<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998 Commission File No. 1-4290
K2 INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-2077125
(State of Incorporation) (I.R.S. Employer Identification No.)
4900 South Eastern Avenue
Los Angeles, California 90040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 724-2800
Former name, former address and former fiscal year, if changed since last
report:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 30, 1998.
Common Stock, par value $1 16,541,321 Shares
<PAGE>
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(Dollars in thousands, except for per share figures)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
------------------------
1998 1997
----------- ---------
(Unaudited)
<S> <C> <C>
Net sales $173,165 $171,541
Cost of products sold 128,974 125,160
-------- --------
Gross profit 44,191 46,381
Selling expenses 22,801 22,391
General and administrative expenses 13,618 13,270
-------- --------
Operating income 7,772 10,720
Interest expense 3,139 2,519
Other income, net (62) (291)
-------- --------
Income before provision for income taxes 4,695 8,492
Provision for income taxes 1,550 2,630
-------- --------
Net income $ 3,145 $ 5,862
-------- --------
-------- --------
Earnings per share:
Basic $ 0.19 $ 0.35
Diluted $ 0.19 $ 0.35
Shares:
Basic 16,537 16,556
Diluted 16,616 16,727
Cash dividend $ 0.11 $ 0.11
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
------
Current Assets
Cash and cash equivalents $ 7,679 $ 5,914
Accounts receivable, net 126,208 118,579
Inventories
Finished goods 143,567 137,123
Work in process 17,448 20,802
Raw materials 31,177 35,238
-------- --------
192,192 193,163
Less LIFO reserve 3,855 3,795
-------- --------
188,337 189,368
Deferred taxes 5,353 9,236
Prepaid expenses and other current assets 7,189 7,071
-------- --------
Total current assets 334,766 330,168
Property, Plant and Equipment 185,496 179,562
Less allowance for depreciation and amortization 104,808 101,774
-------- --------
80,688 77,788
Intangibles, principally goodwill, net 17,527 17,561
Other 4,169 3,411
-------- --------
Total Assets $437,150 $428,928
-------- --------
-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 48,781 $ 48,967
Accounts payable 28,702 29,607
Accrued payroll and related 15,431 17,740
Other accruals 24,640 21,794
Current portion of long-term debt 4,444 4,445
-------- --------
Total current liabilities 121,998 122,553
Long-Term Debt 99,668 88,668
Deferred Taxes 11,376 14,822
Shareholders' Equity
Preferred Stock $1 par value, authorized
12,500,000 shares, none issued
Common Stock, $1 par value, authorized
40,000,000 shares, issued shares -
17,162,080 in 1998 and 17,160,080 in 1997 17,162 17,160
Additional paid-in capital 132,118 132,086
Retained earnings 70,993 69,668
Employee Stock Ownership Plan and
stock option loans (3,002) (3,006)
Treasury shares at cost, 623,759 shares in 1998
and in 1997 (8,106) (8,106)
Cumulative translation adjustments (5,057) (4,917)
-------- --------
Total Shareholders' Equity 204,108 202,885
-------- --------
Total Liabilities and Shareholders' Equity $437,150 $428,928
-------- --------
-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
------------------------
1998 1997
----------- ---------
(Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 3,145 $ 5,862
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,016 3,255
Deferred taxes 437 1,427
Changes in operating assets and liabilities:
Accounts receivable (7,629) (15,481)
Inventories 1,031 3,435
Prepaid expenses and other current assets (118) 60
Accounts payable (905) (401)
Payrolls and other accruals 537 (847)
------- --------
Net cash provided by (used in) operating activities 514 (2,690)
Investing Activities
Property, plant and equipment expenditures (6,715) (6,209)
Disposals of property, plant and equipment 97 9
Other items, net (1,124) (1,471)
------- --------
Net cash used in investing activities (7,742) (7,671)
Financing Activities
Borrowings under long-term debt 13,000 12,000
Payments of long-term debt (2,001) (4,833)
Net decrease in short-term bank loans (186) (285)
Dividends paid (1,820) (1,822)
------- --------
Net cash provided by financing activities 8,993 5,060
------- --------
Net increase (decrease) in cash and cash equivalents 1,765 (5,301)
Cash and cash equivalents at beginning of year 5,914 10,860
------- --------
Cash and cash equivalents at end of period $ 7,679 $ 5,559
------- --------
------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 2,740 $ 1,920
Income taxes paid 1,113 1,203
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1998, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the
Consolidated Financial Statements and Notes to Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are net of allowances for doubtful accounts of $7,213,000 at
March 31, 1998 and $7,418,000 at December 31, 1997.
NOTE 3 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
Covenants contained in the Company's $100 million credit line and accounts
receivable financing arrangement, among other things, restrict amounts
available for payment of cash dividends by the Company. As of March 31,
1998, $16.1 million of retained earnings were free of such restrictions.
At March 31, 1998, $50 million of accounts receivable were sold, fully
utilizing the existing accounts receivable purchase facility.
NOTE 4 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $3.1 million and $5.0 million, respectively.
5
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A. Comparative First Quarter Results of Operations
Net sales for the three months ended March 31, 1998 increased slightly to $173.2
million from $171.5 million in the year-earlier period. Net income for the
first quarter of 1998 declined 46.3% to $3.1 million, or $.19 per diluted share,
from $5.9 million, or $.35 per diluted share, in the first quarter of 1997.
NET SALES. In the sporting goods and other recreational products group, net
sales decreased 4.2% to $116.6 million from $121.7 million in the
year-earlier period. The decline was mainly due to a worldwide reduction of
$7.0 million in K2 shipments of in-line skates from the year-ago quarter.
The reduction reflected cautious ordering of K2 skate products by retailers
as they continue to reduce inventory levels of plastic skates which have been
high relative to retail sales levels. Sales of mountain bikes and skis also
declined, while snowboard product shipments were comparable with those in the
prior year--all in the seasonally weak first quarter for these products. Ski
shipments in the first quarter declined due to cautious ordering by ski
retailers following a poor ski season. First quarter sales of Stearns active
water sports also decreased due to shifts in the ordering patterns of certain
customers to take delivery closer to the retail selling seasons. Sales of
Shakespeare fishing tackle increased 18% from the prior year due to the
introduction of new Shakespeare branded products and the strength of the Ugly
Stik and fishing kits.
Net sales of the industrial products group increased 13.6% to $56.6 million in
the 1998 first quarter from $49.8 million in the prior-year quarter. The gain
was primarily due to increased sales of paperweaving product and cutting line.
Improved shipments of building products and composite light pole products also
contributed to the sales gains.
GROSS PROFIT. Gross profit fell 4.7% to $44.2 million, or 25.5% of net sales,
in the first quarter of 1998 as compared to $46.4 million, or 27.0% of net
sales, in the comparable 1997 quarter. The decrease in gross profit as a
percentage of net sales reflects the impact of an unfavorable sales mix that
included a smaller proportion of higher margin in-line skates and higher
manufacturing costs in the manufacture of monofilament line.
COSTS AND EXPENSES. In the first quarter of 1998, selling expenses of $22.8
million, or 13.2% of net sales, were comparable with those in the prior
year's quarter of $22.4 million, or 13.1% of net sales. General and
administrative of $13.6 million, or 7.9% of net sales, in the first quarter
of 1998 were also comparable to $13.3 million, or 7.7%% of net sales, in the
year-earlier period.
OPERATING INCOME. Operating income declined 27.5% to $7.8 million, or 4.5% of
net sales, in the first quarter of 1998, compared to $10.7 million, or 6.2% of
net sales, in the comparable 1997 period. The decrease was mainly attributable
to the decline in the gross profit percentage.
6
<PAGE>
INTEREST EXPENSE. Interest expense increased $620,000, or 24.6%, to $3.1
million in the first quarter of 1998 compared to the year-earlier period.
Higher average borrowings incurred to support the growth in sales increased
interest expense by $734,000, which was offset by a reduction of $114,000 of
interest due to lower interest rates.
B. Financial Condition
The Company's operating activities provided $500,000 of cash during the three
months ended March 31, 1998, as compared with $2.7 million of cash used
during the first three months ended March 31, 1997. The net cash provided in
the 1998 period is attributable to a smaller seasonal buildup of accounts
receivable as compared with the prior year's period which included a
significant increase in in-line skate sales. Partially offsetting this factor
is the smaller decline in inventories from the year-ago period due to the
continuing shift in ordering patterns of certain customers.
Net cash used for investing activities of $7.7 million in the first quarter
of 1998 approximated that used in the first quarter of 1997. There were no
material commitments for capital expenditures at March 31, 1998.
Net cash provided by financing activities increased to $9.0 million over the
prior year due to an increase in long-term borrowings to support growth in sales
and a decrease in the repayment of long-term borrowing.
The Company anticipates its remaining cash needs in 1998 will be provided from
operations and borrowings under existing credit lines.
Statement Regarding Forward-Looking Disclosure
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events, including, but not limited to,
the following: statements regarding sales and earnings, market trends regarding
softboot in-line skates and skis, inventory levels at retail and overall market
trends which involve substantial risks and uncertainties. The Company cautions
that these statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements, including, but not limited to, economic conditions, product demand,
competitive pricing and products, and other risks described in the Company's
Annual Report on Form 10-K filing with the Securities and Exchange Commission.
7
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(c ) At the Annual Meeting of the Stockholders of the Company held
May 7, 1998, the following actions were taken:
(1) Three directors directors were elected:
Susan E. Engel - 14,899,910 votes for and 162,912 votes
withheld;
Wilford D. Godbold, Jr. - 14,965,338 votes for and
97,484 votes withheld;
Richard M. Rodstein - 14,940,721 votes for and 122,101
votes withheld.
(2) The selection by the Board of Directors to approve Ernst &
Young as the Company's independent auditors for the year
1998 was ratified as follows:
14,931,410 votes for, 64,529 votes against and 66,883
votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.01 Employment agreement dated May 8, 1998 between the
Company and Richard M. Rodstein.
10.02 Employment agreement dated May 8, 1998 between the
Company and John J. Rangel.
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the first quarter ended
March 31, 1998
None
8
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K2 INC.
(registrant)
Date: May 13, 1998 /S/ RICHARD M. RODSTEIN
------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: May 13, 1998 /S/ JOHN J. RANGEL
-------------------
John J. Rangel
Senior Vice President - Finance
9
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on MAY 8, 1998
by and between Richard M. Rodstein, an individual (the "Executive"), and K2
Inc., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Executive is currently the President and Chief Executive
Officer of the Company, and has been serving in such position without an
employment agreement; and
WHEREAS, the Company and the Executive mutually desire that an
employment agreement be entered into setting forth their mutual rights and
obligations in respect of the Executive's employment;
NOW THEREFORE, in consideration of the mutual covenants set forth
herein, and for other good and valuable consideration, receipt of which is
hereby acknowledged, the parties do hereby agree as follows:
A G R E E M E N T:
1. EMPLOYMENT BY THE COMPANY AND TERM.
(a) POSITION AND REPORTING. Subject to the terms set forth
herein, the Company agrees to employ the Executive as President and Chief
Executive Officer and the Executive hereby accepts such employment. During
the term of the Executive's employment, the Executive will report solely and
directly to the Board of Directors of the Company (the "Board"). During the
term of the Executive's employment, the Company will nominate and recommend
the Executive for re-election as a director at each annual meeting of
stockholders coinciding with the expiration of his term as a director.
(b) FULL TIME AND BEST EFFORTS. During the term of his employment
with the Company, the Executive will devote substantially all of his business
time and use his best efforts to advance the business and welfare of the
Company, except for sick leave, vacations and approved leaves of absence.
During the term of the Executive's employment, he will not engage in any
other employment or business activities that would be directly harmful or
detrimental to, or that may compete with, the business and affairs of the
Company, or that would interfere with his duties hereunder. However, the
foregoing will not prevent the Executive from devoting a reasonable amount of
time to personal investment, civic and charitable activities.
(c) DUTIES. The Executive will perform such duties as are
customarily associated with his position in a corporation of the size and
nature of the Company, consistent with the Bylaws of the Company and as
reasonably required by the Board.
(d) COMPANY POLICIES. The employment relationship between the
parties will be governed by the general employment policies and practices of
the Company, including but not
<PAGE>
limited to those relating to protection of confidential information and
assignment of inventions, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or
practices, this Agreement will control.
(e) TERM. The term of this Agreement will begin as of MAY 8, 1998
and end on MAY 7, 2001 (such three-year period, the "Employment Term"),
unless extended and subject to the provisions for termination set forth
herein.
2. COMPENSATION AND BENEFITS.
(a) SALARY. The Executive will receive for services to be
rendered hereunder a base salary at the annual rate of Three Hundred
Twenty-Five Thousand Dollars ($325,000) payable at least as frequently as
monthly and subject to payroll deductions as may be necessary or customary in
respect of the Company's salaried employees (the "Base Salary"). The Base
Salary will be subject to review at least annually and to increase at such
times and in such amounts as the Board may approve.
(b) PARTICIPATION IN BENEFIT PLANS. During the term of the
Executive's employment, the Executive will be entitled to participate in any
insurance, hospitalization, medical, dental, health, accident, disability or
similar plan or program of the Company now existing or established hereafter
to the extent that he is eligible under the general provisions thereof. The
Company may, in its sole discretion and from time to time, amend, eliminate
or establish additional benefit programs as it deems appropriate. The
Executive will also participate in all fringe benefits offered by the Company
to any of its senior executives.
3. INCENTIVE, BONUS AND OPTION PLANS. During the Executive's
employment, the Executive will be entitled to participate, on terms and
conditions that are appropriate to his position and responsibilities at the
Company and are no less favorable than those applying to other senior
executives of the Company, in any incentive, bonus, deferred compensation,
retirement, stock option and other compensation plans of the Company
currently or hereafter made available by the Company to senior executives of
the Company
4. PERQUISITES, VACATIONS AND REIMBURSEMENT OF EXPENSES. During the
term of the Executive's employment:
(a) The Company will furnish the Executive with, and the Executive
will be allowed full use of, office facilities, automobiles, secretarial and
clerical assistance and other Company property and services commensurate with
his position and of at least comparable quality, nature and extent to those
made available to other senior executives of the Company from time to time;
(b) The Executive will be allowed vacations and leaves of absence
with pay on a basis no less favorable than that applying to other senior
executives of the Company;
2
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(c) The Company will reimburse the Executive for all monies which
he has expended for purposes of the Company's business, such reimbursement to
be effected in accordance with Company reimbursement policies and procedures
from time to time in effect.
5. TERMINATION OF EMPLOYMENT.
(a) DEFINITIONS. The following definitions will apply to Sections
5 and 6 as applicable:
(i) CAUSE. The term "Cause" means: (A) conviction of a
felony involving moral turpitude, or (B) willful gross neglect or
willful gross misconduct in carrying out Executive's duties under this
Agreement, resulting in material economic harm to the Company, unless
Executive believed in good faith that such conduct was in, or not
contrary to, the best interests of the Company.
(ii) DISABILITY. The term "Disability" means the inability
of the Executive due to illness (mental or physical), accident, or
otherwise, to perform his duties for any period of 180 consecutive days,
as determined by an independent physician selected by the Company and
reasonably acceptable to the Executive or his legal representative. Any
return to work from a period of disability must be authorized by the
Executive's physician.
(iii) GOOD REASON. The term "Good Reason" means: (A) a
material breach of this Agreement by the Company; (B) without the
Executive's prior written consent, assignment to the Executive of duties
materially inconsistent in any respect with his position or any other
action by the Company that results in a material diminution in the
Executive's position, authority, duties or responsibilities, it being
expressly understood that a change in the Executive's reporting
responsibility so that he does not report directly and solely to the
Board will constitute "Good Reason"; (C) any transaction in which the
Company becomes a subsidiary of another corporation or which is
described in clause (iii) or (iv) of the definition of "Change in
Control" in Section 6(a) below; (D) reduction, without the Executive's
prior written consent, of the Executive's Base Salary, or his bonus or
other cash incentive compensation opportunity, for any reason other than
in connection with the termination of his employment or in connection
with, and proportionate to, a Company-wide pay reduction; (E) any
material reduction of fringe benefits provided to the Executive for any
reason other than in connection with the termination of the Executive's
employment or in connection with any change to the Company's benefit
programs applicable to all Company employees generally made in the
normal course of business; (F) assignment of the Executive, without his
prior written consent, to a Company office located more than 20 miles
from the Executive's current office location; or (G) the Company's
failure to obtain an agreement from any successor or assign of the
Company to assume and to agree to perform this Agreement.
(iv) NOTICE OF TERMINATION. The term "Notice of Termination"
means a notice which indicates the specific termination provision in
this Agreement relied upon and sets forth in reasonable detail the facts
and circumstances claimed to provide a basis
3
<PAGE>
for termination of employment under the provision so indicated. Any
purported termination of employment by the Company or by the Executive
must be communicated by written Notice of Termination to the other party
hereto in accordance with Section 11(a) hereof. With respect to any
termination of employment by the Executive for Good Reason, the
Executive will have 120 days following the occurrence of any event
described in Section 5(a)(iii) to provide the Company with Notice of
Termination, and may not do so thereafter.
(v) SEVERANCE TERM. The term "Severance Term" means the
remaining period of the Employment Term as of a Termination Date or two
full years, whichever is longer.
(vi) TERMINATION DATE. The term "Termination Date" means:
(i) if the Executive terminates his employment for Good Reason, the date
that is 60 days after Notice of Termination is given and (ii) if the
Executive's employment is terminated by the Company other than for
Cause, death or Disability, the date that is 30 days after Notice of
Termination is given.
(b) TERMINATION BY THE COMPANY FOR CAUSE. The Board may terminate
the Executive's employment with the Company at any time for Cause, immediately
upon notice to the Executive of the circumstances leading to such termination
for Cause. In the event that the Executive's employment is terminated for
Cause, the Executive will receive payment for all accrued salary and vacation
time through the Termination Date, which in this event will be the date upon
which Notice of Termination is given. The Company will have no further
obligation to pay severance of any kind whether under this Agreement or
otherwise nor to make any payment in lieu of notice.
(c) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive
will have the right, at his election, to terminate his employment with the
Company by written notice to the Company to that effect for a period of 120
days following any occurrence constituting Good Reason; PROVIDED, HOWEVER,
that termination for Good Reason will not be effective until the Executive
gives written notice specifying the occurrence constituting Good Reason and,
PROVIDED that if such occurrence is curable, the Company fails to correct it
within 10 days after the receipt of the applicable notice.
(d) TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE
FOR GOOD REASON. In the event that the Executive's employment is terminated
by the Company (other than pursuant to Section 5(b)) or such employment is
terminated by the Executive for Good Reason, (and in either such case the
Executive is not entitled to benefits pursuant to Section 6(b)), the Company
agrees to pay or provide to the Executive as termination compensation the
following:
(i) A single lump sum payment, payable in cash within five
days of the Termination Date, equal to the sum of:
(A) the accrued portion of any Base Salary and vacation
through the Termination Date; plus
4
<PAGE>
(B) an amount representing bonus and all other cash
incentive compensation for such period determined by multiplying:
(I) the average of such bonus and other cash
incentive compensation accrued for each of the three preceding
full years, by
(II) the fraction of the year of termination elapsed
prior to the Termination Date; plus
(C) the present value of:
(I) the Executive's Base Salary in effect upon the
Termination Date for the Severance Term, plus
(II) incentive compensation for the Severance Term,
based upon the Executive's average bonus and all other cash
incentive compensation accrued for each of the three preceding
full years,
less standard withholdings for tax and social security purposes. For
the purpose of determining present value, future payments will be
discounted at an interest rate equal to the short-term borrowing rate of
the Company.
(ii) The Executive will have a period of 120 days
following the Termination Date to exercise any options subject to
exercise as of such date.
(iii) Continuation of benefits as follows:
(A) All benefits provided under Section 2(b) will
continue for the remaining period of the Severance Term.
Notwithstanding the foregoing, to the extent any such benefit
cannot be provided through the applicable plan of the Company, the
Company will provide such benefit outside of the plan or will
provide a cash lump sum payment equal to the value of such
additional benefit.
(B) The Company shall meet its obligation under (A),
above, in connection with its group medical/dental plan for the
period ending on the earlier to occur of: (i) the end of the
Severance Term or (ii) the date the Executive ceases to be eligible
for continuation coverage under the Company's group medical/dental
plan pursuant to the provisions of COBRA, by providing the
continuation of such coverage at Company expense, contingent upon
the Executive's timely election of such coverage under COBRA.
(C) To the extent required to avoid adverse tax
consequences under Section 105(h) of the Internal Revenue Code of
1986 (the "Code"), the Company's payments under this Section
5(d)(iii) will be recognized by the Executive in his taxable income
and the Executive will receive, in addition, a
5
<PAGE>
"gross-up" payment covering the tax liability attributable to such
recognized income consistent with principles of paragraph 6(c)(v),
below.
(iv) Additional credited service for retirement benefits under
all retirement plans, including supplemental retirement plans (if any),
equivalent to the Severance Term.
(e) TERMINATION BY REASON OF DEATH OR DISABILITY. This Agreement
will terminate upon the death of the Executive; and the Executive's
employment hereunder may be terminated by the Executive or the Company, at
either of their election, upon the Executive's Disability. In the event the
Executive's employment is terminated as the result of death or Disability,
except as set forth in the following sentence, the Executive, or his estate
or legal representative, will be entitled to receive the accrued portion of
any Base Salary and vacation through the Termination Date, plus any
unreimbursed business expenses, plus for the remainder of the Employment
Term: (i) periodically not less frequently than monthly in accordance with
the Company's normal payroll practice, payments at the rate of his then Base
Salary; and (ii) at the normal and customary time for payment of bonuses and
all other cash incentive compensation, amounts equal to the average of such
payments accrued for each of the three full preceding years; in each case
subject to any applicable withholdings for tax and social security purposes.
The payments provided in this Section 5(e) will be reduced by the amount of
any payments made to the Executive pursuant to any disability or life
insurance policy provided by the Company for this purpose, which insurance
policy is in addition to any other insurance benefits provided to the
Executive as a benefit hereunder.
6. BENEFITS UPON CHANGE OF CONTROL.
(a) DEFINITIONS. In addition to the definitions provided in
Section 5, the following definition will apply to this Section 6:
CHANGE IN CONTROL. The term "Change in Control" means the
occurrence of any of the following events after the date of this
Agreement: (i) the acquisition by any individual, entity or group within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (a "Person"), of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors ("Voting Securities"); PROVIDED, HOWEVER,
that the following acquisitions will not constitute a Change in Control:
(A) any acquisition by the Company, (B) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (C) any acquisition by
the Executive (or a group including the Executive); (ii) a change in the
composition of a majority of the Board within a three-year period, which
change has not been approved by a majority of the persons then surviving
as Directors who also comprised the Board immediately prior to the
commencement of such period; or (iii) the consummation of any
reorganization, merger or consolidation other than a reorganization,
merger or consolidation which would
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result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into Voting Securities of the surviving entity) at
least 60% of the combined voting power of the Voting Securities of the
Company or such surviving entity outstanding immediately after such
reorganization, merger or consolidation; or (iv) the consummation of a
plan of complete liquidation of the Company or of an agreement for the
sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all of the Company's assets.
(b) ELIGIBILITY FOR BENEFITS. The Company agrees to pay to the
Executive the benefits specified in Section 6(c) hereof if (i) there is a
Change in Control during the term of this Agreement and (ii) within the
period commencing on the date of the Change in Control, or (if earlier) the
date of any agreement by the Company to enter into the transaction resulting
in such Change in Control, and ending two years after the Change in Control
(A) the Company terminates the employment of the Executive for any reason
other than Cause, death or Disability or (B) the Executive voluntarily
terminates employment with the Company for Good Reason. A Change of Control
will be deemed to have occurred during the term of this Agreement, for
purposes of this paragraph 6(b), if an agreement is entered into during the
term of this Agreement for a transaction resulting in a Change of Control,
notwithstanding that the Change of Control transaction is not completed until
after the term of this Agreement.
(c) BENEFITS UPON TERMINATION OF EMPLOYMENT. If the Executive is
entitled to benefits pursuant to Section 6(b) hereof, in lieu of any payments
and benefits provided in Section 5 the Company agrees to pay or provide to
the Executive as termination compensation the following:
(i) A single lump sum payment, payable in cash within five
days of the Termination Date, equal to the sum of:
(A) the accrued portion of any Base Salary and vacation
through the Termination Date; plus
(B) an amount representing bonus and all other cash
incentive compensation for such period determined by multiplying:
(I) the average of such bonus and other cash
incentive compensation accrued for each of the three preceding
full years, by
(II) the fraction of the year of termination elapsed
prior to the Termination Date; plus
(C) 299% of the sum of:
(I) the Executive's Base Salary in effect upon the
Termination Date plus
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(II) the Executive's average bonus and all other
cash incentive compensation accrued for each of the three
preceding full years.
(ii) All stock options, restricted stock or other equity
awards then held by Employee will automatically be deemed amended,
without further action on the part of the Company or the Executive, so
that (A) all options will be fully vested and not subject to forfeiture
or expiration by reason of the Executive's termination, and will be
subject to exercise in full for the remainder of their stated term; and
(B) all restricted stock or other equity awards will be fully vested and
all restrictions thereon will lapse.
(iii) Continuation of benefits as follows:
(A) All benefits provided under Section 2(b) will
continue for the remaining period of the Severance Term.
Notwithstanding the foregoing, to the extent any such benefit
cannot be provided through the applicable plan of the Company, the
Company will provide such benefit outside of the plan or will
provide a cash lump sum payment equal to the value of such
additional benefit.
(B) The Company shall meet its obligation under (A),
above, in connection with its group medical/dental plan for the
period ending on the earlier to occur of: (i) the end of the
Severance Term or (ii) the date the Executive ceases to be eligible
for continuation coverage under the Company's group medical/dental
plan pursuant to the provisions of COBRA, by providing the
continuation of such coverage at Company expense, contingent upon
the Executive's timely election of such coverage under COBRA.
(C) To the extent required to avoid adverse tax
consequences under Section 105(h) of the Internal Revenue Code of
1986 (the "Code"), the Company's payments under this Section
5(d)(iii) will be recognized by the Executive in his taxable income
and the Executive will receive, in addition, a "gross-up" payment
covering the tax liability attributable to such recognized income
consistent with principles of paragraph 6(c)(v), below.
(iv) Additional credited service for retirement benefits
under all retirement plans, including supplemental retirement plans (if
any), equivalent to the remaining period of the Employment Term.
(v) In the event that any amount or benefit that may be paid
or otherwise provided to the Executive by the Company or any affiliated
company, whether pursuant to this Agreement or otherwise (collectively,
"Covered Payments"), is or may become subject to the tax imposed under
Code Section 4999 ("Excise Tax"), the Company will pay to the Executive
a "Reimbursement Amount" equal to the total of: (A) any Excise Tax on
the Covered Payments, plus (B) any Federal, state, and local income
taxes, employment and excise taxes (including the Excise Tax) on the
Reimbursement Amount (but without reduction for any Federal, state, or
local income or employment taxes on such Covered Payments), plus (C) the
product of any deductions disallowed for
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Federal, state or local income tax purposes because of the inclusion of
the Reimbursement Amount in the Executive's adjusted gross income
multiplied by the highest applicable marginal rate of Federal, state,
and local income taxation, respectively, for the calendar year in which
the Reimbursement Amount is to be paid. For purposes of this Section
6(c)(v), the Executive will be deemed to pay (Y) Federal income taxes at
the highest applicable marginal rate of Federal income taxation for the
calendar year in which the Reimbursement Amount is to be paid and (Z)
any applicable state and local income taxes at the highest applicable
marginal rate of taxation for the calendar year in which such
Reimbursement Amount is to be paid, net of the maximum reduction in
Federal income taxes which could be obtained from the deduction of such
state or local taxes if paid in such year (determined without regard to
limitations on deductions based upon the amount of the Executive's
adjusted gross income).
(d) CHANGES TO BENEFITS. In the event the Board desires to
approve a merger to be accounted for as a "pooling of "interests," the
Executive will, in good faith, negotiate with the Company concerning such
changes in the foregoing payments and benefits (if any) as may be necessary
in order to achieve such accounting treatment. The parties acknowledge that
the Executive's obligation to negotiate in good faith hereunder will not
require him to accept a material reduction in the net after tax benefits
provided to him hereunder or in any alternative agreement or arrangement.
7. NO OBLIGATION TO MITIGATE DAMAGES. In the event of a termination
of the Executive's employment for any reason, the Executive will not be
required to seek other employment or to mitigate any of the Company's
obligations under this Agreement, and no amount payable hereunder will be
reduced (a) by any claim the Company may assert against the Executive or (b)
by any compensation or benefits earned by the Executive as a result of
employment by another employer, self-employment or from any other source
after such termination of employment with the Company; PROVIDED, HOWEVER,
that the benefits provided pursuant to Sections 5(d)(iii) and 6(c)(iii)(A)
will terminate at such time as the Executive becomes eligible for comparable
benefits as the result of employment by another Person.
8. PROPRIETARY INFORMATION OBLIGATIONS. During the Executive's
employment pursuant to this Agreement, the Executive will have access to and
become acquainted with confidential and proprietary information of the
Company and its subsidiaries, including, but not limited to, information or
plans regarding customer relationships, personnel, or sales, marketing, and
financial operations and methods; trade secrets; formulas; devices; secret
inventions; processes; and other compilations of information, records, and
specifications (collectively "Proprietary Information"). The Executive will
not disclose any such Proprietary Information directly or indirectly, or use
it in any way, either during the Executive's employment pursuant to this
Agreement or at any time thereafter, except as required in the course of his
employment for the Company or as authorized in writing by the Company. All
files, records, documents, computer-recorded information, drawings,
specifications, equipment and similar items relating to the business of the
Company or its subsidiaries, whether prepared by the Executive or otherwise
coming into his possession, will remain the exclusive property of the Company
or its subsidiaries, as the case may be, and may not be removed from the
premises of the Company
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under any circumstances whatsoever without the prior written consent of the
Company, except when (and only for the period) necessary to carry out the
Executive's duties hereunder, and if removed must be immediately returned to
the Company upon any termination of his employment; PROVIDED, HOWEVER, that
the Executive may retain copies of documents reasonably related to his
interest as a shareholder and any documents that were personally owned, which
copies and the information contained therein the Executive agrees not to use
for any business purpose. Notwithstanding the foregoing, Proprietary
Information will not include (a) information which is or becomes generally
public knowledge or public except through disclosure by the Executive in
violation of this Agreement and (b) information that may be required to be
disclosed by applicable law.
9. NONINTERFERENCE. While employed by the Company and for a period of
one year after termination of this Agreement, the Executive agrees not to
interfere with the business of the Company or any subsidiary of the Company
by directly or indirectly soliciting, attempting to solicit, or otherwise
inducing, any employee of the Company or any subsidiary of the Company to
terminate his or her employment in order to become an employee, consultant or
independent contractor to or for any other employer.
10. NON-COMPETITION. The Executive agrees that, during the Employment
Term, he will not, without the prior consent of the Company, directly or
indirectly, have an interest in, be employed by, or be connected with, as an
employee, consultant, officer, director, partner, stockholder or joint
venturer, in any person or entity owning, managing, controlling, operating or
otherwise participating or assisting in any business which is in competition
with the business of the Company, in any location, unless the Executive's
employment is terminated by the Company without Cause or by the Executive for
Good Reason; PROVIDED, HOWEVER, that the foregoing will not prevent the
Executive from being a stockholder of less than 1% of the issued and
outstanding securities of any class of a corporation listed on a national
securities exchange or designated as national market system securities on an
interdealer quotation system by the National Association of Securities
Dealers, Inc.
11. MISCELLANEOUS.
(a) NOTICES. Any notices provided hereunder must be in writing
and will be deemed effective upon the earlier of two days following personal
delivery (including personal delivery by telecopy or telex), or the fourth
day after mailing by first class mail to the recipient at the address
indicated below:
To the Company:
K2 Inc.
4900 South Eastern Avenue
Los Angeles, CA 90040
Attn: Secretary
Telecopier No: (213) 724-0667
With a copy to:
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Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Andrew E. Bogen, Esq.
Telecopier: (213) 229-7520
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To the Executive:
/S/ RICHARD RODSTEIN
-------------------------
-------------------------
-------------------------
With a copy to:
-------------------------
-------------------------
-------------------------
or to such other address or to the attention of such other person as the
recipient party will have specified by prior written notice to the sending
party.
(b) SEVERABILITY. Any provision of this Agreement which is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction and subject to this Section be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any
other provisions of this Agreement invalid, illegal, or unenforceable in any
other jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant will
be modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
(c) ENTIRE AGREEMENT. This document constitutes the final,
complete, and exclusive embodiment of the entire agreement and understanding
between the parties related to the subject matter hereof and supersedes and
preempts any prior or contemporaneous understandings, agreements, or
representations by or between the parties, written or oral.
(d) COUNTERPARTS. This Agreement may be executed on separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
agreement.
(e) SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by the Executive and the
Company, and their respective successors and assigns, except that the
Executive may not assign any of his duties hereunder and he may not assign
any of his rights hereunder without the prior written consent of the Company.
(f) AMENDMENTS. No amendments or other modifications to this
Agreement may be made except by a writing signed by both parties. No
amendment or waiver of this Agreement requires the consent of any individual,
partnership, corporation or other entity not a party to this Agreement.
Nothing in this Agreement, express or implied, is intended to confer upon any
third person any rights or remedies under or by reason of this Agreement.
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(g) CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the laws of
the State of California without giving effect to principles of conflicts of
law.
12. ARBITRATION.
(a) Any disputes or claims arising out of or concerning the
Executive's employment or termination by the Company, whether arising under
theories of liability or damages based upon contract, tort or statute, will
be determined exclusively by arbitration before a single arbitrator in
accordance with the employment arbitration rules of the American Arbitration
Association, except as modified by this Agreement. The arbitrator's decision
will be final and binding on both parties. Judgment upon the award rendered
by the arbitrator may be entered in any court of competent jurisdiction. In
recognition of the fact that resolution of any disputes or claims in the
courts is rarely timely or cost effective for either party, the Company and
the Executive enter this mutual agreement to arbitrate in order to gain the
benefits of a speedy, impartial and cost-effective dispute resolution
procedure.
(b) Any arbitration will be held in the Executive's place of
employment with the Company. The arbitrator must be an attorney with
substantial experience in employment matters, selected by the parties
alternately striking names from a list of five such persons provided by the
American Arbitration Association (AAA) office located nearest to the place of
employment, following a request by the party seeking arbitration for a list
of five such attorneys with substantial professional experience in employment
matters. If either party fails to strike names from the list, the arbitrator
will be selected from the list by the other party.
(c) Each party will have the right to take the deposition of one
individual and any expert witness designated by the other party. Each party
will also have the right to propound requests for production of documents to
any party and the right to subpoena documents and witnesses for the
arbitration. Additional discovery may be made only where the arbitrator
selected so orders upon a showing of substantial need. The arbitrator will
have the authority to entertain a motion to dismiss and/or a motion for
summary judgment by any party and will apply the standards governing such
motions under the Federal Rules of Civil Procedure.
(d) The Company and the Executive agree that they will attempt,
and they intend that they and the arbitrator should use their best efforts in
that attempt, to conclude the arbitration proceeding and have a final
decision from the arbitrator within 120 days from the date of selection of
the arbitrator; PROVIDED, HOWEVER, that the arbitrator will be entitled to
extend such 120-day period for one additional 120-day period. The arbitrator
will deliver a written award with respect to the dispute to each of the
parties, who must promptly act in accordance therewith.
(e) The Company will pay any and all reasonable fees and expenses
incurred by the Executive in seeking to obtain or enforce any rights or
benefits provided by this Agreement, including all reasonable attorneys' and
experts' fees and expenses, accountants' fees and expenses, and court costs
(if any) that may be incurred by the Executive in pursuing a claim for
payment of compensation or benefits or other right or entitlement under this
Agreement,
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PROVIDED that the Executive is successful as to at least part of the disputed
claim by reason of litigation, arbitration or settlement.
(f) In a contractual claim under this Agreement, the arbitrator
must act in accordance with the terms and provisions of this Agreement and
applicable legal principles and will have no authority to add, delete or
modify any term or provision of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date it is last executed below by either party.
/S/ RICHARD RODSTEIN
------------------------------
RICHARD M. RODSTEIN
K2 INC.
By: /S/ JOHN J. RANGEL
---------------------------------------
Name: John J. Rangel
----------------------------------
Title: SENIOR VICE PRESIDENT - FINANCE
--------------------------------
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on May 8, 1998
by and between John J. Rangel, an individual (the "Executive"), and K2 Inc.,
a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Executive is currently the Senior Vice President of the
Company, and has been serving in such position without an employment agreement;
and
WHEREAS, the Company and the Executive mutually desire that an employment
agreement be entered into setting forth their mutual rights and obligations in
respect of the Executive's employment;
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties do hereby agree as follows:
A G R E E M E N T:
1. EMPLOYMENT BY THE COMPANY AND TERM.
(a) POSITION AND REPORTING. Subject to the terms set forth herein,
the Company agrees to employ the Executive as Chief Financial Officer and the
Executive hereby accepts such employment. During the term of the Executive's
employment, the Executive will report solely and directly to the Chief Executive
Officer of the Company.
(b) FULL TIME AND BEST EFFORTS. During the term of his employment
with the Company, the Executive will devote substantially all of his business
time and use his best efforts to advance the business and welfare of the
Company, except for sick leave, vacations and approved leaves of absence.
During the term of the Executive's employment, he will not engage in any other
employment or business activities that would be directly harmful or detrimental
to, or that may compete with, the business and affairs of the Company, or that
would interfere with his duties hereunder. However, the foregoing will not
prevent the Executive from devoting a reasonable amount of time to personal
investment, civic and charitable activities.
(c) DUTIES. The Executive will perform such duties as are
customarily associated with his position in a corporation of the size and nature
of the Company, consistent with the Bylaws of the Company and as reasonably
required by the Board and Chief Executive Officer.
(d) COMPANY POLICIES. The employment relationship between the
parties will be governed by the general employment policies and practices of the
Company, including but not limited to those relating to protection of
confidential information and assignment of inventions,
<PAGE>
except that when the terms of this Agreement differ from or are in conflict
with the Company's general employment policies or practices, this Agreement
will control.
(e) TERM. The term of this Agreement will begin as of May 8, 1998
and end on November 7, 2000 (such two and one-half year period, the "Employment
Term"), unless extended and subject to the provisions for termination set forth
herein.
2. COMPENSATION AND BENEFITS.
(a) SALARY. The Executive will receive for services to be rendered
hereunder a base salary at the annual rate of Two Hundred Ten Thousand Dollars
($210,000) payable at least as frequently as monthly and subject to payroll
deductions as may be necessary or customary in respect of the Company's salaried
employees (the "Base Salary"). The Base Salary will be subject to review at
least annually and to increase at such times and in such amounts as the Board
may approve.
(b) PARTICIPATION IN BENEFIT PLANS. During the term of the
Executive's employment, the Executive will be entitled to participate in any
insurance, hospitalization, medical, dental, health, accident, disability or
similar plan or program of the Company now existing or established hereafter to
the extent that he is eligible under the general provisions thereof. The
Company may, in its sole discretion and from time to time, amend, eliminate or
establish additional benefit programs as it deems appropriate. The Executive
will also participate in all fringe benefits offered by the Company to its
senior executives.
3. INCENTIVE, BONUS AND OPTION PLANS. During the Executive's employment,
the Executive will be entitled to participate, on terms and conditions that are
appropriate to his position and responsibilities at the Company and are no less
favorable than those applying to other senior executives of the Company, in any
incentive, bonus, deferred compensation, retirement, stock option and other
compensation plans of the Company currently or hereafter made available by the
Company to senior executives of the Company
4. PERQUISITES, VACATIONS AND REIMBURSEMENT OF EXPENSES. During the term
of the Executive's employment:
(a) The Company will furnish the Executive with, and the Executive
will be allowed full use of, office facilities, automobiles, secretarial and
clerical assistance and other Company property and services commensurate with
his position and of at least comparable quality, nature and extent to those made
available to other senior executives of the Company from time to time;
(b) The Executive will be allowed vacations and leaves of absence
with pay on a basis no less favorable than that applying to other senior
executives of the Company;
(c) The Company will reimburse the Executive for all monies which he
has expended for purposes of the Company's business, such reimbursement to be
effected in accordance with Company reimbursement policies and procedures from
time to time in effect.
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5. TERMINATION OF EMPLOYMENT.
(a) DEFINITIONS. The following definitions will apply to Sections
5 and 6 as applicable:
(i) CAUSE. The term "Cause" means: (A) conviction of
a felony involving moral turpitude, or (B) willful gross neglect
or willful gross misconduct in carrying out Executive's duties
under this Agreement, resulting in material economic harm to the
Company, unless Executive believed in good faith that such
conduct was in, or not contrary to, the best interests of the
Company.
(ii) DISABILITY. The term "Disability" means the
inability of the Executive due to illness (mental or physical),
accident, or otherwise, to perform his duties for any period of
180 consecutive days, as determined by an independent physician
selected by the Company and reasonably acceptable to the
Executive or his legal representative. Any return to work from
a period of disability must be authorized by the Executive's
physician.
(iii) GOOD REASON. The term "Good Reason" means:
(A) a material breach of this Agreement by the Company; (B)
without the Executive's prior written consent, assignment to
the Executive of duties materially inconsistent in any
respect with his position or any other action by the Company
that results in a material diminution in the Executive's
position, authority, duties or responsibilities, it being
expressly understood that a change in the Executive's
reporting responsibility so that he does not report directly
and solely to the Chief Executive Officer will constitute
"Good Reason"; (C) any transaction in which the Company
becomes a subsidiary of another corporation or which is
described in clause (iii) or (iv) of the definition of
"Change in Control" in Section 6(a) below; (D) reduction,
without the Executive's prior written consent, of the
Executive's Base Salary, or his bonus or other cash incentive
compensation opportunity, for any reason other than in
connection with the termination of his employment or in
connection with, and proportionate to, a Company-wide pay
reduction; (E) any material reduction of fringe benefits
provided to the Executive for any reason other than in
connection with the termination of the Executive's employment
or in connection with any change to the Company's benefit
programs applicable to all Company employees generally made
in the normal course of business; (F) assignment of the
Executive, without his prior written consent, to a Company
office located more than 20 miles from the Executive's
current office location; or (G) the Company's failure to
obtain an agreement from any successor or assign of the
Company to assume and to agree to perform this Agreement.
(iv) NOTICE OF TERMINATION. The term "Notice of
Termination" means a notice which indicates the specific
termination provision in this Agreement relied upon and sets
forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of employment
under the provision so indicated. Any purported termination
of employment by the Company or by the Executive must be
communicated
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by written Notice of Termination to the other party hereto in
accordance with Section 11(a) hereof. With respect to any
termination of employment by the Executive for Good Reason,
the Executive will have 120 days following the occurrence of
any event described in Section 5(a)(iii) to provide the
Company with Notice of Termination, and may not do so
thereafter.
(v) SEVERANCE TERM. The term "Severance Term"
means the remaining period of the Employment Term as of a
Termination Date or one full year, whichever is longer.
(vi) TERMINATION DATE. The term "Termination Date"
means: (i) if the Executive terminates his employment for
Good Reason, the date that is 60 days after Notice of
Termination is given and (ii) if the Executive's employment
is terminated by the Company other than for Cause, death or
Disability, the date that is 30 days after Notice of
Termination is given.
(b) TERMINATION BY THE COMPANY FOR CAUSE. The Board may terminate
the Executive's employment with the Company at any time for Cause, immediately
upon notice to the Executive of the circumstances leading to such termination
for Cause. In the event that the Executive's employment is terminated for
Cause, the Executive will receive payment for all accrued salary and vacation
time through the Termination Date, which in this event will be the date upon
which Notice of Termination is given. The Company will have no further
obligation to pay severance of any kind whether under this Agreement or
otherwise nor to make any payment in lieu of notice.
(c) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive
will have the right, at his election, to terminate his employment with the
Company by written notice to the Company to that effect for a period of 120
days following any occurrence constituting Good Reason; PROVIDED, HOWEVER,
that termination for Good Reason will not be effective until the Executive
gives written notice specifying the occurrence constituting Good Reason and,
PROVIDED that if such occurrence is curable, the Company fails to correct it
within 10 days after the receipt of the applicable notice.
(d) TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE
FOR GOOD REASON. In the event that the Executive's employment is terminated
by the Company (other than pursuant to Section 5(b)) or such employment is
terminated by the Executive for Good Reason, (and in either such case the
Executive is not entitled to benefits pursuant to Section 6(b)), the Company
agrees to pay or provide to the Executive as termination compensation the
following:
(i) A single lump sum payment, payable in cash
within five days of the Termination Date, equal to the sum of:
(A) the accrued portion of any Base Salary and
vacation through the Termination Date; plus
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(B) an amount representing bonus and all other
cash incentive compensation for such period determined
by multiplying:
(I) the average of such bonus and other
cash incentive compensation accrued for each of the
three preceding full years, by
(II) the fraction of the year of
termination elapsed prior to the Termination Date;
plus
(C) the present value of:
(I) the Executive's Base Salary in effect
upon the Termination Date for the Severance Term,
plus
(II) incentive compensation for the
Severance Term, based upon the Executive's average
bonus and all other cash incentive compensation
accrued for each of the three preceding full years,
less standard withholdings for tax and social security
purposes. For the purpose of determining present value,
future payments will be discounted at an interest rate equal
to the short-term borrowing rate of the Company.
(ii) The Executive will have a period of 120 days
following the Termination Date to exercise any options subject
to exercise as of such date.
(iii) Continuation of benefits as follows:
(A) All benefits provided under Section 2(b)
will continue for the remaining period of the Severance
Term. Notwithstanding the foregoing, to the extent any
such benefit cannot be provided through the applicable
plan of the Company, the Company will provide such
benefit outside of the plan or will provide a cash lump
sum payment equal to the value of such additional benefit.
(B) The Company shall meet its obligation
under (A), above, in connection with its group
medical/dental plan for the period ending on the earlier
to occur of: (i) the end of the Severance Term or (ii)
the date the Executive ceases to be eligible for
continuation coverage under the Company's group
medical/dental plan pursuant to the provisions of COBRA,
by providing the continuation of such coverage at Company
expense, contingent upon the Executive's timely election
of such coverage under COBRA.
(C) To the extent required to avoid adverse
tax consequences under Section 105(h) of the Internal
Revenue Code of 1986 (the "Code"), the Company's payments
under this Section 5(d)(iii) will be recognized by the
Executive in his taxable income and the Executive will
receive, in addition,
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a "gross-up" payment covering the tax liability
attributable to such recognized income consistent with
principles of paragraph 6(c)(v), below.
(iv) Additional credited service for retirement
benefits under all retirement plans, including supplemental
retirement plans (if any), equivalent to the Severance Term.
(e) TERMINATION BY REASON OF DEATH OR DISABILITY. This Agreement
will terminate upon the death of the Executive; and the Executive's
employment hereunder may be terminated by the Executive or the Company, at
either of their election, upon the Executive's Disability. In the event the
Executive's employment is terminated as the result of death or Disability,
except as set forth in the following sentence, the Executive, or his estate
or legal representative, will be entitled to receive the accrued portion of
any Base Salary and vacation through the Termination Date, plus any
unreimbursed business expenses, plus for the remainder of the Employment
Term: (i) periodically not less frequently than monthly in accordance with
the Company's normal payroll practice, payments at the rate of his then Base
Salary; and (ii) at the normal and customary time for payment of bonuses and
all other cash incentive compensation, amounts equal to the average of such
payments accrued for each of the three full preceding years; in each case
subject to any applicable withholdings for tax and social security purposes.
The payments provided in this Section 5(e) will be reduced by the amount of
any payments made to the Executive pursuant to any disability or life
insurance policy provided by the Company for this purpose, which insurance
policy is in addition to any other insurance benefits provided to the
Executive as a benefit hereunder.
6. BENEFITS UPON CHANGE OF CONTROL.
(a) DEFINITIONS. In addition to the definitions provided in
Section 5, the following definition will apply to this Section 6:
CHANGE IN CONTROL. The term "Change in Control"
means the occurrence of any of the following events after the
date of this Agreement: (i) the acquisition by any individual,
entity or group within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (a "Person"), of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of the combined voting power of
the then outstanding voting securities of the Company entitled
to vote generally in the election of directors ("Voting
Securities"); PROVIDED, HOWEVER, that the following
acquisitions will not constitute a Change in Control: (A) any
acquisition by the Company, (B) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company, or (C) any acquisition by the Executive (or a group
including the Executive); (ii) a change in the composition of
a majority of the Board within a three-year period, which
change has not been approved by a majority of the persons then
surviving as Directors who also comprised the Board
immediately prior to the commencement of such period; or (iii)
the consummation of any reorganization, merger or
consolidation other than a reorganization, merger or
consolidation which would
6
<PAGE>
result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 60% of the
combined voting power of the Voting Securities of the Company
or such surviving entity outstanding immediately after such
reorganization, merger or consolidation; or (iv) the
consummation of a plan of complete liquidation of the Company
or of an agreement for the sale or disposition by the Company
(in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
(b) ELIGIBILITY FOR BENEFITS. The Company agrees to pay to the
Executive the benefits specified in Section 6(c) hereof if (i) there is a
Change in Control during the term of this Agreement and (ii) within the
period commencing on the date of the Change in Control, or (if earlier) the
date of any agreement by the Company to enter into the transaction resulting
in such Change in Control, and ending two years after the Change in Control
(A) the Company terminates the employment of the Executive for any reason
other than Cause, death or Disability or (B) the Executive voluntarily
terminates employment with the Company for Good Reason. A Change of Control
will be deemed to have occurred during the term of this Agreement, for
purposes of this paragraph 6(b), if an agreement is entered into during the
term of this Agreement for a transaction resulting in a Change of Control,
notwithstanding that the Change of Control transaction is not completed until
after the term of this Agreement.
(c) BENEFITS UPON TERMINATION OF EMPLOYMENT. If the Executive is
entitled to benefits pursuant to Section 6(b) hereof, in lieu of any payments
and benefits provided in Section 5 the Company agrees to pay or provide to
the Executive as termination compensation the following:
(i) A single lump sum payment, payable in cash
within five days of the Termination Date, equal to the sum of:
(A) the accrued portion of any Base Salary and
vacation through the Termination Date; plus
(B) an amount representing bonus and all other
cash incentive compensation for such period determined by
multiplying:
(I) the average of such bonus and other
cash incentive compensation accrued for each of the
three preceding full years, by
(II) the fraction of the year of
termination elapsed prior to the Termination Date;
plus
(C) 299% of the sum of:
(I) the Executive's Base Salary in effect
upon the Termination Date plus
7
<PAGE>
(II) the Executive's average bonus and all
other cash incentive compensation accrued for each
of the three preceding full years.
(ii) All stock options, restricted stock or other
equity awards then held by Employee will automatically be
deemed amended, without further action on the part of the
Company or the Executive, so that (A) all options will be
fully vested and not subject to forfeiture or expiration by
reason of the Executive's termination, and will be subject to
exercise in full for the remainder of their stated term; and
(B) all restricted stock or other equity awards will be fully
vested and all restrictions thereon will lapse.
(iii) Continuation of benefits as follows:
(A) All benefits provided under Section 2(b)
will continue for the remaining period of the Severance
Term. Notwithstanding the foregoing, to the extent any
such benefit cannot be provided through the applicable
plan of the Company, the Company will provide such
benefit outside of the plan or will provide a cash lump
sum payment equal to the value of such additional benefit.
(B) The Company shall meet its obligation
under (A), above, in connection with its group
medical/dental plan for the period ending on the earlier
to occur of: (i) the end of the Severance Term or (ii)
the date the Executive ceases to be eligible for
continuation coverage under the Company's group
medical/dental plan pursuant to the provisions of COBRA,
by providing the continuation of such coverage at Company
expense, contingent upon the Executive's timely election
of such coverage under COBRA.
(C) To the extent required to avoid adverse
tax consequences under Section 105(h) of the Internal
Revenue Code of 1986 (the "Code"), the Company's payments
under this Section 5(d)(iii) will be recognized by the
Executive in his taxable income and the Executive will
receive, in addition, a "gross-up" payment covering the
tax liability attributable to such recognized income
consistent with principles of paragraph 6(c)(v), below.
(iv) Additional credited service for retirement
benefits under all retirement plans, including supplemental
retirement plans (if any), equivalent to the remaining period
of the Employment Term.
(v) In the event that any amount or benefit that
may be paid or otherwise provided to the Executive by the
Company or any affiliated company, whether pursuant to this
Agreement or otherwise (collectively, "Covered Payments"), is
or may become subject to the tax imposed under Code Section
4999 ("Excise Tax"), the Company will pay to the Executive a
"Reimbursement Amount" equal to the total of: (A) any Excise
Tax on the Covered Payments, plus (B) any Federal, state, and
local income taxes, employment and excise taxes (including the
Excise Tax) on the Reimbursement Amount (but without reduction
for any Federal, state, or local income or employment taxes on
such Covered Payments), plus (C) the product of any deductions
disallowed for
8
<PAGE>
Federal, state or local income tax purposes because of the
inclusion of the Reimbursement Amount in the Executive's
adjusted gross income multiplied by the highest applicable
marginal rate of Federal, state, and local income taxation,
respectively, for the calendar year in which the Reimbursement
Amount is to be paid. For purposes of this Section 6(c)(v), the
Executive will be deemed to pay (Y) Federal income taxes at the
highest applicable marginal rate of Federal income taxation for
the calendar year in which the Reimbursement Amount is to be
paid and (Z) any applicable state and local income taxes at the
highest applicable marginal rate of taxation for the calendar
year in which such Reimbursement Amount is to be paid, net of
the maximum reduction in Federal income taxes which could be
obtained from the deduction of such state or local taxes if paid
in such year (determined without regard to limitations on
deductions based upon the amount of the Executive's adjusted
gross income).
(d) CHANGES TO BENEFITS. In the event the Board desires to
approve a merger to be accounted for as a "pooling of "interests," the
Executive will, in good faith, negotiate with the Company concerning such
changes in the foregoing payments and benefits (if any) as may be necessary
in order to achieve such accounting treatment. The parties acknowledge that
the Executive's obligation to negotiate in good faith hereunder will not
require him to accept a material reduction in the net after tax benefits
provided to him hereunder or in any alternative agreement or arrangement.
7. NO OBLIGATION TO MITIGATE DAMAGES. In the event of a termination
of the Executive's employment for any reason, the Executive will not be
required to seek other employment or to mitigate any of the Company's
obligations under this Agreement, and no amount payable hereunder will be
reduced (a) by any claim the Company may assert against the Executive or (b)
by any compensation or benefits earned by the Executive as a result of
employment by another employer, self-employment or from any other source
after such termination of employment with the Company; PROVIDED, HOWEVER,
that the benefits provided pursuant to Sections 5(d)(iii) and 6(c)(iii)(A)
will terminate at such time as the Executive becomes eligible for comparable
benefits as the result of employment by another Person.
8. PROPRIETARY INFORMATION OBLIGATIONS. During the Executive's
employment pursuant to this Agreement, the Executive will have access to and
become acquainted with confidential and proprietary information of the
Company and its subsidiaries, including, but not limited to, information or
plans regarding customer relationships, personnel, or sales, marketing, and
financial operations and methods; trade secrets; formulas; devices; secret
inventions; processes; and other compilations of information, records, and
specifications (collectively "Proprietary Information"). The Executive will
not disclose any such Proprietary Information directly or indirectly, or use
it in any way, either during the Executive's employment pursuant to this
Agreement or at any time thereafter, except as required in the course of his
employment for the Company or as authorized in writing by the Company. All
files, records, documents, computer-recorded information, drawings,
specifications, equipment and similar items relating to the business of the
Company or its subsidiaries, whether prepared by the Executive or otherwise
coming into his possession, will remain the exclusive property of the Company
or its subsidiaries, as the case may be, and may not be removed from the
premises of the Company
9
<PAGE>
under any circumstances whatsoever without the prior written consent of the
Company, except when (and only for the period) necessary to carry out the
Executive's duties hereunder, and if removed must be immediately returned to
the Company upon any termination of his employment; PROVIDED, HOWEVER, that
the Executive may retain copies of documents reasonably related to his
interest as a shareholder and any documents that were personally owned, which
copies and the information contained therein the Executive agrees not to use
for any business purpose. Notwithstanding the foregoing, Proprietary
Information will not include (a) information which is or becomes generally
public knowledge or public except through disclosure by the Executive in
violation of this Agreement and (b) information that may be required to be
disclosed by applicable law.
9. NONINTERFERENCE. While employed by the Company and for a period of
one year after termination of this Agreement, the Executive agrees not to
interfere with the business of the Company or any subsidiary of the Company
by directly or indirectly soliciting, attempting to solicit, or otherwise
inducing, any employee of the Company or any subsidiary of the Company to
terminate his or her employment in order to become an employee, consultant or
independent contractor to or for any other employer.
10. NON-COMPETITION. The Executive agrees that, during the Employment
Term, he will not, without the prior consent of the Company, directly or
indirectly, have an interest in, be employed by, or be connected with, as an
employee, consultant, officer, director, partner, stockholder or joint
venturer, in any person or entity owning, managing, controlling, operating or
otherwise participating or assisting in any business which is in competition
with the business of the Company, in any location, unless the Executive's
employment is terminated by the Company without Cause or by the Executive for
Good Reason; PROVIDED, HOWEVER, that the foregoing will not prevent the
Executive from being a stockholder of less than 1% of the issued and
outstanding securities of any class of a corporation listed on a national
securities exchange or designated as national market system securities on an
interdealer quotation system by the National Association of Securities
Dealers, Inc.
11. MISCELLANEOUS.
(a) NOTICES. Any notices provided hereunder must be in writing
and will be deemed effective upon the earlier of two days following personal
delivery (including personal delivery by telecopy or telex), or the fourth
day after mailing by first class mail to the recipient at the address
indicated below:
To the Company:
K2 Inc.
4900 South Eastern Avenue
Los Angeles, CA 90040
Attn: Secretary
Telecopier No: (213) 724-0667
With a copy to:
10
<PAGE>
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Andrew E. Bogen, Esq.
Telecopier: (213) 229-7520
11
<PAGE>
To the Executive:
/s/ JOHN J. RANGEL
------------------------------
------------------------------
------------------------------
With a copy to:
------------------------------
------------------------------
------------------------------
or to such other address or to the attention of such other person as the
recipient party will have specified by prior written notice to the sending
party.
(b) SEVERABILITY. Any provision of this Agreement which is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction and subject to this Section be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any
other provisions of this Agreement invalid, illegal, or unenforceable in any
other jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant will
be modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable.
(c) ENTIRE AGREEMENT. This document constitutes the final,
complete, and exclusive embodiment of the entire agreement and understanding
between the parties related to the subject matter hereof and supersedes and
preempts any prior or contemporaneous understandings, agreements, or
representations by or between the parties, written or oral.
(d) COUNTERPARTS. This Agreement may be executed on separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
agreement.
(e) SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by the Executive and the
Company, and their respective successors and assigns, except that the
Executive may not assign any of his duties hereunder and he may not assign
any of his rights hereunder without the prior written consent of the Company.
(f) AMENDMENTS. No amendments or other modifications to this
Agreement may be made except by a writing signed by both parties. No
amendment or waiver of this Agreement requires the consent of any individual,
partnership, corporation or other entity not a party to this Agreement.
Nothing in this Agreement, express or implied, is intended to confer upon any
third person any rights or remedies under or by reason of this Agreement.
12
<PAGE>
(g) CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the laws of
the State of California without giving effect to principles of conflicts of
law.
12. ARBITRATION.
(a) Any disputes or claims arising out of or concerning the
Executive's employment or termination by the Company, whether arising under
theories of liability or damages based upon contract, tort or statute, will
be determined exclusively by arbitration before a single arbitrator in
accordance with the employment arbitration rules of the American Arbitration
Association, except as modified by this Agreement. The arbitrator's decision
will be final and binding on both parties. Judgment upon the award rendered
by the arbitrator may be entered in any court of competent jurisdiction. In
recognition of the fact that resolution of any disputes or claims in the
courts is rarely timely or cost effective for either party, the Company and
the Executive enter this mutual agreement to arbitrate in order to gain the
benefits of a speedy, impartial and cost-effective dispute resolution
procedure.
(b) Any arbitration will be held in the Executive's place of
employment with the Company. The arbitrator must be an attorney with
substantial experience in employment matters, selected by the parties
alternately striking names from a list of five such persons provided by the
American Arbitration Association (AAA) office located nearest to the place of
employment, following a request by the party seeking arbitration for a list
of five such attorneys with substantial professional experience in employment
matters. If either party fails to strike names from the list, the arbitrator
will be selected from the list by the other party.
(c) Each party will have the right to take the deposition of one
individual and any expert witness designated by the other party. Each party
will also have the right to propound requests for production of documents to
any party and the right to subpoena documents and witnesses for the
arbitration. Additional discovery may be made only where the arbitrator
selected so orders upon a showing of substantial need. The arbitrator will
have the authority to entertain a motion to dismiss and/or a motion for
summary judgment by any party and will apply the standards governing such
motions under the Federal Rules of Civil Procedure.
(d) The Company and the Executive agree that they will attempt,
and they intend that they and the arbitrator should use their best efforts in
that attempt, to conclude the arbitration proceeding and have a final
decision from the arbitrator within 120 days from the date of selection of
the arbitrator; PROVIDED, HOWEVER, that the arbitrator will be entitled to
extend such 120-day period for one additional 120-day period. The arbitrator
will deliver a written award with respect to the dispute to each of the
parties, who must promptly act in accordance therewith.
(e) The Company will pay any and all reasonable fees and expenses
incurred by the Executive in seeking to obtain or enforce any rights or
benefits provided by this Agreement, including all reasonable attorneys' and
experts' fees and expenses, accountants' fees and expenses, and court costs
(if any) that may be incurred by the Executive in pursuing a claim for
payment of compensation or benefits or other right or entitlement under this
Agreement,
13
<PAGE>
PROVIDED that the Executive is successful as to at least part of
the disputed claim by reason of litigation, arbitration or settlement.
(f) In a contractual claim under this Agreement, the arbitrator
must act in accordance with the terms and provisions of this Agreement and
applicable legal principles and will have no authority to add, delete or
modify any term or provision of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date it is last executed below by either party.
/s/ JOHN J. RANGEL
------------------------------
JOHN J. RANGEL
K2 INC.
By: /s/ RICHARD RODSTEIN
---------------------------
Name: Richard Rodstein
----------------------
Title: President & CEO
----------------------
14
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