Exhibit
10.5
EMPLOYMENT
AGREEMENT
This EMPLOYMENT AGREEMENT (“
Agreement ”) is entered into as of this 6th day
of February, 2006, by and between CRC Health Group, Inc., a
Delaware corporation (the “ Company ”),
CRC Health Corporation, a Delaware corporation (the “
OpCo ”) and Barry Karlin (“
Executive ”).
W
I T N
E S S E T H
:
WHEREAS, the Executive was
previously employed under the terms of an Employment Agreement
dated August 23, 2002 by CRC Holding Corporation, one of
OpCo’s Affiliates (“ Prior Employment
Agreement ”).
WHEREAS, as a result of two mergers
that became effective on the date hereof, the Company (which was
formerly known as CRCA Holdings, Inc) acquired and is the indirect
parent company of the OpCo (which was formerly known as CRC Health
Group, Inc.).
WHEREAS, the parties hereto agree
that the Prior Employment Agreement is now cancelled.
WHEREAS, the Company and OpCo desire
to employ Executive as the Chairman and Chief Executive Officer of
the Company and OpCo and Executive desires to accept such
employment, in each case, on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of
the premises and the mutual covenants and promises contained herein
and for other good and valuable consideration, the Company and
Executive hereby agree as follows:
Section 1. Agreement to Employ;
No Conflicts
Upon the terms and subject to the
conditions of this Agreement, the Company and OpCo hereby employ
Executive, and Executive hereby accepts employment with the Company
and OpCo. Executive represents that ( a ) he is
entering into this Agreement voluntarily and that his employment
hereunder and compliance with the terms and conditions hereof will
not conflict with or result in the breach by him of any agreement
to which he is a party or by which he may be bound, ( b
) he has not violated, and in connection with his employment
with the Company and OpCo will not violate, any non-solicitation or
other similar covenant or agreement by which he is or may be bound,
and ( c ) in connection with his employment with the
Company and OpCo he will not use any confidential or proprietary
information he may have obtained in connection with employment with
any prior employer.
Section 2. Term; Position and
Responsibilities
(a) Term of Employment .
Unless Executive’s employment shall sooner terminate pursuant
to Section 7, the Company and OpCo shall employ Executive for
a term commencing on the date hereof (the “
Commencement Date ”) and ending on the third
anniversary thereof (the “ Initial Term
”). Effective upon the expiration of the Initial Term and of
each Additional Term (as defined below), Executive’s
employment hereunder shall be deemed to be automatically extended,
upon the same terms and conditions, for an additional period of one
year (each, an “ Additional Term ”), in
each such case, commencing upon the expiration of the Initial Term
or the then current Additional Term, as the case may be, unless, at
least sixty (60) days prior to the expiration of the Initial
Term or such Additional Term, either party hereto shall have
notified the other party hereto in writing that such extension
shall not take effect. The period during which Executive is
employed pursuant to this Agreement, including any extension
thereof in accordance with the preceding sentence, shall be
referred to as the “ Employment Period
.”
(b) Position and
Responsibilities . During the Employment Period, Executive
shall serve as Chairman and Chief Executive Officer of the Company
and OpCo. The Executive shall have such duties and responsibilities
as are customarily assigned to individuals serving in such
position, including without limitation duties and responsibilities
with regard to the Company’s subsidiaries, and such other
duties consistent with Executive’s title and position as the
Board of Directors of the Company (the “ Board
”) specifies from time to time. Executive shall devote all of
his skill, knowledge and business time to the conscientious
performance of the duties and responsibilities of such position,
except for vacation time as set forth in Section 6(c), absence
for sickness or similar disability and time spent performing
services for any charitable, religious or community organizations,
so long as such services do not materially interfere with the
performance of Executive’s duties hereunder. Executive may
act as a director for other companies, so long as his duties as an
outside director do not materially interfere with Executive’s
duties hereunder and subject to the prior consent of the Board
(such consent not to be unreasonably withheld).
Section 3. Base
Salary
As compensation for the services to
be performed by Executive during the Employment Period, OpCo shall
pay Executive a base salary at an annualized rate of Five Hundred
and Seventy Five Thousand Dollars ($575,000), payable in
installments on OpCo’s regular payroll dates (but no less
frequently than monthly). The Board shall review Executive’s
base salary annually during the Employment Period and, in its sole
discretion, may increase such base salary from time to time. The
annual base salary payable to Executive under this Section 3,
as the same may be increased from time to time, shall hereinafter
be referred to as the “ Base Salary
.”
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Section 4. Incentive Compensation
(a) Cash Bonus . The
Executive shall be eligible to receive an annual lump-sum
performance incentive bonus (“ Cash Bonus
”) from OpCo based on his Base Salary in effect for the
completed year. The Cash Bonus shall be paid in the event the
Company achieves the EBITDA or alternative operating metric
determined in advance by the compensation committee of the Board
(the “ Compensation Committee ”) under
the annual budget approved by the Board, as such budget may be
amended by the Board during such year to reflect the
Company’s acquisitions during the year (the “
Bonus Target ”). In the event that an
alternative operating metric other than EBITDA is used, such metric
shall be determined by the Compensation Committee in consultation
with the Executive. The amount of the Cash Bonus shall be
determined as follows:
(i) If the Company achieves less
than or equal to 90% of the Bonus Target during a year, then the
Executive’s Cash Bonus with respect to such year shall be
zero.
(ii) If the Company achieves at
least 90% but less than 100% of the Bonus Target during a year, the
Cash Bonus shall be a percentage of the Base Salary during such
year equal to the product of (i) ten multiplied by
(ii) the difference between (A) the percentage of the
Bonus Target actually achieved for such year and
(B) 90%.
(iii) If the Company achieves at
least 100% but less than 110% of the Bonus Target during a year,
the Cash Bonus shall be equal to a percentage of the Base Salary
during such year equal to (i) 150% minus (ii) the product
of (A) five multiplied by (B) the difference between
(1) 110% and (2) the percentage of the Bonus Target
actually achieved for such year.
(iv) If the Company achieves greater
than or equal to 110% of the Bonus Target during a year, then the
Executive’s Cash Bonus with respect to such year shall be
150% of the Base Salary during such year.
The Cash Bonus, if any, shall be a
pre-tax amount and shall be payable by OpCo on the earlier of
(a) the date thirty (30) days after the close of the
audit relating to the then-applicable year and (b) the end of
the calendar year following the then applicable calendar year.
Nothing in this Agreement shall preclude or in any way limit the
ability of the Compensation Committee to award Executive
additional, discretionary bonus amounts.
Section 5. Employee
Benefits
During the Employment Period,
Executive and, to the extent permitted under such plans,
Executive’s family, shall be entitled to participate in the
profit sharing, medical,
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disability and other welfare benefit plans at
levels not less than those offered by OpCo to senior executives of
OpCo on terms and conditions set forth in such plans. OpCo shall
pay 100% of all premiums relating to medical and dental insurance
for Executive and his insured dependents. OpCo shall maintain a
life insurance policy for Executive, the benefits of which shall be
not less than three million dollars ($3,000,000). Such policy shall
be payable to Executive’s designated
beneficiaries.
Section 6. Perquisites and
Expenses
(a) General . During the
Employment Period, Executive shall be entitled to participate in
all perquisite programs maintained by OpCo for its senior
executives, on a basis that is commensurate with Executive’s
position and duties with OpCo and the Company hereunder, in
accordance with the terms thereof, as the same may be amended and
in effect from time to time.
(b) Business Travel, Lodging,
etc . OpCo shall reimburse Executive for reasonable travel,
lodging, meal and other reasonable expenses incurred by him in
connection with his performance of services hereunder upon
submission of evidence, satisfactory to OpCo, of the incurrence and
purpose of each such expense and otherwise in accordance with
OpCo’s expense substantiation policy applicable to its senior
executives as in effect from time to time (the “
Expense Policy ”).
(c) Vacation . During the
Employment Period, Executive shall accrue paid vacation at a rate
of four weeks per year, provided , however , that the
Executive shall be entitled to accrue a maximum of eight weeks of
paid vacation. If at any time the maximum accrual is reached,
Executive shall not accrue further vacation benefits until he has
taken sufficient vacation time to bring his accrued vacation
balance below the maximum accrual permitted by section
6(c).
Section 7. Termination of
Employment and Disability
(a) Termination Due to Death or
Disability . In the event that Executive’s employment
hereunder terminates due to his death or is terminated by the
Company or OpCo due to Executive’s Disability (as defined
below), no termination benefits shall be payable to or in respect
of Executive except as provided in Section 7(e)(ii). For
purposes of this Agreement, “ Disability
” shall mean a physical or mental disability that prevents
the performance by Executive of his duties hereunder for a
continuous period of 90 days or longer, or for 180 days or more in
any 12-month period.
(b) Termination by the
Company . The Company or OpCo may terminate Executive’s
employment with the Company or OpCo with or without Cause. A
termination for “ Cause ” shall mean a
termination by the Company or OpCo of Executive’s employment
with the Company and OpCo following the occurrence of
any
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of the following events: ( i ) the
willful failure by Executive to substantially perform his duties
hereunder (other than any such failure due to Executive’s
physical or mental illness), ( ii ) Executive’s
engaging in willful and serious misconduct that has caused or is
reasonably expected to result in injury to the Company or OpCo, (
iii ) Executive’s conviction of, or entering a
plea of guilty or nolo contendere to, a felony, or (
iv ) the breach by Executive of any of his obligations
hereunder or under any other written agreement or covenant with the
Company or any of its Affiliates which breach results in or is
reasonably expected to result in material harm to the Company or
OpCo. With respect to (i) and (iv), the Company or OpCo must
provide written notice to Executive of any failure or breach that
the Company or OpCo believes constitutes “Cause”, if in
the Company’s and OpCo’s, as the case may be, sole
determination such failure or breach is capable of cure. Executive
will then be allowed fifteen (15) days to remedy the failure
or breach, in which case such failure or breach will not be grounds
for termination under this Section. A termination for Cause shall
include a determination by the Board within 100 days following the
termination of the Employment Period that circumstances existed
during the Employment Period that would have justified a
termination by the Company or OpCo for Cause.
(c) Termination by Executive
. Executive may terminate his employment with the Company or OpCo
with or without Good Reason. A termination of employment by
Executive for “ Good Reason ” shall mean
a termination by Executive of his employment with the Company and
OpCo, by written notice to the Company specifying in reasonable
detail the circumstances claimed to provide the basis for such
termination, within 30 days following the occurrence, without
Executive’s written consent, of any of the following events
and the failure of the Company or OpCo to correct the circumstances
set forth in Executive’s written notice within 30 days of
receipt of such notice: ( i ) the assignment to
Executive of duties that are significantly different from, and that
result in a substantial diminution of, the duties that he is to
assume on the Commencement Date, ( ii ) any change in
Executive’s title that is different from that which he is to
assume as of the Commencement Date and which change is not
consented to by Executive; ( iii ) a reduction in the
rate of Executive’s Base Salary or formula with respect to
Executive’s incentive compensation, unless such reduction is
implemented in connection with an across the board reduction of the
base salaries and incentive compensation of all senior executives
of OpCo and is not greater than 10% of Executive’s Base
Salary or incentive compensation formula, as the case may be, (
iv ) a material breach of this Agreement by the Company
or OpCo, ( v ) if, for any reason other than a reason
constituting Cause, the Company or OpCo provides notice to
Executive that it will not renew Executive’s employment for
an Additional Term pursuant to the terms of Section 2 of this
Agreement; ( vi ) a change in the principal work
location of the Executive to a location greater than 50 miles from
Executive’s primary location with the Company, without the
consent of Executive; or ( vii ) any failure by the
Company or OpCo to have any successor or assign assume in writing
all of the Company’s and OpCo’s obligations and
liabilities under this Agreement in accordance with
Section 15(a). Executive agrees that a
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corporate reorganization by the Company, OpCo
and/or their Affiliates pursuant to which the Company or OpCo
ceases to exist or Executive’s title is changed shall not
constitute Good Reason hereunder so long as there is no substantial
diminution or significant change in the nature of Executive’s
duties described herein.
(d) Notice of Termination .
Any termination of Executive’s employment by the Company or
OpCo pursuant to Section 7(a) or 7(b), or by Executive
pursuant to Section 7(c), shall be communicated by a written
Notice of Termination addressed to the other parties to this
Agreement. A “ Notice of Termination ”
shall mean a notice stating that Executive’s employment with
Company or OpCo has been or will be terminated and the specific
provisions of this Section 7 under which such termination is
being effected. In the event Executive terminates employment
without Good Reason, the applicable Notice of Termination shall set
forth a date of termination which is at least 60 days following the
communication of such Notice of Termination to the other parties to
this Agreement pursuant to this Section 7(d).
(e) Payments Upon Certain
Terminations .
(i) In the event of a termination of
Executive’s employment by the Company or OpCo without Cause
or a termination by Executive of his employment for Good Reason in
either such case during the Employment Period, OpCo shall pay to
Executive (or, following his death, to Executive’s
beneficiaries) (t) the Base Salary earned but not paid through
the date of termination, (u) any vacation time accrued in
accordance with this Agreement but not used through the date of
termination, (v) any bonus compensation earned but unpaid on
the date of termination and (w) any business expenses incurred
by Executive but un-reimbursed on the date of termination, provided
that such expenses and required substantiation and documentation
are submitted within thirty (30) days of termination and that
such expenses are reimbursable under OpCo company policy (“
Final Compensation ”) plus, as liquidated
damages in respect of claims based on provisions of this Agreement
and provided that within 60 days following the Date of Termination
Executive executes, delivers and does not revoke a general release
substantially in the form attached to this Agreement as
Exhibit A (subject to such adjustments as are delivered
by the Company to Executive within ten (10) days after the
Date of Termination and as may be necessary in the Company’s
determination to ensure a comprehensive release of claims by
Executive under the law in effect at the date of the execution of
the release), a lump sum equal to his Base Salary for a period of
Thirty Six (36) months (“ Liquidated
Damages ”). In addition, in the event
Executive’s employment is terminated by the Company or OpCo
without Cause or by Executive for Good Reason in either such case
during the Employment Period and provided that Executive executes,
delivers and does not revoke a general release of all claims in
form and substance satisfactory to the Company, for a period
of
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Eighteen (18) months, OpCo
shall pay as such premiums come due (x) all COBRA premiums for
Executive and his insured dependants; (y) all premiums for
Executive relating to OpCo’s group disability plan; and
(z) all premiums relating to the life insurance policy
described in Section 5.
(ii) If Executive’s employment
shall terminate due to his death or Disability or if the Company or
OpCo shall terminate Executive’s employment for Cause or
Executive shall terminate his employment without Good Reason, in
each case, during the Employment Period, OpCo shall pay Executive
(or, in the event of his death, his beneficiaries) Final
Compensation.
(iii) In the event that
Executive’s employment with the Company or OpCo is terminated
for any reason, Executive shall be entitled to receive all amounts
payable and benefits accrued under any otherwise applicable plan,
policy, program or practice of the Company or OpCo in which
Executive was a participant during his employment with Company and
OpCo in accordance with the terms thereof (other than any plan that
would provide severance, as severance is explicitly covered
herein); provided that Executive shall not continue to accrue any
additional benefits, including vacation benefits, after the Date of
Termination.
(f) Date of Termination . As
used in this Agreement, the term “ Date of
Termination ” shall mean ( i ) if
Executive’s employment is terminated by his death, the date
of his death, and ( ii ) if Executive’s
employment is terminated for any other reason, the latest of the
date on which Notice of Termination is given as contemplated by
Section 7(d), the date of termination specified in such
notice, and the date any applicable correction period ends;
provided that if Executive’s employment with the Company or
OpCo is terminated by Executive without Good Reason, the date that
is 60 days after the date on which Notice of Termination is given
as contemplated by Section 7(d) or, if no such notice is
given, 60 days after the date of termination of employment (“
Notice Period ”).
(g) Resignation upon
Termination . Effective as of any Date of Termination under
this Section 7 or otherwise as of the date of
Executive’s termination of employment with Company or OpCo,
Executive shall be deemed to have resigned from all positions then
held by him with the Company, OpCo and their Affiliates. Upon
request of the Company or OpCo, Executive will promptly execute and
deliver written confirmation of such resignation.
(h) Cessation of Professional
Activity . Upon delivery of a Notice of Termination by any
party, the Company or OpCo may relieve Executive of his
responsibilities described in Section 2(b) and require
Executive to immediately cease all professional activity on behalf
of the Company and OpCo. Whether the Company or OpCo relieves
Executive of his duties pursuant to this Section or not, OpCo shall
continue to pay Executive’s wages and benefits through the
Date of Termination.
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(i) Disability
(i) The Board may designate another
employee to act in Executive’s place during any period of
Executive’s disability. Notwithstanding any such designation,
Executive shall continue to receive the Base Salary in accordance
with Section 3, any Cash Bonus that has been earned in
accordance with Section 4 but not paid, and benefits in
accordance with Section 5, to the extent permitted by the
then-current terms of the applicable benefit plans, until Executive
becomes eligible for disability income benefits under the
Company’s or OpCo’s disability income plan or until the
termination of his employment, whichever shall first
occur.
(ii) While receiving disability
income payments under the Company’s or OpCo’s
disability income plan, Executive shall not be entitled to receive
any Base Salary under Section 3 hereof, but shall continue to
participate in Company and OpCo benefit plans in accordance with
Section 5 and the terms of such plans, until the termination
of his employment.
(iii) If any question shall arise as
to whether during any period Executive is disabled through any
illness, injury, accident or condition of either a physical or
psychological nature so as to be unable to perform substantially
all of his duties and responsibilities hereunder, Executive may,
and at the request of the Company or OpCo shall, submit to a
medical examination by a physician selected by the Company or OpCo
to whom Executive or his duly appointed guardian, if any, has no
reasonable objection to determine whether Executive is so disabled
and such determination shall for the purposes of this
Agreeme
