Document:

Exhibit 10.38

 Exhibit 10.38 
 TRANSACTION BONUS AGREEMENT 
 TRANSACTION BONUS AGREEMENT (this
“Agreement”) made and entered into in Plano, Texas, by and between LCI Holding Company, Inc. (the “Company”), a Delaware corporation, LifeCare Holdings, Inc., a Delaware corporation (the “Principal
Subsidiary”) with its principal place of business at 5560 Tennyson Parkway, Plano, TX 75024, and Erik C. Pahl, of Addison Texas (the “Employee”), effective as of the 28th day of February 2010. 

WHEREAS, the operations of the Company and its subsidiaries are a complex matter requiring direction and leadership in a variety of
arenas, including financial, strategic planning, regulatory, community relations and others; 
 WHEREAS, the Employee is
possessed of certain experience and expertise that qualify him to provide the direction and leadership required by the Company and its subsidiaries; and 
 WHEREAS, in furtherance of Employee’s continued employment by the Company or the Principal Subsidiary, the Company desires to make available to the Employee a one-time transaction bonus opportunity
on the terms, and subject to the conditions, set forth in this Agreement. 
 NOW, THEREFORE, in consideration of the foregoing
premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree: 
 1.
Transaction Bonus Opportunity. For so long as the Employee remains employed by the Company or the Principal Subsidiary, the Employee shall be eligible to earn a one-time bonus (the “Transaction Bonus”) following a Change of
Control based upon the Transaction Proceeds actually received by Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. in respect of their total cash investment in the Company. Any Transaction Bonus earned under this Agreement shall be payable not
later than two and one half months following the end of the fiscal year in which such Change of Control occurs. The amount of any Transaction Bonus (and whether it is payable in cash or in securities) shall be determined in accordance with the
schedule set forth on Exhibit A and any amount of such Transaction Bonus earned in respect of Transaction Proceeds that are received after the closing date of a Change of Control shall become payable by the Company to Employee only upon
receipt by Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. of such Transaction Proceeds. 
 2. Definitions. For
purposes of this Agreement, the following definitions apply: 
 (a) “Affiliates” means all
persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where control may be by either management authority, contract or equity interest. 

(b) “Board” means the Board of Directors of the Company. 

(c) “Change of Control” means the occurrence, after the date hereof, of any of the following: 

(i) the sale, lease or transfer (other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the 

 
assets of the Company and its direct and indirect subsidiaries, taken as a whole, to any Person other than one or more Permitted Holders; 

(ii) the Board’s adoption of a plan relating to the liquidation or dissolution of the Company; or 

(iii) the acquisition by (x) any Person (other than one or more Permitted Holders and other than in connection with
the initial public offering of the Company’s Common Stock) or (y) any Persons (other than one or more Permitted Holders and other than in connection with the initial public offering of the Company’s Common Stock) that together
(A) are a group (within the meaning of Section 13(d)(3), Section 14(d)(2) of the Securities Exchange Act of 1934, as amended, or any successor provision) or (B) are acting, for purposes of acquiring, holding or disposing of
securities, as a group (within the meaning of Rule 13d-5(b)(1) of the Securities Exchange Act of 1934, as amended, or any successor provision), in a single transaction or in a related series of transactions, by way of merger, consolidation or other
business combination or purchase of beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor provision), of more than 50% or more of the total voting power of the common stock of
the Company (or the surviving company of such merger, consolidation or other business combination transaction, as applicable). 
 (d) “Permitted Holders” means, directly or indirectly, (i) TC Group, L.L.C., Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. and their affiliates (but excluding any portfolio
companies of the foregoing) and (ii) any members of the management of the Company on the date hereof and their respective affiliates. 
 (e) “Person” means an individual, a corporation, a limited liability company, an association, a partnership, an estate, a trust and any other entity or organization, other than the
Company or any of its Affiliates. 
 (f) “Transaction Proceeds” means the cumulative total of
all consideration (whether cash or securities) actually received by Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. (whether received before, on or after the closing date of the Change of Control) in respect of their total cash investment in
the Company, excluding, for the avoidance of doubt, management or similar fees paid to affiliates of Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. Any securities included in Transaction Proceeds shall be deemed to have the value attributed
to such securities in the Change of Control (as determined by the Board in good faith). 
 3. Withholding. All payments
made by the Company or the Principal Subsidiary under this Agreement shall be reduced by any tax or other amounts required to be withheld under applicable law. 
 4. Assignment. Neither the Company nor the Employee may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the
other; provided, however, that the Company may assign its rights and 

 
obligations under this Agreement without the consent of the Employee in the event that the Employee is transferred to a position with any of the Company’s subsidiaries or in the event that
the Company shall hereafter affect a reorganization, consolidate with, or merge into, any person or entity or transfer all or substantially all of its properties or assets to any person or entity. This Agreement shall inure to the benefit of and be
binding upon the Company, the Principal Subsidiary and the Employee, their respective successors, executors, administrators, heirs and permitted assigns. 
 5. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Employee and by an expressly authorized representative of the Company. 

6. Headings. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or
content of any provision of this Agreement. 
 7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 
 8.
Obligations of the Company and the Principal Subsidiary. Each of the Company and the Principal Subsidiary shall be jointly and severally liable for any payment obligation of the Company or the Principal Subsidiary pursuant to this Agreement.
In connection with a Change of Control, the Company and the Principal Subsidiary shall require any successor entity to the Company or the Principal Subsidiary, as applicable, to expressly assume and agree to perform this Agreement in accordance with
the terms hereof. 
 9. Entire Agreement. This Agreement, including the exhibit attached hereto which is incorporated
herein, constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior communications, agreements and understandings, whether written or oral, with respect to the subject matter hereof.

 10. Governing Law. This is a Texas contract and shall be construed and enforced under and be governed in all respects
by the laws of the State of Texas, without regard to the conflict of laws principles thereof. 
 11. Code Section 409A
Compliance. The payments described in this Agreement are intended either to comply with the requirements of Code Section 409A and the treasury regulations and other guidance issued thereunder, as in effect from time to time, to the extent
they are subject to Code Section 409A, or to be exempt from such requirements, regulations and guidance (where an exemption is available), and shall be construed accordingly. To the extent a payment provided for in any provision of this
Agreement does not qualify for an exemption and is contrary to or fails to comply with the requirements of Code Section 409A and related treasury regulations, this Agreement shall be construed and administered as necessary to comply with such
requirements to the extent allowed under applicable treasury regulations until this Agreement is appropriately amended to comply with such requirements, to the extent allowed under applicable treasury regulations. 

[Remainder of Page Intentionally Left Blank] 

 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company
and the Principal Subsidiary, by a duly authorized representative thereof, and by the Employee, as of the date first above written. 
  

							
	THE EMPLOYEE:	 		 	LCI HOLDING COMPANY, INC.
				
	/s/ Erik C. Pahl	 		 	By:	 	/s/ G. Wayne McAlister
	Erik C. Pahl	 		 	Name:	 	George Wayne McAlister
		 		 	Title:	 	CEO
			
		 		 	LIFECARE HOLDINGS, INC.
				
		 		 	By:	 	/s/ G. Wayne McAlister
		 		 	Name:	 	George Wayne McAlister
		 		 	Title:	 	CEO

 Exhibit A 
 Transaction Bonus Opportunity 
  

					
	 Multiple of Money1
	  	Transaction
Bonus2	 
	
                <[    
]
	  	$	[            	] 
	 3[    ] but
<[    ]
	  	$	[            	] 
	 3[    ] but
<[    ]
	  	$	[            	] 
	 3[    ] but
<[    ]
	  	$	[            	] 
	 3[    ] but
<[    ]
	  	$	[            	] 
	 3[    ] but
<[    ]
	  	$	[            	] 
	
                
3[    ]
	  	$	[            	] 

  

	1	 Determined as Transaction Proceeds actually received by Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. as a multiple of their total cash
investment in the Company, excluding, for the avoidance of doubt, management or similar fees paid to affiliates of Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. 

	2	 In the event that the amount of Transaction Proceeds used to satisfy the multiple of money condition set forth in this Exhibit A includes any
securities, the Company, in its sole discretion, may elect to pay the Transaction Bonus in a combination of cash and such securities. In such event and for purposes of determining the amount of securities to be paid out in respect of the Transaction
Bonus, such securities will be deemed to have the value given to them for purposes of the Change of Control that resulted in the Transaction Bonus becoming payable (as determined by the Board in good faith) and the amount of securities to be
received in respect of the Transaction Bonus will not exceed the portion of the Transaction Bonus equal to a fraction, the numerator of which equals the dollar value of all securities included in the Transaction Proceeds, and the denominator of
which equals the dollar value of the total Transaction Proceeds upon which the amount of the Transaction Bonus was determined. 

 In the event of a Change of Control that (i) does not result in a Transaction Bonus becoming payable under this Agreement above the <[        ] level
(whether at the closing of such Change of Control or following such closing), and (ii) either (A) any portion of the Transaction Proceeds includes securities of the surviving entity of the Change of Control, or (B) the Company is the
surviving corporation of such Change of Control and either Carlyle Partners IV, L.P. or CP IV Coinvestment, L.P. retains an equity ownership interest in the Company following such Change of Control, then this Agreement shall remain in effect
following that Change of Control such that the Employee will be eligible to earn a Transaction Bonus on the terms set forth in this Agreement (but calculated and paid net of the dollar value of the Transaction Bonus paid to such Employee in respect
of that Change of Control at the <[        ] level) based upon the Transaction Proceeds actually received by Carlyle Partners IV, L.P. and CP IV Coinvestment, L.P. in a subsequent Change of Control
involving the surviving entity of such Change of Control (in the case where clause (ii)(A) above is applicable) or in a subsequent Change of Control involving the Company (in the case where clause (ii)(B) above is applicable). In the event of a
Change of Control in which clauses (i) and (ii)(A) above are applicable, the surviving entity of such Change of Control shall expressly assume the obligations in respect of the Transaction Bonus applicable to such surviving entity as described
in this Agreement.Exhibit 10.39

 Exhibit 10.39 
 March 17, 2011 
 Wayne McAlister 
 [Address] 
 Dear Wayne: 
 As we have discussed, you have retired from your employment with LCI Holding Company, Inc. and LifeCare Holdings, Inc. (together, the “Company”) as Chairman and Chief Executive Officer,
effective as of March 3, 2011 (such date, the “Retirement Date,” and this letter agreement, the “Agreement”). Reference is made to the Agreement between you and the Company, dated as of January 14, 2008
and amended as of April 15, 2008 (the “Employment Agreement”). All capitalized terms used in this Agreement will have the meaning ascribed to them in the Employment Agreement unless otherwise expressly provided herein. For
purposes of the Employment Agreement, your retirement will be treated as a termination by you other than for Good Reason. The purpose of this letter is to confirm the agreement between you and the Company concerning your retirement, as follows:

 1. Transition Period. Pursuant to Section 5(f) of the Employment Agreement, the Company elects to waive the
period of notice required for your resignation and will continue to pay you your salary, at your final base rate of pay of Five Hundred Thousand Dollars ($500,000) per annum (your “Base Salary”), for a period of ninety
(90) days following the Retirement Date (the “Transition Period”). During the Transition Period, you will continue to be employed by the Company in a non-executive capacity. In this capacity, you will not be expected to report
to the Company’s offices, and will have no express duties or responsibilities, other than the responsibility to respond promptly (and without additional compensation) to reasonable requests from the Company for assistance on transitional
matters. You will continue to participate in the Company’s group medical, dental and life insurance plans while you are employed during the Transition Period, provided you remain eligible for coverage under these plans and your participation in
these plans is not contrary to or in violation of applicable law. You will not be eligible to participate in any other Company benefit plans (including, without limitation, disability insurance plans, bonus plans, and 401(k) plans), and will not
continue to earn vacation or other similar benefits, during the Transition Period. Your employment with the Company will terminate on the last day of the Transition Period, that being June 1, 2011. 

2. Retirement Benefits. In consideration of your acceptance of this Agreement and subject to your meeting in full your obligations
under it, including without limitation those obligations set forth in paragraph 5, and your execution, non-revocation and return to the 

 
Company of the release of claims attached hereto as Exhibit A (the “Release of Claims”) on or before the deadline specified therein, and in full satisfaction of any rights
you may have under the Employment Agreement, the Company shall cause the vesting of the restricted stock award granted to you on March 24, 2009 covering 400,000 shares of Common Stock (the “2009 Award”) to accelerate such that
the 133,334 shares of Common Stock scheduled to vest on March 24, 2012 will all vest in full, effective as of immediately prior to the termination of your employment on the last day of the Transition Period. For the avoidance of doubt, as of
the Retirement Date you were vested in 133,333 shares of Common Stock, or one-third (1/3) of the
2009 Award, and as of March 24, 2011 you will be vested in an additional 133,333 shares of Common Stock, or a total of two-thirds (2/3) of the 2009 Award. After signing the Release of Claims, and after the passage of seven days, provided you do not
timely revoke the Release of Claims, 100% of the 2009 Award shall be vested, and a certificate evidencing these 400,000 shares shall be issued to you. 
 3. Acknowledgement of Full Payment and Withholding. You acknowledge and agree that the payments and benefits provided under paragraphs 1 and 2 of this Agreement are in complete satisfaction
of any and all compensation or benefits due to you from the Company or its affiliates through the Retirement Date and Transition Period and that, except as expressly provided under this Agreement, no further compensation or benefits are owed or will
be paid to you, whether under the Employment Agreement, under the Transaction Bonus Agreement between you and the Company dated as of April 15, 2008, or otherwise. The payments made by the Company under this Agreement will be reduced by all
taxes and other amounts required to be withheld by the Company under applicable law and all other lawful deductions authorized by you. 
 4. Status of Employee Benefits, Vacation, & Stock Options. 
 (a) Except for any right you may have to continue your participation and that of your eligible dependents in the Company’s group medical, dental, and vision plans under the federal law known as
“COBRA” or paragraph 1 of this agreement, your participation in all employee benefit plans of the Company will end as of June 1, 2011, in accordance with the terms of those plans. You will not continue to earn vacation or other
similar benefits after June 1, 2011. 
 (b) You currently hold a vested option to purchase an aggregate of
One Million (1,000,000) shares of Common Stock, subject to the terms of the Company’s equity plan and the applicable stock option award (the “Option”). You agree to forfeit the Option and further agree that the Option will be
cancelled effective as of the Retirement Date. 
 5. Confidentiality, Non-Competition, Non-Solicitation &
Indemnification. 
 (a) You hereby affirm your continuing obligations under Sections 7, 8, 9, 10 and 11 of
the Employment Agreement with respect to confidentiality, return of Company property, non-competition, non-solicitation, and assignment of rights to intellectual property. 

(b) The Company hereby affirms its continuing obligations under the second, third and fourth sentences of
Section 3(b) of the Employment Agreement with respect to indemnification and directors’ and officers’ insurance. In addition, for so long as the Company maintains directors’ and officers’ insurance you shall be entitled to
coverage with respect to any of your acts or omissions in your capacity as an officer or director of 

 
the Company occurring during the term of your employment on the same basis as other officers and directors of the Company are entitled to coverage for such time period under the directors’
and officers’ insurance policy that is in effect from time to time. 
 6. Miscellaneous. 

(a) This letter contains the entire agreement between you and the Company, and supersedes all prior and contemporaneous
communications, agreements and understandings, whether written or oral, with respect to your employment, its termination and all related matters, excluding only your obligations under Section 7, 8, 9, 10 and 11 of the Employment Agreement, your
rights and obligations with respect to the securities of the Company (including under LCI Holding Company, Inc. stockholders agreement) and the Company’s obligations under the second, third and fourth sentences of Section 3(b) of the
Employment Agreement, which will all continue in full force and effect in accordance with their terms. 
 (b)
This Agreement may not be modified or amended, and no breach will be deemed to be waived, unless agreed to in writing by you and the Company’s Chief Executive Officer or his expressly authorized designee. The captions and headings in this
Agreement are for convenience only, and in no way define or describe the scope or content of any provision of this Agreement. The obligation of the Company to provide you with benefits under this Agreement, and your right to retain the same, are
expressly conditioned upon your continued full performance of your obligations under this Agreement. 
 (c) This
Agreement, including the Release of Claims set forth in Exhibit A, creates legally binding obligations, and the Company therefore advises you to consult an attorney before signing this Agreement. In signing this Agreement, you give the Company
assurance that you have signed it voluntarily and with a full understanding of its terms; that you have had sufficient opportunity, before signing this Agreement, to consider its terms and to consult with an attorney, if you wished to do so; and
that, in signing this Agreement, you have not relied on any promises or representations, express or implied, that are not set forth expressly in this Agreement. 
 If the terms of this Agreement are acceptable to you, please sign, date and return it to the undersigned within twenty-one (21) days of the date you receive it. You may revoke this Agreement at any
time during the seven-day period immediately following the date of your signing by written notice of such revocation to the undersigned. If you do not timely revoke it, then, at the expiration of that seven-day period, this Agreement will take
effect as a legally binding agreement between you and the Company on the basis set forth above. The enclosed copy of this letter, which you should also sign and date, is for your records. 

 

					
	Sincerely,
	LCI HOLDING COMPANY, INC.
		
	By:	 	/s/ Chris A. Walker
		 	Name:	 	Chris A. Walker
		 	Title:	 	Chief Financial Officer

 
					
	LIFECARE HOLDINGS, INC.
		
	By:	 	/s/ Chris A. Walker
		 	Name:	 	Chris A. Walker
		 	Title:	 	Chief Financial Officer

  

			
	Accepted and agreed:
		
	Signature:	 	/s/ G. Wayne McAlister
		 	Wayne McAlister
	
	Date: March 17, 2011

 Exhibit A 

RELEASE OF CLAIMS 
 FOR AND IN CONSIDERATION OF the benefits to be provided me in connection with the termination of my employment, as set forth in the separation agreement between me, LCI Holding Company, Inc. (the
“Company”) and LifeCare Holdings, Inc. dated as of March 17, 2011 (the “Agreement”), which are conditioned on my signing this Release of Claims and to which I am not otherwise entitled, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, I, on my own behalf and on behalf of my heirs, executors, administrators, beneficiaries, representatives and assigns, and all others connected with or claiming through me,
hereby release and forever discharge the Company and all of its Affiliates (as that term is defined in the Employment Agreement) and all of their respective past, present and future direct and indirect officers, directors, trustees, shareholders,
employees, agents, general and limited partners, members, managers, joint venturers, representatives, successors and assigns, and all others connected with any of them, both individually and in their official capacities, from any and all causes of
action, rights and claims of any type or description, known or unknown, which I have had in the past, now have, or might now have, through the date of my signing of this Release of Claims, in any way resulting from, arising out of or connected with
my employment by the Company or any of its Affiliates or the termination of that employment or pursuant to any federal, state or local law, regulation or other requirement (including without limitation Title VII of the Civil Rights Act of 1964, the
Age Discrimination in Employment Act, the Americans with Disabilities Act, and the fair employment practices laws of the state or states in which I have been employed by the Company or any of its Affiliates, each as amended from time to time).
Excluded from the scope of this Release of Claims is any claim arising under the terms of the Agreement after the effective date of this Release of Claims. 
 In signing this Release of Claims, I acknowledge my understanding that I may not sign it prior to the termination of my employment, but that I may consider the terms of this Release of Claims for up to
twenty-one (21) days from the later of the date my employment with the Company terminates or the date I receive this Release of Claims. I also acknowledge that I am advised by the Company and its Affiliates to seek the advice of an attorney
prior to signing this Release of Claims; that I have had sufficient time to consider this Release of Claims and to consult with an attorney, if I wished to do so, or to consult with any other person of my choosing before signing; and that I am
signing this Release of Claims voluntarily and with a full understanding of its terms. I further acknowledge that, in signing this Release of Claims, I have not relied on any promises or representations, express or implied, that are not set forth
expressly in this Release of Claims or the Agreement. I understand that I may revoke this Release of Claims at any time within seven (7) days of the date of my signing by written notice to Erik Pahl at the Company’s principal place of
business and that this Release of Claims will take effect only upon the expiration of such seven-day revocation period and only if I have not timely revoked it. 
 Intending to be legally bound, I have signed this Release of Claims under seal as of the date written below. 
  

			
	Signature:	 	 

  

			
	Name (please print):	 	 

  

			
	Date Signed:

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