Exhibit 10.5
EMPLOYMENT AGREEMENT
     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of
September 29, 2003, by and between Hythiam, Inc., a Delaware corporation
(“Employer”), and Chuck Timpe, 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

 

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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
Sarbanes-Oxley 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:

                 
Chuck Timpe
   

            EMPLOYER:

HYTHIAM, INC.
      By                     Terren S. Peizer                 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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