EMPLOYMENT AGREEMENT
Exhibit 10.2
THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 29th day of
September, 2003, by and between Hythiam, Inc., a Delaware corporation (“Employer”), and Xxxxxx X.
Xxxxxx, an individual (“Employee”).
RECITALS
A. WHEREAS, Employer has agreed to employ Employee and Employee has agreed to enter into
employment as the Chief Executive Officer (“CEO”) of Employer, on the terms set forth in this
Agreement.
B. 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) five (5) years following the Commencement Date (“Initial
Term”). At the conclusion of the Initial Term, and each successive term thereafter, the Agreement
shall be automatically renewed for an additional five-year term, unless either party gives written
notice of its intention to terminate the Agreement at least two (2) years prior to the automatic
renewal date.
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 Employer’s CEO, reporting directly
to Employer’s Board of Directors (“Board”), and shall have the general powers, duties and
responsibilities of management usually vested in that office in a corporation and such other
additional powers and duties as may be prescribed from time to time by the Board.
In the event that Employee’s duties and responsibilities shall be significantly diminished or
there shall be assigned to him duties and responsibilities materially inconsistent with his
position and either situation continues for thirty (30) days after notice of either such situation
is given such occurrence shall constitute a termination without Good Cause under Section 5.3.
2.3 Board Membership. Employer acknowledges that Employee is currently a member and
Chairman of the Board, and subject to the Board’s fiduciary obligations will take all reasonable
action necessary to assure that Employee remains Chairman throughout the term of this Agreement.
The Employee shall, to the extent appointed or elected, serve as a member of any committee of the
Board, or the equivalent bodies in a subsidiary or affiliate, in all cases, without additional
compensation or benefits and any compensation paid to the Employee, or benefits provided to the
Employee, in such capacities shall be a credit with regard to the amounts due hereunder from the
Employer.
2.4 Other Services. Employer acknowledges and pre-approves Employee’s current
responsibility as Chairman and CEO of Clearant, Inc. (“Clearant”). Employer is hereby notified and
acknowledges that Employee is subject to a Confidentiality Agreement under the terms of his
employment with Clearant. In addition, Employer acknowledges that Employee may do charity work and
conduct personal business as long as such activities do not materially interfere with the
Employee’s duties hereunder.
2.5 Relocation or Change of Duties. Employer shall not, without Employee’s consent,
require Employee to permanently relocate outside of Los Angeles, California. If Employer relocates
more than thirty (30) miles outside of Los Angeles, and Employee elects not to relocate, such
action shall be considered a resignation with Good Reason under Section 5.4. If Employer requests
and Employee agrees to relocate, Employer will pay for reasonable and standard relocation costs of
Employee and Employee’s family, including, but not limited to, closing points on the sale of
Employee’s house and purchase of a new house, temporary housing, travel and moving expenses.
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 annual salary of $325,000,
subject to increases under Section 3.4. In no event shall Employee’s base annual salary be reduced
below $325,000.
3.3 Bonus Plan. Employee is eligible to receive an annual bonus in the reasonable
discretion of the Board, targeted at 100% of Employee’s base salary, and based on achieving
designated individual goals and milestones and the overall performance and profitability of
Employer. The goals and milestones will be established and reevaluated on an annual basis by
mutual agreement of Employee and the Board or its Compensation Committee.
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The bonus will be based on a calendar year and paid no later than April 15th of the
following year.
3.4 Upon each anniversary of the Commencement Date, Employee’s base salary and bonus target
shall be reevaluated and adjusted by the Compensation Committee to ensure appropriate compensation
in the competitive marketplace, such that Employee’s total compensation shall be no less than the
median compensation of similarly positioned CEO’s of similarly situated companies.
3.5 Equity Incentive Plan.
(a) Employee shall be entitled to participate in any stock option, stock bonus, phantom stock
right, equity pool, or other such plans or arrangements, which may exist during the term of his
employment, provided that Employee’s entitlement is not inconsistent with the terms of any such
arrangement or plan.
(b) Employee shall be granted options to purchase one million (1,000,000) shares of Employer’s
common stock under the provisions of Employer’s 2003 Stock Incentive Plan, upon approval by the
Board. The options will vest as follows: 20% on the first, second, third, fourth and fifth
anniversaries of the Commencement Date.
(c) Except as otherwise set forth herein, vesting of options will cease upon the termination
of Employee’s employment with Employer.
3.6 Fringe Benefits.
(a) Employer shall provide to Employee, at Employer’s cost, all perquisites to which other
senior executives of the Employer are generally entitled and such other perquisites which are
suitable to the character of the Employee’s position with the Employer and adequate for the
performance of his duties hereunder in accordance with Employer’s policy.
(b) Upon satisfaction of the applicable eligibility requirements, Employee shall be provided
with group medical and dental insurance through Employer’s plans, as well as any fringe benefit
plan(s) as Employer may offer from time to time to its personnel. Employee’s spouse and any
dependent children of Employee shall be covered under the Employer’s health care and dental plans
at Employer’s cost. Employer will pay for term life insurance for the benefit of Employee in the
amount of 1 1/2 times Employee’s annual base salary, 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. Employer shall also provide
Employee, up to $2,500 each month (grossed up for related taxes), for the actual cost of an
automobile. Employee is also eligible to participate in Employer’s 401K plan. Employer shall pay
for Employee’s membership at Sports Club LA or its equivalent. During the Term of this Agreement,
the Employee shall, at the expense of the Employer, maintain membership in such club or clubs as is
appropriate for a person in his position and entertain at such club or clubs people, the
entertainment of whom is appropriate in the interests of the Employer.
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(c) To the extent legally permissible, the Employer shall not treat such amounts as income to
the Employee.
3.7 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. Any accrued but
unused vacation will be paid to Employee, on a pro rata basis, at the time that his employment is
terminated.
3.8 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
reasonable and necessary business, travel, promotional and similar expenditures incurred by
Employee.
4.2 Liability Insurance. Employer shall provide Employee with officers and directors’
insurance, consistent with usual business practices and acceptable to Employee. Employer shall
also provide Employee with coverage for other forms of liability and property damage insurance
(including, but not limited to, and by way of example only, automobile and travel accident), 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, defend and hold harmless Employee, to the fullest extent under applicable law, for all
defense costs, judgements, fines, settlements, losses, costs or expenses (including attorney’s
fees, including fees representing Employee), 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. Employee shall have the right to approve of counsel selected to represent him (such
approval not to be unreasonably withheld), and in the event a conflict of interest arises at any
time Employer shall provide Employee with separate and independent counsel at Employer’s cost and
expense. Notwithstanding the foregoing, Employer may not enter into any settlement, of any kind,
of any claim, which requires Employee to admit liability or responsibility or to have any order or
judgment entered against Employee without Employee’s consent.
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
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agreement, and all unvested options will terminate. To the extent legally permissible under
the Plan, all vested options shall be exercisable until the end of their original term.
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 three (3) years’ of
additional (i) salary (at the rate in effect at the time of termination) and (ii) bonus (based on
100% of the targeted bonus for the year of termination);
(c) All of Employee’s unvested stock options will vest immediately; and
(d) In addition to any rights under COBRA, all fringe benefits under Section 3.6 shall
continue for a period of three (3) years from the date of termination, provided that medical
insurance 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 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 shall willfully:
(a) Commit an act of fraud, moral turpitude, misappropriation of funds or embezzlement in
connection with his duties;
(b) Violate a material provision of the Employer’s written Codes of Ethics as adopted by the
Board, or any applicable state or federal law or regulation;
(c) Fail or refuse to comply with a relevant and material obligation 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; or
(d) Be convicted of, or enter a plea of guilty or no contest to, a felony under state or
federal law, other than a traffic violation or offense not involving dishonesty or moral turpitude.
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5.4 Good Reason. For purposes of this Agreement, a resignation shall be with “Good
Reason” following:
(a) the assignment to Employee of duties materially inconsistent with Employee’s status as CEO
and Chairman of the Board, the removal of Employee as either CEO or Chairman of the Board, or a
substantial reduction in the nature or status of Employee’s responsibilities;
(b) the relocation of Employer’s principle executive offices to a location more than thirty
(30) miles outside of Los Angeles, or Employer requiring Employee to be primarily based anywhere
other than Employer’s principal executive offices (other than required periodic travel for
Employer’s business);
(c) Employer’s 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.
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;
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(c) An underwritten public offering of Employer’s common stock, if Employer’s stockholders of
record as constituted immediately prior to the offering will, 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 Gross-Up Payment.
(a) Notwithstanding the above, if any of the compensation payable upon termination of
Employee’s employment as provided for above (the “Payments”) triggers the application of Internal
Revenue Code Section 280G, or makes Employee liable for payment of the excise tax (the “Excise
Tax”) provided for under Section 4999 of the Code, or any other statute or regulation under which
Employee may be penalized as a result of the nature or amount of such compensation, then Employer
or the acquiring or successor entity of Employer shall pay to Employee an additional amount (the
“Gross-Up”) such that the net after-tax amount retained by the Employee, after deduction of (X)
any Excise Tax on the Payments, and (Y) any federal, state, local or foreign income, employment or
other tax and Excise Tax upon any payment provided for by this Section 2(h), shall be equal to the
Payments, reduced by the amount of any United States federal, state and local income or employment
tax liability of the Employee calculated as if the Payments were not subject to the Excise Tax.
The determination of whether any of the Payments will be subject to the Excise Tax and the amount
of such Excise Tax will be made by Employer’s regular independent public accounting firm.
(b) In the event that the Excise Tax is subsequently determined to be less than the amount
taken into account under this Section 2(h), Employee shall repay to Employer at the time that the
amount of such reduction of Excise Tax is finally determined, an amount equal to the sum of the
following: (i) the amount of the reduction of the Excise Tax, (ii) the amount of the reduction in
all other taxes generated by the reduction in the Excise Tax, and (iii) interest on the amount of
the sum of (i) and (ii) at the rate provided in Section 1274(b)(2)(B) of the Code.
(c) In the event that the Excise Tax is determined to exceed the amount previously taken into
account under the Section 2(h) (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up),
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Employer shall make an additional Gross-Up payment in respect to such excess (plus any
interest payable with respect to such excess) at the time that the amount of such excess is finally
determined in accordance with the principles set forth above.
5.9 Death or Disability. To the extent consistent with federal and state law,
Employee’s employment, salary 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 an annual period of the Term. 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 and continue to
provide insurance and other fringe benefits to Employee and Employee’s spouse and dependent
children for a period of one year from Employee’s termination date. In the event of a termination
due to death or disability, in addition to all options already vested, 100% of the options set to
vest in the year that death or disability occurs shall vest and Employee (or his legal
representative) shall have until the end of the option term to exercise all options. Employer
shall have no further obligations to Employee (or his legal representative) under this Agreement,
except for those created under any stock option agreements executed prior to the effective date of
termination, and any other vested rights under the employee benefit plans and programs and the
right to receive reimbursement for business expenses (as defined in Section 4).
5.10 Return of Employer Property. Within fifteen (15) 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, engage in any activity directly competitive with 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. The parties agree that the activities provided for in Section
2.4 are not directly competitive with the business or welfare of Employer.
7. NO DISPARAGEMENT
During Employee’s employment with Employer, and at all times thereafter, the parties agree
that they will not disparage each other in any fashion.
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8. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTIES.
Employee shall sign the Employer’s standard Employee Innovation, Proprietary Information and
Confidentiality Agreement (“Confidentiality Agreement”).
9. CURE PERIOD.
In the event that Employee or Employer breaches this Agreement, the breaching party shall have
thirty (30) days within which to cure such breach, after receiving written notice from the other
party specifying in reasonable detail the basis for the claimed breach (“Cure Period”). No breach
of the Agreement shall be actionable if the breaching party is able to cure the breach within the
Cure Period.
10. OTHER PROVISIONS
10.1 Compliance With Other Agreements. Employee represents to Employer that, to his
knowledge and belief, 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. Should claims, demands, causes of action, costs or expenses (including
attorneys’ fees) arise from any alleged breach of contract as a result of accepting employment
with Employer, Employer will indemnify Employee for reasonable legal fees, provided that Employee
did not knowingly or willfully breach such agreement. Employer acknowledges that Employee is
subject to a Confidentiality and Non-Disparagement agreement with Clearant.
10.2 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.
10.3 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.
10.4 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.
10.5 Venue. If any dispute arises regarding the application, interpretation or
enforcement of any provision of this Agreement, including fraud in the
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inducement, such dispute shall be resolved either in federal or state court in Los Angeles,
California.
10.6 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.
10.7 Binding Effect. The provisions of this Agreement shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.
10.8 Notice. Any notices or communications required or permitted by this Agreement
shall be deemed sufficiently given if in writing and when delivered personally or four (4) business
days 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: Compensation Committee,” with a copy to the Employer’s general outside counsel; or
(b) If to Employee, to the most recent address for Employee appearing in Employer’s records.
10.9 Arbitration. Any disputes, controversies or claims arising out of or relating to
this Agreement shall be resolved by binding arbitration before a retired judge at JAMS in Santa
Monica, California, in accordance with its Employment Arbitration Rules and Procedures. The
prevailing party shall be awarded its reasonable attorney’s fees, costs and expenses.
10.10 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.
10.11 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.
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10.12 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 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:
Xxxxxx X. Xxxxxx
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| EMPLOYER: HYTHIAM, INC. |
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| By | ||||
| Xxxx X. Xxxxxxxxxx | ||||
| Chairman of its Compensation Committee |
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