EMPLOYMENT AGREEMENT
Exhibit 10.5
THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of September 29, 2003, by
and between Hythiam, Inc., a Delaware corporation (“Employer”), and Xxxxx Xxxxx, an individual
(“Employee”).
RECITALS
A. WHEREAS, Employee has experience and expertise applicable to employment with Employer to
perform as the Chief Financial Officer of Employer, Employer has agreed to employ Employee and
Employee has agreed to enter into such employment, on the terms set forth in this Agreement.
B. WHEREAS, Employee acknowledges that this Agreement is necessary for the protection of
Employer’s investment in its business, good will, products, methods of operation, information, and
relationships with its customers and other employees.
C. WHEREAS, Employer acknowledges that Employee desires definition of his compensation and
benefits, and other terms of his employment.
NOW, THEREFORE, in consideration thereof and of the covenants and conditions contained herein,
the parties agree as follows:
AGREEMENT
1. TERM OF AGREEMENT
1.1 Initial Term. The initial term of this Agreement shall begin on September 29,
2003 (“Commencement Date”) and shall continue until the earlier of: (a) the date on which it is
terminated pursuant to Section 5; or (b) four (4) years following the Commencement Date (“Initial
Term”). After the expiration of the Initial Term, Employee shall be employed on an at-will basis,
with either party able to terminate the employment, with or without cause and with or without
notice.
2. EMPLOYMENT
2.1 Employment of Employee. Employer agrees to employ Employee to render services on
the terms set forth herein. Employee hereby accepts such employment on the terms and conditions of
this Agreement.
2.2 Position and Duties. Employee shall serve as the Chief Financial Officer of
Employer, reporting to Employer’s Chief Executive Officer (“CEO”), and shall have the general
powers, duties and responsibilities of management usually vested in that office in a
corporation and such other powers and duties as may be prescribed from time to time by the CEO
and Employer’s Board of Directors (“Board”).
2.3 Standard of Performance. Employee agrees that he will at all times faithfully and
industriously and to the best of his ability, experience and talents perform all of the duties that
may be required of and from him pursuant to the terms of this Agreement. Such duties shall be
performed at such place or places as the interests, needs, business and opportunities of Employer
shall require or render advisable.
2.4 Exclusive Service. Except as set forth in Attachment A, (a)
Employee shall devote all of his business energies and abilities and all of his productive time to
the performance of his duties under this Agreement (reasonable absences during holidays and
vacations excepted), and shall not, without the prior written consent of Employer, render to others
any service of any kind (whether or not for compensation) that, in the opinion of Employer, would
materially interfere with the performance of his duties under this Agreement, and (b) Employee
shall not, without the prior written consent of Employer, maintain any affiliation with, whether as
an agent, consultant, employee, officer, director, trustee or otherwise, nor shall he directly or
indirectly render any services of an advisory nature or otherwise to, or participate or engage in,
any other business activity. Employee and Employer agree that those items set forth in Attachment
A are subject to periodic review by Employer and in the event that Employer determines, in its sole
discretion, that such obligations negatively impact Employer, Employer shall have the right to
direct Employee to terminate such relationships.
3. COMPENSATION
3.1 Compensation. During the term of this Agreement, Employer shall pay the amounts
and provide the benefits described in this Section 3, and Employee agrees to accept such amounts
and benefits in full payment for Employee’s services under this Agreement.
3.2 Base Salary. Employer shall pay to Employee a base salary of $200,000 annually in
equal semi-monthly installments, less applicable taxes. At Employer’s sole discretion, Employee’s
base salary may be increased, but not decreased, annually. Notwithstanding the foregoing,
commencing on January 1, 2005 and annually thereafter, the Base Salary shall be increased by at
least the Consumer Price Index for Los Angeles, CA (or a reasonable proxy thereof).
3.3 Discretionary Bonus. Except as described in Section 5.1 below, Employee is
eligible to receive an annual bonus in the sole discretion of Employer. This discretionary bonus
will be targeted at 50% of Employee’s base salary, and will be based on Employee achieving
designated individual goals and milestones, and the overall performance and profitability of the
Company. The goals and milestones will be established and reevaluated on an annual basis by mutual
agreement of Employee and the CEO, subject to review and approval by the Board or its Compensation
Committee. To the extent that a discretionary bonus is granted, it will be based on a calendar
year and shall be paid no later than April 30th of the following year. The first annual
bonus, to the extent granted at the sole discretion of the Company, shall be prorated based on the
Commencement Date.
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3.4 Equity Incentive Plan.
(a) Employee shall be granted options to purchase 300,000 shares of Employer’s common stock,
at fair market value, under the provisions of Employer’s 2003 Stock Incentive Plan, upon approval
by the Board. The options will vest as follows: 20% on June 26, 2004, and 20% on the second,
third, fourth and fifth anniversaries thereof.
(b) Except as otherwise set forth herein, vesting of options will cease upon the termination
of Employee’s employment with Employer.
3.5 Fringe Benefits. Subject to Section 3.7 and upon satisfaction of the applicable
eligibility requirements, Employee and Employee’s family shall be provided with group medical and
dental insurance and group dental coverage through Employer’s plans. Medical and dental benefits
will commence on the first day of the month following the Commencement Date. In the event that no
benefit plans are in place at that time, the Company will reimburse Employee for COBRA coverage
until such time as Employee is covered under the Company’s group medical and dental plans.
Employer will pay for $300,000 of term life insurance for the benefit of Employee, subject to the
standard physical examination that is required by the issuing insurance company. In addition,
Employee will be provided with accidental death and disability and long-term disability insurance.
Employee is also eligible to participate in Employer’s 401K plan beginning on the first day of the
month following the Commencement Date.
3.6 Paid Time Off. Employee shall accrue, on a daily basis, a total of four (4)
workweeks of paid time off (PTO) per year following the date of this Agreement, provided, however,
that Employee’s accrued and unused PTO may not exceed a total of seven (7) workweeks. This PTO
shall be in addition to normal Company holidays, which shall be determined at the discretion of the
Company from time to time. Thereafter, Employee will not continue to accrue PTO benefits until he
has used enough PTO time to fall below this maximum amount. Any accrued but unused PTO will be paid
to Employee, on a pro rata basis, at the time that his employment is terminated. In addition to
PTO, the Employee shall be entitled to normal Company holidays.
3.7 Deduction from Compensation. Employer shall deduct and withhold from all
compensation payable to Employee all amounts required to be deducted or withheld pursuant to any
present or future law, ordinance, regulation, order, writ, judgment, or decree requiring such
deduction and withholding.
4. REIMBURSEMENT OF EXPENSES
4.1 Travel and Other Expenses. Employer shall pay to or reimburse Employee for those
travel, promotional, professional continuing education and licensing costs (to the extent
required), professional society membership fees, seminars and similar expenditures incurred by
Employee which Employer determines are reasonably necessary for the proper discharge of Employee’s
duties under this Agreement and for which Employee submits appropriate receipts and indicates the
amount, date, location and business character in a timely manner.
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4.2 Liability Insurance. Employer shall provide Employee with officers and directors’
insurance, or other liability insurance, consistent with its usual business practices, to cover
Employee against all insurable events related to his employment with Employer.
4.3 Indemnification. Promptly upon written request from Employee, Employer shall
indemnify Employee, to the fullest extent under applicable law, for all judgements, fines,
settlements, losses, costs or expenses (including attorney’s fees), arising out of Employee’s
activities as an agent, employee, officer or director of Employer, or in any other capacity on
behalf of or at the request of Employer. Such agreement by Employer shall not be deemed to impair
any other obligation of Employer respecting indemnification of Employee otherwise arising out of
this or any other agreement or promise of Employer or under any statute.
5. TERMINATION
5.1 Termination With Good Cause; Resignation Without Good Reason. Employer may
terminate Employee’s employment at any time, with or without notice or Good Cause (as defined
below). If Employer terminates Employee’s employment with Good Cause, or if Employee resigns
without Good Reason (as defined below), Employer shall pay Employee his salary prorated through the
date of termination, at the rate in effect at the time notice of termination is given, together
with any benefits accrued through the date of termination. Employer shall have no further
obligations to Employee under this Agreement or any other agreement, and all unvested options will
terminate.
5.2 Termination Without Good Cause; Resignation with Good Reason. Employee shall have
the right to terminate his employment with notice and Good Reason. If Employer terminates
Employee’s employment without Good Cause, or Employee resigns for Good Reason:
(a) Employer shall pay Employee his salary prorated through the date of termination, at the
rate in effect at the time notice of termination is given, together with any benefits accrued
through the date of termination;
(b) Employer shall pay Employee in a lump sum an amount equal to one (1) year’s salary (at the
rate in effect at the time of termination) plus a bonus equal to 100% of the targeted bonus;
(c) All of Employee’s unvested stock options will vest immediately; and
(d) In addition to any rights under COBRA, the term for continued medical benefits provided by
Employer shall continue for a period of one year from the date of termination, provided that
coverage will terminate sooner if Employee becomes eligible for coverage under another employer’s
plan.
To be eligible for the compensation provided for in Section 5.2(b), (c) and (d) above,
Employee must execute a full and complete release of any and all claims against
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Employer in the standard form then used by Employer (“Release”). Employer shall have no
further obligations to Employee under this Agreement or any other agreement.
5.3 Good Cause. For purposes of this Agreement, a termination shall be for “Good
Cause” if Employee, in the subjective, good faith opinion of Employer, shall:
(a) Commit an act of fraud, moral turpitude, misappropriation of funds or embezzlement in
connection with his duties;
(b) Breach Employee’s fiduciary duty to Employer, including, but not limited to, acts of
self-dealing (whether or not for personal profit);
(c) Materially breach this Agreement, the Confidentiality Agreement (defined below), or
Employer’s written Codes of Ethics as adopted by the Board;
(d) Willful, reckless or grossly negligent violation of any material provision of Employer’s
written Employee Handbook, or any applicable state or federal law or regulation;
(e) Fail or refuse (whether willful, reckless or negligent) to comply with all relevant and
material obligations, assumable and chargeable to an executive of his corporate rank and
responsibilities, under the Xxxxxxxx-Xxxxx Act and the regulations of the Securities and Exchange
Commission promulgated thereunder;
(f) Fail or refuse (whether willful, reckless or negligent) to substantially perform the
responsibilities and duties specified herein (other than a failure caused by temporary disability);
provided, however, that no termination shall occur on that basis unless the Employer first provides
the Employee with written notice to cure; the notice to cure shall reasonably specify the acts or
omissions that constitute the Employee’s failure or refusal to perform his duties, and the Employee
shall have a reasonable opportunity (not to exceed 10 days after the date of notice to cure) to
correct his failure or refusal to perform his duties; termination shall be effective as of the date
of written notice to cure; or
(g) Be convicted of, or enter a plea of guilty or no contest to, a felony or misdemeanor under
state or federal law, other than a traffic violation or misdemeanor not involving dishonesty or
moral turpitude.
5.4 Good Reason. For purposes of this Agreement, a resignation shall be for “Good
Reason” if tendered within ninety (90) days of any of the following actions by Employer:
(a) Assignment to Employee of duties materially inconsistent with Employee’s status as defined
in Section 2.2, or a substantial reduction in the nature or status of Employee’s responsibilities;
(b) Relocation of Employee’s site of employment outside a 30 mile radius of Los Angeles
(unless closer to Employee’s residence) without Employee’s consent, except for reasonably required
travel on Employer’s business;
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(c) Failure to cause any acquiring or successor entity following a Change in Control to assume
Employer’s obligations under this Agreement, unless such assumption occurs by operation of law; or
(d) Material breach of this Agreement by Employer, or failure to timely pay to Employee any
amount due under Section 3, which continues after written notice and reasonable opportunity to cure
(not to exceed 10 days after the date of notice).
5.5 Effects of Change in Control. Immediately upon a Change in Control (as defined
below) all of Employee’s unvested options shall vest immediately, and remain exercisable for a
period of three (3) years thereafter. Further, if Employee is terminated without Good Cause or
resigns for Good Reason during the first twelve (12) months following a Change in Control, Employee
shall be entitled to receive a lump sum in an amount equal to: (i) one and one-half years of salary
(at the rate in effect at the time of termination); and (ii) one and one-half times the Employee’s
full targeted bonus for that year. In addition to any rights under COBRA, the term for continued
medical benefits provided by Employer shall continue for a period of eighteen (18) months from the
date of termination, provided that coverage will terminate sooner if Employee becomes eligible for
coverage under another employer’s plan. To be eligible for the compensation provided for in this
Section 5.5, Employee must execute a Release. Employer shall have no further obligations to
Employee under this Agreement or any other agreement.
5.6 Change in Control. For purposes of this Agreement, a “Change in Control” shall be
defined as:
(a) The acquisition of Employer by another entity by means of a transaction or series of
related transactions (including, without limitation, any reorganization, merger, stock purchase or
consolidation); or
(b) The sale, transfer or other disposition of all or substantially all of the Employer’s
assets.
5.7 No Change in Control. Notwithstanding the provisions of Section 5.6, the
following shall not constitute a Change in Control:
(a) If the sole purpose of the transaction is to change the state of the Employer’s
incorporation or to create or eliminate a holding company that will be owned in substantially the
same proportions by the same beneficial owners as before the transaction;
(b) If Employer’s stockholders of record as constituted immediately prior to the transaction
will, immediately after the transaction (by virtue of securities issued as a consideration for
Employer’s capital stock or assets or otherwise), hold more than 50% of the combined voting power
of the surviving or acquiring entity’s outstanding securities;
(c) An underwritten public offering of Employer’s common stock, if Employer’s stockholders of
record as constituted immediately prior to the offering will,
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immediately after the offering, continue to hold more than 50% of the combined voting power of
Employer’s outstanding securities;
(d) The private placement of preferred or common stock, or the issuance of debt instruments
convertible into preferred or common stock, for fair market value as determined by the Board,
provided the acquiring person does not as a result of the transaction own more than 50% of the
outstanding capital stock of Employer, have the right to vote more than 50% of the outstanding
voting stock of Employer, or have the right to elect a majority of the Board; or
(e) If Employee is a member of a group that acquires control of Employer in an event that
would otherwise be a Change in Control, such event shall not be deemed a Change in Control and
Employee shall have no right to benefits hereunder as a result of such event; provided, however,
that Employee shall not be deemed a member of any acquiring group solely by virtue of his continued
employment or ownership of stock or stock options following a Change in Control.
5.8 Death or Disability. To the extent consistent with federal and state law,
Employee’s employment, salary, and accrual of commissions shall terminate on his death or
disability. “Disability” means any health condition, physical or mental, or other cause beyond
Employee’s control, that prevents him from performing his duties, even after reasonable
accommodation is made by Employer, for a period of 180 consecutive days within any 360 day period.
In the event of termination due to death or Disability, Employer shall pay Employee (or his legal
representative) his salary prorated through the date of termination, at the rate in effect at the
time of termination, together with any benefits accrued through the date of termination. Employer
shall have no further obligations to Employee (or his legal representative) under this Agreement.
5.9 Return of Employer Property. Within five (5) days after the Termination Date,
Employee shall return to Employer all products, books, records, forms, specifications, formulae,
data processes, designs, papers and writings relating to the business of Employer including without
limitation proprietary or licensed computer programs, customer lists and customer data, and/or
copies or duplicates thereof in Employee’s possession or under Employee’s control. Employee shall
not retain any copies or duplicates of such property and all licenses granted to him by Employer to
use computer programs or software shall be revoked on the Termination Date.
6. DUTY OF LOYALTY
6.1 During the term of this Agreement, Employee shall not, without the prior written consent
of Employer, directly or indirectly render services of a business, professional, or commercial
nature to any person or firm, whether for compensation or otherwise, or engage in any activity
directly or indirectly competitive with or adverse to the business or welfare of Employer, whether
alone, as a partner, or as an officer, director, employee, consultant, or holder of more than 1 %
of the capital stock of any other corporation. Otherwise, Employee may make personal investments
in any other business so long as these
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investments do not require him to participate in the operation of the companies in which he
invests.
7. CONFIDENTIAL INFORMATION
7.1 Trade Secrets of Employer. Employee, during the term of this Agreement, will
develop, have access to and become acquainted with various trade secrets which are owned by
Employer and/or its affiliates and which are regularly used in the operation of the businesses of
such entities. Employee shall not disclose such trade secrets, directly or indirectly, or use them
in any way, either during the term of this Agreement or at any time thereafter, except as required
in the course of his employment by Employer. All files, contracts, manuals, reports, letters,
forms, documents, notes, notebooks, lists, records, documents, customer lists, vendor lists,
purchase information, designs, computer programs and similar items and information, relating to the
businesses of such entities, whether prepared by Employee or otherwise and whether now existing or
prepared at a future time, coming into his possession shall remain the exclusive property of such
entities, and shall not be removed for purposes other than work-related from the premises where the
work of Employer is conducted, except with the prior written authorization by Employer.
7.2 Confidential Data of Customers of Employer. Employee, in the course of his
duties, will have access to and become acquainted with financial, accounting, statistical and
personal data of customers of Employer and of their affiliates. All such data is confidential and
shall not be disclosed, directly or indirectly, or used by Employee in any way, either during the
term of this Agreement (except as required in the course of employment by Employer) or at any time
thereafter.
7.3 Inevitable Disclosure. After Employee’s employment has terminated, Employee shall
not accept employment with any competitor of Employer, where the new employment is likely to result
in the inevitable disclosure of Employer’s trade secrets or confidential information, or it would
be impossible for Employee to perform his new job without using or disclosing trade secrets or
confidential information.
7.4 Continuing Effect. The provisions of this Section 7 shall remain in effect after
the Termination Date.
8. NO SOLICITATION
8.1 No Solicitation of Employees. Employee agrees that he will not, during his
employment with Employer, and for two (2) years thereafter, encourage or solicit any other employee
of Employer to terminate his or her employment for any reason, nor will he assist others to do so.
8.2 No Solicitation of Customer. Employee agrees that he will not, during his
employment with Employer, and for two (2) years thereafter, directly or indirectly call on, or
otherwise solicit, business from any actual customer or potential customer known by Employee to be
targeted by Employer, nor will he assist others in doing so.
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9. INTELLECTUAL PROPERTIES.
To the extent permissible under applicable law, all intellectual properties made or conceived
by Employee during the term of this employment by Employer shall be the right and property solely
of Employer, whether developed independently by Employee or jointly with others. The Employee will
sign the Employer’s standard Employee Innovation, Proprietary Information and Confidentiality
Agreement (“Confidentiality Agreement”).
10. OTHER PROVISIONS
10.1 Compliance With Other Agreements. Employee represents and warrants to Employer
that the execution, delivery and performance of this Agreement will not conflict with or result in
the violation or breach of any term or provision of any order, judgment, injunction, contract,
agreement, commitment or other arrangement to which Employee is a party or by which he is bound.
10.2 Injunctive Relief. Employee acknowledges that the services to be rendered under
this Agreement and the items described in Sections 6, 7, 8 and 9 are of a special, unique and
extraordinary character, that it would be difficult or impossible to replace such services or to
compensate Employer in money damages for a breach of this Agreement. Accordingly, Employee agrees
and consents that if he violates any of the provisions of this Agreement, Employer, in addition to
any other rights and remedies available under this Agreement or otherwise, shall be entitled to
temporary and permanent injunctive relief, without the necessity of proving actual damages and
without the necessity of posting any bond or other undertaking in connection therewith.
10.3 Attorneys’ Fees. The prevailing party in any suit or other proceeding brought to
enforce, interpret or apply any provisions of this Agreement, shall be entitled to recover all
costs and expenses of the proceeding and investigation (not limited to court costs), including all
attorneys’ fees.
10.4 Counsel. The parties acknowledge and represent that, prior to the execution of
this Agreement, they have had an opportunity to consult with their respective counsel concerning
the terms and conditions set forth herein. Additionally, Employee represents that he has had an
opportunity to receive independent legal advice concerning the taxability of any consideration
received under this Agreement. Employee has not relied upon any advice from Employer and/or its
attorneys with respect to the taxability of any consideration received under this Agreement.
Employee further acknowledges that Employer has not made any representations to him with respect to
tax issues.
10.5 Nondelegable Duties. This is a contract for Employee’s personal services. The
duties of Employee under this Agreement are personal and may not be delegated or transferred in any
manner whatsoever, and shall not be subject to involuntary alienation, assignment or transfer by
Employee during his life.
10.6 Governing Law. The validity, construction and performance of this Agreement
shall be governed by the laws, without regard to the laws as to choice or conflict of laws, of the
State of California.
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10.7 Venue. If any dispute arises regarding the application, interpretation or
enforcement of any provision of this Agreement, including fraud in the inducement, such dispute
shall be resolved either in federal or state court in Los Angeles, California.
10.8 No Jury. If any dispute arises regarding the application, interpretation or
enforcement of any provision of this Agreement, including fraud in the inducement, the parties
hereby waive their right to a jury trial.
10.9 No Punitive Damages. If any dispute arises regarding the application,
interpretation or enforcement of any provision of this Agreement, including fraud in the
inducement, the parties hereby waive their right to seek punitive damages in connection with said
dispute.
10.10 Severability. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provisions, and this Agreement shall be construed in all
respects as if any invalid or unenforceable provision were omitted.
10.11 Binding Effect. The provisions of this Agreement shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.
10.12 Notice. Any notices or communications required or permitted by this Agreement
shall be deemed sufficiently given if in writing and when delivered personally or 48 hours after
deposit with the United States Postal Service as registered or certified mail, postage prepaid and
addressed as follows:
(a) If to Employer, to the principal office of Employer in the State of California, marked
“Attention: Chief Executive Officer”; or
(b) If to Employee, to the most recent address for Employee appearing in Employer’s records.
10.13 Headings. The Section and other headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or interpretation of this
Agreement.
10.14 Amendment and Waiver. This Agreement may be amended, modified or supplemented
only by a writing executed by each of the parties. Either party may in writing waive any provision
of this Agreement to the extent such provision is for the benefit of the waiving party. No waiver
by either party of a breach of any provision of this Agreement shall be construed as a waiver of
any subsequent or different breach, and no forbearance by a party to seek a remedy for
noncompliance or breach by the other party shall be construed as a waiver of any right or remedy
with respect to such noncompliance or breach.
10.15 Entire Agreement. This Agreement is the only agreement and understanding
between the parties pertaining to the subject matter of this Agreement, and supersedes all prior
agreements, summaries of agreements, descriptions of compensation
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packages, discussions, negotiations, understandings, representations or warranties, whether
verbal or written, between the parties pertaining to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.
EMPLOYEE:
Xxxxx Xxxxx
|
| EMPLOYER: HYTHIAM, INC. |
||||
| By | ||||
| Xxxxxx X. Xxxxxx | ||||
| Its Chairman & CEO | ||||
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ATTACHMENT A
1. Employee may continue to serve as a Board Member of IPC-The Hospitalist Company and attend
regularly scheduled Board and Board Committee meetings consistent with past practice.
2. Employee may continue his consulting assignment with Life Outcomes, which shall require no more
than 2 hours per week on Employee’s own time.
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