Contract
This
Earnout Agreement (this “Agreement”) is made as of the ___ day of __________,
2005, by and among the Sellers, Heritage Partners Management Company, LLP, a
Delaware limited liability partnership, as the Representative (the
“Representative”), and Xxxxx Shoe Company, Inc., a New York corporation (the
“Buyer”).
WHEREAS,
pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), dated as
of March ___, 2005, Buyer purchased from Sellers (a) all of the outstanding
equity interests of the Xxxxxxx Footwear Holdings, LLC, a Delaware limited
liability company (the “Company”), except for the equity interests held by
Xxxxxxx Investment Corporation, a Delaware corporation (“BIC”), and (b) all of
the outstanding shares of capital stock of BIC, on the terms and conditions set
forth in the Purchase Agreement; and
WHEREAS,
pursuant to the Purchase Agreement, the parties agreed to enter into this
Agreement as a condition to consummation of the transactions contemplated by the
Purchase Agreement.
NOW,
THEREFORE, in consideration of the premises and mutual promises contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:
ARTICLE
1
DEFINITIONS
1.1 Certain
Definitions. For
purposes of this Agreement, the following terms shall have the following
meanings:
(a) “Adjusted
Operating Income” for a Fiscal Year shall mean the applicable Operating Income
for such Fiscal Year, as may be adjusted in accordance with Sections 4.2, 4.6,
4.7, 4.8 or 4.9, as applicable.
(b) “Arbitrator”
shall mean a person who shall be a certified public accountant and partner at
the Chicago, Illinois office of PricewaterhouseCoopers, LLP selected by
agreement of Buyer and a Seller Majority.
(c) “Brand
Repositioning” shall mean a significant change in either (i) the primary channel
of distribution (i.e., an expected or actual shift of more than 50% in the gross
sales volume in the following twelve (12) month period from one tier of
distribution, as reflected on Exhibit A, to another) or (ii) the retail price
point range of a brand (i.e., the change in average suggested retail price point
range must be greater than 33% in either direction), of a specified
brand.
(d) “Budget”
shall mean the budget submitted to Buyer by the Company and used in the
determination of the Earnings Targets.
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(e) “Company
Accounting Entities” shall mean the Company, Xxxxxxx Footwear Group LLC, Xxxxxxx
Footwear Acquisition LLC, Xxxxxxx Footwear Retail LLC and any successors
thereto.
(f) “Cost of
Sales” shall mean the original purchase price of merchandise plus inbound
freight cost, duties, inventory shrinkage, inventory markdown costs and
inventory valuation charges.
(g) “Earnings
Target” shall mean, as the case may be, the FY 2005 Earnings Target, the FY 2006
Earnings Target or the FY 2007 Earnings Target, each as may be adjusted in
accordance with the terms and conditions hereof.
(h) “Earnout
Payment” and “Earnout Payments” shall have the respective meanings set forth in
Section 2.1 hereof.
(i) “Earnout
Calculations” shall have the meaning set forth in Section 2.7(a)
hereof.
(j) “Fiscal
Year” shall mean, as the case may be, FY 2005, FY 2006 or FY 2007.
(k) “First
Cost Business” shall mean the business pursuant to which an importing customer
purchases goods directly from an overseas seller and is then responsible for
transporting the goods to the customer’s ultimate destination and for clearing
the goods through customs.
(l) “First
Cost Private Label Business” shall mean the First Cost Business related to
labels owned or directly licensed by the retail customer.
(m) “First
Cost Private Label Earnings Target” shall mean such amounts for each Fiscal
Year, consistent with the Budget and the Earnings Targets, as may be agreed to
by Buyer and a Seller Majority prior to the execution hereof specifically
relating to the First Cost Private Label Business; provided, that if the parties
are unable to agree upon the First Cost Private Label Earnings Target for any
Fiscal Year(s), then the parties shall appoint the Arbitrator to determine such
First Cost Private Label Earnings Target(s), and the decision of the Arbitrator
shall be binding and conclusive on all parties. The determination of the First
Cost Private Label Earnings Target requires the segmentation of the gross profit
and expenses specifically relating to the aforementioned division and the
reallocation of corporate overhead to properly account for the estimated
operating profit specifically relating to this division.
(n) “First
Cost Private Label Percentage” for any Fiscal Year shall mean the actual
Operating Income from the private label portion of the First Cost Business for
the applicable Fiscal Year, determined through application of the same
methodology and accounting principles utilized by the parties or the Arbitrator,
as the case may be, in determining the applicable First Cost Private Label
Earnings Target, divided by the First Cost Private Label Earnings Target for
such Fiscal Year, expressed as a percentage.
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(o) “FY 2005”
shall mean the fiscal year beginning January 30, 2005 and ending January 28,
2006.
(p) “FY 2005
Earnings Target” shall initially mean $32,300,000, subject
to adjustment as provided herein.
(q) “FY 2006”
shall mean the fiscal year beginning January 29, 2006 and ending February 3,
2007.
(r) “FY 2006
Earnings Target” shall initially mean $36,309,041, subject to adjustment as
provided herein.
(s) “FY 2007”
shall mean the fiscal year beginning February 4, 2007 and ending February 2,
2008.
(t) “FY 2007
Earnings Target” shall initially mean $39,766,707, subject to adjustment as
provided herein.
(u) “GAAP”
shall mean generally accepted accounting principles in the United States as in
effect as of the date hereof, consistently applied by Buyer.
(v) “Income
Taxes” shall mean all Federal, state and local income taxes.
(w) “Interest
Expense” shall mean all interest costs paid or accrued as a liability determined
in accordance with GAAP.
(x) “Interest
Income” shall mean all interest income received or recorded as a receivable
determined in accordance with GAAP.
(y) “LLC
Agreement” shall mean the limited liability company agreement of the Company in
effect at the Effective Time.
(z) “National
Advertising Costs” shall mean direct to consumer media (such as magazine,
newspaper, radio, TV, and billboards media) costs, and related media development
and agency creative costs, but shall exclude the costs of co-op advertising with
customers in local publications, promotional materials, point of sale materials,
trade advertising, packaging, fixturing with customers, display materials and
shoe show costs and displays, all calculated separately for the Company
Accounting Entities.
(aa) “Net
Sales” shall mean gross sales, license, sublicense and sublease (to the extent
not treated as a reduction of rent expense) revenue and revenues of the First
Cost Business, net of returns, discounts, allowances and co-op advertising, and
shall not include sales taxes, all as determined under GAAP. Net Sales shall
include wholesale sales to all stores operated under the brand names of, and all
leased shoe departments operated by, the Company and its Subsidiaries, including
such stores and leased shoe departments opened after the date hereof, at
wholesale cost of the product plus 10%. Net Sales shall exclude retail sales of
all such stores and leased shoe departments.
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(bb) “Operating
Income” for a Fiscal Year shall mean Net Sales less Cost of Sales and Selling
& Administrative Expenses, and shall specifically exclude Interest Income
and Interest Expense, other non-operating income or expense items, Income Taxes,
amortization of intangible assets, Cost of Sales and expenses of retail stores
and leased shoe departments.
(cc) “Ordinary
Course of Business” shall mean Ordinary Course of Business, as defined in the
Purchase Agreement, for the Company Accounting Entities prior to the Effective
Time.
(dd) “Seller
Majority” shall mean any two of BICO, Heritage and Pentland.
(ee) “Selling
and Administrative Expenses” shall mean all expenses other than Cost of Sales,
Interest Expense, expense for Income Taxes, non-operating expenses and
amortization of intangible assets as determined in accordance with
GAAP.
(ff) “Targeted
National Advertising Costs” shall mean $1,766,250 for FY 2005, $2,350,000 for FY
2006 and $2,485,000 for FY 2007.
(gg) “Three-Year
Period” shall mean the FY 2005, FY 2006 and FY 2007.
1.2 Certain
Matters of Construction. In
addition to the definitions referred to or set forth in Section
1.1:
(a) All
capitalized terms used herein, but not otherwise defined herein, shall have the
meanings ascribed to them in the Purchase Agreement.
(b) The words
“party” and “parties” shall refer to each of the Sellers and Buyer.
(c) Definitions
shall be equally applicable to both the singular and plural forms of the terms
defined, and references to the masculine, feminine, or neuter gender shall
include each other gender.
(d) Accounting
terms used herein and not otherwise defined herein are used herein as defined by
GAAP in effect as of the date hereof, consistently applied by
Buyer.
(e) The word
“including” shall mean including without limitation.
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ARTICLE
2
EARNOUT
PAYMENTS
2.1 Earnout
Payments. Buyer
will pay the Sellers up to Twenty Five Million Dollars ($25,000,000) with
respect to FY 2005, up to Ten Million Dollars ($10,000,000) with respect to FY
2006 and up to Seven Million Five Hundred Thousand Dollars ($7,500,000) with
respect to FY 2007 (individually, an “Earnout Payment,” and collectively, the
“Earnout Payments”), in each case, subject to the review and dispute procedures
set forth in Section 2.7, based on the achievement of the performance targets
for the applicable periods specified below.
2.2 FY
2005 Earnout Payment.
(a) If, for
FY 2005, Adjusted Operating Income is less than 90% of the FY 2005 Earnings
Target, then no Earnout Payment will be earned with respect to FY
2005.
(b) If, for
FY 2005, Adjusted Operating Income is equal to or greater than 90% of the FY
2005 Earnings Target but less than 100% of the FY 2005 Earnings Target, then an
Earnout Payment in the following total amount will be earned with respect to FY
2005: (i) $12,500,000 plus (ii) $12,500,000 multiplied by a fraction (A) the
numerator of which shall be (1) the Adjusted Operating Income for FY 2005 minus
(2) the product of (x) the FY 2005 Earnings Target multiplied by (y) 0.9 and (B)
the denominator of which shall be the FY 2005 Earnings Target multiplied by
0.1.
(c) If, for
FY 2005, Adjusted Operating Income is greater than or equal to 100% of the FY
2005 Earnings Target, then an Earnout Payment in the total amount of $25,000,000
will be earned with respect to FY 2005.
2.3 FY
2006 Earnout Payment.
(a) If, for
FY 2006, Adjusted Operating Income is less than 90% of the FY 2006 Earnings
Target, then no Earnout Payment will be earned with respect to FY
2006.
(b) If, for
FY 2006, Adjusted Operating Income is equal to or greater than 90% of the FY
2006 Earnings Target but less than 100% of the FY 2006 Earnings Target, then an
Earnout Payment in the following total amount will be earned with respect to FY
2006: (i) $5,000,000 plus (ii) $5,000,000 multiplied by a fraction (A) the
numerator of which shall be (1) the Adjusted Operating Income for FY 2006 minus
(2) the product of (x) the FY 2006 Earnings Target multiplied by (y) 0.9 and (B)
the denominator of which shall be the FY 2006 Earnings Target multiplied by
0.1.
(c) If, for
FY 2006, Adjusted Operating Income is greater than or equal to 100% of the FY
2006 Earnings Target, then an Earnout Payment in the total amount of $10,000,000
will be earned with respect to FY 2006.
2.4 FY
2007 Earnout Payment.
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(a) If, for
FY 2007, Adjusted Operating Income is less than 90% of the FY 2007 Earnings
Target, then no Earnout Payment will be earned with respect to FY
2007.
(b) If, for
FY 2007, Adjusted Operating Income is equal to or greater than 90% of the FY
2007 Earnings Target but less than 100% of the FY 2007 Earnings Target, then an
Earnout Payment in the following total amount will be earned with respect to FY
2007: (i) $3,750,000 plus (ii) $3,750,000 multiplied by a fraction (A) the
numerator of which shall be (1) the Adjusted Operating Income for FY 2007 minus
(2) the product of (x) the FY 2007 Earnings Target multiplied by (y) 0.9 and (B)
the denominator of which shall be the FY 2007 Earnings Target multiplied by
0.1.
(c) If, for
FY 2007, Adjusted Operating Income is greater than or equal to 100% of the FY
2007 Earnings Target, then an Earnout Payment in the total amount of $7,500,000
will be earned with respect to FY 2007.
2.5 Reduction
in Earnout Payments. The
Earnout Payment for each Fiscal Year shall be reduced by an amount equal to the
amount, if any, described in clause (xi) of Section 4.9 for such Fiscal Year;
provided that to the extent the maximum Earnout Payment would have been achieved
for any year without adding back to Operating Income amounts described in such
clause, such amounts will not reduce the Earnout Payment for such
year.
2.6 Separate
Determinations of Earnout Payments. The
parties acknowledge that the Earnout Payments provided for in this Agreement
shall be determined in two parts: (a) 14.3791% of the maximum Earnout Payment
for each Fiscal Year shall be for the benefit of Pentland, and (b) 85.6209% of
the maximum Earnout Payment for each Fiscal Year shall be for the benefit of the
Sellers other than Pentland. For purposes of Sections 2.7 and 4.4(d), (e), (f)
and (h), and the separate determinations provided for in the preceding sentence,
(i) the term “Representative” shall mean (A) Pentland, for purposes of
determining any Earnout Payment to be made to Pentland, and (B) the
Representative, for purposes of determining any Earnout Payment to be made to
the Sellers other than Pentland, and (ii) references to the “Sellers” shall mean
(A) Pentland, for purposes of determining any Earnout Payment to be made to
Pentland, and (B) the other Sellers, for purposes of determining any Earnout
Payment to be made to the Sellers other than Pentland. Buyer agrees to conduct
the process of determining the Earnout Payments, and any adjustments, consents
and calculations referred to in the Sections referenced in the preceding
sentence, separately for Pentland and the other Sellers in order to effectuate
the purposes of this Section. The parties acknowledge that: (i) due to
adjustments made in accordance with the terms hereof, Earnings Targets may vary,
both from the initial amounts set forth in Section 1.1 and as between the
Sellers (other than Pentland), on the one hand, and Pentland, on the other hand;
and (ii) due to the separate calculation of Earnout Payments provided for
herein, the determination of Operating Income may differ as between the Sellers
(other than Pentland), on the one hand, and Pentland, on the other hand; and,
therefore, that actual Earnout Payments may be made to the Sellers (other than
Pentland) and Pentland, respectively, in a ratio other than 85.6209% : 14.3791%.
Notwithstanding the separate determinations of the Earnout Payments or the
adjustments to Earnings Targets and Operating Income provided for herein, in no
event shall the Earnout Payment (taking into account all amounts paid to the
Sellers, including Pentland) for any Fiscal Year exceed, in the aggregate, the
amount set forth in Section 2.1 with respect to each such Fiscal
Year.
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2.7 Review
and Dispute Procedures.
(a) Within
sixty (60) days of the end of each Fiscal Year, Buyer shall deliver to the
Representative in writing its calculation of Adjusted Operating Income for such
Fiscal Year and the amount of the Earnout Payment resulting therefrom
(collectively, the “Earnout Calculations”), together with all supporting
documentation necessary for a review of such Earnout Calculations. The
Representative and its accountants and representatives shall at all reasonable
times (and upon reasonable notice) be given full access to (and shall be allowed
to make copies of) such books and records as may be reasonably necessary to
confirm the preparation of the Earnout Calculations.
(b) If the
Representative disputes any of the Earnout Calculations as delivered by Buyer,
the Representative shall so notify Buyer in writing (“Notice of Dispute”) not
more than 30 days after the date the Representative receives the Earnout
Calculations and supporting documentation, specifying in reasonable detail any
points of disagreement. If the Representative fails to deliver a Notice of
Dispute within such 30-day period, the Representative shall be deemed to have
accepted the Earnout Calculations. Upon receipt of the Notice of Dispute, Buyer
shall promptly consult with the Representative with respect to such points of
disagreement in an effort to resolve the dispute. If any such dispute cannot be
resolved by Buyer and the Representative within twenty (20) business days after
Buyer receives the Notice of Dispute, they shall refer the dispute to the
Arbitrator to finally determine, as soon as practicable, and in any event within
thirty (30) days after such reference, all points of disagreement with respect
to the Earnout Calculations. For purposes of such arbitration, each of Buyer and
the Representative shall submit a proposed calculation of Adjusted Operating
Income for the applicable Fiscal Year and the amount of the Earnout Payment
resulting therefrom. The Arbitrator shall apply the accounting and other
principles set forth in this Agreement and shall otherwise conduct the
arbitration under such procedures as Buyer and the Representative may agree or,
failing such agreement, under the Commercial Arbitration Rules of the American
Arbitration Association. The fees, costs and expenses of the arbitration and of
the Arbitrator incurred in connection with the arbitration of the Earnout
Calculations will be borne by the party whose positions generally did not
prevail in such determination, or if the Arbitrator determines that neither
party could be fairly found to be the prevailing party, then such fees, costs
and expenses will be borne 50% by the Sellers, as applicable, and 50% by Buyer;
provided, that such fees, costs and expenses shall not include, so long as a
party complies with the procedures of this Section 2.7, the other party’s
outside counsel, accounting or other fees. All determinations by the Arbitrator
shall be final, conclusive and binding with respect to the Earnout Calculations
and the allocation of arbitration fees and expenses.
(c) Each
Seller acknowledges that receipt of the Earnout Calculations for any Fiscal
Year, together with any supporting documentation, to the extent not already
disclosed to the public, may constitute receipt of confidential and/or material,
non-public information (the “Confidential Information”) concerning Buyer. Each
Seller severally, and not jointly, agrees that it (i) will hold the Confidential
Information in confidence, (ii) will not use the Confidential Information other
than for the purposes set forth herein, and (iii) will disclose the Confidential
Information only to its officers, directors, employees, accountants, counsel,
financial advisors or other representatives with a specific need to know the
Confidential Information. Each Seller severally, and not jointly, agrees that it
will not disclose, publish or otherwise reveal any of the Confidential
Information received from Buyer to any other party whatsoever except with the
specific prior written authorization of Buyer. In addition, each Seller
severally, and not jointly, acknowledges that it is prohibited from (i)
purchasing or selling securities of Buyer until such Confidential Information
(or financial information of Buyer covering the relevant time period to which
the Confidential Information relates) is disclosed to the public and (ii)
communicating such Confidential Information to any other person under
circumstances in which it is reasonably foreseeable that such person is likely
to purchase or sell securities of Buyer until such Confidential Information (or
financial information of Buyer covering the relevant time period to which the
Confidential Information relates) is disclosed to the public.
7
ARTICLE
3
PAYMENT
PROCEDURES
3.1 Earnout
Payments.
(a) Simultaneously
with the delivery of the Earnout Calculation by Buyer to (i) the Representative,
on behalf of the Sellers (other than Pentland), and (ii) Pentland for each
Fiscal Year, Buyer will pay, by wire transfer to one or more accounts designated
by (i) the Representative, with respect to the Sellers (other than Pentland),
and (ii) Pentland, as applicable, the amount of the Earnout Payment shown on
such Earnout Calculation for such Fiscal Year. In addition, within ten (10) days
following the final and binding determination of any Earnout Payment pursuant to
this Agreement, if the amount paid under the preceding sentence for a Fiscal
Year is less than the Earnout Payment earned for such Fiscal Year, Buyer shall
pay, by wire transfer to one or more accounts designated by (i) the
Representative, with respect to the Sellers other than Pentland, and (ii)
Pentland, as applicable, an amount equal to the shortfall, together with
interest thereon from the date of delivery of the Earnout Calculation with
respect to such Fiscal Year at the rate specified in Section 1.6(d) of the
Purchase Agreement. Alternatively, if the amount paid under the first sentence
of this Section 3.1 for a Fiscal Year is more than the Earnout Payment earned
for such Fiscal Year, the Sellers, as applicable, shall pay, by wire transfer to
one or more accounts designated by Buyer, an amount equal to the overpayment,
together with interest thereon from the date of delivery of the Earnout
Calculation with respect to such Fiscal Year at the rate specified in Section
1.6(d) of the Purchase Agreement.
(b) All
amounts paid to the Representative under this Section, net of any third party,
out-of-pocket costs incurred by the Representative in connection with the
determination of the Earnout Payment, shall be distributed by the Representative
to the Sellers (other than Pentland) in accordance with, and in the order of
priority established by, Section 5.2 of the LLC Agreement (disregarding any
Units held by Pentland).
8
3.2 Payment
into Escrow.
(a) Buyer
shall have the right to deliver all or a portion of any Earnout Payment then due
and payable to the Sellers (other than Pentland) to the Escrow Agent, to be held
under the Seller Escrow Agreement, in the following circumstances: (i) the
amount delivered does not exceed the amount of bona fide claims made by the
Buyer Indemnified Persons against the Sellers (other than Pentland) under
Article X of the Purchase Agreement for which there are then insufficient funds
held under the Seller Escrow Agreement, (ii) the indemnification claims as to
which a portion of the Earnout Payment is being delivered to the Escrow Agent
are of a kind that may be paid from funds held under the Seller Escrow Agreement
in accordance with its terms and (iii) the portion of the Earnout Payment
delivered to the Escrow Agent in respect of a Seller (other than Pentland)
relates to indemnification claims for which that Seller may then be liable under
the terms of the Purchase Agreement. Any additional funds delivered to the
Escrow Agent in accordance with Section 10.1(f) of the Purchase Agreement and
this Section 3.2 shall be accompanied by a notice containing an allocation of
such funds among the Sellers (other than Pentland), and upon delivery to the
Escrow Agent shall be and become part of each named Seller’s Allocated Amount
(as defined in the Seller Escrow Agreement) in the amount(s) specified in such
notice.
(b) Buyer
shall have the right to deliver all or a portion of any Earnout Payment then due
and payable to Pentland to the Escrow Agent, to be held under the Pentland
Escrow Agreement, in the following circumstances: (i) the amount delivered does
not exceed the amount of bona fide claims made by the Buyer Indemnified Persons
against Pentland under Article X of the Purchase Agreement for which there are
then insufficient funds held under the Pentland Escrow Agreement, (ii) the
indemnification claims as to which a portion of the Earnout Payment is being
delivered to the Escrow Agent are of a kind that may be paid from funds held
under the Pentland Escrow Agreement in accordance with its terms and (iii) the
portion of the Earnout Payment delivered to the Escrow Agent relates to
indemnification claims for which Pentland may then be liable under the terms of
the Purchase Agreement.
Except as
set forth in this Section, Buyer shall have no right of set off against any
Earnout Payment.
3.3 Tax
Treatment. Any
payment of an Earnout Payment shall be treated as an adjustment to the Purchase
Price for tax purposes.
ARTICLE
4
OPERATING
AND ACCOUNTING PROCEDURES
4.1 Generally. The
parties agree that the guidelines and rules set forth in this Article 4 shall be
used in calculating the Adjusted Operating Income and the Earnout Payments and
conducting the business of the Company until the end of FY 2007. Buyer shall use
its commercially reasonable efforts to allow the Company the opportunity to
achieve the Earnings Targets contemplated by this Agreement. For the purposes of
this Article 4, unless the context requires otherwise, references to “the
Company” shall include the Company Accounting Entities.
9
4.2 Accounting
Standards. Unless
otherwise agreed to in writing by the parties, all financial statements of the
Company for all times from and after the Closing shall be prepared in accordance
with GAAP. All matters relating to the calculation of Adjusted Operating Income,
any component thereof, any Earnout Payment and all other amounts required to be
calculated in this Agreement, shall be determined in accordance with generally
accepted accounting principles in the United States as in effect as of the date
hereof as consistently applied by the Company prior to the Effective Time (and
prior to the preparation of the Required Financial Statements pursuant to
Section 6.5 of the Purchase Agreement, and excluding any requirements under SEC
rules and regulations), all accounting terms used herein or otherwise shall be
defined and interpreted in a manner that is consistent with the foregoing, and
no adjustment shall be made as a result of the transactions contemplated by the
Purchase Agreement, including without limitation any write-up of assets
resulting from the application of purchase accounting. Accordingly, Operating
Income shall be adjusted to exclude the impact of the changes to the Company’s
accounting policies after the Effective Time, but only to the extent that any
such change is specifically attributable to the application of Buyer’s
accounting policies as compared to the Company’s accounting
policies.
4.3 Internal
Control. The
Company shall be subject to a system of internal accounting controls consistent
with the system of internal accounting controls applicable to Buyer from time to
time.
4.4 Management
of Company.
Following the Closing, except as otherwise set forth in this Agreement,
including in the following provisions of this Section 4.4, the Company will be
subject to all generally applicable policies, procedures, and requirements
applicable to Buyer’s operating divisions, in effect from time to time. During
the period from the Effective Time until the end of FY 2007 (or as otherwise set
forth herein), Buyer covenants and agrees as follows:
(a) Until
January 28, 2006, the day-to-day business, activities and affairs of the Company
shall be managed primarily by Xxxxx Xxxxxx and Xxxxx Xxxxxxxx, as long as they
are employed by Buyer or the Company, and their employment shall not be
terminated by Buyer except for cause, as defined in their respective severance
agreements; provided that, so long as Xxxxx Xxxxxx and/or Xxxxx Xxxxxxxx are
primarily managing the day-to-day business, activities and affairs of the
Company, they will keep Buyer's senior management reasonably informed of any
significant business developments in accordance with normal reporting
practices.
(b) Buyer
shall not interfere materially in the continued operation of the Company in the
Ordinary Course of Business, except (i) as specifically contemplated by this
Section or (ii) for other legitimate business objectives of Buyer that do not
materially adversely affect the prospects for achieving the maximum Earnout
Payments. Notwithstanding the foregoing, the Parties agree that the following
activities do not materially interfere in the continued operation of the Company
in the Ordinary Course of Business: (i) causing the Company to operate in
compliance with all applicable laws, rules and regulations, Buyer’s code of
business conduct as applied across its businesses and Buyer’s factory code of
conduct and (ii) based on Buyer’s commercially reasonable judgment, changing the
sourcing structure of the Company’s business or the use of overseas agents by
the Company. Further, the Parties acknowledge and agree that Buyer has not
interfered with the operation of the Company in any manner unless it requires
that a specific action be taken or not taken.
10
(c) Until
January 28, 2006, Buyer shall not transfer any person who is a Covered Employee
(as defined in the Purchase Agreement) out of the Company or assign such person
any material responsibilities other than for the Company, except with the
consent of Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the person giving consent
is still primarily engaged in managing the Company), or if neither is so
engaged, a Seller Majority. Thereafter, Buyer shall not transfer any person who
is a Covered Employee without making good faith efforts to find a suitable
replacement prior to such transfer (if such efforts are requested by Xxxxx
Xxxxxx or Xxxxx Xxxxxxxx), unless, in the case of employees primarily engaged in
lines of business other than Franco Sarto and Via Spiga, Buyer does not believe
in its commercially reasonable judgment that such replacement is
necessary.
(d) In the
event that Buyer permits or causes the Company to make any investment (other
than in the Ordinary Course of Business ), acquisition of a business or product
line or strategic initiative that was not contemplated in the Budget, the
Operating Income for each of the Fiscal Years affected by such transaction will
be adjusted to exclude the financial impact of any such transaction. Buyer will
negotiate in good faith with Representative regarding any adjustments to the
Earnings Targets and Operating Income for each of the Fiscal Years affected by
such transaction. If thirty (30) days have passed since the Buyer and
Representative began negotiations to determine what adjustments, if any, should
be made to the Earnings Targets and Operating Income and Buyer and
Representative are still unable to resolve their differences, then Buyer and
Representative shall appoint the Arbitrator to determine such adjustments, and
the decision of the Arbitrator shall be binding and conclusive on all
parties.
(e) Buyer
shall not cause or permit the Company, directly or indirectly, to sell, cause
the loss of or otherwise dispose of the Franco Sarto business of the Company or
any material portion thereof, including, without limitation, the License
Agreement dated as of February 13, 1998 by and between Fashion Shoe Licensing
LLC and the Company, as amended through the Effective Time. Until January 28,
2006, Buyer shall not cause or permit the Company, directly or indirectly, to
sell, cause the loss of or otherwise dispose of the Via Spiga business of the
Company or any material portion thereof. In the event that Buyer permits or
causes the Company to discontinue any line of business currently existing or
dispose of any material assets or licenses (other than those addressed in the
two preceding sentences), other than in the Ordinary Course of Business or with
the consent of either Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the person
giving consent is still primarily engaged in managing the Company), or if
neither is so engaged, a Seller Majority, Buyer will negotiate in good faith
with Representative regarding any adjustments to the Earnings Targets and
Operating Income for each of the Fiscal Years affected by such discontinuance or
disposition. If thirty (30) days have passed since the Buyer and Representative
began negotiations to determine what adjustments, if any, should be made to the
Earnings Targets and Operating Income and Buyer and Representative are still
unable to resolve their differences, then Buyer and Representative shall appoint
Arbitrator to determine such adjustments, and the decision of the Arbitrator
shall be binding and conclusive on all parties.
11
(f) In the
event that Buyer permits or causes the Company to enter into any material
transaction or activity between Buyer or its Affiliates, on the one hand, and
the Company, on the other hand, except in the Ordinary Course of Business or
with the consent of either Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the person
giving consent is still primarily engaged in managing the Company), or if
neither is so engaged, the a Seller Majority, the Operating Income for each of
the Fiscal Years affected by such transaction or activity will be adjusted to
exclude the financial impact of any such transaction or activity. If thirty (30)
days have passed since the Buyer and Representative began negotiations to
determine what adjustments, if any, should be made to the Earnings Targets and
Operating Income and Buyer and Representative are still unable to resolve their
differences, then Buyer and Representative shall appoint Arbitrator to determine
such adjustments, and the decision of the Arbitrator shall be binding and
conclusive on all parties.
(g) Buyer
shall not permit or
cause the Company to dissolve, wind up, liquidate, merge or consolidate,
unless
Buyer agrees to keep books and records of the business of the Company that allow
the parties to calculate the Earnout Calculations and provide the supporting
documentation used in the preparation, or necessary for a review of, such
Earnout Calculations to substantially the same degree as currently available. In
the event of any such dissolution or other action, references to the Company in
this Agreement will mean the business currently operated by the
Company.
(h) Buyer
shall not permit or cause any Brand Repositioning with respect to the Via Spiga
or Franco Sarto brands prior to January 28, 2006. Thereafter, Buyer shall not
permit or cause any Brand Repositioning with respect to the Franco Sarto brand
without the consent of either Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the
person giving consent is still primarily engaged in managing the Company), or if
neither is so engaged, a Seller
Majority. In the
event that Buyer permits or causes any Brand Repositioning with respect to the
Via Spiga brand following January 28, 2006, other than with the consent of
either Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the person giving consent is
still primarily engaged in managing the Company), or if neither is so engaged, a
Seller Majority, Buyer will negotiate in good faith with Representative
regarding any adjustments to the Earnings Targets and Operating Income for each
of the Fiscal Years affected by such Brand Repositioning. If thirty (30) days
have passed since the Buyer and Representative began negotiations to determine
what adjustments, if any, should be made to the Earnings Targets and Operating
Income and Buyer and Representative are still unable to resolve their
differences, then Buyer and Representative shall appoint Arbitrator to determine
such adjustments, and the decision of the Arbitrator shall be binding and
conclusive on all parties.
12
(i) With
respect to sales of products to Buyer and its Affiliates, the Company shall
receive credit for the same gross margin rates as are currently in effect for
such sales, provided that the foregoing provision shall not apply to stores
operated using the brand names of the Company and its Subsidiaries.
(j) Buyer
shall ensure that the Company has adequate capital and cash to meet its
expenses, in amounts substantially in accordance with the Budget, subject to
reasonable adjustment to reflect the actual performance of the Company’s
businesses, unless a lesser amount is requested by the person(s) specified in
clause (a) above who are then managing the Company.
(k) Buyer
shall not relocate the Company’s headquarters to any location that is more than
fifty (50) miles from its current location in Needham, Massachusetts without the
consent of either Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the person giving
consent is still primarily engaged in managing the Company), or if neither is so
engaged, a Seller Majority.
In the
event of a breach by Buyer of Subsection (a), the first sentence of Subsection
(c), the second sentence of Subsection (e) or the first sentence of Subsection
(h), the maximum Earnout Payment for FY 2005 shall be deemed to have been earned
and shall be due and payable to Sellers. In the event of a breach by Buyer of
the first sentence of Subsection (e) the maximum Earnout Payment for the year in
which the breach occurred and for each subsequent year shall be deemed to have
been earned and shall be due and payable to Sellers. In the case of any breach
by Buyer other than as identified in the previous two sentences, Sellers may
seek damages for breach of this Section and any other provision of this
Agreement, but shall be required to prove their damages for such breach and
shall not be entitled to the maximum Earnout Payment, as a liquidated damage or
otherwise, absent proof of damages in such amount.
For
purposes of Subsections (c), (e), (f), (h) and (k) above and Section 4.8 hereof,
the parties acknowledge and agree that all determinations made, consents given
and similar actions taken or not taken by Xxxxx Xxxxxx and/or Xxxxx Xxxxxxxx are
in their capacities as Sellers, and they shall look solely to the interests of
the Sellers in all such cases. In addition, the parties to this Agreement
acknowledge and agree that neither Xxxxx Xxxxxx nor Xxxxx Xxxxxxxx will have any
liability to any party to this Agreement pursuant to this Agreement relating to
the achievement of the Earnout Payments (or the failure to achieve any Earnout
Payments), so long as each of Xxxxx Xxxxxx and Xxxxx Xxxxxxxx, respectively, act
in good faith. Without limiting the foregoing, nothing in this Agreement shall
in any way limit the right of Xxxxx Xxxxxx and Xxxxx Xxxxxxxx to act in the
interests of the Sellers or Buyer (other than as set forth in the first sentence
of this paragraph) with respect to this Agreement; provided, however, that
nothing in this Agreement shall relieve Xxxxx Xxxxxx or Xxxxx Xxxxxxxx from any
duty they may have to Buyer or any of its subsidiaries, apart from this
Agreement, the Purchase Agreement and the Escrow Agreement, as employees of
Buyer or any of its subsidiaries or otherwise.
13
4.5 Changes
in GAAP. The
parties agree that any changes in GAAP accounting rules from and after the date
hereof shall not affect the calculation of any Earnout Payment. The parties
shall use the GAAP rules, regulations and standards in effect as of the date
hereof as a basis for calculation of all Earnout Payments.
4.6 Xxxxxxx
Soft Brand Repositioning. If the
event of a Brand Repositioning with respect to the Xxxxxxx Soft brand during the
Three-Year Period, the Operating Income for each of the Fiscal Years following
such event shall be adjusted, effective from the first day of the first month
following such Brand Repositioning, to add back any negative variance, or to
eliminate any positive variance, in the results for the Xxxxxxx Soft brand from
those included in the applicable Earnings Target .
4.7 First
Cost Business.
(a) Until
January 28, 2006, the Company shall operate its First Cost Private Label
Business in a manner consistent with the manner in which it is currently
operated, meaning that the Company shall be responsible for (x) designing
product for first-cost sales consistent with its current practices, (y)
maintaining a sales force, and (z) continuing to call on its current first-cost
customers. The Company and Buyer agree that they will work on a coordinated
basis in contacting customers and maintaining customer relationships.
Notwithstanding the foregoing, the Company and Buyer are not precluded from
changing the sourcing structure of the First Cost Private Label Business or the
use of overseas agents by the Company. The Buyer shall credit the Company with
the all earnings, without duplication, on sales of the First Cost Business of
the Company irrespective of which sourcing entity of Buyer is used to oversee
the manufacturing of the products.
(b) If the
Buyer first chooses to consolidate the Buyer’s and Company’s First Cost Private
Label Businesses during FY 2006, an amount equal to the First Cost Private Label
Percentage for FY 2005 multiplied by the First Cost Private Label Earnings
Target for FY 2006 Budget will be
deemed to be the Operating Income from the First Cost Private Label Business for
FY 2006 and an
amount equal to the First Cost Private Label Percentage for FY 2005 multiplied
by the First Cost Private Label Earnings Target for FY 2007 will be deemed to be
the Operating Income from the First Cost Private Label Business for FY
2007.
(c) If the
Buyer first chooses to consolidate the Buyer’s and Company’s First Cost Private
Label Businesses during FY 2007, an amount equal to the First Cost Private Label
Percentage for FY 2006 multiplied by the First Cost Private Label Earnings
Target for FY 2007 will be deemed to be the Operating Income from the First Cost
Private Label Business for FY 2007.
4.8 National
Advertising Costs.
Throughout the Three-Year Period, National Advertising Costs may not exceed
Targeted National Advertising Costs, without the prior written approval of Buyer
and either Xxxxx Xxxxxx or Xxxxx Xxxxxxxx (so long as the person giving consent
is still primarily engaged in managing the Company), or if neither is so
engaged, a Seller Majority. If, during the Three-Year Period, National
Advertising Costs for any Fiscal Year exceed Targeted National Advertising Costs
for such Fiscal Year, Operating Income for such Fiscal Year shall be adjusted to
exclude the amount by which National Advertising Costs exceed Targeted National
Advertising Costs.
14
4.9 Other
Adjustments to Operating Income. For any
Fiscal Year, the following amounts, to the extent deducted or added, as
applicable, in determining Operating Income, shall be added or deducted, as
applicable, to Operating Income for the purpose of determining Adjusted
Operating Income: (i) costs and expenses arising out of, relating to or incurred
in connection with financing transactions, (ii) costs and expenses clearly
related to the integration of the Company’s businesses with Buyer following the
Effective Time, (iii) costs and expenses relating to the transactions
contemplated by the Purchase Agreement, including severance payments pursuant to
agreements entered into in connection with the Closing or under the severance
plan contemplated by the Purchase Agreement, (iv) costs, expenses and revenues
arising out of, relating to or incurred in connection with any investment,
acquisition, business, product line or strategic initiative that was not
contemplated in the Budget or undertaken in the Ordinary Course of Business, (v)
non-cash compensation charges, if any, (vi) selling, general and administrative
costs and expenses that are charged or allocated by Buyer to the extent such
costs and expenses (A) are not directly attributable to the Company or (B)
exceed the amounts reflected in the Budget for such costs and expenses as
measured as a percent of sales, (vii) any increased costs incurred by the
Company for insurance, over the costs of insurance maintained by the Company
prior to the Effective Time, excluding any cost increases for such insurance not
directly related to changes in coverage, limits or retentions required by Buyer,
(viii) costs and expenses arising out of, relating to or incurred in connection
with the preparation or audit of the Company’s or Buyer’s financial statements
that exceed the amounts included in the Budget for such or similar services,
(ix) any Loss for which Buyer could seek indemnification under Article X of the
Purchase Agreement, without regard to the limitations set forth therein, (x)
non-recurring costs and expenses imposed by Buyer and not contemplated in the
Budget and (xi) (A) other non-recurring costs and expenses not covered by a
prior clause of this Section 4.9 or contemplated in the Budget, except to the
extent agreed to by a Seller Majority (provided that, the Parties agree that
writedowns of inventory and accounts receivable shall not be deemed to be
non-recurring), (B) costs and expenses relating to litigation, including any
amounts paid as damages, and (C) the costs of determining the amount of the
Earnout Payments.
4.10 Information. Buyer
will furnish the following information to the Representative and
Pentland:
(a) Monthly
Reports. As soon
as available and in any event within 20 days after the end of each fiscal month
of the Company, a consolidated balance sheet of the Company Accounting Entities
as at the end of such period and the related consolidated statements of
operations for such period and for the portion of the Company’s Fiscal Year
ended on the last day of such month, in the form normally prepared for internal
purposes by Buyer.
15
(b) Quarterly
Reports. As soon
as available and in any event within 20 days after the end of each fiscal
quarter of the Company, a consolidated balance sheet of the Company Accounting
Entities as at the end of such period and the related consolidated statements of
operations for such period and for the portion of the Company’s Fiscal Year
ended on the last day of such quarter prepared in accordance with the Company’s
accounting policies as contemplated by this Agreement adjusted to arrive at a
calculation of Adjusted Operating Income.
(c) Annual
Reports. As soon
as available and in any event within 60 days after the end of each Fiscal Year
of the Company, a consolidated balance sheet of the Company Accounting Entities
as at the end of such Fiscal Year and the related consolidated statements of
operations for Fiscal Year prepared in accordance with the Company’s accounting
policies as contemplated by this Agreement adjusted to arrive at a calculation
of Adjusted Operating Income.
(d) Other
Information. Such
other information relating to the Company as the Representative or Pentland may
from time to time reasonably request.
4.11 Inspection. Buyer
will permit the Representative and its advisors, on reasonable notice and during
normal business hours, and in a manner not unduly disruptive to the operations
of the Company and not to exceed two visits per Fiscal Year, to visit and
inspect any of the properties of the Company, to examine its books, records and
other materials relating thereto (and to make copies thereof and take extracts
therefrom) and to discuss its affairs, finances and accounts with Buyer’s
personnel with responsibility for the Company. For purposes of this Section, a
single visit may include multiple days and inspections and discussions by
multiple persons.
4.12 BICO
Business Trust. Each
BICO Owner agrees that, during the Three-Year Period, (a) he shall cause BICO to
preserve intact its legal existence and (b) he shall not transfer any portion of
his existing ownership interest in BICO, whether to another current BICO Owner
or otherwise (except by the laws of descent or demise).
ARTICLE
5
MISCELLANEOUS
5.1 Representative. The
appointment and removal of the Representative, as well as the authority of the
Company and Buyer to rely on the consent and approval of the Representative,
shall be governed by Section 1.8 of the Purchase Agreement. Any action taken by
the Representative with respect to this Agreement shall bind and otherwise
affect any rights and obligations of each Seller (other than Pentland)
hereunder.
5.2 Entire
Agreement; Waivers. This
Agreement, together with the Purchase Agreement, the Seller Escrow Agreement and
the Pentland Escrow Agreement, constitute the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties with respect to such subject matter. No
waiver of any provision of this Agreement shall be deemed or shall constitute a
waiver of any other provision hereof (whether or not similar), shall constitute
a continuing waiver unless otherwise expressly provided nor shall be effective
unless in writing and executed (a) in the case of a waiver by Buyer, by Buyer,
and (b) in the case of a waiver by the Sellers, by the Representative, and (c)
in the case of a waiver by Pentland, by Pentland.
16
5.3 Amendment
or Modification. The
parties hereto may amend or modify this Agreement only by a written instrument
executed by Buyer, BICO, Pentland and the Representative, and any such amendment
or modification shall be enforceable against Buyer and all the
Sellers.
5.4 Successors
and Assigns. This
Agreement and the various rights and obligations arising hereunder shall inure
to the benefit of and be binding upon the parties and their respective
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be transferred, delegated, or assigned
(by operation of law or otherwise) by Buyer without the prior written consent of
the Representative (which consent shall not be unreasonably withheld) or by any
of the Sellers (except by the laws of descent or demise) without the prior
written consent of Buyer (which consent shall not be unreasonably
withheld).
5.5 Notices. Any
notices or other communications required or permitted hereunder shall be deemed
to have been properly given and delivered if delivered in accordance with
Section 11.1 of the Purchase Agreement.
5.6 Third-Party
Beneficiaries. Except
as otherwise expressly set forth in this Agreement, nothing in this Agreement
will be construed as giving any person, other than the parties, any right,
remedy or claim under or in respect of this Agreement or any provision
hereof.
5.7 Counterparts. This
Agreement may be executed simultaneously in multiple counterparts, each of which
shall be deemed an original, but all of which taken together shall constitute
one and the same instrument.
5.8 Governing
Law. This
Agreement shall in all respects be construed in accordance with and governed by
the substantive laws of The Commonwealth of Massachusetts, without reference to
its choice of law rules.
17
5.9 Consent
to Jurisdiction. Each of
the Sellers and Buyer irrevocably agree that any legal action or proceeding with
respect to this Agreement or for recognition and enforcement of any judgment in
respect hereof brought by a party hereto or its successors or assigns must be
brought and determined in the courts of New York or the federal courts located
in New York, and each of the Sellers and Buyer hereby irrevocably submits with
regard to any such action or proceeding for itself and in respect to its
property, generally and unconditionally, to the exclusive jurisdiction of the
aforesaid court. Each of the Sellers and Buyer hereby irrevocably waives, and
agrees not to assert, by way of motion, as a defense, counterclaim, or
otherwise, in any action or proceeding with respect to this Agreement, (a) any
claim that it is not personally subject to the jurisdiction of the above named
court for any reason other than the failure to serve process in accordance with
this Section 5.10, (b) that it or its property is exempt or immune from
jurisdiction of any such court or from any legal process commenced in such court
(whether through judgment or otherwise), and (c) to the fullest extent permitted
by applicable law that (i) the suit, action or proceeding in any such court is
brought in an inconvenient forum, (ii) the venue of such suit, action or
proceeding is improper and (iii) this Agreement, or the subject matter hereof,
may not be enforced in or by such court. Each party hereto waives all personal
service of any and all process upon such party related to this Agreement and
consents that all service of process upon such party shall be made by hand
delivery, certified mail or confirmed telecopy directed to such party at the
address specified in Section 5.6 hereof; and service made by certified mail
shall be complete seven days after the same shall have been posted.
[SIGNATURE
PAGES FOLLOW]
18
IN
WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have
caused this Agreement to be executed, as of the date first above written by
their respective officers thereunto duly authorized.
THIS
CONTRACT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY THE
PARTIES.
BUYER:
XXXXX
SHOE COMPANY, INC.
By:
________________________________
Name:
Title:
REPRESENTATIVE:
HERITAGE
PARTNERS
MANAGEMENT
COMPANY, LLP
By:
________________________________
Name:
Title:
SELLERS:
HERITAGE
FUND III, L.P.
By: HF
Partners III, L.L.C.,
Its
General Partner
By:
________________________________
Name:
Title:
19
HERITAGE
FUND IIIA, L.P.
By: HF
Partners III, L.L.C.,
Its
General Partner
By:
________________________________
Name:
Title:
HERITAGE
INVESTORS III, L.L.C.
By:
________________________________
Name:
Title:
BICO
BUSINESS TRUST
By:
________________________________
Name:
Title:
PENTLAND
U.S.A., INC.
By:
________________________________
Name:
Title:
____________________________________
Xxxxx
Xxxxxxxxx
____________________________________
Xxxxxxx
Xxxxx
20
BICO
OWNERS:
____________________________________
Xxxxx
Xxxxxxxx
____________________________________
Xxx
Xxxxxx
____________________________________
Xxxxx
Xxxxxx
21
Exhibit
A
Tiers
of Distribution (in descending order)
1. Designer
(retail price point averages greater than $200.00)
2. Bridge
(retail price point averages between $129.99 and $199.99)
3. Better
(retail price point averages between $59.99 and $129.99)
4. Moderate
(retail price point averages between $39.99 and $59.99)
5. Middle
Tier (retail price point averages between $19.99 and $39.99)
6. Discount
(retail price point averages between $9.99 and $19.99)
22
