Document:

exv10w3

 

Exhibit 10.3

EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of April 19, 2005, by and
between Hythiam, Inc., a Delaware corporation (“Employer”), and Richard A. Anderson, an individual
(“Employee”).

RECITALS

          A. WHEREAS, Employer has agreed to employ Employee and Employee has agreed to enter into
employment as the Chief Administrative Officer (“CAO”) of Employer, 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 the date first
set forth above, or as soon thereafter as Employee commences services hereunder (“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”). At the
conclusion of the Initial Term, and each successive term thereafter, the Agreement shall be
automatically renewed for an additional three-year term, unless either party gives written notice
of its intention to terminate the Agreement at least nine (9) months 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 CAO, reporting directly
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
additional powers and duties as may be prescribed from time to time by the CEO and Employer’s Board
of Directors (“Board”).

 

 

          2.3 Other Services. Employer acknowledges and pre-approves Employee’s current
responsibility as member of the Board of Directors of Clearant, Inc. (“Clearant”). Employer is
hereby notified and acknowledges that Employee is subject to a Confidentiality Agreement 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.

          2.4 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 $266,800
annually, payable in accordance with Employer’s standard payroll practices, less applicable
withholding. At Employer’s sole discretion, Employee’s base salary may be increased, but not
decreased. Notwithstanding the foregoing, beginning on January 1, 2006 and annually thereafter,
the Employee’s annual salary then in effect shall be increased by at least the Consumer Price Index
for Los Angeles, CA (or a reasonable proxy thereof).

          3.3 Bonus Plan. Except as described in Section 5.1 below, Employee is eligible to
receive an annual bonus in the reasonable discretion of Employer. This discretionary bonus will be
targeted at 50% of Employee’s base salary, 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 CEO,
subject to review and approval by the Board or its Compensation Committee. In the first year of
this Agreement, the goals and objectives related to the 2005 target bonus shall be established by
June 30, 2005. The bonus will be based on a calendar year and shall be paid no later than April
30th of the following year.

          3.4 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 two hundred fifty-five thousand
(255,000) shares of Employer’s common stock under the provisions of

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Employer’s 2003 Stock Incentive Plan (“Plan”), upon approval by the Board. To the
extent permissible such options shall be incentive stock options. The options will vest as
follows: 20% on the first, second, third, fourth and fifth anniversaries of the
Commencement Date.

          (c) Employee’s previous grant of options under the Plan shall continue to be
outstanding and vest in accordance with the terms of such grant. For the avoidance of
doubt, Employee’s Service (as defined in the Plan) will continue uninterrupted for so long
as Employee is a director and/or an employee, or either of the foregoing.

          (d) Except as otherwise set forth herein, vesting of options will cease upon the
termination of Employee’s employment with Employer.

          3.5 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. Employee is also eligible to participate in Employer’s 401K plan.

          (c) To the extent legally permissible, the Employer shall not treat such amounts as
income to the Employee.

          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. This PTO shall be
in addition to normal Company holidays, which shall be determined at the discretion of the Company
from time to time. Any accrued but unused PTO will be paid to Employee, on a pro rata basis, at
the time that his employment is terminated.

          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.

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     4. REIMBURSEMENT OF EXPENSES

          4.1 Travel and Other Expenses. Employer shall pay to or reimburse Employee for
reasonable and necessary business, travel, promotional, professional continuing education and
licensing costs (to the extent required), professional society membership fees, seminars and
similar expenditures incurred by Employee for which Employee submits appropriate receipts and
indicates the amount, date, location and business character in a timely manner.

          4.2 Liability Insurance. Employer shall provide Employee with officers and directors’
insurance and other liability insurance, consistent with usual and reasonable 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, 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 agreement, and all unvested options will
terminate.

          5.2 Termination Without Good Cause; Resignation with Good Reason. Employer shall have
the right to terminate Employee’s employment under this Agreement without Good Cause at any time.
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;

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          (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 remain
exercisable for a period of three (3) years thereafter; and

          (d) In addition to any rights under COBRA, medical benefits shall continue for a period
of one (1) years 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 a mutual release of any and all claims 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:

          (a) Commit an act of fraud, moral turpitude 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) Violate a material provision of the Confidentiality Agreement (defined below).

          (d) 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
Sarbanes-Oxley Act and the regulations of the Securities and Exchange Commission promulgated
thereunder; or

          (e) 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.

          5.4 Good Reason. For purposes of this Agreement, a resignation shall be with “Good
Reason” following:

          (a) Assignment to Employee of duties materially inconsistent with Employee’s status as
a senior officer of Employer, removal of Employee as a senior officer, material adverse
change in the reporting relationship set forth in Section 2.2, or a substantial reduction in
the nature or status of Employee’s responsibilities;

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          (b) Relocation of Employer’s principle executive offices outside of 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;

          (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. 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
fringe benefits under Section 3.5 shall continue for a period of eighteen (18) months from the date
of termination, provided that Medical and Dental 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.

          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 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 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 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).

          5.9 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.

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     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
2.3 are not directly competitive with the business or welfare of Employer.

     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.

          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 Intellectual Properties. The Employee will sign the Employer’s Employee
Innovation, Proprietary Information and Confidentiality Agreement (“Confidentiality Agreement”
prior to or on the Commencement Date.

          7.4 Injunctive Relief. Employee acknowledges that the services to be rendered under
this Agreement and the items described in this Section 7 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.

          7.5 Continuing Effect. The provisions of this Section 7 shall remain in effect after
the Termination Date.

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     8. OTHER PROVISIONS

          8.1 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.

          8.2 Compliance With Other Agreements. Employee represents and warrants 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.

          8.3 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.

          8.4 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.

          8.5 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.

          8.6 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.

          8.7 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.

          8.8 Binding Effect. The provisions of this Agreement shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.

          8.9 Notice. Any notices or communications required or permitted by this Agreement
shall be deemed sufficiently given if in writing and when delivered personally or two business days
after deposit with the United States Postal Service as registered or certified mail, postage
prepaid and addressed as follows:

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          (a) If to Employer, to the principal office of Employer in the State of California,
marked “Attention: Terren S. Peizer”; or

          (b) If to Employee, to the most recent address for Employee appearing in Employer’s
records.

          8.10 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.

          8.11 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.

          8.12 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.

          8.13 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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          8.14 Entire Agreement. This Agreement, and the Confidentiality Agreement and Plan
option grant reference herein, are 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:

	 	 	 
	 
	 	 	 
	Richard A. Anderson

	 	 

	 	 	 	 	 
	 	EMPLOYER:

HYTHIAM, INC.

 	 
	 	By  	 	 
	 	 	       Terren S. Peizer 	 
	 	 	       Chief Executive Officer 	 
	 

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Exhibit 10.4

AMENDMENT TO

EMPLOYMENT AGREEMENT

     THIS AMENDMENT TO EMPLOYMENT AGREEMENT (“Amendment”) is made and entered into as of January
26, 2006, by and between Hythiam, Inc., a Delaware corporation (“Employer”), and Anthony M.
LaMacchia, an individual (“Employee”).

RECITALS

     A. WHEREAS, Employer and Employee previously made and entered into an Employment Agreement
(“Agreement”) as of September 29, 2003, which is incorporated herein by reference.

     B. WHEREAS, Section 10.14 of the Agreement provides that it may be amended, modified or
supplemented by a writing executed by each of the parties.

     C. WHEREAS, Employer and Employee desire to amend the Agreement as set forth herein.

     NOW, THEREFORE, in consideration thereof and of the covenants and conditions contained herein,
the parties agree as follows:

AMENDMENT

     1. Employee’s Base Salary as set forth in Section 3.2 of the Agreement shall be $278,800.00
annually, effective as of January 1, 2006.

     2. The phrase “but in any event shall not be less than $50,000 for any year of this Agreement”
is hereby stricken from the end of the second sentence of Section 3.3 of the Agreement.

     3. The phrase “and remain exercisable for a period of three (3) years thereafter” is hereby
added to the end of Section 5.2(a) of the Agreement.

     4. Except as expressly amended by this Amendment, the Agreement shall remain in full force and
effect, and is hereby ratified and reaffirmed in all respects.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.

	 	 	 	 	 	 	 	 	 
	EMPLOYEE:	 	 	 	HYTHIAM, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Anthony M. LaMacchia

	 	 	 	 	 	Terren S. Peizer
	 	 
	 

	 	 	 	 	 	Its Chairman & CEO	 	 

 

 

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 Anthony M. LaMacchia, an
individual (“Employee”).

RECITALS

     A. WHEREAS, Employee has experience and expertise applicable to employment with Employer to
perform as the Chief Operating 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 Executive Vice President & Chief
Operating Officer of Employer, reporting to Employer’s Chief Executive Officer (“CEO”) and shall
have the general powers, duties and responsibilities of management

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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, based on Employee achieving designated
individual goals and milestones, and the overall performance and profitability of the Company, but
in any event shall not be less than $50,000 for any year of this Agreement. 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. In the
first year of this Agreement, the goals and objectives related to the 2003 target bonus shall be
established by November 30, 2003. Any bonus under this Section 3.3 will be based on a calendar
year and shall be paid no later than April 30th of the following

- 3 -

 

year. The first annual bonus, to the extent granted at the sole discretion of the Company,
shall be prorated based on the Commencement Date.

          3.4 Relocation Expenses. The Employee is eligible to receive reimbursement of his
reasonable and customary expenses incurred pertaining to his relocation to Los Angeles which shall
include transportation of household contents and vehicles, commissions and fees associated with the
sale of his current home, and normal fees associated with the purchase of a new home.
Reimbursement of relocations expenses shall not exceed $60,000. Failure to remain at the Company,
other than termination by the Company without Cause, for a period of one year from receipt of a
relocation or temporary housing reimbursement shall result in the Employee refunding the amount
paid to the Employer within 30 days.

          3.5 Equity Incentive Plan.

               (a) Employee shall be granted options to purchase 400,000 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 July 14, 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.

          3.6 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.

          3.7 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, 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.

          3.8 Deduction from Compensation. Employer shall deduct and withhold from all
compensation payable to Employee all amounts required to be deducted or

- 4 -

 

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.

          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;

- 5 -

 

               (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 Employer
substantially in the standard form 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 to 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

- 6 -

 

               (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;

               (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.

- 7 -

 

          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) Change in Control. 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, 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

- 8 -

 

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 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 direct competitor of Employer for a period of one (1) year, 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.

- 9 -

 

          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.

     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

- 10 -

 

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.

          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.

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          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 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:

	 	 	 
	 
	 	 	 
	Anthony M. LaMacchia

	 	 

	 	 	 	 	 
	 	EMPLOYER:

HYTHIAM, INC.

 	 
	 	By  	 	 
	 	 	      Terren S. Peizer 	 
	 	 	      Its Chairman & CEO 	 

- 12 -

 

	 	 	 	 	 

ATTACHMENT A

1. GME Solutions, LLC — provide advisory services and assistance with business development not to
exceed an average of 10 hours per month on Employee’s own time.

- 13 -

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