-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JH5gpTV6eYZHLDLt0LtiZMNo+J1Fqu6up4SCtCcH6X6dhnPEdsdJf68JH/BrVV+w kotJGN2uRIJN1E6ayqdPYA== 0000898430-98-001534.txt : 19980424 0000898430-98-001534.hdr.sgml : 19980424 ACCESSION NUMBER: 0000898430-98-001534 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980423 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: K SWISS INC CENTRAL INDEX KEY: 0000862480 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 954265988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18490 FILM NUMBER: 98599725 BUSINESS ADDRESS: STREET 1: 20664 BAHAMA ST CITY: CATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8189983388 MAIL ADDRESS: STREET 1: 20664 BAHAMA ST CITY: CATSWORTH STATE: CA ZIP: 91311 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 1998 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For the period ended March 31, 1998 ---------------------------------------------------- OR ___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------------ ----------------- Commission File number 0-18490 ------- K-SWISS INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4265988 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20664 Bahama Street, Chatsworth, CA 91311 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 818-998-3388 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of common stock outstanding at April 23, 1998: Class A 3,100,371 Class B 2,342,072 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------ K-SWISS INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
March 31, December 31, 1998 1997 ------------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 28,982 $ 36,123 Investment securities 6,128 5,995 Accounts receivable, less allowance for doubtful accounts of $687 and $477 as of March 31, 1998 and December 31, 1997, respectively 31,313 15,657 Inventories 26,604 27,214 Prepaid expenses and other 1,190 4,299 Deferred taxes 2,377 2,256 ------- ------- Total current assets 96,594 91,544 PROPERTY, PLANT AND EQUIPMENT, net 4,261 4,885 OTHER ASSETS Intangible assets 4,647 4,712 Other 521 545 ------- ------- 5,168 5,257 ------- ------- $106,023 $101,686 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Bank lines of credit $ 1,065 $ 642 Current maturities of subordinated debentures 400 400 Trade accounts payable 5,297 4,379 Accrued liabilities 12,255 10,530 ------- ------- Total current liabilities 19,017 15,951 SUBORDINATED DEBENTURES 100 100 DEFERRED TAXES 9,823 9,770 STOCKHOLDERS' EQUITY Preferred Stock-authorized 2,000,000 shares of $.01 par value; none issued and outstanding - - Common Stock: Class A-authorized 18,000,000 shares of $.01 par value; 4,254,836 shares issued, 3,127,136 shares outstanding and 1,127,700 shares held in treasury at March 31, 1998 and 4,110,586 shares issued, 3,107,886 shares outstanding and 1,002,700 shares held in treasury at December 31, 1997 43 41 Class B-authorized 10,000,000 shares of $.01 par value; issued and outstanding 2,342,072 shares at March 31, 1998 and 2,485,572 at December 31, 1997 23 25 Additional paid-in capital 25,294 25,271 Treasury stock (14,600) (12,389) Retained earnings 66,823 63,387 Accumulated other Comprehensive Income - Foreign currency translation (500) (470) ------- ------- 77,083 75,865 ------- ------- $106,023 $101,686 ======= =======
The accompanying notes are an integral part of these statements. 2 K-SWISS INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS (Amounts in thousands, except per share amounts) (Unaudited) THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ----
Revenues $42,274 $31,199 Cost of goods sold 25,128 19,477 ------ ------ Gross profit 17,146 11,722 Selling, general and administrative expenses 11,613 9,554 ------ ------ Operating profit 5,533 2,168 Interest income, net 433 379 ------ ------ Earnings before income taxes 5,966 2,547 Income tax expense 2,421 1,008 ------ ------ NET EARNINGS $ 3,545 $ 1,539 ====== ====== Earnings per common share (Note 3) Basic $.64 $.25 ====== ====== Diluted $.62 $.25 ====== ====== Net Earnings $ 3,545 $ 1,539 Other comprehensive income, net of tax - Foreign currency translation adjustments (30) (92) ------ ------ Comprehensive net earnings $ 3,515 $ 1,447 ====== ======
The accompanying notes are an integral part of these statements. 3 K-SWISS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- Net cash used in operating activities $(6,096) $ (33) Cash flows from investing activities: Purchase of property, plant and equipment (1,370) (145) Proceeds from sale of property 2,250 - ------ ------ Net cash provided by (used in) investing activities 880 (145) Cash flows from financing activities: Net borrowings under bank lines of credit 429 1,229 Purchase of treasury stock (2,211) (591) Payment of dividends (109) (121) Income tax benefit of options exercised 5 - ------ ------ Net cash (used in) provided by financing activities (1,886) 517 Effect of exchange rate changes on cash ( 39) ( 99) ------ ------ Net (decrease) increase in cash and cash equivalents (7,141) 240 Cash and cash equivalents at beginning of period 36,123 34,314 ------ ------ Cash and cash equivalents at end of period $28,982 $34,554 ====== ======
The accompanying notes are an integral part of these statements. 4 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of K-Swiss Inc. (the "Company") as of March 31, 1998 and the results of its operations and its cash flows for the three months ended March 31, 1998 and 1997. The results of operations and cash flows for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for any other interim period or the full year. These consolidated financial statements should be read in combination with the audited consolidated financial statements and notes thereto for the year ended December 31, 1997. 2. The federal income tax returns of the Company for the years ended 1990, 1991 and 1992 are under examination by the Internal Revenue Service ("IRS"). In December 1995, the IRS issued its report proposing additional taxes of approximately $3,850,000 plus penalties and interest. The Company protested the IRS proposed assessment. Also, the federal income tax returns of the Company for the years ended 1993 through 1996 are currently under examination by the IRS. In addition, the IRS Appeals Division returned the earlier cycle to the Examination Division to reopen its examination of the 1991 and 1992 fiscal years. The IRS has issued a preliminary revised examination report covering the 1991 through 1994 fiscal years proposing additional taxes of approximately $4,760,000 plus penalties and interest for these years combined. Although no assurance can be given regarding the outcome of such examinations, the Company believes that any taxes which might become payable as a result of these examinations would not result in additional expense recognized in the financial statements other than interest and penalties, if any, as the Company has recorded deferred income taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. Therefore, management believes that resolution of the IRS examinations should not have a material adverse impact on the Company's financial position and results of operations. 3. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):
Three Months Ended March 31, -------------------------------------------- 1998 1997 -------------------- ------------------- Per Share Per Share Shares Amount Shares Amount ------ ------ ------ ------ Basic EPS 5,524 $ .64 6,069 $ .25 Effect of Dilutive Stock Options 195 (.02) 54 - ----- --------- ----- ------- Diluted EPS 5,719 $ .62 6,123 $ .25 ===== ======== ===== ====== The following options were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares: 1998 1997 --------------- --------------- Options to purchase shares of common stock (in thousands) 109 389 Exercise prices $18.00 - $23.00 $11.25 - $23.00 Expiration dates January 2000 - January 2000 - February 2008 August 2005
5 ITEM 2. - ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, for the periods indicated, the percentage of certain items in the consolidated statements of earnings relative to revenues.
THREE MONTHS ENDED MARCH 31 -------------- 1998 1997 ----- ----- Revenues 100.0% 100.0% Cost of goods sold 59.4 62.4 Gross profit 40.6 37.6 Selling, general and administrative expenses 27.5 30.6 Interest income, net 1.0 1.2 Earnings before income taxes 14.1 8.2 Income tax expense 5.7 3.3 Net earnings 8.4 4.9
Revenues increased to $42,274,000 for the quarter ended March 31, 1998 from $31,199,000 for the quarter ended March 31, 1997, an increase of $11,075,000 or 35.5%. This increase resulted primarily from an increase in the volume of footwear sold to approximately 1,669,000 pair for the quarter ended March 31, 1998 from approximately 1,336,000 pair for the quarter ended March 31, 1997. Also, the average wholesale price per pair increased to $24.56 for the quarter ended March 31, 1998 from $21.94 for the quarter ended March 31, 1997. The increase in the volume of footwear sold was primarily the result of increased sales of the Classic and children's category of shoes of 47.8% and 12.4%, respectively, partially offset by a 4.6% decrease in the tennis/court category of shoes. The average wholesale price per pair increased due to an increase in the average wholesale price per pair for all footwear categories, primarily in the Classic category of shoes. Domestic revenues increased 60.1% to $38,032,000 for the quarter ended March 31, 1998 from $23,760,000 for the quarter ended March 31, 1997. International revenues decreased 43.0% to $4,242,000 for the quarter ended March 31, 1998 from $7,439,000 for the quarter ended March 31, 1997. The decrease in international revenues was primarily the result of lower sales in the Company's Asian markets due to the Asian currency crisis. International revenues, as a percentage of total revenues, decreased to 10.0% for the quarter ended March 31, 1998 from 23.8% for the quarter ended March 31, 1997. Gross profit margins, as a percentage of revenues, increased to 40.6% for the quarter ended March 31, 1998, from 37.6% for the quarter ended March 31, 1997. Gross profit margins increased primarily due to changes in the geographic and product mix of sales. Selling, general and administrative expenses increased to $11,613,000 (27.5% of revenues) for the quarter ended March 31, 1998 from $9,554,000 (30.6% of revenues) for the quarter ended March 31, 1997, an increase of $2,059,000 or 21.6%. The increase in the amount was primarily the result of an increase in the bonus accrual for an employee incentive program as well as an increase in advertising expenses. Net interest income was $433,000 (1.0% of revenues) for the quarter ended March 31, 1998 compared to $379,000 (1.2% of revenues) for the quarter ended March 31, 1997, a change of $54,000 or 14.2%. This increase in net interest income was the result of higher average balances. The Company's effective tax rate increased to 40.6% of earnings before income tax from 39.6% for the quarters ended March 31, 1998 and 1997, respectively. Net earnings increased 130.3% to $3,545,000 for the quarter ended March 31, 1998 from $1,539,000 for the quarter ended March 31, 1997. The net earnings were net of losses incurred by the Company's European operations of $23,000 and $261,000 for the quarters ended March 31, 1998 and March 31, 1997, respectively. 6 At March 31, 1998 and 1997, domestic futures orders with start ship dates from April through September 1998 and 1997 were approximately $58,748,000 and $34,427,000, respectively, an increase of 70.6%. At March 31, 1998 and 1997, international futures orders with start ship dates from April through September 1998 and 1997 were approximately $6,187,000 and $9,244,000, respectively, a decrease of 33.1%. "Backlog", as of any date, represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of "futures" and "at-once" orders can vary significantly from quarter to quarter and year to year and (2) the rate of customer order cancellations can also vary from quarter to quarter and year to year. Liquidity and Capital Resources The Company experienced a net cash outflow of approximately $6,096,000 and $33,000 from its operating activities for the quarters ended March 31, 1998 and 1997, respectively. Cash used in operations for the quarter ended March 31, 1998 increased from the quarter ended March 31, 1997 primarily due to changes in accounts receivable, inventories, net earnings and accounts payable and accrued liabilities. The Company had a net inflow of cash from its investing activities for the quarter ended March 31, 1998 primarily due to the sale of property, plant and equipment offset by the purchase of property, plant and equipment. The Company had a net outflow of cash from its investing activities for the quarter ended March 31, 1997 due to the purchase of property, plant and equipment. The Company had a net outflow of cash from its financing activities for the quarter ended March 31, 1998 primarily due to the purchase of treasury stock partially offset by an increase in borrowings under bank lines of credit. On April 23, 1998, the Company announced a new share repurchase program. The Board of Directors has authorized the Company to purchase up to $20 million of its Class A Common Stock on the open market through April 2002. Such open market purchases, if any, will occur from time to time as market conditions warrant. The Company adopted this program because it believes repurchasing its shares can be good use of excess cash depending on the Company's array of alternatives. The Company has made purchases under previous stock repurchase programs during the period from August 14, 1996 through April 15, 1998 (the date of the final purchase under previously completed stock repurchase programs) of an aggregate of 1,157,700 shares at an aggregate purchase price totaling approximately $15,221,000. The Company is heavily dependent upon complex computer systems for all phases of its operations, which include production, sales and distribution. The Company's computer software programs recognize only the last two digits of the year in any date (e.g., "98" for "1998"), and therefore some software may inaccurately process data in 1999 or 2000 if the software is not reprogrammed, upgraded or replaced (the "Year 2000 issue"). The Company has initiated a program intended to timely mitigate and/or prevent the adverse effects of the Year 2000 Issue, and to pursue compliance by suppliers. The Company believes that many of its suppliers and customers may also have Year 2000 Issues which could affect the Company. At this time, while the Company cannot state with certainty the precise amount of expenditures necessary to resolve the Year 2000 Issue, it appears such expenditures could amount to $200,000 to $300,000 for the Company. However, in any event the Company presently believes that the cost of fixing the Year 2000 Issue will not have a material adverse impact on the Company's financial position and results of operations. During 1998, the Company will expend approximately $2,500,000 for the construction of its new headquarters facility. No other material capital commitments exist at March 31, 1998. Depending on the Company's future growth rate, funds may be required by operating activities. With continued use of its revolving credit facility and internally generated funds, the Company believes its present and currently anticipated sources of capital are sufficient to sustain its anticipated capital needs for the remainder of 1998. The Company owned a 56,000 square foot facility in Pacoima, California, which was used as the Company's principal executive offices through December 1992. This facility was sold in January 1998. The Company's working capital increased $1,984,000 to $77,577,000 at March 31,1998 from $75,593,000 at December 31, 1997. 7 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. ----------------- None. ITEM 2: Changes in Securities. --------------------- None. ITEM 3: Defaults Upon Senior Securities. ------------------------------- None. ITEM 4: Submission of Matters to a Vote of Security Holders. --------------------------------------------------- None. ITEM 5: Other Information. ----------------- None. ITEM 6: Exhibits and Reports on Form 8-K: -------------------------------- (a) Exhibits 10.1 - K-Swiss Inc. Deferred Compensation Plan, Master Plan Document. 10.2 - K-Swiss Inc. Deferred Compensation Plan, Master Trust Agreement. 27 - Financial Data Schedule. 99 - Press Release dated April 23, 1998. (b) Reports on Form 8-K Form 8-K was filed on January 15, 1998. The Company issued a press release relating to the purchase of up to $2,832,000 of its Class A Common Stock on the open market through December 1998. 8 SIGNATURES ---------- 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. K-Swiss Inc. Date: April 23, 1998 By: /S/ GEORGE POWLICK ------------------------------ George Powlick, Vice President Finance and Chief Financial Officer 9 EXHIBIT INDEX ------------- Exhibit Page - ------- ---- 10.1 K-Swiss Inc. Deferred Compensation Plan, Master Plan Document 10.2 K-Swiss Inc. Deferred Compensation Plan, Master Trust Agreement 27 Financial Data Schedule 99 Press Release dated April 23, 1998 10 EX-10.1 2 DEFERRED COMPENSATION PLAN - MASTER PLAN DOCUMENT K-Swiss, Inc. EXHIBIT 10.1 DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ EFFECTIVE JANUARY 1, 1998 Copyright(C) 1997 By Compensation resource Group, Inc. All Rights Reserved K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ TABLE OF CONTENTS
Page ---- Purpose........................................................................................ 1 ARTICLE 1 Definitions......................................................................... 1 ARTICLE 2 Selection, Enrollment, Eligibility.................................................. 7 2.1 Selection by Committee......................................................... 7 2.2 Enrollment Requirements........................................................ 8 2.3 Eligibility; Commencement of Participation..................................... 8 2.4 Termination of Participation and/or Deferrals.................................. 8 ARTICLE 3 Deferral Commitments/Company Contributions/Interest Crediting/Taxes................. 8 3.1 Minimum Deferral............................................................... 8 3.2 Maximum Deferral............................................................... 9 3.3 Election to Defer; Effect of Election Form..................................... 10 3.4 Annual Deferral Amounts........................................................ 10 3.5 Annual Company Contribution Amount............................................. 10 3.6 Stock Option Deferral Amount................................................... 11 3.7 Investment of Trust Assets..................................................... 11 3.8 Sources of Stock............................................................... 11 3.9 Interest Crediting Prior to Distribution....................................... 11 3.10 Interest Crediting for Installment Distributions............................... 12 3.11 FICA and Other Taxes........................................................... 12 3.12 Vesting........................................................................ 13 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election........ 14 4.1 Short-Term Payout.............................................................. 14 4.2 Other Benefits Take Precedence Over Short-Term Payout.......................... 14 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.......... 14 4.4 Withdrawal Election............................................................ 14 ARTICLE 5 Retirement Benefit.................................................................. 15 5.1 Retirement Benefit............................................................. 15 5.2 Payment of Retirement Benefit.................................................. 15 5.3 Death Prior to Completion of Retirement Benefit................................ 15
- -------------------------------------------------------------------------------- i K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ ARTICLE 6 Pre-Retirement Survivor Benefit..................................................... 16 6.1 Pre-Retirement Survivor Benefit................................................ 16 6.2 Payment of Pre-Retirement Survivor Benefit..................................... 16 ARTICLE 7 Termination Benefit..........................................,,,,,.................. 16 7.1 Termination Benefit............................................................ 16 7.2 Payment of Termination Benefit................................................. 17 ARTICLE 8 Disability Waiver and Benefit....................................................... 17 8.1 Disability Waiver.............................................................. 17 8.2 Continued Eligibility; Disability Benefit...................................... 18 ARTICLE 9 Beneficiary Designation............................................................. 18 9.1 Beneficiary.................................................................... 18 9.2 Beneficiary Designation; Change; Spousal Consent............................... 18 9.3 Acceptance..................................................................... 18 9.4 No Beneficiary Designation..................................................... 18 9.5 Doubt as to Beneficiary........................................................ 19 9.6 Discharge of Obligations....................................................... 19 ARTICLE 10 Leave of Absence.................................................................... 19 10.1 Paid Leave of Absence.......................................................... 19 10.1 Unpaid Leave of Absence........................................................ 19 ARTICLE 11 Termination, Amendment or Modification.............................................. 19 11.1 Termination.................................................................... 19 11.2 Amendment...................................................................... 20 11.3 Plan Agreement................................................................. 20 11.4 Interest Rate in the Event of a Change in Control.............................. 21 11.5 Effect of Payment.............................................................. 21 ARTICLE 12 Administration...................................................................... 21 12.1 Committee Duties............................................................... 21 12.2 Administration Upon Change In Control.......................................... 22 12.3 Agents......................................................................... 22 12.4 Binding Effect of Decisions.................................................... 22
- ------------------------------------------------------------------------------- ii K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 12.5 Indemnity of Committee....................................................... 22 12.6 Employer Information......................................................... 23 ARTICLE 13 Other Benefits and Agreements....................................................... 23 13.1 Coordination with Other Benefits............................................. 23 ARTICLE 14 Claims Procedures................................................................... 23 14.1 Presentation of Claim........................................................ 23 14.2 Notification of Decision..................................................... 23 14.3 Review of a Denied Claim..................................................... 24 14.4 Decision on Review........................................................... 24 14.5 Legal Action................................................................. 24 ARTICLE 15 Trust............................................................................... 24 15.1 Establishment of the Trust................................................... 24 15.2 Interrelationship of the Plan and the Trust.................................. 25 15.3 Distributions From the Trust................................................. 25 ARTICLE 16 Miscellaneous....................................................................... 25 16.1 Status of Plan............................................................... 25 16.2 Unsecured General Creditor................................................... 25 16.3 Employer's Liability......................................................... 25 16.4 Nonassignability............................................................. 25 16.5 Not a Contract of Employment................................................. 26 16.6 Furnishing Information....................................................... 26 16.7 Terms........................................................................ 26 16.8 Captions..................................................................... 26 16.9 Governing Law................................................................ 26 16.10 Notice....................................................................... 27 16.11 Successors................................................................... 27 16.12 Spouse's Interest............................................................ 27 16.13 Validity..................................................................... 27 16.14 Incompetent.................................................................. 27 16.15 Court Order.................................................................. 27 16.16 Distribution in the Event of Taxation........................................ 28 16.17 Insurance.................................................................... 28 16.18 Legal Fees To Enforce Rights After Change in Control......................... 28
- -------------------------------------------------------------------------------- iii K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ K-SWISS, INC. DEFERRED COMPENSATION PLAN Effective January 1, 1998 PURPOSE The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of K-Swiss, Inc., a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 DEFINITIONS ----------- For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the Company Contribution Account balance and (iii) the Stock Option Deferral Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual Salary, relating to services performed during any calendar year payable to a Participant as an Employee under any Employer's annual bonus and cash incentive plans, excluding stock options. 1.3 "Annual Company Contribution Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5. 1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary and/or Annual Bonus that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. - -------------------------------------------------------------------------------- 1 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 1.5 "Annual Stock Option Deferral Amount" shall mean, with respect to a Participant for any one Plan Year, the amount of Qualifying Gains deferred on Eligible Stock Option exercise in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of such Eligible Stock Option exercise. 1.6 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any year, excluding bonuses, commissions, overtime, fringe benefits (including amounts contributed by any Employer to any retirement or deferred compensation plan), stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances, paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h) or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.7 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.8 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.9 "Board" shall mean the board of directors of the Company. 1.10 "Bonus Rate" shall mean, for a Plan Year, an interest rate, if any, determined by the Committee, in its sole discretion, which rate shall be determined and announced before the commencement of the Plan Year for which the rate applies. This rate may be zero for any Plan Year. 1.11 "Change in Control" shall mean the first to occur of any of the following events: (a) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of the Company's capital stock having at least 50 percent of the voting power for the election of directors; - -------------------------------------------------------------------------------- 2 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ (b) During any period of not more than two consecutive years, not including any period prior to the adoption of this Plan, individuals who, at the beginning of such period constitute the board of directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c), (d) or (e) of this Section 1.11) whose election by the board of directors or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The shareholders of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger; (d) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or (e) The shareholders of the Company approve the sale or transfer of all or substantially all of the assets of the Company to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member. 1.12 "Claimant" shall have the meaning set forth in Section 14.1. 1.13 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.14 "Committee" shall mean the committee described in Article 12. 1.15 "Company" shall mean K-Swiss, Inc., a Delaware corporation, and any successor to all or substantially all of the Company's assets or business. 1.16 "Company Contribution Account" shall mean (i) the sum of the Participant's Annual Company Contribution Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Company Contribution Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Contribution Account. - -------------------------------------------------------------------------------- 3 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 1.17 "Crediting Rate" shall mean, with respect to a Participant's Deferral Account balance, Company Contribution Account balance and Stock Option Deferral Account balance for each Plan Year, an interest rate, stated as an annual rate, determined and announced by the Committee before the Plan Year for which it is to be used, that is equal to 125% of the applicable federal long term rate (as described in Code Section 1274). The applicable federal long term rate for a Plan Year shall be the one declared in the September preceding the Plan Year. 1.18 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited with interest in accordance with Section 3.10 below, even if such amount is being paid out in installments. The amounts so deferred and interest thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.19 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Deferral Account. 1.20 "Disability" shall mean a period of disability during which a Participant is unable to perform the material duties of his or her regular employment with an Employer. 1.21 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.22 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. - -------------------------------------------------------------------------------- 4 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 1.23 "Eligible Stock Option" shall mean one or more non-qualified stock option(s) selected by the Committee in its sole discretion and exercisable under a plan or arrangement of any Employer permitting a Participant under this Plan to defer gain with respect to such option. 1.24 "Employee" shall mean a person who is an employee of any Employer. 1.25 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. 1.26 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.27 "Participant" shall mean any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.28 "Plan" shall mean the Company's Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.29 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Committee shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.30 "Plan Year" shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. - -------------------------------------------------------------------------------- 5 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 1.31 "Preferred Rate" shall mean, for each Plan Year, an interest rate that is the sum of the Crediting Rate and the Bonus Rate for that Plan Year. 1.32 "Qualifying Gain" shall mean the value accrued upon exercise of an Eligible Stock Option (i) using a Stock-for-Stock payment method and (ii) having an aggregate fair market value in excess of the total Stock purchase price necessary to exercise the option. In other words, the Qualifying Gain upon exercise of an Eligible Stock Option equals the total market value of the shares (or share equivalent units) acquired minus the total stock purchase price. For example, assume a Participant elects to defer the Qualifying Gain accrued upon exercise of an Eligible Stock Option to purchase 1000 shares of Stock at an exercise price of $20 per share, when Stock has a current fair market value of $25 per share. Using the Stock- for-Stock payment method, the Participant would deliver 800 shares of Stock (worth $20,000) to exercise the Eligible Stock Option and receive, in return, 800 shares of Stock plus a Qualifying Gain (in this case, in the form of an unfunded and unsecured promise to pay money or property in the future) equal to $5,000 (i.e., the current value of the remaining 200 shares of Stock). 1.33 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.34 "Retirement", "Retires" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with ten (10) Years of Service. 1.35 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.36 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.37 "Stock" shall mean K-Swiss, Inc. common stock, or any other equity securities of the Company designated by the Committee. 1.38 "Stock Option Deferral Account" shall mean the sum of (i) the Participant's Annual Stock Option Deferral Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Stock Option Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Stock Option Deferral Account. 1.39 "Stock Option Deferral Amount" shall mean, for any Eligible Stock Option, the amount of Qualifying Gains deferred in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of exercise of such Eligible Stock Option. - -------------------------------------------------------------------------------- 6 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 1.40 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.41 "Termination of Employment" shall mean the severing of employment with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. 1.42 "Trust" shall mean the trust established pursuant to that certain Master Trust Agreement, dated as of January 1, 1998, between the Company and the trustee named therein, as amended from time to time. 1.43 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.44 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections have been made by the Participant for any Plan Year). Any partial year shall not be counted. Notwithstanding the previous sentence, a Participant's first Plan Year of participation shall be treated as a full Plan Year for purposes of this definition, even if it is only a partial Plan Year of participation. 1.45 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 SELECTION, ENROLLMENT, ELIGIBILITY ---------------------------------- 2.1 SELECTION BY COMMITTEE. Participation in the Plan shall be ---------------------- limited to a select group of management or highly compensated Employees of the Employers, as determined by the Committee, in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees to participate in the Plan. - -------------------------------------------------------------------------------- 7 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected ----------------------- Employee shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within 30 days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary. 2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee ------------------------------------------ selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee shall commence participation in the Plan on the first day of the month following the month in which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. 2.4 TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee --------------------------------------------- determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan. ARTICLE 3 DEFERRAL COMMITMENTS/COMPANY CONTRIBUTIONS/INTEREST CREDITING/TAXES ------------------------------------------------------------------- 3.1 MINIMUM DEFERRAL. ---------------- (a) ANNUAL DEFERRAL AMOUNT. For each Plan Year, a Participant may elect ---------------------- to defer, as his or her Annual Deferral Amount, Base Annual Salary and/or Annual Bonus in the following minimum amounts for each deferral elected: DEFERRAL MINIMUM AMOUNT ------------------------------- ------------------------- Base Annual Salary $2,000 Annual Bonus $2,000 If an election is made for less than a stated minimum, or if no election is made, the amount deferred shall be zero. - -------------------------------------------------------------------------------- 8 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ (b) SHORT PLAN YEAR. Notwithstanding the foregoing, if a Participant --------------- first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum Base Annual Salary deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12. (c) STOCK OPTION DEFERRAL AMOUNT. For each Eligible Stock Option, a ---------------------------- Participant may elect to defer, as his or her Stock Option Deferral Amount, the following minimum percentage of Qualifying Gain with respect to exercise of the Eligible Stock Option: DEFERRAL MINIMUM PERCENTAGE ------------------------------ -------------------------- Qualifying Gain 10% provided, however, that the Annual Stock Option Deferral Amount shall be no less than the lesser of $20,000 or 100% of the Qualifying Gain. 3.2 MAXIMUM DEFERRAL. ---------------- (a) For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and/or Annual Bonus up to the following maximum percentages for each deferral elected: DEFERRAL MAXIMUM AMOUNT ------------------------------ -------------------------- Base Annual Salary 90% Annual Bonus 100% Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the maximum Annual Deferral Amount with respect to Base Annual Salary and/or Annual Bonus shall be the lesser of the foregoing amounts or the amount of compensation not yet earned by the Participant as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance. (b) For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Deferral Amount, Qualifying Gain up to the following maximum percentage with respect to exercise of the Eligible Stock Option: DEFERRAL MAXIMUM PERCENTAGE ------------------------------ -------------------------- Qualifying Gain 100% - -------------------------------------------------------------------------------- 9 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ (c) Stock Option Deferral Amounts may also be limited by other terms or conditions set forth in the stock option plan or agreement under which such options are granted. 3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM. ------------------------------------------ (a) FIRST PLAN YEAR. In connection with a Participant's commencement of --------------- participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable --------------------- deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. (c) STOCK OPTION DEFERRAL. For an election to defer gain upon an Eligible --------------------- Stock Option exercise to be valid: (i) a separate Election Form must be completed and signed by the Participant with respect to the Eligible Stock Option; (ii) the Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date the Participant elects to exercise the Eligible Stock Option; (iii) the Eligible Stock Option must be exercised using an actual or phantom Stock-for-Stock payment method; and (iv) the Stock actually or constructively delivered by the Participant to exercise the Eligible Stock Option must have been owned by the Participant during the entire six (6) month period prior to its delivery. 3.4 ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base Annual Salary of the ----------------------- portion Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Bonus portions of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. 3.5 ANNUAL COMPANY CONTRIBUTION AMOUNT. For each Plan Year, an Employer, in ---------------------------------- its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Company Contribution Account under this Plan, which amount shall be for that Participant - -------------------------------------------------------------------------------- 10 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her Retirement or death, the Annual Company Contribution Amount for that Plan Year shall be zero. 3.6 STOCK OPTION DEFERRAL AMOUNT. Subject to any terms and ---------------------------- conditions imposed by the Committee, Participants may elect to defer, under the Plan, Qualifying Gains attributable to an Eligible Stock Option exercise. Stock Option Deferral Amounts shall be credited to the Participant on the books of the Employer at the time Stock would otherwise have been delivered to the Participant pursuant to the Eligible Stock Option exercise, but for the election to defer. 3.7 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall -------------------------- be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of Stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee. 3.8 SOURCES OF STOCK. If Stock is credited under the Plan in ---------------- the Trust pursuant to Section 3.7 in connection with an Eligible Stock Option exercise, the shares so credited shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement. 3.9 INTEREST CREDITING PRIOR TO DISTRIBUTION. Except as provided below, prior ---------------------------------------- to any distribution of benefits under Articles 4, 5, 6, 7 or 8, interest shall be credited and compounded annually on the last day of the Plan Year on (i) a Participant's Deferral Account as though the Base Annual Salary and Annual Bonus portions of the Annual Deferral Amount for that Plan Year were withheld on the first day of the year in which the amount deferred is actually withheld and deferred, (ii) on a Participant's Company Contribution Account as though the Annual Company Contribution Amount, if any, was credited at the end of the Plan Year to which it relates and (iii) on a Participant's Stock Option Deferral Account as though the Stock Option Deferral Amount was credited on the day on which the Eligible Stock Option was exercised or otherwise disposed of. If a Participant's commencement of participation in the Plan is other than the first day of the Plan Year, then interest crediting for the Base Annual Salary and Bonus portions of the Annual Deferral Amount shall commence as of the date that the Participant commences participation in the Plan. If the Participant Retires, dies, or experiences a Termination of Employment prior to the end of the Plan Year, the Annual Company Contribution, if any, for the Plan Year in which such event occurs shall be treated as having been credited as of the - -------------------------------------------------------------------------------- 11 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ date of such event. The rate of interest for crediting for any Plan Year shall be the Crediting Rate, but shall be the Preferred Rate if the Participant has completed five or more Years of Plan Participation (in which case the Preferred Rate shall be used for all Plan Years including Plan Years prior to the completion of five years of Plan Participation). In the event of Retirement, Disability, death or Termination of Employment prior to the end of a Plan Year, the basis for that year's interest crediting will be a fraction of the full year's interest, based on the number of full months that the Participant was employed with the Employer during the Plan Year prior to the occurrence of such event. If a distribution is made under this Plan, for purposes of crediting interest up to the time of the distribution, the Participant's Account Balance shall be reduced as of the first day of the month in which the distribution is made. 3.10 INTEREST CREDITING FOR INSTALLMENT DISTRIBUTIONS. If a Participant's ------------------------------------------------ benefits under this Plan are to be paid in substantially equal monthly installments, such payments shall be determined by amortizing the Participant's specified benefit over the number of months elected, using the interest rate specified below and treating the first installment payment as all principal and each subsequent installment payment, first as interest accrued for the applicable installment period on the unpaid Account Balance and second as a reduction in the Account Balance. The interest rate to be used to calculate installment payment amounts shall be a fixed interest rate that is determined by averaging the Crediting or Preferred Rates, whichever is applicable, for the Plan Year in which installment payments commence and the four (4) preceding Plan Years. This rate shall be treated as the nominal rate for making such calculations. If a Participant has completed fewer than five (5) Years of Plan Participation, this average shall be determined using the Crediting Rates for the Plan Years during which the Participant participated in the Plan. 3.11 FICA AND OTHER TAXES. -------------------- (a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual ----------------------- Deferral Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.11. (b) COMPANY CONTRIBUTION AMOUNTS. When a participant becomes vested in a ---------------------------- portion of his or her Company Contribution Account, the Participant's Employer(s) shall withhold from the Participant's Base Annual Salary and/or Bonus that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Contribution Account in order to comply with this Section 3.11. - -------------------------------------------------------------------------------- 12 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ (c) ANNUAL STOCK OPTION AMOUNTS. For each Plan Year in which an Annual --------------------------- Stock Option Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary, Bonus and Qualifying Gains that are not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Stock Option Amount. If necessary, the Committee may reduce the Annual Stock Option Amount in order to comply with this Section 3.11. (d) DISTRIBUTIONS. The Participant's Employer(s), or the trustee of the ------------- Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. 3.12 VESTING. ------- (a) Except as provided in Section 7.1 below, a Participant shall at all times be 100% vested in his or her Deferral Account and Stock Option Deferral Account. (b) A Participant shall be vested in his or her Company Contribution Account in accordance with the terms of such Participant's Plan Agreement, based on his or her Years of Plan Participation. (c) Notwithstanding anything to the contrary contained in this Section 3.12 or the Participant's Plan Agreement, in the event of a Change in Control, a Participant's Company Contribution Account shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedules). (d) Notwithstanding subsection (c), the vesting schedule for a Participant's Company Contribution Account shall not be accelerated to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event that all of a Participant's Company Contribution Account is not vested pursuant to such a determination, the Participant may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within 15 business days of such a request an opinion from a nationally recognized accounting firm selected by the Participant (the "Accounting Firm"). The opinion shall state the Accounting Firm's opinion that any limitation in the vested percentage hereunder is necessary to avoid the limits of Section 280G and contain supporting calculations. The cost of such opinion shall be borne by the Company. - -------------------------------------------------------------------------------- 13 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ ARTICLE 4 SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES; -------------------------------------------------------- WITHDRAWAL ELECTION ------------------- 4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual ----------------- Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus interest credited in the manner provided in Section 3.10 above on that amount, but using the applicable interest rate set forth in Section 7.1 below, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid during a period beginning 1 day and ending 60 days after the last day of any Plan Year designated by the Participant that is at least five Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a five year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing January 1, 1997, the five year Short- Term Payout would become payable during a 60 day period commencing January 1, 2003. 4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM PAYOUT. ----------------------------------------------------- Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus interest thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article. 4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. --------------------------------------------------------------------- If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. 4.4 WITHDRAWAL ELECTION. A Participant (or, after the Participant's death, ------------------- his or her Beneficiary) may elect, at any time, to withdraw all of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the - -------------------------------------------------------------------------------- 14 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ election, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 RETIREMENT BENEFIT ------------------ 5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant ------------------ who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or ----------------------------- her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or in substantially equal monthly installments (the latter determined in accordance with Section 3.10 above) over a period of 60, 120 or 180 months. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 2 years prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Participant Retires. Any payment made shall be subject to the Deduction Limitation. 5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies ----------------------------------------------- after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of months and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a - -------------------------------------------------------------------------------- 15 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. ARTICLE 6 PRE-RETIREMENT SURVIVOR BENEFIT ------------------------------- 6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, ------------------------------- the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance, if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in connection ------------------------------------------ with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or in substantially equal monthly payments (the latter determined in accordance with Section 3.10 above) over a period of 60, 120 or 180 months. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre- Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or monthly installment payments that do not exceed five years in duration. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 TERMINATION BENEFIT ------------------- 7.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, the Participant ------------------- shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance, with interest credited in the manner provided in Section 3.10 above, if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability, using the Crediting Rate if the Participant has fewer than 5 completed Year of Plan Participation and the Preferred Rate if the Participant has completed 5 or more Years of Plan Participation (in which case the Preferred Rate shall be used for all Plan Years including Plan Years prior to the completion of five years of Plan Participation). Notwithstanding - -------------------------------------------------------------------------------- 16 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ the foregoing, the Board in its sole and absolute discretion may determine that the applicable rate for any Participant shall be the Preferred Rate without regard to his or her completed Years of Plan Participation. 7.2 PAYMENT OF TERMINATION BENEFIT. If the Participant's Account Balance at ------------------------------ the time of his or her Termination of Employment is less than $200,000, payment of his or her Termination Benefit shall be paid in a lump sum. If his or her Account Balance at such time is equal to or greater than that amount, the Participant may elect at the time of his or her commencement of participation in the Plan to have the Termination Benefit to be paid in a lump sum or in substantially equal monthly installment payments over a period of time that does not exceed five years in duration (the latter determined in accordance with Section 3.10 above). The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date of the Participant's Termination of Employment. Any payment made shall be subject to the Deduction Limitation. The Participant may annually change his or her election to an alternative payout period allowable under this Section 7.2 by submitting a new election to the Committee; provided that, in order to be valid, any change must be submitted at least two years prior to the Participant's Termination of Employment and is accepted by the Committee in its sole discretion. ARTICLE 8 DISABILITY WAIVER AND BENEFIT ----------------------------- 8.1 Disability Waiver. ----------------- (a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee ------------------ to be suffering from a Disability shall be (i) excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and/or Annual Bonus for the Plan Year during which the Participant first suffers a Disability and (ii) excused from fulfilling any unexercised Stock Option Deferral Amount commitments. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) RETURN TO WORK. If a Participant returns to employment with an -------------- Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount and Stock Option Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. - -------------------------------------------------------------------------------- 17 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a ----------------------------------------- Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall, in the case of a Participant whose Disability has lasted at least 24 months or who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5; otherwise the Disability Benefit shall be paid in a lump sum within 60 days of the Committee's exercise of such right, unless the Committee determines to pay such amount in installments over a period not to exceed 180 months. Any payment made shall be subject to the Deduction Limitation. ARTICLE 9 BENEFICIARY DESIGNATION ----------------------- 9.1 BENEFICIARY. Each Participant shall have the right, at any time, to ----------- designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall ------------------------------------------------ designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 ACCEPTANCE. No designation or change in designation of a Beneficiary ---------- shall be effective until received and acknowledged in writing by the Committee or its designated agent. 9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a -------------------------- Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the - -------------------------------------------------------------------------------- 18 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper ----------------------- Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a ------------------------ Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 LEAVE OF ABSENCE ---------------- 10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the --------------------- Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the ----------------------- Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION -------------------------------------- 11.1 TERMINATION. Although each Employer anticipates that it will continue the ----------- Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan, at any - -------------------------------------------------------------------------------- 19 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ time, with respect to its participating Employees, by the action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows. Prior to a Change in Control, if the Plan is terminated with respect to all its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or monthly installments for up to 15 years, with interest credited during the installment period as provided in Section 3.10. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or in installments using fewer months (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in --------- whole or in part with respect to that Employer by the action of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification, or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or in installments using fewer months (provided that, the present value of all payments that will have been received by a Participant at any given point in time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above, -------------- if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan - -------------------------------------------------------------------------------- 20 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ document, the Employer may only amend or terminate such provisions with the consent of the Participant. 11.4 INTEREST RATE IN THE EVENT OF A CHANGE IN CONTROL. If a Change in ------------------------------------------------- Control occurs, notwithstanding any other provision hereof, the applicable interest rate to be used in determining a Participant's benefit in connection with a Termination of Employment after the Change in Control, or a Plan termination, amendment or modification under Sections 11.1 and 11.2, shall be the Preferred Rate without regard to the Participant's Years of Plan Participation. However, the Crediting Rate for the applicable Plan Year, and not the Preferred Rate, shall continue to be used as the discount rate for determining present value. 11.5 EFFECT OF PAYMENT. The full payment of the applicable benefit under ----------------- Section 4.4 or Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. ARTICLE 12 ADMINISTRATION -------------- 12.1 COMMITTEE DUTIES. Except as otherwise provided in this Section 12, ---------------- this Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 12.2 ADMINISTRATION UPON CHANGE IN CONTROL. For purposes of this Plan, the ------------------------------------- Committee shall be the "Administrator" at all times prior to the occurrence of a Change in Control. Upon and after the occurrence of a Change in Control, the "Administrator" shall be an independent third party selected within 60 days by the Trustee (and such party may be the Trustee) and approved by the individual who, immediately prior to such event, was the Company's Chief Executive Officer or, if not so identified, the Company's highest ranking officer (the "Ex-CEO") whose approval will not be unreasonably withheld. The Administrator shall have the discretionary power to determine all questions arising in connection with the administration and interpretation of the Plan including but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator (if a party other than the Trustee) shall have no - -------------------------------------------------------------------------------- 21 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust. Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator; (2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney's fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Retirement, Disability, death or Termination of Employment of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may only be terminated (and a replacement appointed) by the Trustee with the approval of the Ex-CEO, and may in no event be terminated by the Company. 12.3 AGENTS. In the administration of this Plan, the Committee may, from time ------ to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.4 BINDING EFFECT OF DECISIONS. The decision or action of the Administrator --------------------------- with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.5 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless ---------------------- the members of the Committee, and any Employee to whom duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator. 12.6 EMPLOYER INFORMATION. To enable the Committee and/or Administrator to -------------------- perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require. - -------------------------------------------------------------------------------- 22 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ ARTICLE 13 OTHER BENEFITS AND AGREEMENTS ----------------------------- 13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a -------------------------------- and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 CLAIMS PROCEDURES ----------------- 14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased --------------------- Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. The claim must state with particularity the determination desired by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's ------------------------ claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. - -------------------------------------------------------------------------------- 23 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from ------------------------ the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 DECISION ON REVIEW. The Committee shall render its decision on review ------------------ promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of ------------ this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 TRUST ----- 15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and -------------------------- each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts, Annual Company Contribution Amounts, Annual Stock Option Deferral Amounts and interest and/or dividend credits for those amounts for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. - -------------------------------------------------------------------------------- 24 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the ------------------------------------------- Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the ---------------------------- Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Agreement. ARTICLE 16 MISCELLANEOUS ------------- 16.1 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified -------------- within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 16.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, -------------------------- successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.3 EMPLOYER'S LIABILITY. An Employer's liability for the payment of -------------------- benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.4 NONASSIGNABILITY. Neither a Participant nor any other person shall have ---------------- any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. - -------------------------------------------------------------------------------- 25 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ 16.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan ---------------------------- shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.6 FURNISHING INFORMATION. A Participant or his or her Beneficiary will ---------------------- cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.7 TERMS. Whenever any words are used herein in the masculine, they shall ----- be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.8 CAPTIONS. The captions of the articles, sections and paragraphs of -------- this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions . 16.9 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be ------------- construed and interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles. 16.10 NOTICE. Any notice or filing required or permitted to be given to the ------ Committee under this Plan shall be sufficient if in writing and hand- delivered, or sent by registered or certified mail, to the address below: Deferred Compensation Plan Committee c/o K-Swiss, Inc. 20664 Bahama Street Chatsworth, CA 91311 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. - -------------------------------------------------------------------------------- 26 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the ---------- benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse ----------------- of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.13 VALIDITY. In case any provision of this Plan shall be illegal or -------- invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.14 INCOMPETENT. If the Committee determines in its discretion that a ----------- benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.15 COURT ORDER. The Committee is authorized to make any payments directed ----------- by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse. 16.16 DISTRIBUTION IN THE EVENT OF TAXATION. ------------------------------------- (a) GENERAL. If, for any reason, all or any portion of a Participant's ------- benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has - -------------------------------------------------------------------------------- 27 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of ----- the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.17 INSURANCE. The Employers, on their own behalf or on behalf of the --------- trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 16.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company ---------------------------------------------------- and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of the Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company or the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the - -------------------------------------------------------------------------------- 28 K-Swiss, Inc. DEFERRED COMPENSATION PLAN Master Plan Document ================================================================================ Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. IN WITNESS WHEREOF, the Company has signed this Plan document as of 12/22, 1997. K-Swiss, Inc. a Delaware corporation By: /s/ George Powlick --------------------------------- Title: Vice President ------------------------------- - -------------------------------------------------------------------------------- 29 EX-10.2 3 DEFERRED COMPENSATION PLAN - MASTER TRUST AGRMNT K-SWISS, INC. EXHIBIT 10.2 Deferred Compensation Plan Master Trust Agreement ================================================================================ COPYRIGHT(C) 1997 BY COMPENSATION RESOURCE GROUP, INC. ALL RIGHTS RESERVED K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ MASTER TRUST AGREEMENT ---------------------- Table of Contents ----------------- ARTICLE PAGE - ------- ---- ARTICLE 1 NAME, INTENTIONS, IRREVOCABILITY, DEPOSIT AND DEFINITIONS.........1 --------------------------------------------------------- 1.1 Name...............................................................1 1.2 Intentions.........................................................1 1.3 Irrevocability; Creditor Claims....................................1 1.4 Initial Deposit....................................................2 1.5 Additional Definitions.............................................2 1.6 Grantor Trust......................................................3 ARTICLE 2 GENERAL ADMINISTRATION............................................4 ---------------------- 2.1 Committee Directions and Administration Before Change in Control...4 2.2 Administration Upon Change in Control..............................4 2.3 Contributions......................................................5 2.4 Trust Fund.........................................................5 2.5 Distribution of Excess Trust Fund to Employers.....................5 ARTICLE 3 POWERS AND DUTIES OF TRUSTEE......................................5 ---------------------------- 3.1 Investment Directions..............................................5 3.2 Investment Upon Change in Control..................................6 3.3 Management of Investments..........................................6 3.4 Securities.........................................................8 3.5 Substitution.......................................................8 3.6 Distributions......................................................9 - -------------------------------------------------------------------------------- -i- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ 3.7 Trustee Responsibility Regarding Payments on Insolvency...........11 3.8 Costs of Administration...........................................13 3.9 Trustee Compensation and Expenses.................................13 3.10 Professional Advice..............................................13 3.11 Payment on Court Order...........................................13 3.12 Protective Provisions............................................14 3.13 Indemnifications.................................................14 ARTICLE 4 INSURANCE CONTRACTS..............................................14 ------------------- 4.1 Types of Contracts................................................14 4.2 Ownership.........................................................15 4.3 Restrictions on Trustee's Rights..................................15 ARTICLE 5 TRUSTEE'S ACCOUNTS...............................................15 ------------------ 5.1 Records...........................................................15 5.2 Annual Accounting; Final Accounting...............................15 5.3 Valuation.........................................................16 5.4 Delegation of Duties..............................................16 ARTICLE 6 RESIGNATION OR REMOVAL OF TRUSTEE................................17 --------------------------------- 6.1 Resignation; Removal..............................................17 6.2 Successor Trustee.................................................17 6.3 Settlement of Accounts............................................17 ARTICLE 7 CONTROVERSIES, LEGAL ACTIONS AND COUNSEL.........................17 ---------------------------------------- 7.1 Controversy.......................................................17 7.2 Joinder of Parties................................................18 - -------------------------------------------------------------------------------- -ii- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ 7.3 Employment of Counsel.............................................18 ARTICLE 8 INSURERS.........................................................18 -------- 8.1 Insurer Not a Party...............................................18 8.2 Authority of Trustee..............................................18 8.3 Contract Ownership................................................18 8.4 Limitation of Liability...........................................18 8.5 Change of Trustee.................................................18 ARTICLE 9 AMENDMENT AND TERMINATION........................................19 ------------------------- 9.1 Amendment.........................................................19 9.2 Final Termination.................................................20 ARTICLE 10 MISCELLANEOUS...................................................21 ------------- 10.1 Directions Following Change in Control...........................21 10.2 Taxes............................................................21 10.3 Third Persons....................................................21 10.4 Nonassignability; Nonalienation..................................21 10.5 The Plans........................................................21 10.6 Applicable Law...................................................22 10.7 Notices and Directions...........................................22 10.8 Successors and Assigns...........................................22 10.9 Gender and Number................................................22 10.10 Headings........................................................22 10.11 Counterparts....................................................22 10.12 Beneficial Interest.............................................22 - -------------------------------------------------------------------------------- -iii- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ 10.13 The Trust and Plans............................................22 10.14 Effective Date.................................................22 - -------------------------------------------------------------------------------- -iv- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ MASTER TRUST AGREEMENT FOR K-SWISS, INC. DEFERRED COMPENSATION PLAN THIS MASTER TRUST AGREEMENT ("Master Trust Agreement") is made and entered into as of January 1, 1998, between K-Swiss, Inc., a Delaware corporation (the "Company"), and Wachovia Bank, N.A., a national banking association (the "Trustee"), to evidence the master trust (the "Trust") to be established, pursuant to those executive deferral plans of the Company now or hereafter existing that require the establishment of a trust, for the benefit of a select group of management, highly compensated employees and/or Directors who contribute materially to the continued growth, development and business success of the Company and those subsidiaries of the Company, if any, that participate in the Plans (collectively, "Subsidiaries," or singularly, "Subsidiary"). ARTICLE 1 NAME, INTENTIONS, IRREVOCABILITY, DEPOSIT AND DEFINITIONS --------------------------------------------------------- 1.1 NAME. The name of the Trust created by this Agreement (the "Trust") shall ---- be: MASTER TRUST AGREEMENT FOR K-SWISS, INC. DEFERRED COMPENSATION PLAN 1.2 INTENTIONS. The Company wishes to establish the Trust and to contribute to ---------- the Trust assets that shall be held therein, subject to the claims of the Company's and the Subsidiaries' creditors in the event of their Insolvency (as defined below) until paid to Participants and their Beneficiaries in such manner and at such times as specified in the Plans. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing supplemental compensation for a select group of management, highly compensated employees and/or Directors for purposes of Title I of ERISA (as defined below). In addition, it is the intention of the Company and the Subsidiaries to make contributions to the Trust to provide themselves with a source of funds to assist them in the meeting of their liabilities under the Plans. 1.3 IRREVOCABILITY; CREDITOR CLAIMS. The Trust hereby established shall be ------------------------------- irrevocable. Except as otherwise provided in Sections 2.5 and 9.2, the principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and the Subsidiaries and shall be used exclusively for the uses and purposes of the Participants and the general creditors of the Company and the Subsidiaries as herein set forth. The Participants and their Beneficiaries shall have no preferred claim on, or any beneficial - -------------------------------------------------------------------------------- -1- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ ownership interest in, any assets of the Trust. Any rights created under the Plans and this Master Trust Agreement shall be mere unsecured contractual rights of the Participants and their Beneficiaries against the Company and the Subsidiaries. Any assets held by the Trust will be subject to the claims of the Company's and the Subsidiaries' general creditors under federal and state law in the event of Insolvency. 1.4 INITIAL DEPOSIT. The Company hereby deposits with the Trustee in trust --------------- $100, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Master Trust Agreement. 1.5 ADDITIONAL DEFINITIONS. In addition to the definitions set forth above, ---------------------- for purposes hereof, unless otherwise clearly apparent from the context, the following terms have the following indicated meanings: (a) "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with a Plan, that are entitled to receive benefits under a Plan upon the death of a Participant. (b) "Board" shall mean the board of directors of the Company. (c) "Change in Control" shall mean the first to occur of any of the following events: (i) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of the Company's capital stock with at least 50 percent of the voting power for the election of directors; (ii) During any period of not more than two consecutive years, not including any period prior to the adoption of this Trust, individuals who, at the beginning of such period constitute the board of directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), (iv) or (v) of this Section 1.5(c)) whose election by the board of directors or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) The shareholders of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in - -------------------------------------------------------------------------------- -2- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ which the holders of the common stock of the Company immediately prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger; (iv) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or (v) The shareholders of the Company approve the sale or transfer of substantially all of the Company's assets to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member. (d) "Committee" shall mean the administrative committee appointed by the Board to administer this Trust. (e) "Director" shall mean any member of the board of directors of the Company or any subsidiary. (f) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. (g) "Insolvent" shall have the meaning set forth in Section 3.7(a) below. (h) "Insolvent Entity" shall have the meaning set forth in Section 3.7(a) below. (i) "IRS" shall mean the Internal Revenue Service. (j) "Participant" shall mean a person who is a participant in one or more of the Plans in accordance with their terms and conditions. (k) "Payment Schedule" shall have the meaning set forth in Section 3.6(b) below. (l) "Plan(s)" shall mean the K-SWISS, Inc. Deferred Compensation Plan and any other executive deferral plans established now or in the future by the Company that requires the establishment of a trust. (m) "Plan Year" shall mean the calendar year starting with 1998. (n) "Trust Fund" shall mean the assets held by the Trustee pursuant to the terms of this Master Trust Agreement and for the purposes of the Plans. 1.6 GRANTOR TRUST. The Trust is intended to be a "grantor trust," of which ------------- the Company and the Subsidiaries are the grantors, within the meaning of subpart E, part I, subchapter J, - -------------------------------------------------------------------------------- -3- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and the Trust shall be construed accordingly. ARTICLE 2 GENERAL ADMINISTRATION ---------------------- 2.1 COMMITTEE DIRECTIONS AND ADMINISTRATION BEFORE CHANGE IN CONTROL. Until a ---------------------------------------------------------------- Change in Control has occurred, this Section 2.1 shall be effective and the Committee shall direct the Trustee as to the administration of the Trust in accordance with the following provisions: (a) The Committee shall be identified to the Trustee by a copy of the resolution of the Board appointing the Committee. In the absence thereof, the Board shall be the Committee. Persons authorized to give directions to the Trustee on behalf of the Committee shall be identified to the Trustee by written notice from the Committee, and such notice shall contain specimens of the authorized signatures. The Trustee shall be entitled to rely on such written notice as evidence of the identity and authority of the persons appointed until a written cancellation of the appointment, or the written appointment of a successor, is received by the Trustee. (b) Directions by the Committee, or its delegate, to the Trustee shall be in writing and signed by the Committee or persons authorized by the Committee, or may be made by such other method as is acceptable to the Trustee. (c) The Trustee may conclusively rely upon directions from the Committee in taking any action with respect to this Master Trust Agreement, including the making of payments from the Trust Fund and the investment of the Trust Fund pursuant to this Master Trust Agreement. The Trustee shall have no liability for actions taken, or for failure to act, on the direction of the Committee. The Trustee shall have no liability for failure to act in the absence of proper written directions. (d) The Trustee may request instructions from the Committee and shall have no duty to act or liability for failure to act if such instructions are not forthcoming from the Committee. If requested instructions are not received within a reasonable time, the Trustee may, but is under no duty to, act on its own discretion to carry out the provisions of this Master Trust Agreement in accordance with this Master Trust Agreement and the Plans. 2.2 ADMINISTRATION UPON CHANGE IN CONTROL. In the event of a Change in ------------------------------------- Control, the authority of the Committee to administer the Trust and direct the Trustee, as set forth in Section 2.1 above, shall cease, and the Trustee shall have complete authority to administer - -------------------------------------------------------------------------------- -4- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ the Trust in addition to any duties or responsibilities it may have under the terms of the Plan. 2.3 CONTRIBUTIONS. Except as provided in any Plan, the Company and the ------------- Subsidiaries, in their sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Master Trust Agreement. Neither the Trustee nor any Participant or Beneficiary shall have any right to compel such additional deposits. The Trustee shall have no duty to collect or enforce payment to it of any contributions or to require that any contributions be made, and shall have no duty to compute any amount to be paid to it nor to determine whether amounts paid comply with the terms of the Plans. 2.4 TRUST FUND. The contributions received by the Trustee from the Company and ---------- the Subsidiaries shall be held and administered pursuant to the terms of this Master Trust Agreement as a single fund without distinction between income and principal and without liability for the payment of interest thereon except as expressly provided in this Master Trust Agreement. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. 2.5 DISTRIBUTION OF EXCESS TRUST FUND TO EMPLOYERS. In the event that the ---------------------------------------------- Committee, prior to a Change in Control, or the Trustee in its sole and absolute discretion, after a Change in Control, determines that the Trust Fund exceeds 125 percent of the anticipated benefit obligations and administrative expenses that are to be paid under the Plans, the Trustee, at the direction of the Committee prior to a Change in Control, or in its sole and absolute discretion after a Change in Control, shall distribute to the Company and the Subsidiaries such excess portion of the Trust Fund. ARTICLE 3 POWERS AND DUTIES OF TRUSTEE ---------------------------- 3.1 INVESTMENT DIRECTIONS. Except as provided in this Section and Section 3.2 --------------------- below, the Committee shall provide the Trustee with all investment instructions. The Trustee shall neither affect nor change investments of the Trust Fund, except as directed in writing by the Committee, and shall have no right, duty or responsibility to recommend investments or investment changes; provided, that the Trustee may (i) deposit cash on hand from time to time in any bank savings account, certificate of deposit, or other instrument creating a deposit liability for a bank, including the Trustee's own banking department, if the Trustee is a bank, without such prior direction, or (ii) invest in government securities, bonds with specific ratings, or stock of "Fortune 500" companies, or companies of comparable investment grade, or mutual funds composed of such investments, all within broad investment guidelines established by the Committee from time to time. - -------------------------------------------------------------------------------- -5- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ 3.2 INVESTMENT UPON CHANGE IN CONTROL. In the event of a Change in Control, --------------------------------- the authority of the Committee to direct investments of the Trust Fund shall cease and the Trustee shall have complete authority to direct investments of the Trust Fund. The president of the Company shall notify the Trustee in writing when a Change in Control has occurred. The Trustee has no duty to inquire whether a Change in Control has occurred and may rely on notification by the president of the Company of a Change in Control; provided, however, that if any officer, former officer, director or former director of the Company or any Subsidiary (other than the president of the Company), or any Participant notifies the Trustee that there has been or there may be a Change in Control, the Trustee shall have the duty to satisfy itself as to whether a Change in Control has in fact occurred. The Company and the Subsidiaries shall indemnify and hold harmless the Trustee for any damages or costs (including attorneys' fees) that may be incurred because of reliance on the president's notice or lack thereof. 3.3 MANAGEMENT OF INVESTMENTS. Subject to Section 3.1 above, the Trustee shall ------------------------- have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein, and all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by or rest with Participants or their Beneficiaries. The Trustee shall have full power and authority to invest and reinvest the Trust Fund in any investment permitted by law, exercising the judgment and care that persons of prudence, discretion and intelligence would exercise under the circumstances then prevailing, considering the probable income and safety of their capital, including, without limiting the generality of the foregoing, the power: (a) To invest and reinvest the Trust Fund, together with the income therefrom, in common stock, preferred stock, convertible preferred stock, mutual funds, bonds, debentures, convertible debentures and bonds, mortgages, notes, time certificates of deposit, commercial paper and other evidences of indebtedness (including those issued by the Trustee or any of its affiliates), other securities, policies of life insurance, annuity contracts, options to buy or sell securities or other assets, and other property of any kind (personal, real, or mixed, and tangible or intangible); provided, however, that in no event may the Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company or the Subsidiaries, other than a de minimis amount held in common investment vehicles in which the Trustee invests; (b) To deposit or invest all or any part of the assets of the Trust Fund in savings accounts or certificates of deposit or other deposits which bear a reasonable interest rate in a bank, including the commercial department of the Trustee, if such bank is supervised by the United States or any State; - -------------------------------------------------------------------------------- -6- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ (c) To hold, manage, improve, repair and control all property, real or personal, forming part of the Trust Fund and to sell, convey, transfer, exchange, partition, lease for any term, even extending beyond the duration of this Trust, and otherwise dispose of the same from time to time in such manner, for such consideration, and upon such terms and conditions as the Trustee shall determine; (d) To have, respecting securities, all the rights, powers and privileges of an owner, including the power to give proxies, pay assessments and other sums deemed by the Trustee to be necessary for the protection of the Trust Fund, to vote any corporate stock either in person or by proxy, with or without power of substitution, for any purpose; to participate in voting trusts, pooling agreements, foreclosures, reorganizations, consolidations, mergers and liquidations, and in connection therewith to deposit securities with and transfer title to any protective or other committee under such terms as the Trustee may deem advisable; to exercise or sell stock subscriptions or conversion rights; and, regardless of any limitation elsewhere in this instrument relative to investment by the Trustee, to accept and retain as an investment any securities or other property received through the exercise of any of the foregoing powers; (e) To hold in cash, without liability for interest, such portion of the Trust Fund which, in its discretion, shall be reasonable under the circumstances, pending investments, or payment of expenses, or the distribution of benefits; (f) To take such actions as may be necessary or desirable to protect the Trust Fund from loss due to the default on mortgages held in the Trust including the appointment of agents or trustees in such other jurisdictions as may seem desirable, to transfer property to such agents or trustees, to grant such powers as are necessary or desirable to protect the Trust or its assets, to direct such agents or trustees, or to delegate such power to direct, and to remove such agents or trustees; (g) To employ such agents including custodians and counsel as may be reasonably necessary and to pay them reasonable compensation; to settle, compromise or abandon all claims and demands in favor of or against the Trust assets; (h) To cause title to property of the Trust to be issued, held or registered in the individual name of the Trustee, or in the name of its nominee(s) or agents, or in such form that title will pass by delivery; (i) To exercise all of the further rights, powers, options and privileges granted, provided for, or vested in trustees generally under the laws of the State whose laws are applicable to this Master Trust Agreement, as provided in Section 10.6 below, so that the powers conferred upon the Trustee herein shall not be in limitation of any authority conferred by law, but shall be in addition thereto; - -------------------------------------------------------------------------------- -7- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ (j) To borrow money from any source (including the Trustee) and to execute promissory notes, mortgages or other obligations and to pledge or mortgage any Trust assets as security; (k) To lend certificates representing stocks, bonds, or other securities to any brokerage or other firm selected by the Trustee; (l) To institute, compromise and defend actions and proceedings; to pay or contest any claim; to settle a claim by or against the Trustee by compromise, arbitration, or otherwise; to release, in whole or in part, any claim belonging to the Trust to the extent that the claim is uncollectible; (m) To use securities depositories or custodians and to allow such securities as may be held by a depository or custodian to be registered in the name of such depository or its nominee or in the name of such custodian or its nominee; (n) To invest the Trust Fund from time to time in one or more investment funds, which funds shall be registered under the Investment Company Act of 1940; and (o) To do all other acts necessary or desirable for the proper administration of the Trust Fund, as if the Trustee were the absolute owner thereof. However, nothing in this section shall be construed to mean the Trustee assumes any responsibility for the performance of any investment made by the Trustee in its capacity as trustee under the operations of this Master Trust Agreement. Notwithstanding any powers granted to the Trustee pursuant to this Master Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code of 1986, as amended. 3.4 SECURITIES. Voting or other rights in securities shall be exercised by the ---------- person or entity responsible for directing such investments, and the Trustee shall have no duty to exercise voting or proxy or other rights relating to any investment managed or directed by the Committee. If any foreign securities are purchased pursuant to the direction of the Committee, it shall be the responsibility of the person or entity responsible for directing such investments to advise the Trustee in writing of any laws or regulations, either foreign or domestic, that apply to such foreign securities or to the receipt of dividends or interest on such securities. 3.5 SUBSTITUTION. Notwithstanding any provision of any Plan or the Trust to ------------ the contrary, the Company and/or any Subsidiary shall at all times have the power to reacquire the Trust Fund by substituting readily marketable securities (other than stock, a debt obligation or - -------------------------------------------------------------------------------- -8- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ other security issued by the Company or any Subsidiary) and/or cash of an equivalent value and such other property shall, following such substitution, constitute the Trust Fund. 3.6 DISTRIBUTIONS. ------------- (a) The establishment of the Trust and the payment or delivery to the Trustee of money or other property shall not vest in any Participant or Beneficiary any right, title, or interest in and to any assets of the Trust. To the extent that any Participant or Beneficiary acquires the right to receive payments under any of the Plans, such right shall be no greater than the right of an unsecured general creditor of the Company and the Subsidiaries and such Participant or Beneficiary shall have only the unsecured promise of the Company and the Subsidiaries that such payments shall be made. (b) Concurrent with the establishment of this Trust, the Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Participant (and his or her Beneficiaries) on a Plan by Plan basis, provides a formula or formulas or other instructions acceptable to the Trustee for determining the amounts so payable, specifies the form in which such amount is to be paid (as provided for or available under the applicable Plans), and the time of commencement for payment of such amounts. The Payment Schedule shall be updated annually and from time to time as is necessary, and a copy of each update shall be delivered to the Trustee. Except as otherwise provided herein, prior to a Change in Control, the Trustee shall make payments to the Participants and their Beneficiaries in accordance with such Payment Schedule. Despite the foregoing, after a Change in Control, the Trustee shall make payments in accordance with the terms and provisions of each of the Plans and related plan agreements. The Trustee, at the direction of the Committee or, after a Change in Control, on its own volition, may make any distribution required to be made by it hereunder by delivering: (i) Its check payable to the person to whom such distribution is to be made, to the person, or, if prior to a Change in Control, to the Company for redelivery to such person; provided that before a Change in Control, the Committee may direct the Trustee to deliver one or more lump sum checks payable to the Company, and the Company shall prepare and deliver individual checks for each Participant or Beneficiary; or (ii) Its check payable to an insurer for the benefit of such person, to the insurer, or, if prior to a Change in Control, to the Company for redelivery to the insurer; or - -------------------------------------------------------------------------------- -9- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ (iii) Contracts held on the life of the Participant to whom or with respect to whom the distribution is being made, to the Participant or Beneficiary, or, if prior to a Change in Control, to the Company for redelivery to the person to whom such distribution is to be made; or (iv) If a distribution is being made, in whole or in part, of other assets, assignments or other appropriate documents or certificates necessary to effect a transfer of title, to the Participant or Beneficiary, or, if prior to a Change in Control, to the Company for redelivery to such person. (c) If the principal of the Trust, and any earnings thereon, are not sufficient, determined on a Plan by Plan basis, to make payments of benefits in accordance with the terms of the Plans, then the corpus of the Trust shall be allocated equitably among Plan participants, and the Company and the Subsidiaries shall make the balance of each such payment as it falls due. The Trustee shall notify the Company and the Subsidiaries when principal and earnings are not sufficient. (d) The Company and the Subsidiaries may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Plans. The Company and the Subsidiaries shall notify the Trustee of their decisions to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries. (e) Notwithstanding anything contained in this Master Trust Agreement to the contrary, if at any time the Trust is finally determined by the IRS not to be a "grantor trust" with the result that the income of the Trust Fund is not treated as income of the Company or the Subsidiaries pursuant to Sections 671 through 679 of the Internal Revenue Code of 1986, as amended, or if a tax is finally determined by the IRS to be payable by one or more Participants or Beneficiaries with respect to any interest in the Plans or the Trust Fund prior to payment of such interest to any such Participant or Beneficiary, the Trustee shall immediately determine each Participant's share of the Trust Fund in accordance with the Plans, and the Trustee shall immediately distribute such share in a lump sum to each Participant or Beneficiary entitled thereto, regardless of whether such Participant's employment has terminated (provided such Participant has a vested interest in his or her accrued benefits under the Plans) and regardless of form and time of payments specified in or pursuant to the Plans. Any remaining assets (less any expenses or costs due under Sections 3.8 and 3.9 of this Master Trust Agreement) shall then be paid by the Trustee to the Company and the Subsidiaries in such amounts, and in the manner instructed by the Committee. If the value of the Trust Fund is less than the benefit obligations under the Plans, the foregoing described distributions will be limited to a Participant's share of the Trust Fund, determined by allocating assets to the Participant based on the ratio of the Participant's benefit obligations - -------------------------------------------------------------------------------- -10- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ under the Plans to the total benefit obligations under the Plans. Prior to a Change in Control, the Trustee shall rely solely on the directions of the Committee with respect to the occurrence of the foregoing events and the resulting distributions to be made, and the Trustee shall not be responsible for any failure to act in the absence of such direction. (f) The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plans and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company and the Subsidiaries. (g) Prior to a Change in Control, payments by the Trustee shall be delivered or mailed to addresses supplied by the Committee and the Trustee's obligation to make such payments shall be satisfied upon such delivery or mailing. Prior to a Change in Control, the Trustee shall have no obligation to determine the identity of persons entitled to benefits or their mailing addresses. After a Change in Control, the Trustee shall have such obligations. (h) Prior to a Change in Control, the entitlement of a Participant or his or her Beneficiaries to benefits under the Plans shall be determined by the Company and the Subsidiaries or such party as they shall designate under the Plans, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plans. 3.7 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS ON INSOLVENCY. ------------------------------------------------------- (a) The Trustee shall cease payment of benefits to Participants and their Beneficiaries if the Company, or any Subsidiary, is Insolvent (the "Insolvent Entity"). The Insolvent Entity shall be considered "Insolvent" for purposes of this Master Trust Agreement if: (i) the Insolvent Entity is unable to pay its debts as they become due, or (ii) the Insolvent Entity is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. For purposes of this Section 3.7, if an entity is determined to be Insolvent, each Subsidiary in which such entity has an equity interest shall also be deemed to be an Insolvent Entity. However, the insolvency of a Subsidiary will not cause a parent corporation or any other Subsidiary to be deemed Insolvent. (b) At all times during the continuance of this Trust, as provided in Section 1.3 above, the principal and income of the Trust shall be subject to claims of the general - -------------------------------------------------------------------------------- -11- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ creditors of the Company and its Subsidiaries under federal and state law as set forth below: (i) The Board and the president of the Company shall have the duty to inform the Trustee in writing of the Company's or any Subsidiary's Insolvency. If a person claiming to be a creditor of the Company or any Subsidiary alleges in writing to the Trustee that the Company or any Subsidiary has become Insolvent, the Trustee shall determine whether the Company or any Subsidiary is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to the Insolvent Entity's Participants or their Beneficiaries. Prior to a Change in Control, the Trustee may conclusively rely on any determination it receives from the Board or the president of the Company with respect to the Insolvency of the Company or any Subsidiary. (ii) Unless the Trustee has actual knowledge of the Company's or a Subsidiary's Insolvency, or has received notice from the Company, a Subsidiary, or a person claiming to be a creditor alleging that the Company or a Subsidiary is Insolvent, the Trustee shall have no duty to inquire whether the Company or any Subsidiary is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's or any Subsidiary's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's or any Subsidiary's solvency. In this regard, the Trustee may rely upon a letter from the Company's or a Subsidiary's auditors as to the Company's or any Subsidiary's financial status. (iii) If at any time the Trustee has determined that the Company or any Subsidiary is Insolvent, the Trustee shall discontinue payments to the Insolvent Entity's Participants or their Beneficiaries, and shall hold the portion of the assets of the Trust allocable to the Insolvent Entity for the benefit of the Insolvent Entity's general creditors. Nothing in this Master Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Insolvent Entity with respect to benefits due under the Plans or otherwise. (iv) The Trustee shall resume the payment of benefits to Participants or their Beneficiaries in accordance with this Article 3 of this Master Trust Agreement only after the Trustee has determined that the alleged Insolvent Entity is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3.7(b) hereof and subsequently - -------------------------------------------------------------------------------- -12- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their Beneficiaries under the terms of the Plans for the period of such discontinuance plus earnings thereon at the applicable federal long term rate or rates (as described in Code Section 1274(d) in effect during such period, less the aggregate amount of any payments made to Participants or their Beneficiaries by the Company or any Subsidiary in lieu of the payments provided for hereunder during any such period of discontinuance. Prior to a Change in Control, the Committee shall instruct the Trustee as to such amounts, and after a Change in Control, the Trustee shall determine such amounts in accordance with the terms and provisions of the Plans. 3.8 COSTS OF ADMINISTRATION. The Trustee is authorized to incur reasonable ----------------------- obligations in connection with the administration of the Trust, including attorneys' fees, administrative fees and appraisal fees. Such obligations shall be paid by the Company and the Subsidiaries. The Trustee is authorized to pay such amounts from the Trust Fund if the Company or the Subsidiaries fail to pay them within 60 days of presentation of a statement of the amounts due. 3.9 TRUSTEE COMPENSATION AND EXPENSES. The Trustee shall be entitled to --------------------------------- reasonable compensation for its services as from time to time agreed upon between the Trustee and the Company. If the Trustee and the Company fail to agree upon a compensation, or following a Change in Control, the Trustee shall be entitled to compensation at a rate equal to the rate charged by the Trustee for similar services rendered by it during the current fiscal year for other trusts similar to this Trust. The Trustee shall be entitled to reimbursement for expenses incurred by it in the performance of its duties as the Trustee, including reasonable fees for legal counsel. The Trustee's compensation and expenses shall be paid by the Company and the Subsidiaries. The Trustee is authorized to withdraw such amounts from the Trust Fund if the Company or the Subsidiaries fail to pay them within 60 days of presentation of a statement of the amounts due. 3.10 PROFESSIONAL ADVICE. The Company and the Subsidiaries specifically ------------------- acknowledge that the Trustee may find it desirable or expedient to retain legal counsel (who may also be legal counsel for the Company generally) or other professional advisors to advise it in connection with the exercise of any duty under this Master Trust Agreement, including, but not limited to, any matter relating to or following a Change in Control or the Insolvency of the Company or any Subsidiary. The Trustee shall be fully protected in acting upon the advice of such legal counsel or advisors. 3.11 PAYMENT ON COURT ORDER. To the extent permitted by law, the Trustee is ---------------------- authorized to make any payments directed by court order in any action in which the Trustee has been named as a party. The Trustee is not obligated to defend actions in which the Trustee is named, but shall notify the Company or Committee of any such action and may tender defense of the action to the Company, Committee, Participant or Beneficiary whose - -------------------------------------------------------------------------------- -13- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ interest is affected. The Trustee may in its discretion defend any action in which the Trustee is named, and any expenses incurred by the Trustee shall be paid by the Company and the Subsidiaries. The Trustee is authorized to pay such amounts from the Trust Fund if the Company or the Subsidiaries fail to pay them within sixty (60) days of presentation of a statement of the amounts due. 3.12 PROTECTIVE PROVISIONS. Notwithstanding any other provision contained in --------------------- this Master Trust Agreement to the contrary, the Trustee shall have no obligation to (i) determine the existence of any conversion, redemption, exchange, subscription or other right relating to any securities purchased of which notice was given prior to the purchase of such securities and shall have no obligation to exercise any such right unless the Trustee is advised in writing by the Committee both of the existence of the right and the desired exercise thereof within a reasonable time prior to the expiration of the right to exercise, or (ii) advance any funds to the Trust. Furthermore, the Trustee is not a party to the Plans. 3.13 INDEMNIFICATIONS. ---------------- (a) The Company and the Subsidiaries shall indemnify and hold the Trustee harmless from and against all loss or liability (including expenses and reasonable attorneys' fees) to which it may be subject by reason of its execution of its duties under this Trust, or by reason of any acts taken in good faith in accordance with any directions, or acts omitted in good faith due to absence of directions, from the Company, the Committee or a Participant, unless such loss or liability is due to the Trustee's gross negligence or willful misconduct. The indemnity described herein shall be provided by the Company and the Subsidiaries. (b) In the event that the Trustee is named as a defendant in a lawsuit or proceeding involving one or more of the Plans or the Trust Fund, the Trustee shall be entitled to receive on a current basis the indemnity payments provided for in this Section, provided however that if the final judgment entered in the lawsuit or proceeding holds that the Trustee is guilty of gross negligence or willful misconduct with respect to the Trust Fund, the Trustee shall be required to refund the indemnity payments that it has received. (c) All releases and indemnities provided in this Master Trust Agreement shall survive the termination of this Master Trust Agreement. ARTICLE 4 INSURANCE CONTRACTS ------------------- 4.1 TYPES OF CONTRACTS. To the extent that the Trustee is directed by the ------------------ Committee prior to a Change in Control to invest part or all of the Trust Fund in insurance contracts, the type - -------------------------------------------------------------------------------- -14- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ and amount thereof shall be specified by the Committee. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. 4.2 OWNERSHIP. Each insurance contract issued shall provide that the Trustee --------- shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change in Control, be subject to the direction of the Committee. 4.3 RESTRICTIONS ON TRUSTEE'S RIGHTS. The Trustee shall have no power to name -------------------------------- a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. Despite the foregoing, the Trustee may (i) loan to the Company or any Subsidiary the proceeds of any borrowing against an insurance policy held in the Trust Fund or (ii) assign all, or any portion, of a policy to the Company or any Subsidiary if under other provisions of this Master Trust Agreement the Company or any Subsidiary is entitled to receive assets from the Trust. ARTICLE 5 TRUSTEE'S ACCOUNTS ------------------ 5.1 RECORDS. The Trustee shall maintain accurate records and detailed accounts ------- of all investments, receipts, disbursements and other transactions hereunder. Such records shall be available at all reasonable times for inspection by the Company and Subsidiaries or their authorized representative. The Trustee, at the direction of the Committee, shall submit to the Committee and to any insurer such valuations, reports or other information as the Committee may reasonably require and, in the absence of fraud or bad faith, the valuation of the Trust Fund by the Trustee shall be conclusive. 5.2 ANNUAL ACCOUNTING; FINAL ACCOUNTING. ----------------------------------- (a) Within 60 days following the end of each Plan Year and within 60 days after the removal or resignation of the Trustee or the termination of the Trust, the Trustee shall file with the Committee a written account setting forth a description of all properties purchased and sold, all receipts, disbursements and other transactions effected by it during the Plan Year or, in the case of removal, resignation or termination, since the close of the previous Plan Year, and listing the properties held in the Trust Fund as of the last day of the Plan Year or other period and indicating their values. Such values shall be either cost or market as directed by the Committee in accordance with the terms of the Plans. - -------------------------------------------------------------------------------- -15- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ (b) The Committee may approve such account either by written notice of approval delivered to the Trustee or by its failure to express written objection to such account delivered to the Trustee within 60 days after the date of which such account was delivered to the Committee. (c) The approval by the Committee of an accounting shall be binding as to all matters embraced in such accounting on all parties to this Master Trust Agreement and on all Participants and Beneficiaries, to the same extent as if such accounting had been settled by a judgment or decree of a court of competent jurisdiction in which the Trustee, the Committee, the Company, the Subsidiaries and all persons having or claiming any interest in any Plan or the Trust Fund were made parties. (d) Despite the foregoing, nothing contained in this Master Trust Agreement shall deprive the Trustee of the right to have an accounting judicially settled, if the Trustee, in the Trustee's sole discretion, desires such a settlement. 5.3 VALUATION. The assets of the Trust Fund shall be valued at their --------- respective fair market values on the date of valuation, as determined by the Trustee based upon such sources of information as it may deem reliable, including, but not limited to, stock market quotations, statistical valuation services, newspapers of general circulation, financial publications, advice from investment counselors, brokerage firms or insurance companies, or any combination of sources. Prior to a Change in Control, the Committee shall instruct the Trustee as to the value of assets for which market values are not readily obtainable by the Trustee. If the Committee fails to provide such values, the Trustee may take whatever action it deems reasonable, including employment of attorneys, appraisers, life insurance companies or other professionals, the expense of which shall be an expense of administration of the Trust Fund and payable by the Company and the Subsidiaries. The Trustee may rely upon information from the Company and the Subsidiaries, the Committee, appraisers or other sources and shall not incur any liability for an inaccurate valuation based in good faith upon such information. 5.4 DELEGATION OF DUTIES. The Company or the Committee, or both, may at any -------------------- time employ the Trustee as their agent to perform any act, keep any records or accounts and make any computations that are required of the Company, any Subsidiary or the Committee by this Master Trust Agreement or the Plans. The Trustee may be compensated for such employment and such employment shall not be deemed to be contrary to the Trust. Nothing done by the Trustee as such agent shall change or increase its responsibility or liability as Trustee hereunder. - -------------------------------------------------------------------------------- -16- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ ARTICLE 6 RESIGNATION OR REMOVAL OF TRUSTEE --------------------------------- 6.1 RESIGNATION; REMOVAL. The Trustee may resign at any time by written notice -------------------- to the Company, which shall be effective 60 days after receipt of such notice unless the Company and the Trustee agree otherwise. Prior to a Change in Control, the Trustee may be removed by the Company on 60 days notice or upon shorter notice accepted by the Trustee. After a Change in Control, the Trustee may be removed by a majority vote of the Participants, and if a Participant is dead, his or her Beneficiaries (who collectively shall have one vote among them and shall vote in place of such deceased Participant), on 60 days notice or upon shorter notice accepted by the Trustee. 6.2 SUCCESSOR TRUSTEE. If the Trustee resigns or is removed, a successor shall ----------------- be appointed by the Company, in accordance with this Section, by the effective date of the resignation or removal under Section 6.1 above. The successor shall be a bank, trust company, or similar independent third party that is granted corporate trustee powers under state law. After the occurrence of a Change in Control, a successor Trustee may not be appointed without the consent of a majority of the Participants. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. 6.3 SETTLEMENT OF ACCOUNTS. Upon resignation or removal of the Trustee and ---------------------- appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 90 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. Upon the transfer of the assets, the successor Trustee shall succeed to all of the powers and duties given to the Trustee in this Master Trust Agreement. The resigning or removed Trustee shall render to the Committee an account in the form and manner and at the time prescribed in Section 5.2. The approval of such accounting and discharge of the Trustee shall be as provided in such Section. ARTICLE 7 CONTROVERSIES, LEGAL ACTIONS AND COUNSEL ---------------------------------------- 7.1 CONTROVERSY. If any controversy arises with respect to the Trust, the ----------- Trustee shall take action as directed by the Committee or, in the absence of such direction or after a Change in Control, as it deems advisable, whether by legal proceedings, compromise or otherwise. The Trustee may retain the funds or property involved without liability pending settlement of the controversy. The Trustee shall be under no obligation to take any legal action of - -------------------------------------------------------------------------------- -17- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ whatever nature unless there shall be sufficient property in the Trust to indemnify the Trustee with respect to any expenses or losses to which it may be subjected. 7.2 JOINDER OF PARTIES. In any action or other judicial proceedings affecting ------------------ the Trust, it shall be necessary to join as parties the Trustee, the Committee, the Company and the Subsidiaries. No Participant or other person shall be entitled to any notice or service of process. Any judgment entered in such a proceeding or action shall be binding on all persons claiming under the Trust. Nothing in this Master Trust Agreement shall be construed as to deprive a Participant or Beneficiary of his or her right to seek adjudication of his or her rights by administrative process or by a court of competent jurisdiction. 7.3 EMPLOYMENT OF COUNSEL. The Trustee may consult with legal counsel (who may --------------------- be counsel for the Company or any Subsidiary) and shall be fully protected with respect to any action taken or omitted by it in good faith pursuant to the advice of counsel. ARTICLE 8 INSURERS -------- 8.1 INSURER NOT A PARTY. No insurer shall be deemed to be a party to the Trust ------------------- and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by it. 8.2 AUTHORITY OF TRUSTEE. An insurer shall accept the signature of the Trustee -------------------- to any documents or papers executed in connection with such contracts. The signature of the Trustee shall be conclusive proof to the insurer that the person on whose life an application is being made is eligible to have a contract issued on his or her life and is eligible for a contract of the type and amount requested. 8.3 CONTRACT OWNERSHIP. An insurer shall deal with the Trustee as the sole and ------------------ absolute owner of any insurance contracts and shall have no obligation to inquire whether any action or failure to act on the part of the Trustee is in accordance with or authorized by the terms of the Plans or this Master Trust Agreement. 8.4 LIMITATION OF LIABILITY. An insurer shall be fully discharged from any ----------------------- and all liability for any action taken or any amount paid in accordance with the direction of the Trustee and shall have no obligation to see to the proper application of the amounts so paid. An insurer shall have no liability for the operation of the Trust or the Plans, whether or not in accordance with their terms and provisions. 8.5 CHANGE OF TRUSTEE. An insurer shall be fully discharged from any and all ----------------- liability for dealing with a party or parties indicated on its records to be the Trustee until such time as - -------------------------------------------------------------------------------- -18- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ it shall receive at its home office written notice of the appointment and qualification of a successor Trustee. ARTICLE 9 AMENDMENT AND TERMINATION ------------------------- 9.1 AMENDMENT. Subject to the limitations set forth in this Section 9.1, this --------- Master Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plans or shall make the Trust revocable after it has become irrevocable in accordance with Section 1.3 above. Any amendment, change or modification shall be subject to the following rules: (a) General Rule. Subject to Sections 9.1(b), (c) and (d) below, this ------------ Master Trust Agreement may be amended: (i) By the Company and the Trustee, provided, however, that if an amendment would in any way adversely affect the rights accrued under the Plans in the Trust Fund by any Participant or Beneficiary, each and every Participant and Beneficiary whose rights in the Trust Fund would be adversely affected must consent to the amendment before this Master Trust Agreement may be so amended; and (ii) By the Company and the Trustee as may be necessary to comply with laws which would otherwise render the Trust void, voidable or invalid in whole or in part. (b) Limitation. Notwithstanding that an amendment may be permissible ---------- under Section 9.1(a) above, this Master Trust Agreement shall not be amended by an amendment that would: (i) Cause any of the assets of the Trust to be used for or diverted to purposes other than for the exclusive benefit of Participants and Beneficiaries as set forth in the Plans, except as is required to satisfy the claims of the Company's or a Subsidiary's general creditors; or (ii) Be inconsistent with the terms of any Plan, including the terms of any Plan regarding termination, amendment or modification of the Plan. (c) Writing and Consent. Any amendment to this Master Trust Agreement ------------------- shall be set forth in writing and signed by the Company and the Trustee and, if consent of any Participant or Beneficiary is required under Section 9.1(a), the Participant or - -------------------------------------------------------------------------------- -19- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ Beneficiary whose consent is required. Any amendment may be current, retroactive or prospective, in each case as provided therein. (d) The Company and Trustee. In connection with the exercise of the ----------------------- rights under this Section 9.1: (i) prior to a Change in Control, the Trustee shall have no responsibility to determine whether any proposed amendment complies with the terms and conditions set forth in Sections 9.1(a) and (b) above and may conclusively rely on the directions of the Committee with respect thereto, unless the Trustee has knowledge of a proposed transaction or transactions that would result in a Change in Control; and (ii) after a Change in Control, the power of the Company to amend this Master Trust Agreement shall cease, and the power to amend that was previously held by the Company shall, instead, be exercised by either a majority of the Participants and, if a Participant is dead, his or her Beneficiaries (who collectively shall have one vote among them and shall vote in place of such deceased Participant) or by the Company with the consent of such majority, in either case with the consent of the Trustee, provided that such amendment otherwise complies with the requirements of Sections 9.1(a), (b) and (c) above. (e) Taxation. This Master Trust Agreement shall not be amended, altered, -------- changed or modified in a manner that would cause the Participants and/or Beneficiaries under any Plan to be taxed on the benefits under any Plan in a year other than the year of actual receipt of benefits. 9.2 FINAL TERMINATION. The Trust shall not terminate until the date on which ----------------- Participants and their Beneficiaries are no longer entitled to benefits pursuant to the terms of the Plans and all expenses of the Trust have been paid, and on such date the Trust shall terminate. Upon termination of the Trust, any assets remaining in the Trust shall be returned to the Company and the Subsidiaries. Such remaining assets shall be paid by the Trustee to the Company and the Subsidiaries in such amounts and in the manner instructed by the Company, whereupon the Trustee shall be released and discharged from all obligations hereunder. From and after the date of termination and until final distribution of the Trust Fund, the Trustee shall continue to have all of the powers provided herein as are necessary or expedient for the orderly liquidation and distribution of the Trust Fund. - -------------------------------------------------------------------------------- -20- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ ARTICLE 10 MISCELLANEOUS ------------- 10.1 DIRECTIONS FOLLOWING CHANGE IN CONTROL. Despite any other provision of this -------------------------------------- Master Trust Agreement that may be construed to the contrary, following a Change in Control, all powers of the Committee, the Company and the Board to direct the Trustee under this Master Trust Agreement shall terminate, and the Trustee shall act on its own discretion to carry out the terms of this Master Trust Agreement in accordance with the Plans and this Master Trust Agreement. 10.2 TAXES. The Company and the Subsidiaries shall from time to time pay taxes ----- of any and all kinds whatsoever that at any time are lawfully levied or assessed upon or become payable in respect of the Trust Fund, the income or any property forming a part thereof, or any security transaction pertaining thereto. To the extent that any taxes lawfully levied or assessed upon the Trust Fund are not paid by the Company and the Subsidiaries, the Trustee shall have the power to pay such taxes out of the Trust Fund and shall seek reimbursement from the Company and the Subsidiaries. Prior to making any payment, the Trustee may require such releases or other documents from any lawful taxing authority as it shall deem necessary. The Trustee shall contest the validity of taxes in any manner deemed appropriate by the Company or its counsel, but at the Company's and the Subsidiaries' expense, and only if it has received an indemnity bond or other security satisfactory to it to pay any such expenses. Prior to a Change in Control, the Trustee (i) shall not be liable for any nonpayment of tax when it distributes an interest hereunder on directions from the Committee, and (ii) shall have no obligation to prepare or file any tax return on behalf of the Trust Fund, any such return being the sole responsibility of the Committee. The Trustee shall cooperate with the Committee in connection with the preparation and filing of any such return. After a Change in Control, the Trustee shall have such duties and obligations. 10.3 THIRD PERSONS. All persons dealing with the Trustee are released from ------------- inquiring into the decisions or authority of the Trustee and from seeing to the application of any moneys, securities or other property paid or delivered to the Trustee. 10.4 NONASSIGNABILITY; NONALIENATION. Benefits payable to Participants and ------------------------------- their Beneficiaries under this Master Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. 10.5 THE PLANS. The Trust and the Plans are parts of a single, --------- integrated employee benefit plan system and shall be construed together. In the event of any conflict between the terms of this Master Trust Agreement and the agreements that constitute the Plans, such conflict shall be resolved in favor of this Master Trust Agreement. - -------------------------------------------------------------------------------- -21- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ 10.6 APPLICABLE LAW. Except to the extent, if any, preempted by ERISA, this -------------- Master Trust Agreement shall be governed by and construed in accordance with the internal laws of the State of California. Any provision of this Master Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. 10.7 NOTICES AND DIRECTIONS. Whenever a notice or direction is given by the ---------------------- Committee to the Trustee, it shall be in the form required by Section 2.1. Actions by the Company shall be by the Board or a duly authorized officer, with such actions certified to the Trustee by an appropriately certified copy of the action taken. The Trustee shall be protected in acting upon any such notice, resolution, order, certificate or other communication believed by it to be genuine and to have been signed by the proper party or parties. 10.8 SUCCESSORS AND ASSIGNS. This Master Trust Agreement shall be binding upon ---------------------- and inure to the benefit of the Company, the Subsidiaries and the Trustee and their respective successors and assigns. 10.9 GENDER AND NUMBER. Words used in the masculine shall apply to the ----------------- feminine where applicable, and when the context requires, the plural shall be read as the singular and the singular as the plural. 10.10 HEADINGS. Headings in this Master Trust Agreement are inserted for -------- convenience of reference only and any conflict between such headings and the text shall be resolved in favor of the text. 10.11 COUNTERPARTS. This Master Trust Agreement may be executed in an original ------------ and any number of counterparts, each of which shall be deemed to be an original of one and the same instrument. 10.12 BENEFICIAL INTEREST. The Company and the Subsidiaries are the true ------------------- beneficiaries hereunder in that the payment of benefits, directly or indirectly to or for a Participant or Beneficiary by the Trustee, is in satisfaction of the Company's and the Subsidiaries' liability therefor under the Plans. Nothing in this Master Trust Agreement shall establish any beneficial interest in any person other than the Company and the Subsidiaries. 10.13 THE TRUST AND PLANS. This Trust, the Plans and each Participant's Plan ------------------- Agreement are part of and constitute a single, integrated employee benefit plan and trust, shall be construed together as the entire agreement between the Company, the Trustee, the Participants and the Beneficiaries with regard to the subject matter thereof, and shall supersede all previous negotiations, agreements and commitments with respect thereto. 10.14 EFFECTIVE DATE. The effective date of this Master Trust Agreement shall -------------- be January 1, 1998. - -------------------------------------------------------------------------------- -22- K-SWISS, INC. Deferred Compensation Plan Master Trust Agreement ================================================================================ IN WITNESS WHEREOF the Company and the Trustee have signed this Master Trust Agreement as of the date first written above. TRUSTEE: THE COMPANY: - ------- ----------- Wachovia Bank, N.A. K-Swiss, Inc. a Delaware corporation, By: By: /s/ George Powlick _________________________ _________________________ Title: Title: Vice President ____________________ ___________________ - -------------------------------------------------------------------------------- -23- EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 28,982 6,128 32,000 (687) 26,604 96,594 4,261 0 106,023 19,017 0 0 0 66 77,017 106,023 42,274 42,274 25,128 11,613 0 0 433 5,966 2,421 3,545 0 0 0 3,545 0.640 0.620 Interest Income net of Interest Expense
EX-99 5 PRESS RELEASE DTD 4/23/98 EXHIBIT 99 FOR IMMEDIATE RELEASE CONTACT: GEORGE POWLICK CHIEF FINANCIAL OFFICER (818) 998-3388 K-SWISS REPORTS FIRST QUARTER RESULTS AND ----------------------------------------- ANNOUNCES STOCK BUY BACK AUTHORIZATION -------------------------------------- CHATSWORTH, CA., THURSDAY, APRIL 23, 1998 - Steven Nichols, Chairman of the Board and President of K-Swiss Inc., (NASDAQ - KSWS), announced first quarter net earnings for the quarter ended March 31, 1998 of $3,545,000, an increase of 130.3% from the quarter ended March 31, 1997. Diluted earnings per share for the quarter ended March 31, 1998 of $.62, increased 148.0% from the quarter ended March 31, 1997. Revenues for the quarter ended March 31, 1998 increased 35.5% to $42,274,000 from the quarter ended March 31, 1997. Revenues were as follows (in thousands, except percents): Three Months Ended March 31, (Unaudited)
Increase (Decrease) --------------------- 1998 1997 Amount Percent ---- ---- ------ ------- Domestic $38,032 $23,760 $14,272 60.1% International 4,242 7,439 (3,197) (43.0)% ------ ------ ------ Total revenues $42,274 $31,199 $11,075 35.5% ====== ====== ======
At March 31, 1998 and 1997, domestic futures orders with start ship dates from April through September 1998 and 1997 were approximately $58,748,000 and $34,427,000, respectively, an increase of 70.6%. At March 31, 1998 and 1997, international futures orders with start ship dates from April through September 1998 and 1997 were approximately $6,187,000 and $9,244,000, respectively, a decrease of 33.1%. "Backlog", as of any date, represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of "futures" and "at-once" orders can vary significantly from quarter to quarter and year to year and (2) the rate of customer order cancellations can also vary from quarter to quarter and year to year. The Company also announced a new share repurchase program. The Board of Directors has authorized the Company to purchase up to $20 million of its Class A Common Stock on the open market through April 2002. Such purchases, if any, will occur from time to time as market conditions warrant. The Company announced that adoption of the repurchase program can be a good use of excess cash depending on the Company's array of alternatives. The Company has made purchases under previous stock repurchase programs during the period from August 14, 1996 through April 15, 1998 (the date of the final purchase under previously completed stock repurchase programs) of an aggregate of 1,157,700 shares of Class A Common Stock, at an aggregate purchase price totaling approximately $15,221,000. The Company's Board of Directors has established May 20, 1998 as the annual stockholders' meeting date and April 13, 1998 as the record date for such meeting. K-Swiss Inc. designs, develops and markets athletic footwear for high performance sports use and fitness activities. The Company presently offers footwear for court, nautical, casual and children's categories. FINANCIAL SUMMARY ----------------- (In Thousands, Except Per Share Amounts) (Unaudited) CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, ------------------ 1998 1997 ------- ------- Revenues.......................................... $42,274 $31,199 Cost of goods sold................................ 25,128 19,477 ------ ------ Gross profit..................................... 17,146 11,722 Selling, general and administrative expenses...... 11,613 9,554 ------ ------ Operating profit................................. 5,533 2,168 Interest income, net.............................. 433 379 ------ ------ Earnings before income taxes..................... 5,966 2,547 Income tax expense................................ 2,421 1,008 ------ ------ Net earnings..................................... $ 3,545 $ 1,539 ====== ====== Basic earnings per share.......................... $ .64 $ .25 ====== ====== Diluted earnings per share........................ $ .62 $ .25 ====== ====== Weighted average number of shares outstanding Basic............................................ 5,524 6,069 Diluted.......................................... 5,719 6,123
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