly inconsistent herewith, governed by the Stock Plan and the Nonstatutory Stock Option Agreement in the form attached hereto as Exhibit C (the “Extra Option Agreement”).  All of the Extra Options shall be fully vested on the Grant Date.  However, the Extra Options may only be exercised to the extent that the Equity Value Per Share (as defined in the Extra Option Agreement) at the time of exercise is at least three hundred percent (300%) of the Equity Value Per Share at the Closing Date (as defined in the Extra Option Agreement).  The number of Extra Option shares will be adjusted in accordance with the terms of the Stock Plan for stock splits, stock dividends, recapitalizations and the like.  Any Extra Options shall expire in accordance with the terms of the Stock Plan.  The Extra Options shall have an exercise price equal to $5,000 per share.

 

(d)        Participation in Benefit Plans.  During the Term, Employee shall be entitled to participate in all employee benefit plans and programs (including but not limited to paid time off policies, retirement and profit sharing plans, health insurance, etc.) provided by the Company under which the Employee is eligible in accordance with the terms of such plans and programs.  The Company reserves the right to amend, modify or terminate in their entirety any of such programs and plans. The Company shall pay that portion of the reasonable and customary costs of an annual executive physical at the Mayo Clinic or other mutually agreeable medical facility certified by the American Medical Association which is not paid by the Employee’s health insurance coverage (whether provided by the Company or Employee’s spouse’s employer).  Employee shall promptly advise the Chairman or a designated member of the Board with any medical conditions identified in such physical that might adversely affect the performance of his duties hereunder.  Reimbursement for a physical will be paid within a reasonable time after submission of the reimbursement request and no later than the last day of the Employee’s taxable year following the taxable year in which the expense is incurred.

 

(e)        Out-of-Pocket Expenses.  The Company shall promptly pay the ordinary, necessary and reasonable expenses incurred by the Employee in the performance of the Employee’s duties hereunder (or if such expenses are paid directly by the Employee shall promptly reimburse him for such payment), consistent with the reimbursement policies adopted by the Company from time to time and subject to the prior written approval by the Chairman.  Any reimbursements made under this Section 3(e) will be paid no later

 

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than the last day of the Employee’s taxable year following the taxable year in which the expense is incurred.

 

(f)         Withholding of Taxes; Income Tax Treatment.  If, upon the payment of any compensation or benefit to the Employee under this Employment Agreement (including, without limitation, in connection with the grant of any stock options or payment of any bonus or benefit), the Company determines in its discretion that it is required to withhold or provide for the payment in any manner of taxes, including but not limited to, federal income or social security taxes, state income taxes or local income taxes, the Employee agrees that the Company may satisfy such requirement by:

 

(i)         withholding an amount necessary to satisfy such withholding requirement from the Employee’s compensation or benefit; or

 

(ii)        conditioning the payment or transfer of such compensation or benefit upon the Employee’s payment to the Company of an amount sufficient to satisfy such withholding requirement.

 

The Employee agrees that he will treat all of the amounts payable pursuant to this Employment Agreement as compensation for income tax purposes.

 

4.         Termination.  The Employee’s employment hereunder may be terminated under this Employment Agreement as follows, subject to the Employee’s rights pursuant to Section 5 hereof:

 

(a)        Death.  The Employee’s employment hereunder shall terminate upon his death.

 

(b)          Disability.  The Employee’s employment shall terminate hereunder at the earlier of (i) immediately upon the Company’s determination (conveyed by a Notice of Termination (as defined in paragraph (f) of this Section 4)) that the Employee is permanently disabled, and (ii) the Employee’s absence from his duties hereunder for 180 days.  “Permanent disability” for purposes of this Employment Agreement shall mean the onset of a physical or mental disability which prevents the Employee from performing the essential functions of the Employee’s duties hereunder, which is expected to continue for 180 days or more, subject to any reasonable accommodation required by state and/or federal disability anti-discrimination laws, including, but not limited to, the Americans With Disabilities Act of 1990, as amended.

 

(c)        Cause.  The Company may terminate the Employee’s employment hereunder for Cause.  For purposes of this Employment Agreement, the Company shall have “Cause” to terminate the Employee’s employment because of the Employee’s breach of fiduciary duty involving personal profit, repeated and gross neglect of or failure to perform his material duties under this Employment Agreement, or conviction of, or

 

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plea of nolo contendere to, any law, rule or regulation (other than traffic violations or similar offenses).

 

(d)        Without Cause.  The Company may terminate the Employee’s employment under this Employment Agreement at any time without Cause (as defined in paragraph (c) of this Section 4) by delivery of a Notice of Termination specifying a date of termination at least thirty (30) days following delivery of such notice.

 

(e)        Voluntary Termination.  By not less than thirty (30) days prior written notice to the Chairman, Employee may voluntarily terminate his employment hereunder.

 

(f)         Notice of Termination.  Any termination of the Employee’s employment by the Company during the Term pursuant to paragraphs (b), (c) or (d) of this Section 4 shall be communicated by a Notice of Termination from the Company to the Employee.  Any termination of the Employee’s employment by the Employee during the Term pursuant to paragraph (e) of this Section 4 shall be communicated by a Notice of Termination from Employee to the Company.  For purposes of this Employment Agreement, a “Notice of Termination” shall mean a written notice which shall indicate the specific termination provision in this Employment Agreement relied upon and in the case of any termination for Cause shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee’s employment.

 

(g)        Date of Termination.  The “Date of Termination” shall, for purposes of this Employment Agreement, mean:  (i) if the Employee’s employment is terminated by his death, the date of his death; (ii) if the Employee’s employment is terminated on account of disability pursuant to Section 4(b) above, thirty (30) days after Notice of Termination is given (provided that the Employee shall not, during such 30-day period, have returned to the performance of his duties on a full-time basis), (iii) if the Employee’s employment is terminated by the Company for Cause pursuant to Section 4(c) above, the date specified in the Notice of Termination, (iv) if the Employee’s employment is terminated by the Company without Cause, pursuant to Section 4(d) above, the date specified in the Notice of Termination, (v) if the Employee’s employment is terminated voluntarily pursuant to Section 4(e) above, the date specified in the Notice of Termination, and (vi) if the Employee’s employment is terminated by reason of an election by either party not to extend the Term, the last day of the then effective Term.

 

Provided that, for purposes of the timing of payments triggered by the Date of Termination under Section 5, Date of Termination shall not be considered to have occurred until the date the Employee and the Company reasonably anticipate that (i) Employee will not perform any further services for the Company or any other entity considered a single employer with the Company under Section 414(b) or (c) of the Internal Revenue Code of 1986, as amended (“Code”) (but substituting fifty percent (50%) for eighty percent (80%) in the application thereof) (the “Employer Group”), or (ii) the level of bona fide services Employee will perform for the Employer Group after that date will permanently decrease to less than fifty percent (50%) of the average level of

 

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bona fide services performed over the previous thirty-six (36) months (or if shorter over the duration of service).  For this purpose, service performed as an employee or as an independent contractor is counted, except that service as a member of the board of directors of an Employer Group entity is not counted unless termination benefits under this Employment Agreement are aggregated for purposes of Section 409A of the Code with benefits under any other Employer Group plan or agreement in which Employee also participates as a director.  Employee will not be treated as having a termination of Employee’s employment while Employee is on military leave, sick leave or other bona fide leave of absence if the leave does not exceed six (6) months or, if longer, the period during which Employee has a reemployment right under statute or contract.  If a bona fide leave of absence extends beyond six (6) months, Employee’s employment will be considered to terminate on the first day after the end of such six (6) month period, or on the day after Employee’s statutory or contractual reemployment right lapses, if later.  The Company will determine when Employee’s Date of Termination occurs based on all relevant facts and circumstances, in accordance with Treasury Regulation Section 1.409A-1(h).

 

5.         Compensation upon Termination or During Disability; Change of Control.

 

(a)        Death.  If the Employee’s employment shall be terminated by reason of his death during the Term, the Employee shall continue to receive installments of his then current Base Salary until the date of his death and shall receive any earned but unpaid Incentive Bonus for any calendar year ending prior to the date of his death and a pro-rated Incentive Bonus for the current calendar year for the period ending on the date of his death.

 

(b)        Disability.  During any period of disability and prior to termination pursuant to Section 4(b) by reason of disability, Employee shall be compensated as provided in this paragraph (b).  During any waiting period prior to receiving short or long-term disability payments, Employee shall be required to use available Paid Time Off (“PTO”).  After available PTO is exhausted, Employee shall be required to use Emergency Leave Reserve (“ELR”) time.  Once Employee has exhausted any available ELR, Employee shall continue to be paid Employee’s then current Base Salary until short-term disability payments to Employee commence under any plan or program then provided and funded by the Company.  If the benefits payable under any such disability plan or program do not provide 100% replacement of the Employee’s installments of Base Salary during such period, Employee shall be paid at regular payroll intervals the difference between the periodic installments of Employee’s then current Base Salary that would have otherwise been payable and the disability benefit paid from such disability plan or program.  Upon termination pursuant to Section 4(b) hereof, the above provisions of this paragraph (b) shall no longer apply and Employee shall be entitled to any earned but unpaid Incentive Bonus for any calendar year ended prior to the date Employee’s period of disability commenced.

 

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(c)        Cause.  If the Employee’s employment shall be terminated for Cause, the Employee shall continue to receive installments of his then current Base Salary only through the Date of Termination and the Employee shall not be entitled to receive any Incentive Bonus (other than any earned but unpaid Incentive Bonus for any prior calendar year), and shall not be eligible for any severance payment of any nature.

 

(d)        Without Cause.  If the Employee’s employment is terminated without Cause and paragraph (h) of this Section 5 shall not be applicable, the Employee shall receive an amount equal to twice his then current Base Salary which amount shall be payable in equal monthly installments during the period commencing with the Date of Termination and ending on March 15 of the calendar year immediately following the Date of Termination.  The Employee shall also be entitled to receive any earned but unpaid Incentive Bonus for any calendar year ending prior to the Date of Termination and a pro-rated Incentive Bonus for the current calendar year for the period ending on the Date of Termination.

 

(e)        Expiration of Term.  If the Employee’s employment shall be terminated by reason of expiration of the Term by reason of Employee’s election not to extend the Term, the Employee shall continue to receive installments of his then current Base Salary until the Date of Termination and shall also be entitled to receive any earned but unpaid Incentive Bonus for the last calendar year of the Term.  If the Employee’s employment shall be terminated by reason of expiration of the Term by reason of the Company’s election not to extend the Term, the Employee shall receive an amount equal to twice his then current Base Salary which amount shall be payable in equal monthly installments during the period commencing with the Date of Termination and ending on March 15 of the calendar year immediately following the Date of Termination and shall also be entitled to receive any earned but unpaid Incentive Bonus for last calendar year of the Term.

 

(f)         Voluntary Termination for Good Reason.  If the Employee shall voluntarily terminate his employment hereunder for Good Reason (as defined below), the Employee shall receive an amount equal to twice his then current Base Salary which amount shall be payable in equal monthly installments during the period commencing with the Date of Termination and ending on March 15 of the calendar year immediately following the Date of Termination.  The Employee shall also be entitled to receive any earned but unpaid Incentive Bonus for any calendar year ending prior to the Date of Termination and a pro-rated Incentive Bonus for the current calendar year for the period ending on the Date of Termination.  “Good Reason” means: (A) the assignment to Employee of any duties inconsistent with his status as President and Chief Executive Officer of the Company or a material adverse alteration in the nature or status of his responsibilities from those provided herein or the transfer of a significant portion of such responsibilities to one or more other persons, in all such cases without the prior written consent of Employee, which assignment, alteration or transfer is not rescinded within such 30-day period after such written notice; (B) the failure by the Company to pay or provide to Employee, within thirty (30) days of a written demand for the same, any

 

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amount of compensation or any benefit which is due, owing and payable pursuant to the terms hereof or of any applicable plan, program, arrangement or policy and which is then unpaid; (C) a requirement, without Employee’s consent, to move Employee’s principal office location more than twenty-five (25) miles from the location of the Company’s executive offices as of the Execution Date; or (D) the breach in any material respect by the Company of any of its other obligations or agreements set forth herein, and the failure by the Company to cure such breach within thirty (30) days after written notice thereof from Employee.  In each case, Employee must give the Company notice of the Good Reason condition within ninety (90) days of the initial existence of the condition, and Employee’s Date of Termination must occur within a period of time not to exceed two (2) years (or such shorter period as provided in this Employment Agreement) following the initial existence of one or more of the good reason conditions set forth in this Employment Agreement, or any termination will not be considered to be for Good Reason.  The occurrence of a Change of Control (as defined in paragraph (h) below) shall not, by itself, constitute Good Reason hereunder.

 

(g)        Voluntary Termination Other Than for Good Reason.  If the Employee shall voluntarily terminate his employment hereunder for other than Good Reason, the Employee shall continue to receive installments of his then current Base Salary until the Date of Termination and the Employee shall not be entitled to receive any then unpaid Incentive Bonus (other than any earned but unpaid Incentive Bonus for any calendar year ending prior to the date Employee gives Notice of Termination), and shall not be entitled to any severance payment of any nature.

 

(h)        Change of Control.  For purposes of this paragraph (h), “Change of Control”  means (i) an event or series of events which have the effect of any “person” as such term is used in Section 13(d) and 14(d) of the Exchange Act, other than (x) Onex Corporation, Onex Partners III LP or any of their respective affiliates (as defined in Rule 12b-2 under the Exchange Act) or any group including any of the foregoing and (y) any trustee or other fiduciary holding securities of the Company under any employee benefit plan of the Company, becoming the “beneficial owner” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding capital stock; (ii) any merger, consolidation, share exchange, recapitalization or other transaction in which any person other than Onex Corporation, Onex Partners III LP or any of their respective affiliates or any group including any of the foregoing becomes the beneficial owner of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding capital stock; (iii) all or substantially all of the business of the Company is disposed of pursuant to a partial or complete liquidation, sale of assets, or otherwise.  If a Change of Control has occurred with respect to the Company and within two (2) years after the occurrence of such Change of Control, either --

 

(i)         the Employee’s employment shall be terminated by the Company without Cause, or

 

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(ii)        the Employee shall terminate his employment for Good Reason, then

 

Employee shall be entitled to receive a lump sum payment equal to the greater of (x) the unpaid amount of Employee’s Base Salary for the balance of the then effective Term and (y) the Employee’s then current Base Salary multiplied by three (3).  The Employee shall also be entitled to receive any earned but unpaid Incentive Bonus for any calendar year ending prior to the Date of Termination and a pro-rated Incentive Bonus for the current calendar year for the period ending on the Date of Termination.

 

(i)         No Further Obligations after Payment.  After all payments, if any, have been made to the Employee pursuant to the applicable provisions of paragraphs (a) through (h) of this Section 5, the Company shall have no further obligations to the Employee under this Employment Agreement other than the provision of any employee benefit plan required to be continued under applicable law or by its terms.

 

(j)         Payment of Incentive Bonus.  If Employee will be paid an earned but unpaid Incentive Bonus for any calendar year ending prior to his Date of Termination under the above provisions of this Section 5, the Bonus for the prior calendar year will be paid at the normal time as paid to employees whose employment has not terminated.  If Employee is due a pro-rated Incentive Bonus for the calendar year in which Employee’s Date of Termination occurs, the pro-rated bonus for the year of the Date of Termination shall be paid in the calendar year after year the Date of Termination occurs, and at the normal payment timing for Incentive Bonus payments, and such pro-rata bonus shall be based on whether the actual performance measures for such Incentive Bonus period were met at the normal time for measuring such performance measures.

 

6.         Duties Upon Termination.  Upon the termination of Employee’s employment hereunder for any reason whatsoever (including but not limited to the failure of the parties hereto to agree to the extension of this Employment Agreement pursuant to Section 1 hereof), Employee shall promptly (a) comply with his obligation to deliver an executed exit interview document as provided in accordance with Company policy, and (b) return to the Company any property of the Company or its subsidiaries then in Employee’s possession or control, including without limitation, any Confidential Information (as defined in Section 7(d)(iii) hereof) and whether or not constituting Confidential Information, any technical data, performance information and reports, sales or marketing plans, documents or other records, and any manuals, drawings, tape recordings, computer programs, discs, and any other physical representations of any other information relating to the Company, its subsidiaries or affiliates or to the Business (as defined in Section 7(d)(iv) hereof) of the Company.  Employee hereby acknowledges that any and all of such documents, items, physical representations and information are and shall remain at all times the exclusive property of the Company.

 

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7.         Restrictive Covenants.

 

(a)        Acknowledgments.  Employee acknowledges that (i) his services hereunder are of a special, unique and extraordinary character and that his position with the Company places him in a position of confidence and trust with the operations of the Company, its subsidiaries and affiliates (collectively, the “Res-Care Companies”) and allows him access to Confidential Information, (ii) the Company has provided Employee with a unique opportunity as President and Chief Executive Officer of the Company, (iii) the nature and periods of the restrictions imposed by the covenants contained in this Section 7 are fair, reasonable and necessary to protect and preserve for the Company the benefits of Employee’s employment hereunder, (iv) the Res-Care Companies would sustain great and irreparable loss and damage if Employee were to breach any of such covenants, (v) the Res-Care Companies conduct and are aggressively pursuing the conduct of their business actively in and throughout the entire Territory (as defined in paragraph (d)(ii) of this Section 7), and (vi) the Territory is reasonably sized because the current Business of the Res-Care Companies is conducted throughout such geographical area, the Res-Care Companies are aggressively pursuing expansion and new operations throughout such geographic area and the Res-Care Companies require the entire Territory for profitable operations.

 

(b)        Confidentiality and Non-disparagement Covenants. Having acknowledged the foregoing, Employee covenants that without limitation as to time, (i) commencing on the Commencement Date, he will not directly or indirectly disclose or use or otherwise exploit for his own benefit, or the benefit of any other Person (as defined in paragraph (d)(v) of this Section 7), except as may be necessary in the performance of his duties hereunder, any Confidential Information, and (ii) commencing on the Date of Termination, he will not disparage or comment negatively about any of the Res-Care Companies, or their respective officers, directors, employees, policies or practices, and he will not discourage anyone from doing business with any of the Res-Care Companies and will not encourage anyone to withdraw their employment with any of the Res-Care Companies.

 

(c)        Covenants.  Having acknowledged the statements in Section 7(a) hereof, Employee covenants and agrees with the Res-Care Companies that he will not, directly or indirectly, from the Commencement Date until the Date of Termination, and for a period of twenty-four (24) months thereafter, directly or indirectly (i) offer employment to, hire, solicit, divert or appropriate to himself or any other Person, any business or services (similar in nature to the Business) of any Person who was an employee or an agent of any of the Res-Care Companies at any time during the last twelve (12) months of Employee’s employment hereunder; or (ii) own, manage, operate, join, control, assist, participate in or be connected with, directly or indirectly, as an officer, director, shareholder, partner, proprietor, employee, agent, consultant, independent contractor or otherwise, any Person which is, at the time, directly or indirectly, engaged in the Business of the Res-Care Companies within the Territory.  The Employee further agrees that from the Commencement Date until the Date of Termination, he will not undertake any planning

 

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for or organization of any business activity that would be competitive with the Business. Notwithstanding the foregoing, Employee agrees that if this Employment Agreement shall be terminated by reason of expiration of the Term (irrespective of which party elected not to extend the Term), the covenants in this paragraph (c) shall survive the expiration thereof until twenty-four (24) months after the last day of employment of Employee by any Res-Care Company.

 

(d)        Definitions.  For purposes of this Employment Agreement:

 

(i)         For purposes of this Section 7, “termination of Employee’s employment” shall include any termination pursuant to paragraphs (b), (c) and (d) of Section 4 hereof, the termination of such Employee’s employment by reason of the failure of the parties hereto to agree to the extension of this Agreement pursuant to Section 1 hereof or the voluntary termination of Employee’s employment hereunder.

 

(ii)        The “Territory” shall mean the fifty (50) states of the United States, the United States Virgin Islands, Puerto Rico, all of the Provinces of Canada, all of the countries of the European Union, Switzerland and Norway.

 

(iii)       “Confidential Information” shall mean any business information relating to the Res-Care Companies or to the Business (whether or not constituting a trade secret), which has been or is treated by any of the Res-Care Companies as proprietary and confidential and which is not generally known or ascertainable through proper means.  Without limiting the generality of the foregoing, so long as such information is not generally known or ascertainable by proper means and is treated by the Res-Care Companies as proprietary and confidential, Confidential Information shall include the following information regarding any of the Res-Care Companies:

 

(1)          any patent, patent application, copyright, trademark, trade name, service mark, service name, “know-how” or trade secrets;

 

(2)          customer lists and information relating to (i) any client of any of the Res-Care Companies or (ii) any client of the operations of any other Person for which operations any of the Res-Care Companies provides management services;

 

(3)          supplier lists, pricing policies, consulting contracts and competitive bid information;

 

(4)          records, compliance and/or operational methods and Company policies and procedures, including manuals and forms;

 

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(5)          marketing data, plans and strategies;

 

(6)          business acquisition, development, expansion or capital investment plan or activities;

 

(7)          software and any other confidential technical programs;

 

(8)          personnel information, employee payroll and benefits data;

 

(9)          accounts receivable and accounts payable;

 

(10)       other financial information, including financial statements, budgets, projections, earnings and any unpublished financial information; and

 

(11)       correspondence and communications with outside parties.

 

(iv)       The “Business” of the Res-Care Companies shall mean the business of providing training or job placement services as provided in the Company’s Workforce Services and Youth Services Segments, youth treatment or services, home care or periodic services to the elderly, services to persons with mental retardation and other developmental disabilities, including but not limited to persons who have been dually diagnosed, services to persons with acquired brain injuries, or providing management and/or consulting services to third parties relating to any of the foregoing.

 

(v)        The term “Person” shall mean an individual, a partnership, an association, a corporation, a trust, an unincorporated organization, or any other business entity or enterprise.

 

(e)        Injunctive Relief, Invalidity of any Provision.  Employee acknowledges that his breach of any covenant contained in this Section 7 will result in irreparable injury to the Res-Care Companies and that the remedy at law of such parties for such a breach will be inadequate.  Accordingly, Employee agrees and consents that each of the Res-Care Companies in addition to all other remedies available to them at law and in equity, shall be entitled to seek both preliminary and permanent injunctions to prevent and/or halt a breach or threatened breach by Employee of any covenant contained in this Section 7 and no bond or other security shall be required in connection therewith.  If any provision of this Section 7 is invalid in part or in whole, it shall be deemed to have been amended, whether as to time, area covered, or otherwise, as and to the extent required for its validity under applicable law and, as so amended, shall be enforceable.  The parties further agree to execute all documents necessary to evidence such amendment.

 

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(f)         Advice to Future Employers.     If Employee, in the future, seeks or is offered employment by any other Person, he shall provide a copy of this Section 7 to the prospective employer prior to accepting employment with that prospective employer.

 

8.         Entire Agreement; Modification; Waiver.  This Employment Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties, including but not limited to the Prior Agreement.  No supplement, modification, or amendment of this Employment Agreement shall be binding unless executed in writing by all parties hereto (other than as provided in the next to last sentence of Section 7(e) hereof).  No waiver of any of the provisions of this Employment Agreement will be deemed, or will constitute, a waiver of any other provision, whether or not similar, nor will any waiver constitute a continuing waiver.  No waiver will be binding unless executed in writing by the party making the waiver.

 

9.         Successors and Assigns; Assignment.  This Employment Agreement shall be binding on, and inure to the benefit of, the parties hereto and their respective heirs, executors, legal representatives, successors and assigns; provided, however, that this Employment Agreement is intended to be personal to the Employee and the rights and obligations of the Employee hereunder may not be assigned or transferred by him.

 

10.       Notices.  All notices, requests, demands and other communications required or permitted to be given or made under this Employment Agreement, or any other agreement executed in connection therewith, shall be in writing and shall be deemed to have been given on the date of delivery personally or upon deposit in the United States mail postage prepaid by registered or certified mail, return receipt requested, to the appropriate party or parties at the following addresses (or at such other address as shall hereafter be designated by any party to the other parties by notice given in accordance with this Section):

 

To the Company:

 

Res-Care, Inc.

9901 Linn Station Road

Louisville, Kentucky 40223

	
Attn:
    	
James H. Bloem,
    
	
 
    	
Chairman
    

 

To the Employee:

 

Ralph G. Gronefeld, Jr.

4106 Willow Reed Place

Louisville, Kentucky 40299

 

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11.       Execution in Counterparts.  This Employment Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document.

 

12.       Further Assurances.  The parties each hereby agree to execute and deliver all of the agreements, documents and instruments required to be executed and delivered by them in this Employment Agreement and to execute and deliver such additional instruments and documents and to take such additional actions as may reasonably be required from time to time in order to effectuate the transactions contemplated by this Employment Agreement.

 

13.       Severability of Provisions.  The invalidity or unenforceability of any particular provision of this Employment Agreement shall not affect the other provisions hereof and this Employment Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

 

14.       Governing Law; Jurisdiction; Venue.  This Employment Agreement is executed and delivered in, and shall be governed by, enforced and interpreted in accordance with the laws of, the Commonwealth of Kentucky.  The parties hereto agree that the federal or state courts located in Kentucky shall have the exclusive jurisdiction with regard to any litigation relating to this Employment Agreement and that venue shall be proper only in Jefferson County, Kentucky, the location of the principal office of the Company.

 

15.       Tense; Captions.  In construing this Employment Agreement, whenever appropriate, the singular tense shall also be deemed to mean the plural, and vice versa, and the captions contained in this Employment Agreement shall be ignored.

 

16.       Survival.  The provisions of Sections 5, 6 and 7 hereof shall survive the termination, for any reason, of this Employment Agreement, in accordance with their terms.

 

17.       Six Month Delay.  Notwithstanding anything herein to the contrary, if the Employee is a “specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) (or any successor thereto) on Employee’s Date of Termination, any severance payment that is in excess of the amount that qualifies as separation pay under Treasury Regulation Section 1.409A-1(b)(9), or that does not qualify as separation pay, shall not begin to be paid until six (6) months after Employee’s Date of Termination.  The Company shall determine, consistent with any guidance issued under Section 409A of the Code, the portion of severance payments that are required to be delayed, if any.

 

18.       409A Compliance.  The Employee and the Company agree and confirm that this Employment Agreement is intended by both parties to provide for compensation that is exempt from Section 409A of the Code as separation pay (up to the Section 409A limit), and to be compliant with Section 409A of the Code with respect to additional severance compensation and bonus compensation.  This Employment Agreement shall be interpreted, construed, and administered in accordance with this agreed intent, provided that the Company does not promise or warrant any tax treatment of compensation hereunder.  Employee is responsible for obtaining

 

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advice regarding all questions to federal, state, or local income, estate, payroll, or other tax consequences arising from participation herein.  This Employment Agreement shall not be amended or terminated in a manner that would accelerate or delay payment of severance pay or bonus pay except as permitted under Treasury Regulations under Section 409A of the Code.

 

 

[Remainder of page intentionally blank — signatures begin on next page.]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement on the dates set forth below.

 

	
 
    	
 
    	
 
    	
RES-CARE, INC.
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
Date:
    	
4/13/11
    	
 
    	
By:
    	
/s/ James H. Bloem
    
	
 
    	
 
    	
 
    	
 
    	
James   H. Bloem
    
	
 
    	
 
    	
 
    	
 
    	
Chairman,   Board of Directors
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
Date:
    	
5/1/11
    	
 
    	
/s/   Ralph G. Gronefeld, Jr.
    
	
 
    	
 
    	
 
    	
Ralph G.   Gronefeld, Jr.
    

 

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