EXHIBIT 10.1 EMPLOYMENT AGREEMENT, DATED NOVEMBER 1, 2001, BETWEEN THE COMPANY
AND ERIC PAULSON
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of November,
2001, by and between NAVARRE CORPORATION, a Minnesota corporation (the
"Company"), and ERIC H. PAULSON, a resident of the State of Minnesota
("Executive").
WITNESSETH:
WHEREAS, Executive has a unique knowledge of the Company's business, and
has special expertise in the management and future planning of its affairs, and
has been a key Executive of the Company, helping to develop the image of the
business; and
WHEREAS, the Company believes that Executive's continued involvement in the
management and affairs of the business are essential to its management and
planning in the future; and
WHEREAS, a previous employment agreement expired as of October 31, 2001 and
it is the desire of the parties to extend the terms thereof.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and obligations of this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. EMPLOYMENT. Subject to all of the terms and conditions of this Agreement,
the Company hereby employs Executive, and Executive hereby accepts
employment with the Company, as its President and Chief Executive Officer.
2. DUTIES.
(a) PRESIDENT/CHIEF EXECUTIVE OFFICER. The services of Executive are
exclusive to the Company. Executive will devote substantially all of
his business hours to, and make the best use of his energy, knowledge
and training in, performing his duties as President and Chief
Executive Officer of the Company consistent with past practices within
the general guidelines established by the Board of Directors of the
Company as the same may, from time to time, be modified by the
Company's Board of Directors. Executive will report to the Board of
Directors of the Company and have all the duties commonly associated
with or appropriate to the office of Chief Executive Officer.
Notwithstanding anything in this Agreement to the contrary, the duties
of Executive under this Agreement do not (i) require Executive to
relocate his principal office or residence from the Minneapolis/St.
Paul, Minnesota metropolitan area without the prior written consent of
Executive, or (ii) prevent Executive from owning, directly or
indirectly, securities of, or otherwise participating in the ownership
of, any publicly-owned business, trade, industry or venture. Executive
will perform his duties in a competent and professional manner,
consistent with that expected of a chief executive officer of the
Company.
(b) DIRECTOR. During the term of this Agreement, Executive shall also
serve as Chairman of the Board of Directors of the Company and shall
perform all duties incident to services as a director of the Company.
3. TERM. Subject only to earlier termination in accordance with Section 5 of
this Agreement, Executive's term of employment shall commence on the date
hereof and continue for a period ending March 31, 2007 (the "Employment
Period").
4. COMPENSATION AND OTHER INCENTIVES AND PERQUISITES. As compensation for all
of Executive's services under this Agreement, the Company agrees to pay
Executive during the Employment Period and on retirement, and Executive
agrees to accept the following:
(a) BASE SALARY. A base salary of $350,000 per annum (the "Base Salary"),
payable in accordance with the Company's standard payroll practices.
On each anniversary of this Agreement, the Base Salary shall be
adjusted by the Company's Board of Directors based upon the level of
performance by Executive, provided that in no event shall the Base
Salary for any fiscal year hereunder be less than the sum provided
above for the first full fiscal year.
(b) PERFORMANCE BONUS. As additional compensation, Executive shall be
eligible to receive for each fiscal year of the Company ending during
the Employment Period a bonus (the "Bonus") determined under the Bonus
formula described below (the "Bonus Formula") by the Board of
Directors in the manner described below with a maximum bonus equal to
100% of the Base Salary of Executive (as in effect the first day of
such fiscal year) (the "Target Bonus"). Executive's Bonus shall be
paid annually not later than 90 days after the end of the fiscal year
in which such Bonus is earned. If no Bonus criteria is otherwise
established by the Board of Directors during the first fiscal quarter
of a fiscal year of the Company, Executive will be entitled to receive
a bonus equal to 100% of Executive's Base Salary for such fiscal year.
By no later than the end of the first fiscal quarter of each fiscal
year of the Company during the Employment Period, the Board of
Directors or a committee thereof will establish, for purposes of the
Bonus Formula only, (i) a targeted net profit for the Company for such
fiscal year against which actual financial performance will be
measured for purposes of earning a portion of the Bonus (the "Net
Profit Component"), (ii) a targeted net sales for the Company for such
fiscal year against which actual financial performance will be
measured for purposes of earning a portion of the Bonus (the "Net
Sales Component"), and (iii) other specific goals to be achieved by
Executive during such fiscal year (the "Specified Goals Component").
At the end of such fiscal year, the Board of Directors or a committee
thereof will determine the Bonus payable to Executive under the Bonus
Formula with respect to such fiscal year based upon the actual
financial performance of the Company compared to the Net Profit
Component and the Net Sales Component and the achievement by Executive
of the goals specified for such fiscal year as part of the Specified
Goals Component. Under the Bonus Formula, during any fiscal year
Executive is eligible to earn an aggregate Bonus equal to (i) up to
60% of his Base Salary under the Net Profits Component; plus (ii) up
to 20% of his Base Salary under the Net Sales Component; plus (iii) up
to 20% of his Base Salary under the Specific Goals Component. The
calculation of the amount of Bonus to be awarded under each component
of the Bonus Formula is as set forth in the following chart:
Maximum Percentage of Component Component
Component Base Salary Awardable CALCULATION Threshold
- --------------------- --------------------- -------------------------------- ------------------------
NET PROFITS COMPONENT 60% Actual net profits for fiscal Actual Net Profits must
year ("Actual Net Profits") as a be at least 70% of
percentage (not to exceed Target Net Profits
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100%) of the target net profit before a portion of the
of the Company for such fiscal Bonus is awarded under
year ("Target Net Profits") the Net Profits Component
multiplied by 60% of Base Pay of the Bonus Formula.
for such fiscal year.
NET SALES COMPONENT 20% Actual net sales for fiscal year Actual Net Sales must
("Actual Net Sales") as a be at least 70% of
percentage (not to exceed 100%) Target Net Sales before
of target net sales of the a portion of the Bonus
Company for the applicable fiscal is awarded under the
year ("Target Net Sales") Net Sales Component of
multiplied by 20% of Base Pay for the Bonus Formula.
such fiscal year.
SPECIFIC GOALS COMPONENT 20% Up to 20% of Base Pay for a N/A
fiscal year based upon the good
faith judgement of the Board of
Directors as to the attainment of
specified goals set by the Board
of Directors for such fiscal
year.
Example: For purposes of example only, assume that during a fiscal year ending
during the Employment Period, the Company attains Actual Net Profits equal to
80% of Target Net Profits and Actual Net Sales equal to 60% of Target Net Sales,
in each case as such targets were established by the Board of Directors no later
than the end of the first fiscal quarter of such fiscal year and the Board of
Directors determines that Executive has achieved 50% of the specific goals
established by the Board of Directors for such fiscal year. The Bonus for such
fiscal year would be equal to 58% of Base Salary calculated as the sum of (A)
80% of the 60% of Base Salary attainable under the Net Profits Component of the
Bonus Formula, plus (B) none of the 20% of Base Salary attainable under the Net
Sales Component of the Bonus Formula because that component's benchmark
threshold of 70% of Target Net Sales was not met, and (C) 50% of the 20% of Base
Salary attainable under the Specific Goals Component of the Bonus Formula.
(c) LOANS AND OTHER LIABILITIES. At the expiration of the Employment
Period and/or the termination of this Agreement for any reason
whatsoever, except by the Company for Company Cause pursuant to
Section 5(a) hereof or by Executive without Executive Cause (as
defined in Section 5(d) hereof) in which case repayment of
indebtedness shall be as set forth in Section 6(c) hereof, any and all
sums owed by Executive to Company as of such date shall be deemed paid
and satisfied in full including, without limitation, the outstanding
loan owed by Executive to the Company in the amount of $1,000,000
evidenced by a Promissory Note dated the date hereof (the "Note").
During the Employment Period, the Company shall forgive $200,000 in
outstanding principal and all accrued and unpaid and unforgiven
interest on the outstanding principal balance of the Note on each of
March 31, 2003, March 31, 2004, March 31, 2005, March 31, 2006 and
March 31, 2007.
(d) INCENTIVE BASED DEFERRED COMPENSATION PLAN.
(i) PURPOSE. As incentive for his continued employment with the
Company and to further align his financial interests with the
financial interests of shareholders of the Company, an incentive
based deferred compensation plan on the terms of this Section 4
(d) is hereby established for Executive (the "IDCP"). Under the
IDCP, during the Employment
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Period Executive is eligible to earn a single award of up to
$4,000,000 in deferred incentive compensation based upon the
sustained appreciation over a thirty consecutive trading day
period during the Employment Period of the market value of the
Company's publicly traded common stock, no par value (the "Common
Stock"). The award of deferred incentive compensation to
Executive under the IDCP may be increased (but not decreased) to
$3,000,000 upon a sale or other Change of Control of the Company
in which the shareholders of the Company receive consideration
with an implied value in excess of $6.00 per share of Common
Stock.
(ii) IDCP STOCK APPRECIATION FORMULA. The formula for the amount of
the deferred incentive compensation award to Executive under the
IDCP on account of a sustained appreciation in the trading price
of a share of Common Stock during a 30 consecutive trading day
period within the Employment Period is as set forth in the chart
below. Executive may earn a single award under one of Tier I,
Tier II or Tier III. As more fully described below, in order for
Executive to be eligible for an award under Tier I of the IDCP,
shares of common stock of the Company must trade at or above
$4.00 per share on each trading day during any period of 30
consecutive trading days. The amount of the award for which
Executive is eligible increases if, during an applicable
measurement period of 30 consecutive trading days, the Company's
common stock trades at or above $7.00 per share on each trading
day in such period (Tier II) or at or above $10.00 per share on
each trading say in such period (Tier III). The amount of the
award is dependent upon the average closing price of a share of
such common stock during such period. Executive is eligible for
one award (the largest award for which he qualifies) under the
stock appreciation formula.
IDCP STOCK APPRECIATION FORMULA
Stock Price Within Any Measurement AMOUNT OF DEFERRED INCENTIVE COMPENSATION
Tiers Period During the Employment Period AWARD (WITHOUT DUPLICATION)
- ---------- -------------------------------------------- ------------------------------------------------
TIER I Equal to or greater than $4.00 per share. $1,000,000 multiplied by the sum of (A) one plus
(B) one-third of the difference, if any, between
the Average Stock Price and $4.00 per share, up
to a maximum of $2,000,0000.
TIER II Equal to or greater than $7.00 per share and $2,000,000 multiplied by the sum of (A) one plus
less than $10.00 per share. (B) one-third of the difference, if any, between
the Average Stock Price and $7.00 per share, up
to a maximum of $4,000,000.
TIER III Equal to or greater than $10.00 per share. $4,000,000.
For purposes of the IDCP stock price appreciation formula, (A) "Measurement
Period" means any period during the Employment Period of 30 consecutive trading
days during which Common Stock is traded on a national securities exchange or
through the NASDAQ National Market System ("NASDAQ/NMS") or the National
Association of Securities Dealers Automated Quotation System; (B) "Stock Price"
means, as of any applicable date, (i) if the Common Stock is listed on a
national securities exchange or is authorized for quotation on the Nasdaq/NMS
the closing price, regular way, of a share of Common Stock on such exchange or
NASDAQ/NMS, as the case may be, or (ii) if the Common Stock is neither listed on
a national securities exchange nor authorized for quotation on NASDAQ/NMS, the
closing bid price as reported by the National Association of Securities Dealers
Automated Quotation System for a share of Common Stock; and (C) "Average Stock
Price" means the average of the Stock Prices over the applicable Measurement
Period. In the
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event of any subdivision or combination of the outstanding shares of Common
Stock, stock dividend, recapitalization, reclassification of shares or other
corporate transaction that would result in the substantial enlargement or
dilution of the rights or economic benefits inuring to Executive under the IDCP,
the Board of Directors shall make such equitable adjustments as it may deem
appropriate to the IDCP.
(iii) IDCP EARNED UPON SALE, MERGER, OR SIMILAR TRANSACTION. Upon the
occurrence of a Change of Control (as defined in Section 6(e)
hereof) of the Company effected through an asset sale, merger,
tender offer, consolidation or other similar transaction in
which the shareholders of the Company receive consideration on
account of their shares of Common Stock with a fair market
value, as determined in good faith by the Board of Directors
(with assistance of the Company's investment bankers), equal to
or greater than $6.00 per share, the amount of deferred
incentive compensation to be awarded to Executive under the IDCP
shall be increased (but not decreased if Executive has
previously earned an award of deferred incentive compensation
under the IDCP equal to or greater than $3,000,0000) to
$3,000,000.
(iv) PAYMENT AND FUNDING OF IDCP. Except as provided in Section 6
hereof, the amount of deferred incentive compensation earned
under the IDCP during the Employment Period shall be paid to
Executive, or upon his earlier death, his legal representatives
or heirs, in three equal installments on the first, second and
third anniversaries of the termination of Executive's
employment. The Company shall also pay to Executive, or his
legal representatives or heirs, as the case may be, on such
payment dates, an amount equal to the return on such funds if
Executive and the Company have agreed on the investment of such
funds or if no such agreement is reached, interest at the 8% per
annum from the date of termination of employment. The IDCP is an
unfunded and unsecured nonqualified plan for federal income tax,
ERISA and Department of Labor purposes. Executive and
Executive's beneficiaries shall look solely to the Company for
payment of amounts due under the IDCP. Upon the expiration or
earlier termination of the Employment Period, the Company shall
establish a "rabbi trust" as a funding vehicle for the IDCP and
the Company shall contribute to such trust an amount of cash
equal to the aggregate amount earned under the IDCP.
(v) EXAMPLES.
(A) For purposes of example only, assume that during each
trading day of a Measurement Period within the Employment
Period the Stock Price exceeded $4 per share and the Average
Stock Price within such Measurement Period was $4.75 per
share. Executive would have earned a Tier I award of
$1,250,000 in deferred incentive compensation under the
IDCP.
(B) Assume further that subsequently (I) the Stock Price
fluctuated above and below $4.00 per share but there was no
Measurement Period during which the Stock Price exceeded
$4.00 per share and (II) the Company was sold to a third
party for cash and stock valued at $5.50 per share.
Executive's Tier I award of deferred incentive compensation
under the IDCP would be increased to $3,000,000. Had
Executive previously earned a deferred incentive
compensation award under the IDCP equal to or greater than
$3,000,000, no further adjustment would be made on account
of the sale of the Company.
(C) Alternatively, assume that after Executive earned the
initial $1,250,000 Tier I award, the Stock Price continued
to increase until a subsequent Measurement Period during
which the Stock Price fluctuated above and below $10.00 per
share
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(but was never less than $7.00 per share) and the Average
Stock Price was $10.50 per share. In lieu of the Tier I
award previously earned, Executive's award of deferred
incentive compensation under the IDCP would be a Tier II
award of $4,000,000.
(e) BENEFITS.
(i) EXPENSES. The Company shall reimburse Executive for any and
all ordinary, necessary and reasonable business expenses
that Executive incurs in connection with the performance of
his duties under this Agreement, including entertainment,
telephone, travel and miscellaneous expenses, provided that
Executive provides the Company with documentation for such
expenses in a form sufficient to sustain the Company's
deduction for such expenses under Section 162 of the
Internal Revenue Code of 1986, as amended. These expenses
include all dues and assessments to Executive's social,
athletic, golf or country club.
(ii) MEDICAL AND DISABILITY INSURANCE. Subject to Executive
taking and passing the physical examination required by the
Company's insurance carrier, the Company shall provide
Executive with full medical and disability insurance
coverage provided to other officers of the Company.
(iii) LIFE INSURANCE. Subject to the same physical examination
and cost provisions, the Company shall provide Executive
with a $2,000,000 term life insurance policy insuring
Executive's life during the term of Executive's employment
with the Company and shall pay all premiums thereon. The
Executive shall own such policy and shall be payable to
such beneficiary or beneficiaries as Executive directs by
written instrument delivered to the Company or the insurer
under the life insurance policy.
(iv) VACATION. Executive shall be entitled to a paid vacation
period of four (4) weeks each year, which may be taken at
any time subject to the Company's business needs.
(v) AUTOMOBILE EXPENSES. The Company will pay or reimburse the
Executive for all reasonable costs of licensing, sales
taxes, property taxes, maintenance, repair, oil, gasoline
and insurance for his automobile.
(vi) BENEFIT CHANGES. No reference in this Agreement to any
policy or any employee benefit plan established or
maintained by the Company shall preclude the Company from
changing any such policies or amending or terminating any
such benefit plans if the Company provides a substantially
similar benefit to Executive.
(vii) OTHER PLANS. Nothing contained herein is intended to or
shall be deemed to be granted to Executive in lieu of any
rights or privileges which Executive may be entitled to as
an employee of the Company under any other policies or
benefit plans that are currently in effect or that may
hereafter be adopted. Executive shall be entitled to
participate in any other employee benefit plans of the
Company generally applicable to officers of the Company,
its divisions or subsidiaries, occupying similar positions
as Executive, including, but not limited to, any profit
sharing, pension, stock option, stock appreciation rights,
stock ownership, health, medical, dental, vacation,
insurance or other employee benefit plans.
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5. TERMINATION. This Agreement may not be terminated prior to the end of the
Employment Period except as follows:
(a) BY THE COMPANY FOR COMPANY CAUSE. The Company may terminate this
Agreement for Company Cause upon Executive's material breach of this
Agreement. Except as to subparagraph (iii) below, the Company shall
give Executive thirty (30) days' advance written notice of such
termination, which notice shall be via registered mail, return receipt
requested, and which shall describe in detail the acts or omissions
which the Company believes constitute such breach. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for
Company Cause unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote
of not less than seventy-five (75%) of the entire membership of the
Board of Directors (certified by the Secretary of the Board of
Directors) at a meeting of the Board of Directors called and held for
the purpose (after reasonable notice to Executive and an opportunity
for Executive, together with Executive's counsel, to appear before the
Board), finding that in the good faith opinion of the Board of
Directors, Executive was guilty of conduct described in this Section
5(a), and specifying the particulars thereof in detail. The Company
shall not be allowed to terminate this Agreement pursuant to this
Section 5(a) if Executive is able to cure such breach within thirty
(30) days following delivery of such notice. However, in no event
shall a breach of the provisions of Sections 5(a)(iii) or 7 be subject
to cure. Acts or omissions which constitute a material breach of this
Agreement constituting "Company Cause" shall be limited strictly to
the following:
(i) Any material breach by Executive of his obligations under this
Agreement;
(ii) Gross misconduct of Executive which is manifestly injurious to
Company, or habitual failure or inability of Executive to
perform his duties under this Agreement; and
(iii) Any fraud, theft or embezzlement by Executive of the Company's
assets, or any other unlawful or criminal act which is
punishable as a felony.
(b) DEATH. Subject to the provisions of Section 6, this Agreement shall
terminate upon Executive's death.
(c) DISABILITY. Subject to the provisions of Section 6, this Agreement
shall terminate upon Executive's Disability. As used herein, the term
"Disability" shall have such meaning as set forth in the Company's
disability policy in effect at the date hereof and shall include both
permanent and temporary disability, short term and long term
disability, and total and partial disability. If there is no policy in
effect at the date of Executive's potential disability, Disability
shall mean Executive becoming substantially incapable of performing
his duties hereunder for a period of six (6) months or more.
(d) BY EXECUTIVE FOR EXECUTIVE CAUSE. Executive shall have the right, at
his election, to terminate this Agreement, upon thirty (30) days'
written notice to the Company upon the occurrence, without Executive's
express written consent, of any one or more of the following events
("Executive Cause"), provided that Executive shall not have the right
to terminate this Agreement if the Company is able to cure such event
within thirty (30) days following delivery of such notice:
(i) The Company is in material breach of this Agreement;
(ii) Executive is required to report to or accept assignments from
persons other than the Board of Directors of the Company or he
is removed without his written consent as the President and
Chief Executive Officer of the Company and such removal is not
pursuant to Section 5(a) hereof;
7
(iii) The Board of Directors should fail to elect Executive as
President and Chief Executive Officer or Chairman of the Board
of Directors, or if Executive should have a policy dispute with
the Board of Directors;
(iv) The Shareholders should fail to elect Executive as a director;
(v) An adverse change in Executive's status or position as an
executive officer of the Company, including, without
limitation, any adverse change in Executive's status or
position as a result of a material diminution in Executive's
duties, responsibilities or authority as of the date of this
Agreement (or any status or position to which Executive may be
promoted after the date hereof) or the assignment to Executive
of any duties or responsibilities which, in Executive's
reasonable judgment, are inconsistent with Executive's status
or position, or any removal of Executive from or any failure to
reappoint or reelect Executive to such positions (except in
connection with the termination of Executive's employment in
accordance with Section 5(a) hereof);
(vi) A reduction by the Company of Executive's Base Salary as the
same may be increased time to time, or a change in the
eligibility requirements or performance criteria for any
benefit other than salary, which adversely effects Executive;
(vii) Without replacement by a plan providing benefits to Executive
equal to or greater than those discontinued, the failure by the
Company to continue in effect, within its maximum stated term,
any employee benefit plan in which Executive is participating
immediately prior to the date of this Agreement or the taking
of any action by the Company that would adversely effect
Executive's participation or materially reduce Executive's
benefits under any such plan;
(viii) The taking of any action by the Company that would materially
adversely effect the physical conditions existing immediately
prior to this Agreement in or under which Executive performs
his employment duties;
(ix) The Company's requiring Executive to be based anywhere other
than the Minneapolis/St. Paul, Minnesota metropolitan
statistical area, except for required travel on the Company's
business to an extent substantially consistent with the
business travel obligations which Executive has typically
undertaken on behalf of the Company prior to the date of this
Agreement; or
(x) Any purported termination by the Company of this Agreement or
the employment of Executive by Company which is not expressly
authorized by this Agreement or any breach of this Agreement by
the Company which is not remedied by the Company within thirty
(30) days after the Company's receipt of notice thereof from
Executive.
6. PAYMENTS UPON TERMINATION.
(a) DEATH. Upon Executive's death during the Employment Period, the heirs
or legal representatives of Executive shall be entitled to receive as
a lump sum payment, payable within sixty (60) calendar days of his
death, equal to the sum of (i) 2.99 times the average of the aggregate
Base Salary and Bonus paid to Executive over the preceding five years,
plus (ii) the amount of the deferred incentive compensation award
earned by Executive under the IDCP.
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(b) DISABILITY. In the event that this Agreement is terminated due to
Executive's Disability, Executive shall be paid (i) his Base Salary
for a period of one year following the date of such Disability or
until Executive begins receiving benefits under the Company's
disability benefits plan, whichever occurs first to be paid at the
times such Base Salary would otherwise be paid during such period,
(ii) all Bonus to which Executive would have been entitled for the
fiscal year in which such Disability occurred, prorated to the date of
Disability to be paid at the time such Bonus would otherwise be paid
for such fiscal year, (iii) his accrued but unpaid vacation pay for
the year in which such Disability occurred, pro rated to the date of
such Disability, (iv) any unpaid expense reimbursement, and (iv) the
amount, payable in a lump sum within sixty (60) days of the end of the
fiscal year in which such Disability occurred, of the deferred
incentive compensation award which Executive would have been awarded
under the IDCP through the end of the fiscal year in which such
Disability occurred.
(c) TERMINATION BY COMPANY FOR COMPANY CAUSE OR BY EXECUTIVE WITHOUT
EXECUTIVE CAUSE. If Executive is terminated pursuant to Section 5(a)
hereof, or Executive terminates this Agreement other than in
accordance with Section 5(d) hereof, the Company shall pay to
Executive as a lump sum payment, payable within sixty (60) calendar
days of the date of termination (i) his Base Salary through the date
written notice is properly mailed to Executive pursuant to Section
5(a) hereof, (ii) all Bonus payments owing to Executive for the fiscal
year prior to the year such written notice is received by Executive
(to the extent that any such payments were unpaid on the date of
termination), and (iii) the amount of the deferred incentive
compensation award earned by Executive under the IDCP through the date
of termination. Additionally all outstanding and unpaid indebtedness
of Executive to the Company for borrowed money shall be due and
payable within 60 days of the date of termination.
(d) TERMINATION WITHOUT COMPANY CAUSE OR BY EXECUTIVE FOR EXECUTIVE CAUSE.
In addition to any other rights granted Executive hereunder, if the
Company should terminate this Agreement other than in accordance with
Section 5(a) hereof, or if Executive should terminate this Agreement
pursuant to Section 5(d) hereof, the Company shall pay to Executive as
a lump sum payment, payable within sixty (60) calendar days of the
date of termination (i) his Base Salary and Target Bonus through the
end of the term of this Agreement or three years, whichever is
greater, (ii) any payments owing to Executive pursuant to Section 4(b)
hereof for the fiscal year prior to the year of termination (to the
extent any such payments were unpaid on the date of termination),
(iii) a sum equivalent to any accrued but unpaid vacation for the year
in which he is terminated, (iv) any unpaid expense reimbursement, and
(v) the amount of the deferred incentive compensation award earned by
Executive under the IDCP. Furthermore, for the remainder of the term
of this Agreement, or three years whichever is greater, the Company
shall maintain in full force and effect for the continued benefit of
Executive and his dependents all (i) pension plans, (ii) medical and
disability policies, (iii) stock option plans, (iv) life insurance
plans in which Executive participated immediately prior to his
termination (or if such participation is barred, shall arrange for
individual policies of insurance providing benefits substantially
similar, on an after-tax basis, to those which Executive otherwise
would have been entitled hereunder), and (v) other benefits and
perquisites to which Executive would otherwise be entitled under
Section 4 (e).
(e) CHANGE OF CONTROL AND OWNERSHIP.
(i) SEVERANCE PAYMENT. In the event that (A) Executive's employment
with the Company (I) is terminated by the Company (other than in
accordance with Sections 5(a), (b), or (c) hereof) or (II) is
terminated by Executive in accordance with Section 5(d) hereof
during the Employment Period and (B) such termination occurs
after a Change in Control (as defined hereinbelow), in addition
to and not in lieu of those payments
9
otherwise due Executive under this Agreement or otherwise,
Company shall pay Executive a cash bonus ("Severance Payment") in
an amount equal to Executive's Average Annual Compensation (as
defined hereinbelow), multiplied by a factor of 2.99.
(ii) EXCISE TAX ADJUSTMENT. Notwithstanding any other provisions of
this Agreement, in the event that any payment or benefit received
or to be received by the Executive in connection with a Change in
Control or the termination of the Executive's employment (whether
pursuant to the terms of this Agreement or any other plan),
arrangement or agreement with the Company (all such payments and
benefits, including the Severance Payment, being hereinafter
referred to as the "Total Payments") would be subject (in whole
or part), to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (the
"Excise Tax"), then, after taking into account any reduction in
the Total Payments provided by reason of Section 280G of the Code
in such other plan, arrangement or agreement, (i) the Severance
Payment shall first be reduced, (ii) the cash portion of any
other Total Payments shall thereafter be reduced, and (iii)
finally, the non-cash portion of any Total Payments shall
thereafter be reduced, to the extent necessary so that no portion
of the Total Payments is subject to the Excise Tax but only if
(I) the net amount of such Total Payments, as so reduced (and
after subtracting the net amount of federal, state and local
income taxes on such reduced Total Payments and after taking into
account the phase out of itemized deductions and personal
exemptions attributable to such reduced Total Payments) is
greater than or equal to (II) the net amount of such Total
Payments without such reduction (but after subtracting the net
amount of federal, state and local income taxes on such Total
Payments and the amount of Excise Tax to which the Executive
would be subject in respect of such unreduced Total Payments and
after taking into account the phase out of itemized deductions
and personal exemptions attributable to such unreduced Total
Payments); provided, however, that the Executive may elect to
have the non-cash Total Payments reduced (or eliminated) prior to
any reduction of the cash Total Payments.
(B) For purposes of determining whether and the extent to
which the Total Payments will be subject to the Excise Tax, (I)
no portion of the Total Payments the receipt or enjoyment of
which the Executive shall have waived at such time and in such
manner as not to constitute a "payment" within the meaning of
Section 280G(b) of the Code shall be taken into account, (II) no
portion of the Total Payments shall be taken into account which,
in the opinion of tax counsel ("Tax Counsel") reasonably
acceptable to the Executive and selected by the accounting firm
(the "Auditor") which was, immediately prior to the Change in
Control, the Company's independent auditor, does not constitute a
"parachute payment" within the meaning of Section 280G(b)(2) of
the Code (including by reason of Section 280G(b)(4)(A) of the
Code) and, in calculating the Excise Tax, no portion of such
Total Payments shall be taken into account which, in the opinion
of Tax Counsel, constitutes reasonable compensation for services
actually rendered, within the meaning of Section 280G(b)(4)(B) of
the Code, in excess of the "base amount" allocable to such
reasonable compensation, and (III) the value of any non-cash
benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Auditor in accordance with
the principles of Sections 280G(d)(3) and (4) of the Code.
(C) At the time that payments are made under this Agreement,
the Company shall provide the Executive with a written statement
setting forth the manner in which such payments were calculated
and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received
from Tax Counsel,
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the Auditor or other advisors or consultants (and any such
opinions or advice which are in writing shall be attached to the
statement). If the Executive objects to the Company's
calculations, the Company shall pay to the Executive such portion
of the Severance Payment (up to 100% thereof) as the Executive
determines is necessary to result in the proper application of
Section 6(e)(ii) hereof.
(iii) DEFINITIONS. (A) For purposes of this Agreement, "Change in
Control" shall mean (I) the sale of all or substantially all of
the assets of the Company, (II) the acquisition by any means of
more than twenty percent (20%) of the issued and outstanding
voting stock of the Company by any entity, person or group of
persons acting in concert, (III) the merger of the Company with,
or the consolidation of the Company into, another corporation or
entity, or (IV) the election to the Board of Directors of the
Company without the recommendation or approval of the incumbent
Board of Directors of the Company the lesser of (x) three
directors or (y) directors constituting a majority of the number
of directors of the Company then in office.
(B) For purposes of this Agreement, "Average Annual
Compensation" shall mean the average of the Base Salary and the
Bonus paid to or on behalf of Executive by Company, based on the
three (3) most recent calendar years.
(iv) ADDITIONAL PAYMENTS. Amounts payable pursuant to this Section
6(e) shall be in addition to, and not in lieu of, all other
compensation, rights and benefits accruing or afforded to
Executive pursuant to this Agreement or the obligations of
Executive thereunder.
7. PAYMENTS UPON RETIREMENT. At the completion of Executive's employment as
President, Chief Executive Officer and Chairman of the Company on March 31,
2007, Executive and his heirs or legal representatives shall be entitled to
receive, in addition to any payments to be made under the IDCP, the
following retirement benefits: (i) Average Annual Compensation (as defined
above) for a period of three (3) years payable at the times such
compensation would otherwise be payable hereunder, (ii) any payments owing
to Executive pursuant to Section 4(b) hereof through the date of retirement
(to the extent any such payments were unpaid on the date of retirement),
(iii) a sum equivalent to any accrued but unpaid vacation for the year in
which he retires, and (iv) any unpaid expense reimbursement. Amounts
payable in accordance with clauses (ii), (iii) and (iv) of the preceding
sentence shall be paid in a single lump sum within sixty (60) days of the
completion of Executive's employment. Furthermore, for a period of three
(3) years after retirement, the Company shall maintain in full force and
effect for the continued benefit of Executive and his dependents all (i)
pension plans, (ii) medical and disability policies, (iii) stock option
plans, (iv) life insurance plans in which Executive participated
immediately prior to his termination (or if such participation is barred,
shall arrange for individual policies of insurance providing benefits
substantially similar, on an after-tax basis, to those which Executive
otherwise would have been entitled hereunder), and (v) other benefits and
perquisites to which Executive would otherwise be entitled under Section 4
(e).
8. OWNERSHIP OF PROPERTIES, CONFIDENTIALITY; NON-COMPETITION AND EXCLUSIVITY;
INVESTMENTS.
(a) OWNERSHIP OF PROPERTIES. The Company, as employer, shall own, and
Executive hereby transfers and assigns to the Company, all rights in
and to any material and/or ideas written, suggested or submitted by
Executive during the Employment Period and all other results and
proceeds of his services under this Agreement (the "Properties").
Without limiting the generality of the foregoing, these rights shall
include all motion picture, television, radio, dramatic, musical,
publication and other rights in and to the Properties, including the
sole and exclusive right to photograph and record the same with or
without dialogue, music and other
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sounds synchronously recorded, and to perform, exhibit, distribute,
reproduce, transmit, broadcast or otherwise communicate the same
and/or motion picture, dramatic or other versions or adaptations
thereof, theatrically, nontheatrically and/or by means of television,
radio, the legitimate stage, internet or other electronic transmission
and/or any other means now known or hereafter devised and to
manufacture, publish, or vend printed and/or recorded versions or
adaptations thereof, either publicly or privately and for profit or
otherwise. The Company and its licensees and assigns shall have the
right to adapt, change, revise, delete from, add to and/or rearrange
the Properties or any part thereof written or submitted by Executive
and to combine the same with other works to any extent, and to change
or substitute the title thereof and in this connection Executive
hereby waives any so-called "moral rights" of authors. Executive
agrees to execute and deliver to the Company such releases,
assignments or other instruments as the Company may require from time
to time to evidence its ownership of the results and proceeds of
Executive's services hereunder' provided, however, that nothing in
this Section 8(a) shall be deemed in any manner to restrict or qualify
Executive's ownership or right to exploit Executive's personal
memoirs.
The requirements of this Section 8(a) do not apply to Properties for
which no equipment, facility or confidential information of the
Company was used and which were developed entirely on Executive's own
time, and which (i) do not relate directly to the Company's business
or to the Company's actual research or development, or (ii) do not
result from any work Executive performed for the Company. Except as
previously disclosed to the Company in writing, Executive does not
have and will not assert any claims to or rights under any Properties
as having been made, conceived, authored or acquired by Executive
prior to his employment by the Company.
(b) CONFIDENTIALITY. Executive acknowledges that his services will,
throughout the Employment Period, bring Executive in close contact
with many confidential affairs of the Company and its affiliates,
including information about costs, profits, financial data, markets,
trade secrets, sales, products, computer programs, key personnel,
pricing policies, customer lists, development projects, operational
methods, technical processes, plans for future development, business
affairs and methods and other information not readily available to the
public. Executive further acknowledges that the businesses of the
Company and its affiliates are international in scope, that their
products are marketed throughout the world, that the Company and its
affiliates compete in nearly all of their business activities with
other organizations which are or could be located in nearly any part
of the world and that the nature of Executive's services, position and
expertise are such that he is capable of competing with the Company
and its affiliates from nearly any location in the world. In
recognition of the foregoing Executive covenants and agrees:
(i) that Executive will keep secret all material confidential matters
of the Company and its affiliates which are not otherwise in the
public domain and will not disclose them to anyone outside of the
Company or its affiliates, either during or after the Employment
Period, except with, the Company's written consent and except for
such disclosure as is necessary in the performance of Executive's
duties during the Employment Period; and
(ii) that Executive will deliver promptly to the Company on
termination of his employment with the Company or at any other
time the Company may so request, at the Company's expense, all
confidential memoranda, notes, records, reports and other
documents (and all copies thereof) relating to the Company's and
its affiliates' business, which Executive obtained while employed
by, or otherwise serving or acting on behalf of, the Company or
which the Executive may then possess or have under his control.
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(c) NON-COMPETITION AND EXCLUSIVITY. Executive agrees that (i) during his
employment with the Company and (ii) during (A) the period for which
Executive is entitled to receive payments under Section 6 or 7 hereof
or, if longer, (B) the period which ends three years after the
termination of his employment with the Company, he will not alone, or
in any capacity with another entity or person, (x) engage in any
commercial activity that competes with the Company's business, as it
is conducted during the Employment Period, within any state of the
United States, (y) in any way interfere or attempt to interfere with
the Company's relationships with any of its current or potential
customers, or (z) attempt to employ any of the Company's then
employees on behalf of any other entities competing with the Company.
Executive further acknowledges that all services of Executive shall be
exclusive to the Company, and that Executive's performances and
services hereunder are of a special, unique, unusual, extraordinary
and intellectual character which gives them peculiar value, the loss
of which cannot be reasonably or adequately compensated in an action
at law for damages and that a breach by Executive of the terms hereof
(including without limitation this Section 7) will cause the Company
irreparable injury. Executive agrees that the Company is entitled to
injunctive and other equitable relief to prevent a breach or
threatened breach of this Agreement, which shall be in addition to any
other rights or remedies to which the Company may be entitled. For
purposes of this Section 7(c), the term "Company" shall include the
Company, its successors, assigns and affiliates.
(d) INVESTMENTS. Notwithstanding anything contained herein to the
contrary, during the Employment Period and thereafter Executive may
acquire and/or retain, solely as an investment, and take customary
actions to maintain and preserve Executive's ownership of:
(i) securities of any corporation which are registered under Sections
12(b) or 12(g) of the Securities Exchange Act of 1934 and which
are publicly traded, so long as Executive is not part of any
control group of such corporation; and
(ii) any securities of a partnership, trust, corporation, limited
liability company or other entity so long as (i) Executive
remains a passive investor in that entity and does not become
part of any control group thereof (except in a passive capacity)
and (ii) such entity is not, directly or indirectly, in
competition with the Company or its affiliates, regardless of
whether Executive is a passive investor or part of any control
group thereof.
9. REMEDIES. The parties hereto recognize and agree that, because the material
breach of this Agreement or any part hereof would result in damages
difficult to ascertain, upon any allegation of material breach of this
Agreement, either party hereto shall be entitled:
(a) PROCEEDINGS. To institute proceedings in a court located in the State
of Minnesota to enjoin the breach, termination, or threatened
termination of this Agreement. Such injunctive remedy shall be in
addition to and not in lieu of any right to recover money damages for
any such breach.
(b) COSTS AND EXPENSES. The successful party in any action brought
concerning the breach or termination of this Agreement shall be
entitled to recover all costs and expenses, including attorney's fees
incurred or associated with the enforcement of any covenant of this
Agreement.
(c) ADDITIONAL COSTS. Additionally, if there shall be any breach of this
Agreement by the Company, and Executive shall institute any action (or
counterclaim) in connection therewith, Executive shall be entitled, if
successful in such action or if the Company sues and if Executive is
successful in that action, to recover as damages the discounted value
(at a rate of 6%) of all amounts unpaid under this Agreement, or
Executive may, at his election, recover as damages
13
each monthly payment of Base Salary and additional compensation at
such time as it becomes payable or would have become payable under the
terms of this Agreement, and the Company agrees not only to pay such
sums, but, in addition thereto, interest thereon at the prime rate
then in effect, until such payment is made. In any such action, the
fact that Executive did or did not seek or engage in any other
employment or in other activities shall not affect, reduce or mitigate
the amount of recovery allowable to Executive. Executive's rights
hereunder, upon his death, accrue to his legal representatives or to
his designated beneficiary.
10. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement is binding on and inures to the
benefit of the Company's successors and assigns, provided, however,
that this Agreement may not be assigned by any of the parties hereto
without the prior written consent of each of the parties hereto. This
Agreement shall be binding upon and inure to the benefit of any
successor of the Company, and any such successor shall absolutely and
unconditionally assume all of the Company's obligations hereunder.
Upon the written request of Executive, the Company shall seek to have
any successor, by agreement in form and substance satisfactory to
Executive, assent to the fulfillment by the Company of its obligations
under this Agreement. Failure to attain such assent at least thirty
(30) business days prior to the time a person or entity becomes a
successor in interest to the Company shall be considered Executive
Cause for termination of this Agreement in accordance with Section
5(d) hereof.
(b) OFFSETS. In no event shall any amount payable to Executive pursuant to
this Agreement be reduced for purposes of offsetting, either directly
or indirectly, any indebtedness or liability of Executive to Company.
(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument.
(d) CONSTRUCTION. Wherever possible, each provision of this Agreement will
be interpreted so that it is valid under the applicable law. If any
provision of this Agreement is to any extent invalid under the
applicable law, that provision will still be effective to the extent
it remains valid. The remainder of this Agreement also will continue
to be valid, and the entire Agreement will continue to be valid in
other jurisdictions.
(e) WAIVERS. No failure or delay by either the Company or Executive in
exercising any right or remedy under this Agreement will waive any
provision of this Agreement, nor will any single or partial exercise
by either the Company or Executive of any right or remedy under this
Agreement preclude either of them from otherwise or further exercising
these rights or remedies, or any other rights or remedies granted by
any law or any related document.
(f) CAPTIONS. The headings in this Agreement are for convenience of
reference only and do not affect the interpretation of this Agreement.
(g) MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be altered,
modified or amended except by an instrument in writing signed by all
of the parties hereto. No person, whether or not an officer, agent,
employee or representative of any party, has made or has any authority
to make for or on behalf of that party any agreement, representation,
warranty, statement, promise, arrangement or understanding not
expressly set forth in this Agreement or in any other document
executed by the parties concurrently herewith ("Parol Agreements").
This Agreement and all other documents executed by the parties
concurrently herewith constitute the
14
entire agreement between the parties and supersede all express or
implied, prior or concurrent, Parol Agreements and prior written
agreements with respect to the subject matter hereof including, but
not limited to, that certain Employment Agreement, dated September 1,
1993, that certain Amendment to Employment Agreement, dated December
1, 1993 and that certain Employment Agreement, dated October 1, 1996.
The parties acknowledge that in entering into this Agreement, they
have not relied and will not in any way rely upon any Parol
Agreements.
(h) GOVERNING LAW. The laws of the State of Minnesota shall govern the
validity, construction and performance of this Agreement. Any legal
proceeding related to this Agreement shall be brought in an
appropriate Minnesota court, and each of the parties hereto hereby
consents to the exclusive jurisdiction of the courts of the State of
Minnesota for this purpose.
(i) NOTICES. All notices and other communications required or permitted
under this Agreement shall be in writing and sent by registered first
class mail, postage prepaid, and shall be deemed received five (5)
days after mailing to the addresses stated below:
If to the Company:
Navarre Corporation
7400 49th Avenue North
New Hope, Minnesota 55428
Attention: Chairman of the Board of Directors
If to Executive:
Eric H. Paulson
2605 Maple Ridge Lane
Excelsior, Minnesota 55331
(j) SURVIVAL. Notwithstanding the termination of this Agreement or
Executive's employment with the Company, the terms of this Agreement
concerning rights and remedies of the parties shall survive such
termination and shall govern in perpetuity all rights, disputes,
claims or causes of action arising out of or in any way related to
this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NAVARRE CORPORATION
By:
---------------------------------
Its:
----------------------------
-------------------------------------
Eric H. Paulson
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