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Employment Agreement - Wild Oats Markets Inc. and James Lee

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[LOGO OF WILD OATS COMMUNITY MARKET APPEARS HERE]

June 1, 1999

Mr. James Lee
C/o Wild Oats Markets
3375 Mitchell Lane
Boulder, CO  80301

Re:  EMPLOYMENT AGREEMENT

     This Employment Agreement (this "Agreement") is entered into effective as
of the 29th day of October, 1998, by and between Wild Oats Markets, Inc. (the
"Corporation"), a Delaware Corporation and James Lee (the "Executive") and is a
renewal of an original employment agreement dated September 1996. The
Corporation desires to employ Executive, and Executive desires to be an
Executive Officer of the Corporation, pursuant to the terms and conditions set
forth herein. In consideration of the foregoing and the promises and covenants
set forth below, the parties agree as follows:

1.  Employment.    The Corporation hereby employs Executive as President and
    ----------
Chief Operating Officer (the "COO"), and Executive agrees to be employed in such
position during the term of this Agreement.  Executive shall devote his full
time and efforts to perform his duties faithfully and diligently and, to the
best of his ability, to advance the interests of the Corporation.

2.  Compensation.  (a)  The Corporation shall pay Executive a base salary of
    ------------
$250,000.00 per year, with such increases as may be approved by the Compensation
Committee of Corporation's Board of Directors, payable in accordance with the
Corporation's practices in effect from time to time.

    (b)  In addition, Executive shall be provided with a car and reimbursement
for all business related automobile expenses; 100% Corporation-paid medical and
dental insurance; four weeks paid vacation per year; and other benefits that are
comparable to the benefits offered to other executive officers of the
Corporation in general, including stock option grants as approved by the
Compensation Committee of the Corporation's Board of Directors. The Corporation
also shall reimburse Executive for all out-of-pocket expenses reasonably
incurred and paid by him in the performance of his duties pursuant to this
Agreement. Such reimbursement shall be in accordance with the Corporation's
policies, and Executive shall furnish to the Corporation the documentation
required to support the deductibility of such expenses for federal income tax
purposes. All payments made under this Agreement are subject to all deductions
required by law.
<PAGE>

Mr. James Lee
Page 2

    (c)  Executive also shall be entitled to participate in an annual bonus
plan wherein Executive shall receive a bonus of up to fifty percent (50%) of his
base salary based upon exceeding the internally budgeted EBIT (earnings before
interest and taxes) for the corresponding fiscal year achieved by the
Corporation. Budgeted annual EBIT shall be determined based on the annual
operating plan submitted to and approved by the Corporation's Board of
Directors. The bonus payment, if any, shall be made reasonably promptly after
audited financial statements are available to the Corporation and may be paid in
either cash or stock options, or a combination of both, as mutually agreed upon
between Executive and the Compensation Committee.

3.  Term.
    ----

    a.   The term of this Agreement (the "Term") shall commence on the date
hereinabove mentioned and shall terminate on June 1, 2000; provided, however,
that the Corporation may extend this Agreement for additional successive one (1)
year terms upon approval by the Compensation Committee of the Board of
Directors. Notwithstanding the foregoing, however, if the Executive's employment
is terminated as the result of a Change in Control (as defined in Section
3(b)(v)) during the Term of this Agreement, this Agreement shall continue in
effect for a period of twenty-four (24) months after the last day of the month
in which such Change in Control occurred.

    b.   The Term may be terminated at any time upon the occurrence of any of
the following events:

         i).   The death or permanent disability of Executive;

         ii).  Executive's voluntary resignation;

         iii). Executive's discharge for cause;

         iv).  Upon the thirtieth (30th) day following written notice of
         termination other than for cause (the "Termination Without Cause
         Notice") from the Corporation to Executive; or

         v).  On Executive's election for Good Reason upon a Change in
          Control. For purposes of this Agreement, a Change in Control shall be
          deemed to occur if:

              1.   any Person (as defined below) becomes the Beneficial Owner
                   (as defined below), directly or indirectly, of securities of
                   the Corporation representing a majority or more of the
                   combined voting power of the Corporation's then outstanding
                   securities. For purposes of this Agreement, (A) the term
                   "Person" is used as such term is used in Section 13(d) and
                   14(d) of the Securities Exchange Act of 1934, as amended (the
                   "Exchange Act"); provided, however, that unless this
                   Agreement provides to the contrary, the term shall not
                   include Elizabeth C. Cook, Michael C. Gilliland, Chase
                   Venture Capital Associates or their affiliates, the
                   Corporation, any trustee or other fiduciary holding
                   securities under an employee benefit plan of the Corporation,
                   or any corporation owned, directly or indirectly, by the
                   stockholders of the Corporation in substantially the same
                   proportions as their ownership of stock of the Corporation,
                   and (B) the term "Beneficial Owner" shall have the meaning
                   given to such term in Rule 13d-3 under the Exchange Act;
<PAGE>

Mr. James Lee
Page 3

              2.   during any period of two consecutive years following the
                   execution of this Agreement, individuals who at the beginning
                   of such period constitute the Board, and any new director
                   (other than a director designated by a person who has entered
                   into an agreement with the Corporation to effect a
                   transaction described in Sections 3(b)(v), (1) or (3)) whose
                   election by the Board or nomination for election by the
                   Corporation's stockholders was approved by a vote of at least
                   a majority of the directors then still in office who either
                   were directors at the beginning of such period or whose
                   election or nomination for election was previously so
                   approved (hereinafter referred to as "Continuing Directors"),
                   cease for any reason to constitute at least a majority
                   thereof;

              3.   the stockholders of the Corporation consummate a plan of
                   complete liquidation of the Corporation or an agreement for
                   the sale or disposition by the Corporation to an unrelated
                   third party or parties of all or substantially all of the
                   Corporation's assets.

     c.  Executive shall be considered permanently disabled if Executive is
absent from employment or unable to render services hereunder on a full-time
basis by reason of physical or mental illness or disability for three (3) months
or more in the aggregate in any consecutive twelve month period during the Term.

     d.  As used in Paragraph 3(b)(ii), "voluntary resignation" means Executive
has resigned for any reason other than at the express written request, whether
or not for cause, of the Board.

     e.  As used in Paragraph 3(b)(iii), "cause" shall mean only that (i)
Executive has refused to perform or discharge his material objections or duties
hereunder for thirty (30) days after notice from the Board, or (ii) Executive
has engaged in illegal or other wrongful conduct substantially detrimental to
the business or reputation of the Corporation.

4.   Compensation upon Termination

     a.  If this Agreement is terminated pursuant to Paragraphs 3(b)(i) or
3(b)(ii), this Agreement shall terminate immediately or at such later date as
shall be designated by the Board and all of Executive's rights hereunder shall
terminate effective upon such termination.

     b.  If this Agreement is terminated pursuant to Paragraph 3(b)(iii), this
Agreement shall terminate immediately and all of Executive's rights hereunder
shall terminate effective upon such termination and Executive shall not be
entitled to any further benefits. Except as provided above and as otherwise
specified in any notice of termination, Executive shall not continue after
termination to be an Executive Officer of the Corporation for any purpose and
all rights Executive might thereafter have as an Executive Officer pursuant to
any plan shall cease, except as expressly provided to the contrary in writing
under any such plan.

     c.  If the Corporation should terminate this Agreement pursuant to
Paragraph 3(b)(iv) by giving a Termination Without Cause Notice:

         i).  Executive shall cease to be President and COO, or to hold such
     other office or position Executive then holds in the Corporation or any
     subsidiary or affiliate
<PAGE>

Mr. James Lee
Page 4

     thereof, effective upon the date specified in the Termination Without Cause
     Notice (the "Effective Date").

         ii). The Corporation shall be obligated and shall continue to pay
     Executive a salary at Executive's then annual salary (excluding bonus) for
     a period of one (1) year following the Effective Date.  Such payments shall
     be made in installments payable as provided in Section 2 hereof.

     d.  If this Agreement should terminate pursuant to Paragraph 3(b)(v):

         i).  General.  If any of the events described in Section 3(b)(v)
     constituting a Change in Control shall have occurred, and the Executive
     terminates for Good Reason, the Executive shall be entitled to the benefits
     provided in Section 4(d)(iii) upon the subsequent termination of his
     employment during the term of this Agreement. In the event the Executive's
     employment with the Corporation is terminated for any reason and
     subsequently a Change in Control occurs, he shall not be entitled to any
     benefits hereunder.

         ii)  Good Reason. The Executive shall be entitled to terminate his
     employment for Good Reason. For purposes of this Agreement, "Good Reason"
     shall mean, without his express written consent, the occurrence after a
     Change in Control of any of the following circumstances:

              (A)  a significant adverse alteration in the nature or status of
         his responsibilities or the conditions of his employment from those in
         effect immediately prior to such Change in Control;

              (B)  the Corporation's reduction of his annual base salary as in
         effect on the date hereof or as the same may be increased from time to
         time except for proportional across-the-board salary reductions
         similarly affecting all management personnel of the Corporation and all
         management personnel of any Person in control of the Corporation;

              (C)  the relocation of the Corporation's offices at which he is
         principally employed immediately prior to the Change of Control to a
         location more than 25 miles further from the Executive's home than the
         previous location;

              (D)  the Corporation's failure to pay to the Executive any portion
         of his current compensation or to pay any portion of an installment of
         deferred compensation under any deferred compensation program of the
         Corporation within thirty (30) days of the date such compensation is
         due;

              (E)  the Corporation's failure to continue in effect any material
         compensation or benefit plan in which the Executive participates or to
         arrange for him to receive any perquisites to which he is entitled
         immediately prior to the Change in Control, unless an equitable
         arrangement (embodied in an ongoing substitute or alternative plan) has
         been made with respect to such plan, or the Corporation's failure to
         continue the Executive's participation therein (or in such substitute
         or alternative plan) on a basis not materially less favorable, both in
         terms of the amount of benefits provided and the level of participation
         relative to other participants, as existed at the time of the Change in
         Control;

              (F)  the Corporation's failure to continue to provide the
         Executive with benefits substantially similar to those enjoyed by him
         under any of the Corporation's life insurance, medical, health and
         accident, or disability plans in
<PAGE>

Mr. James Lee
Page 5

         which he was participating at the time of the Change in Control, the
         taking of any action by the Corporation which would directly or
         indirectly materially reduce any of such benefits, or the failure by
         the Corporation to provide him with the number of paid vacation days to
         which he was entitled pursuant to this Agreement.

               (G)  the Corporation's failure to obtain a satisfactory agreement
         from any successor to assume and agree to perform this Agreement, as
         contemplated in Section 7.

               (H)  the continuation or repetition, after written notice of
         objection from the Executive, of harassing or denigrating treatment of
         him inconsistent with his position with the Corporation.

               (I)  The Executive's continued employment shall not constitute
         consent to, or a waiver of rights with respect to, any circumstances
         constituting Good Reason hereunder.

         iii). Upon a termination for Good Reason under Paragraph 3(b)(v), the
    Corporation shall be obligated and shall continue to pay Executive a salary
    at Executive's then annual salary (excluding bonus) for a period of two (2)
    years following the Effective Date. Such payments shall be made in
    installments payable as provided in Section 2 hereof, provided, however,
    that Executive may elect a lump sum payment discounted at the applicable
    long term federal interest rate.

         iv).  If the Executive's employment is terminated under Paragraph
    3(b)(v), all outstanding stock options held by Executive shall become
    immediately and fully vested. Such options must be exercised within 30 days
    of the Effective Date.

         v).   The Corporation shall pay to the Executive all legal fees and
    expenses reasonably incurred by him, in contesting or disputing any such
    termination or in seeking to obtain or enforce any right or benefit
    provided by this Agreement.

         vi).  If by reason of Section 280G of the Internal Revenue Code
    ("Code") any payment or benefit received or to be received by the Executive
    in connection with a Change in Control or the termination of his employment
    would not be deductible (in whole or in part) by the Corporation, an
    Affiliate or other person making such payment or providing such benefit,
    then the severance payments payable under (iii) above shall be reduced until
    no portion of the total payments is not deductible by reason of Section
    280G. For purposes of this limitation, (A) no portion of the total payments,
    the receipt or enjoyment of which the Executive shall have effectively
    waived in writing prior to the date of payment of the Severance Payments
    shall be taken into account; (B) no portion of the total payments shall be
    taken into account which in the opinion of the Corporation's counsel does
    not constitute a "parachute payment" within the meaning of Code Section
    280G(b)(2); (C) the severance payments shall be reduced only to the extent
    necessary so that the severance payments in their entirety constitute
    reasonable compensation for services actually rendered within the meaning of
    Code Section 280G(b)(4), and (D) the value of any noncash benefit or any
    deferred payment or benefit included in the Severance Payments shall be
    determined by the Corporation's independent auditors in accordance with the
    principles of Code Sections 280G(d)(3) and (4). For purposes of this Section
    4(d)(vi), the term "Affiliate" means the Corporation's successors, any
    Person whose actions result in a Change in Control or any corporation
    affiliated (or which, as a result of the completion of the transactions
    causing a Change in Control shall become affiliated) with the Corporation
    within the meaning of Code Section 1504.
<PAGE>

Mr. James Lee
Page 6

         (vii) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4(d) by seeking other employment or
otherwise nor shall the amount of any payment or benefit provided for in this
Section 4(d) be reduced by any compensation earned by the Executive as the
result of employment by another employer or self-employment or by retirement
benefits.

5.  Return of Documents and Property.  Upon the termination of Executive's
    --------------------------------
employment by the Corporation, or at any time upon the request of the
Corporation, Executive (or his heir or personal representative) shall deliver to
the Corporation:  (a) all documents and materials containing trade secrets and
other confidential information relating to the Corporation's business and
affairs, and (b) all other documents, materials and other property belonging to
the Corporation or its affiliated companies that are in the possession or under
the control of Executive.

6.  Competition, Confidential Information.
    -------------------------------------

    a.   The Corporation acknowledges that prior to Executive's employment
by the Corporation, the Executive has previously worked in the retail
supermarket business.  As a result, Executive possesses knowledge and
information which was acquired through sources other than the Corporation, and
which includes, but is not limited to, knowledge and information regarding
prospective products, products, systems, prospective customers, agents,
processes, and sales and marketing methods which may be identical to or similar
to information regarding the Corporation's present and prospective products,
systems, customers, agents, process, and sales and marketing methods disclosed
to Executive by the Corporation relating to the business and operation of the
Corporation.  Accordingly, the Corporation and Executive agree that when the
term "Confidential Information" is used in this Section 6, that said term shall
refer only to Confidential Information of the Corporation which is not generally
known to others engaged in similar businesses or activities as the Corporation,
or which was not known by Executive prior to his employment by the Corporation.

    b.   The Executive and the Corporation recognize that due to the nature
of his engagement hereunder, and the relationship of the Executive to the
Corporation, the Executive will have access to and will acquire, and may assist
in developing confidential and proprietary information which is not generally
known to others engaged in similar business or activities as the Corporation, or
which was not known by Executive prior to his employment by the Corporation
(hereinafter "Confidential Information") relating to the business and operations
of the Corporation, including, without limiting the generality of the foregoing,
information with respect to its present and prospective products, systems,
customers, agents, processes, and sales and marketing methods except that such
Confidential Information shall exclude information already in the public domain
or which enters the public domain through sources other than the Executive.  The
Executive acknowledges that such Confidential Information is of central
importance to the business of the Corporation and that disclosure of it to
others or its use by others could cause substantial loss to the Corporation.
The Executive and the Corporation also recognize that an important part of the
Executive's duties will be to develop good will for the Corporation through his
personal contact with customers, agents and others having business relationships
with the Corporation, and that there is a danger that this good will, a
proprietary asset of the Corporation, may follow the Executive if and when his
relationship with the Corporation is terminated.  The Executive accordingly
agrees to the following provisions:
<PAGE>

Mr. James Lee
Page 7

         i).   During the term of this Agreement and for a period of twelve
    (12) months thereafter, the Executive will not personally, either on his own
    behalf, or on behalf of any other person or entity, except for the account
    of and on behalf of the Corporation: (A) solicit employment from or become
    an employee of any company which was, at the time of termination of this
    Agreement or within six (6) months prior to that date, a competitor of the
    Corporation; (B) hire any individual who was, at the time of termination of
    this Agreement or within six (6) months prior to that date, an employee of
    the Corporation; or (C) compete with the Corporation in the area of natural
    foods or grocery supermarkets anywhere in the United States.

         ii).  Nothing in this Section 6 shall be construed to prevent the
    Executive from owning, as an investment, not more than 1% of a class of
    equity securities issued by any competitor of the Corporation and publicly
    traded and registered under the federal securities laws.

         iii). The Executive will keep confidential any Confidential
    Information of the Corporation which is now known to him or which hereafter
    may become known to him as a result of his employment or association with
    the Corporation and shall not at any time directly or indirectly disclose
    any such Confidential Information to any person or entity, or use the same
    in any way, other than in connection with the business of the Corporation,
    during and after the term of this Agreement. Confidential Information of the
    Corporation shall include, but not be limited to, the following: (A) the
    business operations or internal structure of the Corporation, (B) the
    employees, customers or clients of the Corporation, (C) past, present or
    future research done by the Corporation respecting the business or
    operations of the Corporation or customers, clients, or potential customers
    or clients of the Corporation, (D) the Executive's work performed for any
    customer or client of the Corporation, (E) any method or procedure relating
    or pertaining to projects developed by the Corporation or contemplated by
    the Corporation to be developed, or (F) any other Confidential Information
    of the Corporation. Further, upon leaving the employ of the Corporation for
    any reason whatsoever, the Executive shall not take with him, without the
    prior written consent of the Board of Directors of the Corporation, anything
    containing Confidential Information relating to or pertaining to the
    Corporation, whether in written, graphic, recorded, or computer-generated
    form, or in any other form.

         iv).  A violation by the Executive of the provisions of this
    Section would cause irreparable injury to the Corporation, and there is no
    adequate remedy at law for such violation, the Corporation shall have the
    right, in addition to any other remedies available to it at law or in
    equity, to enjoin the Executive from violating these provisions.

7.  Successors; Binding Agreement.  The Corporation shall, upon the Executive's
    -----------------------------
written request, require that any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Corporation expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Corporation
would be required to perform it if no such succession had taken place.  Failure
of any such successor to assume and agree to perform this Agreement within 30
days of such written request upon such successor to assume and agree to perform
this Agreement shall be a breach of this Agreement and shall entitle the
Executive to terminate his employment and receive compensation from the
Corporation in the same amount and on the same terms to which he would be
entitled hereunder if he terminates his employment for Good Reason following a
Change of Control.  For purposes of implementing the foregoing, the date
<PAGE>

Mr. James Lee
Page 8

which is 30 days after the Corporation makes a written request upon a successor
to assume and agree to perform this Agreement shall be deemed the Date of
Termination. Where the context requires, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.

8.  Assignment.    Executive's rights and obligations under this Agreement shall
    ----------
not be assignable by Executive.  The Corporation's rights and obligations under
this Agreement shall not be assignable by the Corporation except as incident to
the transfer, by sale, merger, liquidation, or otherwise, of all or
substantially all of the business of the Corporation.

9.  Severability.  The invalidity or unenforceability of any provision of this
    ------------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.

10. Counterparts.  This Agreement may be executed in several counterparts, each
    ------------
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.

11. Notices.       Any notice required or permitted under this Agreement shall
    -------
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if telegraphed, telexed, cabled, faxed, e-mailed, or
mailed to the other party at its address set forth below in this Section 11, or
at such other address as such party may designate by written notice to the other
party hereto. Any effective notice hereunder shall be deemed given on the date
personally delivered or on the date telegraphed, telexed, cabled faxed, e-
mailed, or deposited in the United States mail (sent by certified mail, return
receipt requested) mailed postage prepaid, as the case may be at the following
addresses:

          To Corporation:  Wild Oats Markets, Inc.
                           Attention:  Freya Brier, General Counsel
                           3375 Mitchell Lane
                           Boulder, CO  80301
                           (303) 440-5220
                           Fax (303) 440-5280

          To Executive:    Jim Lee
                           685 East Wiggins
                           Superior, Colorado  80027

12. GOVERNING LAW.  This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.

13. AGREEMENT.  This Agreement constitutes the entire understanding of
the Executive and the Corporation with respect to its subject matter and
supersedes any and all prior understandings of the parties.  This Agreement may
not be amended, modified, or discharged orally, but only by an instrument in
writing signed by both parties.
<PAGE>

Mr. James Lee
Page 9

     IN WITNESS WHEREOF, the parties have set their hands and seals as of the
day and year above written.

THE CORPORATION

Wild Oats Markets, Inc.



By  /s/ Freya R. Brier
    ----------------------------


THE EXECUTIVE



By  /s/ James Lee
    ----------------------------
    James Lee