-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lzL1mCjsp4LwnjP9NBHQcbIFAkHtrP72wKNW/niTM91/rgHn089g1koqwspwmoZH yrUlz+2/ieTU6E6i2afpng== 0000950152-95-000774.txt : 19950428 0000950152-95-000774.hdr.sgml : 19950428 ACCESSION NUMBER: 0000950152-95-000774 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950427 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATES SHOE CORP CENTRAL INDEX KEY: 0000101771 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 310474200 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04009 FILM NUMBER: 95532148 BUSINESS ADDRESS: STREET 1: ONE EASTWOOD DR CITY: CINCINNATI STATE: OH ZIP: 45227 BUSINESS PHONE: 5135277000 10-K405 1 U.S. SHOE CORP. 10-K405 1 ============================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended January 28, 1995 Commission File Number 1-4009 THE UNITED STATES SHOE CORPORATION Ohio 31-0474200 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Eastwood Drive 45227 Cincinnati, Ohio (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (513) 527-7000 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Each Exchange On Which Registered -------------- ----------------------------------------- Common Shares without Par Value New York Stock Exchange/Pacific Stock Exchange Preference Share Purchase Rights New York Stock Exchange/Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Aggregate market value of the registrant's common stock held by nonaffiliates of the registrant as of April 20, 1995: $1,283,900,393 Number of shares outstanding of the registrant's common stock as of April 20, 1995: 46,958,375 1 2 PART I Item 1. Business. THE COMPANY The United States Shoe Corporation (the "company" or "Corporation") is a specialty retailing company operating 2,349 retail outlets and leased departments in the United States, Puerto Rico and Canada. The company's specialty retailing businesses focus on three major product segments: women's apparel, optical and footwear. The company also manufactures, imports and wholesales prominent footwear brands, primarily for women, that accounted for about 17% of the company's net sales for the fiscal year ended January 28, 1995 ("fiscal 1994"). The number of stores operated by the company's retailing businesses at the close of each of its last three fiscal years is as follows:
1994 1993 1992 -------------------------------------- Women's apparel retailing 1,351 1,306 1,249 Optical retailing 589 543 502 Footwear retailing 409 388 434 Discontinued operations - - 283 -------------------------------------- Total 2,349 2,237 2,468 ======================================
On March 15, 1995, the company entered into an Asset Purchase Agreement (the "Nine West Agreement") with Nine West Group Inc. ("Nine West") and Footwear Acquisition Corp., pursuant to which, on the terms and subject to the conditions thereof, Footwear Acquisition Corp. has agreed to acquire substantially all of the assets and business, and to assume substantially all of the liabilities, of the company's Footwear Group for $560 million in cash, plus warrants to purchase 3.7 million shares of Nine West's common stock at a price of $35.50 per share at any time during the 8.5 years following the consummation of the sale. The transaction is subject to the satisfaction of certain conditions. A copy of the Nine West Agreement is filed as Exhibit 10.(u) hereto and is incorporated herein by reference. The foregoing description of the Nine West Agreement is qualified in its entirety by reference to the text of the Nine West Agreement. On April 21, 1995, the company entered into an Agreement and Plan of Merger (the "Luxottica Merger Agreement") with Luxottica Acquisition Corp. ("LAC") and Avant-Garde Optics, Inc., each 2 3 indirect subsidiaries of Luxottica Group S.p.A. ("Luxottica"), pursuant to which LAC has agreed to purchase all of the company's outstanding Common Shares (and associated preference share purchase rights). The transaction is to be completed through a tender offer by LAC for all of the company's outstanding Common Shares (and associated preference share purchase rights) for $28 per Common Share (and associated preference share purchase right), which will be followed by a second-step merger in which any of the company's Common Shares (and associated preference share purchase rights) not acquired in the tender offer will be cancelled and retired and will be converted into a right to receive in cash $28 per Common Share (and associated preference share purchase right). The transaction is subject to the satisfaction of certain conditions. A copy of the Luxottica Merger Agreement is filed as Exhibit 10.(w) hereto and is incorporated herein by reference. The foregoing description of the Luxottica Merger Agreement is qualified in its entirety by reference to the text of the Luxottica Merger Agreement. 3 4 Information concerning net sales, earnings from operations and identifiable assets for each of the company's business segments is as follows:
(in millions) 1994 1993 1992 --------------------------------------------- Net sales: Women's apparel retailing $ 1,125.5 $ 1,217.1 $ 1,262.2 Optical retailing 766.7 698.7 660.1 Footwear - Manufacturing/wholesaling 444.4 465.1 470.7 Retailing 261.7 245.2 257.7 --------------------------------------------- Total $ 2,598.3 $ 2,626.1 $ 2,650.7 ============================================= Earnings (loss) from operations: Women's apparel retailing $ (49.7) $ (41.7) $ 12.1 Optical retailing 71.9 43.6 40.4 Footwear 36.2 9.5 (5.5) General corporate expense (17.8) (18.0) (22.4) --------------------------------------------- Total $ 40.6 $ (6.6) $ 24.6 ============================================= Total assets: Women's apparel retailing $ 300.0 $ 288.0 $ 344.5 Optical retailing 274.4 250.4 270.6 Footwear 360.0 357.5 396.7 Corporate 140.6 183.2 159.2 --------------------------------------------- Total $ 1,075.0 $ 1,079.1 $ 1,171.0 =============================================
4 5 WOMEN'S APPAREL RETAILING GROUP The operating divisions constituting the Women's Apparel Retailing Group, whose stores are located primarily in enclosed malls, are as follows: CASUAL CORNER offers wear-to-work fashion apparel for the misses customer for her ready-to-wear, sportswear and accessory needs at moderate and upper-moderate prices. PETITE SOPHISTICATE focuses on wear-to-work and casual fashion apparel for women 5'4" and under at moderate and upper-moderate prices. AUGUST MAX WOMAN offers wear-to-work and casual fashion apparel for women who wear sizes 14-26 at moderate prices. FACTORY OUTLET STORES, operating under the Casual Corner & Co., Casual Corner Outlet, Casual Corner Woman Outlet and Petite Sophisticate Outlet names, offer misses brand-name fashions at value prices, with stores located in factory outlet centers. CAPEZIO focuses on moderately priced casual and active apparel in updated feminine styles that emphasize color. OPTICAL RETAILING GROUP The company's Optical Retailing Group, the largest in the world based on revenues, includes LensCrafters, an optical superstore chain, LensCrafters Optique, a high-fashion optical "boutique" chain, and Sight & Save, a value optical retailing chain. 5 6 LENSCRAFTERS operates the largest group of optical superstores in both the United States and Canada. Customers can choose from a large selection of frames and lenses offering superior comfort and fit and can obtain a completed pair of glasses made in about one hour because of the on-site lens grinding laboratories. These stores are located primarily in enclosed malls and strip centers. The company acquired Opti-World, Inc., a 59 store optical chain located primarily in the Southeastern United States, in April 1995. LensCrafters also operates EYEXAM2000, a service of independent or company optometrists who provide eye examinations either in, or in locations convenient to, the stores. LensCrafters also provides services under managed care programs, in which third-party benefit plans cover eyewear purchases from approved outlets. LENSCRAFTERS OPTIQUE, the company's optical boutique chain, targets consumers interested in high-fashion or high-tech eyewear. These stores, located in upscale malls, offer the same services as a LensCrafters superoptical store but with a broader selection of high-end and designer merchandise. The company acquired Tuckerman Optical Company, a 31 store optical chain located primarily in the Midwestern United States, in July 1994. Of these 31 stores, 30 are now operated under the Optique concept. SIGHT & SAVE , the company's value optical retailing business, offers everyday low prices and service in one to four days. As a brand, it is sharply different from LensCrafters, appealing to a different, but complementary, customer as a way to broaden the group's reach. The company operates the Sight & Save business primarily through leased optical departments in selected Kmart stores. 6 7 FOOTWEAR GROUP FOOTWEAR RETAILING The company's footwear retailing operations include two separate businesses: the CONCEPT division, which operates corporately-owned concept shoe stores primarily under the name EASY SPIRIT; and the SPECIALTY FOOTWEAR RETAILING division, which operates factory outlet stores and manages leased footwear departments in Burlington Coat Factory and Steinmart strong-value stores. In fiscal 1994, about 12% of the company's wholesale footwear volume was sold through its footwear retailing operations, which also merchandises shoes and accessories provided by other manufacturers. FOOTWEAR MANUFACTURING, IMPORTING AND WHOLESALING The company manufactures and imports footwear which is sold in medium and higher price ranges. The company's brands include AMALFI, BANDOLINO, YFA BANDOLINO, CAPEZIO, COBBIE, EASY SPIRIT, EVAN-PICONE (under license), JOYCE, PAPPAGALLO and SELBY. The company also manufactures and markets Western and casual boots for men, women and children under the TEXAS BRAND BOOTS, EL DORADO, J. CHISHOLM and WRANGLER (under license) brand names. GENERAL There have been no significant changes in the kinds of products manufactured and imported, or services rendered, by the company since January 29, 1994. During the last fiscal year, the company's Women's Apparel Retailing Group purchased merchandise from a substantial number of domestic and foreign suppliers. Approximately 56% of that merchandise was purchased from domestic suppliers and the remainder was purchased from foreign suppliers. It is not practicable for the company to identify separately the domestic and foreign sources of its domestic purchases. During fiscal 1994, no single supplier accounted for more than 6% of the merchandise purchased by the Women's Apparel Retailing Group. 7 8 During fiscal 1994, the company's Optical Retailing Group purchased from domestic manufacturers and suppliers. However, while most of the frames are purchased from domestic suppliers, they are primarily manufactured in foreign countries. In April 1995, the company entered into agreements with eight suppliers committing to purchase an aggregate of $31 million of eyeglass frames from such suppliers during the next twelve months. The Footwear Group maintains a policy of global sourcing which combines domestic shoe manufacturing capacity with importing capabilities. Approximately 45% of the company's wholesale footwear volume is accounted for by imported women's shoes (primarily from South America, the Far East and Europe), which are designed and manufactured to the company's specifications. The most important raw materials used in the manufacture of shoes are leather, synthetic materials and fabrics, all of which are purchased by the company in the open market from various suppliers, and all of which have been available in adequate quantities. During the past year, the company has experienced moderate increases in the price of leather, which have generally been reflected in the selling price of its products. Synthetic materials and fabrics have decreased slightly in price, which had no significant impact on the selling price of the company's products. The company has granted licenses in foreign countries for the manufacture and sale of shoes abroad under various trademarks owned by the company. The company also has granted licenses to a number of operators of domestic shoe stores, including THE COBBIE SHOP, JOYCE-SELBY SHOES, SHOP FOR PAPPAGALLO and EASY SPIRIT. Domestic companies also are licensed to manufacture and market non-footwear products under the company's CAPEZIO and EASY SPIRIT trademarks. No individual patent, license, franchise or concession held or granted by the company is considered to have been material to its operations during the last fiscal year. The company has a number of registered trademarks and servicemarks, both in the United States and in foreign countries, that are considered to be of significant value to its business. The registered trademarks and servicemarks are subject to periodic renewal. 8 9 The company experiences seasonal fluctuations in components of working capital. Inventories of the Women's Apparel Retailing Group are generally at their highest level at the end of the third quarter prior to the Christmas holiday season. The sales volume of the Women's Apparel Retailing Group is normally highest during the fourth fiscal quarter. This peak is generally attributable to the Christmas season and post-holiday promotional activity. The company maintains lines of credit that are available to finance seasonal fluctuations in working capital on a short-term basis. During fiscal 1994, no single customer accounted for more than 10% of the company's consolidated net sales. The company's footwear wholesaling business sells primarily to independent retailers and department stores across the United States. In fiscal 1994, the wholesaling segment's three largest customers accounted for 9.2%, 8.8% and 4.5%, respectively, of the segment's net sales. The company's footwear wholesaling business does not have, nor has it historically had, a significant backlog of noncancelable orders. Advance orders are solicited by the company's sales force four to six times each year with most of such orders being for the Spring and Fall retail seasons. These advance orders are placed by wholesale customers for delivery in up to seven months, which is greatly influenced by the amount of lead time that customers allow when placing orders for the forthcoming retail season. The footwear wholesaling business also includes substantial sales under various stock programs. In order to support these programs, the company maintains stock inventories of certain high-volume styles that allow customers the ability to replenish fast-moving items. Accordingly, management does not believe its fiscal year-end order backlog is a meaningful indicator of the footwear wholesaling division's future results. The Women's Apparel Retailing, Optical Retailing and Footwear Groups operate within highly competitive markets. The company's women's apparel competitors include national, regional and individual specialty apparel stores, department stores and direct marketing catalog companies. The Optical Retailing Group competes with independent optometrists as well as regional and national chains of optical superstores. The footwear manufacturing/wholesaling divisions compete with other 9 10 domestic manufacturers and importers of foreign-produced footwear in medium-to-higher price ranges. Footwear retailing divisions compete with stores and leased departments ranging from individual operators to regional and national chains and department stores. The company's investment in research and development during the last three fiscal years was not significant to the company's consolidated operations. The company does not anticipate that compliance with federal, state and local laws and regulations relating to the protection of the environment will have a significant effect on the company's consolidated operations. The company employs approximately 40,000 people. Item 2. Properties. The company's executive offices and certain offices of the Footwear Group are located in Cincinnati, Ohio, in a 201,000 square foot building owned by the company. Office space occupied by other divisions in various parts of the United States totaled approximately 506,000 square feet as of January 28, 1995, of which 59% was leased. The company also had leased approximately 72,000 square feet of office space in various foreign countries as of that date. As of January 28, 1995, the Women's Apparel Retailing Group leased one distribution center/warehouse in Enfield, Connecticut and owned one distribution center/warehouse in Atlanta, Georgia. Total square footage of these two distribution centers/warehouses was approximately 471,000. As of that date, the Women's Apparel Retailing Group operated 1,351 stores, encompassing about 4.9 million square feet of space, located primarily in enclosed malls in 47 states and the District of Columbia. As of January 28, 1995, the Optical Retailing Group leased two distribution centers/warehouses, one in Cincinnati, Ohio and one in Toronto, Ontario. Total square footage of these locations was approximately 57,000. On that date, the group operated 589 stores and leased departments, encompassing about 2.7 million square feet of space. These stores are located primarily in enclosed 10 11 malls and strip centers in 45 states (about 2.4 million square feet of space), Puerto Rico and Canada. The leased optical departments are primarily located in selected Kmart stores. As of January 28, 1995, the Footwear Group operated nine footwear manufacturing plants, a product development facility and two component plants, with an aggregate of approximately 741,000 square feet of space, located in four states in the Midwestern United States. One of the manufacturing plants is leased. The company also leases two component plants, with approximately 93,000 square feet of space, in the Dominican Republic and leases one component plant, with approximately 29,000 square feet of space, in Honduras. The manufacturing plants have an optimum daily production capacity (which includes production of shoes utilizing fitted upper component parts manufactured in the company's component plants) of approximately 47,000 pairs of shoes and boots. During fiscal 1994, the company's plants operated at approximately 87% of optimum production capacity. As of January 28, 1995, the group operated four footwear manufacturing/wholesaling distribution centers, with approximately 934,000 square feet of space, in various parts of the United States. One of the centers is owned and is located in the complex with the company's executive offices in Cincinnati, Ohio. The footwear retailing divisions operated 409 shoe stores and leased shoe departments at January 28, 1995, encompassing about 1.4 million square feet of space in 43 states. The shoe stores are located primarily in major shopping centers and outlet malls. The leased shoe departments are located in Burlington Coat Factory and Steinmart strong-value stores. The company's operating leases for retail stores expire between 1995 and 2006. The average remaining terms of existing retail leases are as follows: women's apparel stores, 4 years; optical stores, 4 years; shoe stores, 5 years; leased optical departments, 4 years; and leased shoe departments, 1 year. 11 12 Item 3. Legal Proceedings. On March 3, 1995, Luxottica Group S.p.A. ("Luxottica") and Luxottica Acquisition Corp. ("LAC", together with Luxottica and Avant-Garde Optics, Inc., the "Luxottica Plaintiffs") commenced an action in the United States District Court for the Southern District of Ohio, Eastern Division (the "District Court"), by filing a complaint (the "Luxottica Complaint") against the company, the Directors of the company, the Commissioner of Securities of Ohio, the Director of Commerce of Ohio, and the State of Ohio. The Luxottica Complaint seeks, among other things, (a) temporary, preliminary and permanent injunctive relief against the enforcement of the Ohio Take-Over Act and a declaratory judgment that the Take-Over Act is unconstitutional as it may be applied to the Luxottica tender offer (the "Luxottica Offer"), and (b) preliminary and permanent injunctive relief prohibiting the company and its Directors from enforcing and amending the company's Share Purchase Rights Agreement (except to redeem the Rights) and directing the company and its Directors to redeem the Rights, and a declaratory judgment declaring that the Rights Agreement and the Rights are invalid, unlawful, null and void. On March 6, 1995, the Luxottica Plaintiffs filed a First Amended Complaint which added Avant-Garde Optics, Inc. ("Avant-Garde") as a Luxottica Plaintiff and which, in addition, seeks (c) a declaratory judgment that Directors of the company who are not officers of the company are in breach of their fiduciary duties under Ohio law for failing to approve the Luxottica Offer and (d) preliminary and permanent injunctive relief requiring the Directors of the company who are not officers of the company to approve the Luxottica Offer and thereby render the Rights Agreement inapplicable. On March 10 and 24, 1995, respectively, Luxottica filed Second and Third Amended Complaints in the District Court. The relief sought includes, among other things, (e) an order declaring that the Directors of the company have breached their fiduciary duties by failing to negotiate with Luxottica and by taking certain actions with respect to the company's compensation and retirement plans, (f) an injunction prohibiting consummation of the proposed sale of the Footwear Group to Nine West without a shareholder vote, and (g) an order declaring that certain disclosures made by the company contain false and misleading statements in violation of the Securities Exchange Act of 1934. 12 13 On March 22, 1995, the company and all the company's Directors filed an Answer denying all claims of the Luxottica Plaintiffs, and the company filed a Counterclaim against the Luxottica Plaintiffs. The Counterclaim asserts that the Luxottica Plaintiffs are violating the disclosure requirements of federal securities law by false and misleading statements and non-disclosures contained in the Luxottica Offer and in Luxottica's Schedule 14D-1, and that the Luxottica Plaintiffs have not delivered to the company's shareholders substantial information required by the Ohio Take-Over Act. The Counterclaim seeks to declare Luxottica's acquisition of the company's Common Shares to be in violation of federal and state laws, to restrain further violations of such laws, to require Luxottica and LAC to withdraw the Luxottica Offer and to enjoin the Luxottica Offer from being consummated, until such time as the Luxottica Plaintiffs have complied with applicable laws. On March 29, 1995, the company and all the company's Directors filed an Answer substantially denying all material allegations in the Luxottica Third Amended Complaint and filed an Amended Counterclaim against the Luxottica Plaintiffs. The Amended Counterclaim asserts that the Luxottica Plaintiffs are making false and misleading statements relating to the number of Common Shares owned by Mellon Bank Corporation and its subsidiaries in Luxottica's proxy statement filed on March 21, 1995, with the Securities and Exchange Commission. On March 31, 1995, the company filed a motion for a preliminary and permanent injunction seeking to enjoin the Luxottica Plaintiffs from distributing false and misleading information in their proxy solicitation materials in connection with solicitation of Appointments of Designated Agents to call a special meeting of shareholders. The company also filed a motion to dismiss certain counts of Luxottica Plaintiffs' Third Amended Complaint. On April 7, 1995, the company and all of the company's Directors filed an Amended Answer and a Second Amended Counterclaim. The Second Amended Counterclaim generally asserts that the Luxottica Plaintiffs are violating the disclosure requirements of federal securities law by failing to disclose certain information and making false and misleading statements in their proxy materials. On April 10, 1995, the company filed a Notice of Dismissal of Count IX of its Second Amended Counterclaim which alleged the failure by Luxottica to deliver to the company's shareholders 13 14 substantial information required by the Ohio Take-Over Act. On April 11, 1995, the Luxottica Plaintiffs filed an Answer to the Company's Second Amended Counterclaim substantially denying all material allegations. On April 14, 1995, the company filed a Motion for Immediate Injunctive Relief seeking to enjoin Luxottica from making false and misleading statements in their proxy materials. On April 17, 1995, the company filed a Third Amended Counterclaim asserting that the Luxottica Plaintiffs are violating the disclosure requirements of the federal securities law based on the false and misleading statements which are the subject of the company's Motion for Immediate Injunctive Relief filed April 14. On April 20, 1995, the District Court entered an Agreed Order pursuant to which the parties agreed that they were not seeking prompt consideration by the Court of any pending motion and further agreed that no briefs were required to be filed in response to any outstanding motions; provided that, by giving written notice to all other parties and the District Court, any party could reactivate consideration of the pending motions, in which event, briefs would be due from the responding parties on the second business day after the day on which such notice were received. On April 21, 1995, the company and Avant-Garde and LAC signed the Luxottica Merger Agreement. Pursuant to the Luxottica Merger Agreement, the parties have agreed, promptly, and in any event not later than April 26, 1995 (unless the Luxottica Merger Agreement has been earlier terminated), to use their respective best efforts to obtain a dismissal without prejudice of the claims (with certain limited exceptions) and counterclaims filed, with each party bearing its own costs and attorneys' fees therefor. On April 25, 1995, all parties to the litigation entered into a Stipulation of Dismissal of Certain Claims whereby the parties agreed to dismiss without prejudice all of the plaintiffs' claims (with certain limited exceptions, such remaining claims to be dismissed without prejudice when Luxottica's tender offer is consummated) and all counterclaims; such Stipulation was filed in the District Court on the same date. OHIO LITIGATION On March 7, 1995, several shareholders of the company filed three separate complaints in the Court of Common Pleas, Hamilton County, Ohio naming the company and its Directors as defendants (Allen v. The United States Shoe Corporation, et. al., Civil Action No. A9501170, Schwartz, et. al. v. Kronick, et. al., Civil Action No. A9501172, and Freedman, et. al. v. Kronick, et. al., Civil Action No. A9501171). The relief sought includes, among other things, (a) class action certification, (b) a declaration that the Directors of the company have breached their fiduciary duties and an order 14 15 directing that the Directors of the company carry out their fiduciary duties, (c) an order that the defendants consider the Luxottica Offer in good faith, (d) an order that the defendants rescind any transactions that are unfair, (e) an order enjoining any action by the defendants to change the company's cumulative voting rules, (f) an order enjoining the transaction complained of in the complaint or any related transaction, (g) an order that the defendants account for any profits realized as a result of the transaction complained of in the complaint, and (h) an award of compensatory damages, attorneys' fees and costs. Environmental The company has been named as a third party defendant, along with approximately 175 other third party defendants, in connection with a federal superfund legal action involving a site in Adams County, Pennsylvania. No determination of the company's share, if any, of future remediation costs can be made at this time. Item 4. Submission of Matters to a Vote of Security Holders. The company did not submit any matters to a vote of security holders during the last quarter of its fiscal year ended January 28, 1995. 15 16 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. The company's Common Shares are traded on the New York Stock Exchange and the Pacific Stock Exchange. There were 11,237 shareholders of record of the company's Common Shares as of April 20, 1995. Fiscal 1994 dividend payments marked the 63rd consecutive year that the company has paid cash dividends on its Common Shares. The range of market closing prices and the dividends paid per share, by quarter, for fiscal 1994 and 1993 were as follows:
1994 1993 ------------------------------- --------------------------------- High Low Dividend High Low Dividend ------------------------------- --------------------------------- First Quarter $ 18 1/4 $12 $ .08 $ 12 1/2 $ 10 1/8 $ .13 Second Quarter 20 17 7/8 .08 10 8 3/4 .08 Third Quarter 24 17 1/2 .08 11 1/4 8 7/8 .08 Fourth Quarter 20 3/8 15 1/4 .08 15 1/2 10 7/8 .08 ----- ----- $ .32 $ .37 ===== =====
16 17 Item 6. Selected Financial Data.
(millions except per share amounts) 1994 1993 1992 1991 1990(a) ------------------------------------------------------------------- Net sales $ 2,598.3 $ 2,626.1 $ 2,650.7 $ 2,725.8 $ 2,718.7 Earnings (loss) before cumulative effect of accounting changes $ 16.4 $ (15.8) $ 4.4 $ 40.0 $ (27.7) Cumulative effect of accounting changes, for years ended prior to - February 3, 1991, related to nonpension postretirement benefits (net of tax effect of $5.7) -- -- -- (8.8) -- February 4, 1990, related to eyewear product maintenance contracts (net of tax effect of $2.3) -- -- -- -- (3.6) ------------------------------------------------------------------- Net earnings (loss) $ 16.4 $ (15.8) $ 4.4 $ 31.2 $ (31.3) =================================================================== PER SHARE DATA - -------------- Earnings (loss) per common share before cumulative effect of accounting changes $ .35 $ (.35) $ .10 $ .88 $ (.61) Cumulative effect of accounting changes (see above) -- -- -- (.19) (.08) ------------------------------------------------------------------- Net earnings (loss) $ .35 $ (.35) $ .10 $ .69 $ (.69) =================================================================== Dividends per common share $ .32 $ .37 $ .52 $ .52 $ .50 1/2 Book Value per common share 10.13 10.06 10.71 11.18 11.03 BALANCE SHEET DATA - ------------------ Total assets $ 1,075.0 $ 1,079.1 $ 1,171.0 $ 1,152.1 $ 1,236.2 Working capital 240.4 322.6 294.7 251.9 281.1 Long-term debt and capital lease obligations 88.8 189.8 191.7 144.4 244.8 Shareholders' investment 470.5 461.7 488.5 506.8 498.0 Return on average shareholders' investment 4% (3)% 1% 6% (6)%
(a) 1990 results include restructuring charges of $90 ($57.9 after tax benefits). $56 was allocated to Women's Apparel Retailing and $34 was allocated to Footwear. 17 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS OVERVIEW - --------------------------------------------------------------------------------
As a Percent of Net Sales ------------------------------ 1994 1993 1992 ------------------------------ Net sales: Women's apparel retailing 43.3% 46.4% 47.6% Optical retailing 29.5 26.6 24.9 Footwear - Manufacturing/wholesaling 17.1 17.7 17.8 Retailing 10.1 9.3 9.7 Total net sales 100.0 100.0 100.0 Gross profit 46.7 47.2 47.8 Selling, general & administrative expenses 45.1 47.5 46.9 Interest expense, net 0.5 0.6 0.6 Provision (credit) for income taxes * 43.0 (30.0) 43.0 Net earnings (loss) 0.6 (0.6) 0.2
*Represents effective income tax rate. - -------------------------------------------------------------------------------- Net sales for fiscal 1994 totaled $2,598 million and the company reported net earnings of $16.4 million, or $.35 per share. The company's optical retailing group continued its strong performance and reported record sales and operating earnings. The company's footwear group reported its best operating earnings in six years. The company's women's apparel retailing group was unable to achieve a turnaround of its operations, and the group reported a significant operating loss for the year. The strength of the optical retailing and footwear groups, and the length of time projected to achieve the company's objectives in the women's apparel retailing group, led the company to evaluate strategic alternatives, including the sale of the company or one or more of its businesses. On March 15, 1995, the company entered into the Nine West Agreement with Nine West and Footwear Acquisition Corp., pursuant to which, on the terms and subject to the conditions thereof, Footwear Acquisition Corp., has agreed to acquire substantially all of the assets and business, and to 18 19 assume substantially all of the liabilities, of the company's Footwear Group for $560 million in cash, plus warrants to purchase 3.7 million shares of Nine West's common stock at a price of $35.50 per share at any time during the 8.5 years following the consummation of the sale. The transaction is subject to the satisfaction of certain conditions. A copy of the Nine West Agreement is filed as Exhibit 10.(u) hereto and is incorporated herein by reference. The foregoing description of the Nine West Agreement is qualified in its entirety by reference to the text of the Nine West Agreement. On April 21, 1995, the company entered into the Luxottica Merger Agreement with LAC and Avant-Garde Optics, Inc., each indirect subsidiaries of Luxottica, pursuant to which LAC has agreed to purchase all of the company's outstanding Common Shares (and associated preference share purchase rights). The transaction is to be completed through a tender offer by LAC for all of the company's outstanding Common Shares (and associated preference share purchase rights) for $28 per Common Share (and associated preference share purchase right), which will be followed by a second-step merger in which any of the company's Common Shares (and associated preference share purchase rights) not acquired in the tender offer will be cancelled and retired and will be converted into a right to receive in cash $28 per Common Share (and associated preference share purchase right). The transaction is subject to the satisfaction of certain conditions. A copy of the Luxottica Merger Agreement is filed as Exhibit 10.(w) hereto and is incorporated herein by reference. The foregoing description of the Luxottica Merger Agreement is qualified in its entirety by reference to the text of the Luxottica Merger Agreement. NET SALES - The company's net sales for fiscal 1994 decreased 1.1% to $2,598 million from $2,626 million for fiscal 1993. This decrease reflects a 2.8% decrease in the average number of stores in operation during the period, partially offset by a 1.4% increase in comparable store sales. 19 20 Net sales for fiscal 1993 decreased 0.9% to $2,626 million from $2,651 million for fiscal 1992. This decrease was principally due to the sale or closing of 389 poorly performing stores, primarily in connection with the divestiture of the Ups 'N Downs and Caren Charles divisions, the effect of which was partially offset by sales from 158 new stores opened in 1993 and a 0.5% increase in comparable store sales. NET EARNINGS - The company reported net earnings of $16.4 million, or $.35 per share, in 1994 compared with a net loss of $15.8 million, or $.35 per share, in 1993, and net earnings of $4.4 million, or $.10 per share, in 1992. GROSS PROFIT - The gross profit percentage in 1994 decreased to 46.7% from 47.2% in 1993 and 47.8% in 1992. The decrease in 1994 reflects the effects of a lower gross profit percentage in the women's apparel group that resulted from a higher level of markdown activity throughout the year. Partially offsetting the lower women's apparel margins were higher margins in the footwear group and the effect of the higher margin sales in the optical retailing group representing a larger percentage of consolidated net sales in 1994. The improvement in the footwear group's margins primarily resulted from fewer off-price sales by the Marx & Newman import divisions as they improved their inventory management processes. Fiscal 1994 gross profit included a LIFO credit of $5.7 million compared with a LIFO credit of $11.3 20 21 million in 1993 and $3.6 million in 1992. The 1994 credit primarily resulted from deflation in apparel and footwear inventory purchases during 1994, while the 1993 credit was due to a higher level of markdowns taken against excess footwear inventories, lower inventory quantities at year-end and low rates of inflation on the company's inventory purchases during 1993. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - The company's SG&A expenses decreased 6.0% in 1994, reflecting lower operating expenses in the women's apparel and footwear groups that resulted from cost control measures and a decrease in the average number of women's apparel stores in operation during the year. The decreases resulting from these factors were partially offset by higher expenses in the optical group as a result of operating expenses associated with 46 additional optical stores and leased departments. Included in 1994 SG&A expenses was a $4.0 million charge related to the planned closing or conversion of the remaining 14 Pappagallo women's apparel stores and $3.3 million of fees related to the sale of the company's footwear group to Nine West and evaluation of other strategic alternatives. Included in 1993 SG&A was a $10.6 million charge related to the divestiture of the Ups 'N Downs and Caren Charles divisions, a $5.5 million charge related to the divestiture of optical retailing operations in the United Kingdom, $6.0 million of costs related to executive management changes, $15.0 million of costs associated with cost reduction initiatives, and $2.6 million of costs associated with business process redesign initiatives. SG&A comparisons were also affected by a change in 1994 in the classification of optical coupon discounts from operating expenses to sales reductions. Optical coupon discounts totaled $33.9 million and $19.9 million in 1994 and 1993, respectively. SG&A expenses increased 0.3% in 1993. Lower operating expenses in the footwear and women's apparel groups, resulting from cost control measures and the effects of a net reduction of 217 women's apparel stores were more than offset by the series of charges detailed above. INTEREST EXPENSE - Net interest expense in 1994 was $11.8 million compared with $16.0 million in 1993 and $16.9 million in 1992. The reduction in net interest expense in 1994 reflects a $42.0 million decrease 21 22 in average debt outstanding, resulting from scheduled payments and the prepayment at par in June 1994 of $50 million of 8% notes that were due to mature in 1996, and an increase in interest income as average short-term investments increased 20%. These factors were partially offset by the effects of an increase in the effective interest rate on borrowed funds from 8.0% to 9.6%, reflecting the increase in prevailing market rates. The decrease in net interest expense in 1993 compared to 1992 was primarily due to a decrease in the effective interest rate on borrowed funds of 8.0% compared with 8.5% in 1992 and an increase in interest income as average short-term investments increased 48%, offset by a $23 million increase in the average outstanding debt balance. INCOME TAXES - The effective tax rate was 43% in 1994 compared to an effective tax benefit rate of 30% in 1993 and an effective tax rate of 43% in 1992. The low 1993 tax benefit rate resulted from a lower effective state tax benefit rate and an increase in the valuation allowance related to certain state operating loss and foreign tax credit carryforwards. As of the end of fiscal 1994, the company has recorded a $69.6 million net deferred tax asset that is composed of $91.8 million of deferred tax assets and $22.2 million of deferred tax liabilities. The realizability of approximately 40% of the deferred tax assets is dependent upon the company generating future income at levels sufficient to utilize the assets. Although the realizability of the deferred tax assets will be evaluated on a quarterly basis, management believes that sufficient earnings will be generated to ensure recovery of the net deferred tax assets, particularly considering the long period of time available to generate the taxable income necessary to utilize the deferred tax assets related to the accounting for postretirement benefits under SFAS No. 106 and the expected gain on the sale of the footwear group. FOURTH QUARTER RESULTS - The company's 1994 fourth quarter operating results reflected a $12.7 million LIFO credit, a $4.0 million charge related to the company's decision to close or convert its Pappagallo women's apparel stores and $3.3 million of fees related to the sale of the footwear group and evaluation 22 23 of other strategic alternatives. In 1993, the fourth quarter operating results included a $24.0 million LIFO credit and a $15.0 million charge for costs associated with certain cost reduction initiatives across all operating groups. The cost reduction initiatives included changes in certain business practices (e.g., store labor scheduling and merchandise return and allowance policies), streamlining field management and home office operations in all operating groups, early lease termination and planned shutdown of 11 poorly performing women's apparel stores, and consolidating Cincinnati Shoe and Banister footwear retail operations. WOMEN'S APPAREL RETAILING GROUP - --------------------------------------------------------------------------------
($ in millions) ---------------------------------- 1994 1993 1992 ---------------------------------- Net sales % decrease (7.5) (3.6) (7.5) Comparable store sales % decrease (5.0) (0.5) (3.0) Earnings (loss) from operations $ (49.7) $ (41.7) $ 12.1
- -------------------------------------------------------------------------------- NET SALES - The women's apparel retailing group's decrease in net sales from $1,217 million in 1993 to $1,126 million in 1994 resulted from a 5.0% decrease in comparable store sales. The decline in comparable store sales was experienced across all mall-based divisions, as a result of the poor performance of most merchandise categories. The group's factory outlet division reported a significant increase in sales on new store volume (88 stores in operation at the end of 1994 compared to 26 at the end of 1993) and strong comparable store sales increases. During 1993, the group's net sales decreased 3.6% to $1,217 million, reflecting a net reduction of 217 stores and a 0.5% decrease in comparable store sales. Net sales at the Casual Corner division decreased in 1993 as a result of a net reduction of 29 stores, the effect of which was partially offset by a slight increase in comparable store sales. The Petite Sophisticate division increased sales on new store volume and an increase in comparable store sales. Most merchandising categories within the Ups 'N Downs/Capezio and Caren Charles/Pappagallo divisions performed poorly, resulting in substantial 23 24 declines in comparable store sales. In consideration of the continuing poor performance of these divisions, the company sold or closed its remaining Ups 'N Downs and Caren Charles stores over the second half of 1993. The August Max Woman division experienced a significant decline in comparable store sales compared to 1992. OPERATING RESULTS - The group's 1994 operating loss of $49.7 million reflects the poor sales performance experienced by the mall-based divisions. Despite a reduction in per-store operating expenses, weak sales volumes and a high level of markdowns required to clear poorly performing merchandise resulted in each of the group's mall-based divisions reporting an operating loss for the year. The Casual Corner division reported an operating loss significantly higher than 1993. The Petite Sophisticate division's performance declined dramatically as they reported a 1994 operating loss compared to strong earnings in 1993. The factory outlet division reported a significant increase in operating earnings on increased sales. The group's operating loss in 1994 was reduced by a LIFO credit of $3.6 million (compared with a charge of $0.9 million in 1993 and a credit of $1.1 million in 1992), which resulted primarily from deflation in the group's inventory purchases. 1994 operating results also included a $4.0 million charge related to the planned closing or conversion of the Pappagallo women's apparel stores. The $41.7 million operating loss in 1993 was principally due to the poor performance of the Casual Corner division in the first half of the year and operating losses in the Ups 'N Downs/Capezio and Caren Charles/Pappagallo divisions. The 1993 results included a $10.6 million charge related to the divestiture of the Ups 'N Downs and Caren Charles divisions and $14.1 million in operating losses in these two divisions prior to their sale, $6.7 million of costs associated with cost reduction initiatives, $3.8 million of severance and recruitment costs related to executive management changes, and $1.7 million of costs associated with business process redesign initiatives. In 1993, Casual Corner recorded an operating loss as earnings generated over the last half of the year on stronger sales performance and lower operating expenses were not sufficient to offset operating losses in the first half of the year that resulted primarily from the poor performance of spring merchandise. The Petite Sophisticate division experienced an increase in 1993 earnings on increased 24 25 sales, while the Ups 'N Downs/Capezio and Caren Charles/Pappagallo divisions experienced significant operating losses. The August Max Woman division recorded an operating loss for the year compared to operating earnings in 1992. SOURCING - The group purchases a significant amount (44% in 1994 and 26% in 1993) of its product from the Far East. OPTICAL RETAILING GROUP - --------------------------------------------------------------------------------
($ in millions) ------------------------------- 1994 1993 1992 ------------------------------- Net sales % increase 9.7 5.8 5.6 Comparable store sales % increase 11.4 2.9 1.4 Earnings from operations $ 71.9 $ 43.6 $ 40.4
- -------------------------------------------------------------------------------- NET SALES - The optical retailing group increased net sales by $68 million to $767 million in 1994 as a result of an 11.4% increase in comparable store sales and new store volume (589 stores and leased departments in operation at the end of 1994 compared to 543 at the end of 1993). The comparable store sales increase reflects strengthening domestic market fundamentals and favorable customer response to promotional campaigns run throughout the year. Total sales comparisons for the group were affected by a change in 1994 in the classification of coupon discounts from operating expenses to sales deductions. Optical coupon discounts totaled $33.9 million and $19.9 million in 1994 and 1993, respectively. Net sales increased 5.8% in 1993 as a result of a greater number of retail locations (543 at the end of 1993 and 511 at the end of 1992) and a 2.9% increase in comparable store sales. OPERATING RESULTS - The group increased operating earnings by 64.7% during 1994 to $71.9 million, primarily reflecting increased domestic sales volume and effective containment of costs to operate the group's domestic superoptical stores. The group's results were negatively impacted by increased operating losses in the Sight & Save value optical division, which continues to be affected by the significant costs of establishing and developing the value optical concept and lower than expected sales 25 26 levels. Sight & Save operating losses include $2.1 million of charges to close a number of poorly performing locations. Effective cost containment efforts resulted in an improvement in the operating earnings of LensCrafters Canada on comparable sales. The group's operating earnings in 1993 included a $5.5 million charge related to the divestiture of the United Kingdom operations. In 1993, the group's earnings from operations increased 7.9% to $43.6 million. Earnings from the group's domestic operations improved on higher superoptical sales due to new store volume and increased comparable store sales. The effects of the increased sales were partially offset by costs associated with the expansion of the Sight & Save value optical concept. LensCrafters Canada improved operating earnings on higher sales as a result of new store volume, including sales at 22 Eyemasters Ltd. superoptical stores acquired in January 1993, that was partially offset by a decline in comparable store sales. Canadian operating results were reduced by costs associated with the transition of the Eyemasters stores to the LensCrafters format. Operating losses in the United Kingdom, excluding the $5.5 million charge to divest of the operations, totaled $1.9 million in 1993 compared to operating losses of $7.0 million in 1992. FOOTWEAR GROUP - --------------------------------------------------------------------------------
($ in millions) --------------------------------- 1994 1993 1992 --------------------------------- Net sales % increase (decrease): Manufacturing/wholesaling (4.5) (1.2) 3.6 Retailing 6.7 (4.9) (8.7) Comparable store sales % increase (decrease) 3.4 (1.4) (0.7) Earnings (loss) from operations $ 36.2 $ 9.5 $(5.5)
- -------------------------------------------------------------------------------- NET SALES - The footwear group's net sales decreased $4 million in 1994 to $706 million. The manufacturing/wholesaling divisions' net sales decreased 4.5% to $444 million. The Easy Spirit division experienced strong sales increases, reflecting the brand's continued growth and well executed promotional programs. Other manufacturing/wholesaling divisions reported decreased sales; most notably Joyce and Cobbie, reflecting fewer independent store operators and the conversion of certain 26 27 company-owned stores to the Easy Spirit format, and Texas Boot, which continues to be adversely affected by a soft western boot market. Sales in the Marx & Newman import division were comparable to 1993. Sales in the company's footwear retail divisions increased to $262 million as a result of a net increase of 21 stores and a 3.4% increase in comparable store sales, primarily increases in Easy Spirit retail stores. In 1993, the manufacturing/wholesaling divisions reported a 1.2% decrease in net sales to $465 million. Sales increases in the Easy Spirit division were offset by decreases in the Texas Boot division and in the Cobbie division, whose sales were adversely affected by fewer independent store operators and management's decision to close or convert to the Easy Spirit concept a majority of company-owned Cobbie retail stores. Sales in other manufacturing/wholesaling divisions were generally comparable with the prior year. 1993 sales in the company's footwear retail divisions declined $12.5 million from 1992 to $245 million as a result of a net reduction of 46 stores and a 1.4% decline in comparable store sales. The comparable store sales decline reflected strong increases in Easy Spirit retail stores that were more than offset by declines in other divisions. OPERATING RESULTS - The group's operating earnings increased during 1994 to $36.2 million, reflecting improved operating results in both the group's manufacturing/wholesaling and retailing operations. In 1994, the Easy Spirit division reported improved operating earnings on increased sales. The Marx & Newman import division reported a substantial improvement in operating results on relatively comparable sales due to improved margins, attributed in large part to an improvement in inventory management and favorable foreign currency exchange rates. These earnings improvements were partially offset by the declines in operating results experienced by the Joyce, Cobbie and Texas Boot divisions, which were due primarily to the effects of lower sales volume. Although the group's retailing operations reported an operating loss in 1994, both the Concept and Specialty Footwear Retailing divisions showed improvement over the prior year. The Concept division's improved results in 1994 reflect the increased sales volume of the Easy Spirit concept stores and the effects of the closure or conversion of a majority of the Cobbie and Joyce-Selby concept stores 27 28 during 1993. The Specialty Footwear Retailing division reported a slight improvement in operating results on a 1.4% increase in sales. In 1993, the Easy Spirit for women division generated a substantial increase in operating earnings as a result of a 12.4% increase in sales, higher margins and lower operating costs. The Easy Spirit for men division achieved near-breakeven results compared to substantial operating losses in 1992 as margins stabilized and operating expenses were brought in line with the division's sales level. The Texas Boot division saw sales and operating earnings decline in 1993. The company's import brands continued to perform poorly as the problems affecting the group continued in 1993. Despite improved performance by the Evan-Picone brand over the second half of the year, operating losses of the group increased in 1993, primarily as a result of increased markdowns taken to clear excess inventories. In 1993, footwear retailing recorded an operating loss compared to operating earnings in 1992, primarily as a result of a decline in operating earnings in the Banister division. Banister experienced further declines in comparable store sales and margin erosion as promotional activity increased to generate sales and as markdowns were taken to clear older inventory. The Concept division's operating losses increased in 1993 due to the poor performance of Cobbie and Joyce-Selby concept stores and costs associated with the closure or conversion of a majority of these stores during the year, the effects of which were only partially offset by the stronger performance of Easy Spirit concept stores. During 1993, the company closed 35 Cobbie and Joyce-Selby stores and converted 10 stores to the Easy Spirit format, reducing the number of Cobbie and Joyce-Selby stores in operation at year-end to 14. The group's 1994 operating earnings were increased by a $2.7 million LIFO credit compared with credits of $12.2 million and $2.5 million in 1993 and 1992, respectively. The 1994 credit resulted primarily from lower inventory quantities at year-end and 5% deflation in the group's import purchases due to favorable foreign currency exchange rates, while the higher credit in 1993 resulted from higher levels of markdowns to clear excess inventories, lower inventory quantities at year-end, a low rate of inflation (1.4%) on the group's import purchases during 1993 and 4.3% deflation of the costs of inventory manufactured by the company during 1993. The group's 1994 results were affected by a $1.5 million net gain in connection with the sale of 28 29 the Beloit, Wisconsin facility and by a $2.1 million reduction in the group's bad debt reserve, reflecting improved collection experience and a reduction in the number of independent concept store operators. In 1993, the group's results were affected by $7.4 million of costs associated with cost reduction initiatives, $2.2 million of severance and recruitment costs related to executive management changes, and $0.9 million of costs associated with business process redesign initiatives. In 1992, footwear results included $5.2 million of costs associated with the establishment of a buying operation in the Far East, $3.5 million of costs associated with the bankruptcy of an independent operator of a substantial number of concept stores, the consolidation of Marx & Newman operations into the Cincinnati, Ohio footwear operations, and $2.8 million of costs associated with the group's business process redesign initiatives. OUTLOOK Looking forward, performance in the optical retailing group over the first two months of fiscal 1995 has continued to show strong growth. However, results over the same period in the women's apparel and footwear groups have been below the comparable results in fiscal 1994. Accordingly, the company expects first quarter 1995 results to be substantially below the comparable period in the prior year. 29 30 FINANCIAL CONDITION OVERVIEW - --------------------------------------------------------------------------------
($ in millions) -------------------------------- 1994 1993 1992 -------------------------------- Cash provided by operations $ 94.1 $ 113.9 $ 126.2 Working capital $ 240.4 $ 322.6 $ 294.7 Long-term debt $ 77.2 $ 177.4 $ 179.0 Current ratio 1.6 1.9 1.6 Debt-to-capital ratio * 15.9 29.1 28.2
* Long-term debt, including capital lease obligations, as a percentage of the sum of long-term debt, including capital lease obligations, and shareholders' investment. - -------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Cash provided by operations decreased $19.8 million to $94.1 million in 1994 as the effects of improved operating results were offset by a $43.6 million increase in cash used for changes in working capital. The increase in cash used for working capital primarily reflects $88.9 million related to an increase in inventory levels in 1994, due primarily to the earlier receipt of Spring merchandise in the women's apparel group and a net increase of 112 retail stores. In addition, the increase reflects $18.6 million related to an increase in accounts receivable, due primarily to an increase in footwear wholesale sales during the last two months of the fiscal year. Partially offsetting these factors was a greater increase in accounts payable related to the increase in inventories. In 1993, cash provided by operations decreased $12.3 million principally as a result of a $21.7 million decrease in cash generated from net earnings, adjusted for non-cash items, which was partially offset by an increase of $3.0 million in cash provided by changes in working capital. The increase in cash provided by changes in working capital included $10.2 million related to a reduction in accounts receivable as a result of improved collection experience and $18.4 million related to inventories as the company's inventory reduction efforts and store closing activities led to a greater reduction in inventories in 1993 compared to 1992. These and other working capital changes that increased cash during the year were partially offset by a $34.8 million decrease in cash that resulted from a reduction in accounts payable related to the decline in inventories. 30 31 CAPITAL EXPENDITURES - --------------------------------------------------------------------------------
($ in millions) ------------------------------------- 1994 1993 ------------------------------------- Women's apparel retailing $ 24.2 30% $ 20.9 34% Optical retailing 38.8 47 25.0 41 Footwear- Manufacturing/wholesaling 12.5 15 4.3 7 Retailing 6.6 8 11.2 18 -------------- -------------- $ 82.1 100% $ 61.4 100% ============== ==============
- -------------------------------------------------------------------------------- 1994 capital expenditures emphasized the expansion of Easy Spirit footwear retailing stores, LensCrafters optical retailing stores and women's apparel factory outlet stores. 1994 capital expenditures also emphasized the upgrading of management information systems at all divisions and the refurbishment of certain stores, including Casual Corner and LensCrafters. In 1994, the company opened or acquired 225 new retail units; 91 optical stores or leased departments, 84 women's apparel stores and 50 footwear stores or leased departments. In 1993, the company opened 158 new retail units, and converted 67 existing units to new formats. Of the new stores, 50 were optical stores or leased departments, 57 were women's apparel stores and 51 were footwear stores or leased departments. WORKING CAPITAL The company's working capital at January 28, 1995 was $240.4 million compared with $322.6 million at January 29, 1994. This decrease reflects a $42.6 million decrease in cash, cash equivalents and short-term investments, due primarily to the prepayment at par on June 30, 1994 of $50 million of 8% notes due in 1996; a $50.0 million increase in the current portion of long-term debt as a result of scheduled maturities; and a $31.1 million increase in accounts payable related to, and offset by, a $32.1 million increase in inventory, which results primarily from the earlier receipt of Spring merchandise in the women's apparel group and an increase in the number of retail stores. During 1993, the company's working capital increased to $322.6 million from $294.7 million the 31 32 prior year primarily as a result of an increase in cash and cash equivalents of $24.0 million and a $41.2 million reduction in accounts payable. These increases were partially offset by a $58.5 million reduction in inventories, reflecting a net reduction of retail stores, a delay in receipt of Spring apparel in the women's apparel group, an increase in markdown reserves to adjust excess footwear inventories to their estimated net realizable value and the effects of management's continued inventory reduction efforts. The decline in accounts payable was directly related to the lower inventory levels. The company continues to maintain lines of credit with domestic and foreign banks. At January 28, 1995, the company had in place a revolving credit agreement, with nine participating financial institutions, making available up to $125 million of credit through February 5, 1996. The revolving credit agreement is available to finance working capital needs. At January 28, 1995 and January 29, 1994, there were no borrowings outstanding under this facility. The company obtained waivers to its revolving credit agreement to permit the signing of each of the Nine West Agreement and the Luxottica Merger Agreement (actual consummation of any of those transactions will require the company to renegotiate or terminate the revolving credit agreement). The company also obtained an amendment to the revolving credit agreement primarily related to the acquisition of Opti-World, Inc. ("Opti-World") and to the long-term debt repayment due May 27, 1995. In conjunction with the acquisition of Opti-World, a 59 store optical chain, the company borrowed $50 million under the revolving credit agreement on April 3, 1995. The company anticipates significant cash outlays in the first half of fiscal 1995 related to the acquisition of Opti-World, and the scheduled repayment of $50 million of debt. In addition, on March 20, 1995, the company deposited $24.5 million into a trust in accordance with the terms of certain severance compensation agreements as a result of the Luxottica Offer. The company believes that its existing cash balance and lines of credit will be adequate to fund these cash requirements. In addition, upon closing of the sale of the Footwear Group to Nine West, the company expects to receive $560 million in cash before expenses. The Luxottica Merger Agreement provides that the company will not make any distribution to shareholders of the proceeds received by the company from the footwear sale. 32 33 LONG-TERM CAPITAL RESOURCES Long-term debt totaled $77.2 million at year-end 1994, $177.4 million at year-end 1993 and $179.0 million at year-end 1992. The lower balance in 1994 resulted from the $50 million debt prepayment on June 30, 1994 and the $50 million increase in the current portion of long-term debt due to scheduled maturities. To balance the company's fixed and variable interest rate risk, as of January 28, 1995, the company had entered into four $25 million interest rate swap agreements that mature on various dates through November 1995. Under the terms of the agreements, the company receives interest at a fixed rate (5.05% weighted-average rate as of January 28, 1995) and pays interest at a variable rate tied to the six-month LIBOR (6.55% weighted-average rate as of January 28, 1995). At January 28, 1995, the company's debt-to-capital ratio (long-term debt including capital lease obligations, as a percentage of the sum of long-term debt, including capital lease obligations, and shareholders' investment) was 15.9% compared with 29.1% in 1993 and 28.2% in 1992. The decline in the ratio in 1994 resulted primarily from the $50 million debt prepayment on June 30, 1994 and the $50 million increase in the current portion of long-term debt due to scheduled maturities. The amended revolving credit agreement and the long-term debt agreements include, among other things, provisions which limit total consolidated indebtedness, require the maintenance of minimum amounts of working capital and of certain financial ratios, limit the amount of capital expenditures, capital stock repurchases and asset sales, and limit the payment of cash dividends by the company. Under the most restrictive dividend provision, approximately $24 million of consolidated retained earnings at January 28, 1995 is available for payment of cash dividends. The company's ability to pay future dividends is, among other things, contingent upon future operating results or changes to existing borrowing agreements. On February 22, 1995, Moody's Investors Service announced that it had placed under review for a possible downgrade the Baa3 rating on the company's senior long-term debt and the (P)Baa3 rating on the company's senior unsecured shelf registration. Also, on February 22, 1995, Standard & Poor's Ratings 33 34 Group ("S&P") announced that it had lowered its rating on the company's senior long-term debt from Triple-B-Minus to Double-B-Plus and removed the debt from its CreditWatch surveillance list. Following the announcement of Luxottica's tender offer, on March 7, 1995, S&P announced that it was returning the company's senior long-term debt to its CreditWatch surveillance list with "developing implications," indicating that the debt rating could be raised or lowered depending on the outcome of the recently announced developments. FOREIGN EXCHANGE RISK The company uses foreign exchange forward contracts to hedge the risk of changes in foreign currency exchange rates associated with transactions denominated in foreign currencies, primarily shoe purchases from European countries. At January 28, 1995, the company held contracts aggregating approximately $39.8 million. EFFECT OF INFLATION Overall, the company's sales growth and earnings have not been materially impacted by inflation over the last three years. 34 35 Item 8. Financial Statements and Supplementary Data. See Index to Financial Statements and following pages. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 35 36 PART III Item 10. Directors and Executive Officers of the Registrant. Executive Officers of the Registrant (as of April 20, 1995)
Name Title Age - ---- ----- --- David M. Browne Executive Vice President, President- Optical Retailing Group 35 James J. Crowe Vice President-Secretary and General Counsel 59 Edwin C. Gerth Vice President-Corporate Controller 56 Noel E. Hord Executive Vice President, President- Footwear Group 48 Bannus B. Hudson President and Chief Executive Officer 49 James P. Maloney Vice President-Human Resources 55 Charles S. Mechem, Jr. Chairman of the Board 64 Robert J. Petrik Vice President-Treasurer 46 Michael M. Searles Executive Vice President, President- Women's Apparel Retailing Group 46 K. Brent Somers Executive Vice President and Chief 46 Financial Officer David G. Stouffer Vice President-Corporate Planning 37
36 37 Executive Officers of the Registrant (continued)
Name Business Experience - Past five years to present - ---- ------------------------------------------------ David M. Browne Executive Vice President of the company since March 1994; President-Optical Retailing Group since February 1992; President-LensCrafters Division, March 1990-February 1992; Executive Vice President of the LensCrafters Division, October 1989-March 1990; Vice President-Marketing of the LensCrafters Division, October 1987-October 1989. James J. Crowe* Edwin C. Gerth* Noel E. Hord Executive Vice President of the company since March 1994; President- Footwear Group since May 1993; Group President of Nine West and Enzo Angiolini divisions of Nine West Group, Inc. (formerly Fisher-Camuto), January 1991-May 1993; President of Enzo Angiolini division prior to January 1991. Bannus B. Hudson (See information in Directors' section which follows.) James P. Maloney Vice President-Human Resources of the company since January 1994; Vice President-Human Resources of the Footwear Group, April 1993-January 1994; Vice President-Human Resources, Howmet Corporation, September 1992-April 1993; Director-Organization Change, Howmet Corporation, May 1992-September 1992, Director- Education and Management Development, Howmet Corporation, January 1988 - May 1992. Charles S. Mechem, Jr. (See information in Directors' section which follows.) Robert J. Petrik* Michael M. Searles Executive Vice President of the company since March 1994; President-Women's Apparel Retailing Group since March 1993; President of the Kids 'R Us division of Toys 'R Us, Inc. prior to March 1993. K. Brent Somers Executive Vice President of the company since March 1994; Chief Financial Officer since April 1990; Vice President-Finance of the company, April 1990 - March 1994; Vice President-Finance and Accounting and Chief Financial Officer of the LensCrafters Division, October 1987-April 1990. David G. Stouffer Vice President-Corporate Planning of the company since September 1994; Director of Planning of the company, February 1992-September 1994; Director of Marketing Information of the LensCrafters Division, January 1991-February 1992; Director of Financial Planning of the LensCrafters Division, January 1989- January 1991.
* Has served the company in the present position for at least the past five years. 37 38 Directors of the Registrant (as of April 20, 1995)
Name Committee Assignments Term Expires Age - ---- --------------------- ------------ --- Joseph H. Anderer Audit, Executive and Compensation* 1996 70 Philip E. Beekman Compensation and Retirement 1995 63 Gilbert Hahn, Jr. Executive, Finance and Audit* 1995 73 Roger L. Howe Audit and Nominating 1995 60 Bannus B. Hudson Executive and Finance 1996 49 Lorrence T. Kellar Executive, Retirement and Finance* 1996 57 Albert M. Kronick Audit, Executive and Nominating* 1997 71 Thomas Laco Compensation and Finance 1995 66 Charles S. Mechem, Jr. Executive* 1997 64 John L. Roy Executive, Nominating and Retirement* 1997 66 Phyllis S. Sewell Compensation and Nominating 1995 64
* Denotes committee chair. 38 39 Directors of the Registrant (continued)
Name Business Experience and Directorships - ---- ------------------------------------- Joseph H. Anderer Director since 1980. Consultant to the textile industry. Director of General Clutch Corp. and Storage Solutions, Inc. Philip E. Beekman Director since 1992. Chairman of the Board and Chief Executive Officer of Hook-SupeRx, Inc., a drug store chain, 1987 to 1994. Director of ABEX, Inc., Fisher Scientific International and the Ladies Professional Golf Association. Gilbert Hahn, Jr. Director since 1970. Senior Partner with Amram & Hahn, P.C., Washington, D.C. Roger L. Howe Director since 1991. Chairman of the Board of U.S. Precision Lens, Inc., a maker of precision optical equipment, since 1988. Director of Cintas Corporation, Eagle-Picher Industries, Inc., Star Banc Corp., Star Bank of Cincinnati, Atkins and Pearce Company and Baldwin Piano & Organ Co. Bannus B. Hudson Director since 1989. President and Chief Executive Officer of the company since 1990; President and Chief Operating Officer of the company, January 1990-March 1990; President of the LensCrafters Division, October 1987-March 1990. Director of The Ohio National Life Insurance Company. Lorrence T. Kellar Director since 1986. Group Vice President, Real Estate and Finance of The Kroger Co., a national grocery store chain. Director of Multi- Color Corporation and a trustee of Bartlett Management Trust. Albert M. Kronick Director since 1979. Trustee of Retail Property Trust. Thomas Laco Director since 1990. Retired in 1989 as an executive of The Procter & Gamble Company, a consumer products company, where he served in various positions, including Executive Vice President and Vice Chairman of the Board. Director of United States Playing Card Company and Atkins and Pearce Company. Charles S. Mechem, Jr. Director since 1990. Chairman of the Board of the company since 1993; Commissioner of the Ladies Professional Golf Association since 1991; director of Star Banc Corp., The Mead Corporation, J.M. Smucker Company, The Ohio National Life Insurance Company and AGCO Corporation. Director of Great American Broadcasting Company (formerly Taft Broadcasting Company), 1967-June 1990, Chairman of its Executive Committee, June 1990-December 1990; Of Counsel to Taft, Stettinius & Hollister, June 1990- December 1990.
39 40 Directors of the Registrant (continued) John L. Roy Director since 1979. Chairman of the Board of Hydro Systems Company, a maker of industrial cleaning equipment. Phyllis S. Sewell Director since 1990. Senior Vice President of Federated Department Stores, Inc., a retail department store, 1979-1988. Director of Pitney Bowes, Inc., Lee Enterprises, Inc. and SYSCO Corporation.
Compliance with Section 16(a) Reporting Requirements Section 16(a) of the Securities Exchange Act of 1934 requires the company's directors and officers, and persons who beneficially own more than 10% of a registered class of the company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the New York and Pacific Stock Exchanges. Directors, officers and greater-than-10% beneficial owners are required by SEC regulations to furnish the company with copies of all Section 16(a) reports that they file. Based solely on its review of copies of such reports received by it, or written representations from certain reporting persons that no such reports were required for those persons, the company believes that during fiscal year 1994 all filing requirements applicable to its directors, officers and greater-than-10% beneficial owners were complied with. 40 41 Item 11. Executive Compensation. Summary Compensation Table The following information relates to the annual and long-term compensation for services in all capacities to the Corporation for the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 of those persons who, at January 28, 1995 were (i) the Chief Executive Officer and (ii) the other four most highly compensated executive officers of the Corporation (together with the Chief Executive Officer, the "Named Officers").
Annual Compensation Long Term Compensation ---------------------------------- Awards Payouts ----------------------- ------- Other Restricted Securities Annual Shares Underlying LTIP All Other Compen- Awards Options/SARs Payouts Compensation Name and Principal Position Year Salary ($) Bonus ($) sation ($) ($)(a) (#)(b)(f) ($)(g)(h) ($)(c) - --------------------------------------------------------------------------------------------------------------------------------- Bannus B. Hudson President Chief Executive Officer 1994 $602,885 $400,000 $0 $0 40,000 $0 $ 7,171 1993 $583,492 $0 $0 $0 40,000 $0 $ 3,492 1992 $571,214 $0 $0 $0 40,000 $0 $ 3,714 David M. Browne Executive Vice President President, Optical Retailing Group 1994 $400,000 (i) $400,000 $0 $0 30,000 $0 $11,972 1993 $332,922 $300,000 $0 $ 50,000 30,000 $0 $ 7,922 1992 $320,717 $200,000 $0 $0 25,000 $0 $ 9,417 Noel E. Hord Executive Vice President President, Footwear Group (d) 1994 $472,500 (i) $285,000 $0 $0 25,000 $0 $ 7,578 1993 $549,400 (j) $0 $54,886 $190,000 50,000 $0 $ 0 1992 $0 $0 $0 $0 0 $0 $ 0 Michael M. Searles Executive Vice President President, Women's Apparel Retailing Group (d) 1994 $650,000(e) $0 $0 $0 25,000 $0 $ 3,306 1993 $592,300 (j) $500,000 $40,385 $0 100,000 $0 $ 0 1992 $0 $0 $0 $0 0 $0 $ 0 K. Brent Somers Executive Vice President Chief Financial Officer 1994 $331,154 (i) $250,000 $0 $0 20,000 $0 $ 8,331 1993 $280,000 $0 $0 $0 20,000 $0 $ 4,092 1992 $273,077 $0 $0 $0 12,000 $0 $ 4,364
41 42 (a) As of January 28, 1995, the Corporation had 67,985 restricted Common Shares outstanding with an aggregate value (assuming no restrictions) of $1,385,194. The Named Officers' restricted shareholdings (as of that date) are as follows: Mr. Hudson - 25,000 shares/$509,375; Mr. Browne - 7,985 shares/$162,694; Mr. Hord - 20,000 shares/$407,500; and Mr. Somers - 5,000 shares/$101,875. Dividends are paid to holders of restricted Common Shares. Pursuant to the terms of the Luxottica Merger Agreement, the Board of Directors of the Corporation will adopt resolutions to terminate all restrictions on the restricted Common Shares prior to the Merger (as defined in the Luxottica Merger Agreement). (b) The Corporation's 1988 Employee Incentive Plan (the "1988 Plan") does not permit grants of stock appreciation rights. The 1988 Plan (as well as all of the Corporation's other plans under which stock options have been awarded) provides for acceleration of exercisability of options granted thereunder upon the occurrence of certain events constituting a change of control, as described in the 1988 Plan. (c) Amounts listed hereunder reflect contributions by the Corporation made to various retirement and deferred compensation plans in which the Named Officers have participated, and the dollar value of insurance premiums paid by the Corporation for the benefit of the Named Officers. Amounts contributed to the Corporation's Salaried Employees Deferred Compensation Plan for the benefit of the Named Officers are as follows: Mr. Hudson - $3,436; Mr. Browne - $3,696; Mr. Hord - $4,620; and Mr. Somers - $5,025. The amount contributed to the LensCrafters Tax Incentive Retirement Savings Plan for the benefit of Mr. Browne was $7,055. The dollar amount of insurance premiums paid for the benefit of the Named Officers are as follows: Mr. Hudson - $3,735; Mr. Browne - $1,221; Mr. Hord - $2,958; Mr. Searles - $3,306; and Mr. Somers - $3,306. (d) Messrs. Hord and Searles were first employed by the Corporation in 1993. (e) For Mr. Searles, such amount includes a guaranteed payment of $150,000 pursuant to the terms of his employment contract. (f) Shares reflected do not include those shares underlying options granted to the Named Officers on March 31, 1995, as follows: Mr. Hudson - 40,000; Mr. Browne - 27,000; Mr. Hord - 23,000; Mr. Searles - 20,000; and Mr. Somers - 18,000. (g) On March 31, 1995, the Board of Directors approved payments to the Named Officers in accordance with the Total Return to Shareholders Plan. The payments, relating to the performance period January 1, 1992 through March 31, 1995, were as follows: Mr. Hudson - $259,000; Mr. Browne - $107,000; Mr. Hord - $118,000; Mr. Searles - $130,000; and Mr. Somers - $77,000. Such payments were made in restricted shares based upon $26.3125 per share (the average of the March 30, 1995 high and low prices of the Corporation's Common Shares on the New York Stock Exchange). These payments are not included in the above table. (h) The change in control of the Corporation that is anticipated to occur as a result of the Luxottica Merger Agreement would result in the Named Officers receiving a prorated portion of awards earned under the Total Return to Shareholders Plan for performance periods that have not been completed as of the date of the change in control, as provided in the plan. (i) On March 31, 1995, the Board of Directors approved regular annual salary increases for 1995, including increases for Mr. Browne, from $425,000 to $500,000, Mr. Hord, from $515,000 to $540,000, and Mr. Somers, from $350,000 to $370,000. The timing of the approval and effectiveness of such annual salary increases is consistent with the Corporation's practices in prior years. 42 43 (j) Such amounts include $250,000 and $150,000 of guaranteed incentive bonus payments for Messrs. Hord and Searles, respectively, pursuant to the terms of their employment contracts. Option/SAR Grants in Last Fiscal Year The following information relates to grants of options awarded to the Named Officers in fiscal year 1994 under the Corporation's 1988 Employee Incentive Plan (the "1988 Plan"). INDIVIDUAL GRANTS
Number of % of Total Securities Options/SARs Underlying Granted to Grant Date Options/SARs Employees in Exercise or Expiration Present Value Name Granted (#)(a)(d) Fiscal Year Base Price (/Sh) Date ($)(b)(c)(d) - ------------------------------------------------------------------------------------------------------------ Bannus B. Hudson 40,000 7.1% $ 19.06 11/26/04 $238,800 David M. Browne 30,000 5.3% $ 19.06 11/26/04 $179,100 Noel E. Hord 25,000 4.4% $ 19.06 11/26/04 $149,250 Michael M. Searles 25,000 4.4% $ 19.06 11/26/04 $149,250 K. Brent Somers 20,000 3.5% $ 19.06 11/26/04 $119,400
(a) Options granted to the Named Officers were granted on May 26, 1994 and first become exercisable on May 26, 1995. All options granted are subject to a vesting schedule, with 25% of the total grant exercisable on the first anniversary of the grant and the remainder exercisable in 25% increments at each anniversary of the grant. In the event of death or disability, outstanding options may be exercised by the optionee or his or her personal representative for a period of one year following such event. In the event of retirement or any other termination, outstanding options may be exercised for a period of three months following such event. All outstanding options automatically vest and become exercisable in the event of an "Event of Acceleration" as defined in the plan, which includes the occurrence of certain events constituting a change of control as described therein. See footnote (c). All options were granted at an exercise price equal to the average of the high and low price on the New York Stock Exchange -- Composite Transactions of the Corporation's Common Shares on the date of grant. (b) The estimate of grant date present value in the above table is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options reflected in the above table include the following: (1) an exercise price on the options of $19.06, each equal to the fair market value of the underlying Common Shares on the date of grant; (2) option terms of 10.5 years; (3) interest rates representing the interest rate on U.S. Treasury securities with maturity dates corresponding to that of the option term as of the date of grant; (4) volatility of 38% calculated using daily stock prices for the one-year period prior to the date of grant; (5) dividends at the rate of $0.32 per share representing the annualized dividends paid with respect to a Common Share at the date of grant; and (6) a reduction of approximately 19% to reflect the probability of forfeiture due to termination prior to vesting, and a reduction of approximately 20% to reflect the probability of a shortened option term due to termination of employment prior to the option expiration date. See footnote (c). 43 44 (c) Based on Luxottica's $28 per share purchase price, the value of the options granted to each Named Officer in fiscal year 1994 ($28 per share purchase price, less the option exercise price) is as follows: Mr. Hudson - $357,600; Mr. Browne - $268,200; Mr. Hord - $223,500; Mr. Searles - $223,500; and Mr. Somers - $178,800. Pursuant to the terms of the Luxottica Merger Agreement and in accordance with the terms of the 1988 Plan, all options will become fully exercisable and vested, and each such option will be cancelled in exchange for a payment equal to the difference between $28 and the exercise price of such option. (d) The number of options granted to each Named Officer on March 31, 1995, at an exercise price of $26.25 per share, and the value of such options based on Luxottica's $28 per share purchase price ($28 per share purchase price, less the option exercise price) are as follows: Mr. Hudson - 40,000/$70,000; Mr. Browne - 27,000/$47,250; Mr. Hord - 23,000/$40,250; Mr. Searles - 20,000/$35,000; and Mr. Somers - 18,000/$31,500. These options were granted in fiscal year 1995. Accordingly, the option grants and their related values are not included in the above table. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following information relates to options to purchase the Corporation's Common Shares granted in fiscal 1994 and prior years under the 1988 Plan, the 1987 Key Personnel Stock Option Plan and the 1983 Key Personnel Stock Option Plan to the Named Officers and held by them at January 28, 1995.
Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options/SARs at Options/SARs at FY-End(c) Shares Value FY-End Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($)(a) Unexercisable (#)(b)(e) Unexercisable ($)(b)(d)(e) - ----------------------------------------------------------------------------------------------------------------- Bannus B. Hudson - - 149,500/97,500 $400,785/$453,538 David M. Browne 2,500 $9,063 61,500/70,000 $231,598/$325,388 Noel E. Hord - - 12,500/62,500 $135,938/$440,688 Michael M. Searles - - 25,000/100,000 $218,750/$689,125 K. Brent Somers 2,400 $17,700 44,500/43,500 $148,754/$201,113
(a) Aggregate market value of the shares covered by the option, less the aggregate price paid by the Named Officer. (b) The Common Shares represented by the "Unexercisable" amounts could not be acquired by the respective Named Officer as of January 28, 1995, and future exercisability is subject to continuing employment by the Corporation and incremental vesting for periods up to four years, depending upon the individual Named Officer, subject to acceleration for retirement, death, disability or in the event of a change in control (as defined in the respective plans). Pursuant to the terms of the Luxottica Merger Agreement and in accordance with the terms of the plans, all options will become fully exercisable and vested, and each such option will be cancelled in exchange for a payment equal to the difference, if any, between $28 and the exercise price of such option. (c) Amounts reflecting gains on outstanding options based upon the closing price of the Corporation's Common Shares on January 27, 1995, the last trading day of the fiscal year. 44 45 (d) Based on Luxottica's $28 per share purchase price, the value of the options held by each Named Officer at the end of fiscal year 1994 ($28 per share purchase price, less the option exercise price) is as follows (exercisable/unexercisable): Mr. Hudson - $1,206,366/$1,196,975; Mr. Browne - $650,666/$859,138; Mr. Hord - $231,250/$917,250; Mr. Searles - $409,375/$1,451,625; and Mr. Somers - $448,759/$532,800. (e) The number of options granted to each Named Officer on March 31, 1995, at an exercise price of $26.25 per share, and the value of such options based on Luxottica's $28 per share purchase price ($28 per share purchase price, less the option exercise price) are as follows: Mr. Hudson - 40,000/$70,000; Mr. Browne - 27,000/$47,250; Mr. Hord - 23,000/$40,250; Mr. Searles - 20,000/$35,000; and Mr. Somers - 18,000/$31,500. These options were granted in fiscal year 1995. Accordingly, the option grants, none of which are currently exercisable, and their related values are not included in the above table. Long-Term Incentive Plans - Awards in Last Fiscal Year On July 29, 1994, the Board of Directors of the Corporation adopted the Total Return to Shareholders Plan (the "TRS Plan") to replace the Corporation's Key Executive Long-Term Incentive Program (the "LTI Program"). Under the TRS Plan, beginning in 1994 and for each year thereafter, a 39-month performance period will be established, and for each performance period a target award will be determined for each participant in the TRS Plan. The target award generally will be based upon median competitive levels for long-term incentive opportunities, as determined by the Compensation Committee of the Board of Directors. At the end of each 39- month period, the total return for that period (share price appreciation plus reinvested dividends) for an investment in Common Shares of the Corporation will be compared with a similar investment in the shares of a designated peer group of corporations. Awards will then be made to participants based on the Corporation's ranking in the peer group, ranging from 50% of the participant's target award if the Corporation is in the 40th percentile to 200% of a participant's target award if the Corporation is in at least the 90th percentile. No awards will be made if the Corporation's ranking in the peer group is below the 40th percentile. All awards under the TRS Plan will be in cash or in Common Shares, which will be restricted and subject to forfeiture if the participant terminates his or her employment during the three-year period following the award. The Plan also provides for payouts in the event of a change in control of the Corporation. A transition plan is in effect whereby executives may earn prorated awards based on total share price appreciation for the 39-month periods ending at the close of the first calendar quarters in 1995 and 1996. The LTI Program will be phased out during this transition period. On April 21, 1995, the Board of Directors adopted a restatement of the TRS Plan that clarified certain of its terms and provisions by the addition of various details and explanatory material. In particular, the restatement included a description of the Compensation Committee's authority to administer and modify the plan, to select participants and to establish target awards; definitions of certain key terms used in the plan; a list of the 21 companies included in the Corporation's peer group (which is the same list used for purposes of its annual proxy statement); procedures by participants for the designation of beneficiaries; a designation of dates on which values are to be determined; an explanation of the consequences of termination of employment under various circumstances, including normal retirement, disability and death; automatic adjustment of the number of restricted Common Shares subject to an award in the case of stock splits, reorganizations and other fundamental changes in the structure of the Corporation; and reservation of the Corporation's right to register and/or qualify the Common Shares under federal or state securities laws if such registration and/or 45 46 qualification is deemed necessary. The restatement also made it clear that the "change in control" definition used in the TRS Plan is similar to those used in the Corporation's Severance Agreements and in the Corporation's Economic Bridge Program; that in the event of a change in control as to any participant, such participant will be entitled to a prorated number of Common Shares or cash earned under performance periods that have not been completed at the time such change in control occurs; and that Common Shares previously awarded to that participant will be unrestricted. No payouts were made in fiscal 1994 under the LTI Program. The following information relates to long-term incentive awards made to the Named Officers in fiscal 1994 under the TRS Plan. See footnote (c) for payments made to the Named Officers approved on March 31, 1995.
Number of Performance Estimated Future Payouts Shares, Units or Other Under Non-Stock Price-Based Plans(d) or Other Period Until ---------------------------------------------------- Rights Awarded Maturation or Threshold Target Maximum Name ($)(a)(b) Payout (d) ($) ($) ($)(c) - ------------------------------------------------------------------------------------------------------------- Bannus B. Hudson $129,000 1/1/92 through 3/31/95 $ 65,000 $129,000 $259,000 $259,000 1/1/93 through 3/31/96 $129,000 $259,000 $517,000 $388,000 1/1/94 through 3/31/97 $194,000 $388,000 $776,000 David M. Browne $ 53,000 1/1/92 through 3/31/95 $ 27,000 $ 53,000 $107,000 $107,000 1/1/93 through 3/31/96 $ 53,000 $107,000 $213,000 $160,000 1/1/94 through 3/31/97 $ 80,000 $160,000 $320,000 Noel E. Hord $ 59,000 1/1/92 through 3/31/95 $ 29,000 $ 59,000 $118,000 $118,000 1/1/93 through 3/31/96 $ 59,000 $118,000 $235,000 $176,000 1/1/94 through 3/31/97 $ 88,000 $176,000 $352,000 Michael M. Searles $ 65,000 1/1/92 through 3/31/95 $ 32,000 $ 65,000 $130,000 $130,000 1/1/93 through 3/31/96 $ 65,000 $130,000 $259,000 $194,000 1/1/94 through 3/31/97 $ 97,000 $194,000 $388,000 K. Brent Somers $ 39,000 1/1/92 through 3/31/95 $ 19,000 $ 39,000 $ 77,000 $ 77,000 1/1/93 through 3/31/96 $ 39,000 $ 77,000 $155,000 $116,000 1/1/94 through 3/31/97 $ 58,000 $116,000 $232,000
(a) Amounts represent the dollar value of potential target payouts which, if earned, will be made following the end of the performance period indicated. At the end of each performance period, the Compensation Committee will approve the payout earned for such period, and will make such payout in cash or the dollar value of the payout will be converted to restricted Common Shares based upon the average of the high and low price of the Corporation's Common Shares on the New York Stock Exchange on the trading day preceding the day of such approval. All restrictions on such restricted Common Shares will lapse after three years. Additionally, the TRS plan provides for payouts in the event of a change in control. See footnote (d). (b) In this initial year of transition from the LTI Program to the TRS Plan, a target award was set for the "initial performance period" (the performance period ending March 31, 1997) and the two "transitional performance periods" (the two performance periods ending March 31, 1995 and March 31, 1996), with the target awards for the transitional performance periods being set at 33% and 67% of the initial performance period target award, respectively. The remaining portion of each participant's target award for the transitional performance periods will be earned in accordance with the LTI Program, which is being phased out. (c) On March 31, 1995, the Board of Directors approved payments to the Named Officers in accordance with the Total Return to Shareholders Plan. The payments, relating to the performance period 46 47 January 1, 1992 through March 31, 1995, were as follows: Mr. Hudson - $259,000; Mr. Browne - $107,000; Mr. Hord - $118,000; Mr. Searles - $130,000; and Mr. Somers - $77,000. Such payments were made in restricted shares based upon $26.3125 per share (the average of the March 30, 1995 high and low prices of the Corporation's Common Shares on the New York Stock Exchange). Following is the value of these restricted shares based on Luxottica's $28 per share price: Mr. Hudson - $275,000; Mr. Browne - $114,000; Mr. Hord - $125,000; Mr. Searles - $138,000; and Mr. Somers - $82,000. (d) The change in control of the Corporation that is anticipated to occur as a result of the Luxottica Merger Agreement would result in the Named Officers receiving a prorated portion of awards earned under the Total Return to Shareholders Plan for performance periods that have not been completed as of the date of the change in control, as provided in the Plan. Pension and Retirement Supplemental Income Plans For many years the Corporation has maintained several pension and profit sharing plans for the benefit of its employees. Prior to 1995, employees of the Footwear, Optical Retailing and Corporate Center Groups were included in a traditional defined benefits pension plan which, upon retirement, provided a monthly benefit based on compensation and years of service. Employees of the Women's Specialty Retailing Group were covered under a profit sharing plan. Beginning in January 1995, the Corporation adopted a single, simplified pension plan that covers all employees, other than those covered by the hourly pension plans of the Footwear Group. Effective January 1, 1995, benefits under the U.S. Specialty Retailing Division Profit Sharing Plan for eligible employees of the Women's Specialty Retailing Group were frozen and participants in such plan became eligible to participate in The United States Shoe Corporation Pension Plan (formerly the Salaried Employees Pension Plan) (the "Pension Plan"). Effective January 1, 1995, the method for calculating benefit accruals under the Pension Plan was changed from a final average pay formula to a cash balance formula for eligible associates other than those in the Footwear Group. Accordingly, the method for calculating benefit accruals for Mr. Hord is a final average pay formula, whereas the method for the remaining Named Executive Officers is a cash balance formula. Under the cash balance formula, each quarter participants receive a benefit credit equal to a percentage of their annualized quarterly compensation based upon their years of service as follows: 1 to 4 years of service, 1.375%; 5 to 14 years of service, 1.8125%; and 15 or more years of service, 2.5%. The cash balance account also is credited with assumed "earnings" each quarter at a rate equal to 1% over the average 90-day Treasury Bill rate. Each participant's initial cash balance will be equal to the present value of such participant's accrued benefit as of December 31, 1994. Participants who have attained age 50 and completed a minimum of 10 years of service as of January 1, 1995 may receive additional benefit credits based on the participant's age and years of service with the Corporation. The Corporation also provides a non-qualified Supplemental Executive Salaried Employees Benefit Plan (the "Supplemental Employees Benefit Plan") which recognizes retirement benefits for compensation in excess of limits imposed under the Pension Plan pursuant to the Internal Revenue Code. The estimated annual benefits (under both plans) payable upon retirement at normal retirement age (as defined in the Pension Plan and the Supplemental Executive Salaried Employees Benefit Plan) for each of the Named Officers is as follows: Mr. Hudson-$240,000; Mr. Browne-$272,000; Mr. Hord-$104,000; Mr. Searles-$173,000, and Mr. Somers-$211,000. On April 21, 1995, the Board of Directors adopted amendments to the Supplemental Employees Benefit Plan to provide, in the case of active or retired Corporate Center Group employees (including Mr. Hudson and Mr. Somers), for a lump sum payout of the present value of each such employee's accrued benefit under the Supplemental Employees Benefit Plan immediately prior to the Merger. 47 48 Director Compensation Directors who are not employees of the Corporation ("Outside Directors") are paid directors' fees for their services at the rate of $25,000 per year each, as well as attendance fees of $750 per meeting for service on certain committees. Directors who chair committees receive an additional annual fee of $3,000. Total payments to such directors for the Corporation's last fiscal year amounted to $288,000. The Corporation has agreed to pay Charles S. Mechem, Jr., Chairman of the Board of Directors, $125,000 annually for his services as a part-time employee in lieu of his annual retainer. In addition to such payments, since 1985, Outside Directors have received stock options under the 1985 Outside Directors Stock Option Plan (the "1985 Director Plan"), which terminated on May 31, 1990, and under the 1991 Outside Directors Stock Option Plan (the "1991 Director Plan"). Mr. Mechem is not eligible to participate in the 1991 Director Plan because of his part-time employee status with the Corporation. Under the 1991 Director Plan an option is granted automatically on each annual meeting date, as long as the Plan is in effect, to each Outside Director who continues in office after such annual meeting, to purchase 2,000 Common Shares (subject to adjustment as described below); such grants are further subject to the limit on the maximum number of Common Shares that can be issued or transferred pursuant to the exercise of options under the 1991 Director Plan. In no event will an Outside Director be granted options to purchase, in the aggregate, more than 20,000 Common Shares under the 1991 Director Plan (subject to adjustment for changes in the Corporation's capitalization, such as a stock split, stock dividend, recapitalization, consolidation or similar change that affects equity interests in the Corporation). Each option granted to an Outside Director under the 1991 Director Plan has an exercise price equal to the fair market value of the shares subject to the option (determined at the time the option is granted). Options may be exercised by payment to the Corporation of the exercise price in cash or in Common Shares already owned by the optionee. No stock option granted under the 1991 Director Plan may be exercised more than ten years from the date the option is granted. Each option granted to an Outside Director will be exercisable for one-third of the shares subject to the option after one year from the date of grant and for an additional one-third of the shares after each successive one-year period. Such right to exercise is cumulative. A Director to whom an option is granted under the 1991 Director Plan may not, during his or her lifetime, transfer the option to any other person. The 1991 Director Plan also provides that upon the occurrence of certain events constituting a change in control, as defined in the 1991 Director Plan, any unexercised or partially exercised options will become immediately exercisable, and will remain exercisable for as long as they would be otherwise exercisable. The 1985 Director Plan was substantially similar to the 1991 Director Plan, and options granted under the 1985 Director Plan are subject to similar terms and conditions as those granted under the 1991 Director Plan. Pursuant to the terms of the Luxottica Merger Agreement and in accordance with the terms of the plans, all options will become fully exercisable and vested, and each such option will be cancelled in exchange for a payment equal to the difference, if any, between $28 and the exercise price of such option. During the Corporation's last fiscal year, options to purchase 18,000 shares were granted to Outside Directors at an exercise price of $19.06 under the 1991 Director Plan. During fiscal 1994, 6,000 options were exercised under the 1985 Director Plan and 3,999 shares were exercised under the 1991 Director Plan. Options to purchase 105,326 shares currently are exercisable under the 1985 Director Plan and the 1991 Director Plan. On February 2, 1995, the Board of Directors approved the adoption of a new retirement plan for Directors who are not employees of the Corporation (the "Retirement Plan for Outside Directors"). Under this Plan, a member of the Board of Directors who retires with five or more years of service as a director will receive a quarterly retirement benefit commencing at age 72 (or if later, when such Director retires) and payable for life equal to the quarterly retainer paid to Outside Directors immediately prior to the retirement of the Director. Payments under this Plan terminate upon the death of the Director. On April 21, 1995, the Board of Directors (including by the unanimous vote of the Directors who are not eligible to participate in the Retirement Plan for Outside Directors) approved amendments to the Plan to provide for its termination immediately prior to the Merger and the payment of a lump sum to each participant in such Plan which is the actuarial equivalent of such participant's accrued benefit under the Retirement Plan for Outside Directors. 48 49 Mr. Mechem, the Chairman of the Board of the Corporation, is not eligible to participate in the Retirement Plan for Outside Directors or in the 1991 Director Plan because of his part-time employee status with the Corporation. However, as a part-time employee, Mr. Mechem was granted options (i) on April 23, 1993 under The United States Shoe Corporation 1983 Key Personnel Stock Option Plan to purchase 10,000 Common Shares at an exercise price of $10.56 per Common Share, (ii) on May 26, 1994 under the 1988 Plan to purchase 10,000 Common Shares at an exercise price of $19.06 per Common Share, and (iii) on March 31, 1995 under the 1988 Plan to purchase 10,000 Common Shares at an exercise price of $26.25 per Common Share. The Corporation also maintains The United States Shoe Corporation Deferred Compensation Plan for Non-Management Directors (the "Deferred Compensation Plan"). Pursuant to the terms of the Deferred Compensation Plan, a Director may elect to defer payment of his or her directors' fees. Upon a Director's termination of service, the Corporation will distribute to such Director the deferred compensation to which he or she is entitled in cash in a lump sum or, at the Director's election, in quarterly installments, the amount payable to be based on sums available from assumed investments in Common Shares, other securities or cash. On April 21, 1995, the Board of Directors took action to terminate the Deferred Compensation Plan effective upon the Merger. Upon termination of the Deferred Compensation Plan, the Corporation will, pursuant to the terms of the Deferred Compensation Plan, distribute the deferred compensation account balances to Mr. Anderer and Mr. Kellar, the two Directors on behalf of whom such accounts are currently maintained. Employment Contracts, Termination of Employment and Change in Control Arrangements The Corporation has entered into employment contracts with certain of its executives, including all of the Named Officers. Generally, such contracts have terms of three to five years (with automatic renewals) and require the payment of salaries at certain minimum levels during their respective terms. The Named Officers' current annual salaries are set forth in the Summary Compensation Table above. Some of the contracts also provide for front-end payments of cash, options and/or restricted stock. The employment contracts permit either the officer or the Corporation to terminate the employment relationship by providing written notice of termination not less than a specified time prior to the respective contract's automatic renewal date -- generally, six months. The contracts also permit the individual officers to terminate their respective contracts upon shorter notice under certain circumstances -- generally, if the Corporation changes the officer's assignment to a position of lesser responsibility or if the Corporation experiences a "change of control." In any such event the Corporation has agreed to pay a termination payment equivalent to the officer's current annual salary, payable in monthly installments over a one-year period (in the case of the Chief Executive Officer, the payment is equivalent to twice his current salary, payable over a two-year period). If the officer dies or becomes disabled while employed under the contract, the Corporation will pay him or his beneficiary twice the amount of his then current salary in monthly installments over a ten-year period. The Named Officers' employment contracts have current terms ending on the following dates and require payment of the minimum annual salaries indicated: Mr. Hudson, July 31, 1998, $650,000; Mr. Browne, December 31, 1996, $425,000; Mr. Hord, May 31, 1997, $450,000; Mr. Searles, March 31, 1996, $500,000; and Mr. Somers, March 31, 1996, $280,000. Mr. Hord's employment contract provides for annual incentive payments in fiscal years 1993 through 1996 in an amount equal to 1.5% of the annual operating income (after capital costs) of the Footwear Group with a minimum payment of $250,000 in each of the fiscal years 1993 through 1995. Mr. Searles' employment contract provides for annual incentive payments in fiscal years 1993 through 1995 in an amount equal to 0.7% of the annual operating income (after capital costs) of the Women's Apparel Retailing Group with a minimum payment of $150,000 in each of the fiscal years 1993 and 1994. 49 50 The Corporation also has provided Severance Compensation Agreements to seventeen of its present senior executives, including all of the Named Officers. On September 23, 1994, the Board of Directors approved the entry by the Corporation into Amended and Restated Severance Compensation Agreements (each, a "Severance Compensation Agreement") with the senior executives of the Corporation for the stated purpose of reinforcing and encouraging the continued attention and dedication of members of the Corporation's management to their assigned duties in the event of a Change in Control (as defined in the Severance Compensation Agreements) of the Corporation. The terms of all such agreements, as amended, are identical. The Severance Compensation Agreements provide certain payments and benefits to executives whose employment is terminated within two years after a Change in Control. No payments or benefits will be made if the termination occurs for cause or is due to the executive's retirement, death, or disability. In the event of a compensated termination of an executive before the expiration of two years following a Change in Control, the executive will be paid the following: (i) all salary due to the date of termination; (ii) unused vacation pay; (iii) a prorated share of the executive's Annual Bonus Target (as defined in the Severance Compensation Agreements) under the Corporation's annual incentive cash bonus plan; (iv) a prorated share of the executive's TRS Bonus Target (as defined in the Severance Compensation Agreements) under the Total Return to Shareholders Plan; and (v) an amount equal to three times the sum of the executive's annualized base salary and Annual Bonus Target, reduced by amounts payable to the executive under clauses (ii), (iii) and (iv) above and provided further that the amounts described above would be further reduced if the Net After Tax Amount (as defined in the Severance Agreements) received by the executive would be increased by such a reduction because such reduced amounts would not be subject to the excise tax on "excess parachute payments" imposed by Section 4999 of the Internal Revenue Code of 1986. Such amount will be paid in a lump sum on the 10th day after the date of termination. In addition to the payments described, the Corporation also has agreed to maintain for the Named Officers all medical, health and accident, and life insurance, as well as any disability plans, to which he or she was entitled immediately prior to termination. The coverage will remain in effect for the earlier of two years after termination or until the executive begins full- time employment with a new employer. The executive has no obligation to mitigate benefits or payments owed by the Corporation by seeking employment before the end of the two-year period. The Severance Compensation Agreements do not reduce any other contractual rights an executive may have under the Corporation's Economic Bridge Program (as defined below), but payments under the Severance Compensation Agreements are in lieu of, and not in addition to, any payments to which an executive would be entitled under the Economic Bridge Program. Any successor to or assignee of the Corporation will be required to assume the obligations of the Severance Compensation Agreements, including the payment of all legal fees and expenses incurred by executives as a result of the Corporation contesting certain aspects of the Agreements. Trusts formed for the purpose of ensuring payment of all amounts due under the Severance Compensation Agreements have been implemented with PNC Bank, Ohio, National Association, Cincinnati, Ohio, serving as Trustee. An amount equal to the aggregate amount payable under each of the Severance Compensation Agreements has been paid into the corresponding trust as a result of the tender offer by Luxottica Group S.p.A. on March 3, 1995. On February 2, 1995, the Board of Directors adopted revisions to The United States Shoe Corporation Economic Bridge Program for employees of the Corporation (as supplemented and amended, the "Economic Bridge Program"). The Economic Bridge Program provides a salary bridge benefit and continuation of group medical, dental and life insurance benefits upon an involuntary termination of employment under stated circumstances, or upon voluntary termination of employment after a "change in control" (as defined in the Economic Bridge Program) if the covered employee is not offered comparable employment and coverage under a comparable economic bridge program after the change in control. The amount of the salary bridge benefits for 50 51 executive officers generally is equal to 36 weeks of base salary plus one week of base salary for each year of service with the Corporation plus one week of base salary for each year of age over age 40, not to exceed 64 weeks total. If an eligible employee's employment ends at or within two years after a change in control has occurred, the amount of the salary bridge benefits for executive generally is equal to 48 weeks of base salary plus two weeks of base salary for each year of service with the Corporation plus one week of base salary for each year of age over age 40, not to exceed 78 weeks total. Group medical, dental and life insurance benefits are provided for the number of weeks for which salary bridge benefits are payable. Individuals with Severance Compensation Agreements are subject to provisions in such agreements which provide that any payments under the Severance Compensation Agreements will be in lieu of and not in addition to any payment to which the individual would otherwise be entitled under the Economic Bridge Program in the event of a change in control, as defined in the Economic Bridge Program. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OVERVIEW AND PHILOSOPHY The Compensation Committee of the Board of Directors (the "Committee") is responsible for developing principles, policies and programs relating to the compensation of the Corporation's executives and recommending such principles, policies and programs to the Board of Directors. In addition, the Committee recommends to the Board of Directors the compensation to be paid to the Chief Executive Officer and, with advice from the Chief Executive Officer, to each of the other executive officers of the Corporation, including the officers named in the Summary Compensation Table (the "Named Officers"). The Corporation's executive compensation program is designed to: - -- Provide compensation arrangements that will assist the Corporation in attracting, retaining and motivating better- performing executives. - -- Provide a direct link between executive compensation and the interests of the Corporation's shareholders by tying a significant portion of each executive's compensation to the performance of that executive's business group and to the price performance of the Corporation's Common Shares. - -- Provide top performers with opportunities to earn compensation at levels within the top quartile of ranges offered by companies of similar size, business characteristics and complexity, and with which the Corporation competes for executive talent (the "Comparison Framework"). - -- Assist executives in achieving and maintaining desired levels of Common Share ownership through stock option and restricted share awards. Desired levels of Common Share ownership are the following amounts (based on market value of the Common Shares): Chief Executive Officer, three times annual salary; senior executives, two times annual salary; and other executives of the Corporation, same as annual salary. The Committee strives to establish total compensation levels that are competitive with companies in the Comparison Framework. When establishing total compensation levels, the Committee examines the practices of those companies included in the Corporation's "peer group" for stock price performance and the practices of other retailing and specialty retailing companies. In addition, the Committee works with compensation consultants to ensure that the Committee's analysis of compensation levels is supported by survey data and other indicia of comparability. 51 52 The Committee is composed of four non-employee directors of the Corporation. No member of the Committee has any insider or interlocking relationship with the Corporation, as those terms are defined by applicable rules and regulations of the Securities and Exchange Commission. COMPENSATION OF EXECUTIVE OFFICERS Compensation packages include base salaries, annual incentive cash bonuses, stock option awards, restricted share awards and long- term incentive payouts. Incentive compensation includes bonuses, stock options, restricted share awards and long-term incentive payouts and may represent between one-third and two-thirds of an executive officer's potential annual compensation, depending upon the executive's position. The portion of an executive officer's total compensation that is incentive compensation increases with the level of responsibility of the executive officer. BASE SALARIES The Committee generally seeks to establish base salaries at levels that are competitive with the median levels of base salaries for executives with similar roles and responsibilities at companies within the Comparison Framework. In making salary increase decisions each year, the Committee primarily considers (a) each executive's individual performance compared with the Committee's expectations regarding that performance and (b) each executive's salary relative to the mid-point of that executive's salary range, which represents the median salary level of executives with similar roles and responsibilities at companies within the Comparison Framework. All of the Named Officers have written employment agreements with terms of three to five years, subject to extension by agreement of the parties. See "Employment Contracts, Termination of Employment and Change in Control Arrangements." Such agreements establish minimum base salaries. In fiscal 1994, David M. Browne, President of the Optical Retailing Group, received a salary increase from $325,000 to $425,000, Noel Hord, President of the Footwear Group, received a salary increase from $450,000 to $515,000, and K. Brent Somers, Chief Financial Officer, received a salary increase from $280,000 to $350,000. These salary increases were based on each executive's strong individual performance compared with the Committee's expectations. Additionally, the Committee's recommendations with respect to Messrs. Browne and Somers were intended to adjust their respective salaries to levels competitive with those of executives with similar roles and responsibilities at companies within the Comparison Framework. ANNUAL INCENTIVE CASH BONUSES The Committee administers an annual incentive cash bonus program for executive officers, as well as for other management employees. Each year the Committee recommends to the Board of Directors individual and aggregate target cash bonus amounts for executive officers that reflect approximate median levels of bonuses for executives with similar roles and responsibilities at companies within the Comparison Framework. The program is structured to pay minimum bonuses if the pertinent business group (or groups) meets its threshold annual operating income goal. Median bonuses are paid if the business group (or groups) meets its targeted operating income goal, and larger bonuses are paid if the business group (or groups) exceeds its operating income goal. Generally, bonuses are not paid if the business group (or groups) fails to achieve its threshold operating income goal; however, the Committee retains discretion to award annual incentive cash bonuses based on exceptional individual performance that is related to performance considerations other than financial. In fiscal 1994, an incentive award formula was established at the beginning of the year for each business group within the Corporation based on the operating income results of such business group; that formula included threshold, target and maximum levels. A similar incentive award formula, which also included threshold, target and maximum levels, was established for individuals in the Corporate Center 52 53 Group based on the operating income results of each of the Corporation's three business groups. In fiscal 1994, Mr. Browne received a cash bonus above his target award amount reflecting the facts that the Optical Retailing Group significantly exceeded its targeted operating income goal and reflecting his strong individual performance. Mr. Somers received a cash bonus in fiscal 1994 above his target award amount reflecting the fact that the Optical Retailing Group significantly exceeded its target operating income results and the Footwear Group met its target operating income and reflecting his strong individual performance. Pursuant to the terms of his employment contract, Mr. Hord received an incentive cash bonus based upon 1.5% of the operating income (after capital costs) of the Footwear Group and his strong individual performance. Based on the financial performance of the Women's Specialty Retailing Group, Mr. Searles did not receive a performance based incentive bonus; he did, however, receive a guaranteed payment of $150,000 pursuant to the terms of his employment contract. OPTION GRANTS AND RESTRICTED SHARE AWARDS Grants of options and awards of restricted shares are made to executive officers pursuant to The United States Shoe Corporation 1988 Employee Incentive Plan (the "1988 Plan"). Option grants are designed to align the long-term interests of the Corporation's executives with those of the Corporation's shareholders. Additionally, option grants provide a favorable mechanism through which the Corporation's executives can achieve equity ownership in the Corporation. The size of an option grant is based on the executive's level of responsibility and the Committee's expectations regarding the executive's future contribution to the Corporation. The size of the grant, when combined with the executive's Total Return to Shareholders Plan and Key Executive Long-Term Incentive Plan opportunity, as set forth below, is designed to provide a median level of long-term incentive opportunity when compared to such opportunities for executives with similar roles and responsibilities at companies within the Comparison Framework. Options are granted at an exercise price equal to the average of the high and low stock price of the Corporation's Common Shares on the date of grant. Options have a 10.5-year term with vesting occurring in equal increments over the first four years of that term. Options are forfeited three months after the recipient leaves the employ of the Corporation and expire one year after retirement, death or disability of the recipient. It has been the Committee's practice to award stock options to executive officers early each fiscal year to provide competitive compensation opportunities. In fiscal 1994, the Committee granted options to each of the Named Officers based on the level of responsibility of each and the Committee's expectation of that officer's future contribution to the Corporation. The Committee also recommends awards of restricted Common Shares under the 1988 Plan. Such awards are made to executives who demonstrate superior performance or potential. The restrictions on such shares lapse on the basis of continued employment of the executive by the Corporation. No restricted shares were awarded to any Named Executive Officer in fiscal 1994. LONG-TERM INCENTIVE PLAN On July 29, 1994, the Board of Directors adopted the Total Return to Shareholders Plan (the "TRS Plan") to replace the Corporation's Key Executive Long-Term Incentive Plan (the "LTI Plan"). Beginning in 1994, a thirty-nine month performance period will be established each year under the TRS Plan, and for each performance period a target award will be determined for each participant in the TRS Plan. Generally, such target awards are based upon median long-term incentive opportunities at companies within the Comparison Framework. At the end of each performance period the total return during that period (share price appreciation plus reinvested dividends) on a hypothetical investment in Common Shares will be compared 53 54 with a similar investment in the shares of companies in the "peer group," as set forth in "Shareholder Return Performance Information." Awards will be made to participants based on the Corporation's ranking in the "peer group", ranging from 50% of a participant's target award if the Corporation is at the 40th percentile to 200% of a participant's target award if the Corporation is at or above the 90th percentile. No awards will be made if the Corporation's ranking is below the 40th percentile. All awards under the TRS Plan, as determined by the Committee, will be in cash or in Common Shares, which will be restricted and subject to forfeiture if the participant terminates employment during the three-year period following the award. The TRS Plan also provides for the payout of awards in the event of a change in control. A transition plan is in effect whereby executives may earn prorated awards based on total share price appreciation for the performance periods covering January 1, 1992 through March 31, 1995, and January 1, 1993 through March 31, 1996. The LTI Plan will be phased out during this transition period. In fiscal 1994, target awards were determined for each of the Named Officers for the performance periods covering January 1, 1992 through March 31, 1995, January 1, 1993 through March 31, 1996, and January 1, 1994 through March 31, 1997. No awards were made under the Corporation's LTI Plan in fiscal 1994. COMMITTEE'S POLICY ON SECTION 162(M) It is the policy of the Corporation to structure its executive compensation plans in a manner intended to enhance shareholder value. Whenever possible, implementation of this strategy will include taking advantage of applicable provisions of the Internal Revenue Code, including Section 162(m), regarding deductible compensation expenses. However, the Compensation Committee recognizes the need to retain discretion to compensate executives in a manner that is in the best interests of the Corporation and its shareholders, even if that practice results in a nondeductible expense. In fiscal 1994 tax deductions lost by the Corporation by reason of Section 162(m) were not material. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Hudson's compensation is recommended by the Committee to the Board of Directors. In fiscal 1993, the Committee did not increase Mr. Hudson's base salary and, in early fiscal 1994, delayed consideration of a salary increase to Mr. Hudson until the results of the Corporation's organization restructuring were better known. In November 1994, the Committee awarded a salary increase to Mr. Hudson, from $580,000 to $650,000, based on the Corporation's improved performance and Mr. Hudson's individual performance, as determined by the Committee, in comparison with the Committee's expectations. Mr. Hudson received a bonus for fiscal 1994, above his target award amount, based on the Corporation's improved operating income and stock price performance and the Board's assessment of Mr. Hudson's individual performance. The Committee awarded stock options to Mr. Hudson based on the Committee's expectation of Mr. Hudson's continued and future contribution to the Corporation. Additionally, in fiscal 1994, Mr. Hudson's target awards were determined pursuant to the terms of the TRS Plan. The Compensation Committee: Joseph H. Anderer, Chairman Philip E. Beekman Thomas Laco Phyllis S. Sewell 54 55 Shareholder Return Performance Information The following table compares the cumulative total shareholder return on the Corporation's Common Shares over a five-year period with the cumulative total return of the Standard & Poor's 500 Stock Index (the "S&P 500") and a "peer" index composed of twenty-one companies* for the same period. The table assumes an investment of $100 in the Corporation's Common Shares and each index on February 3, 1990, and reinvestment of all dividends.
February January January January January January Fiscal Year 1990 1991 1992 1993 1994 1995 - ----------- ---- ---- ---- ---- ---- ---- S&P 500 $100 $108 $133 $147 $166 $167 Peer Group $100 $115 $154 $161 $146 $124 U.S. Shoe $100 $ 57 $ 72 $ 68 $ 74 $121
*The companies composing this group are Ann Taylor Stores Corp.; Baker (J.), Inc.; Brown Group, Inc.; Burlington Coat Factory Warehouse Corp.; Charming Shoppes, Inc.; Clothestime, Inc.; Dayton Hudson Corp.; Dress Barn, Inc.; Edison Brothers Stores, Inc.; Gantos, Inc.; Gap, Inc.; Genesco, Inc.; The Limited, Inc.; May Department Stores Co.; Melville Corp.; Merry-Go-Round Enterprises, Inc.; Nordstrom, Inc.; Petrie Stores Corporation; Stride Rite Corp.; TJX Companies, Inc.; and Woolworth Corporation. None of these companies offers a range of products and services identical to the Corporation, although each is, like the Corporation, a major footwear manufacturer and/or clothing retailer. The returns of each company have been weighted according to their respective stock market capitalization for purposes of arriving at a group average. 55 56 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information, as of April 20, 1995 (unless a different date is specified in the notes to the table), with respect to (a) each person known by the Board of Directors of the Corporation to be the beneficial owner of more than 5% of the Corporation's outstanding Common Shares, (b) each current director of the Corporation, (c) each of the Named Officers (as defined herein) and (d) all directors and executive officers of the Corporation as a group:
Amount and nature Shares subject to of beneficial options exercisable Percent of Shareholder ownership (a) within 60 days class (b) - ---------------------- ------------------- -------------------- ---------------- Mellon Bank Corporation 4,678,000 (c) 10.1% One Mellon Bank Center Pittsburgh, Pennsylvania 15258 The Prudential Insurance 3,168,000 (d) 6.8% Company of America Prudential Plaza Newark, New Jersey 07102 Sasco Capital, Incorporated 2,971,200 (e) 6.4% 10 Sasco Hill Road Fairfield, Connecticut 06430 Leon G. Cooperman 2,678,100 (f) 5.8% c/o Omega Advisors, Inc. 88 Pine Street Wall Street Plaza, 31st Floor New York, New York 10005 Joseph H. Anderer 28,308 13,999 * Philip E. Beekman 4,999 2,000 * David M. Browne 103,910 (g)(h)(i) 87,750 * Gilbert Hahn, Jr. 28,999 25,999 * Noel E. Hord 61,219 (g)(i) 31,250 * Roger L. Howe 18,999 3,999 * Bannus B. Hudson 242,778 (g)(i) 187,000 * Lorrence T. Kellar 21,005 13,999 * Albert M. Kronick 41,999 (h) 22,000 * Thomas Laco 48,799 (h) 5,999 * Charles S. Mechem, Jr. 36,500 24,000 * John L. Roy 37,999 25,999 * Michael M. Searles 67,175 (i) 56,250 * Phyllis S. Sewell 11,999 5,999 * K. Brent Somers 71,810 (h)(i) 60,000 * All directors and executive officers as a group (20 persons) 1,004,804 (g)(h)(i) 728,683 2.1%
*Percent of class is less than 1% 56 57 (a) The Securities and Exchange Commission has defined "beneficial owner" of a security to include any person who has or shares voting power or investment power with respect to any such security or who has the right to acquire beneficial ownership of any such security within 60 days. Unless otherwise indicated, (i) the amounts owned reflect direct beneficial ownership, and (ii) the person indicated has sole voting and investment power. Amounts shown include the number of Common Shares subject to outstanding options under the Corporation's stock option plans that are exercisable within 60 days. (b) The percentages shown are calculated on the basis that outstanding shares include Common Shares subject to outstanding options under the Corporation's stock option plans that are exercisable by directors and officers within 60 days. (c) Mellon Bank Corporation, on behalf of itself and its direct or indirect subsidiaries, Boston Safe Deposit and Trust Company, Mellon Bank, N.A., Mellon Capital Management Corporation, The Boston Company Advisors, Inc., The Boston Company Asset Management, Inc. and The Dreyfus Corporation, has reported (in Amendment No. 3 to a Schedule 13G dated March 8, 1995 and filed with the Securities and Exchange Commission) that as of that date it had sole voting power with respect to 3,562,000 Common Shares, shared voting power with respect to 20,000 Common Shares, sole dispositive power with respect to 3,919,000 Common Shares and shared dispositive power with respect to 759,000 Common Shares. (d) The Prudential Insurance Company of America has reported (in a Schedule 13G dated February 2, 1995 and filed with the Securities and Exchange Commission) that as of December 31, 1994 it had sole voting power and sole dispositive power with respect to 265,600 Common Shares and shared voting power and shared dispositive power with respect to 2,902,400 Common Shares. (e) Sasco Capital, Incorporated has reported (in a Schedule 13G dated February 3, 1995 and filed with the Securities and Exchange Commission) that as of that date it had sole voting power with respect to 1,519,300 Common Shares and beneficial ownership to direct disposition with respect to 2,971,200 Common Shares. (f) Leon G. Cooperman of Omega Capital Partners, L.P., Omega Institutional Partners, L.P., Omega Overseas Partners, Ltd., Omega Overseas Partners II, Ltd., and Omega Advisors, Inc., has reported (in a Schedule 13D dated March 6, 1995 and filed with the Securities and Exchange Commission) that as of that date he had sole voting power and sole dispositive power with respect to 2,014,300 Common Shares and shared voting power and shared dispositive power with respect to 663,800 Common Shares. (g) Includes restricted Common Shares granted under The United States Shoe Corporation 1988 Employee Incentive Plan, which total 10,000, 2,985 and 20,000 for Messrs. Hudson, Browne and Hord, respectively, and 32,985 for all directors and executive officers as a group. (h) Includes Common Shares in which the reporting person disclaims beneficial ownership. Messrs. Browne, Kronick and Somers disclaim beneficial ownership of 33 Common Shares, 2,000 Common Shares and 200 Common Shares, respectively; such Common Shares are owned by their spouses. Mr. Laco disclaims beneficial ownership of 2,800 Common Shares; such Common Shares are held in trust for family members. Directors and executive officers as a group disclaim beneficial ownership of 5,033 Common Shares. (i) Includes restricted Common Shares granted in fiscal 1995 under The United States Shoe Corporation Total Return to Shareholders Plan, which total 9,836, 4,054, 4,469, 4,925 and 2,935 for Messrs. Hudson, Browne, Hord, Searles and Somers, respectively, and 27,952 for all directors and executive officers as a group. 57 58 Item 13. Certain Relationships and Related Transactions. None. 58 59 PART IV Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K. The following documents are filed as part of this report: (a)1. Consolidated Financial Statements (Registrant and subsidiaries). REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the fiscal years ended January 28, 1995, January 29, 1994, and January 30, 1993. CONSOLIDATED BALANCE SHEETS as of January 28, 1995 and January 29, 1994. CONSOLIDATED STATEMENTS OF CASH FLOWS for the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. (a)2. Financial Statement Schedule. Schedule II - Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable or not required or because the required information is set forth in the consolidated financial statements or notes thereto. (a)3. Exhibits. 3.(a) Amended Articles of Incorporation, as amended, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-54285) and filed with the Commission. 3.(b) Regulations, as amended, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-54285), and filed with the Commission. 4.(a) Third Amendment to Rights Agreement, between the company and State Street Bank and Trust Company, dated as of March 29, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. Second Amendment to Rights Agreement among the company, Morgan Shareholder Services Trust Company and The Bank of New York, dated as of June 1, 1993, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-54285)and filed with the Commission. First Amendment to Rights Agreement between the company and Morgan Shareholders Services Trust Company, dated as of March 23, 1988, incorporated herein by reference to the company's Current Report on Form 8-K, dated March 23, 1988, and filed with the Commission. Rights Agreement between the company and Morgan Guaranty Trust Company of New York, dated as of March 31, 1986, incorporated herein by reference to the company's Form 8-A, dated April 9, 1986, and filed with the Commission. 59 60 Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (continued). (a)3. Exhibits (continued). 4.(b) Instruments defining the rights of security holders, including indentures. The company hereby agrees to furnish to the Commission, upon request, copies of instruments defining the rights of holders of the company's long-term debt. 10.(a) The United States Shoe Corporation 1983 Key Personnel Stock Option Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 2-86625) and filed with the Commission. 10.(b) The United States Shoe Corporation 1985 Outside Directors Stock Option Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-6501) and filed with the Commission. 10.(c) The United States Shoe Corporation 1988 Employee Incentive Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-21106) and filed with the Commission. 10.(d) The United States Shoe Corporation 1991 Outside Directors Stock Option Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-44514) and filed with the Commission. 10.(e) The United States Shoe Corporation Supplemental Deferred Compensation Plan (formerly the Salaried Employees Deferred Compensation Plan), as amended and restated, effective January 1, 1995. Amendments dated as of January 29, 1991 and March 25, 1992 to The United States Shoe Corporation Salaried Employees Deferred Compensation Plan, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 1, 1992. The United States Shoe Corporation Salaried Employees Deferred Compensation Plan, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 2, 1991. 10.(f) The United States Shoe Corporation Deferred Compensation Plan for Non-Management Directors, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 1, 1992. 10.(g) Amendment No. 1, dated as of November 1, 1994, to Employment Agreement between the company and Bannus B. Hudson, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. Employment Agreement, dated as of August 1, 1990, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 2, 1991. 10.(h) Employment Agreement, dated as of April 1, 1993, between the company and K. Brent Somers, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 60 61 Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (continued). (a)3. Exhibits (continued). 10.(i) Amendment No. 1, dated as of February 3, 1994, to Employment Agreement between the company and David M. Browne, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 29, 1994. Employment Agreement, dated as of January 1, 1991, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 2, 1991. 10.(j) The United States Shoe Corporation Corporate Deferred Compensation Plan effective May 1, 1991 (commencing June 1, 1992), incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 10.(k) Form of Amended and Restated Severance Compensation Agreement, dated as of November 14, 1994, between the company and the Named Officers, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(l) Form of Amended and Restated Trust Agreement, dated as of November 14, 1994, between the company and the Named Officers, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(m) The United States Shoe Corporation Supplemental Executive Salaried Employees Benefit Plan, as amended April 21, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. Amendment and Restatement to the Supplemental Executive Salaried Employees Benefit Plan, dated as of March 27, 1991, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 1, 1992. 10.(n) Total Return to Shareholders Plan, as restated April 24, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. 10.(o) Description of the Key Executive Long Term Incentive Program effective February 2, 1992, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 10.(p) Description of the Annual Incentive Bonus Program, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 10.(q) Employment Agreement, dated as of March 15, 1993, between the company and Michael M. Searles, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 29, 1994. 61 62 Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (continued). (a)3. Exhibits (continued). 10.(r) Employment Agreement, dated as of May 19, 1993, between the company and Noel E. Hord, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 29, 1994. 10.(s) Form of Special Bonus Agreement, dated as of February 2, 1995, between the company and certain officers of the company, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(t) The United States Shoe Corporation Economic Bridge Program, as amended March 15, 1995, for employees of the company, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(u) Asset Purchase Agreement, dated as of March 15, 1995, by and among the company, Footwear Acquisition Corp. and Nine West Group Inc. 10.(v) The United States Shoe Corporation Retirement Plan for Outside Directors, as amended April 21, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. 10.(w) An Agreement and Plan of Merger, dated as of April 21, 1995, by and among Avant-Garde Optics, Inc., Luxottica Acquisition Corp. and the company. 11. Computation of Earnings per Common and Common Equivalent Share. 21. List of Subsidiaries. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule (b) Reports on Form 8-K. The company did not file a report on Form 8-K during the last quarter of its fiscal year ended January 28, 1995. 62 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. THE UNITED STATES SHOE CORPORATION Date: April 26, 1995 By /s/ Edwin C. Gerth ------------------------------------- Edwin C. Gerth Vice President - Corporate Controller (Principal accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: April 26, 1995 /s/ Bannus B. Hudson ------------------------------------- Bannus B. Hudson President and Chief Executive Officer (Principal executive officer) Date: April 26, 1995 /s/ K. Brent Somers ------------------------------------- K. Brent Somers Executive Vice President and Chief Financial Officer (Principal financial officer) Date: April 26, 1995 /s/ Joseph H. Anderer ------------------------------------- Joseph H. Anderer Director of the Corporation Date: April 26, 1995 /s/ Philip E. Beekman ------------------------------------- Philip E. Beekman Director of the Corporation Date: April 26, 1995 /s/ Gilbert Hahn, Jr. ------------------------------------- Gilbert Hahn, Jr. Director of the Corporation Date: April 26, 1995 /s/ Roger L. Howe ------------------------------------- Roger L. Howe Director of the Corporation Date: April 26, 1995 /s/ Lorrence T. Kellar ------------------------------------- Lorrence T. Kellar Director of the Corporation Date: April 26, 1995 /s/ Albert M. Kronick ------------------------------------- Albert M. Kronick Director of the Corporation 63 64 Date: April 26, 1995 /s/ Thomas Laco ------------------------------------- Thomas Laco Director of the Corporation Date: April 26, 1995 /s/ Charles S. Mechem, Jr. ------------------------------------- Charles S. Mechem, Jr. Director of the Corporation Date: April 26, 1995 /s/ John L. Roy ------------------------------------- John L. Roy Director of the Corporation Date: April 26, 1995 /s/ Phyllis S. Sewell ------------------------------------- Phyllis S. Sewell Director of the Corporation 64 65 THE UNITED STATES SHOE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. -------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 66 CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 67 CONSOLIDATED BALANCE SHEETS as of January 28, 1995 and January 29, 1994 68-69 CONSOLIDATED STATEMENTS OF CASH FLOWS for the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71-81 FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts 82
65 66 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Directors of The United States Shoe Corporation: We have audited the accompanying consolidated balance sheets of THE UNITED STATES SHOE CORPORATION (an Ohio corporation) and subsidiaries as of January 28, 1995 and January 29, 1994, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended January 28, 1995. These consolidated financial statements and the schedule referred to below are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The United States Shoe Corporation and subsidiaries as of January 28, 1995 and January 29, 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 1995, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the accompanying index is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cincinnati, Ohio, March 6, 1995 (except with respect to the subsequent events discussed in Notes 10 and 13, as to which the date is April 21, 1995). 66 67 The United States Shoe Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (thousands except per share amounts)
Fiscal Year Ended ----------------------------------------------------------- JANUARY 28, 1995 January 29, 1994 January 30, 1993 - ----------------------------------------------------------------------------------------------------------------------------- NET SALES $ 2,598,308 $ 2,626,136 $ 2,650,684 COST OF SALES 1,384,945 1,385,511 1,382,536 - ----------------------------------------------------------------------------------------------------------------------------- Gross profit 1,213,363 1,240,625 1,268,148 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,172,741 1,247,267 1,243,598 - ----------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from operations 40,622 (6,642) 24,550 INTEREST EXPENSE, NET (11,836) (15,978) (16,890) Earnings (loss) before provision (credit) for income taxes 28,786 (22,620) 7,660 PROVISION (CREDIT) FOR INCOME TAXES 12,378 (6,786) 3,292 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 16,408 (15,834) 4,368 RETAINED EARNINGS AT BEGINNING OF YEAR 388,998 421,741 441,012 Dividends declared ($.32 per share in 1994, $.37 per share in 1993 and $.52 per share in 1992) (14,784) (16,909) (23,639) - ----------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS AT END OF YEAR $ 390,622 $ 388,998 $ 421,741 ============================================================================================================================= EARNINGS (LOSS) PER COMMON SHARE $ .35 $ (.35) $ .10 =============================================================================================================================
The accompanying notes are an integral part of these statements. 67 68 The United States Shoe Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (thousands except share amounts)
JANUARY 28, 1995 January 29, 1994 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS ============================================================================================================================= CURRENT ASSETS: Cash and cash equivalents $ 114,553 $ 183,203 Short-term investments, at cost 26,007 -- Receivables, net of allowance for doubtful accounts of $5,207 in 1994 and $7,620 in 1993 93,250 85,600 Inventories 356,198 324,096 Future income tax benefits 63,396 60,473 Prepaid expenses 16,010 15,861 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 669,414 669,233 - ----------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Leasehold improvements 331,905 321,434 Furniture, fixtures and machinery 442,891 412,779 Buildings, land and land improvements 82,695 91,723 - ----------------------------------------------------------------------------------------------------------------------------- 857,491 825,936 Less: Accumulated depreciation and amortization 512,345 465,379 - ----------------------------------------------------------------------------------------------------------------------------- 345,146 360,557 - ----------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS: Excess of cost over fair value of net assets acquired, net 26,734 22,247 Deferred income taxes 6,241 -- Other assets and deferred charges 27,460 27,015 - ----------------------------------------------------------------------------------------------------------------------------- 60,435 49,262 - ----------------------------------------------------------------------------------------------------------------------------- $ 1,074,995 $ 1,079,052 ============================================================================================================================= The accompanying notes are an integral part of these statements.
68 69 The United States Shoe Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (thousands except share amounts)
JANUARY 28, 1995 January 29, 1994 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT ============================================================================================================================= CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 52,670 $ 865 Accounts payable 206,792 175,709 Accrued expenses 169,579 170,065 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 429,041 346,639 - ----------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 77,212 177,416 - ----------------------------------------------------------------------------------------------------------------------------- CAPITAL LEASE OBLIGATIONS 11,608 12,345 - ----------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES -- 5,885 - ----------------------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 86,614 75,071 - ----------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 10) - ----------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT: Cumulative preferred shares, without par value - 1,500,000 shares authorized; none issued or outstanding -- -- Common shares, without par value - 60,000,000 shares authorized; 46,455,964 issued in 1994, 45,914,246 issued in 1993 85,103 75,629 Foreign currency translation adjustments (5,205) (2,931) Retained earnings 390,622 388,998 - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 470,520 461,696 - ----------------------------------------------------------------------------------------------------------------------------- $ 1,074,995 $ 1,079,052 =============================================================================================================================
The accompanying notes are an integral part of these statements. 69 70 The United States Shoe Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
Fiscal Year Ended ----------------------------------------------------------- JANUARY 28, 1995 January 29, 1994 January 30, 1993 - ----------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS: Net earnings (loss) $ 16,408 $ (15,834) $ 4,368 Adjustments to reconcile net earnings (loss) to cash provided by operations - Provision for depreciation and amortization 83,948 84,298 83,522 Net loss from disposal of property, plant and equipment 5,479 12,770 6,503 Deferred income tax provision (15,049) (18,032) (9,300) Deferred compensation provision 4,774 7,785 7,606 Other, net 8,395 9,116 (3,188) Changes in components of working capital, net of effects of acquisitions, dispositions and restructuring - Receivables (7,443) 11,113 889 Inventories (30,381) 58,518 40,158 Prepaid expenses (139) 3,674 9,256 Accounts payable 28,747 (41,190) (6,368) Accrued expenses (612) 1,692 (7,269) - ----------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 94,127 113,910 126,177 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (82,097) (61,438) (71,861) Net proceeds from sale of operating assets 8,718 9,897 7,446 Excess of cost over fair value of net assets acquired (7,040) (1,085) (13,565) Net increase in short-term investments (26,007) -- -- Other, net 705 6,484 (2,595) - ----------------------------------------------------------------------------------------------------------------------------- Cash used in investing activities (105,721) (46,142) (80,575) - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- -- 75,000 Payment of long-term debt (50,480) (27,180) (22,256) Dividend payments (14,784) (16,909) (23,639) Payment of capital lease obligations (737) (2,053) (713) Sale of common shares under stock option plans 4,940 457 760 Other, net 4,005 1,895 845 - ----------------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities (57,056) (43,790) 29,997 - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (68,650) 23,978 75,599 Cash and cash equivalents, beginning of year 183,203 159,225 83,626 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 114,553 $ 183,203 $ 159,225 ============================================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for - Interest $ 18,270 $ 19,839 $ 17,624 Income taxes 23,527 8,766 16,586 ============================================================================================================================= The accompanying notes are an integral part of these statements.
70 71 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES The United States Shoe Corporation ("the company") is a specialty retailing company operating 2,349 retail stores and leased departments located throughout the United States, Puerto Rico and Canada. The company's specialty retailing businesses focus on three major product segments: women's apparel, optical and footwear. The company also manufactures, wholesales and imports footwear which is sold in the medium and higher price ranges. See Note 12 for financial information on each of the company's business segments. As of January 28, 1995, the women's apparel segment operated 1,351 stores located primarily in enclosed malls in 47 states and the District of Columbia. As of the same date, the optical retailing group operated 589 stores and leased departments located primarily in enclosed malls and strip centers in 45 states, Puerto Rico and Canada. The leased optical departments are located in select Kmart stores. The footwear retailing divisions operated 409 stores and leased shoe departments at January 28, 1995 in 43 states. The shoe stores are located primarily in major shopping malls and outlet centers while the leased shoe departments are located in strong-value stores. In fiscal 1994, approximately 44% of women's apparel merchandise was purchased from foreign suppliers and approximately 45% of wholesale footwear was imported from foreign manufacturers (located primarily in South America, the Far East and Europe.) PRINCIPLES OF CONSOLIDATION-- The consolidated financial statements include the accounts of the company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated. FISCAL YEAR-- The company's fiscal year is the 52-53 week period ending on the Saturday closest to January 31. Fiscal years 1994, 1993 and 1992 each consisted of 52 weeks and ended on January 28, 1995, January 29, 1994 and January 30, 1993, respectively. ESTIMATES-- In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management has made, where necessary, estimates and judgements based on currently available information that affect certain of the amounts reflected in the consolidated financial statements. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS-- Cash and cash equivalents include cash on hand, demand deposits and highly liquid investments with a maturity of three months or less. SHORT-TERM INVESTMENTS-- Short-term investments are stated at cost and are comprised of high investment grade commercial paper with original terms of three to six months. INVENTORIES-- Inventories are stated at the lower of cost, principally using the last-in, first-out (LIFO) method, or market. The company valued 85% and 90% of its inventories using the LIFO method at January 28, 1995 and January 29, 1994, respectively. Consolidated inventories, if stated at FIFO, would have exceeded the reported inventory values by approximately $31.2 million at January 28, 1995 and $36.9 million at January 29, 1994. During fiscal 1993, inventory quantities were reduced, which resulted in a liquidation of LIFO inventory layers carried at lower costs that prevailed in prior years. The effect of this liquidation was to increase net income by $5.5 million ($.12 per share). The LIFO effects of inventory reductions were not material in 1994 and 1992. Inventories consisted of the following:
(Thousands) JANUARY 28, January 29, 1995 1994 ----------- ----------- Finished and in-process goods $ 332,925 $ 302,445 Raw materials 23,273 21,651 --------- --------- $ 356,198 $ 324,096 ========= =========
DEPRECIATION AND AMORTIZATION-- Depreciation and amortization of property, plant and equipment are provided using principally the straight-line method at rates designed to allocate the cost of property, plant and equipment over their estimated useful lives. The useful lives are generally 10 years for land improvements, 20-40 years for buildings, 3-10 years for furniture, fixtures and machinery, and the remaining lease term, which includes certain renewal periods, for leasehold improvements. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED-- These amounts are being amortized on a straight-line basis over various periods, not exceeding 40 years. Accumulated amortization was $8.5 million and $6.8 million at January 28, 1995 and January 29, 1994, respectively. OPENING AND CLOSING COSTS-- Store opening costs are charged to operations as incurred. The costs associated with closing stores or facilities are accrued when the decision is made to close the location. 71 72 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) FOREIGN CURRENCY TRANSLATION-- Assets and liabilities of the company's foreign operations are translated at the exchange rates in effect as of the balance sheet date and results of operations are translated at average exchange rates prevailing during the period. Translation adjustments are recorded as a separate component of shareholders' investment. INCOME TAXES-- Deferred income taxes are provided on temporary differences between financial and tax reporting. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date of the temporary difference. DERIVATIVE FINANCIAL INSTRUMENTS-- The company utilizes derivative financial instruments to manage well-defined foreign currency exchange rate and interest rate risks and does not use them for trading purposes. Foreign exchange contracts are used to hedge the risk of changes in foreign currency exchange rates associated with transactions denominated in foreign currencies, primarily footwear purchases from European countries. Any gain or loss upon settlement of such contracts is included in the cost of the related purchases. At January 28, 1995, the company had contracts maturing on various dates between February 9, 1995 and August 22, 1995 to purchase foreign currency (27,617 million Italian lire and 3,000 million Spanish pesetas) for $39.8 million. To balance the company's fixed and variable interest rate risk, as of January 28, 1995, the company had entered into four interest rate swap agreements with notional amounts of $25 million each that mature on various dates through November 1995. Under the terms of the agreements, the company receives interest at a fixed rate (5.05% weighted-average rate as of January 28, 1995) and pays interest at a variable rate tied to the six-month LIBOR (6.55% weighted-average rate as of January 28, 1995). The differential to be paid or received under the agreements is accrued and is charged or credited to interest expense over the life of the agreements. The company monitors the risk of default by the swap counterparties and does not anticipate nonperformance. EARNINGS PER SHARE-- Earnings (loss) per share are based on the weighted-average number of common shares and equivalents outstanding during each year. Common share equivalents represent shares issuable upon assumed exercise of stock options which would have a dilutive effect in years where there are earnings. Common share equivalents had no material effect in 1994, 1993 or 1992. RECLASSIFICATIONS-- Certain reclassifications have been made to the prior years' financial statements to conform with the 1994 presentation. (2) ACCOUNTING CHANGES Effective February 2, 1992, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This change did not have a material effect on the company's financial statements. The company adopted the LIFO method of determining inventory values for its optical retailing inventories effective March 1, 1992. Management believes the LIFO method is preferable because it more closely matches revenues and expenses. There was no significant effect on 1992 net earnings from this change in accounting principle. The cumulative effect of this change on retained earnings at February 2, 1992 was not determinable, nor were the pro forma effects of retroactive application of LIFO to prior years. Effective January 30, 1994, the company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." This change did not have a material effect on the company's financial statements. (3) ACQUISITIONS AND DISPOSITIONS On July 7, 1994, the company acquired for cash the assets of Tuckerman Optical Company, a chain of 31 optical stores located primarily in the Midwestern United States. The acquisition was accounted for using the purchase method of accounting. The excess of the cost of the net assets acquired over their fair values has been recorded as goodwill. On January 27, 1993, the company acquired for cash 100% of the stock of Eyemasters Ltd., a Canadian chain of 22 optical superstores. The acquisition was accounted for using the purchase method of accounting. The excess of the cost of the net assets acquired over their fair values has been recorded as goodwill. During 1993, the company sold the assets of its optical retailing operations in the United Kingdom. A $5.5 million charge was recorded in 1993 in conjunction 72 73 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) with the divestiture. Operating losses recognized from operations in the United Kingdom prior to the sale were $1.9 million in 1993 (excluding the charge to divest the business) and $7.0 million in 1992. Also during 1993, the company sold 61 Ups `N Downs and 124 Caren Charles stores. The sale completed the company's divestiture of these divisions. A $10.6 million charge was recorded in 1993 in conjunction with the divestiture. Operating earnings (losses) recognized from the Ups `N Downs and Caren Charles divisions prior to the sale and transfer of these stores were $(14.1) million in 1993 (excluding the charge to divest the stores) and $1.4 million in 1992. (4) CONCENTRATION OF CREDIT RISK The company's footwear wholesaling business sells primarily to independent retailers and department stores across the United States. Receivables arising from these sales are not collateralized. Credit risk is affected by conditions or occurrences within the economy and the retail industry. The company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. No single customer accounted for more than 10% of the company's receivables balance as of January 28, 1995. (5) NOTES PAYABLE AND LONG-TERM DEBT The company maintains lines of credit through both formal and informal credit arrangements with domestic and foreign banks. At January 28, 1995, the company had in place an amended revolving credit agreement, with nine participating financial institutions, making available up to $125 million of credit through February 5, 1996. The revolving credit agreement is maintained to finance working capital. Borrowing rates are based on prime rates and Eurodollar loan rates. At January 28, 1995 and January 29, 1994, there were no borrowings outstanding under this facility. Commitment fees of .25% to .50% per annum are payable on the company's available and unused portion of its committed credit facilities (.275% at January 28, 1995). The company also has letter of credit facilities to support the purchase of inventories. At January 28, 1995, the company had letter of credit facilities totaling $149 million, of which $70 million in letter of credit commitments were outstanding. Long-term debt consisted of the following:
(Thousands) JANUARY 28, January 29, 1995 1994 ----------- ----------- 8.63% Notes, payable in 2002 $ 75,000 $ 75,000 9.60% Notes, payable in 1995 50,000 50,000 8% Notes, payable in 1996, prepaid at par in 1994 -- 50,000 Other indebtedness, with various maturities 2,342 2,596 -------- -------- 127,342 177,596 Less: Current portion, due within one year 50,130 180 -------- -------- $ 77,212 $177,416 ======== ========
At January 28, 1995, the company was authorized to issue an additional $25 million of debt under a shelf registration filed with the Securities and Exchange Commission in August 1992. The company has zero coupon notes, payable in 2013, that had an aggregate face value of $15.6 million at January 28, 1995 and January 29, 1994, and are stated net of the unamortized discount of $14.1 million at January 28, 1995 and $14.3 million at January 29, 1994, with an imputed interest rate of 13%. The aggregate payments required on long-term debt during the next five fiscal years are as follows:
(Thousands) 1995 $ 50,130 1996 130 1997 130 1998 140 1999 140
The amended revolving credit agreement and the long-term debt agreements include, among other things, provisions which limit total consolidated indebtedness, require the maintenance of minimum amounts of working capital and of certain financial ratios, limit the amount of capital expenditures, capital stock repurchases and asset sales, and limit the payment of cash dividends by the company. Under the most restrictive dividend provision, approximately $24 million of consolidated retained earnings at January 28, 1995 is available for payment of cash dividends. See Note 13. 73 74 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (6) COMMON SHARES A summary of the activity of common shares for the last three fiscal years is as follows: (Thousands except share amounts)
1994 1993 1992 -------- -------- -------- Balance at beginning of year $ 75,629 $ 70,307 $ 66,470 Sale of common shares issued under stock option plans, net (shares issued: 334,757 in 1994, 35,965 in 1993 and 67,055 in 1992) 4,940 457 760 Restricted stock issued (shares issued: 20,000 in 1994, 105,000 in 1993 and 25,000 in 1992) 385 1,699 384 Shares issued under tax incentive savings plans: New shares 3,068 2,071 -- Treasury shares -- 771 2,620 Shares issued under associate stock purchase plan 516 -- -- Other 565 324 73 -------- -------- -------- Balance at end of year $ 85,103 $ 75,629 $ 70,307 ======== ======== ========
The company's Executive Committee of its Board of Directors, in 1987, authorized the open market purchase of up to two million of its outstanding common shares. As of January 28, 1995, the total shares repurchased under this authorization was approximately 450,000. During 1994 and 1993, the company issued 167,485 and 194,147, respectively, previously unissued common shares in connection with the company's tax incentive savings plans. During 1993 and 1992, the company also issued 68,210 and 198,240, respectively, common shares out of treasury stock in connection with these plans. See Note 8 for further discussion of these plans. During 1994, the company adopted, and reserved 500,000 common shares for issuance under, The United States Shoe Corporation Associates' Discounted Stock Purchase Plan. Under the Plan, associates may purchase previously unissued common shares of the company at 85% of the shares' fair market value at the date of purchase. During 1994, 36,491 shares were issued in connection with the Plan. The company has a Share Purchase Rights Plan adopted in 1986 and amended in March 1988. Under the Plan, shareholders of record on April 14, 1986 received, in connection with each common share owned, the right to purchase one one-hundredth of a Series A Preference Share ("Preference Share") at an exercise price of $200, subject to adjustment (collectively, the "Rights"). As a result of the payment by the company of a 100% common share dividend in June 1986, one-half of a Right is now attached to each outstanding common share of the company. The Rights are exercisable for Preference Shares following (i) the public announcement that a person or group has acquired, or has obtained the right to acquire, beneficial ownership of 20% or more of the company's outstanding common shares, or (ii) ten days following the commencement of, or public announcement of an intention to make, a tender offer or exchange offer if, upon consummation, such person or group would be the beneficial owner of 30% or more of the outstanding common shares and if the company's Board of Directors does not delay the exercisability of the Rights. The Rights do not have any voting rights and are not entitled to dividends. Additionally, if any person or group acquires 20% or more of the company's outstanding common shares, the Rights would entitle the holder to purchase common shares (or other securities or property of the company) in lieu of the Preference Shares at half the market value. Such purchase rights for common shares will not be triggered if the 20% acquisition is made pursuant to a tender or exchange offer for all outstanding common shares which the directors of the company who are not officers deem to be in the best interests of the company and its shareholders (a "Permitted Offer"). Upon the occurrence of certain other events (including a merger in which the company's common shares are exchanged or 50% or more of the company's assets or earning power is sold or transferred), the Rights would entitle the holder to purchase common stock in the acquiring entity at half its market value, except in connection with certain transactions following a Permitted Offer. All of the Rights may be redeemed by the company at a price of $.05 per Right until a person or group has acquired beneficial ownership of 20% or more of the outstanding common shares. After a person or group acquires 20% or more of the common shares, the company may not redeem the Rights, except in certain limited circumstances. The Rights also may be redeemed in connection with certain negotiated transactions. The Rights will expire on April 14, 1996. See Note 13. 74 75 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (7) STOCK OPTIONS At January 28, 1995, 5,501,608 (4,041,672 at January 29, 1994 and 4,289,460 at January 30, 1993) of the company's authorized but unissued common shares were reserved for issuance to directors, executives and key employees under the company's stock option and incentive plans. Of such reserved shares, 3,484,053 at January 28, 1995 (3,727,267 at January 29, 1994 and 3,526,011 at January 30, 1993) were subject to options outstanding. A summary of the changes in options outstanding for the last three years is as follows:
Number of Option Price Range Shares (Per Share) --------- ----------------------- Outstanding at February 1, 1992 3,272,244 $ 7.03 - $31.56 Granted 647,650 10.88 - 16.50 Exercised (100,183) 7.03 - 14.00 Cancelled (293,700) 12.25 - 30.13 --------- Outstanding at January 30, 1993 3,526,011 $10.88 - $31.56 Granted 709,750 9.00 - 11.94 Exercised (57,150) 10.88 - 14.00 Cancelled (451,344) 10.88 - 28.50 --------- OUTSTANDING AT JANUARY 29, 1994 3,727,267 $ 9.00 - $31.56 GRANTED 586,335 12.75 - 20.31 EXERCISED (350,144) 9.06 - 20.94 CANCELLED (479,405) 9.69 - 31.56 --------- OUTSTANDING AT JANUARY 28, 1995 3,484,053 $ 9.00 - $31.56 ========= EXERCISABLE AT JANUARY 28, 1995 2,121,548 $ 9.00 - $31.56 =========
The 1988 incentive plan permits restricted stock to be granted at no cost to key employees. At January 28, 1995, 67,985 shares of restricted stock were outstanding, subject to forfeiture during periods expiring from three to five years after the date of grant. See Note 13. (8) BENEFIT PLANS DEFINED BENEFIT PLANS-- The company has several noncontributory retirement plans which provide for pension benefits to eligible employees upon retirement. Pension benefits are based on length of service and compensation, under career average or final average formulas. The company's funding policy is in accordance with minimum funding requirements. Net periodic pension cost includes the following components:
(Thousands) 1994 1993 1992 -------- -------- --------- Service cost $ 7,056 $ 6,512 $ 6,056 Interest cost 9,729 8,955 7,834 Return on plan assets 1,927 (13,993) (9,350) Net amortization and deferral (15,836) 279 (3,465) -------- -------- --------- Net periodic pension cost $ 2,876 $ 1,753 $ 1,075 ======== ======== =========
All of the company's pension plans have assets in excess of accumulated plan benefits. Plan assets are invested in equity securities, bonds and money market funds. The plans' funded status and prepaid pension cost as of January 1, 1995 and 1994 are as follows:
(Thousands) 1995 1994 -------- --------- Actuarial present value of benefit obligations: Vested $106,145 $ 96,431 Nonvested 6,739 8,451 -------- --------- Accumulated benefit obligations 112,884 104,882 Effect of salary progression 13,100 25,578 -------- --------- Projected benefit obligations 125,984 130,460 Plan assets at fair value 141,764 149,678 -------- --------- Plan assets in excess of projected benefit obligations 15,780 19,218 Unrecognized net (gain) loss 701 (4,493) Unrecognized prior service cost (3,164) 4,042 Unrecognized net transition assets (10,627) (13,201) -------- --------- Prepaid pension cost $ 2,690 $ 5,566 ======== =========
The weighted-average discount rates used in determining the actuarial present value of the projected benefit obligations were 8% and 7.5% at January 1, 1995 and 1994, respectively. The assumed rate of increase in future compensation levels used to measure the actuarial present value of the projected benefit obligations was 5.5% at January 1, 1995 and 1994. The expected long-term rate of return on assets used in determining pension costs was 8.5% and 9% at January 1, 1995 and 1994, respectively. The impact of the change in the discount rate assumption was to decrease the actuarial present value of the projected benefit obligations by $10.6 million at January 1, 1995. Effective January 1, 1995, The United States Shoe Corporation Pension Plan for salaried employees ("Salaried Pension Plan") was amended to allow women's apparel retailing group associates to participate in the Plan. The net periodic pension expense related to these associates is estimated at $4.3 million for fiscal 75 76 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1995. Additionally, during 1994 the Salaried Pension Plan was amended, effective January 1, 1995, for associates of the corporate services, optical retailing and women's apparel retailing groups to change the benefit formula to a cash balance formula. The amendment will result in affected participants accruing an annual benefit at a percentage determined based upon their years of service and their annual compensation. The amendment resulted in a decrease of approximately $6.8 million in the projected benefit obligation at January 1, 1995. The company maintains an unfunded supplemental retirement plan for participants of its Salaried Pension Plan to provide benefits in excess of amounts permitted under the provisions of prevailing tax law. Additionally, the company provides supplemental retirement benefits to certain retired executives in accordance with individual retirement agreements. The pension liability associated with these plans is accrued using the same actuarial methods and assumptions as those used for the company's qualified plans. See Note 13. Net periodic pension cost for these supplemental plans includes the following components:
(Thousands) 1994 1993 1992 -------- --------- --------- Service cost $ 427 $ 75 $ 75 Interest cost 542 312 289 Net amortization and deferral 247 6 -- ------- -------- --------- Net periodic pension cost $ 1,216 $ 393 $ 364 ======= ======== =========
The supplemental plans' funded status and accrued pension cost are as follows:
(Thousands) JANUARY 28, January 29, 1995 1994 ----------- ----------- Accumulated benefit obligations $ 4,869 $ 4,212 Effect of salary progression 1,028 3,134 ------- ------- Projected benefit obligations 5,897 7,346 Unrecognized prior service cost (1,519) (2,809) Unrecognized net gain (loss) 247 (838) ------- ------- Accrued pension cost $ 4,625 $ 3,699 ======= =======
On February 2, 1995, the Board of Directors approved the adoption of The United States Shoe Corporation Retirement Plan for Outside Directors. Under the Plan, directors retiring with five or more years of service as an outside director (i.e., directors who are not employees of the company or its subsidiaries) will receive a lifetime quarterly retirement benefit commencing at the later of age 72 or retirement. The annual benefit payment will be equal to the retainer received by the director immediately prior to retirement and will terminate upon death. The present value of the Plan's accumulated benefit obligation at the date of approval is estimated to approximate $1.0 million. See Note 13. DEFINED CONTRIBUTION PLANS-- The company provides retirement benefits to eligible employees of some divisions through a noncontributory profit sharing plan. Company contributions are determined by a formula based upon participants' compensation and profits of the divisions, as defined in the plan. The company's provision for such contributions was $0.2 million in 1994, $1.6 million in 1993 and $1.7 million in 1992. In connection with the previously mentioned amendment to the Salaried Pension Plan, no additional company contributions will be made to this plan subsequent to January 28, 1995. The company also sponsors three tax incentive savings plans, as well as a non-qualified deferred compensation plan. Eligible employees may contribute or defer a portion of their compensation to these plans. The company makes quarterly contributions of its common stock to the plans based on a percentage of employees' contributions or deferrals, as appropriate. The provision for these stock contributions was $4.3 million in 1994, $3.3 million in 1993 and $3.2 million in 1992. Effective January 1, 1995, the three tax incentive savings plans were merged into a single plan. See Note 13. HEALTH BENEFIT PLANS-- The company partially subsidizes health care benefits for eligible retirees. Net periodic cost of these benefits included the following components:
(Thousands) 1994 1993 1992 ----- ----- ------- Service cost $ 206 $ 183 $ 623 Interest cost 688 838 1,264 Amortization of unrecognized net gain (365) (289) -- ----- ----- ------- Net periodic cost $ 529 $ 732 $ 1,887 ===== ===== =======
76 77 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The accrued postretirement benefit obligation was as follows:
(Thousands) JANUARY 28, January 29, 1995 1994 ----------- ----------- Retirees $ 7,619 $ 9,706 Fully eligible active employees 249 243 Other active employees 1,618 1,638 Unrecognized reduction in prior service cost 7,528 6,272 Unrecognized gain (loss) 379 (477) ------- ------- Accrued postretirement benefit obligation $17,393 $17,382 ======= =======
For 1994, a 12% (13% for 1993) increase in the cost of covered health care benefits was assumed. This rate was assumed to decrease gradually to 7% for 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a 1% increase in the health care trend rate would increase the accumulated postretirement benefit obligation by $0.8 million as of January 28, 1995 and the net periodic cost by $0.1 million for the year then ended. The weighted-average discount rates used in determining the accumulated postretirement benefit obligation were 8% and 7.5% at January 28, 1995 and January 29, 1994, respectively. The company funds these benefits as claims are incurred. In 1993, the company changed the formula for cost sharing with retirees which resulted in an unrecognized reduction in prior service cost of approximately $6.6 million. (9) INCOME TAXES The provision (credit) for income taxes, excluding the cumulative effect of accounting changes, consisted of:
(Thousands) 1994 1993 1992 -------- ---------- -------- Federal income taxes: Currently payable $ 21,158 $ 7,195 $ 8,661 Deferred (12,523) (15,085) (6,746) State, local and foreign income taxes: Currently payable 6,269 4,051 3,931 Deferred (2,526) (2,947) (2,554) -------- -------- -------- Provision (credit) for income taxes $ 12,378 $ (6,786) $ 3,292 ======== ======== ========
The reconciliation of the income tax provision based upon the statutory rate to the reported income tax provision is as follows:
(Thousands) 1994 1993 1992 -------- --------- ---------- Federal statutory provision (credit) $ 10,075 $ (7,917) $ 2,604 State, local and foreign income taxes (net of federal benefit) 1,638 (968) 567 Change in valuation allowance 602 2,939 -- Change in federal tax rate -- (821) -- Other, net 63 (19) 121 -------- ---------- ---------- Provision (credit) for income taxes $ 12,378 $ (6,786) $ 3,292 ======== ========= ==========
The components of the company's future income tax benefits and deferred tax liabilities were as follows:
(Thousands) JANUARY 28, January 29, 1995 1994 ----------- ----------- Future income tax benefits: Compensation and benefits $ 40,131 $ 37,598 Occupancy reserves 13,948 13,826 Accrued restructuring costs 3,544 5,418 Allowance for doubtful accounts and returns 6,728 9,085 Inventory accounting 10,345 6,192 Other, net 22,189 21,047 -------- -------- 96,885 93,166 Valuation allowance (5,025) (4,423) -------- -------- Total 91,860 88,743 -------- -------- Deferred tax liabilities: Accelerated depreciation 20,552 30,405 Other, net 1,671 3,750 -------- -------- Total 22,223 34,155 -------- -------- Net deferred tax asset $ 69,637 $ 54,588 ======== ========
The valuation allowance relates to state, local and foreign tax assets and operating loss carryforwards that may expire before the company can utilize them. Realization of the company's $69.6 million net deferred tax asset is dependent upon the company generating sufficient future taxable income. At January 28, 1995, the company had state net operating loss carryforwards totaling between $30.0 million and $70.0 million, depending upon taxing jurisdiction, expiring between 1997 to 2009; foreign net operating loss carryforwards totaling $4.3 million, expiring in 2000 and 2001; and U.S. foreign tax credit carryforwards totaling $1.5 million, expiring in 1997. 77 78 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (10) COMMITMENTS AND CONTINGENCIES LEASES AND LICENSES-- The company leases various retail store, plant, warehouse and office facilities, as well as certain of its data processing, automotive and production equipment under lease arrangements expiring between 1995 and 2006, with options to renew at varying terms. The company also operates retail shoe departments within strong-value stores and retail optical departments within certain Kmart stores under licensing arrangements. The company has leased certain property under capital leases that is included in the "Property, Plant and Equipment" caption in the accompanying consolidated balance sheets as follows:
(Thousands) JANUARY 28, January 29, 1995 1994 ----------- ----------- Furniture, fixtures and machinery $ 5,780 $ 4,565 Buildings, land and land improvements 15,472 15,472 ------- ------- 21,252 20,037 Less: Accumulated depreciation and amortization 9,123 8,315 ------- ------- $12,129 $11,722 ======= =======
The lease and license arrangements for the company's retail locations often include escalation clauses and provisions requiring the payment of incremental rentals, in addition to any established minimums, contingent upon the achievement of specified levels of sales volume. Rental expense was as follows:
(Thousands) 1994 1993 1992 --------- --------- --------- Minimum rent $ 165,844 $ 169,597 $ 164,451 Contingent rent 14,978 14,131 15,601 --------- --------- --------- $ 180,822 $ 183,728 $ 180,052 ========= ========= =========
Future minimum annual rentals under lease and license arrangements at January 28, 1995 are as follows:
(Thousands) Operating Leases and License Fiscal Year Capital Leases Arrangements - ----------- -------------- ------------ 1995 $ 4,445 $ 171,798 1996 2,502 149,702 1997 2,316 115,772 1998 2,316 90,826 1999 2,316 72,281 Thereafter 17,949 146,291 --------- --------- 31,844 $ 746,670 ========= Less: Imputed interest 17,696 --------- Present value of capital lease obligations $ 14,148 =========
CONTINGENCIES-- The company is contingently liable as a guarantor of 337 leases in 33 states, the District of Columbia and the United Kingdom relating to customer facilities and certain leases that were assigned in connection with various dispositions. Leases guaranteed by the company expire between 1995 and 2017 and minimum rentals aggregate $61.0 million for the twenty-three-year period. The company does not hold security for these guarantees. As of January 28, 1995, approximately 57% of the guaranteed aggregate minimum rentals were concentrated with two primary obligors. The company has entered into severance compensation agreements with certain of its executives. Such agreements provide for payments to these executives of amounts up to three times their base salary plus bonus potential, plus continuation of certain benefits, if a change in control (as defined) is followed within two years by a termination (as defined) of employment. The maximum contingent liability of the company pursuant to all such agreements is approximately $25 million at January 28, 1995. See Note 13. COMMITMENTS-- In April 1995, the company entered into agreements with eight suppliers committing to purchase an aggregate of $31 million of eyeglass frames from such suppliers during the next twelve months. 78 79 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) LEGAL PROCEEDINGS-- Litigation is instituted from time to time against the company which involves routine matters incident to the company's business. In the opinion of management and legal counsel, the ultimate disposition of such litigation will not have a material effect upon the company's consolidated financial position or results of operations. See Note 13. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS Following are the methods and assumptions used to estimate the fair values of the company's financial instruments (amounts in thousands): SHORT-TERM INVESTMENTS-- Approximate the carrying amounts reflected in the Consolidated Balance Sheets because of the liquidity and short-term nature of these instruments. LONG-TERM DEBT-- Based on current rates offered to the company for debt of the same remaining maturities. The carrying amounts and fair values were $127,342 and $123,019, respectively, at January 28, 1995; and $177,596 and $186,260, respectively, at January 29, 1994. FOREIGN EXCHANGE CONTRACTS-- Based on current foreign exchange contract rates offered to the company for similar contracts of the same remaining maturities. The fair values were $39,657 at January 28, 1995; and $21,551 at January 29, 1994. INTEREST RATE SWAP AGREEMENTS-- Based on the amount that the company would (pay) receive to terminate the agreements. The fair values were $(1,973) at January 28, 1995; and $1,403 at January 29, 1994. LEASE GUARANTEES-- Not practicable to estimate since quoted prices are not readily available and valuation techniques would not be practicable due to the number of primary obligors, inherent differences in the primary obligors' credit risk and the varying lease terms. (12) SEGMENT DATA Financial information for each of the company's business segments was as follows:
(Thousands) 1994 1993 1992 ---------- ---------- ---------- Net sales: Women's apparel retailing $1,125,509 $1,217,099 $1,262,154 Optical retailing 766,746 698,660 660,130 Footwear- Manufacturing/wholesaling 444,399 465,219 470,682 Retailing 261,654 245,158 257,718 ---------- ---------- ---------- Total $2,598,308 $2,626,136 $2,650,684 ========== ========== ========== Earnings (loss) from operations: Women's apparel retailing $ (49,704) $ (41,724) $ 12,078 Optical retailing 71,859 43,628 40,361 Footwear 36,187 9,548 (5,528) General corporate expense (17,720) (18,094) (22,361) ---------- ---------- ---------- Total $ 40,622 $ (6,642) $ 24,550 ========== ========== ========== Total assets: Women's apparel retailing $ 300,032 $ 287,999 $ 344,491 Optical retailing 274,367 250,377 270,629 Footwear 360,036 357,473 396,674 Corporate 140,560 183,203 159,226 ---------- ---------- ---------- Total $1,074,995 $1,079,052 $1,171,020 ========== ========== ========== Depreciation and amortization expense: Women's apparel retailing $ 31,718 $ 33,097 $ 33,962 Optical retailing 38,201 37,654 35,275 Footwear 14,029 13,547 14,285 ---------- ---------- ---------- Total $ 83,948 $ 84,298 $ 83,522 ========== ========== ========== Capital expenditures: Women's apparel retailing $ 24,212 $ 20,881 $ 33,262 Optical retailing 38,783 24,990 25,484 Footwear 19,102 15,567 13,115 ---------- ---------- ---------- Total $ 82,097 $ 61,438 $ 71,861 ========== ========== ==========
79 80 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (13) SUBSEQUENT EVENTS ACQUISITION OF OPTI-WORLD, INC.-- On April 3, 1995, the company acquired 100% of the stock of Opti-World, Inc. ("Opti-World"), a chain of 59 optical stores located primarily in the Southeastern United States. SALE OF FOOTWEAR GROUP-- On March 15, 1995, the company entered into a definitive agreement for the sale of the footwear group to Nine West Group Inc. ("Nine West"). In exchange for the net assets of the footwear group, the company will receive $560 million in cash, plus warrants to purchase 3.7 million shares of Nine West common stock at $35.50 per share at any time during the 8.5 years following the consummation of the sale. The sale is subject to the satisfaction of certain conditions. In 1994, the footwear group accounted for $706.1 million, or 27.2%, of the company's net sales and generated $36.2 million of earnings from operations. AGREEMENT WITH LUXOTTICA GROUP-- On April 21, 1995, the company entered into an Agreement and Plan of Merger pursuant to which Luxottica Acquisition Corp. ("LAC"), an indirect subsidiary of Luxottica Group S.p.A. ("Luxottica"), will purchase all of the company's outstanding common shares (and associated Rights). The transaction is to be completed through a tender offer by LAC for all of the company's outstanding common shares (and associated Rights) for $28 per common share (and associated Right), which will be followed by a second-step merger in which any of the company's common shares (and associated Rights) not acquired in the tender offer will be cancelled and retired and will be converted into a right to receive in cash $28 per common share (and associated Right). The transaction is subject to the satisfaction of certain conditions. The consummation of the transaction will result in (a) the cancellation of all outstanding stock options and, for each such option, payment to the holders thereof of an amount equal to the excess of $28 over the exercise price of the option, (b) the termination of all restrictions on outstanding shares of restricted stock, (c) the payment of liabilities to participating employees of the company's non-qualified deferred compensation plans, (d) the payment of liabilities to certain participating employees of the company's Supplemental Executive Salaried Employees Benefit Plan, and (e) the payment of liabilities under the company's Retirement Plan for Outside Directors. As a result of Luxottica's tender offer, the company deposited $24.5 million into a trust in accordance with the terms of certain severance compensation agreements described in Note 10. LITIGATION-- On March 3, 1995, Luxottica commenced an action in U.S. District Court by filing a complaint against the company, its Directors, the Commissioner of Securities of Ohio, the Director of Commerce of Ohio, and the State of Ohio (the "Luxottica Action"). Luxottica seeks, among other things, (a) injunctive relief against enforcement of the Ohio Take-Over Act and a declaratory judgement that the Take-Over Act is unconstitutional as it may be applied to the Luxottica Offer, and (b) injunctive relief prohibiting the company and its Directors from enforcing its Share Purchase Rights Agreement, and a declaratory judgement declaring that Agreement and the Rights are null and void. On March 6, 10 and 24, 1995, Luxottica filed Amended Complaints which added Avant-Garde Optics, Inc. as a Plaintiff and which, in addition, seek (c) declaratory judgement that the Directors of the Company are in breach of their fiduciary duties for failing to approve the Luxottica Offer, (d) injunctive relief requiring the Directors to approve the Luxottica Offer, (e) an injunction prohibiting consummation of the proposed sale of the footwear group to Nine West without a shareholder vote, and (f) an order declaring that certain disclosures made by the company contain false and misleading statements in violation of the Securities Exchange Act of 1934. On April 21, 1995, the company and Avant-Garde Optics, Inc. and Luxottica Acquisition Corp. signed an agreement and plan of merger ("Agreement"). Pursuant to the Agreement, the parties have agreed, promptly, and in any event not later than April 26, 1995 (unless the Agreement has been earlier terminated), to use their respective best efforts to obtain a dismissal without prejudice of the Luxottica Action (with certain limited exceptions), with each party bearing its own costs and attorneys' fees therefor. On March 7, 1995, several shareholders of the company filed three complaints in the Court of Common Pleas, Hamilton County, Ohio naming the company and its Directors as defendants. The relief sought includes, among other things, (a) class action certification, (b) a declaration that the Directors have breached their fiduciary duties and an order directing that they carry out their such duties, (c) an order that the defendants consider the Luxottica Offer in good faith, (d) an order that the defendants rescind any transactions that are unfair, (e) an order enjoining any action by the defendants to change the company's cumulative voting 80 81 The United States Shoe Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) rules, (f) an order enjoining the transaction complained of in the complaint or any related transaction, (g) accounting for any profits realized as a result of the transaction complained of, and (h) damages, attorneys' fees and costs. AMENDMENTS TO THE REVOLVING CREDIT AGREEMENT-- The company obtained waivers to its revolving credit agreement to permit the signing of the company's agreements with Nine West and Luxottica (actual consummation of any of those transactions will require the company to renegotiate or terminate the revolving credit agreement). The company also obtained an amendment to the revolving credit agreement primarily related to the acquisition of Opti-World and to the long-term debt repayment due May 27, 1995. In conjunction with the Opti-World acquisition, the company borrowed $50 million under the revolving credit agreement on April 3, 1995. (14) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal years 1994 and 1993 are as follows:
(Thousands except per share amounts) QUARTER FIRST SECOND THIRD FOURTH --------- --------- --------- -------- 1994 NET SALES $ 625,319 $ 633,172 $ 655,698 $684,119 GROSS PROFIT 317,656 299,331 306,119 290,257 NET EARNINGS (LOSS) 12,766 6,934 4,705 (7,997) EARNINGS (LOSS) PER SHARE * $ .28 $ .15 $ .10 $(.17) 1993 Net Sales $ 640,340 $ 639,727 $ 677,038 $669,031 Gross Profit 311,649 290,103 323,750 315,123 Net Earnings (Loss) (9,659) (22,692) 8,246 8,271 Earnings (Loss) Per Share $ (.21) $ (.50) $ .18 $ .18 * Earnings (loss) per share for individual quarters will not add to earnings per share for the entire year since each period is computed independently. Net earnings in the fourth quarter reflect favorable LIFO adjustments of $7.2 million ($.16 per share) in 1994 and $16.8 million ($.37 per share) in 1993.
81 82 THE UNITED STATES SHOE CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 28, 1995, JANUARY 29, 1994 AND JANUARY 30, 1993 (THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------- ----------- --------------------------------- ----------- ------------ Additions --------------------------------- Balance at Charged to Balance at Beginning Costs and Charged to End Description of Year Expenses Other Accounts Deductions of Year - -------------------------------------- ----------- ----------- -------------- ----------- ------------ FOR THE YEAR ENDED JANUARY 28, 1995 Allowance for Doubtful Accounts $ 7,620 $ 331 (d) - $ 2,744 (a) $ 5,207 Reserves for Returns and Allowances $ 10,682 $ 20,188 - $ 22,861 (b) $ 8,009 Accrued Restructuring Costs $ 12,221 - - $ 4,616 (c) $ 7,605 FOR THE YEAR ENDED JANUARY 29, 1994 Allowance for Doubtful Accounts $ 10,832 $ 1,889 - $ 5,101 (a) $ 7,620 Reserves for Returns and Allowances $ 9,682 $ 25,436 - $ 24,436 (b) $ 10,682 Accrued Restructuring Costs $ 21,945 - - $ 9,724 (c) $ 12,221 FOR THE YEAR ENDED JANUARY 30, 1993 Allowance for Doubtful Accounts $ 9,878 $ 6,998 - $ 6,044 (a) $ 10,832 Reserves for Returns and Allowances $ 6,399 $ 27,360 - $ 24,077 (b) $ 9,682 Accrued Restructuring Costs $ 50,840 - - $ 28,895 (c) $ 21,945
NOTES: (a) Represents uncollectible accounts charged off and miscellaneous reclassifications. (b) Represents credits issued to customers. The change in the reserve balance is affected by the timing of the issuance of credits to customers and better returns management. (c) Represents primarily store and plant closing costs, lease termination costs, severance pay, write-down of the related assets and operating losses until sale or closing. (d) Includes a $2.1 million reduction in the Footwear group's bad debt reserve, reflecting improved collection experience and a reduction in the number of independent concept store operators. 82 83 INDEX TO EXHIBITS Exhibit No. - ------- 3.(a) Amended Articles of Incorporation, as amended, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-54285) and filed with the Commission. 3.(b) Regulations, as amended, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33- 54285) and filed with the Commission. 4.(a) Third Amendment to Rights Agreement, between the company and State Street Bank and Trust Company, dated as of March 29, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. Second Amendment to Rights Agreement among the company, Morgan Shareholder Services Trust Company and The Bank of New York, dated as of June 1, 1993, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-54285) and filed with the Commission. First Amendment to Rights Agreement between the company and Morgan Shareholders Services Trust Company, dated as of March 23, 1988, incorporated herein by reference to the company's Current Report on Form 8-K, dated March 23, 1988, and filed with the Commission. Rights Agreement between the company and Morgan Guaranty Trust Company of New York, dated as of March 31, 1986, incorporated herein by reference to the company's Form 8-A, dated April 9, 1986, and filed with the Commission. 4.(b) Instruments defining the rights of security holders, including indentures. The company hereby agrees to furnish to the Commission, upon request, copies of instruments defining the rights of holders of the company's long-term debt. 10.(a) The United States Shoe Corporation 1983 Key Personnel Stock Option Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 2-86625) and filed with the Commission. 10.(b) The United States Shoe Corporation 1985 Outside Directors Stock Option Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-6501) and filed with the Commission. 10.(c) The United States Shoe Corporation 1988 Employee Incentive Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-21106) and filed with the Commission. 10.(d) The United States Shoe Corporation 1991 Outside Directors Stock Option Plan, incorporated herein by reference to the company's Registration Statement on Form S-8 (No. 33-44514) and filed with the Commission. 10.(e) The United States Shoe Corporation Supplemental Deferred Compensation Plan (formerly the Salaried Employees Deferred Compensation Plan), as amended and restated, effective January 1, 1995. Amendments dated as of January 29, 1991 and March 25, 1992 to The United States Shoe Corporation Salaried Employees Deferred Compensation Plan, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 1, 1992. The United States Shoe Corporation Salaried Employees Deferred Compensation Plan, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 2, 1991. 10.(f) The United States Shoe Corporation Deferred Compensation Plan for Non-Management Directors, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 1, 1992. 84 INDEX TO EXHIBITS Exhibit No. - ------- 10.(g) Amendment No. 1, dated as of November 1, 1994, to Employment Agreement between the company and Bannus B. Hudson, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. Employment Agreement, dated as of August 1, 1990, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 2, 1991. 10.(h) Employment Agreement, dated as of April 1, 1993, between the company and K. Brent Somers, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 10.(i) Amendment No. 1, dated as of February 3, 1994, to Employment Agreement between the company and David M. Browne, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 29, 1994. Employment Agreement, dated as of January 1, 1991, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 2, 1991. 10.(j) The United States Shoe Corporation Corporate Deferred Compensation Plan effective May 1, 1991 (commencing June 1, 1992), incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 10.(k) Form of Amended and Restated Severance Compensation Agreement, dated as of November 14, 1994, between the company and the Named Officers, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(l) Form of Amended and Restated Trust Agreement, dated as of November 14, 1994, between the company and the Named Officers, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(m) The United States Shoe Corporation Supplemental Executive Salaried Employees Benefit Plan, as amended April 21, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. Amendment and Restatement to the Supplemental Executive Salaried Employees Benefit Plan, dated as of March 27, 1991, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended February 1, 1992. 10.(n) Total Return to Shareholders Plan, as restated April 24, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. 10.(o) Description of the Key Executive Long Term Incentive Program effective February 2, 1992, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 85 INDEX TO EXHIBITS Exhibit No. - ------- 10.(p) Description of the Annual Incentive Bonus Program, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 30, 1993. 10.(q) Employment Agreement, dated as of March 15, 1993, between the company and Michael M. Searles, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 29, 1994. 10.(r) Employment Agreement, dated as of May 19, 1993, between the company and Noel E. Hord, incorporated herein by reference to the company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended January 29, 1994. 10.(s) Form of Special Bonus Agreement, dated as of February 2, 1995, between the company and certain officers of the company, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(t) The United States Shoe Corporation Economic Bridge Program, as amended March 15, 1995, for employees of the company, incorporated herein by reference to the company's Schedule 14D-9, dated March 16, 1995, and filed with the Commission. 10.(u) Asset Purchase Agreement, dated as of March 15, 1995, by and among the company, Footwear Acquisition Corp. and Nine West Group Inc. 10.(v) The United States Shoe Corporation Retirement Plan for Outside Directors, as amended April 21, 1995, incorporated herein by reference to the company's Amendment No. 9 to Schedule 14D-9, dated April 24, 1995, and filed with the Commission. 10.(w) An Agreement and Plan of Merger, dated as of April 21, 1995, by and among Avant-Garde Optics, Inc., Luxottica Acquisition Corp. and the company. 11. Computation of Earnings per Common and Common Equivalent Share. 21. List of Subsidiaries. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. EX-10.E 2 U.S. SHOE CORP. 10-K405 EXHIBIT 10(E) 1 EXHIBIT 10.(e) THE UNITED STATES SHOE CORPORATION SUPPLEMENTAL DEFERRED COMPENSATION PLAN 2 TABLE OF CONTENTS
Page SECTION 1 - NAME AND PURPOSE OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Amendment to Prior Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4 Rollover of Accounts from Corporate Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2- GENERAL DEFINITIONS; GENDER AND NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 General Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 3 - ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.3 Eligibility Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 4 - SALARY DEFERRALS; COMPANY MATCH; DISCRETIONARY CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . 6 4.1 Salary Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.2 Company Match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.3 Discretionary Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 5 - ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.1 Salary Deferral Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.2 Company Matching Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.3 Discretionary Contribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.4 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.5 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.6 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 6 - PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.2 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.3 Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.4 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.5 Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
i 3 TABLE OF CONTENTS (continued)
Page ---- SECTION 7 - ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.1 Appointment of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.2 Compensation of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.3 Rules of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.4 Agents and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.5 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.6 Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.7 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 8 - FUNDING OBLIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 9 - AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 10 - NON-ALIENATION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 11 - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11.1 Adjustments in Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11.2 Valuation of Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11.3 Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11.4 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11.5 Separability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ii 4 THE UNITED STATES SHOE CORPORATION SUPPLEMENTAL DEFERRED COMPENSATION PLAN WHEREAS, The United States Shoe Corporation (the "Company") maintains The United States Shoe Corporation Corporate Deferred Compensation Plan (the "Corporate Plan") and The United States Shoe Corporation Salaried Employees Deferred Compensation Plan (the "Salaried Plan"); WHEREAS, the Company deems it desirable to allow participants in the Corporate Plan to rollover their account under such plan to the Salaried Plan, effective January 1, 1995; WHEREAS, the Company desires to change the name of the Salaried Plan to The United States Shoe Corporation Supplemental Deferred Compensation Plan, effective January 1, 1995; NOW, THEREFORE, the following shall constitute The United States Shoe Corporation Supplemental Deferred Compensation Plan (the "Plan"), effective January 1, 1995; SECTION 1 NAME AND PURPOSE OF PLAN 1.1 Name. The plan set forth herein shall be known as The United States Shoe Corporation Supplemental Deferred Compensation Plan (the "Plan"). 1.2 Purpose. The purpose of the Plan is to provide deferred compensation for a select group of management and highly compensated employees of The United States Shoe Corporation. 1.3 Amendment to Prior Plan. This Plan is intended to amend the Salaried Plan effective January 1, 1995. 1.4 Rollover of Accounts from Corporate Plan. The balance in the plan account of each person who was a participant in the Corporate Plan immediately prior to January 1, 1995 and who elects to have his plan account rolled over to this Plan shall be rolled over to this Plan and shall be credited to the Participant's Salary Deferral Account under this Plan. 5 SECTION 2 GENERAL DEFINITIONS; GENDER AND NUMBER 2.1 General Definitions. For purposes of the Plan, the following terms shall have the meanings hereinafter set forth unless the context otherwise requires: 2.1.1 "Affiliated Employer" means the Company, each corporation which is a member of a controlled group of corporations (within the meaning of section 414(b) of the Code as modified by section 415(h) of the Code) which includes the Company, each trade or business (whether or not incorporated) which is under common control (as defined in section 414(c) of the Code as modified by section 415(h) of the Code) with the Company, each member of an affiliated service group (within the meaning of section 414(m) of the Code) which includes the Company and each other entity required to be aggregated with the Company under section 414(o) of the Code. 2.1.2 "Annual Bonus" means the annual bonus paid to a Participant by the Company for services rendered as a Covered Employee, as reflected on form W-2, plus the additional amount of annual bonus which the Company would have paid to the Participant for services rendered as a Covered Employee if the Participant had not participated in a cafeteria plan under section 125 of the Code, a cash or deferred arrangement described in section 401(k) of the Code or another deferred compensation plan sponsored by the Company. 2.1.3 "Approved Absence" means an absence from active service with an Affiliated Employer by reason of a vacation or leave of absence approved by the Affiliated Employer, any absence from active service with an Affiliated Employer while employment rights with the Affiliated Employer are protected by law and any other absence from active service with an Affiliated Employer which does not constitute a termination of employment with the Affiliated Employer under rules adopted by the Affiliated Employer and applied in a uniform and nondiscriminatory manner. 2.1.4 "Beneficiary" means the person or entity designated by a Participant, on forms furnished and in the manner prescribed by the Committee, to receive any benefit payable under the Plan after the Participant's death. If a Participant fails to designate a beneficiary or if, for any reason, such designation is not effective, his "Beneficiary" shall be his surviving spouse or, if none, his estate. 2.1.5 "Board of Directors" means the Board of Directors of the Company. 2.1.6 "Change in Control" means: (i) any consolidation or merger of the Company, if, as a result of such consolidation or merger (a) less than 50% of the outstanding common shares and 50% of the voting shares of the surviving or resulting corporation are owned, immediately after such consolidation or merger, by the owners of the Company's common shares 2 6 immediately prior to such consolidation or merger, or (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of the surviving or resulting corporation's outstanding common shares, and (c) in each such case, within two years after such consolidation or merger, individuals who were directors of the Company immediately prior to such consolidation or merger cease to constitute a majority of the Board of Directors of the Company or its successor by consolidation or merger, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company shall be consummated, or (iii) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company, or (iv) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of the Company's outstanding common shares, and, within two years after such person becomes such beneficial owner, individuals who were directors of the Company immediately prior to the time such person became such beneficial owner cease to constitute a majority of the Board of Directors of the Company or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board of Directors shall cease for any reason to constitute a majority thereof unless the election or the nomination for election by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period or (vi) if, without the approval of the Board of Directors, any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more the Company's outstanding common shares. 2.1.7 "Code" means the Internal Revenue Code of 1986 and the sections thereof, as such Code and sections now exist or are hereafter amended or renumbered. 2.1.8 "Committee" means the Committee appointed by the Company to administer the Plan in accordance with the provisions of Section 7. 2.1.9 "Company Matching Account" means the bookkeeping account established for a Participant in accordance with the provisions of Section 5.2. 2.1.10 "Covered Employee" means an Employee who in the Plan Year in which such Employee would otherwise meet the eligibility requirements of Section 3.1 of the Plan is determined to have met the IRS definition of a "Highly Compensated Employee" in the previous calendar year. 2.1.11 "Discretionary Contribution Account" means the bookkeeping account established for a Participant in accordance with the provisions of Section 5.3. 2.1.12 "Effective Amendment Date" means January 1, 1995. 3 7 2.1.13 "Employee" means any person who is employed as a common law employee of an Affiliated Employer, including any such person who is absent from active service with an Affiliated Employer by reason of an Approved Absence. 2.1.14 "Annual Compensation" means the cash compensation paid to a Participant by the Company for services rendered as a Covered Employee, as reflected on form W-2, plus the additional amount of cash compensation which the Company would have paid to the Participant for services rendered as a Covered Employee if the Participant had not participated in a cafeteria plan under section 125 of the Code or a cash and deferred arrangement described in section 401(k) of the Code, but excluding any compensation attributable to an Annual Bonus, the exercise of a stock option, and any other special or unusual remuneration. 2.1.15 "Participant" means a person who has become and who remains a Participant in the Plan in accordance with the provisions of Section 3. 2.1.16 "Plan Accounts" means, collectively, all outstanding Salary Deferral Accounts and Company Matching Accounts maintained for a Participant. 2.1.17 "Plan Year" means the calendar year. 2.1.18 "Salary Deferral Account" means the bookkeeping account established for a Participant in accordance with the provisions of Section 5.1. 2.2 Gender and Number. For purposes of the Plan, words used in any gender shall include all other genders, words used in the singular form shall include the plural form and words used in the plural form shall include the singular form, as the context may require. SECTION 3 ELIGIBILITY AND PARTICIPATION 3.1 Eligibility. 3.1.1 Each Employee who was a Participant in the Plan immediately prior to the Effective Amendment Date shall continue to be a Participant in the Plan. 3.1.2 Each Employee who is a Covered Employee, who has attained age 21, and who has been credited with at least one year of Eligibility Service shall be eligible to become a Participant in the Plan. 3.2 Participation. An Employee may elect to become a Participant in the Plan as of any Entry Date on which he satisfies all of the eligibility requirements of Section 3.1 by completing the process prescribed by the Committee. Each Participant shall continue to be a Participant so 4 8 long as he remains an Employee and until his Plan Accounts have been fully distributed. For purposes of the Plan, "Entry Date" means each January 1 and the first day of the first month following the date an Employee satisfies all the eligibility requirements of Section 3.1. 3.3 Eligibility Service. Each Employee who completes at least 1,000 Hours of Service during the 12-month period commencing on the day he first performs an Hour of Service shall be credited with one year of "Eligibility Service" as of the last day of such 12-month period. Each Employee who fails to complete at least 1,000 Hours of Service during the 12-month period commencing on the day he first performs an Hour of Service shall be credited with one year of "Eligibility Service" as of the last day of the first Plan Year (commencing on or after the day he first performs an Hour of Service) during which he completes at least 1,000 Hours of Service. For purposes of this Section 3.3, an Employee's "Hours of Service" shall be computed as follows (subject to the rules contained in 29 CFR Section 2530.200b-2(b) and (c), which are incorporated herein by reference): 3.3.1 One Hour of Service shall be credited for each hour for which an Employee is paid, or entitled to payment, for the performance of duties for an Affiliated Employer during the applicable computation period. 3.3.2 One Hour of Service shall be credited for each hour for which an Employee is paid, or entitled to payment, by an Affiliated Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: (a) No more than 501 Hours of Service are required to be credited under this Section 3.3.2 to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (b) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workmen's compensation, unemployment compensation or disability insurance laws; and (c) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this Section 3.3.2, a payment shall be deemed to be made by or due from an Affiliated Employer regardless of whether such payment is made by or due from the Affiliated Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Affiliated Employer contributes or pays premiums and regardless of whether contributions made 5 9 or due to the trust fund, insurer or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. 3.3.3 One Hour of Service shall be credited for each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Affiliated Employer. The same hours of service shall not be credited both under Section 3.3.1 or Section 3.3.2, as the case may be, and under this Section 3.3.3. Crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in Section 3.3.2 shall be subject to the limitations set forth in that Section. SECTION 4 SALARY DEFERRALS; COMPANY MATCH; DISCRETIONARY CONTRIBUTION 4.1 Salary Deferrals. A Participant may elect to defer up to 25% of his Annual Compensation for each Plan Year. Furthermore, subject to such rules as the Committee may prescribe, a Participant may elect to defer up to 100% of his Annual Bonus for each Plan Year. 4.1.1 A Participant who has elected to defer a portion of his Annual Compensation and/or Annual Bonus may change the amount of his deferrals from one permissible amount to another, effective as of any Entry Date, by completing the procedure prescribed by the Committee. 4.2 Company Match. For each calendar quarter, the Company shall credit an amount, on behalf of each Participant who is an Employee on the last day of such quarter or who ceased to be an Employee during such quarter by reason of his retirement (on or after attaining age 65 or, in the case of a Participant who has completed ten years of service with the Company, on or after attaining age 55) or death, to the Participant's bookkeeping account under Section 5.2. To the extent that the Participant's aggregate non-deferred Annual Compensation and Annual Bonus for the calendar year through the end of the applicable calendar quarter exceed $150,000 or such aggregate non-deferred Annual Compensation and annual bonus was not matched under The United States Shoe Corporation Tax Incentive Savings Plan, the amount to be credited to the bookkeeping account under Section 5.2 for such a Participant for any calendar quarter will be equal to 100% of the Participant's Base Salary Deferrals for the calendar quarter. For purposes of the Plan, "Base Salary Deferrals" means, with respect to any period, that portion of the Participant's Annual Compensation and Annual Bonus payable for such period which he has elected to defer under Section 4.1 and which is not in excess of 3% of the Participant's Annual Compensation and Annual Bonus payable for such period. 4.3 Discretionary Contribution. For each calendar year, the Company shall credit an amount to Participants' bookkeeping accounts under Section 5.3. To the extent that a Participant's aggregate non-deferred Annual Compensation and Annual Bonus for the calendar year exceeds 6 10 $150,000 or such aggregate non-deferred Annual Compensation and annual bonus was not matched under The United States Shoe Corporation Tax Incentive Savings Plan, the amount to be credited to the bookkeeping account under Section 5.3 for a Participant for any calendar year shall be equal to a percentage of such Participant's Base Salary Deferrals for the calendar year, such percentage to be determined each year by the Company. Only those Participants who are Employees on the date the Company determines the percentage of Base Salary Deferrals to be contributed under the Plan or who ceased to be Employees prior to such date by reason of their retirement (on or after attaining age 65 or, in the case of Participants who have completed ten years of service with the Company, on or after attaining age 55) or death shall be entitled to such discretionary contribution. SECTION 5 ACCOUNTS 5.1 Salary Deferral Accounts. A separate bookkeeping Salary Deferral Account shall be established and maintained for each Participant who has elected salary deferrals which shall reflect the amounts deferred by the Participant under Section 4.1 and the assumed investment thereof. Subject to such rules as the Committee may prescribe, the amounts deferred by a Participant with respect to any month shall be credited to the Participant's Salary Deferral Account as soon as administratively practical and shall be assumed to have been invested in the investment designated by the Participant in a form provided by and filed with the Committee. 5.2 Company Matching Accounts. A separate bookkeeping Company Matching Account shall be established and maintained for each Participant which shall reflect the Company Match to be credited to the Participant under Section 4.2 and the assumed investment thereof. The amount of the Company Match with respect to any calendar quarter shall be credited to the Participant's Company Matching Account as soon as administratively practical. Amounts credited to a Participant's Company Matching Account prior to January 1, 1995 shall be assumed to have been invested exclusively in common shares of the Company. Amounts credited to a Participant's Company Matching Account on or after January 1, 1995 shall be assumed to have been invested in the investment designated by the Participant. 5.3 Discretionary Contribution Accounts. A separate bookkeeping Discretionary Contribution Account shall be established and maintained for each Participant which shall reflect the Discretionary Contribution to be credited to the Participant under Section 4.3 and the assumed investment thereof. The amount of the Company Discretionary Contribution with respect to any calendar year shall be credited to the Participant's Discretionary Contribution Account as of the date such Company Discretionary Contribution is determined. Amounts credited to a Participant's Discretionary Contribution Account shall be assumed to have been invested exclusively in common shares of the Company. 7 11 5.4 Vesting. A Participant shall at all times be 100% vested in amounts credited to his Salary Deferral Account. A Participant employed on or after January 1, 1995 shall become vested in amounts credited to his Company Matching Account and Discretionary Contribution Account in accordance with the following schedule:
Years of Service Vested Percentage ---------------- ----------------- Less than 2 years 0% 2 years 25% 3 years 50% 4 years 75% 5 years 100%
A Participant employed prior to January 1, 1995 shall be 100% vested in his Company Matching Account and Discretionary Contribution Account. 5.5 Dividends. With respect to the portion of a Participant's Plan Accounts which are assumed to be invested in common shares of the Company, whenever any cash dividends are paid with respect to common shares of the Company, additional amounts shall be credited to the applicable Plan Account of the Participant as of the dividend payment date. The additional amount to be credited to such account shall be determined by multiplying the per share cash dividend paid with respect to the common shares of the Company on the dividend payment date times the number of assumed common shares of the Company credited to such account(s) on the record date. Such additional amount credited to the applicable account(s) of the Participant shall be assumed to have been invested in additional common shares of the Company on the day on which such dividends were paid. 5.6 Valuation. Each calendar quarter, the Company shall furnish each Participant or, in the event of his death, his Beneficiary, a statement as of the end of such calendar quarter showing the then balance of the Participant's Plan Accounts, the total credits to such accounts during the preceding quarter and, if amounts credited to any such account are assumed to have been invested in securities, a description of such securities including the number of shares assumed to have been purchased by the amounts credited to such Accounts. SECTION 6 PAYMENTS 6.1 General. Except as otherwise provided in this Section 6, no amount shall be paid with respect to a Participant's Plan Accounts while he remains an Employee. 8 12 6.2 Termination of Employment. If a Participant ceases to be an Employee for any reason other than his death, the Company shall pay to the Participant the amounts credited to the Participant's Plan Accounts in one lump sum as of the first day of the first calendar quarter following the calendar quarter in which he ceases to be an Employee. 6.3 Death. If a Participant ceases to be an Employee by reason of his death, or if a Participant dies after ceasing to be an Employee but before his Plan Accounts have been distributed, the Company shall pay to the Participant's estate the amounts credited to the Participant's Plan Accounts in one lump sum as of the first day of the first calendar quarter following the calendar quarter in which the Participant's death occurred. 6.4 Change in Control. If a Change in Control of the Company occurs, each Participant's Plan Accounts shall be paid to him in one lump sum as of the day next following the date on which such Change in Control occurred and the Plan shall thereupon terminate. 6.5 Form of Payment. Payments with respect to all Plan Accounts shall be made in cash. SECTION 7 ADMINISTRATION OF THE PLAN 7.1 Appointment of Committee. The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in a Committee of such number of members as may be fixed by the Company who shall be appointed from time to time by and serve at the pleasure of the Company. Any person who is appointed as a member of the Committee shall signify his acceptance by filing a written acceptance with the Company. A member of the Committee may resign by delivering his written resignation to the Company and such resignation shall become effective upon the date specified therein or the date of receipt, whichever is later. 7.2 Compensation of Committee. The members of the Committee shall not receive compensation for their services as such, and, except as required by law, no bond or other security need be required of them in such capacity in any jurisdiction. 7.3 Rules of Plan. Subject to the limitations of the Plan, the Committee may, from time to time, establish rules for the administration of the Plan and the transaction of its business. The Committee may correct errors, however arising, and, as far as possible, adjust any benefit payments accordingly. The determination of the Committee as to the interpretation of the provisions of the Plan or any disputed question shall be conclusive upon all interested parties. 7.4 Agents and Employees. The Committee may authorize one or more agents to execute or deliver any instrument. The Committee may appoint or employ such agents, counsel 9 13 (including counsel of any Affiliated Employer), auditors (including auditors of any Affiliated Employer), clerical help and actuaries as in the Committee's judgment may seem reasonable or necessary for the proper administration of the Plan. 7.5 Records. The Committee shall maintain accounts showing the fiscal transactions of the Plan and shall keep, in convenient form, such data as may be necessary for valuation of the assets and liabilities of the Plan. The Committee shall prepare and submit annually to the Company a report setting forth the amount of contributions required to be made to the Plan and in conformity with applicable law, showing in reasonable detail the assets and liabilities of the Plan, and giving a brief account of the operation of the Plan for each Plan Year. 7.6 Delegation of Authority. With the consent of the Company the Committee may, by resolution, delegate to any person or persons any or all of its rights and duties hereunder. Any such delegation shall be valid and binding on all persons, and the person or persons to whom authority has been delegated shall, upon written acceptance of such authority, have full power to act in all matters so delegated until the authority expires by its terms or is revoked by the Committee. 7.7 Eligibility. The members of the Committee shall not be precluded from becoming Participants in the Plan if they are otherwise eligible. 7.8 Indemnification. The Company shall indemnify each member of the Committee for all expenses and liabilities (including reasonable attorney's fees) arising out of the administration of the Plan, other than any expenses or liabilities resulting from the Committee's own gross negligence or willful misconduct. The foregoing right of indemnification shall be in addition to any other rights to which the members of the Committee may be entitled as a matter of law. SECTION 8 FUNDING OBLIGATION The Company shall have no obligation to fund, either by the purchase of common shares of the Company or the investment in any account or by any other means, its obligation to Participants hereunder. If, however, the Company does elect to allocate assets to provide for any such obligation, the assets allocated for such purpose shall be assets of the Company subject to claims against the Company, including claims of the Company's creditors, to the same extent as are other corporate assets, and the Participants shall have no right or claim against the assets so allocated, other than as general creditors of the Company. 10 14 SECTION 9 AMENDMENT AND TERMINATION The Company may without the consent of any Participant or Beneficiary amend or terminate the Plan at any time; provided that no amendment shall be made or act of termination taken which divests any Participant of the right to receive payments under the Plan with respect to amounts theretofore credited to the Participant's Plan Accounts. SECTION 10 NON-ALIENATION OF BENEFITS No Participant or Beneficiary shall commute, encumber, pledge or dispose of the right to receive the payments required to be made by the Company hereunder, which payments and the right to receive them are expressly declared to be nonassignable and nontransferable. In the event of any attempt to assign or transfer any such payments or the right to receive them, the Company shall have no further obligation to make any payments otherwise required of it hereunder. SECTION 11 MISCELLANEOUS 11.1 Adjustments in Common Shares. If there is any change in the common shares of the Company through the declaration of a stock dividend or a stock split or through a recapitalization resulting in a stock split, or a combination or a change of shares, the number of shares assumed to have been purchased hereunder shall be appropriately adjusted. 11.2 Valuation of Common Shares. Whenever the common shares of the Company are to be valued for the purpose of determining the amount to be distributed from a Participant's Company Matching Account, the value of each such share shall be taken as the closing price of a common share of the Company on the New York Stock Exchange on the last business day preceding the date as of which the distribution is made. 11.3 Delegation. Any matter or thing to be done by the Company shall be done by its Board of Directors or the Executive Committee thereof, except that, from time to time, the Board or Executive Committee by resolution may delegate to any person or committee certain of its rights and duties hereunder. Any such delegation shall be valid and binding on all persons and the person or committee to whom or which authority is delegated shall have full power to act in all matters so delegated until the authority expires by its terms or is revoked by the Board or the Executive Committee, as the case may be. 11 15 11.4 Applicable Law. The Plan shall be governed by applicable federal law and, to the extent not preempted by applicable federal law, the laws of the State of Ohio. 11.5 Separability of Provisions. If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, and the Plan shall be construed and enforced as if such provision had not been included. 11.6 Headings. Headings used throughout the Plan are for convenience only and shall not be given legal significance. 11.7 Counterparts. The Plan may be executed in any number of counterparts, each of which shall be deemed an original. All counterparts shall constitute one and the same instrument, which shall be sufficiently evidenced by any one thereof. IN WITNESS WHEREOF, The United States Shoe Corporation has caused its name to be subscribed on the 20th day of April, 1995. THE UNITED STATES SHOE CORPORATION By: /s/ Robert J. Petrik _______________________________ Robert J. Petrik VP - Treasurer 12 EX-10.U 3 U.S. SHOE CORP. 10-K405 EXHIBIT 10(U) 1 Exhibit 10.(u) Asset Purchase Agreement 2 TABLE OF CONTENTS
Page ---- ARTICLE I Assets To Be Purchased and Sold Section 1.1 Seller's Assets . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Seller's Liabilities . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE II Closing and Closing Date; Purchase Price Section 2.1 The Closing. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.2 Payment at the Closing . . . . . . . . . . . . . . . . . . . . 15 Section 2.3 Post-Closing Adjustment . . . . . . . . . . . . . . . . . . . 16 ARTICLE III Representations and Warranties of the Seller Section 3.1 Organization; Subsidiaries . . . . . . . . . . . . . . . . . . 17 Section 3.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 3.3 Consents and Approvals; No Violations . . . . . . . . . . . . 20 Section 3.4 SEC Reports and Financial Statements . . . . . . . . . . . . . 21 Section 3.5 Footwear Business Financial Statements . . . . . . . . . . . . 22 Section 3.6 Title to Acquired Assets; Inventories . . . . . . . . . . . . 23 Section 3.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.8 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.9 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . 28 Section 3.10 Absence of Certain Changes or Events; Material Agreements . . 28 Section 3.11 No Violation of Law . . . . . . . . . . . . . . . . . . . . . 29 Section 3.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 3.13 Labor Controversies . . . . . . . . . . . . . . . . . . . . . 32 Section 3.14 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 3.15 Intellectual Property . . . . . . . . . . . . . . . . . . . . 33 Section 3.16 Material Contracts . . . . . . . . . . . . . . . . . . . . . . 35 Section 3.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 3.18 Parent Securities . . . . . . . . . . . . . . . . . . . . . . 36 Section 3.19 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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Page ---- ARTICLE IV Representations and Warranties of Parent and the Purchaser Section 4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 4.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 4.3 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.4 Consents and Approvals; No Violations . . . . . . . . . . . . 38 Section 4.5 SEC Reports and Financial Statements . . . . . . . . . . . . . 39 Section 4.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 4.7 Absence of Certain Changes or Events; Material Agreements . . 41 Section 4.8 No Violation of Law . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE V Covenants Section 5.1 Conduct of the Seller's Business . . . . . . . . . . . . . . . 41 Section 5.2 Covenants of Parent . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE VI Additional Agreements Section 6.1 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . 45 Section 6.2 Access to Information . . . . . . . . . . . . . . . . . . . . 46 Section 6.3 Further Assurances; Subsequent Transfers . . . . . . . . . . . 46 Section 6.4 Use of Names . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 6.5 Non-Solicitation . . . . . . . . . . . . . . . . . . . . . . . 50 Section 6.6 Employee Matters; Employee Benefit Plans . . . . . . . . . . . 50 Section 6.7 Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 6.8 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 52 Section 6.9 Notification of Certain Matters . . . . . . . . . . . . . . . 53 Section 6.10 Settlements for Cash Collections and Disbursements . . . . . . 53 Section 6.11 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 6.12 Transition Services; Interim Leases . . . . . . . . . . . . . 54 Section 6.13 Purchase Price Allocation for Tax Purposes . . . . . . . . . . 55 Section 6.14 Certain Environmental Matters . . . . . . . . . . . . . . . . 56 Section 6.15 Disclosure Schedule Updates 60 Section 6.16 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . 60
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Page ---- Section 6.17 Section 338 Elections; Procedures . . . . . . . . . . . . . . 60 Section 6.18 Allocation of Certain Taxes . . . . . . . . . . . . . . . . . 62 Section 6.19 Carrybacks . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.20 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.21 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 6.22 W-2 Preparation . . . . . . . . . . . . . . . . . . . . . . . 65 Section 6.23 Prohibited Transactions by Parent . . . . . . . . . . . . . . 65 Section 6.24 Audited Financial Statements . . . . . . . . . . . . . . . . . 66 Section 6.25 Books and Records; Personnel . . . . . . . . . . . . . . . . . 66 Section 6.26 Registration and Transfer of the Parent Warrants . . . . . . . 68 Section 6.27 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . 72 ARTICLE VII Indemnification Section 7.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . 73 Section 7.2 Indemnity by the Seller . . . . . . . . . . . . . . . . . . . 74 Section 7.3 Indemnity by Parent and the Purchaser . . . . . . . . . . . . 76 Section 7.4 Notification of Third-Party Claims . . . . . . . . . . . . . . 77 Section 7.5 Defense of Claims . . . . . . . . . . . . . . . . . . . . . . 78 Section 7.6 Access and Cooperation . . . . . . . . . . . . . . . . . . . . 79 Section 7.7 Assessment of Claims . . . . . . . . . . . . . . . . . . . . . 79 Section 7.8 Limits on Indemnification . . . . . . . . . . . . . . . . . . 79 Section 7.9 Survival of Representations and Warranties . . . . . . . . . . 81 ARTICLE VIII Conditions Section 8.1 Conditions to Each Party's Obligation to Close . . . . . . . . 82 Section 8.2 Conditions of Obligations of Parent and the Purchaser . . . . 82 Section 8.3 Conditions of Obligations of the Seller . . . . . . . . . . . 84 Section 8.4 If Conditions Not Satisfied . . . . . . . . . . . . . . . . . 85 ARTICLE IX Termination and Amendment Section 9.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 9.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . 86
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Page ---- ARTICLE X Miscellaneous Section 10.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 10.2 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . 87 Section 10.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 10.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.6 Entire Agreement; No Third Party Beneficiaries . . . . . . . . 89 Section 10.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 10.8 Specific Performance . . . . . . . . . . . . . . . . . . . . . 89 Section 10.9 Broker's Fees . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 10.10 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 10.11 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . 89
iv 6 GLOSSARY OF DEFINED TERMS
Page ---- Acquired Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Acquired Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Acquired Intellectual Property . . . . . . . . . . . . . . . . . . . . . 4 Allocation Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Assumed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Audited Footwear Business Financial Statements . . . . . . . . . . . . . 66 Bill of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Capezio License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Capezio Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Carryback Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Claim Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Closing Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Compensation and Benefit Plans . . . . . . . . . . . . . . . . . . . . . 26 Competing Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Competitive Business . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . 67 Confidentiality Agreement . . . . . . . . . . . . . . . . . . . . . . . . 46 Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Contracting Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . 19 Conveyancing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 13 Copyrights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Corporate Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Deeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Delay Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Distribution Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Domestic Footwear Subsidiaries . . . . . . . . . . . . . . . . . . . . . 6 Environmental Consultant . . . . . . . . . . . . . . . . . . . . . . . . 56 Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Environmental Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Environmental Right . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ERISA Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Final Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Footwear Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Footwear Business Balance Sheet . . . . . . . . . . . . . . . . . . . . . 22 Footwear Business Financial Statements . . . . . . . . . . . . . . . . . 22 Footwear Business Net Worth . . . . . . . . . . . . . . . . . . . . . . . 83
v 7 Footwear Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Footwear Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Foreign Footwear Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 6 Governmental Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Hazardous Material . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Identified Environmental Conditions . . . . . . . . . . . . . . . . . . . 56 Indemnification Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Indemnitee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Indemnitor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Independent Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . 16 Intellectual Property Assignments . . . . . . . . . . . . . . . . . . . . 13 Interim Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Material Adverse Effect on the Footwear Business . . . . . . . . . . . . 18 Notice Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Other Acquired Intellectual Property Licenses . . . . . . . . . . . . . . 13 Pappagallo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Parent Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Parent Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . 38 Parent SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Parent Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Parent's Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Permitted Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Phase I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Phase II Investigations . . . . . . . . . . . . . . . . . . . . . . . . . 56 Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Purchaser Actuary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Purchaser Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Purchaser Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . 51 Purchaser Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Purchaser Services Agreement . . . . . . . . . . . . . . . . . . . . . . 54 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . 68 Related to the Footwear Business . . . . . . . . . . . . . . . . . . . . 3 Remedial Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Remediation Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Required Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Retained Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Retained Corporate Operations Assets . . . . . . . . . . . . . . . . . . 7 Retained Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 11
vi 8 Retained Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Return Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 338 Elections . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 338(h)(10) Election . . . . . . . . . . . . . . . . . . . . . . . 64 Section 338 Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Seller Actuary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Seller Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . 2 Seller Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Seller Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Seller Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Seller Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 22 Seller Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Seller SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Seller Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Seller Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . 54 Seller's Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Severance Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Severance Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Target Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Tax Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Third-Party Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 338(h) Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Transfer Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Transferred Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Transferred Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 6 Warrant Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
vii 9 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of March 15, 1995, by and among Nine West Group Inc., a Delaware corporation ("Parent"), Footwear Acquisition Corp., a Delaware corporation (the "Purchaser"), and The United States Shoe Corporation, an Ohio corporation (the "Seller"). WHEREAS, Parent desires to acquire through the Purchaser all of the assets, properties and rights of every and all types whatsoever, whether real or personal, tangible or intangible, of the Seller and its Subsidiaries (as defined in Section 3.1) used primarily in, arising primarily from or related primarily to the manufacture, import, marketing, designing and wholesale and retail sale of footwear in the United States and abroad (the "Footwear Business") (all such assets other than the Retained Assets (as defined in Section 1.1(b)) being referred to as the "Acquired Assets"), and to assume the Assumed Liabilities (as defined in Section 1.2); and WHEREAS, the Boards of Directors of each of the Seller, Parent and the Purchaser have authorized and approved by all requisite action the acquisition of the Acquired Assets and the assumption of the Assumed Liabilities by the Purchaser, subject to the terms, conditions and provisions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and agreements herein contained, the parties, intending to be legally bound hereby, agree as follows: 10 ARTICLE I ASSETS TO BE PURCHASED AND SOLD Section 1.1 Seller's Assets. (a) Acquired Assets. On the Closing Date (as defined in Section 2.1(a)) and subject to the terms and conditions of this Agreement, the Seller shall sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered, to the Purchaser and the Purchaser shall purchase, pay for and accept from the Seller and its Subsidiaries all of the right, title and interest of the Seller and its Subsidiaries in all of the Acquired Assets held by the Seller or its Subsidiaries as of the Closing Date, including, without limitation, the following assets, properties and rights, in each case whether or not reflected or required to be reflected on the Footwear Business Balance Sheet (as defined in Section 3.5(a)), other than the Retained Assets: (i) Acquired Facilities. The headquarters building and related land located at One Eastwood Drive, Cincinnati, Ohio 45227-1197 and all of the other owned facilities Related to the Footwear Business (as defined below), whether owned by the Seller or any of its Subsidiaries, including a Transferred Subsidiary (as defined in Section 1.1(a)(x)), all of which are identified in Section 1.1(a)(i) of the disclosure schedule delivered by the Seller to Parent on the date hereof and attached hereto (the "Seller Disclosure Schedule") (collectively, the "Acquired Facilities"), including, without limitation, the following: (A) all real estate upon which the Acquired Facilities are situated; (B) any and all presently existing easements or licenses necessary or desirable in connection with the use of, or in order to maintain free access to, the Acquired Facilities, except for those easements or licenses identified in Section 1.1(a)(i) of the Seller Disclosure Schedule which cannot be 2 11 assigned by the Seller or its Subsidiaries; (C) all improvements constituting a part of the Acquired Facilities; and (D) all the fixed plant, machinery and equipment and all other fixtures and fittings owned by the Seller or any of its Subsidiaries on the Closing Date and used in connection with any of the Acquired Facilities primarily in, arising primarily from or related primarily to the Footwear Business ("Related to the Footwear Business") (but not including the Retained Corporate Operations Assets (as defined in Section 1.1(b)(iv))). (ii) Tangible Personal Property. All moveable plant, machinery, equipment, computer hardware, furniture, fixtures, fittings, automobiles, trucks, tools and supplies, together with all other tangible personal property Related to the Footwear Business, other than the Retained Corporate Operations Assets. (iii) Inventories. All inventories of finished goods, work in progress, raw materials, service parts and supplies of the Footwear Business wherever located at the Closing Date, including, without limitation, such inventories: (A) located at the Acquired Facilities; (B) located at facilities or in departments leased by Seller or any of its Subsidiaries Related to the Footwear Business; (C) located on the premises of the Seller's or any of its Subsidiaries' suppliers; (D) in transit; 3 12 (E) located on the premises of the Seller's or any of its Subsidiaries' warehouses; and (F) located on the premises of public warehouses. (iv) Contracts. All Contracts (as defined in Section 3.3(a)) and contract rights of the Seller or any of its Subsidiaries Related to the Footwear Business, including, without limitation, all Contracts set forth in Section 3.16 of the Seller Disclosure Schedule. (v) Accounts and Notes Receivable. All accounts and notes receivable of the Seller or any of its Subsidiaries Related to the Footwear Business other than accounts and notes receivable that are owed by the Seller or any of its Subsidiaries the capital stock of which will not be transferred to the Purchaser pursuant to Section 1.1(a)(x) (the "Retained Subsidiaries"). (vi) Intangible Acquired Assets. All goodwill and other intangible assets of the Seller or any of its Subsidiaries Related to the Footwear Business, excluding the Capezio trademark/trade name (the "Capezio Name") and the U.S. Shoe and The United States Shoe Corporation trademarks/tradenames (the "Corporate Names"), but including, without limitation, and subject to existing licenses, the following intangible assets of an intellectual property nature (collectively, the "Acquired Intellectual Property"): (A) all know-how, show-how, confidential or proprietary technical information, trade secrets, designs, processes, computer software and data bases originating with the Seller or as a "work for hire" created for the Seller, research in progress, inventions and invention disclosures (whether patentable or unpatentable) and drawings, schematics, blueprints, flow sheets, designs and models, of any nature whatsoever; 4 13 (B) all copyrights, copyright registrations and copyright applications (the "Copyrights"); (C) all patents, patent applications, patents pending, patent disclosures on inventions and all patents issued upon said patent applications or based upon such disclosures (the "Patents"); and (D) all registered and unregistered trade names, trademarks, service marks, product designations, corporate names, trade dress, logos, slogans, designs and general intangibles of like nature, together with all registrations and recordings and all applications for registration therefor and all translations, adaptations, derivatives and combinations thereof, excluding the Capezio Name and the Corporate Names (the "Trademarks"). (vii) Permits, Licenses, Registrations, Etc. To the extent assignable, all consents, permits, licenses, orders, registrations, franchises, certificates, approvals or other similar rights from any federal, state or local regulatory agencies Related to the Footwear Business, including, without limitation, the Licenses (as defined in Section 3.14). (viii) Books and Records. All books and records of the Seller and its Subsidiaries Related to the Footwear Business, including, without limitation, customer lists, sales and other records, promotional material, oper- ating manuals and guidelines, software manuals and documentation, files, documents, papers, data stored in electronic, optical or magnetic form, agreements, books of account, Contracts, correspondence, plats, plans and drawings and specifications. (ix) Security Deposits, Prepaid Expenses and Third Party Claims. All security deposits and prepaid expenses and other prepaid items made by the Seller or any of its Subsidiaries Related to the Footwear Business and all claims, 5 14 causes of action and rights of recovery of the Seller and its Subsidiaries against third parties Related to the Footwear Business or arising from the operation of the Acquired Assets. (x) Subsidiaries. All of (A) the stock of each of the corporations set forth on Section 1.1(a)(x)(A) of the Seller Disclosure Schedule (the "Domestic Footwear Subsidiaries") and (B) the assets of each of the corporations set forth in Section 1.1(a)(x)(B) of the Seller Disclosure Schedule (the "Foreign Footwear Subsidiaries" and, together with the Domestic Subsidiaries, the "Footwear Subsidiaries"); provided, however, that the Purchaser shall have the right, in its sole discretion, to purchase directly all of such assets of the Foreign Footwear Subsidiaries or to indirectly acquire such assets through the purchase of all of the issued and outstanding shares of capital stock of any of the Foreign Footwear Subsidiaries (all Footwear Subsidiaries whose capital stock is so purchased by the Purchaser being referred to herein as the "Transferred Subsidiaries"). (xi) Severance Trusts. All of the Seller's reversionary and other rights to the trusts (the "Severance Trusts") established under the Amended and Restated Severance Compensation Agreements (the "Severance Agreements") identified in Section 1.1(a)(xi) of the Seller Disclosure Schedule. (xii) Other Acquired Assets. Any and all other rights, properties, claims, contracts, businesses and assets of the Seller and its Subsidiaries of every kind, character and description, whether real, personal or mixed, whether accrued, contingent or otherwise, whether tangible or intangible, and wherever located Related to the Footwear Business, excluding the Retained Assets, but including, without limitation, all investments in securities reflected on the Footwear Business Balance Sheet or arising since January 28, 1995, other than marketable securities. 6 15 (b) Retained Assets. Notwithstanding anything contained herein to the contrary, the Seller shall not sell, transfer, convey or deliver, or cause to be sold, transferred, conveyed or delivered, to the Purchaser, and the Purchaser shall not purchase from the Seller the following assets, properties, interests and rights of the Seller and/or of its Subsidiaries (the "Retained Assets"): (i) Capezio Name. The Capezio Name. (ii) Books and Records. All books and records of the Seller related to the other Retained Assets or the Retained Liabilities. (iii) Tax Refunds. All claims of the Seller or any of its Subsidiaries for refunds, credits, carrybacks or carryforwards in connection with any Taxes (as defined in Section 3.12(b)) for tax periods ending on or prior to the Closing Date and the proceeds thereof. (iv) Corporate Operations Assets. All property and equipment located on the Acquired Facilities used for the purpose of general corporate operations of the Seller as of the Closing Date described or listed in Section 1.1(b)(iv) of the Seller Disclosure Schedule (the "Retained Corporate Operations Assets"). (v) Retained License Agreements. The License Agreements in respect of intellectual property of the Seller set forth in Section 1.1(b)(v) of the Seller Disclosure Schedule, and all rights and interests of the Seller in and to the payments and profits in respect thereof. (vi) Cash and Cash Equivalents. All cash and cash equivalents, such as bank deposits and marketable securities, other than cash on hand in the stores included in the Acquired Assets at the time of the Closing. (vii) Accounts and Notes Receivable from Seller. All accounts and notes receivable of the Seller Related to the Footwear Business owed by the Seller or any of the Retained Subsidiaries. 7 16 (viii) Non-Footwear Business Assets. All of the assets, properties, interests and rights of the Seller and its Subsidiaries which are not Related to the Footwear Business. (ix) Corporate Names. The Corporate Names. Section 1.2 Seller's Liabilities (a) Assumed Liabilities. On and as of the Closing Date and subject to the terms and conditions of this Agreement, the Purchaser shall assume and agree to pay, perform and discharge as and when due all of the liabilities and obligations of the Seller or the Footwear Subsidiaries Related to the Footwear Business, whether fixed, absolute or contingent, material or immaterial, matured or unmatured, as the same exist as of the Closing Date except for the Retained Liabilities (as defined in Section 1.2(b)) (collectively, the "Assumed Liabilities"), including but not limited to the following: (i) current liabilities and obligations of the Seller and the Footwear Subsidiaries that are reflected or of a type reserved against on the Footwear Business Balance Sheet, to the extent such liabilities or obligations have not been paid or discharged prior to Closing Date, and such categories of current liabilities and obligations incurred in the ordinary course of the Footwear Business consistent with past practice since January 28, 1995, including, without limitation, all accounts payable, accrued expenses, trade obligations and notes payable Related to the Footwear Business (but excluding any accounts payable, trade obligations or notes payable which are owed to the Seller or to any of the Retained Subsidiaries), the self-insured portion of any workers' compensation, general liability or automobile liability claims, and any other liabilities or obligations against which reserves are provided on the Footwear Business Balance Sheet; (ii) all capital commitments of the Seller and the Footwear Subsidiaries Relat- 8 17 ed to the Footwear Business either identified in Section 1.2(a)(ii) of the Seller Disclosure Schedule or made in the ordinary course of business and not exceeding $25,000 individually or $100,000 for each month from the date hereof through the Closing Date in the aggregate; (iii) all liabilities under employee benefit plans and arrangements of the Seller and the Footwear Subsidiaries set forth in Section 1.2(a)(iii) of the Seller Disclosure Schedule to the extent such liabilities relate to Transferred Employees (as defined in Section 6.6(a)) (except in the case of Section 1.2(a)(iii)(D)), including, but not limited to, the following: (A) all liabilities and obligations relating to the pay, benefits and any perquisites offered to the Transferred Employees; (B) all liabilities and obligations arising upon or after the Closing under the Severance Agreements and the other severance or termination agreements set forth in Section 1.2(a)(iii) of the Seller Disclosure Schedule; (C) all liabilities and obligations under the Seller's Economic Bridge Program in effect on the date of this Agreement with respect to the Transferred Employees; and (D) all liabilities and obligations to provide to eligible current and former employees of the Footwear Business the retiree health and life benefits set forth in Section 3.8(e) of the Seller Disclosure Schedule and reflected or of a type reserved against on the Footwear Business Balance Sheet with respect thereto; (iv) to the extent not otherwise constituting Retained Liabilities, all 9 18 liabilities and obligations under or related to existing Licenses and Contracts which constitute Acquired Assets including, but not limited to, all liabilities and obligations under or related to retail store leases and other leases of real property by Seller or any of the Footwear Subsidiaries (as tenant) Related to the Footwear Business which constitute Acquired Assets; (v) all liabilities and obligations Related to the Footwear Business arising from outstanding commitments (in the form of accepted purchase orders or otherwise) to sell products, or outstanding quotations, proposals or bids with respect to the sale of products; (vi) all liabilities and obligations Related to the Footwear Business arising from outstanding commitments (in the form of issued purchase orders or otherwise), or outstanding quotations, proposals or bids, to purchase or acquire finished goods, raw materials, components, supplies or services; (vii) all liabilities and obligations Related to the Footwear Business arising from any rights or claims of customers of the Footwear Business to return or exchange merchandise sold by the Footwear Business; (viii) all liabilities and obligations of the Seller and the Footwear Subsidiaries in respect of the foreign exchange contracts and letters of credit Related to the Footwear Business set forth in Section 1.2(a)(viii) of the Seller Disclosure Schedule and those incurred in the ordinary course of the Footwear Business consistent with past practice from the date hereof to the Closing Date; (ix) all other liabilities and obligations reflected or of a type reserved against on the Footwear Business Balance Sheet; (x) all liabilities and obligations arising from or in connection with any litigation Related to the Footwear Business or arising from or 10 19 alleged to have arisen from any actual or alleged injury to persons or property either as a result of the ownership, possession or use of any product manufactured or sold by the Footwear Business or of any violation of applicable law in the operation of the Footwear Business or related to, arising from or connected with Environmental Laws or Hazardous Materials (each as defined in Section 6.14(g)), including, without limitation, response costs under 42 U.S.C. Section 7601 et seq. or any state law or remediation expense; and (xi) all other liabilities and obligations Related to the Footwear Business which are not Retained Liabilities. (b) Liabilities Not Assumed. Notwithstanding anything to the contrary contained in this Agreement, the Seller and its Subsidiaries (other than Transferred Subsidiaries) shall retain and neither Parent nor the Purchaser shall assume or in any manner become liable or responsible for any liability, obligation, commitment or expense of any kind, known or unknown, now existing or hereafter arising from the following (the "Retained Liabilities"): (i) any capital commitments of the Seller or its Subsidiaries undertaken prior to the Closing Date which have not been assumed by the Purchaser pursuant to Section 1.2(a)(ii); (ii)(A) any Taxes payable with respect to the sale of the Acquired Assets to the Purchaser, and (B) any Taxes payable with respect to the Acquired Assets or to the Seller's or its Subsidiaries' operations, assets or income for, or properly attributable to, any periods ending on or prior to the Closing Date (including, with respect to any taxable period that includes but does not end on the Closing Date, Taxes with respect to the portion of such period that includes and ends on the Closing Date calculated as if such taxable period ended at the consummation of the Closing on the Closing Date); (iii) expenses incurred in connection with the sale of the Acquired Assets pursuant to this Agreement or the other transactions contemplated hereby, including without limitation, the fees and expenses of the Seller's counsel, investment advisors and independent auditors; (iv) the obligation to pay liquidated damages pursuant to Section 6.3(c); (v) any liabilities or obligations of the Seller or any of its Subsidiaries arising from or relating to the agreements listed in Section 11 20 1.2(b)(v) of the Seller Disclosure Schedule; and (vi) any liabilities or obligations of the Seller or its Subsidiaries not Related to the Footwear Business. (c) Releases. At the Closing (as defined in Section 2.1(a)), the Seller shall deliver to the Purchaser releases, duly executed by all parties to the Contracts listed in Section 1.2(c) of the Seller Disclosure Schedule (the "Seller Encumbrances"), in form and substance satisfactory to the Purchaser, releasing Parent, the Purchaser and the Acquired Assets from all liabilities and obligations related thereto. ARTICLE II CLOSING AND CLOSING DATE; PURCHASE PRICE Section 2.1 The Closing. (a) Closing Date. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York, commencing at 9:00 A.M., local time, on May 15, 1995 or, if later, three business days following the date on which either Parent or the Seller shall have notified the other that all of the conditions set forth in Article VIII shall have been satisfied or waived (the "Closing Date"); provided, however, that, if the notified party can reasonably demonstrate that all of such conditions have not been satisfied or waived, the Closing shall take place three business days following the date on which such conditions have been satisfied or waived; provided, further, the parties may, by agreement in writing, change the Closing Date or place of the Closing to another date or place. (b) Closing Documents. (i) Seller's Documents. At or prior to the Closing, the Seller shall deliver or cause to be delivered to the Purchaser the following documents (the "Seller Documents"). (A) executed and, if appropriate, acknowledged deeds substantially in 12 21 the forms attached as Exhibit 2.1(b)(i)(A) hereto (the "Deeds"); (B) executed and, if appropriate, acknowledged patent, trademark, copyright and other intellectual property assignments in the forms attached as Exhibit 2.1(b)(i)(B)(1) (the "Intellectual Property Assignments") conveying to the Purchaser the Acquired Intellectual Property, subject to retention by the Seller of perpetual non-exclusive licenses, each in the form attached hereto as Exhibit 2.1(b)(i)(B)(2) (collectively, the "Other Acquired Intellectual Property Licenses"), to continue current use in its businesses other than the Footwear Business of the Acquired Intellectual Property listed in Section 2.1(b)(i)(B) of the Seller Disclosure Schedule; (C) an executed Bill of Sale, Assignment and Assumption in the form attached as Exhibit 2.1(b)(i)(C) (the "Bill of Sale"); (D) such other executed and, if appropriate, acknowledged sale, conveyance and transfer documents in form and substance reasonably satisfactory to Parent and its counsel in order effectively to vest in the Purchaser title to all of the Acquired Assets (all such documents, together with the Deeds, the Intellectual Property Assignments and the Bill of Sale, the "Conveyancing Agreements"); (E) copies of notices to and the consents obtained from third parties under any Contract Related to the Footwear Business identified in Section 8.2(c) and Section 8.2(c) of the Seller Disclosure Schedule as a condition to the consummation of the transactions contemplated by this Agreement and any other consents obtained by the Seller prior to the Closing which are identified in Section 3.3(a) 13 22 of the Seller Disclosure Schedule as necessary in connection with the transactions contemplated by this Agreement; (F) an executed perpetual non-exclusive license in the form attached hereto as Exhibit 2.1(b)(i)(F) (the "Capezio License") for the Purchaser to continue current use in the Footwear Business of the Capezio Name; (G) a copy of the guaranty in the form attached hereto as Exhibit 2.1(b)(i)(G), as executed by LensCrafters, Inc.; (H) copies of each of the Purchaser Services Agreement (as defined in Section 6.12(a)) and the Seller Services Agreement (as defined in Section 6.12(b)), in each case as executed by the Seller; (I) copies of each of the Interim Leases (as defined in Section 6.12(c)), in each case as executed by the Seller; and (J) the various other documents otherwise required by this Agreement to be delivered by the Seller or its Subsidiaries at or prior to the Closing. (ii) Purchaser's Documents. At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller the following documents (the "Purchaser Documents"): (A) the Conveyancing Agreements to which it will become a party, in each case executed by the Purchaser; (B) a copy of the Warrant Agreement in the form attached hereto as Exhibit 2.1(b)(ii)(B) (the "Warrant Agreement") as executed by Parent and the certificate evidencing the warrants to be 14 23 issued thereunder as provided for in Section 2.2(b); (C) the Other Acquired Intellectual Property Licenses, in each case executed by the Purchaser; (D) copies of each of the Purchaser Services Agreement and the Seller Services Agreement, in each case executed by the Purchaser; (E) executed copies of each of the Interim Leases, in each case executed by the Purchaser; and (F) the various other documents otherwise required by this Agreement to be delivered by the Purchaser at or prior to the Closing. Section 2.2 Payment at the Closing. The consideration to be paid to the Seller on the Closing Date for the Acquired Assets shall be as follows: (a) Cash Purchase Price. Parent shall pay or cause to be paid to the Seller an amount equal to $560 million by wire transfer of immediately available funds to an account designated by the Seller (or other means acceptable to the Seller). (b) Warrants. Parent shall issue to the Seller warrants to purchase an aggregate of 3,700,000 shares of common stock, par value $.01 per share (the "Parent Common Stock"), of Parent (the "Parent Warrants") pursuant to the Warrant Agreement. (c) Assumed Liabilities. On the Closing Date, the Purchaser shall assume the Assumed Liabilities. (d) Severance Trusts. Parent shall pay or cause to be paid to the Seller the aggregate amount of cash payments made by the Seller to fund the Severance Trusts, reduced by the amount of any reversions to the Seller from the Severance Trusts on or prior to the Closing Date, all as certified as of the Closing Date by 15 24 the Chief Financial Officer of the Seller and in any event not to exceed $6,100,000. Section 2.3 Post-Closing Adjustment. (a) Within 45 days following the Closing Date, the Purchaser shall provide to the Seller an unaudited combined balance sheet of the Footwear Business as of the Closing Date, but without giving effect to the Closing, prepared in accordance with United States generally accepted accounting principles and on a basis consistent with the Footwear Business Balance Sheet (the "Closing Balance Sheet"). The Seller shall cooperate fully in good faith with the Purchaser in the preparation of the Closing Balance Sheet, such cooperation to include, without limitation, full access to the books and records of the Seller Related to the Footwear Business for such purpose. (b) The Seller shall have 25 days following receipt of the Closing Balance Sheet to notify the Purchaser of any dispute with the Closing Balance Sheet. In order to facilitate the Seller's review of the Closing Balance Sheet, the Purchaser shall cooperate fully in good faith with the Seller, such cooperation to include, without limitation, full access to the Purchaser's work papers relating to the Closing Balance Sheet. If the Seller fails to notify the Purchaser of any such dispute within such 25-day period, or, prior to the expiration thereof, notifies the Purchaser in writing that no such dispute exists, the Closing Balance Sheet shall be deemed to be the "Final Balance Sheet." In the event that the Seller shall so notify the Purchaser of any dispute, the Seller and the Purchaser shall cooperate in good faith to resolve such dispute as promptly as practicable. In the event that the Seller and the Purchaser are unable to resolve any such dispute within 20 days of the Seller's delivery of such notice, such dispute shall be resolved by the New York office of KPMG Peat Marwick or another accounting firm acceptable to the Seller and the Purchaser (the "Independent Accounting Firm"), with any fees being paid 50% by the Seller and 50% by the Purchaser. The determination of the Independent Accounting Firm shall be final and binding. The Closing Balance Sheet, as it may be modified by resolution of any disputes by the Seller and the Purchaser or by the Independent Accounting Firm pursuant hereto, shall be the "Final Bal- 16 25 ance Sheet." (c) In the event that the Closing Net Worth (as defined below) as reflected on the Final Balance Sheet is less than $247.8 million (the "Required Net Worth"), then the Seller shall transfer to the Purchaser a cash amount equal to the amount by which the Closing Net Worth is less than the Required Net Worth. In the event that the Closing Net Worth is more than the Required Net Worth, then the Purchaser shall transfer to the Seller a cash amount equal to the amount by which the Closing Net Worth is more than the Required Net Worth. Such transfers shall be made to the account designated in writing for such purpose within two business days after delivery of the Final Balance Sheet by wire transfer in immediately available funds of the amount of such differences as determined pursuant to the preceding sentences, together with interest thereon from the Closing Date to the date of payment calculated based on the thirty-day AA composite commercial paper rate (as last published by the Federal Reserve prior to the Closing Date). For purposes of this Section 2.3, "Closing Net Worth" shall equal the amount, determined pursuant to this Section 2.3, by which the total Acquired Assets on the Final Balance Sheet (excluding for such purposes the rights relating to the Severance Trusts), plus the cash on hand in the stores included in the Acquired Assets at the time of the Closing, exceed the total Assumed Liabilities on the Final Balance Sheet. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to Parent and the Purchaser as follows: Section 3.1 Organization; Subsidiaries. (a) Each of the Seller and the Footwear Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, 17 26 existing and in good standing or to have such power and authority would not have a "material adverse effect on the Footwear Business" (as defined below). The Seller and each of the Footwear Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a material adverse effect on the Footwear Business. The Seller has heretofore made available to Parent a complete and correct copy of the charter and regulations or comparable organizational documents, each as amended to date, of the Seller and each Footwear Subsidiary. Such charters and regulations are in full force and effect. Neither the Seller nor any of the Footwear Subsidiaries is in violation of any provision of its charter, regulations or comparable organizational documents, except for such violations that would not, individually or in the aggregate, have a material adverse effect on the Footwear Business. (b) Schedule 1.1(a)(x) of the Seller Disclosure Schedule sets forth for each Footwear Subsidiary (i) the jurisdiction of its incorporation, (ii) the number of shares of its authorized capital stock, (iii) the number of shares of its capital stock which are issued and outstanding, and (iv) the names of all record holders of such issued and outstanding shares (indicating the number of shares owned). Except for the Footwear Subsidiaries, neither the Seller nor any of its Subsidiaries has any direct or indirect equity interest in any corporation, partnership or other entity Related to the Footwear Business. All of the outstanding shares of capital stock of each Footwear Subsidiary have been validly issued and are fully paid and nonassessable, and such shares are owned by the Seller or its nominees free and clear of any liens, claims, charges, security interests, encumbrances or other rights of third parties ("Liens"). Upon consummation of the transactions contemplated hereby, the Purchaser will acquire all of the Seller's and its nominees' interests in the outstanding shares of capital stock of each Transferred Subsidiary, free and clear of any adverse claims (within the meaning of Section 8-302 of the Uniform Commercial Code as in effect in the State of New York). 18 27 (c) For purposes of this Agreement, (i) the term "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (A) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (B) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries, and (ii) any reference to any event, change or effect having a "material adverse effect on the Footwear Business" means such event, change or effect which is materially adverse to (A) the business, properties, assets, results of operations or financial condition of the Footwear Business, taken as a whole, or (B) the ability of the Seller or any of its Subsidiaries to consummate the transactions contemplated hereby. Section 3.2 Authority. Each of the Seller and each of its Subsidiaries which will be a party to any of the Seller Documents (each such Subsidiary, a "Contracting Subsidiary"), has the requisite corporate power and authority to execute and deliver this Agreement and the Seller Documents (to the extent it will be a party thereto) and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Seller Documents by the Seller and each Contracting Subsidiary and the consummation by the Seller and each Contracting Subsidiary of the transactions contemplated hereby and thereby have been duly authorized by the respective Boards of Directors of the Seller and each Contracting Subsidiary (to the extent it will be a party thereto), and no other corporate proceedings on the part of the Seller and any Contracting Subsidiary are necessary to authorize this Agreement and the Seller Documents (to the extent it will be a party thereto), or to consummate the transactions so contemplated. This Agreement has been and each of the Seller Documents will be duly executed and delivered by the Seller and each Contracting Subsidiary (to the extent it 19 28 will be a party thereto) and constitutes or (to the extent such agreement is not being entered into as of the date hereof) will constitute a valid and binding obligation of each of the Seller and each Contracting Subsidiary (to the extent it is or will be a party thereto), enforceable against it in accordance with its terms. Section 3.3 Consents and Approvals; No Violations. (a) Except as set forth in Section 3.3(a) of the Seller Disclosure Schedule, and except for such filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), none of the execution, delivery or performance of this Agreement or the Seller Documents by the Seller or any Contracting Subsidiary (to the extent it is or will be a party thereto), or the consummation by the Seller or any Contracting Subsidiary (to the extent it is or will be a party thereto) of the transactions contemplated hereby or thereby and compliance by the Seller or any Contracting Subsidiary (to the extent it is or will be a party thereto) with any of the provisions hereof or thereof will (i) conflict with or result in any breach of any provisions of the charter or regulations or comparable organizational documents of the Seller or of any of the Contracting Subsidiaries or the Footwear Subsidiaries, (ii) require any filing by the Seller or any of the Contracting Subsidiaries or the Footwear Subsidiaries with, or any permit, authorization, consent or approval to be obtained by the Seller or any of the Contracting Subsidiaries or the Footwear Subsidiaries of, any court, arbitral tribunal, administrative agency or commission or other governmental or regulatory authority or administrative agency or commission whether domestic or foreign (a "Governmental Entity") (except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not have a material adverse effect on the Footwear Business), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, or result in the creation of any Lien on any of the Acquired Assets pursuant to, any of the terms, conditions or provisions of any note, bond, mortgage, 20 29 indenture, lease, license, contract, agreement, franchise, permit, concession or other instrument, obligation, understanding, commitment or other arrangement to which the Seller or any of the Contracting Subsidiaries or the Footwear Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or affected (each, a "Contract"), (iv) result in the triggering of any right of first refusal or other right under any stockholder, partnership or joint venture agreement to which the Seller or any of the Contracting Subsidiaries or the Footwear Subsidiaries is a party and which relates to any Acquired Assets, or (v) violate any order, writ, injunction, decree, statute, ordinance, rule or regulation applicable to the Seller or any of the Contracting Subsidiaries or the Footwear Subsidiaries, except, in the case of clauses (iii) and (v), for violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on the Footwear Business. (b) Except as set forth in Section 3.3(b) of the Seller Disclosure Schedule, neither the Seller nor any of its Subsidiaries is in conflict with, or in default or violation of, any Contract, except for any such conflicts, defaults or violations which have not had and are not likely to have a material adverse effect on the Footwear Business. Section 3.4 SEC Reports and Financial Statements. The Seller has timely filed with the Securities and Exchange Commission (the "SEC"), and has heretofore made available to Parent true and complete copies of, all forms, reports and documents required to be filed by it since January 1, 1992 under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act") (as such documents have been amended since the time of their filing, collectively, the "Seller SEC Documents"). The Seller SEC Documents, including, without limitation, any financial statements or schedules included therein, at the time filed, in respect of the Footwear Business (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied in all material respects with the applicable requirements of the 21 30 Securities Act or the Exchange Act, as the case may be. The consolidated financial statements of the Seller included in the Seller SEC Documents (including the notes and schedules thereto, the "Seller Financial Statements"), in respect of the Footwear Business comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present in all material respects (subject, in the case of the unaudited statements, to normal audit adjustments) the consolidated financial position of the Seller and its consolidated Subsidiaries as at the dates thereof in respect of the Footwear Business and the consolidated results of their operations and cash flows for the periods then ended in respect of the Footwear Business. Section 3.5 Footwear Business Financial Statements. (a) The unaudited combined balance sheets of the Footwear Business at January 29, 1994 and at January 28, 1995 and the unaudited combined statement of operations and cash flows for the one-year period ended January 28, 1995 included in Section 3.5(a) of the Seller Disclosure Schedule (the "Footwear Business Financial Statements") have been prepared in accordance with United States generally accepted accounting principles on a basis consistent with the Seller Financial Statements referred to in Section 3.4, and fairly present in all material respects (subject to normal audit adjustments) the financial position of the Footwear Business at the respective dates thereof and the combined results of operations and cash flows of the Footwear Business for the periods then ended. The balance sheet of the Footwear Business at January 28, 1995 included in Section 3.5(a) of the Seller Disclosure Schedule (the "Footwear Business Balance Sheet") fairly presents in all material respects (subject to normal audit adjustments) the combined financial position of the Footwear Business as of January 28, 1995, except for the exclusion therefrom of any assets not constituting Acquired Assets and any liabilities not constituting Assumed Liabilities. 22 31 (b) All notes and accounts receivable constituting Acquired Assets have arisen from bona fide transactions in the ordinary course of the Footwear Business consistent with past practice. All notes and accounts receivable constituting Acquired Assets are properly reflected in accordance with generally accepted accounting principles on the Footwear Business Balance Sheet (other than notes and accounts receivable arising in the ordinary course of the Footwear Business consistent with past practice since January 28, 1995, which would not, in the aggregate, have a material adverse effect on the Footwear Business). (c) There are no outstanding intercompany payables, receivables, loans, cash overdrafts, advances and other similar accounts between the Footwear Business, on the one hand, and the Seller and its Subsidiaries (other than the Transferred Subsidiaries), on the other hand. Section 3.6 Title to Acquired Assets; Inventories. (a) Except as set forth in Section 3.6(a) of the Seller Disclosure Schedule, the Seller directly or indirectly owns or has a valid leasehold interest in the Acquired Assets, free and clear of any Liens, except for Permitted Liens (as defined below), the Seller Encumbrances and as may be reflected in the Footwear Business Balance Sheet. At the Closing, the Purchaser will, directly or indirectly, acquire good and marketable title to, or a valid leasehold interest in, the Acquired Assets, free and clear of any Liens, including, without limitation, the Seller Encumbrances, except for Permitted Liens. On the Closing Date, the Acquired Assets will include the assets reflected on the Footwear Business Balance Sheet and the capital stock interests in any Transferred Subsidiary, as such may have changed since the date of the Footwear Business Balance Sheet consistent with the provisions of this Agreement, but in any event shall include all of the Seller's direct and indirect right, title and interest in, and any assets then used in connection with the Footwear Business, other than the Retained Assets. All of the buildings and material tangible personal property owned or leased by the Seller and its Subsidiaries that are included in the Acquired Assets are in good working condition (normal wear and tear 23 32 excepted) and are suitable in all material respects for the purposes for which they were being used. (b) Section 1.1(a) of the Seller Disclosure Schedule contains a complete and accurate list of all of the Acquired Facilities. At the Closing, (i) the Purchaser will acquire good and marketable title in fee simple to the Acquired Facilities, other than those owned by the Transferred Subsidiaries, free and clear of all Liens, and (ii) the Transferred Subsidiaries will have good and marketable title in fee simple to the Acquired Facilities owned by them free and clear of all Liens. (c) The inventories included in the Footwear Business consist, and on the Closing Date will consist, of items of a quantity and quality historically useable or saleable in the ordinary course of the Footwear Business consistent with past practice. The inventories included in the Footwear Business are reflected on the Footwear Business Balance Sheet and in the books and records of the Seller in accordance with generally accepted accounting principles applied on a basis consistent with past practice, with inventory recorded at a lower of cost (determined on a LIFO basis) or market. (d) Except as set forth in Section 3.6(d) of the Seller Disclosure Schedule, on the Closing Date neither the Seller nor any of the Retained Subsidiaries will use in the conduct of its business or own or have rights to use any assets or property, whether tangible, intangible or mixed, which are also used in the conduct of the Footwear Business. Except as contemplated in Section 6.13, immediately following the Closing neither the Seller nor any of its Subsidiaries will be a party to any material agreement, arrangement or understanding with the Footwear Business (other than the Conveyancing Agreements), including, without limitation, any material Contract, providing for the furnishing of services or rental of real or personal property to or from, or otherwise relating to the business or operations of, the Footwear Business or pursuant to which the Footwear Business may have any obligation or liability. (e) For the purposes of this Agreement, "Permitted Liens" means Liens for (i) Taxes not yet due and payable, (ii) workmen's, repairmen's or other similar Liens imposed by law but not yet asserted arising or 24 33 incurred in the ordinary course of business in respect of obligations which are not overdue, (iii) minor title defects, easements, encroachments or encumbrances which do not materially impair the value or continued use of the property to which they relate, assuming that the property is used on the same basis as such property is currently being used, (iv) retention of title agreements with suppliers entered into in the ordinary course of business consistent with past practice, and (v) Liens listed in Section 3.6(e) of the Seller Disclosure Schedule. Section 3.7 Litigation. Except as set forth in Section 3.7(a) of the Seller Disclosure Schedule, there is no suit, claim, action, proceeding or, to the Seller's knowledge (as defined below) investigation pending or threatened, against the Seller or any of its Subsidiaries before any Governmental Entity Related to the Footwear Business or related to the transactions contemplated by this Agreement. Except as disclosed in Section 3.7(b) of the Seller Disclosure Schedule, neither the Seller nor any of its Subsidiaries is subject to any outstanding order, writ, injunction or decree, domestic or foreign, Related to the Footwear Business or related to the transactions contemplated by this Agreement. For the purposes of this Agreement, "Seller's Knowledge" shall mean the actual knowledge, after reasonable inquiry, of the officers of the Seller listed in Section 3.7(c) of the Seller Disclosure Schedule. Section 3.8 Employee Benefits. (a) Section 3.8(a) of the Seller Disclosure Schedule contains a list of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans, all employment or severance contracts, other material employee benefit plans and any applicable "change of control" or similar provisions in any plan, contract or arrangement which are or have been maintained by the Seller or any of its Subsidiaries and which cover active employees or former employees of the Footwear Business (the "Seller Employees"), including, without limitation, any such individuals who are employees of any entity which together with the Seller would be considered a "single" employer within the meaning of Section 4001 of 25 34 Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 414 of the Internal Revenue Code of 1986, as amended (the "Code") (an "ERISA Affiliate"), and all other benefit plans, contracts or arrangements (regardless of whether they are funded or unfunded or foreign or domestic) which are or have been maintained by the Seller or any of its Subsidiaries and which cover Seller Employees, including, but not limited to, "employee benefit plans" within the meaning of Section 3(3) of the ERISA, other than government plans (collectively, the "Compensation and Benefit Plans"). True and complete copies of all the Compensation and Benefit Plans, including any trust instruments and/or insurance contracts, if any, forming a part of any such plans, and all amendments thereto have been made available to Parent. (b) Except as set forth in Section 3.8(b) of the Seller Disclosure Schedule, each of the Compensation and Benefit Plans has been operated and administered in all material respects in compliance with its terms and applicable law, including but not limited to ERISA. Except as set forth in Section 3.8(b) of the Seller Disclosure Schedule, each Compensation and Benefit Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the United States Internal Revenue Service (the "Service"), and the Seller is not aware of any circumstances likely to result in revocation of any such favorable determination letter. Neither the Seller nor any ERISA Affiliate has engaged in a transaction with respect to any Compensation and Benefit Plan that could subject the Seller or any ERISA Affiliate to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would have a material adverse effect on the Seller. Neither the Seller nor any ERISA Affiliate has contributed or been required to contribute to any Multiemployer Plan (as defined in ERISA). (c) No liability under Subtitles C or D of Title IV of ERISA has been or to Seller's Knowledge will be incurred by the Seller or any ERISA Affiliate with respect to any ongoing, frozen or terminated Compensation and Benefit Plan, currently or formerly maintained by any of them. 26 35 (d) Full payment has been made, or will be made in accordance with Section 404(a)(6) of the Code, of all amounts which the Seller or any ERISA Affiliate is required to pay under the terms of each Compensation and Benefit Plan as of the last day of the most recent plan year ended prior to the date of this Agreement, and all such amounts properly accrued through the Closing Date with respect to the current plan year thereof will be paid by the Seller prior to the Closing Date. No Pension Plan or any trust established thereunder has incurred an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither the Seller nor any ERISA Affiliate has provided, or is required to provide, security to any Pension Plan pursuant to Section 401(a)(29) of the Code. (e) Neither the Seller nor any of its Subsidiaries has any obligations for severance or retiree health and life benefits under any Compensation and Benefit Plan, except for such benefits and amounts as set forth in Section 3.8(e) of the Seller Disclosure Schedule. (f) Except as set forth in Section 3.8(f) of the Seller Disclosure Schedule, the Seller and its Subsidiaries have no unfunded liabilities in an amount which would have a material adverse effect on the Seller with respect to any Compensation and Benefit Plan which covers foreign Seller Employees. (g) Except as set forth in Section 3.8(g) of the Seller Disclosure Schedule, the consummation of the transactions contemplated by this Agreement or in the Conveyancing Agreements will not (i) entitle any current or former employee or officer of the Seller or any ERISA Affiliate to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due or other benefits granted to any such employee or officer. Except as set forth in Section 3.8(g) of the Seller Disclosure Schedule, no payment which will or may be made by the Seller or any ERISA Affiliate to any Seller Employee or any agent of the Footwear Business will constitute an "excess parachute payment" within the meaning of Section 280G of the Code. 27 36 (h) There are no pending, threatened or anticipated claims by or on behalf of any Compensation and Benefit Plan, by any employee or beneficiary covered under any such Compensation and Benefit Plan, or otherwise involving any such Compensation and Benefit Plan (other than routine claims for benefits). (i) Under each Compensation and Benefit Plan which is a single employer plan, as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all "benefit liabilities" within the meaning of Section 4001(a)(16) of ERISA, as determined on the basis of the actuarial assumptions contained in such plan's most recent actuarial valuation, did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of such plan since the last day of the most recent plan year. Section 3.9 Absence of Undisclosed Liabilities. Except as set forth in Section 3.9 of the Seller Disclosure Schedule or as contemplated by this Agreement, neither the Seller nor any of its Subsidiaries had at January 28, 1995, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature which would be Assumed Liabilities, except liabilities, obligations or contingencies (i) which were accrued or reserved against in the Seller Financial Statements, or as to the Footwear Business on the Footwear Business Balance Sheet, or (ii) which were incurred after January 28, 1995 in the ordinary course of the Footwear Business consistent with past practice and which would not, in the aggregate, have a material adverse effect on the Footwear Business or which have been discharged or paid in full prior to the date hereof. Section 3.10 Absence of Certain Changes or Events; Material Agreements. Since January 29, 1994, the Seller and its Subsidiaries have conducted the Footwear Business only in the ordinary course of business consistent with past practice, except as set forth in Section 3.10 of the Seller Disclosure Schedule, and there has not been any change or development, or combination of changes or developments, which individually or in the aggregate have a material adverse effect on the Footwear Business. 28 37 Section 3.11 No Violation of Law. Except as set forth in Section 3.11 of the Seller Disclosure Schedule, neither the Seller nor any of its Subsidiaries is in conflict with, or in default or violation of, or, to the Seller's Knowledge, is under investigation with respect to or has been given notice or been charged by any Governmental Entity with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable Environmental Law (as defined in Section 6.14) of any Governmental Entity, except for violations which do not relate to the Footwear Business or which, in the aggregate, do not have a material adverse effect on the Footwear Business. Section 3.12 Taxes. (a) Except as set forth in Section 3.12 of the Seller Disclosure Schedule and only to the extent Related to the Footwear Business: (i) the Seller and the Footwear Subsidiaries have (x) duly filed (or there has been filed on their behalf) with the appropriate governmental authorities all Tax Returns (as defined below) required to be filed by them on or prior to the date hereof, except where any failure to file such Tax Returns would not have a material adverse effect on the Footwear Business or the Acquired Assets, taken as a whole, and such Tax Returns are true, correct and complete in all material respects, and (y) duly paid in full or made provision in accordance with generally accepted accounting principles (or there has been paid or provision has been made on their behalf) for the payment of (I) all material Taxes shown to be due on such Tax Returns and (II) all deficiencies and assessments of Taxes of which written notice has (or by the Closing Date will have) been received by the Seller or any Footwear Subsidiary that are or may become payable by the Footwear Subsidiaries or chargeable as a lien upon the Acquired Assets; (ii) the Seller and the Footwear Subsidiaries have established (and until the Closing will establish) on their books and 29 38 records reserves in compliance with generally accepted accounting principles for the payment of all Taxes for which they will be required to file Tax Returns and which are not yet due and payable; (iii) there are no Liens for Taxes upon any of the Acquired Assets, except for Liens for Taxes not yet due; (iv) neither the Seller nor any of the Footwear Subsidiaries has made any change in accounting methods, received a ruling from any taxing authority or signed an agreement with any taxing authority which, in each case, is reasonably likely to have a material adverse effect on the Footwear Business; (v) the Seller and the Footwear Subsidiaries have complied in all respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes (including, without limita- tion, withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar provisions under any foreign laws) and have, within the time and the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required to be so withheld and paid over under applicable laws; (vi) no federal, state, local or foreign audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Returns of the Footwear Subsidiaries, and none of the Footwear Subsidiaries has received a written notice of any pending audits or proceedings; (vii) the federal income Tax Returns of the Footwear Subsidiaries have been examined by the Service (or the applicable statutes of limitation for the assessment of federal income Taxes for such periods have expired) for all periods through and including January 31, 1987, and no material deficiencies 30 39 were asserted as a result of such examinations which have not been resolved and fully paid; (viii) there are no outstanding requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any Taxes or deficiencies against the Footwear Subsidiaries, and no power of attorney granted by either the Seller or any of its Subsidiaries with respect to any Taxes of any Footwear Subsidiary is currently in force; and (ix) neither the Seller nor any of the Footwear Subsidiaries has, with regard to any Acquired Assets, filed a consent to the application of Section 341(f) of the Code, or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Seller or any of the Footwear Subsidiaries. (b) "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, real or personal property, sales, withholding, social security, occupation, use, service, service use, license, net worth, payroll, franchise, transfer, gains and recording taxes, fees and charges, imposed by the Service or any taxing authority (whether domestic or foreign including, without limitation, any state, county, local or foreign government or any subdivision or taxing agency thereof (including a United States possession)), whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest whether paid or received, fines, penalties or additional amounts attributable to, or imposed upon, or with respect to, any such taxes, charges, fees, levies or other assessments. "Tax Return" shall mean any report, return, document, declaration or other information or filing required to be supplied to any taxing authority or jurisdiction (foreign or domestic) with respect to Taxes, including, without limitation, information returns, any documents with respect to or accompanying payments of estimated Taxes, or with respect to or accompanying requests for the extension of time in which to file any 31 40 such report, return, document, declaration or other information. (c) The representations and warranties set forth in Section 3.12(a) are not applicable with respect to matters constituting a breach of such representations and warranties unless and until, as a result of such breach: (i) the Acquired Assets are made subject to Tax Liens; (ii) the Purchaser is made liable for Taxes; or (iii) the payment of Taxes is sought from any of the Transferred Subsidiaries. Section 3.13 Labor Controversies. Except as set forth in Section 3.13 of the Seller Disclosure Schedule, neither the Seller nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other under- standing with a labor union or labor organization Related to the Footwear Business or related to its employees. Except as set forth in Section 3.7(a) to the Seller Disclosure Schedule, as of the date hereof, there are no material controversies pending or, to the Seller's Knowledge, threatened between the Seller or any of its Subsidiaries and any of their respective employees, and, to the Seller's Knowledge, as of the date hereof, there are no organizational efforts presently being made involving any of the employees of the Seller or any of its Subsidiaries, in each case Related to the Footwear Business or related to its employees. Except as set forth in Section 3.13 of the Seller Disclosure Schedule, the Seller and its Subsidiaries have complied in all material respects with all laws relating to wages, hours, collective bargaining, and the payment of social security and similar Taxes with respect to the Footwear Business, and, as of the date hereof, no person has, to the Seller's Knowledge, asserted that the Seller or any of its Subsidiaries is liable in any material amount with respect to the Footwear Business for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 32 41 Section 3.14 Licenses. Section 3.14 of the Seller Disclosure Schedule sets forth a list of all permits, licenses, waivers and authorizations (collectively, "Licenses") which are necessary for the Footwear Business to conduct its business in the manner in which it is presently being conducted, other than any Licenses the failure of which to have would not, individually or in the aggregate, have a material adverse effect on the Footwear Business. Except for those Licenses identified in Section 3.14 of the Seller Disclosure Schedule and, to the extent that in connection with the transfer of any License the Purchaser is required to execute any documents or take any other actions in order to secure the transfer and assignment of such License, except where the Purchaser fails to execute such documents or take such actions, the Seller has, and as of the Closing Date the Purchaser will acquire, all of the Licenses. To the Seller's Knowledge, no event has occurred or other fact exists with respect to the Licenses which permits, or after notice or lapse of time or both would permit, revocation or termination of any of the Licenses or would result in any other impairment of the rights of the holder of any of the Licenses. The Seller and its Subsidiaries have duly performed their respective obligations under the Licenses in all material respects. There is not pending or, to the Seller's Knowledge, threatened, any application, petition, objection or other pleading with any Governmental Entity which challenges or questions the validity of or any rights of the holder under any License. Section 3.15 Intellectual Property. (a) Section 3.15(a) of the Seller Disclosure Schedule contains a complete and accurate list of all of the Acquired Intellectual Property, other than Acquired Intellectual Property as described in Section 1.1(a)(vi)(A). Except as set forth in Section 3.15(a) of the Seller Disclosure Schedule, the Seller and its Subsidiaries own all right, title and interest in and to, or hold valid licenses, if any, from third parties for, all of the Acquired Intellectual Property. (b) Except as set forth in Section 3.15(b) of the Seller Disclosure Schedule, the Seller and its Subsidiaries have not, as of and since the date upon which they acquired any of the Acquired Intellectual 33 42 Property, (i) transferred, conveyed, sold, assigned, pledged, mortgaged or granted a security interest in any of the Acquired Intellectual Property to any third party, (ii) entered into any license, franchise or other agreement with respect to any of the Acquired Intellectual Property with any third person, or (iii) otherwise encumbered any of the Acquired Intellectual Property. The Seller and its Subsidiaries have maintained and enforced the Acquired Intellectual Property in accordance with their customary practices in order to safeguard the secrecy of all the Acquired Intellectual Property that are considered to be trade secrets. (c) The conduct of the Footwear Business by the Seller and its Subsidiaries as currently conducted does not, to the Seller's knowledge, conflict or infringe in any way with any intellectual property right of any third party that, individually or in the aggregate, is reasonably likely to have a material adverse effect on the Footwear Business, and there is no claim, suit, action or proceeding pending or to the Seller's Knowledge threatened against the Seller or any of its Subsidiaries (i) alleging that use of the Acquired Intellectual Property or any intellectual property licenses included in the Acquired Assets by the Seller or any of its Subsidiaries conflicts or infringes in any way with any third party's intellectual property rights, or (ii) challenging the Seller's or its Subsidiaries' ownership of or right to use or the validity of any Acquired Intellectual Property. To the Seller's Knowledge, there are no conflicts or infringements by any third party of any of the Acquired Intellectual Property owned by or licensed by or to the Seller or any of its Subsidiaries. (d) Each Copyright registration, Patent and Trademark registration and each application therefor listed in Section 3.15(a) of the Seller Disclosure Schedule is valid, subsisting and in proper form, and has been duly maintained, including the submission of all necessary filings in accordance with the legal and administrative requirements of the appropriate jurisdictions. Except as set forth in Section 3.15(d) of the Seller Disclosure Schedule, there have been no failures in complying with such requirements and no Copyright, Patent or Trademark has lapsed and there has been no cancellation or abandonment thereof. 34 43 (e) Neither the Seller, nor to the Seller's Knowledge, has any other person granted any release, covenant not to sue, or non-assertion assurance or entered into any indemnification or settlement agreement with any person with respect to any part of the Acquired Intellectual Property or intellectual property licenses included in the Acquired Assets. Section 3.16 Material Contracts. Except as disclosed in Section 3.16 of the Seller Disclosure Schedule, as of the date hereof, neither the Seller nor any of its Subsidiaries is a party to any Contract Related to the Footwear Business: (a) to undertake capital expenditures or to acquire any property in an aggregate amount exceeding $100,000; (b) to loan money or to extend credit in an amount greater than $100,000 to any person or group of related persons; (c) involving rebates, sales, advertising or other allowances with customers in an amount of more than $100,000 per year; (d) which would restrict the Footwear Business from carrying on any business anywhere in the world or which would restrict the products or services which the Footwear Business may sell or the customers to whom the Footwear Business may sell; (e) involving any indebtedness, obligation or liability for borrowed money or the guaranty of any such indebtedness, obligation or liability in an amount greater than $100,000; (f) involving the provision of goods or services having annual aggregate payments in excess of $100,000 and which is not terminable by the Seller or one of its Subsidiaries without penalty upon notice of ninety days or less; (g) involving employment, consulting, compensation or severance obligations; (h) involving any lease of personal property having annual payments in excess of $100,000 and which is not terminable by the Seller or one of its Subsidiaries without penalty upon notice of ninety days or less; (i) involving any lease of real property; (j) involving any license of intellectual property by or to the Footwear Business; (k) which relates to the sale of finished goods and which is being performed by the Footwear Business at a loss; or (l) which is material to the Footwear Business. Except as set forth in Section 3.16 of the Seller Disclosure Schedule, the consummation of the transactions contemplated hereby or in the Conveyancing Agreements will not impair any of the Footwear Business' rights under any such Contract whether oral or written and, to the Seller's knowledge, all such Contracts constitute valid and bind- 35 44 ing obligations of the parties thereto. Except as set forth in Section 3.16 of the Seller Disclosure Schedule, there is no breach or violation of, or default under any such Contract, and no event has occurred which, with notice or lapse of time or both, would constitute a breach, violation or default, or give rise to a right of termination, modification, cancellation, prepayment or acceleration under any such Contract. Section 3.17 Insurance. Set forth in Section 3.17 of the Seller Disclosure Schedule is a list of all policies of liability, fire, automobile, property, business interruption and other forms of insurance covering the Footwear Business or the Acquired Assets, all of which are valid and enforceable and in full force and effect. Section 3.18 Parent Securities. The Seller acknowledges that it is acquiring the Parent Warrants without registration under the Securities Act. Section 3.19 Disclosure. None of the representations or warranties of the Seller contained in this Article III and none of the information contained in the Seller Disclosure Schedule, to the Seller's Knowledge, is false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER Parent and the Purchaser jointly and severally represent and warrant to the Seller as follows: Section 4.1 Organization. Each of Parent and the Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a "material adverse effect on Parent" (as defined 36 45 below). Parent and each of its Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a material adverse effect on Parent. Parent has heretofore made available to the Seller a complete and correct copy of the charter and by-laws, each as amended to date, of Parent and the Purchaser. Such charters and by-laws are in full force and effect. Neither Parent nor any of its Subsidiaries is in violation of any provision of its charter, by-laws or comparable organizational documents, except for such violations that would not, individually or in the aggregate, have a material adverse effect on Parent. As used in this Agreement, any reference to any event, change or effect having a "material adverse effect on Parent" means such event, change or effect which is materially adverse to (A) the business, properties, assets, results of operations or financial condition of Parent and its Subsidiaries, taken as a whole, or (B) the ability of Parent and the Purchaser to consummate the transactions contemplated hereby. Section 4.2 Capitalization. As of the date hereof, the authorized capital stock of Parent consists of: (i) 100,000,000 shares of Parent Common Stock of which, as of December 31, 1994, 34,608,545 shares were issued and outstanding and no shares were held in treasury, and (ii) 25,000,000 shares of preferred stock, par value $.01 per share, of which no shares were issued and outstanding or held in treasury. Since December 31, 1994 and prior to the date hereof, no shares of Parent Common Stock have been issued except issuances of shares upon exercise of employee stock options. All the outstanding shares of Parent's capital stock are, and all of (i) the Parent Warrants which are to be issued pursuant to this Agreement and (ii) the shares of Parent Common Stock which will be issuable upon exercise of the Parent Warrants will be, when issued in accordance with the terms of this Agreement, in the case of the Parent Warrants, and the Warrant Agreement or the terms of the Parent Warrants, in the case of the shares of Parent Common Stock which will be issuable upon exercise of the Parent Warrants, duly authorized, validly issued, fully paid and 37 46 non-assessable and free of any Liens (except Permitted Liens) and any preemptive rights in respect thereto. Section 4.3 Authority. Each of Parent and the Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and the Purchaser Documents (to the extent it will be a party thereto) and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Purchaser Documents by Parent and the Purchaser (to the extent it will be a party thereto) and the consummation by Parent and the Purchaser of the transactions contemplated hereby and thereby have been duly authorized by the Boards of Directors of Parent and the Purchaser and no other corporate proceedings on the part of Parent and the Purchaser are necessary to authorize this Agreement and the Purchaser Documents (to the extent it will be a party thereto) or for Parent and the Purchaser to consummate the transactions so contemplated. This Agreement has been, and each of the Purchaser Documents will be, duly executed and delivered by Parent and the Purchaser (to the extent it will be a party thereto) and constitutes or (to the extent such agreement is not being entered into as of the date hereof) will constitute a valid and binding obligation of Parent and the Purchaser, enforceable against Parent and the Purchaser in accordance with its terms. Section 4.4 Consents and Approvals; No Violations. (a) Except as set forth in Section 4.4(a) of the disclosure schedule delivered by Parent to the Seller on or prior to the date hereof (the "Parent Disclosure Schedule"), and except for such filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the HSR Act, neither the execution, delivery or performance of this Agreement by Parent or the Purchaser nor the consummation by either of them of the transactions contemplated hereby or by the Purchaser Documents nor compliance by Parent or the Purchaser with any of the provisions hereof or thereof will (i) conflict with or result in any breach of any provision of the charter or by-laws of Parent or the Purchaser, (ii) require any filing by Parent or its Subsidiaries with, or any permit, authorization, consent or approval of, any Governmental Entity to be obtained by 38 47 Parent or its Subsidiaries (except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not have a material adverse effect on Parent), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement, franchise, permit, concession or other instrument, obligation, understanding, commitment or other arrangement to which Parent or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or affected, or (iv) violate any order, writ, injunction, decree, statute, ordinance, rule or regulation applicable to Parent or any of its Subsidiaries, except, in the case of clauses (iii) or (iv), for violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on Parent. (b) Except as set forth in Section 4.4(b) of the Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is in conflict with, or in default or violation of, any note, bond, mortgage, indenture, lease, license, contract, agreement, franchise, permit, concession or other instrument, obligation, understanding, commitment or other arrangement to which Parent or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or affected, except for any such conflicts, defaults or violations which have not had and are not likely to have a material adverse effect on Parent. Section 4.5 SEC Reports and Financial Statements. Parent has timely filed with the SEC, and has heretofore made available to the Seller true and complete copies of, all forms, reports and other documents required to be filed by it since January 1, 1992 under the Exchange Act and the Securities Act (as such documents have been amended since the time of their filing, collectively, the "Parent SEC Documents"). The Parent SEC Documents, including, without limitation, any financial statements or schedules included therein, at the time filed, (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the 39 48 statements therein, in light of the circumstances under which they were made, not misleading and (b) complied in all material respects with the applicable requirements of the Exchange Act or the Securities Act, as the case may be. The consolidated financial statements of Parent included in the Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present in all material respects (subject, in the case of the unaudited statements, to normal, recurring audit adjustments which are not material in amount) the consolidated financial position of Parent and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. Section 4.6 Litigation. Except as set forth in Section 4.6 of the Parent Disclosure Schedule, there is no suit, claim, action, proceeding or, to Parent's knowledge (as defined below), investigation pending or threatened, against Parent or any of its Subsidiaries before any Governmental Entity which, if adversely determined, individually or in the aggregate, would have a material adverse effect on Parent. Except as disclosed in Section 4.6 of the Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is subject to any outstanding order, writ, injunction or decree, domestic or foreign, which, individually or in the aggregate, has had or could reasonably be expected to have a material adverse effect on Parent or relates to the transactions contemplated by this Agreement. For the purposes of this Agreement, "Parent's Knowledge" shall mean the actual knowledge, after reasonable inquiry, of the officers of Parent listed in Section 4.6 of the Parent Disclosure Schedule. Section 4.7 Absence of Certain Changes or Events; Material Agreements. Since December 31, 1993, there has not been any change or development, or combination of changes or developments, which individually or in the aggregate have a material adverse effect on Parent. 40 49 Except as set forth in Section 4.7 of the Parent Disclosure Schedule, the transactions contemplated by this Agreement or by the Warrant Agreement will not constitute a change of control under or require the consent from or the giving of notice to a third party pursuant to the terms, conditions or provisions of any Contract to which Parent or any of its Subsidiaries is a party. Section 4.8 No Violation of Law. Except as set forth in Section 4.8 of the Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is in conflict with, or in default or violation of, or, to Parent's Knowledge, is under investigation with respect to or has been given notice or been charged by any Governmental Entity with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law, ordinance or regulation) of any Governmental Entity, except for violations which, in the aggregate, do not have a material adverse effect on Parent. ARTICLE V COVENANTS Section 5.1 Conduct of the Seller's Business. During the period from the date of this Agreement and continuing until the Closing Date, the Seller agrees as to itself and its Subsidiaries that, except for the transactions expressly provided for in this Agreement, or to the extent that Parent shall otherwise consent in writing: (a) Ordinary Course. The Seller shall, and shall cause each of its Subsidiaries to, conduct the Footwear Business in the usual, regular and ordinary course consistent with past practice and shall use its reasonable efforts, and will cause each of its Subsidiaries to use its reasonable efforts, to preserve substantially intact the present business organization of the Footwear Business, keep substantially available the services of the present officers of the Footwear Business and employees and preserve substantially intact the business relationships of the Footwear Business with customers, suppliers and others having business dealings with the Footwear Business. Notwithstanding the forego- 41 50 ing, except as identified in Section 5.1(a) of the Seller Disclosure Schedule, neither the Seller nor any of its Subsidiaries shall enter into any retail store leases or other leases of real property Related to the Footwear Business unless the Seller shall have informed Parent of such intention sufficiently in advance of the finalization thereof and shall have provided Parent an opportunity to assist the Seller in the negotiation thereof. (b) Governing Documents. The Seller and the Footwear Subsidiaries shall not amend or propose to amend their respective articles of incorporation or regulations or comparable organizational documents in any manner which would require any further authorization or approval by the Board of Directors or shareholders of the Seller or the Footwear Subsidiaries, as the case may be, for the consummation of the transactions contemplated by this Agreement or which would place any material restraints or material additional requirements on any of the parties hereto in connection with the consummation of the transactions contemplated by this Agreement. (c) No Acquisitions; Material Commitments. The Seller shall not, nor shall it permit any of its Subsidiaries to, (i) acquire or agree to acquire by merging or consolidating with, or by purchasing an equity interest in or the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any material assets, in each case Related to the Footwear Business, other than the purchase of raw materials and inventory in the ordinary course of the Footwear Business consistent with past practice, or (ii) otherwise enter into any material commitment or transaction Related to the Footwear Business outside the ordinary and usual course of the Footwear Business consistent with past practice. (d) No Dispositions. The Seller shall not, nor shall it permit any of its Subsidiaries to, sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any Acquired Assets other than the sale of inventory in the ordinary course of the Footwear Business consistent with past practice. 42 51 (e) Indebtedness. The Seller shall not, nor shall it permit any of its Subsidiaries to, incur, assume, pre-pay, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for any indebtedness for borrowed money or other material obligation Related to the Footwear Business which would become an Assumed Liability, except in the ordinary course of the Footwear Business consistent with past practice. (f) Changes to Benefit Plans. Except as set forth in Section 5.1(f) of the Seller Disclosure Schedule, the Seller shall not, nor shall it permit any of its Subsidiaries to, (i) enter into, adopt, amend (except as may be required by law and except for immaterial amendments) or terminate any Compensation and Benefit Plan as it relates to any Transferred Employees (as defined in Section 6.7), or (ii) except for immaterial or normal increases in the ordinary course of the Footwear Business consistent with past practice, increase in any manner the compensation or fringe benefits of any Transferred Employee or pay any benefit to any Transferred Employee not required by any plan or arrangement as in effect as of the date hereof or enter into any Contract, agreement, commitment or arrangement to do any of the foregoing. (g) Advice of Changes; Filings. The Seller shall promptly advise Parent in writing of any change or development or combination of changes or developments that would cause the representation in Section 3.10 to be untrue in any material respect. The Seller shall promptly provide Parent (or its counsel) copies of all filings made by the Seller with any federal, state or foreign Governmental Entity in connection with this Agreement and the transactions contemplated hereby. (h) Accounting Policies and Procedures. Except as set forth in Section 5.1(h) of the Seller Disclosure Schedule, the Seller will not and will not permit any of its Subsidiaries to change in any material respect any of its accounting principles, policies or procedures, except as may be required by United States generally accepted accounting principles, in respect of the Footwear Business. 43 52 (i) Lawsuits and Claims. Except as set forth in Section 5.1(i) of the Seller Disclosure Schedule, the Seller will not, and shall not permit any of its Subsidiaries to, settle or compromise any material suit or claim or threatened suit or claim Related to the Footwear Business. (j) Contracts. The Seller will not, and shall not permit any of its Subsidiaries to, modify, amend or terminate any Contract Related to the Footwear Business, waive, release, relinquish or assign any Contract or other right or claim Related to the Footwear Business or cancel or forgive any indebtedness owed to the Seller or its Subsidiaries which would be an Acquired Asset, other than in the ordinary course of the Footwear Business consistent with past practice. (k) Intercompany Transactions. The Seller and its Subsidiaries shall not establish or otherwise incur any intercompany payables, receivables, loans, cash overdrafts, advances and other similar accounts between the Footwear Business, on the one hand, and the Seller and its Subsidiaries (other than the Transferred Subsidiaries), on the other hand. (l) Other Actions. Notwithstanding the fact that such action might otherwise be permitted pursuant to this Section 5.1, the Seller shall not, nor shall it permit any of its Subsidiaries to, take any action that would or can reasonably be expected to result in any of the conditions to the obligations of Parent and the Purchaser set forth in Article VIII not being satisfied or that would materially impair the ability of the Seller to consummate the transactions contemplated herein in accordance with the terms hereof or that would materially delay such consummation. Section 5.2 Covenants of Parent. (a) During the period from the date of this Agreement and continuing until the Closing Date, Parent agrees as to itself and its Subsidiaries that Parent shall not take any action that would or can reasonably be expected to result in any of the conditions to the obligations of the Seller set forth in Article VIII not being satisfied or that would materially impair the ability of Parent to consummate the transactions contem- 44 53 plated herein in accordance with the terms hereof or that would materially delay such consummation. (b) Parent shall promptly advise the Seller in writing of any change or development or combination of changes or developments that would cause the representation in Section 4.7 to be untrue in any material respect. Parent shall promptly provide the Seller (or its counsel) copies of all filings made by Parent with any federal, state or foreign Governmental Entity in connection with this Agreement and the transactions contemplated hereby. ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Reasonable Efforts. Subject to the terms and conditions of this Agreement, including, without limitation, Section 6.3(b), each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under this Agreement and under applicable Contracts, laws and regulations to consummate and make effective the transactions contemplated by this Agreement (which actions shall include, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any Governmental Entity and cooperating in Parent's efforts to complete the closing of its financing) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their respective Subsidiaries in connection therewith. Subject to the terms and conditions hereof, each of the Seller and Parent will, and will cause its respective Subsidiaries to, promptly use all reasonable efforts to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party, required to be obtained or made by such party in connection with the taking of any action contemplated by this Agreement. Section 6.2 Access to Information. Upon reasonable notice, the Seller shall (and shall cause its 45 54 Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of Parent, access, during normal business hours during the period prior to the Closing Date and for a reasonable period of time following the Closing Date to the extent necessary for Parent or the Purchaser to prepare or evaluate any schedules or filings contemplated by this Agreement, to all its properties, books, Contracts, commitments and records and all other information Related to the Footwear Business, the Acquired Assets, the Assumed Liabilities and the Transferred Employees as Parent may reasonably request, and, during such periods, each of the Seller and Parent shall (and shall cause each of their respective Subsidiaries to) furnish promptly to the other a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal securities laws. Unless otherwise required by law, the parties will hold any such information which is non-public in confidence in accordance with the Confidentiality Agreement, dated September 30, 1994 and as amended on January 9, 1995 (the "Confidentiality Agreement"), between Parent and the Seller. Section 6.3 Further Assurances; Subsequent Transfers. (a) From time to time, each of the parties hereto will execute and deliver such further instruments and will take such other actions as Parent or any of its Subsidiaries, on the one hand, or the Seller or any of its Subsidiaries, on the other hand, may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof; provided, however, that the Seller shall not agree to amend or otherwise modify any Contract constituting a part of the Acquired Assets in connection with the obtaining of any such consent in any manner which would place any additional restraints or requirements on the Purchaser or Parent or which would increase any of the payments to be made by the Purchaser thereunder without the written consent of the Purchaser. Without limiting the generality of the foregoing, at any time and from time to time after the Closing Date, (i) at the request of Parent or any of its Subsidiaries, the Seller and its Subsidiaries will execute and deliver such other instruments of transfer, and take such action as Parent or any of its Subsidiaries may reasonably deem necessary in order to effectively 46 55 transfer, convey and assign to the Purchaser all of the Acquired Assets, to put the Purchaser in actual possession and operating control thereof and to permit the Purchaser to exercise all rights with respect thereto (including, without limitation, rights under Contracts and other arrangements as to which the consent of any third party to the transfer thereof shall not have previously been obtained) and to properly assume and discharge the related Assumed Liabilities, and (ii) at the request of the Seller or any of its Subsidiaries, the Purchaser, Parent and their respective Subsidiaries will execute and deliver such other instruments and agreements, and take such action, as the Seller or any of its Subsidiaries may reasonably deem necessary in order effectively to assume from the Seller all of the Assumed Liabilities and to confirm the Seller's right, title and interest in and to the Retained Assets. (b) The Seller will use all reasonable efforts and Parent will reasonably cooperate with the Seller to obtain any consents required to transfer and assign to the Purchaser all Contracts, Licenses and other rights of any nature whatsoever relating to or constituting a part of the Acquired Assets, it being understood that neither the Seller nor Parent shall be obligated to make payments to third parties in order to obtain consents. In the event and to the extent that at the Closing the Seller is unable to obtain any such required consents, (i) the Seller shall continue to be bound thereby, (ii) the Purchaser shall pay, perform and discharge fully all of the obligations of such entity thereunder from and after the Closing Date, and (iii) the Seller shall, for a period continuing through December 31, 1995, continue to use all reasonable efforts to obtain such consent at the earliest practicable date following the Closing Date. The Seller shall, without further consideration therefor, pay, assign and remit to the Purchaser promptly all monies, rights and other consideration received in respect of such performance. The Seller shall exercise or exploit the rights and options under all such Contracts, Licenses and other rights and commitments referred to in this Sections 6.3(b) only as reasonably directed in writing by the Purchaser and at the Purchaser's expense and shall indemnify and hold harmless Parent and the Purchaser against any Third-Party Claims (as defined in Section 7.1(b)) arising out of, resulting from or relating to any actions taken by the Seller or its Subsidiaries in con- 47 56 nection with such Contracts, Licenses and other rights and commitments which the Purchaser did not so direct. Except with respect to the exercise or exploitation of the rights and options under the non-assignable Contracts, Licenses and other rights and commitments as contemplated under this Section 6.3(b) and Section 6.3(c), the Seller and its Subsidiaries shall have no obligation hereunder to pay, perform or discharge any obligations under any such non-assignable Contract, License or other right relating to the Acquired Assets after the Closing, and Parent and the Purchaser shall indemnify and hold harmless the Seller and its Subsidiaries from any Third-Party Claims relating thereto and from Third-Party Claims arising out of, resulting from or relating to any actions taken by the Seller or its Subsidiaries in connection with such Contracts, Licenses and other rights and commitments which the Purchaser directed the Seller or its Subsidiaries to take or which were reasonably taken if directions were requested by the Seller in writing and not forthcoming from Parent or the Purchaser within a reasonable period of time. If and when any such consent shall be obtained or such Contract, License or other right shall otherwise become assignable, the Seller or such Subsidiary, as the case may be, shall promptly assign all its rights and obligations thereunder to the Purchaser without payment of further consideration and the Purchaser shall, without the payment of any further consideration therefor, assume such rights and obligations. (c) In the event that (i) any landlord under any of the store leases constituting Contracts takes legal action alleging that the transactions contemplated by this Agreement constitute a breach of such lease or (ii) as of December 31, 1995, the Seller shall have failed to obtain and provide to the Purchaser any required consents to the assignment to the Purchaser of any of such store leases, the Purchaser may elect by written notice to the Seller, which in the case of clause (ii) shall be provided not later than January 15, 1996, to terminate the operating arrangement provided for in Section 6.2(b) with respect to any or all such leases and vacate any or all such stores within a commercially reasonable period thereafter. In the event that the Purchaser makes any such election, such termination and agreement to vacate shall become effective on the tenth business day following the receipt by the Seller of such 48 57 notice other than as to any such stores for which the Seller provides a satisfactory undertaking to Parent and the Purchaser to indemnify and hold Parent and the Purchaser harmless from any damages or other costs, including without limitation any litigation costs, relating to claims that the related lease had been breached. In the event that the Seller shall not provide such undertaking as to any lease, the Seller shall retain responsibility for, and indemnify Parent and the Purchaser against, any and all obligations or other liabilities relating to such lease other than rental payments through the date of the Purchaser's vacating of the related store and the Seller shall pay to the Purchaser at the time of such vacating as liquidated damages (the "Liquidated Damages") for the Seller's failure to deliver such lease as an Acquired Asset an amount in cash equal to the sum of (i) the net asset value as reflected on the most recently available balance sheet of the Footwear Business of the leasehold improvements as in existence on the Closing Date relating to such store not reasonably removable by the Purchaser when vacating such store and (ii) the amount indicated as liquidated damages for such store in Section 6.3(c) of the Seller Disclosure Schedule. Section 6.4 Use of Names. Following the Closing Date and except as otherwise provided in the Other Acquired Intellectual Property Licenses and the Capezio License, Parent and its Subsidiaries shall have the sole and exclusive ownership of and right to use, as between Parent and its Subsidiaries, on the one hand, and the Seller and its Subsidiaries, on the other hand, each of the names included in the Acquired Intellectual Property (the "Footwear Names"). The Footwear Names shall not include the Capezio Name and the Corporate Names. Following the Closing Date and except as otherwise provided in the Intellectual Property Assignments or the Other Acquired Intellectual Property Licenses, the Seller shall, and shall cause its Subsidiaries and other affiliates to, take all action necessary to cease using, and change as promptly as practicable (including by amending any charter documents), any corporate or other names which are the same as or confusingly similar to any of the Footwear Names. Following the Closing, Parent and the Purchaser shall take all action necessary to cause the Footwear Business to cease the use of the Corporate Names. 49 58 Section 6.5 Non-Solicitation. (a) The Seller agrees that, for a period of two years following the Closing Date, without the prior written consent of Parent or the Purchaser, it will not, whether directly or indirectly, and will not permit any of its Subsidiaries to, solicit the employment of or employ any employee of the Footwear Business who has merchandising or management decision making responsibilities who was an employee as of the date of this Agreement or as of any date during the period of one year prior thereto unless such employee's employment was terminated by the Purchaser or Parent. (b) Parent and the Purchaser agree that, for a period of two years following the Closing Date, without the prior written consent of the Seller, they will not, whether directly or indirectly, and will not permit any of their Subsidiaries to, solicit the employment of or employ any employee of the Seller who has merchandising or management decision making responsibilities, who is not a Transferred Employee who accepted the Purchaser's offer of employment and who was an employee as of the date of this Agreement or as of any date during the period of one year prior thereto unless such employee's employment was terminated by the Seller. Section 6.6 Employee Matters; Employee Benefit Plans. (a)(i) Effective as of the Closing Date, the Purchaser shall offer employment to each person who is an active employee of the Footwear Business immediately prior to the Closing Date and (ii) effective as of the date on which a person who is an inactive employee of the Footwear Business immediately prior to the Closing Date and who is ready to return in a timely manner from sick leave, disability leave, furlough, layoff, approved leave of absence or any other leave covered by the Family and Medical Leave Act or any comparable applicable law (the "Return Date"), the Purchaser shall offer employment to such employee (each such person, upon receipt of such offer, a "Transferred Employee," and all such persons, upon receipt of such offers, "Transferred Employees"). The foregoing shall not be construed to require the Purchaser to continue the employment of any Transferred 50 59 Employee for any period following the Closing Date or the applicable Return Date, as the case may be. (b) As soon as practicable after the Closing Date, the Purchaser shall take all steps necessary and appropriate to establish a defined benefit pension plan and trust intended to qualify under Sections 401(a) and 501(a) of the Code, respectively (the "Purchaser Pension Plan"). As soon as practicable following receipt by the Seller of written evidence of the establishment of the Purchaser Pension Plan and the trust thereunder by the Purchaser (the "Transfer Date"), the Seller shall cause the trustees of the Salaried Employees Pension Plan (the "Seller Pension Plan") to transfer from the trust under the Seller Pension Plan to the trust under the Purchaser Pension Plan an amount equal to the product of (i) the fair market value of all of the assets held under the Seller Pension Plan as of the Closing Date and (ii) a fraction, the numerator of which shall equal the present value of all the accrued benefits under the Seller Pension Plan as of the Closing Date in respect of all Transferred Employees and the denominator of which shall equal the present value of all accrued benefits under the Seller Pension Plan as of the Closing Date; provided, however, that the amount transferred shall be equitably adjusted to reflect any appreciation or depreciation in the value of the assets and any benefit distributions that occur between the Closing Date and the last day of the calendar month which precedes the Transfer Date. The calculation of the amount to be transferred pursuant to this Section 6.6(b) shall be determined on an ongoing basis, in accordance with the standards of Section 414(l) of the Code, jointly by the certified actuary of the Seller Pension Plan (the "Seller Actuary") and a certified actuary selected by the Purchaser (the "Purchaser Actuary"). If the Seller Actuary and the Purchaser Actuary cannot agree on the amount to be transferred hereunder, the dispute shall be settled by a third-party certified actuarial firm mutually agreed upon by the Purchaser Actuary and the Seller Actuary, with any fees being paid 50% by the Seller and 50% by the Purchaser. The decision of the third-party certified actuarial firm shall be final and binding on the parties. (c) Notwithstanding any other provision of this Agreement to the contrary, neither the Purchaser nor the Purchaser Pension Plan shall be deemed to have 51 60 assumed any liability concerning the Seller Pension Plan until the date of transfer of the amount pursuant to Section 6.6(b), at which time the Purchaser Pension Plan shall assume all liabilities for the accrued benefits of the Transferred Employees under the Seller Pension Plan. All remaining liabilities with respect to the Seller Pension Plan shall remain with the Seller. (d) The Purchaser and the Seller shall provide each other with such records and information as may be necessary or appropriate to carry out their obligations under Section 6.6(b) or for the purpose of administration of the Purchaser Pension Plan, and shall cooperate in the filing of documents required by the transfer of assets and liabilities described therein. Notwithstanding anything contained in this Section 6.6 to the contrary, no transfer of funds between the Seller Pension Plan and the Purchaser Pension Plan shall occur until thirty-one days following the filing of all required Forms 5310-A in connection therewith. Section 6.7 Exclusivity. Until the termination of this Agreement pursuant to Section 9.1, the Seller will not, directly or indirectly, through any officer, director, agent or otherwise, initiate, solicit, encourage, negotiate or discuss with any third party (including by way of furnishing non-public information concerning the Seller or its businesses, assets or properties), or take any other action to facilitate any inquiries with respect to or the making of, any proposal that constitutes or may reasonably be expected to lead to a Competing Transaction. For purposes hereof, the term "Competing Transaction" shall mean any proposal with respect to the acquisition of any of the Acquired Assets other than as contemplated by this Agreement. Section 6.8 Fees and Expenses. Whether or not the transactions contemplated by this Agreement are consummated, except as otherwise specifically provided for in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. 52 61 Section 6.9 Notification of Certain Matters. The Seller shall give prompt notice to Parent, and Parent shall give prompt notice to the Seller, of (a) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be reasonably likely to cause (i) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect or (ii) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied in any material respect and (b) any failure of the Seller, the Purchaser or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder in any material respect; provided, however, that the delivery of any notice pursuant to this Section 6.9 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. Section 6.10 Settlements for Cash Collections and Disbursements. For each calendar month commencing with the month in which the Closing Date occurs and continuing until reasonably determined by the parties no longer to be necessary, the Purchaser and the Seller shall cause all cash collections and cash disbursements received or made by the Purchaser and its Subsidiaries for the benefit of the Seller and its Subsidiaries or by the Seller and its Subsidiaries for the benefit of the Purchaser and its Subsidiaries during the relevant month to be remitted or reimbursed, as the case may be, to the party entitled to the benefit thereof as promptly as possible but in any case within 15 days after the receipt thereof or request for reimbursement thereof, as the case may be. Section 6.11 Insurance. The Seller will continue to carry and maintain in full force and effect the insurance policies listed on Section 3.17 of the Seller Disclosure Schedule, or policies with comparable coverage, to the Closing Date, and will reasonably cooperate with Parent in Parent's efforts to obtain insurance coverage for the Footwear Business from and after the Closing. 53 62 Section 6.12 Transition Services; Interim Leases. (a) Transition Services to Seller. On the Closing Date, upon the request of the Seller, the Seller and the Purchaser shall enter into a Services Agreement in the form attached hereto as Exhibit 6.12(a) (the "Purchaser Services Agreement"), pursuant to which the Purchaser will agree to provide to the Seller, at the Seller's election, certain data processing, payroll, financial, tax, accounting, insurance, banking, cash management, personnel, payables collection, employee benefits, management information systems, communications and similar services (collectively, the "Purchaser Services") presently being provided by the Footwear Business to the businesses of the Seller other than the Footwear Business, in accordance with the terms and for the time period set forth in the Purchaser Services Agreement. (b) Transition Services to the Purchaser. On the Closing Date, upon the request of the Purchaser, the Seller and the Purchaser shall enter into a Services Agreement in the form attached hereto as Exhibit 6.12(b) (the "Seller Services Agree- ment"), pursuant to which the Seller will agree to provide to the Purchaser, at the Purchaser's election, certain data processing, payroll, financial, tax, accounting, insurance, banking, cash management, personnel, payables collection, employee benefits, management information systems, communications and similar services (collectively, the "Seller Services") presently being provided by the Seller to the Footwear Business, in accordance with the terms and for the time period set forth in the Seller Services Agreement. (c) Interim Leases. On the Closing Date, upon the request of the Seller, the Seller and the Purchaser shall enter into Interim Lease Agreements in the forms attached hereto as Exhibit 6.12(c) (the "Interim Leases") for the lease and occupancy by the Seller of certain executive office space in the headquarters building of the Footwear Business located at One Eastwood Drive, Cincinnati, Ohio, and certain additional office space in New York City in accordance with the terms and for the time periods set forth in the respective Interim Leases. 54 63 Section 6.13 Purchase Price Allocation for Tax Purposes. Pursuant to Section 1060 of the Code and the Treasury regulations thereunder and any analogous provisions of state, local or foreign law, the Seller and the Purchaser shall prepare and file "asset acquisition statements" with the Service and other taxing authorities as required by applicable law with respect to the acquisition of the Acquired Assets and the non-competition agreement provided for in Section 6.27. The asset acquisition statements shall be filed in the time and manner set forth in Section 1060 of the Code and the Treasury regulations thereunder, and any analogous provisions of state, local or foreign law, and shall allocate the total consideration to be paid by the Purchaser (including the Assumed Liabilities) to the Acquired Assets and the non-competition agreement provided for in Section 6.27 in conformance with the methods prescribed therein. For these purposes, within 60 days following the Closing Date, the Purchaser shall prepare and deliver to the Seller a tentative asset acquisition statement that shall be binding on the Seller unless the Seller notifies the Purchaser within 60 days of its receipt of the tentative asset acquisition statement that it disputes the allocations contained therein and such notice sets forth in detail the nature of and basis for its dispute. Notwithstanding the foregoing, the fair market value of the Parent Warrants to be reflected in the tentative asset acquisition statement shall be calculated based upon the average of the closing prices of the Parent Warrants on the principal stock exchange or quotation system on which the Parent Warrants are then listed or quoted for trading for the five trading days immediately following the tenth trading day after the distribution of the Parent Warrants by the Seller to its stockholders. In the event that the Seller shall so notify the Purchaser of any dispute, the Seller and the Purchaser shall cooperate in good faith to resolve such dispute as promptly as practicable. In the event that the Seller and the Purchaser are unable to resolve any such dispute within 30 days of the Seller's delivery of such notice, such dispute shall be resolved by the Independent Accounting Firm, with any fees being paid 50% by the Seller and 50% by the Purchaser. The determination of the Independent Accounting Firm shall be final and binding. The Purchaser and the Seller shall be bound to and take positions on their respective Tax Returns consistent with the final asset acquisition statements determined in compliance with this Section 6.13. 55 64 6.14 Certain Environmental Matters. (a) Parent and the Seller will jointly (i) promptly arrange for "Phase I" investigations of a reasonable scope to be undertaken by a firm of environmental consultants identified in Section 6.14(a) of the Seller Disclosure Schedule (the "Environmental Consultant") as to each of the facilities identified in Section 6.14(a) of the Seller Disclosure Schedule (the "Facilities"), and (ii) instruct the Environmental Consultant to consult with both the Seller and Parent and to address its Phase I Report(s) to both the Seller and Parent. In the event that, in the reasonable judgment of the Environmental Consultant, any of the Phase I investigations identifies as to any Facility any condition, including off-site conditions, which requires further investigation or which may reasonably likely require Remedial Activities (as defined below) ("Identified Environmental Conditions"), Parent and the Seller will jointly (i) promptly arrange for further reasonable investigations, which may include, without limitation, soil and ground water sampling and testing (provided, however, soil and ground water testing will not be conducted on off-site properties), review of relevant files held by Governmental Entities and discussions with representatives of Governmental Entities, to be undertaken by the Environmental Consultant as to each such Identified Environmental Condition ("Phase II Investigations"), and (ii) instruct the Environmental Consultant to consult with both the Seller and Parent and to address its Phase II Report(s), including laboratory reports, to both the Seller and the Parent. The Seller agrees to cooperate with and upon reasonable notice to the Seller provide the Environmental Consultant and representatives of Parent reasonable access to the Facilities and the Seller's employees and representatives to conduct such investigations. The parties agree that the fees and expenses incurred in connection with the retention of the Environmental Consultant, the environmental investigations and the preparation of the environmental reports contemplated by this Section 6.14(a) (exclusive of any legal fees and expenses incurred by Parent) shall be paid by the Seller. The parties agree to conduct the environmental investigations in a timely, commercially reasonable and cost-effective manner and to use reasonable efforts to minimize any interference with or impairment of the regular conduct of the Footwear Business, and to provide to the Seller and Parent an opportunity to 56 65 comment on any plans for the sampling and testing of soil and ground water. (b) If the Phase I investigations or, if applicable, any further investigations conducted by the Environmental Consultant reveal Identified Environmental Conditions that would in the reasonable judgment of the Environmental Consultant require Remedial Activities, the Environmental Consultant shall develop an estimate of the reasonable aggregate most likely costs and expenses (i.e., the most likely cost estimate for the Remedial Activity or part thereof that reasonably may be incurred by a party to this transaction) of such Remedial Activities (the "Remediation Estimate"). The Environmental Consultant shall base the Remediation Estimate as appropriate on requirements of Environmental Laws and what Governmental Entities of the States within which the Facilities or off-site properties are located reasonably might require. (c) With respect to the environmental investigation contemplated herein, the Seller shall initiate contact with appropriate Governmental Entities in any matter that involves a legal proceeding to which the Seller is or expects imminently to become a party before such Governmental Entity and which concerns or relates to the Seller's obligations or liabilities arising from or related to Environmental Laws. The Seller shall afford the Environmental Consultant an opportunity to be present during such contacts with Governmental Entities for the purpose of performing the environmental investigation contemplated herein. Except as may be required by law, the Environmental Consultant and Parent shall not have independent contact or communications with any such Governmental Entity without the prior consent of the Seller, which consent shall not be unreasonably withheld or delayed. (d) In the event that the total Remediation Estimate exceeds $10,000,000, the Seller shall have the right (the "Environmental Right") to elect to reimburse Parent for the full amount of such excess pursuant to Section 6.14(e); provided, however, in the event that the Seller fails to exercise the Environmental Right, this Agreement may be terminated by Parent in accordance with Section 9.1(e). The Seller shall have the right to exercise the Environmental Right during the 57 66 seven business day period following receipt by the Seller of the Remediation Estimate by sending a notice by personal delivery or telecopy to Parent pursuant to Section 10.3. (e) Subject to the terms and conditions of Section 7.8(c), upon receipt by the Seller of invoices for the costs of Remedial Activities incurred by Parent in respect of Identified Environmental Conditions, the Seller shall reimburse Parent for such costs; provided, however, that Parent and the Seller agree that the first $2 million of costs for such Remedial Activities shall be paid 50% by Parent and 50% by the Seller. Parent agrees to conduct the Remedial Activities at any Facility in a commercially reasonable and cost-effective manner. Any contract for such Remedial Activities in excess of $30,000 shall be put out for competitive bidding. Parent shall provide the Seller with prior notice and an opportunity to comment on Parent's plans to implement Remedial Activities. (f) Subject to the limitations set forth in Sections 7.8 and 7.9, the Seller agrees to indemnify and hold harmless Parent, the Purchaser and their respective directors, officers, employees, agents and representatives from and against any and all losses, liabilities, damages and reasonable expenses of any kind or character (whether or not known or asserted prior to the date of this Agreement), including, without limitation, any legal or other expenses reasonably incurred in connection with investigating or defending any claims or actions, whether or not resulting in any liability ("Environmental Loss") incurred by, imposed or asserted against any of them arising or resulting from (i) any breach of the agreement to reimburse Parent for the costs of implementing Remedial Activities as set forth in Section 6.14(e), and (ii) Third-Party Claims arising from or related to Identified Environmental Conditions but exclusive of such claims arising from or related to Parent's negligent or reckless or willful misconduct in the course of implementation of Remedial Activities. (g) As used in this Section 6.14, the following terms shall have the meanings set forth below: (i) "Environmental Law." The term Environmental Law shall mean any law, statute, order, 58 67 rule, regulation, ordinance or final judgment of any Governmental Entity and any binding judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, and any common law, relating to human health, occupational safety, pollution or the environment, including, without limitation, laws relating to emissions, discharges, releases, natural resource damages or otherwise relating to treatment, storage, disposal, generation, transport or shipment of Hazardous Materials, in each case as in effect as of the Closing Date, including Environmental Laws existing as of the Closing Date that impose requirements effective within one year of the Closing Date. (ii) "Hazardous Material." The term Hazardous Material shall mean any substance, chemical or waste that is listed, defined, designated, or classified as a pollutant or contaminant or as hazardous, toxic or radioactive, or is otherwise regulated under any applicable Environmental Laws; as well as any asbestos or asbestos-containing material, petroleum, petroleum product or by-product, crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, synthetic gas usable as fuel, and polychlorinated biphenyls. (iii) "Remedial Activities." The term Remedial Activities shall mean any monitoring, investigation, sampling, treatment, removal or remediation of Hazardous Materials at any Facility or off-site property after the Closing or any actions, including, without limitation, the purchase and installation of pollution control facilities or the modification of existing pollution control facilities, necessary at any Facility or off-site property to fully comply with applicable Environmental Laws in effect as of the Closing Date, including Environmental Laws existing as of the Closing Date that impose requirements effective within one year of the Closing Date. 59 68 Section 6.15 Disclosure Schedule Updates. No later than five business days prior to the scheduled Closing Date, the Seller shall amend or supplement the Seller Disclosure Schedule and Parent shall amend or supplement the Parent Disclosure Schedule with respect to any manner coming to their respective attention or arising which, if known to them or existing prior to the date of this Agreement, would have been required to be set forth therein or which is necessary or desirable to complete or correct any information contained therein or in any representation or warranty rendered inaccurate thereby. Notwithstanding the foregoing, for the purposes of determining the satisfaction of the conditions to Closing set forth in Article VIII, neither the Seller Disclosure Schedule or the Parent Disclosure Schedule shall be deemed to have been amended or supplemented from the form in which it was delivered on the date of this Agreement. Section 6.16 Tax Returns. The Purchaser agrees to prepare IRS Form 5471 for the taxable year which includes the Closing Date, if applicable, for any Transferred Subsidiaries on behalf of the Seller and the Purchaser and to prepare all other required Tax Returns for any Transferred Subsidiaries for the taxable year which includes but does not end on the Closing Date in a manner consistent with applicable Tax laws. Such Tax Returns shall be submitted to the Seller for review at least 30 days prior to the due date. The Purchaser agrees to provide the Seller with copies of such Tax Returns as filed. The Seller will prepare all Tax Returns for any Transferred Subsidiaries for the taxable year ending on the Closing Date on a basis consistent with past practice. The Purchaser will provide the Seller with appropriate powers of attorney to enable the Seller to sign and file such returns. The Seller agrees to provide the Purchaser with copies of such Tax Returns as filed. Any disputes with respect to such Tax Returns shall be resolved by the Independent Accounting Firm, or such other independent expert as may be mutually agreed upon by the parties, whose determination shall be binding on the parties. Section 6.17 Section 338 Elections; Procedures. In the event that the Purchaser, in its sole discretion, elects to purchase the capital stock of one or more of the Footwear Subsidiaries, each of which shall 60 69 become a Transferred Subsidiary, and to make the elections provided for in Section 338(h)(10) of the Code with respect to the Acquired Assets and the Transferred Subsidiaries, then: (a) With respect to the Purchaser's acquisition of the capital stock of the Transferred Subsidiaries hereunder and with respect to the capital stock of any other corporation acquired by the Purchaser hereunder that is a "target affiliate" of the Transferred Subsidiaries (as such term is defined in section 338(h)(6) of the Code and the regulations promulgated thereunder) (a "Target Affiliate"), the Seller and the Purchaser shall jointly make all available Section 338(h)(10) Elections in accordance with applicable Tax laws of the United States and any state or other political subdivision thereof and as set forth herein. The Purchaser and the Seller agree to report the transfers under this Agreement consistent with the Section 338 Elections, and shall take no position contrary thereto unless required to do so by applicable Tax laws pursuant to a Determination. (b) The Seller shall be responsible for the preparation and filing of all Section 338 Forms in accordance with applicable Tax laws of the United States and of any state or other political subdivision thereof and the terms of this Agreement. The Purchaser shall execute and deliver to the Seller such documents or forms as are requested by the Seller and are required by any Tax laws of the United States and of any state or other political subdivision thereof properly to complete the Section 338 Forms, at least 20 days prior to the date such Section 338 Forms are required to be filed. (c) The Purchaser and the Seller agree that they shall use all reasonable efforts to enter into an agreement (the "Allocation Agreement") as soon as practicable after the Closing Date concerning the computation of the Modified Aggregate Deemed Sale Price (as defined under applicable Treasury Regulations) of the assets of the Transferred Subsidiaries and any Target Affiliates and the allocation of such Modified Aggregate Deemed Sale Price among such assets (including the non-competition covenant provided for in Section 6.27 hereof), and the allocation of the Purchase Price among the Acquired Assets other than the Transferred Subsidiaries 61 70 and any Target Affiliates. In furtherance of this effort, the Purchaser and the Seller agree that they shall use all reasonable efforts to agree on the formula for allocating the Modified Aggregate Deemed Sale Price among each of the Transferred Subsidiaries and each group of Acquired Assets before the Closing (it being agreed and understood that such agreement is not a condition to the Closing). The Purchaser and the Seller agree that they shall use all reasonable efforts to revise the Allocation Agreement to the extent necessary no later than 60 days before the last date on which the Section 338(h)(10) Election may be filed. If 60 days before the last date on which the Section 338(h)(10) Election may be filed, the Purchaser and the Seller have not adopted or revised the Allocation Agreement as described above, any disputed aspects of the Allocation Agreement or such revision shall be resolved by the Independent Accounting Firm (or such other independent valuation firm as may be mutually agreed upon by the parties) before the last date on which the Section 338(h)(10) Election may be filed. The costs, expenses and fees of the Independent Accounting Firm (or any other agreed upon firm) shall be borne equally by the Purchaser and the Seller. The Purchaser and the Seller agree to act in accordance with the allocations contained in the Allocation Agreement in any relevant Tax Returns or similar filings. (d) The Seller reserves the right, on or prior to the Closing Date, to cause any or all of the Acquired Assets to be transferred to The Shops for Pappagallo Inc., an Ohio corporation ("Pappagallo"), or to a newly-formed subsidiary of Pappagallo, which in such event would be a Transferred Subsidiary (the "338(h) Subsidiary"). The Seller agrees to give Parent not less than ten days' prior written notice of the details of any such transfer and to make a Section 338(h)(10) Election in connection with such Transferred Subsidiary. Parent and the Purchaser agree to liquidate or merge out of existence, or cause to be liquidated or merged out of existence, on or prior to December 31, 1995, the 338(h) Subsidiary. Section 6.18 Allocation of Certain Taxes. (a) The Purchaser and the Seller agree that if any of the Transferred Subsidiaries is permitted but not required under applicable state, local or foreign 62 71 Tax laws to treat the Closing Date as the last day of a taxable period, the Purchaser and the Seller shall treat such day as the last day of a taxable period. (b) Any Taxes for a taxable period beginning on or before the Closing Date and ending after the Closing Date with respect to the Transferred Subsidiaries shall be apportioned for purposes of Section 1.2(b)(ii)(B) based on actual operations of the Transferred Subsidiaries during the portion of such period ending at the consummation of the Closing on the Closing Date and the portion of such period beginning on the day following the Closing Date; provided, however, that any Taxes (such as real estate taxes) that are measured by the passage of time (rather than by reference to income, profits or results of operations) shall be apportioned between the Seller and the Purchaser based on the number of days elapsed in the portion of such period ending on the Closing Date and the number of days in the portion of such period beginning on the day following the Closing Date. (c) Any disputes with respect to the allocation of Taxes pursuant to this Section 6.18 shall be resolved by the Independent Accounting Firm (or such other independent valuation firm as may be mutually agreed upon by the parties) whose determination shall be binding on both parties. Section 6.19 Carrybacks. The Purchaser shall be entitled to all refunds or credits of Taxes resulting from a carryback of any loss or similar tax benefit of a Transferred Subsidiary from a period beginning after the Closing Date (a "Carryback Benefit"). The Seller agrees to cooperate with the Purchaser to enable the Purchaser to receive any such Carryback Benefits. The Seller shall be entitled to any and all other claims of the Seller, of any Retained Subsidiary or of any of the Transferred Subsidiaries for refunds or credits in connection with any Taxes arising in a period before the Closing Date. The Purchaser agrees to cooperate with the Seller to enable the Seller to receive any such benefits. Section 6.20 Cooperation. The Purchaser and the Seller and their respective affiliates shall cooperate in the preparation of all Tax Returns relating in whole or in part to taxable periods ending on or before 63 72 or including the Closing Date that are required to be filed after such date. Such cooperation shall include, but not be limited to, furnishing prior years' Tax Returns or return preparation packages illustrating previous reporting practices or containing historical information relevant to the preparation of such Tax Returns, and furnishing such other information within such party's possession requested by the party filing such Tax Returns as is relevant to their preparation. In the case of any state, local or foreign joint, consolidated, combined, unitary or group relief system Tax Returns, such cooperation shall also relate to any other taxable periods in which one party could reasonably require the assistance of the other party in obtaining any necessary information. Section 6.21 Definitions. For purposes of this Agreement, the following terms shall have the meanings ascribed to them below: (a) "Determination" means a "determination" as defined by Section 1313(a) of the Code. (b) "Section 338 Forms" means all returns, documents, statements, and other forms that are required to be submitted to any federal, state, county, or other local Taxing Authority in connection with a Section 338(h)(10) Election. Section 338 Forms shall include, without limitation, any "statement of section 338 election" and United States Internal Revenue Service Form 8023 (together with any schedules or attachments thereto) that are required pursuant to Treas. Reg. Section 1.338-1 or Treas. Reg. Section 1.338(h)(10)-1 or any successor regulation. (c) "Section 338 Elections" shall mean a Section 338(h)(10) Election. (d) "Section 338(h)(10) Election" means an election described in Section 338(h)(10) of the Code with respect to the Seller's sale of the stock of the Transferred Subsidiaries or any Target Affiliate to the Purchaser pursuant to this Agreement. Section 338(h)(10) Election shall include any corresponding election under any other relevant Tax laws of any state or other political subdivision of the United States for which a separate election is permissible with respect to the Purchaser's 64 73 acquisition of the stock of the Transferred Subsidiaries or any Target Affiliate from the Seller under this Agreement. Section 6.22 W-2 Preparation. The Seller and Purchaser agree that the Purchaser has purchased substantially all of the property used in the Footwear Business and, in connection therewith, the Purchaser may employ individuals who immediately before the Closing Date were employed in such business by the Seller. Accordingly, pursuant to Revenue Procedure 84-77, at the request of the Seller, provided the Seller provides the Purchaser with all necessary payroll records for the calendar year that includes the Closing Date, the Purchaser will furnish a Form W-2 to each Transferred Employee that is employed by the Purchaser disclosing all wages and other compensation paid for such calendar year, and Taxes withheld therefrom, and Seller will be relieved of the responsibility to do so. Section 6.23 Prohibited Transactions by Parent. Parent covenants and agrees that, for a period of ten years from the Closing Date, other than in accordance with the provisions of this Agreement, it will not, and will direct its affiliates not to, and will not assist, solicit or encourage others to, directly or indirectly, unless the Seller's board of directors shall have specifically consented thereto in writing in advance, (a) make any public announcement with respect to, or submit or otherwise disclose an intent to submit to the Seller or any of its directors, officers or securityholders, any proposal for a transaction between Parent or Parent's affiliates, on the one hand, and the Seller, its affiliates or any of its securityholders, on the other hand, (b) by purchase or otherwise, alone or with others, acquire, or agree to acquire, offer, seek or propose to acquire, or otherwise disclose an intent to acquire, ownership (including, without limitation, beneficial ownership as defined in Rule 13d-3 under the Exchange Act) of any securities issued by the Seller or any assets or businesses of the Seller, or any rights or options to acquire such ownership (including from third parties), (c) seek or propose, or disclose an intent to seek or propose, alone or in concert with others (including by providing financing for another person), to influence or control, in any manner, the Seller's directors and officers or policies, including by making or in any way 65 74 participating in, proposing to make or participate in, or disclosing an intent to make or participate in, any solicitation of proxies with respect to any voting securities of the Seller (including by the execution of action by written consent), becoming, proposing to become or disclosing an intent to become a participant in any election contest with respect to the Seller, seeking, proposing to seek or disclosing an intent to seek to influence any person with respect to any voting securities of the Seller, or demanding, proposing to demand or disclosing an intent to demand a copy of the Seller's list of its securityholders or other books and records, (d) participate in or encourage the formation of any partnership, syndicate, or other group which owns or seeks or offers to acquire beneficial ownership of any securities of the Seller or which seeks to affect control of the Seller or for the purpose of circumventing any provision of this Section 6.23 or (e) otherwise enter into any discussions, negotiations, arrangements or understandings with any third party, including any securityholder of the Seller, with respect to any of the foregoing. Section 6.24 Audited Financial Statements. Prior to the Closing Date, the Seller shall prepare or cause to be prepared audited financial statements of the Footwear Business (the "Audited Footwear Business Financial Statements"). The Audited Footwear Business Financial Statements shall be prepared in a manner so as to comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC as will be applicable with respect thereto in connection with Parent's reporting or other obligations under the Securities Act or the Exchange Act, shall be prepared in accordance with United States generally accepted accounting principles on a basis consistent with the Seller Financial Statements referred to in Section 3.4, and shall fairly present in all material respects the financial position of the Footwear Business at the respective dates thereof and the combined results of operations and cash flows of the Footwear Business for the periods then ended. Section 6.25 Books and Records; Personnel. (a) None of Parent, the Purchaser or any of their respective Subsidiaries shall within ten years 66 75 after the Closing Date or, with respect to Tax records within the later of six years or the applicable statute of limitations as extended, dispose of or destroy any business records or files Related to the Footwear Business for periods prior to the Closing Date, without first offering to turn over possession thereof to the Seller by written notice at least 30 days prior to the proposed dates of such disposition or destruction. (b) From and after the Closing Date, to the extent reasonably required by in connection with the preparation of Tax Returns or other legitimate purposes specified in writing, each of the Purchaser and the Seller shall (subject to applicable contractual and privacy obligations) allow the other party and its agents access to all business records and files (other than those containing competitively sensitive or privileged information) Related to the Footwear Business, which relate to periods prior to the Closing Date, upon reasonable advance notice during normal working hours, and each party shall have the right, at its own expense, to make copies of any such records and files, provided, however, that any such access or copying shall be had or done in such a manner so as not to interfere with the normal conduct of business. (c) From and after the Closing Date, each of the Seller and the Purchaser shall make available to the other upon written request (and at the requesting party's expense) (i) personnel to assist in locating and obtaining records and files for periods prior to the Closing Date and (ii) personnel whose assistance or participation is reasonably required in anticipa- tion of, preparation for, or the prosecution or defense of existing or future claims or actions, Tax Returns or other matters in which the parties do not have any adverse interest. (d) Any confidential, proprietary or trade secret information provided under this Section 6.26 shall be deemed "Confidential Information" under the terms of the Confidentiality Agreement and shall be held in accordance with the terms thereof. 67 76 Section 6.26 Registration and Transfer of the Parent Warrants. (a) Upon the written request of the Seller at or following the Closing, Parent agrees that it will use all reasonable efforts (i) to cause to be filed with the SEC as promptly as practicable following its receipt of such request a registration statement (the "Registration Statement") under the Securities Act covering the distribution in full of the Parent Warrants to the Seller's stockholders and any subsequent issuance of Parent Common Stock upon exercise of Parent Warrants, (ii) to cause the Registration Statement to be declared effective under the Securities Act at the earliest practicable date, and to remain effective under the Securities Act (A) with respect to the distribution of the Parent Warrants, until such time as the Parent Warrants have been distributed in full to the Seller's stockholders and (B) with respect to the issuance of Parent Common Stock upon the exercise of the Parent Warrants, until the earliest of (1) the date on which all of the Parent Warrants shall have been exercised, (2) the date on which all of the Parent Warrants shall have been redeemed and cancelled by Parent and (3) the date on which the Parent Warrants shall have expired, (iii) to qualify the Parent Warrants and the underlying shares of Parent Common Stock under the applicable state securities or "blue sky" laws, it being agreed that Parent shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified, (iv) to cause the Parent Warrants and the underlying shares of Parent Common Stock to be authorized for listing on the principal securities exchange within the United States on which the Parent Common Stock is listed, (v) to cause to be provided to the Seller such number of copies of the form of prospectus included in the Registration Statement at the time it is declared effective by the SEC, together with any amendment or supplement thereto provided by Parent as contemplated in Section 6.26(c) (the "Prospectus") as the Seller may reasonably request in order to facilitate the distribution in full of the Parent Warrants to the Seller's stockholders; provided, however, that, in the event that counsel to Parent has determined in good faith and provided to the Seller its written opinion to the effect that (A) the filing of the Registration Statement or the compliance by Parent with its disclosure obligations in connection with the Registration Statement would 68 77 require the disclosure of material information which Parent has a bona fide business purpose for preserving as confidential, or (B) Parent is unable to comply with its disclosure obligations or SEC requirements in connection with the Registration Statement, then in either such case Parent may delay (each, a "Delay Period") the filing of the Registration Statement (if not then filed) and shall not be required to maintain the effectiveness thereof or amend or supplement the Registration Statement or the Prospectus until the earlier of (1) the date on which such material information is disclosed to the public or ceases to be material or Parent is able to so comply with its disclosure obligations and SEC requirements and (2) the sixtieth calendar day following the date of such good faith determination, and (vi) to furnish, at the request of the Seller, as of the date on which the distribution to the Seller's stockholders of the Parent Warrants and any Parent Common Stock issued to the Seller upon exercise of the Parent Warrants is planned be commenced by the Seller, (A) an opinion dated such date of counsel representing Parent for the purposes of such registration, addressed to the Seller, stating that the Registration Statement has become effective under the Securities Act and that (1) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, and (2) the Registration Statement, the related form of prospectus and each amendment or supplement thereof comply as to form with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder (except that such counsel need not express an opinion as to financial statements contained therein) and to such other effects as may reasonably be requested by the Seller, and (B) a letter dated such date from the independent public accountants retained by Parent, addressed to the Seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of Parent included in the Registration Statement and the Prospectus, or any amendment or supplement thereof, comply as to form with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters in respect of the Registration Statement and the Prospectus or any 69 78 amendment or supplement thereof as the Seller may reasonably request. (b) The Seller agrees that, notwithstanding anything in the Warrant Agreement to the contrary, (i) it will not dispose of the Parent Warrants or any shares of Parent Common Stock issuable upon exercise thereof other than pursuant to a distribution in full to its stockholders following the Registration Statement having been declared effective, provided that, in the event that the Registration Statement has not been declared effective prior to the first anniversary of the written request of the Seller pursuant to Section 6.26(a), or in the event that the effectiveness of the Registration Statement has not been maintained for a period of 180 consecutive calendar days, the Seller will be free to dispose of the Parent Warrants or any shares of Parent Common Stock issuable upon exercise thereof in any lawful manner, and (ii) the Parent Warrants and any shares of Parent Common Stock issued upon exercise thereof will contain a legend regarding such transfer restriction, to the extent such restriction remains in effect, and the unregistered status of such securities until such time as the Registration Statement has been declared effective and the Seller has consummated the distribution in full of such securities to its stockholders. In connection with the foregoing, the Seller agrees (i) to cooperate fully in Parent's preparation of, and dealings with the SEC in connection with, the Registration Statement, including without limitation providing to Parent any information as to the Seller or such distribution as Parent may reasonably request in connection with the Registration Statement, (ii) to distribute the Parent Warrants to its stockholders in accordance with applicable law as promptly as practicable following the Registration Statement having been declared effective by the SEC, (iii) to only use the Prospectus in the form provided by Parent pursuant to Section 6.26(a), and (iv) upon the receipt of written notice from Parent of the occurrence of a Delay Period or the happening of any event as a result of which the Prospectus as then in effect includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, to cease using the Prospectus until it is amended or supplemented by Parent. 70 79 (c) In connection with the distribution of the Parent Warrants by the Seller to its stockholders, the Parent agrees to cooperate fully and consult with the Seller in the preparation of, and dealings with the SEC in connection with, the Registration Statement and, subject to the proviso contained in Section 6.26(a), to amend or supplement the Prospectus so that, as thereafter provided by the Seller to its stockholders, the Prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Parent will indemnify and hold harmless the Seller and its directors, officers and "control persons" (within the meaning of the Securities Act) for any and all liability arising under the Securities Act or any state securities or "blue sky" laws in connection with the Registration Statement, other than as to inaccuracies or omissions which relate solely to information provided to Parent by the Seller in respect of the Seller or the Footwear Business, as to which the Seller will indemnify and hold harmless Parent. (e) Parent shall pay all costs and expenses incurred by Parent in complying with this Section 6.26, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for Parent, fees and disbursements of the warrant agent and fees of any securities exchange, but excluding any Distribution Expenses (as such term is hereinafter defined). The Seller shall pay all costs and expenses directly incurred by the Seller in connection with the distribution of the Parent Warrants or of Parent Common Stock to the Seller's stockholders, including, without limitation, mailing costs, Taxes, fees and disbursements of transfer agents, costs of insurance and fees and disbursements of counsel to the Seller in connection with such distribution (collectively, "Distribution Expenses"). 71 80 Section 6.27 Non-Competition. (a) For a period of two years following the Closing Date, the Seller hereby covenants and agrees that it will not, and it will not permit any of its Subsidiaries to, directly or indirectly, through officers, directors, agents, subsidiaries, joint ventures, other business arrangements or otherwise, (i) manufacture, import, market, sell, distribute, provide, promote, develop, license or sublicense, except for the Capezio License, in any manner whatsoever, any women's footwear on either a wholesale or retail basis (a "Competitive Business"), or (ii) own an interest in, manage, operate, join, control, or participate in or be connected with, as a partner, stockholder, consultant or otherwise, any corporation, partnership, firm, association or other entity that engages in a Competitive Business; provided, however, that the Seller shall have the right to own up to 5% of any class of equity securities of a publicly traded company. (b) Notwithstanding anything in Section 6.5(a) to the contrary, the Seller shall not be deemed to have violated the restrictions contained in Section 6.5(a) in the event that (i) the Seller manufactures, imports, markets or sells women's footwear as an accessory item in the Seller's retail clothing stores and less than 25% of the revenues of the Seller from each store in which such footwear is sold are derived from such footwear sales, or (ii) as a result of any acquisition, merger or other business combination with a third party, the Seller or the surviving entity in such transaction becomes engaged in a Competitive Business as a result of such third party's business activities. (c) The invalidity or unenforceability of any provision of this Section 6.27, in whole or by virtue of the following sentence in part, shall not affect the validity or enforceability of any other provision of this Section 6.27 or of any other provision of this Agreement, all of which shall to the full extent consistent with applicable law continue in full force and effect. In addition, if any provision of Section 6.27(a) shall be adjudged to be excessively broad as to duration, geographical scope, activity or subject, the parties intend that such provision shall be deemed modified to the minimum degree necessary to make such provision valid and 72 81 enforceable under applicable law and that such modified provision shall thereafter be enforced to the fullest extent possible. ARTICLE VII INDEMNIFICATION Section 7.1 Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: (a) Losses. The term "Losses" shall mean any and all losses, liabilities, damages, reasonable expenses or diminutions in value of any kind or character (whether or not known or asserted prior to the date hereof), including, without limitation, interest on any amount payable to a third party as a result of the foregoing, liabilities on account of Taxes (including interest and penalties thereon) and any legal or other expenses reasonably incurred in connection with investigating or defending any claims or actions, whether or not resulting in any liability; provided, however, that Losses shall be net of any insurance proceeds received by an Indemnitee from an insurance company on account of such Losses (after taking into account any costs incurred in obtaining such proceeds and any increase in insurance premiums as a result of a claim with respect to such proceeds). (b) Third-Party Claims. The term "Third-Party Claims" shall mean any and all Losses which arise out of or result from (i) any claims or actions asserted against an Indemnitee by a third party, (ii) any rights of a third party asserted against an Indemnitee, or (iii) any liabilities of, or amounts payable by, an Indemnitee to a third party arising out of subparagraphs (i) or (ii), including, without limitation, claims or actions asserted against an Indemnitee by any taxing authority on account of Taxes. (c) Indemnitee. The term "Indemnitee" shall mean any person which may be entitled to seek indemnification pursuant to the provisions of Section 7.2 or 7.3. 73 82 (d) Indemnitor. The term "Indemnitor" shall mean any person which may be obligated to provide indemnification pursuant to Section 7.2 or 7.3. (e) Notice Period. The term "Notice Period," as applied to any Third-Party Claim for which an Indemnitee seeks to be indemnified pursuant to this Article VII, shall mean the period ending the earlier of the following: (i) 45 days after the time at which the Indemnitee has either (x) received notice of the facts giving rise to such Third-Party Claim or (y) commenced an active investigation of circumstances likely to give rise to such Third-Party Claim and, in each case, where such Indemnitee believes or should reasonably believe that such facts or circumstances would give rise to such Third-Party Claim for which such Indemnitee would be entitled to indemnification pursuant to this Article VII; and (ii) 45 days after the time at which any Third-Party Claim against the Indemnitee has become the subject of proceedings before any court or tribunal, or such time as would allow the Indemnitor sufficient time to contest, on the assumption that there is an arguable defense to such Third-Party Claim, such proceeding prior to any judgment or decision thereon. (f) Claim Notice. The term "Claim Notice" shall have the meaning set forth in Section 7.4(a). Section 7.2 Indemnity by the Seller. The Seller agrees to indemnify and hold harmless Parent, the Purchaser and their respective directors, officers, employees, agents and representatives (each of whom may be an Indemnitee pursuant to this Section 7.2) from and against the following: (a) Retained Liabilities. Any and all Losses in respect of the Retained Liabilities. 74 83 (b) Third-Party Claims. Any and all Third-Party Claims in respect of the Acquired Assets, other than Third-Party Claims in respect of Assumed Liabilities, which may be asserted against any such Indemnitee or the Acquired Assets or which any such Indemnitee shall incur or suffer to the extent that such Third-Party Claims arise out of, result from or relate to: (i) any Retained Liabilities; (ii) any allegations to the effect that the negotiation or execution of, or consummation of the transactions contemplated by, this Agreement (A) constitutes interference with any other agreement to which the Seller any of or its Subsidiaries is purportedly bound prior to the Closing Date or (B) constitutes a misrepresentation or breach of warranty, covenant or agreement made by the Seller under any other agreement; (iii) any Liens imposed on the Acquired Assets, or any of them, resulting from the Seller's or any of its Subsidiaries' failure to satisfy Retained Liabilities; or (iv) any liability resulting from the Seller's or any of its Subsidiaries' failure to comply with the requirements of any bulk sales or similar legislation applicable to the transactions contemplated by this Agreement. (c) Breach of Representation, Warranty, Etc. Any and all Losses which may be asserted against such Indemnitee or which such Indemnitee may incur or suffer and which arise out of or result from: (i) any untrue representation or breach of warranty of the Seller in this Agreement; (ii) any default or nonfulfillment or breach of any covenant or agreement on the part of the Seller under this Agreement; 75 84 (iii) any untrue representation or breach of warranty in any of the Seller Documents; (iv) except as otherwise contemplated by this Agreement, the failure by the Seller to obtain any consent or approval necessary to enable it to consummate the transactions contemplated by this Agreement; or (v) the failure by the Seller to have conveyed to the Purchaser on the Closing Date all right, title and interest in and to the Acquired Assets, including, without limitation, any Contracts Related to the Footwear Business other than those the benefits of which are provided to the Purchaser pursuant to Section 6.3(b), free and clear of any Lien of any nature whatsoever (except for Permitted Liens and as otherwise contemplated by this Agreement and other than such thereof as are included in or arise in respect of the Assumed Liabilities). (d) Environmental Matters. Environmental Losses to the extent provided in Section 6.14(f). (e) Beloit Property Agreement. Any Losses not to exceed $3,225,000 arising from the environmental and hazardous waste indemnity obligations of the Seller under the Beloit Property Sale and Indemnity Back to Purchaser, dated July 22, 1994, between the Seller and Reynolds Aluminum, Inc. Section 7.3 Indemnity by Parent and the Purchaser. Parent and the Purchaser shall jointly and severally indemnify and hold harmless the Seller and its directors, officers, employees, agents and representatives (each of whom may be an Indemnitee pursuant to this Section 7.3) from and against the following: (a) Assumed Liabilities. Any and all Losses in respect of the Assumed Liabilities. (b) Third-Party Claims. Any and all Third-Party Claims in respect of the Acquired Assets, other than Third-Party Claims in respect of Retained 76 85 Liabilities, which may be asserted against any such Indemnitee, or which any such Indemnitee shall incur or suffer, including, without limitation, Third-Party Claims in respect of Assumed Liabilities. (c) Breach of Representation, Warranty, Etc. Any and all Losses which may be asserted against any such Indemnitee or which any such Indemnitee shall incur or suffer and which arise out of or result from: (i) any untrue representation or breach of warranty of Parent or the Purchaser in this Agreement; (ii) any default or nonfulfillment or breach of any covenant or agreement on the part of Parent or the Purchaser under this Agreement; (iii) any untrue representation or breach of warranty in any of the Purchaser Documents; or (iv) the failure of Parent or the Purchaser to obtain any consent or approval necessary to enable it to consummate the transactions contemplated by this Agreement. Section 7.4 Notification of Third-Party Claims. In no case shall any Indemnitor under this Agreement be liable with respect to any Third-Party Claim against any Indemnitee unless the Indemnitee shall have delivered to the Indemnitor a Claim Notice and the following conditions are satisfied: (a) Timely Delivery of Claim Notice. Except as provided in Section 7.4(b) or 7.4(c), no right to indemnification under this Article VII shall be available to an Indemnitee with respect to a Third-Party Claim unless the Indemnitee shall have delivered to the Indemnitor within the Notice Period a notice (a "Claim Notice") describing in reasonable detail the facts giving rise to such Third-Party Claim and stating that the Indemnitee intends to seek indemnification for such Third-Party Claim from the Indemnitor pursuant to this Article VII. 77 86 (b) Late Delivery of Claim Notice. If, in the case of a Third-Party Claim, a Claim Notice is not given by the Indemnitee within the Notice Period as set forth in Section 7.4(a), the Indemnitee shall nevertheless be entitled to be indemnified under this Article VII: (i) if the Indemnitee can establish that the time elapsed between the end of the Notice Period and the giving of the Claim Notice is reasonable; and (ii) to the extent that the Indemnitee can establish that the Indemnitor has not been prejudiced by such time elapsed. (c) Paid or Settled Claims. If a Claim Notice is not given by the Indemnitee prior to the payment or settlement of a Third-Party Claim, the Indemnitee shall be entitled to be indemnified under this Article VII only to the extent that the Indemnitee can establish that the Indemnitor has not been prejudiced by such payment or settlement. Section 7.5 Defense of Claims. Upon receipt of a Claim Notice from an Indemnitee with respect to any Third-Party Claim, the Indemnitor may assume the defense thereof with counsel reasonably satisfactory to such Indemnitee and the Indemnitee shall cooperate in all reasonable respects in such defense. The Indemnitee shall have the right to employ separate counsel in any action or claim and to participate in the defense thereof, provided that the fees and expenses of counsel employed by the Indemnitee shall be at the expense of the Indemnitor only if such counsel is retained pursuant to either of the following two sentences or if the employment of such counsel has been specifically authorized by the Indemnitor. If the Indemnitor does not notify the Indemnitee within sixty days after receipt of the Claim Notice that it elects to undertake the defense thereof, the Indemnitee shall have the right to defend the claim with counsel of its choosing reasonably satisfactory to the Indemnitor, subject to the right of the Indemnitor to assume the defense of any claim at any time prior to settlement or final determination thereof. Notwithstanding anything to the contrary contained in this Section 7.5, the Indemnitee shall have the right to employ sepa- 78 87 rate counsel if, under applicable standards of professional conduct (as advised by counsel to the Indemnitee), a conflict of interest on any issue between the Indemnitee and the Indemnitor exists in respect of a Third-Party Claim. The Indemnitee shall send a written notice to the Indemnitor of any proposed settlement of any claim, which settlement the Indemnitor may reject, in its reasonable judgment, within thirty days of receipt of such notice. Failure to reject such notice within such thirty day period shall be deemed an acceptance of such notice. Section 7.6 Access and Cooperation. After the Closing Date, Parent and the Purchaser, on the one hand and the Seller on the other hand, shall (i) each cooperate fully with the others as to all Third-Party Claims, shall make available to the others, as reasonably requested, all information, records and documents relating to all Third-Party Claims and shall preserve all such information, records and documents until the termination of any Third-Party Claim and (ii) make available to the others, as reasonably requested, personnel (including technical and scientific), agents and other representatives who are responsible for preparing or maintaining information, records or other documents, or who may have particular knowledge with respect to any Third-Party Claim. Section 7.7 Assessment of Claims. In the event that any of the Losses for which an Indemnitor is responsible or allegedly responsible pursuant to Section 7.2 or 7.3 are recoverable or potentially recoverable against any third party at the time when payment is due hereunder, following payment by the Indemnitor to the Indemnitee for such Losses the Indemnitee shall assign any and all rights that it may have to recover such Losses to the Indemnitor, or, if such rights are not assignable under applicable law or otherwise, the Indemnitee shall attempt in good faith to collect any and all Losses on account thereof from such third party for the benefit of, and at the expense and direction of, the Indemnitor. Section 7.8 Limits on Indemnification. (a) Small Claims Threshold. The Seller and the other Indemnitees under Section 7.3 shall not be entitled to seek indemnification, and Parent and the 79 88 other Indemnitees under Section 7.2 shall not be entitled to seek indemnification, in respect of Third-Party Claims unless the amount of Losses incurred by the Indemnitee in respect of such Third-Party Claims exceeds $10,000, and then the Indemnitee shall be entitled to seek indemnification to the full extent of such Losses. (b) Indemnity Basket. Notwithstanding anything to the contrary contained in Section 7.8(a), the Seller shall only be obligated to indemnify Parent and the other Indemnitees under Sections 7.2(c) and 7.2(e) to the extent that the aggregate amount of all Losses under Sections 7.2(c) and 7.2(e) exceeds $2 million, as reduced by any amounts paid by Parent pursuant to the proviso in Section 6.14(e), and Parent and the Purchaser shall only be obligated to indemnify the Seller and the other Indemnitees under Section 7.3(c) to the extent that the aggregate amount of all Losses under Section 7.3(c) exceeds $2 million. (c) Limit of Liability. Notwithstanding anything contained in this Article VII to the contrary, (i) the Seller shall have no reimbursement obligation under Section 6.14(e) or indemnification obligation under Sections 6.14(f), 7.2(c) and 7.2(d) to the extent such costs and Losses are not indemnifiable under Section 7.2(a) or 7.2(b) and (after giving effect to the application of Sections 7.8(a) and 7.8(b)) exceed $25 million in the aggregate (the "Indemnification Cap"), as reduced by (x) any amounts not reimbursed to the Seller pursuant to Section 7.8(c)(ii) and (y) any Liquidated Damages paid under Section 6.3(c), and (ii) Parent and the Purchaser shall have no reimbursement obligation under Section 7.3(a) or 7.3(b) in respect of Assumed Liabilities or Third Party Claims to the extent that the existence of such Assumed Liability or Third Party Claim would have constituted a breach of a representation or warranty of the Seller at the Closing Date, the existence of such Assumed Liability or Third Party Claim becomes known prior to the end of the relevant survival period provided for in Section 7.9 and the amount of such liability so unreimbursed, together with the amount of all such other liabilities so unreimbursed, does not exceed the difference between $25,000,000 and the aggregate amount of reimbursement and indemnification theretofore provided by the Seller pursuant to Section 6.14(e), 6.14(f), 7.2(c) 80 89 or 7.2(d) and any Liquidated Damages paid pursuant to Section 6.3(c). Section 7.9 Survival of Representations and Warranties. All representations and warranties of the parties contained in this Agreement, the Seller Documents or the Purchaser Documents, each and every one of which representations and warranties is strictly relied upon by the parties to whom they are made, shall survive the Closing hereunder and continue in full force and effect thereafter, regardless of any investigation made or to be made by or on behalf of any party hereto, for a period ending on the earlier of (i) the first anniversary of the Closing Date and (ii) August 31, 1996, except for the representations and warranties of the Seller provided for in Section 3.12 (which shall survive the Closing hereunder and continue in full force and effect thereafter, regardless of any investigation made or to be made by or on behalf of any party hereto, for the relevant statutes of limitations including any extension or waiver thereof regarding the filing of Tax Returns and the payment of Taxes). Except as set forth in this Section 7.9, after the end of such period, an Indemnitor's obligation to an Indemnitee under this Article VII (i) with respect to such representations and warranties and (ii) with respect to environmental matters under Section 7.2(d) shall expire except with respect to a matter set forth in a Claim Notice theretofore delivered to an Indemnitee; provided, that the expiration of indemnification obligations pursuant to this Section 7.9 shall in no way constitute an assumption by the Purchaser, Parent or any of their respective successors or related Indemnitees of any liabilities of the Seller other than Assumed Liabilities or a waiver by the Purchaser or Parent or any of their respective successors of any other legal remedies they may have to seek from the Seller or its successor reimbursement or contribution for amounts paid or payable in respect of Retained Liabilities. It is further agreed that Parent's rights to indemnification set forth in Sections 7.2(a) and 7.2(b) and the Seller's rights to indemnification set forth in Sections 7.3(a) and 7.3(b) shall remain in full force and effect indefinitely. 81 90 ARTICLE VIII CONDITIONS Section 8.1 Conditions to Each Party's Obligation to Close. The respective obligations of the parties to effect the transactions contemplated by this Agreement are subject to the satisfaction, on or prior to the Closing Date, of the following conditions: (a) HSR Approval. Any applicable waiting period under the HSR Act shall have expired or been terminated. (b) Other Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity, shall have been filed, occurred or been obtained. (c) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect (each party agreeing to use all reasonable efforts to have any such order reversed or injunction lifted). (d) No Action. No action, suit or proceeding by any Governmental Entity before any court or governmental or regulatory authority shall be pending or threatened against the Seller or Parent or any of their Subsidiaries challenging the validity or legality of the transactions contemplated by this Agreement, other than actions, suits or proceedings which, in the reasonable opinion of counsel to the parties hereto, are unlikely to result in an adverse judgment. Section 8.2 Conditions of Obligations of Parent and the Purchaser. The obligations of Parent and the Purchaser to effect the transactions contemplated by this Agreement are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived by Parent: 82 91 (a) Representations and Warranties. (i) The aggregate effect of all inaccuracies in the representations and warranties of the Seller set forth in this Agreement (without taking into account any qualifications as to materiality contained in such representations and warranties, it being understood, however, that for the purposes of this clause (i), the accuracy of any representation or warranty which speaks as of the date of this Agreement or another date prior to the Closing Date shall be determined solely as of the date of this Agreement or such other date and not as of the Closing Date) does not and will not have a material adverse effect on the Footwear Business, and (ii) the representations and warranties of the Seller contained in Sections 3.1, 3.2, 3.3, 3.6(a), 3.10 and 3.14 shall be true and correct in all material respects as of the date hereof, and, except to the extent such representations and warranties speak as of an earlier date, as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and Parent shall have received a certificate signed on behalf of the Seller by the chief executive officer or the chief financial officer of the Seller to such effect. (b) Performance of Obligations of the Seller. The Seller and its Subsidiaries shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Seller by the chief executive officer or the chief financial officer of the Seller to such effect. (c) Required Consents. The Seller shall have provided to Parent satisfactory evidence of the receipt or anticipated receipt of the required consents contemplated by Section 8.2(c) of the Seller Disclosure Schedule. (d) Net Worth. The Seller shall have provided to Parent a certificate dated as of a date within five days prior to the Closing Date certifying as to the Footwear Business Net Worth (as defined below), which amount shall not be less than $230 million. For purposes of this Agreement, "Footwear Business Net Worth" shall equal the Seller's good faith estimate of the amount by which the total Acquired Assets (excluding for 83 92 such purposes the rights relating to the Severance Trusts) exceed the total Assumed Liabilities, calculated as of the date in question on a basis consistent with the Footwear Business Balance Sheet. (e) Financial Statements. The Seller shall have provided to the Purchaser the Audited Footwear Business Financial Statements. (f) Opinions of Counsel. Parent shall have received the opinions of Jones, Day, Reavis & Pogue and James J. Crowe, Esq. in the forms customary for transactions of the type contemplated herein and reasonably satisfactory to Parent. (g) Seller Documents. The Seller shall have executed and delivered to the Purchaser the Seller Documents. Section 8.3 Conditions of Obligations of the Seller. The obligation of the Seller to effect the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions, on or prior to the Closing Date, unless waived by the Seller: (a) Representations and Warranties. (i) The aggregate effect of all inaccuracies in the representations and warranties of Parent and the Purchaser set forth in this Agreement (without taking into account any qualifications as to materiality contained in such representations and warranties, it being understood, however, that for the purposes of this clause (i), the accuracy of any representation or warranty which speaks as of the date of this Agreement or another date prior to the Closing Date shall be determined solely as of the date of this Agreement or such other date and not as of the Closing Date) does not and will not have a material adverse effect on the Parent, and (ii) the representations and warranties of Parent and the Purchaser contained in Sections 4.1, 4.2, 4.3, 4.4 and 4.7 shall be true and correct in all material respects as of the date hereof, and, except to the extent such representations and warranties speak as of an earlier date, as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and the Seller shall have received a certificate signed on behalf of Parent by the Chairman of the Board or the 84 93 Co-Chairman of the Board and President of Parent to such effect. (b) Performance of Obligations of Parent and the Purchaser. Parent and the Purchaser shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and the Seller shall have received a certificate signed on behalf of Parent by the chief executive officer or the chief operating officer of Parent to such effect. (c) Opinions of Counsel. The Seller shall have received the opinions of Skadden, Arps, Slate, Meagher & Flom and Joel K. Bedol, Esq. in the forms customary for transactions of the type contemplated herein and reasonably satisfactory to the Seller. (d) Purchaser Documents. The Purchaser shall have executed and delivered to the Seller the Purchaser Documents. Section 8.4 If Conditions Not Satisfied. In the event that any of the foregoing conditions of obligations of a party shall fail to have been satisfied, such party may elect, in its sole discretion, to consummate the transactions contemplated by this Agreement despite such failure, in which event such party shall be deemed to have waived any claim for damages, Losses or other relief arising from or in connection with such failure, unless otherwise agreed in a writing executed by both parties and except that any such waiver by the Purchaser or Parent shall not affect the Seller's obligation to reimburse Parent for the costs of Remedial Activities pursuant to Section 7.2(d). ARTICLE IX TERMINATION AND AMENDMENT Section 9.1 Termination. This Agreement may be terminated at any time prior to the Closing Date as follows: (a) by mutual consent of Parent and the Seller; 85 94 (b) by either Parent or the Seller if the Closing shall not have occurred before September 30, 1995 (unless the failure to so consummate the Closing by such date shall be due to the action or failure to act of the party seeking to terminate this Agreement, which action or failure to act constitutes a breach of this Agreement); (c) by Parent if (i) there has been a breach on the part of the Seller in the representations, warranties or covenants of the Seller set forth herein, or any failure on the part of the Seller to comply with its obligations hereunder, such that, in any such case, any of the conditions to the Closing set forth in Section 8.1 or 8.2 hereof could not be satisfied on or prior to August 31, 1995, or (ii) the Seller takes any action that would be prohibited by Section 6.7; (d) by the Seller if there has been a breach on the part of Parent or the Purchaser in the representations, warranties or covenants of Parent or the Purchaser set forth herein, or any failure on the part of Parent to comply with its obligations hereunder, such that, in any such case, any of the conditions to the Closing set forth in Section 8.1 or 8.3 hereof could not be satisfied on or prior to August 31, 1995; or (e) by Parent if the amount of the Remediation Estimate exceeds $10,000,000 and the Seller fails to exercise the Environmental Right pursuant to the terms of Section 6.14(d). Section 9.2 Effect of Termination. In the event of a termination of this Agreement by either the Seller or Parent as provided in Section 9.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, the Purchaser or the Seller or their affiliates or respective officers or directors, other than the provisions of Section 6.8; provided, however, that any such termination shall not relieve any party from liability for any breach of this Agreement. 86 95 ARTICLE X MISCELLANEOUS Section 10.1 Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time by an instrument in writing signed on behalf of each of the parties hereto. Section 10.2 Extension; Waiver. At any time prior to the Closing Date, the parties hereto, by action taken or authorized by the respective Boards of Directors, may to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions contained here. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. Section 10.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given on the date delivered if delivered personally (including by reputable overnight courier), on the date transmitted if sent by telecopy (which is confirmed) or on the date received if mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or the Purchaser, to Nine West Group Inc. 9 West Broad Street Stamford, Connecticut 06902 Attn: Vincent Camuto and Joel K. Bedol Telecopy: (203) 978-6020 87 96 with a copy to Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 Attn: Roger S. Aaron and Randall H. Doud Telecopy: (212) 735-2000 and (b) if to the Seller, to The United States Shoe Corporation One Eastwood Drive Cincinnati, Ohio 45227 Attn: James J. Crowe Telecopy: (513) 527-7880 with a copy to Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attn: William F. Henze II Telecopy: (212) 755-7306 Section 10.4 Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The Table of Contents, Glossary of Defined Terms and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrases "the date of this Agreement," "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to March 15, 1995. Section 10.5 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when a counterpart has been signed by each of the parties and delivered to each of the other parties, it being understood that all parties need not sign the same counterpart. 88 97 Section 10.6 Entire Agreement; No Third Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof, and (b) is not intended to confer upon any person other than the parties hereto and thereto any rights or remedies hereunder or thereunder. Section 10.7 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to any applicable conflicts of law principles. Section 10.8 Specific Performance. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 10.9 Broker's Fees. Each of the Seller and Parent (a) represents and warrants that it has not taken and will not take any action that would cause the other party to have any obligation or liability to any person for a finder's or broker's fee, and (b) agrees to indemnify the other party for breach of the foregoing representation and warranty, whether or not the Closing occurs. Section 10.10 Publicity. Except as otherwise required by law or the rules of the New York Stock Exchange, for so long as this Agreement is in effect, neither the Seller nor Parent shall, nor shall they permit any of their Subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld or delayed. Section 10.11 Assignment. Neither this Agreement nor any of the rights, interests or obligations 89 98 hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties; provided, that the Purchaser may assign its rights to acquire all or any portion of the Acquired Assets to Parent or one or more direct or indirect wholly-owned Subsidiaries of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 90 99 IN WITNESS WHEREOF, Parent, the Purchaser and the Seller have caused this Asset Purchase Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. THE UNITED STATES SHOE CORPORATION By: /s/ Bannus Hudson -------------------------- Name: Bannus Hudson Title: President and Chief Executive Officer NINE WEST GROUP INC. By: /s/ Vincent Camuto ---------------------- Name: Vincent Camuto Title: President FOOTWEAR ACQUISITION CORP. By: /s/ Vincent Camuto ---------------------- Name: Vincent Camuto Title: President 100 EXHIBIT 2.1(b)(i)(G) FORM OF LENSCRAFTERS GUARANTY GUARANTY, dated _____________, 1995, by LensCrafters, Inc., an Ohio corporation (the "Guarantor"). W I T N E S S E T H : WHEREAS, 100% of the outstanding shares of capital stock of the Guarantor are directly owned by The United States Shoe Corporation, an Ohio corporation (the "Seller"); WHEREAS, the Seller, Nine West Group Inc., a Delaware corporation ("Parent"), and Footwear Acquisition Corp., a Delaware corporation (the "Purchaser"), are parties to an Asset Purchase Agreement dated as of March 15, 1995 (the "Agreement"); WHEREAS, the Seller will receive substantial direct and indirect benefits from the transactions contemplated by the Agreement (which benefits are hereby acknowledged). NOW, THEREFORE, in order to induce Parent and the Purchaser to consummate the transactions consummated by the Agreement and in consideration thereof, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guarantor hereby agrees as follows: 1. Definitions. All terms capitalized herein which are not otherwise defined shall have the meanings attributed thereto in the Agreement. 2. Guaranty of Obligations. The Guarantor hereby irrevocably, absolutely and unconditionally guarantees, as primary obligor and not merely as a surety, to Parent and the Purchaser and each of their permitted successors and assigns (each, a "Beneficiary" and, collectively, the "Beneficiaries"), as their respective interests may appear, the due and punctual payment by the Seller of any and all amounts (without duplication) that are or may become due and payable by the Seller to any Beneficiary pursuant to Sections 6.3(c), 6.14(e), 6.14(f) and 7.2 of the Agreement, whether such obligations now 101 exist or arise hereafter, as and when the same shall become due and payable in accordance with the terms thereof, including money damage claims and collection costs (such obligations, "Obligations"). The Guarantor hereby further agrees that if the Seller shall fail to pay or perform when due any of the Obligations, the Guarantor will promptly pay or perform the same. All payments by the Guarantor hereunder shall be made in U.S. Dollars. This is a guaranty of payment and performance, not collection. This Guaranty and all covenants and agreements of the Guarantor contained herein shall continue in full force and effect and shall not be discharged until such time as all of the Obligations shall be paid and performed in full and all of the agreements of the Guarantor hereunder shall have been duly performed. The obligations of the Guarantor under this Section 2 shall be automatically reinstated if and to the extent that for any reason any payment to any Beneficiary by or on behalf of the Seller, in respect of the Obligations, is rescinded or must otherwise be returned by such Beneficiary, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Guarantor agrees that it will indemnify each Beneficiary on demand for all reasonable costs and expenses (including reasonable fees and out-of-pocket expenses of counsel) incurred by such Beneficiary in connection with its compliance with or reasonable resistance (if requested by the Guarantor) to any such rescission or restoration. Notwithstanding the generality of the foregoing, if the Agreement shall be terminated as a result of the rejection or disaffirmance thereof by any trustee, receiver, liquidator, agent or other representative of the Seller or any of its respective properties in any assignment for the benefit of creditors or in any bankruptcy, insolvency, dissolution or similar proceeding, or the exercise of any of the rights or remedies under the Agreement is stayed, enjoined or prohibited in any such assignment or proceeding, the obligations of the Guarantor hereunder shall continue to the same extent as if the Agreement had not been so rejected or disaffirmed and as if such exercise had not been so stayed, enjoined and prohibited. The Guarantor shall and does hereby waive all rights and benefits that might accrue to it by reason of any such assignment or proceeding, and the Guarantor agrees that it shall be liable for the full amount of the Obliga- 2 102 tions, irrespective of and without regard to any modification, limitation or discharge of liability of the Seller that may result from or in connection with any such assignment or proceeding. 3. Nature of the Guarantor's Obligations. The Guarantor guarantees that the Obligations will be paid and performed strictly in accordance with the terms of the Agreement, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Beneficiaries with respect thereto. The liability of the Guarantor under this Guaranty shall not be subject to any counterclaim, setoff, deduction, release, recoupment or defense and shall remain in full force and effect and shall be irrevocable, absolute and unconditional, irrespective of any lack of value, genuineness, validity, legality, regularity or enforceability of the Agreement or any part of the Obligations or any agreement or instrument relating to the Obligations, or any substitution, release or exchange of any other guarantee of or security for any of the Obligations, to the fullest extent permitted by any applicable laws, statutes, orders, rules, regulations, ordinances or judgments of any Governmental Entity ("Applicable Laws"), irrespective of any other circumstances whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence or existence of any one or more of the following shall not, to the fullest extent permitted by Applicable Laws, affect the liability of the Guarantor hereunder: (i) at any time or from time to time, without notice to the Guarantor, the time, manner or place for any performance of or compliance with any of the Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of the Agreement shall be done or omitted; (iii) any of the Obligations shall be modified, supplemented, amended or compromised in any re- 3 103 spect, or any right under the Agreement shall be waived in whole or in part or otherwise dealt with (except in accordance with Section 8.4 of the Agreement); (iv) the partial payment or performance of the Obligations, whether as a result of the exercise of any right, remedy, power or privilege or otherwise, shall be accepted or received (except to the extent of such partial payment or performance); (v) all or any part of the Obligations shall be settled, compromised, released, liquidated or enforced upon such terms and in such manner as any Beneficiary may determine or as Applicable Laws may dictate; (vi) any modification, renewal or amendment of the Agreement; (vii) any merger or consolidation of, sale of substantial assets by or other restructuring or termination of the corporate existence of the Seller into or with any other person, or any consent thereto; (viii) any change in the ownership of any of the shares of capital stock in the Seller; (ix) any regulatory change or other governmental action; (x) any legal disability, incapacity or other similar defense of the Seller with respect to the Obligations (other than payment and performance); (xi) the cessation, for any cause whatsoever, of the liability of the Seller (other than by reason of the full and final payment and performance of all Obligations); (xii) the Seller's entering into the Agreement being invalid or in excess of the powers of the Seller or of any person purporting to act on the Seller's behalf; (xiii) any transfer or assignment of the rights of the Seller pursuant to the Agreement; 4 104 (xiv) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to the Seller or any of its properties, or any action taken by any trustee or receiver or by any court in any such proceeding; or (xv) any pursuit of or failure by the Beneficiaries to pursue remedies against the Seller for the Obligations. 4. Waiver. The Guarantor hereby waives expressly and unconditionally (a) acceptance of this Guaranty and proof of reliance by any Beneficiary hereon, (b) notice of any of the matters referred to above, (c) all notices that may be required by statute, rule of law or otherwise, now or hereinafter in effect, to preserve intact any right against the Guarantor, including, without limitation, any demand for payment or performance, diligence, presentment, protest and dishonor, proof of notice of nonpayment under the Agreement, and notice of default or notice of any failure on the part of the Seller to perform and comply with any covenant, agreement, term or condition of the Agreement, (d) any requirement of any Beneficiary to take any action whatsoever to exhaust any remedies under the Agreement and (e) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety, or that might otherwise limit recourse against the Guarantor. 5. Waiver of Subrogation. The Guarantor irrevocably waives, disclaims and relinquishes all claims against the Seller which the Guarantor has or would have by virtue of having executed this Guaranty or otherwise, whether at law or in equity, and, specifically including, but not limited to, all rights of indemnity, reimbursement, contribution or exoneration. 6. Rights to Setoff. In addition to all rights to setoff against the moneys, securities or other property of the Guarantor given to Beneficiaries by law, each Beneficiary and each affiliate thereof shall have a right of setoff on account of amounts due by the Guarantor to such Beneficiary against all moneys, securities and other property of the Guarantor and the Seller now or hereafter in the possession of or on deposit with such 5 105 Beneficiary or affiliate, whether held in a general or special account or deposit, or for safekeeping or otherwise; and every such right of setoff may be exercised without demand upon or notice to the Guarantor, except that any Beneficiary exercising such right of setoff shall promptly after the exercise thereof give notice thereof to the Guarantor. No right of setoff shall be deemed to have been waived by any act or conduct on the part of any Beneficiary or by any neglect to exercise such right of setoff, or by any delay in so doing; and every right of setoff shall continue in full force and effect until specifically waived or released by an instrument in writing executed by each Beneficiary. 7. Covenants. The Guarantor hereby agrees and covenants as follows: (i) at its own expense to promptly and duly execute and deliver to each Beneficiary such further documents and assurances and to take such further action as any Beneficiary may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Guaranty and to establish and protect the rights and remedies created or intended to be created in favor of the Beneficiaries hereunder; (ii) this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment or discharge of any of the Obligations is rescinded or must otherwise be returned by the Beneficiaries upon the insolvency, bankruptcy or reorganization of the Seller or the Guarantor or otherwise, as though such payment or discharge had not been made; (iii) the Guarantor shall pay all expenses incurred by the Beneficiaries in enforcing this Guaranty and the Obligations (including reasonable legal fees and expenses); and (iv) the Guarantor assumes the responsibility for being and keeping informed of the financial condition of the Seller and of all other circumstances bearing upon the risk of nonpayment of the Obligations which diligent inquiry would reveal, and agrees that no Beneficiary shall have the duty to advise the Guarantor of information known to it regarding such condition or any such circumstances. 6 106 8. Representations. The Guarantor hereby represents and warrants to each Beneficiary as follows: (i) the Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio and has all requisite corporate power and authority to deliver this Guaranty and to perform its obligations hereunder; (ii) the execution, delivery and performance by the Guarantor of this Guaranty have been duly authorized by all necessary corporate action on the part of the Guarantor, do not require any stockholder approval, or approval or consent of any trustee or holders of any indebtedness or obligations of the Guarantor except such as have been duly obtained, and none of the execution, delivery or performance hereof contravenes any Applicable Laws applicable to or binding on the Guarantor or the charter documents of the Guarantor or contravenes the provisions of, or constitutes a default under, or results in the creation of any Lien upon the property of the Guarantor under, any Contract to which the Guarantor is a party or by which it or its properties may be bound or affected; (iii) there is no suit, claim, action, proceeding or investigation pending or, to the Guarantor's knowledge, threatened, against or affecting the Guarantor before any Governmental Entity which relates to the Agreement or this Guaranty, or which, if adversely determined, would have a material adverse effect on the Guarantor; (iv) the execution, delivery and performance by the Guarantor of this Guaranty will not require any filing by the Guarantor with, or any permit, authorization, consent or approval of, or exemption by, or the giving of notice to, or the registration with or the taking of any other action in respect of, any Governmental Entity, and no filing, recording or registration in any public office or any other place is required on behalf of the Guarantor to authorize the execution, delivery and performance of this Guaranty, except as has been duly obtained or effected; (v) the Seller owns directly 100% of the outstanding shares of capital stock of the Guarantor; and 7 107 (vi) this Guaranty has been duly executed and delivered by the Guarantor and constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency and other similar laws of general application affecting the rights of creditors and by general equitable principles. 9. Assignment. This Guaranty shall be binding upon the Guarantor and its permitted successors and assigns and shall inure to the benefit of and be enforceable by the Beneficiaries and their respective permitted successors and assigns. Each Beneficiary and its permitted successors and assigns may assign this Guaranty or any of its rights and powers hereunder (but only to any person to whom its respective rights under the Agreement are assigned as permitted by the Agreement), and in such event the assignee shall have the same rights and remedies as if originally named herein in place of such Beneficiary. The Guarantor may not assign this Guaranty or any of its obligations, rights or powers hereunder without the prior written consent of the Beneficiaries and may not transfer its assets substantially as an entirety to any one or more entities without having first made provisions for such entity or entities becoming a co-obligor of the Guarantor's obigations under this Guaranty pursuant to an instrument in form and substance reasonably acceptable to Parent and the Purchaser. 10. Rights to Deal with the Seller. At any time and from time to time, without terminating, affecting or impairing the validity of this Guaranty or the obligations of the Guarantor hereunder, any Beneficiary may deal with the Seller in the same manner and as fully as if this Guaranty did not exist and shall be entitled, among other things, to grant the Seller such extension or extensions of time to perform, or to waive any obligation of the Seller to perform, any act or acts as may to such Beneficiary be deemed advisable, and no such waiver or extension shall in any way limit or otherwise affect any of the Guarantor's obligations hereunder. 11. Addresses for Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Guaranty shall be given (i) if to Parent or the Purchaser, to the 8 108 address specified for them in Section 10.3 of the Agreement, or (ii) if to the Guarantor, to LensCrafters, Inc., [address], [telephone], [telefax], in either case in accordance with the terms of the Agreement. 12. No Waiver; Remedies; No Inquiry. No failure on the part of the Beneficiaries to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided by law, and the rights of Beneficiaries herein are supplemental to, and not in lieu of, any rights of Beneficiaries under the Agreement. It is not and shall not be necessary for Beneficiaries to inquire into the powers of the Seller or the officers or agents acting or purporting to act on the Seller's behalf and any obligations made or created in reliance upon the professed exercise of such powers shall be governed hereunder. 13. Effectiveness; Continuing Guaranty. The obligations of the Guarantor hereunder shall become effective (the "Effective Date") upon, and only upon, the consummation of any transaction which results either in the Seller no longer owning greater than 80% of the outstanding capital stock of the Guarantor or in the Guarantor disposing of its assets substantially as an entirety to one or more entities. This Guaranty is a continuing guaranty and shall remain in full force and effect commencing on the Effective Date and continuing until payment and performance in full of the Obligations. 14. Amendments, Etc. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor therefrom shall in any event be effective unless the same shall be in writing and signed by each and all of the Beneficiaries, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15. Governing Law. This Guaranty shall be governed by and construed in accordance with the laws of the State of New York without regard to any applicable conflicts of law principles. 9 109 16. Headings. Headings of the sections of this Guaranty are for reference purposes only and shall not affect in any way the meaning or interpretation of this Guaranty. 17. Jurisdiction; Service: Etc. The Guarantor hereby submits to the non-exclusive jurisdiction of the courts of the State of New York located in the County of New York and the federal courts of the United States of America located in such State and County in respect to the interpretation and enforcement of the provisions hereof, and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that this Guaranty may not be enforced in or by said courts or that its property is exempt or immune from execution, that the suit, action or proceeding is brought in an inconvenient forum, or that the venue of the suit, action or proceeding is improper. The Guarantor agrees that service of process may be made upon it by service upon (the office of its General Counsel at [address]) in any action, suit or proceeding against the Guarantor with respect to this Guaranty or any of the documents referred to herein, and hereby irrevocably designates and appoints the Seller as its agent upon which process may be served in any action, suit or proceeding, it being understood that such appointment and designation shall become effective without any further action on the part of the Guarantor or the Seller. Final judgment against the Guarantor in any action, suit or proceeding shall conclusively determine the fact and amount of indebtedness arising from such judgment, a certified copy of which shall be conclusive evidence of the fact and amount of indebtedness arising from such judgment. 18. Severability. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforce-ability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the Guarantor hereby waives any provision of law which renders any 10 110 provision of this Guaranty prohibited or unenforceable in any respect. 19. Entire Agreement. This Guaranty constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, between the Guarantor and the Beneficiaries with respect to the subject matter hereof and thereof. IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be signed and delivered by its officers thereunto duly authorized as of the date first above written. LENSCRAFTERS, INC. By: ------------------------------------ Name: Title: 11 111 Exhibit 2.1(b)(ii)(B) WARRANT AGREEMENT dated as of ______ __, 1995, between Nine West Group Inc., a Delaware corporation (the "Company"), and [name of Warrant Agent], a [New York banking] corporation, as Warrant Agent (the "Warrant Agent"). WHEREAS, the Company proposes to issue warrants to purchase an aggregate of 3,700,000 shares of its Common Stock, par value $.01 per share (such 3,700,000 shares being hereinafter referred to as the "Shares" and where appropriate such term shall also mean the other securities or property purchasable upon the exercise of a warrant as provided for herein upon the happening of certain events; such Common Stock being hereinafter referred to as the "Common Stock;" and such warrants being hereinafter referred to as the "Warrants" and the certificates evidencing the Warrants being hereinafter referred to as the "Warrant Certificates"); and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance of Warrant Certificates and other matters as provided herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions set forth hereinafter in this Agreement, and the Warrant Agent hereby accepts such appointment. SECTION 2. Form of Warrant Certificates. The Warrant Certificates to be delivered pursuant to this Agreement shall be in registered form only and shall be substantially in the form set forth in Exhibit A attached hereto. 112 SECTION 3. Execution of Warrant Certificates. The Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board, Co-Chairman of the Board and President or a Vice President and by its Secretary or an Assistant Secre- tary under its corporate seal. Each such signature upon the Warrant Certificates may be in the form of a facsimile signature of the present or any future Chairman of the Board, Co-Chairman of the Board and President, Vice President, Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on the Warrant Certificates and for that purpose the Company may adopt and use the facsimile signature of any person who shall have been Chairman of the Board, Co-Chairman of the Board and President, a Vice President, Secretary or an Assistant Secretary notwithstanding the fact that at the time the Warrant Certificates shall be countersigned and delivered or disposed of he or she shall have ceased to hold such office. The seal of the Company may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Warrant Certificates. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificates so signed shall have been countersigned by the Warrant Agent pursuant to Section 4, or disposed of by the Company, such Warrant Certificates nevertheless may be countersigned and delivered or disposed of as though such person had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such officer. Warrant Certificates shall be dated the date of countersignature by the Warrant Agent pursuant to Section 4. SECTION 4. Registration and Countersignature. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. Warrant Certificates distributed as provided in Section 11 shall be registered in the 2 113 names of the record holders of the Warrant Certificates to whom they are to be distributed. The Company and the Warrant Agent may deem and treat the registered holder of a Warrant Certificate as the absolute owner thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for the purpose of any exercise thereof and any distribution to the holder thereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. SECTION 5. Registration of Transfers and Exchanges. The Warrant Agent shall from time to time register the transfer of any outstanding Warrant Certificates upon the records to be maintained by it for that purpose, upon surrender thereof accompanied by a written instrument of transfer in one of the forms of assignment appearing at the end of the form of the Warrant Certificate attached as Exhibit A hereto, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate of like tenor and representing in the aggregate a like number of Warrants shall be issued to the transferee and the surrendered Warrant Certificate shall be cancelled by the Warrant Agent. Warrant Certificates may be exchanged at the option of the holders thereof, when surrendered to the Warrant Agent at its office maintained for the purpose of exchanging, transferring or exercising the Warrants in the Borough of Manhattan, The City of New York, State of New York (the "Warrant Agent Office"), for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange, transfer or exercise shall be cancelled by the Warrant Agent. Warrant Certificates cancelled as provided in this Section 5 shall then be disposed of by the Warrant Agent in a manner satisfactory to the Company. The Warrant Agent is hereby authorized to countersign, in accordance with the provisions of this Section 5 and of Section 4, the new Warrant Certificates required pursuant to the provisions of this Section, and 3 114 for the purpose of any distribution of Warrant Certificates contemplated by Section 11. SECTION 6. Duration and Exercise of Warrants. (a) The Warrants shall expire at 5:00 p.m., New York City time, on ____________, 200_ [date to be the date eight and one-half years following the Closing Date] (such date of termination being herein referred to as the "Termination Date"). On and after the date of this Agreement, each Warrant may be exercised on any business day prior to 5:00 p.m., New York City time, on the Termination Date. (b) Subject to the provisions of this Agreement, including Section 11, on or after the date of this Agreement the holder of each Warrant shall have the right to purchase from the Company (and the Company shall issue and sell to such holder) one fully paid and non-assessable Share at the initial exercise price of $35.50 (the "Exercise Price") upon the surrender on any business day prior to 5:00 p.m., New York City time, on the Termination Date to the Warrant Agent at the Warrant Agent Office of the Warrant Certificate evidencing such Warrant, with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment of the Exercise Price in lawful money of the United States of America or in the manner provided in Section 6(c). The Warrants evidenced by a Warrant Certificate shall be exercisable prior to 5:00 p.m., New York City time, on the Termination Date, at the election of the registered holder thereof, either as an entirety or from time to time for part of the number of Warrants specified in the Warrant Certificate. In the event that less than all of the Warrants evidenced by a Warrant Certificate surrendered upon the exercise of Warrants are exercised at any time prior to 5:00 p.m., New York City time, on the Termination Date, a new Warrant Certificate or Certificates will be issued for the remaining number of Warrants evidenced by the Warrant Certificate so surrendered. No adjustments shall be made for any cash dividends on Shares issuable on the exercise of a Warrant. (c) Upon any exercise of a Warrant, the holder thereof may, at its option, instruct the Company, by written notice accompanying the surrender of the Warrant Certificate evidencing the Warrant at the time of such exercise, to apply to the payment of the Exercise 4 115 Price such number of the shares of Common Stock otherwise issuable to such holder upon such exercise as shall be specified in such notice, in which case an amount equal to the excess of the aggregate current market price (as defined in Section 11(c)) of such specified number of shares on the date of exercise over the portion of the aggregate Exercise Price attributable to such shares shall be deemed to have been paid to the Company and the number of shares issuable upon such exercise shall be reduced by such specified number. (d) Subject to Section 7, upon such surrender of a Warrant Certificate and payment of the Exercise Price, the Warrant Agent shall cause to be issued and delivered to or upon the written order of the registered holder of such Warrant Certificate and in such name or names as such registered holder may designate, a certificate for the Share or Shares issuable upon the exercise of the Warrant or Warrants evidenced by such Warrant Certificate. Such certificate shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become the holder of record of such Share or Shares as of the date of the surrender of such properly completed and duly executed Warrant Certificate and the payment of the Exercise Price. The Warrant Agent is hereby authorized to countersign any required new Warrant Certificate or Certificates pursuant to the provisions of this Section 6 and of Section 5. SECTION 7. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of Shares upon the exercise of Warrants prior to 5:00 p.m., New York City time, on the Termination Date; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance of any Warrant Certificates or any certificates for Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates or certificates for Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 5 116 SECTION 8. Mutilated or Missing Warrant Certificates. In case any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company may in its discretion issue, and the Warrant Agent shall countersign, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence reasonably satisfactory to the Company and the Warrant Agent of such mutilation, loss, theft or destruction of such Warrant Certificate and indemnity or bond, if requested, also reasonably satisfactory to them. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company or the Warrant Agent may prescribe. SECTION 9. Reservation of Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock, for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of Warrants, through the Termination Date, the number of Shares deliverable upon the exercise of all outstanding Warrants, and the Transfer Agent for such Common Stock is hereby irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Agreement on file with such Transfer Agent. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such Transfer Agent stock certificates issuable upon exercise of outstanding Warrants, and the Company will supply such Transfer Agent with duly executed stock certificates for such purpose. Before taking any action which would cause an adjustment pursuant to Section 11 reducing the Exercise Price below the then par value of the Shares issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Shares at the Exercise Price as so adjusted. 6 117 The Company represents, warrants and covenants that all Shares issued upon exercise of the Warrants will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free and clear from all liens, claims, charges, security interests, encumbrances or other rights of third parties created by the Company with respect to the issuance thereof. SECTION 10. Obtaining of Governmental Approvals and Stock Exchange Listings. The Company from time to time will (a) obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities and make any necessary filings under federal or state securities laws, which may become requisite in connection with the issuance, sale, transfer and delivery of the Warrant Certificates, the exercise of the Warrants and the issuance, sale, transfer and delivery of the Shares issued upon exercise of the Warrants, and (b) cause the Shares, upon their issuance upon the exercise of Warrants, to be listed on the principal securities exchange within the United States of America on which the Common Stock is then listed. SECTION 11. Adjustment of Exercise Price and Number of Shares Purchasable or Number of Warrants. The Exercise Price, the number of Shares purchasable upon the exercise of each Warrant and the number of Warrants outstanding are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 11. (a) In case the Company shall at any time after March 15, 1995 (i) declare a dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and/or the number and kind of shares of capital stock issuable on such date shall be proportionately adjusted so that the holder of any Warrant exercised after such time shall be 7 118 entitled to receive the aggregate number and kind of shares of capital stock which, if such Warrant had been exercised immediately prior to such date, he or she would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall at any time after the date of this Agreement fix a record date for the making of a distribution to all holders of Common Stock (other than any such distribution made in a dissolution or liquidation but including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (including securities, but excluding any distribution referred to in Section 11(a) and regular periodic cash dividends publicly announced as such by the Board of Directors of the Company), the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price per share of Common Stock (as defined in Section 11(c)) on such record date, less the fair market value (as reasonably determined by the Board of Directors of the Company and described in a statement filed with the Warrant Agent) of the portion of evidences of indebtedness or assets to be so distributed applicable to one share of Common Stock and the denominator of which shall be such current market price per share of Common Stock; provided, however, that, if such fair market value equals or exceeds such current market price, in lieu of such adjustment of the Exercise Price, the Company shall cause to be distributed to each holder of any Warrants the amount of such indebtedness or assets which would have been distributable in respect of the Common Stock then issuable upon exercise of such Warrants. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. (c) For the purpose of any computation under Section 6(c) or Section 11(b), the current market price per share of Common Stock on any date shall be 8 119 deemed to be the average of the daily closing prices of the Common Stock for the 30 consecutive trading days on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any national securities exchange, the average of the highest reported bid and lowest reported asked prices for such 30 consecutive trading day period as furnished by the National Association of Securities Dealers (the "NASD") or similar organization if the NASD is no longer reporting such information, commencing 45 trading days before such date. The closing price for each day shall be the last sale price regular way. (d) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 11(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (e) In the event that at any time, as a result of an adjustment made pursuant to Section 11(a), the holder of any Warrant thereafter exercised shall become entitled to receive any share of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in Sections 11(a) and (b), and the provisions of Sections 6, 7, 9, 10, 11 and 12 with respect to the Shares shall apply on like terms to any such other shares. (f) In any case in which this Section 11 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Warrant exercised after such record date the Shares and other capital stock of the Company, if any, issuable upon such 9 120 exercise over and above the Shares and other capital stock of the Company, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (g) Unless the Company shall have exercised its election as provided in Section 11(h), upon each adjustment of the Exercise Price as a result of the calculations made in Section 11(a) or (b), each Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Shares (calculated to the nearest hundredth) obtained by (A) multiplying the number of Shares purchasable upon exercise of a Warrant immediately prior to such adjustment by the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (B) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (h) The Company may elect on or after the date of any adjustment of the Exercise Price to adjust the number of Warrants, in substitution for an adjustment in the number of Shares purchasable upon the exercise of a Warrant as provided in Section 11(g). In such event, the Company will cause to be distributed to registered holders of Warrant Certificates either Warrant Certificates representing the additional Warrants issuable pursuant to the adjustment, or substitute Warrant Certificates to replace all outstanding Warrant Certificates. (i) In case of any capital reorganization of the Company, or of any reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of subdivision or combination), or in the case of consolidation of the Company with or the merger of the Company into any other corporation (other than a consolidation or merger in which the Company is the continuing corporation) or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other corporation, each Warrant shall after such reorganization, reclassification, consolida- 10 121 tion, merger or sale be exercisable, upon the terms and conditions specified in this Agreement, for the number of shares of stock or other securities or property to which a holder of the number of Shares purchasable (at the time of such reorganization, reclassification, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such reorganization, reclassification, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section 11 with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrants. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares shall not be deemed to be a reclassification of the Common Stock for the purposes of this Section 11(i). The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets or such other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Agreement. If the holders of Common Stock may elect to choose the kind or amount of stock or other securities or property receivable upon consummation of such reorganization, reclassification, consolidation, merger or sale, then for the purpose of this Section 11(i) the kind and amount of stock or other securities or property receivable upon such reorganization, reclassification, consolidation, merger or sale shall be deemed to be whatever choice is made by a plurality of the holders of Common Stock not affiliated with the Company or the other party to such reorganization, reclassification, consolidation, merger or sale or, if no such holders exist, as specified by the Board of Directors of the Company in good faith. No dividends or other distributions declared or made or interest amounts paid prior to the exercise of a Warrant with respect to the stock or other securities or property receivable pursuant to this Section 11(i) upon exercise 11 122 of a Warrant as a result of the consummation of a reorganization, reclassification, consolidation, merger or sale shall be made or paid upon exercise of a Warrant following the consummation of any such reorganization, reclassification, consolidation, merger or sale. SECTION 12. Fractional Warrants and Fractional Shares. (a) Notwithstanding an adjustment pursuant to Section 11(g) in the number of Shares purchasable upon the exercise of a Warrant, the Company shall not be required to issue fractions of Shares upon exercise of the Warrants or to distribute certificates which evidence fractional Shares. In lieu of fractional Shares, there shall be paid to the registered holders of Warrant Certificates at the time the Warrants represented thereby are exercised as herein provided an amount in cash equal to the same fraction of the current market value of a share of Common Stock. For purposes of this Section 12(a), the current market value of a share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to Section 11(c)) for the trading day immediately prior to the date of such exercise. (b) The Company shall not be required to issue fractions of Warrants on any distribution of Warrants to holders of Warrant Certificates pursuant to Section 11(h) or to distribute Warrant Certificates which evidence fractional Warrants. In lieu of such fractional Warrants there shall be paid to the registered holders of the Warrant Certificates with regard to which such fractional Warrants would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a full Warrant. For purposes of this Section 12(b), the current market value of a Warrant shall be the closing price of the Warrant (as determined pursuant to Section 11(c)) for the trading day immediately prior to the date on which such fractional Warrant would have been otherwise issuable. SECTION 13. Notice to Warrantholders. (a) Upon any adjustment of the Exercise Price pursuant to Section 11, the Company within 20 calendar days thereafter shall (i) cause to be filed with the Warrant Agent a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors of the Company (who may be the regular auditors of the 12 123 Company) setting forth the Exercise Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Shares purchasable upon exercise of a Warrant after such adjustment in the Exercise Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein and (ii) cause to be given to each of the registered holders of the Warrant Certificates at such holder's address appearing on the Warrant register written notice of such adjustments by first-class mail, postage prepaid. Where appropriate, such notice may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 13. (b) In the event: (i) the Company shall fix a record date for the making of a distribution to all holders of Common Stock (other than any such distribution made in a dissolution or liquidation but including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (including securities, but excluding any distribution referred to in Section 11(a) and cash dividends or cash distributions); or (ii) of any capital reorganization of the Company, or of any reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of subdivision or combination), or in the case of consolidation of the Company with or the merger of the Company into any other corporation (other than a consolidation or merger in which the Company is the continuing corporation) or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other corporation; or (iii) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed with the Warrant Agent and shall cause to be given to each of the registered holders of the Warrant Certificates at his or her address appearing on the Warrant register, at least 10 13 124 calendar days prior to the applicable record date hereinafter specified, by first class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such distribution are to be determined or (ii) the date on which any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up. The failure to give the notice required by this Section 13 or any defect therein shall not affect the legality or validity of any reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up or the vote upon any action. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice as shareholders in respect of the meetings of shareholders or the election of directors of the Company or any other matter, or any rights whatsoever as shareholders of the Company. SECTION 14. Merger, Consolidation or Change of Name of Warrant Agent. Any corporation into which the Warrant Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Warrant Agent under the provisions of Section 17. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, and in case at that time any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent; and in case at that time any of the Warrant Cer- 14 125 tificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent whose name has changed may adopt the countersignature under its prior name; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. SECTION 15. Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound: (a) The statements contained herein and in the Warrant Certificates shall be taken as statements of the Company and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrant Certificates except as otherwise provided herein. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate in respect of any action taken, suffered or omitted by it hereunder in good 15 126 faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in connection with this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in connection with this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in connection with this Agreement except as a result of its negligence or bad faith. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred by it, but this provision shall not affect the power of the Warrant Agent to take such action as it may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery or judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights or interests may appear. (g) The Warrant Agent, and any stockholder, director, officer or employee thereof, may buy, sell 16 127 or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent shall act hereunder solely as agent for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence or bad faith. SECTION 16. Disposition of Proceeds of Exercise of Warrants. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent on the purchase of Shares through the exercise of Warrants. SECTION 17. Change of Warrant Agent. If the Warrant Agent shall become incapable of acting as Warrant Agent, the Company shall appoint a successor. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such incapacity by the incapacitated Warrant Agent or by the registered holder of a Warrant Certificate, then the registered holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a successor to the incapacitated Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor warrant agent whether appointed by the Company or by such a court, shall be a bank or trust company, in good standing, incorporated under the laws of the State of New York or of the United States of America, and having its principal office in the Borough of Manhattan, The City of New York, State of New York and must have at the time of its appointment as warrant agent a combined capital and surplus of at least one hundred million dollars. After appointment the successor warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally 17 128 named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor warrant agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section 17, however, or any defect therein, shall not affect the legality or validity of the removal of the Warrant Agent or the appointment of a successor warrant agent as the case may be. SECTION 18. Notices to Company and Warrant Agent. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by the registered holder of any Warrant Certificate to or on the Company shall be sufficiently given or made if sent by mail, first class or registered, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent), as follows: Nine West Group Inc. 9 West Broad Street Stamford, Connecticut 06902 Attn: General Counsel In case the Company shall fail to maintain such office or shall fail to give such notice of any change in the location thereof, presentations may be made and notices and demands may be served at the principal office of the Warrant Agent. Any notice pursuant to this Agreement to be given by the Company or by the registered holder of any Warrant Certificate to the Warrant Agent shall be sufficiently given if sent by mail, first class or registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) to the Warrant Agent as follows: [Warrant Agent's name and address] SECTION 19. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any holders of Warrant Certificates in order to cure any ambiguity or to correct or supplement any provision 18 129 contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates. SECTION 20. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 21. Termination. This Agreement shall terminate at the close of business on ____________, 200_. Notwith- standing the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised or redeemed. The provisions of Section 15 shall survive such termination. SECTION 22. Governing Law. THIS AGREEMENT AND EACH WARRANT AND WARRANT CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO ANY APPLICABLE CONFLICTS OF LAWS PRINCIPLES. SECTION 23. Benefits of This Agreement. This Agreement is not intended to confer upon any person other than the Company, the Warrant Agent and the registered holders of the Warrant Certificates any rights or remedies hereunder. SECTION 24. Counterparts. This Agreement may be executed in counterparts, all which shall be considered one and the same agreement and shall become effective when a counterpart has been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 19 130 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. NINE WEST GROUP INC. By: ------------------------------------- Name: Title: [SEAL] Attest: - ------------------------------ [WARRANT AGENT] By: ------------------------------------- Name: Title: [SEAL] Attest: - ------------------------------ 20 131 EXHIBIT A [Form of Warrant Certificate] [Face] NINE WEST GROUP INC. WARRANTS TO PURCHASE COMMON STOCK Warrant No. _________ ________ Warrants This Warrant Certificate certifies that ___________________, or registered assigns, is the registered holder of _________ Warrants expiring at 5:00 p.m., New York City time, on ________, 200_ (the "Warrants") to purchase shares (the "Shares") of Common Stock, par value $.01 per share, of Nine West Group Inc., a Delaware corporation (the "Company"). Each Warrant entitles the holder to purchase from the Company on or after ____________, 1995 and on or before 5:00 p.m., New York City time, on ____________, 200_ one fully paid and nonassessable Share at the initial exercise price of $35.50 (the "Exercise Price"), payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Exercise Price at the office or agency of [name of Warrant Agent], as Warrant Agent (the "Warrant Agent"), in the Borough of Manhattan, The City of New York, State of New York (the "Warrant Agent Office"), but only subject to the terms and conditions set forth herein and in the Warrant Agreement, dated as of _______, 1995 (the "Warrant Agreement"), between the Company and the Warrant Agent. The Exercise Price and number of Shares purchasable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. No Warrant may be exercised after 5:00 p.m., New York City time, on _____________, 200_. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all 21 132 purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent. WITNESS the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. NINE WEST GROUP INC. Dated: By: ------------------------------------- Co-Chairman and President Countersigned: [Name of Warrant Agent], as Warrant Agent By: ------------------------------------- Secretary By: ------------------------------ Authorized Signature 22 133 [Form of Warrant Certificate] [Reverse] NINE WEST GROUP INC. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring at 5:00 p.m., New York City time, on ___________, 200_ (the "Termination Date"), to purchase ____________ Shares and are issued or to be issued pursuant to the Warrant Agreement which is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised to purchase Shares from the Company on or after ____________, 1995 and on or before 5:00 p.m., New York City time, on the Termination Date, at the Exercise Price set forth on the face hereof, subject to adjustment, as hereinafter referred to. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Exercised Price at the Warrant Agent Office. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any cash dividends on any Shares issuable upon exercise of this Warrant. The Warrant Agreement provides that, upon the occurrence of certain events, the Exercise Price set forth on the face hereof may, subject to certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant Agreement provides that, at the election of the Company, either (i) the number of Shares purchasable upon the exercise of each Warrant shall be adjusted, or (ii) each outstanding Warrant shall be adjusted to become a differ- 23 134 ent number of Warrants. In the latter event, the Company will cause to be distributed to registered holders of Warrant Certificates either Warrant Certificates representing the additional Warrants issuable pursuant to the adjustment, or substitute Warrant Certificates to replace all outstanding Warrant Certificates. The Company shall not be required to issue fractions of Warrants or fractions of Shares or any certificates which evidence fractional Warrants or fractional Shares. In lieu of such fractional Warrants and fractional Shares there shall be paid to the registered holders of the Warrant Certificates with regard to which such fractional Warrants or fractional Shares would other- wise be issuable an amount in cash equal to the same fraction of the current market value (as determined pursuant to the Warrant Agreement) of a full Warrant or a full Share, as the case may be. Warrant Certificates, when surrendered at the Warrant Agent Office, by the registered holder thereof in person or by a duly appointed legal representative or a duly authorized attorney, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentment for registration of transfer of this Warrant Certificate at the Warrant Agent Office, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. 24 135 [Form of Election to Purchase] (To be executed upon exercise of Warrant prior to 5:00 p.m., New York City time, on the Termination Date) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase __________ Shares and herewith tenders payments for such Shares in the amount of $_________ in accordance with the terms hereof. The undersigned requests that a certificate representing such Shares be registered in the name of ___________________________ whose address is __________________________________ and that such certificate be delivered to ____________________ whose address is ________________________. If said number of Shares is less than all of the Shares purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the balance of the Shares be registered in the name of _______________________ whose address is _______________________________________________________ and that such Warrant Certificate be delivered to _______________________ whose address is __________________________________________________. Any cash payments to be paid in lieu of a fractional Share should be made to ___________________________ whose address is ___________________________________________ and the check representing payment thereof should be delivered to ___________________ whose address is ___________________________. Dated: [Social Security Box] Name of holder of Warrant Certificate: ...................................... (Please print) Address: ............................. ............................. 25 136 Signature: ................................................. Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever and if the certificate representing the Shares or any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which this Warrant Certificate is registered, the signature of the holder hereof must be guaranteed. Signature Guaranteed: ........................................ 26 137 [Form of Assignment] For value received _____________________ hereby sells, assigns and transfers unto _______________________ the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated: Address: ............................................ ............................................ Signature: ............................................ Note: The above signature must correspond with the name as written upon theface of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: .................................. 27 138 [Form of Partial Assignment] For value received _____________________ hereby sells, assigns and transfers unto _______________________ the right to purchase __________ Shares evidenced by the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________ attorney, to transfer that part of the said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated: Address: ........................................... ........................................... Signature: ........................................... Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: ................................. 28 EX-10.W 4 U.S. SHOE CORP. 10-K405 EXHIBIT 10(W) 1 Exhibit 10.(w) ================================================================================ AGREEMENT AND PLAN OF MERGER by and among AVANT-GARDE OPTICS, INC. LUXOTTICA ACQUISITION CORP. and THE UNITED STATES SHOE CORPORATION Dated as of April 21, 1995 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I THE TENDER OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Company Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 831 Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.4 Board of Directors of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE II THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1.2 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1.3 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1.4 Conversion of Common Shares . . . . . . . . . . . . . . . . . . . . . 6 2.2 Meeting of Holders of Common Shares . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Consummation of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.4 Payment for Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.5 Closing of the Company's Transfer Books . . . . . . . . . . . . . . . . . . . . . . 9 2.6 The Company Stock Options and Related Matters . . . . . . . . . . . . . . . . . . . 9 2.7 Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER . . . . . . . . . . . . . . . . . . 11 3.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 Consents and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . . . . 11 3.4 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.5 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.6 Offer Documents; Schedule 14D-9; Proxy Statement . . . . . . . . . . . . . . . . . . 12 3.7 Acquiring Person Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.8 831 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.9 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . 14 4.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.3 Consents and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . . . . 15 4.4 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.5 Commission Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.7 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.8 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
i 3 4.9 Proxy Statement; Schedule 14D-9; Offer Documents . . . . . . . . . . . . . . . . . 22 4.10 Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.11 831 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.12 Company Notice and Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.13 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.14 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.15 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.16 Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE V COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.1 No Solicitation and Other Actions . . . . . . . . . . . . . . . . . . . . . . . . 24 5.2 Interim Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.2.1 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . 25 5.2.2 Articles and Code of Regulations . . . . . . . . . . . . . . . . . . 25 5.2.3 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.2.4 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.2.5 Employee Plans; Compensation . . . . . . . . . . . . . . . . . . . . 26 5.2.6 Loans and Investments . . . . . . . . . . . . . . . . . . . . . . . 27 5.2.7 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.2.8 Litigation; Settlement of Claims . . . . . . . . . . . . . . . . . . 27 5.2.9 Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . 27 5.2.10 Tax Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2.11 Business Combination . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2.12 No Amendment to Rights Agreement . . . . . . . . . . . . . . . . . . 28 5.2.13 Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2.14 No Amendment to Nine West Agreement . . . . . . . . . . . . . . . . 28 5.2.15 Advertising Agreements . . . . . . . . . . . . . . . . . . . . . . . 29 5.3 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.4 Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.5 State Takeover Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.6 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.7 Solicitation of Proxies for 831 Meeting . . . . . . . . . . . . . . . . . . . . . 30 5.8 Indemnification, Insurance and Certain Other Employee-Related Matters. . . . . . . 31 5.9 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.10 Compliance with Antitrust Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.11 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.12 Disposition of Litigation . . . . . . . . . . . . . . . . . . . . . . 35 5.13 Proxy Contests . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE VI CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 6.1 Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 6.1.1 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . 35 6.1.2 Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 35 6.1.3 Injunctions; Illegality . . . . . . . . . . . . . . . . . . . . . . 36
ii 4 ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 7.2 Non-Survival of Representations, Warranties and Agreements . . . . . . . . . . . 37 7.3 Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.5 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.6 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.10 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.11 Obligation of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.12 Enforcement of the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.13 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.14 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
iii 5 ANNEXES Annex A - Conditions of the Offer iv 6 LIST OF SCHEDULES Schedule 4.3 Required Consents and Approvals Schedule 4.7 Employee Benefit Plans Schedule 4.8 Certain Tax Matters Schedule 5.2.15 Advertising Agreements Schedule 5.8(d) Economic Bridge Program v 7 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of April 21, 1995 (this "Agreement"), by and among AVANT-GARDE OPTICS, INC., a New York corporation ("Parent"), LUXOTTICA ACQUISITION CORP., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and THE UNITED STATES SHOE CORPORATION, an Ohio corporation (the "Company"). Parent, Purchaser and the Company hereby agree as follows: ARTICLE I THE TENDER OFFER 1.1 The Offer. (a) Purchaser will, and Parent will cause Purchaser to, amend and supplement its outstanding tender offer for any and all outstanding common shares, without par value (the "Common Shares") (including the associated preference share purchase rights (the "Rights"), issued pursuant to the Rights Agreement, dated as of March 31, 1986, as amended by the First Amendment to the Rights Agreement, dated as of March 23, 1988, each between the Company and Morgan Shareholder Services Trust Company (as successor to Morgan Guaranty Trust Company of New York), as Rights Agent and by a Second Amendment to the Rights Agreement, dated as of June 1, 1993, between the Company and The Bank of New York, as Rights Agent, and by a Third Amendment to the Rights Agreement, dated as of March 29, 1995, between the Company and State Street Bank and Trust Company, as Rights Agent (as so amended, the "Rights Agreement")), of the Company (the "Offer") in accordance with, and to the extent required by, the provisions of this Agreement as promptly as reasonably practicable after the date hereof, but in no event later than five business days after the date hereof to provide that (i) the purchase price offered pursuant to the Offer will be $28.00 per Common Share (including the associated Rights), net to the seller in cash, (ii) the obligation of Purchaser to accept for payment and pay for Common Shares (including the associated Rights) tendered pursuant to the Offer will be subject only to the conditions (A) that the control share acquisition, as such phrase is used in Section 1701.831 of the Ohio General Corporation Law (the "GCL") by Purchaser (the "Control Share Acquisition") will be authorized by the holders of Common Shares pursuant to Section 1701.831 at a special meeting of the holders of Common Shares duly and validly called and held in accordance with Section 1701.831 or Purchaser is satisfied, in its sole discretion, that Section 1701.831 is invalid or inapplicable to the acquisition of Common Shares pursuant to the Offer (the 8 "Control Share Condition"), (B) that the number of Common Shares being validly tendered and not withdrawn prior to the expiration date provided in the Offer, when added to the Common Shares beneficially owned by Purchaser and its affiliates, will constitute not less than two-thirds of the Common Shares outstanding on a fully diluted basis (the "Minimum Share Condition"), and (C) that are set forth in Annex A hereto, and (iii) the expiration date of the Offer will be extended until the later of (A) midnight on the tenth business day following the date of such amendment referred to above or (B) the earlier of (x) the satisfaction of the Control Share Condition in the event the Control Share Condition is satisfied by Purchaser determining that Section 1701.831 is invalid or inapplicable to the acquisition of Common Shares pursuant to the Offer, and (y) midnight on the second business day next succeeding the date of the 831 Meeting (as hereinafter defined). Any such condition other than the Minimum Share Condition and the Control Share Condition may be waived by Purchaser in its sole discretion. Purchaser will accept for payment all Common Shares (including the associated Rights) validly tendered pursuant to the Offer and not withdrawn prior to the expiration date of the Offer as soon as legally permissible, and pay for all such Common Shares (including the associated Rights) as promptly as practicable thereafter, in each case subject only to the conditions referred to above in this Section 1.1(a). Without the prior written consent of the Company, Purchaser will not (u) reduce the number of Common Shares to be purchased in the Offer, (v) reduce the purchase price offered pursuant to the Offer, (w) impose conditions to the Offer in addition to those set forth on Annex A, (x) change the form of consideration payable in the Offer, (y) otherwise amend the Offer (other than amendments which are not adverse to the Company or its shareholders) or (z) extend the time of the expiration of the Offer if all conditions to the Offer are then, as provided in the Offer, satisfied or waived. (b) As soon as practicable on the date of the amendment of the Offer, Luxottica Group S.p.A., a corporation organized under the laws of the Republic of Italy ("Luxottica Group") and Purchaser will file with the Securities and Exchange Commission (the "Commission") an amendment to their Tender Offer Statement on Schedule 14D-1 (together with any amendments or supplements thereto, the "Schedule 14D-1") with respect to the Offer, which will contain or incorporate by reference an amendment and supplement to the offer to purchase and forms of the related letter of transmittal and any related summary advertisement (such Schedule 14D-1 and such other documents, together with any supplements or amendments thereto, the "Offer Documents"). The Company and its counsel will be given a reasonable opportunity to review the Offer Documents and all amendments and supplements thereto prior to their filing with the Commission or dissemination to holders of Common Shares. If required, immediately prior to the amendment of the Offer, 2 9 Luxottica Group and Purchaser will file with the Ohio Division of Securities the information required under Section 1707.041(A)(2) of the Ohio Revised Code, and will use their best efforts to prevent or cause to be lifted any suspension of the Offer imposed by the Ohio Division of Securities in connection with such filing. 1.2 Company Action. The Company hereby consents to the Offer, as amended pursuant to Section 1.1. Promptly after the date hereof, the Company will file with the Commission and mail to the holders of Common Shares an amendment to its Solicitation/Recommendation Statement on Schedule 14D-9 pursuant to the Exchange Act with respect to the Offer (together with any amendments or supplements thereto, the "Schedule 14D-9"). The Schedule 14D-9 will set forth, and the Company hereby represents and warrants, that the Board of Directors of the Company has at a meeting duly called and held and at which a quorum was present and acting throughout, by the unanimous vote of all directors present (a) approved the transactions contemplated hereby in a manner satisfying the requirements of paragraph 2(A) of Article Seventh of the Articles of Incorporation of the Company, (b) determined that the Offer and the related business combination transaction pursuant to which Purchaser will merge with and into the Company (the "Merger") are fair to and in the best interests of the Company and its shareholders, (c) approved the Offer, this Agreement and the Merger, (d) recommended that the holders of Common Shares authorize the purchase of Common Shares by the Purchaser for purposes of Section 1701.831 of the GCL, (e) recommended acceptance of the Offer, the tender of Common Shares pursuant to the Offer and approval and adoption of this Agreement and the Merger by the holders of Common Shares, (f) taken all actions which are necessary on the part of its Board of Directors as contemplated by Section 1704.02(A) of the Ohio Revised Code in order to make Chapter 1704 of the Ohio Revised Code inapplicable to the Merger, and (g) determined that the Offer is a Permitted Offer (as defined in the Rights Agreement) for purposes of the Rights Agreement (the "Recommendation"); provided that the Recommendation, in whole or in part (other than the parts referred to in clauses (a), (f) and (g) above, which were effected by irrevocable action), may be withdrawn, modified or amended if and to the extent legally required for the discharge by the Company's directors of their fiduciary duties as advised by independent legal counsel, who may be the Company's regularly engaged independent legal counsel (a "Director Duty"). Parent, Purchaser and their counsel will be given a reasonable opportunity to review the Schedule 14D-9 and all amendments and supplements thereto prior to their filing with the Commission or dissemination to the holders of Common Shares. The Company will furnish to Parent and Purchaser, upon request, a copy of the resolutions adopting the Recommendation certified by an appropriate officer of the Company. 3 10 1.3 831 Meeting. The parties acknowledge that a special meeting of the holders of Common Shares for the purpose of voting to authorize the Control Share Acquisition of Common Shares by Purchaser pursuant to Section 1701.831 of the GCL was called for April 21, 1995 (the "Original 831 Meeting") and adjourned to May 5, 1995 (the "Rescheduled 831 Meeting"). In the event that the 831 Proxy Statement has not been circulated for a sufficient period of days by the date of the Rescheduled 831 Meeting, Parent, Purchaser and the Company (without affecting the Company's right to withdraw its Recommendation referred to in Section 1.2(d) pursuant to a Director Duty) will use their respective best efforts to adjourn the Rescheduled 831 Meeting to such other date as the Company and Purchaser may mutually determine from time to time in accordance with the GCL (the adjourned meeting at which the Control Share Acquisition is submitted for a vote to the holders of Common Shares is herein referred to as the "831 Meeting"). 1.4 Board of Directors of the Company. If requested by Parent, the Company will, promptly following the acceptance for payment of the Common Shares to be purchased pursuant to the Offer, and from time to time thereafter, take all action necessary to cause at least two-thirds of the number of directors, rounded up to the next whole number, of the Company to be persons designated by Parent (whether, at the request of Parent, by increasing the size of the number of directors of the Company or by seeking the resignation of directors and causing Parent's designees to be elected to fill the vacancies so created) as will give Parent representation on the Board of Directors of the Company equal to the product of the number of directors of the Company and the percentage that such number of Common Shares so purchased bears to the number of Common Shares outstanding. At such time, the Company also will take all action permitted by law to cause persons designated by Parent to constitute at least the same percentage as is on the Company's Board of Directors of (a) each committee of the Company's Board of Directors, (b) the board of directors of each subsidiary of the Company, and (c) each committee, if any, of each such board of directors. The Company's obligation to cause designees of Parent to be so elected or appointed as directors of the Company will be subject to Section 14(f) of the Exchange Act and Rule 14(f)-1 promulgated thereunder. Parent will supply to the Company in writing and will be solely responsible for any information with respect to it and its designees, officers, directors and affiliates required by Section 14(f) and Rule 14f-1, and the Company will include in the Schedule 14D-9 such information as is required under Section 14(f) and Rule 14(f)-1. Notwithstanding the foregoing, until the Effective Time (as hereinafter defined), the Company will use its best efforts to assure that the Company's Board of Directors has at least three directors who are directors on the date hereof (the "Continuing Directors"); provided further, that, in such event, if the number 4 11 of Continuing Directors is reduced below three for any reason whatsoever, any remaining Continuing Directors (or Continuing Director, if there is only one remaining) will be entitled to designate three persons to fill such vacancies who will be deemed to be Continuing Directors for purposes of this Agreement or, if no Continuing Director then remains, the other directors will designate three persons to fill such vacancies who are not shareholders, affiliates or associates of Parent or Purchaser and such persons will be deemed to be Continuing Directors for purposes of this Agreement. The Company will use its best efforts to cause the person(s) so designated by the Continuing Directors to be elected to the Board of Directors of the Company. ARTICLE II THE MERGER 2.1 Merger. 2.1.1 Merger. Subject to the terms and conditions hereof, (a) Purchaser will be merged with and into the Company and the separate corporate existence of Purchaser will thereupon cease in accordance with the applicable provisions of the GCL and the Delaware General Corporation Law (the "DGCL") and (b) each of the Company, Purchaser and Parent will use its best efforts to cause the Merger to be consummated as soon as practicable following the expiration of the Offer. 2.1.2 Effective Time. As soon as practicable following fulfillment or waiver of the conditions specified in Article VI hereof, and provided that this Agreement has not been terminated or abandoned pursuant to Section 7.1 hereof, the Company and Purchaser (the "Constituent Corporations") will cause a duly executed certificate of merger (the "Certificate of Merger") to be filed with the Secretary of State of Ohio as provided in Section 1701.81 of the GCL and with the Secretary of State of Delaware as provided in Section 252 of the DGCL (or, if permitted, Section 253 of the DGCL). The Merger will become effective (the "Effective Time") on the date on which the later of the following actions will have been completed: (a) the Certificate of Merger has been duly filed with the Secretary of State of Ohio and (b) the Certificate of Merger has been duly filed with the Secretary of State of Delaware. 2.1.3 Effect of Merger. The Company will be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and will continue to be governed by the laws of the State of Ohio, and the separate corporate existence of Purchaser will cease. The Merger will have the effects specified in the GCL and the DGCL. The Articles of Incorporation (the "Articles") and the Code of Regulations 5 12 (the "Code of Regulations") of the Company in effect at the Effective Time will be the Articles of Incorporation and Code of Regulations of the Surviving Corporation, until duly amended in accordance with their terms and the GCL. The directors of Purchaser immediately prior to the Effective Time will be the initial directors of the Surviving Corporation, and the officers of the Company at the Effective Time will be the initial officers of the Surviving Corporation, to serve in accordance with the Code of Regulations, from and after the Effective Time, until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the terms of the Surviving Corporation's Articles of Incorporation and Code of Regulations and the GCL. 2.1.4 Conversion of Common Shares. At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Purchaser, Parent or the holders of any of the following securities, (a) each then-outstanding Common Share not owned by Luxottica Group, Parent, Purchaser or any other direct or indirect subsidiary of Parent (other than those Common Shares held in the treasury of the Company or held by any subsidiary of the Company and the Dissenting Shares (as hereinafter defined)) (including the associated Rights) will be cancelled and retired and be converted into a right to receive in cash an amount per Common Share equal to the highest price per Common Share paid for a Common Share by Purchaser pursuant to the Offer (the "Merger Price"), (b) each then-outstanding Common Share (including the associated Rights) owned by Luxottica Group, Parent, Purchaser or any other direct or indirect subsidiary of Parent will be cancelled and retired, and no payment will be made with respect thereto, (c) each Common Share issued and held in the Company's treasury or held by any subsidiary of the Company will be cancelled and retired, and no payment will be made with respect thereto, and (d) each common share of Purchaser will be converted into and become 500,000 common shares of the Surviving Corporation, which thereafter will constitute all of the issued and outstanding common shares of the Surviving Corporation. Notwithstanding the foregoing provisions of this Section to the contrary, Parent may elect, at any time prior to the fifth business day immediately preceding the date on which the Proxy Statement (as provided for in Section 5.6) is initially to be mailed to the Company's shareholders (or, if the Merger is to be effected without a meeting of holders of Common Shares, in accordance with Section 1701.801 of the GCL and Section 253 of the DGCL, at any time prior thereto), that, instead of merging Purchaser into the Company, the Company merge with and into Purchaser or another direct or indirect wholly owned subsidiary of Luxottica Group. In such event, the parties agree to execute an appropriate amendment to this Agreement in order to reflect the foregoing, and to provide that Purchaser or such other subsidiary will be the Surviving Corporation and will continue under the name "The United States Shoe Corporation"; provided, 6 13 however, that if such amendment would otherwise cause any representation or warranty of the Company hereunder no longer to be true or correct in any respect or would otherwise cause the Company to be in breach or to have failed to comply in any respect with any of its obligations hereunder, no such failure of any representation or warranty to be true or correct or breach or failure to comply shall give either Parent, Purchaser or Luxottica Group any rights under this Agreement or under the Offer. 2.2 Meeting of Holders of Common Shares. The Company will take all action necessary in accordance with applicable law and its Articles and Code of Regulations to convene a meeting of the holders of Common Shares promptly after the purchase of Common Shares pursuant to the Offer to consider and vote upon the approval of the Merger, if such approval is required by applicable law. At any such meeting, Parent and Purchaser will vote all of the Common Shares then beneficially owned by them in favor of the Merger. The Board of Directors of the Company will recommend that the holders of Common Shares approve the Merger if such approval is required pursuant to the GCL or otherwise; provided that any such recommendation may be withdrawn, modified or amended in accordance with a Director Duty. Prior to any such meeting, in the event that Parent and Purchaser acquire beneficial ownership of at least 90% of the outstanding Common Shares, the parties will take all action necessary to cause the Merger to become effective as soon as practicable after such acquisition, without a meeting of holders of Common Shares, in accordance with Section 1701.801 of the GCL and Section 253 of the DGCL. 2.3 Consummation of the Merger. The closing of the Merger (the "Closing") will take place (a) at the offices of Winston & Strawn, 175 Water Street, New York, New York as promptly as practicable after the later of (i) the day of (and immediately following) the receipt of approval of the Merger by the holders of the Common Shares if such approval is required, or as soon as practicable after completion of the Offer if such approval by the holders of the Common Shares is not required, and (ii) the day on which the last of the conditions set forth in Article VI hereof is satisfied or duly waived, or (b) at such other time and place and on such other date as Purchaser and the Company may agree in writing executed by both parties. 2.4 Payment for Common Shares. Purchaser will authorize the depositary for the Offer (or one or more commercial banks organized under the laws of the United States or any state thereof with capital, surplus and undivided profits of at least $100,000,000) to act as Paying Agent hereunder with respect to the Merger (the "Paying Agent"). Each holder (other than Luxottica Group, Parent, Purchaser or any subsidiary of Parent, the Company or any subsidiary of the Company) of a certificate or 7 14 certificates which immediately prior to the Effective Time represented Common Shares (the "Certificates") will be entitled to receive, upon surrender to the Paying Agent of such Certificates for cancellation and subject to any required withholding of taxes, the aggregate amount of cash into which the Common Shares previously represented by such Certificates will have been converted in the Merger. On or before the Effective Time, Purchaser will make available to the Paying Agent sufficient funds to make all payments pursuant to the preceding sentence. Pending payment of such funds to the holders of Common Shares, such funds will be held and invested by the Paying Agent as Parent directs. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation or Parent, as Parent directs. Parent will promptly replace any monies lost through any investment made pursuant to this Section 2.4. Until surrendered to the Paying Agent, each Certificate which immediately prior to the Effective Time represented Common Shares (other than Common Shares owned by Luxottica Group, Parent, Purchaser or any other direct or indirect subsidiary of Parent, or treasury shares held by the Company or Common Shares held by any subsidiary of the Company and Dissenting Shares) will be deemed for all corporate purposes to evidence only the right to receive upon such surrender the aggregate amount of cash into which the Common Shares represented thereby will have been converted, subject to any required withholding of taxes. No interest will be paid on the cash payable upon the surrender of the Certificates. Any cash delivered or made available to the Paying Agent pursuant to this Section 2.4 and not exchanged for Certificates within six months after the Effective Time will be returned by the Paying Agent to the Surviving Corporation, which thereafter will act as Paying Agent, subject to the rights of holders of non-surrendered Certificates under this Article II and any former shareholders of the Company who have not theretofore complied with the instructions for exchanging their Certificates representing Common Shares, who will thereafter look only to the Surviving Corporation for payment of their claim for the consideration set forth in Section 2.1, without any interest thereon, but will have no greater rights against the Surviving Corporation (or either Constituent Corporation) than may be accorded to general unsecured creditors thereof under applicable law. Notwithstanding the foregoing, neither the Paying Agent nor any party hereto will be liable to a holder of Common Shares for any cash or interest thereon delivered to a public official pursuant to applicable abandoned property laws. Promptly after the Effective Time, the Paying Agent will mail to each record holder of Common Shares immediately prior to the Effective Time a form of letter of transmittal (the "Transmittal Letter") and instructions for use thereof in surrendering the Certificates previously representing such Common Shares which will specify that delivery will be effected, and risk of loss and title to the Certificates will pass, only upon proper delivery of the 8 15 Certificates to the Paying Agent in accordance with the terms of delivery specified in the Transmittal Letter and instructions for use thereof in surrendering such Certificates and receiving the Merger Price for each Common Share previously represented thereby. 2.5 Closing of the Company's Transfer Books. At the Effective Time, the stock transfer books of the Company will be closed and no transfer of Common Shares will thereafter be made. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they will be cancelled, retired and exchanged for cash as provided in Section 2.4 hereof, subject to applicable law in the case of Dissenting Shares. 2.6 The Company Stock Options and Related Matters. (a) Prior to the Effective Time, the Board of Directors of the Company will (i) adopt such resolutions and approve such amendments, if any, as are necessary to provide for the cancellation of all stock options (the "Options") to purchase Common Shares granted pursuant to the Company's 1978 Key Personnel Stock Option Plan, 1983 Key Personnel Stock Option Plan, 1985 Outside Directors Stock Option Plan, 1991 Outside Directors Stock Option Plan and 1988 Employee Incentive Plan (all such plans collectively referred to as the "Stock Plans"), effective as of immediately prior to the Effective Time and (ii) promptly furnish Parent and Purchaser a copy of such resolutions certified by an appropriate officer of the Company. If necessary or appropriate, the Company will, upon the request of Purchaser, (x) use its best efforts to obtain the written acknowledgment of each holder of an Option that the payment of the amount of cash referred to below will satisfy the Company's obligation to such holder pursuant to such Option and (y) take such other action as is necessary or appropriate to effect the provisions of this Section 2.6(a). Immediately prior to the Effective Time, each Option which is not then exercisable or vested will become fully exercisable and vested, and each such Option and all other Options will be cancelled, effective as of immediately prior to the Effective Time, in exchange for a payment by the Company or the Surviving Corporation of an amount, payable within three business days after the Effective Time, equal to the product of (A) the total number of Common Shares subject to such Option and (B) the excess, if any, of the Merger Price over the exercise price per Common Share subject to such Option, subject to any required withholding of taxes. Payments made pursuant to this Section 2.6(a) represent and will be characterized and reported by the Surviving Corporation as additional compensation expense. (b) Prior to the Effective Time, the Board of Directors of the Company will adopt appropriate resolutions to provide for the termination of all restrictions on the Common Shares ("Restricted Shares"), if any, which have been distributed to employees pursuant to the 1988 Employee Incentive Plan and 9 16 will promptly furnish Parent and Purchaser a copy of such resolutions certified by an appropriate officer of the Company. (c) Subject to the payment by the Company or the Surviving Corporation of all amounts required to be paid by them pursuant to Section 2.6(a), at and after the Effective Date, no option, convertible security, warrant, subscription or other claim, right to-acquire or commitment of any sort previously existing in respect of one or more whole and/or fractional shares of any class of securities of the Company shall represent an option, convertible security, warrant, subscription or other claim, right-to-acquire or commitment of any sort in respect of whole and/or fractional shares of any class of securities of the Surviving Corporation. 2.7 Dissenters' Rights. Notwithstanding anything in this Agreement to the contrary, any Common Shares which are issued and outstanding immediately prior to the Effective Time and which are held by holders of Common Shares who shall not have voted such Common Shares in favor of the adoption of the Merger and who shall have timely delivered a written demand for the payment of the fair cash value of such Common Shares in the manner provided in Section 1701.85 of the GCL ("Dissenting Shares") shall not be converted as described in Section 2.1.4 hereof but shall become the right to receive payment of the fair cash value of such Common Shares in accordance with the provisions of Section 1701.85 of the GCL; provided, however, that (i) if any holder of Dissenting Shares shall subsequently withdraw such holder's demand for payment of the fair cash value of such Common Shares (with the consent of the Surviving Corporation by its directors), (ii) if any holder fails to comply with such Section 1701.85 (unless the Surviving Corporation by its directors waives such failure), (iii) if the Purchaser abandons or is finally enjoined or prevented from carrying out, or the holders of Common Shares rescind their adoption of, the Merger or (iv) if the Surviving Corporation and any holder of Dissenting Shares will not have come to an agreement as to the fair cash value of such holder's Dissenting Shares, and neither such holder of Dissenting Shares nor the Surviving Corporation has filed or joined in a petition demanding a determination of the value of all Dissenting Shares within the period provided in Section 1701.85 of the GCL, the right and obligation of such holder or holders (as the case may be) to receive such fair cash value and to sell such Common Shares shall terminate, and such Common Shares shall thereupon be deemed to have been extinguished and to have been converted, as of the Effective Time of the Merger, into the right to receive the Merger Price, without interest. Persons who have perfected statutory rights with respect to Dissenting Shares as aforesaid shall not be paid by the Surviving Corporation as provided in this Agreement and shall have only such rights as are provided by Section 1701.85 of the GCL with respect to such Common Shares. 10 17 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser hereby jointly and severally represent and warrant to the Company that: 3.1 Corporate Organization. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its respective properties and assets and to carry on its respective businesses as they are now being conducted. Parent beneficially owns all of the outstanding capital stock of Purchaser. 3.2 Authority. Each of Parent and Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly approved by the respective Boards of Directors of Parent and Purchaser and by Parent and one or more of its direct and/or indirect wholly owned subsidiaries as the sole shareholders of Purchaser and no other corporate proceedings on the part of Parent or Purchaser are necessary to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by each of Parent and Purchaser and constitutes a valid and binding obligation of each of Parent and Purchaser, enforceable against each of Parent and Purchaser in accordance with its terms. 3.3 Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by Parent and Purchaser nor the consummation by Parent and Purchaser of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of their respective articles of incorporation or bylaws (or comparable governing instruments), (b) violate, conflict with, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien or other encumbrance (except as contemplated by the financing transaction provided for in the Commitment Letter (as hereinafter defined)) upon any of the properties or assets of Parent or any of its subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease agreement or other instrument or obligation to which Parent or any such subsidiary is a party or to which they or any of their respective properties or assets are subject, except for such violations, conflicts, breaches, 11 18 defaults, terminations, accelerations or creations of liens or other encumbrances, which would not reasonably be expected to have, individually or in the aggregate, the effect of preventing or materially delaying Parent and Purchaser from performing their respective obligations under this Agreement, or (c) require any consent, approval, authorization or permit of or from, or filing with or notification to, any court, governmental authority or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity"), except (i) pursuant to the Exchange Act, (ii) the filing of certificates of merger pursuant to the GCL, the DGCL and the laws of any other state, (iii) filings required under the securities or blue sky laws of the various states, or (iv) consents, approvals, authorizations, permits, filings or notifications which if not obtained or made would not reasonably be expected to have, individually or in the aggregate, the effect of preventing or materially delaying Parent and Purchaser from performing their respective obligations under this Agreement. Neither Parent, Purchaser nor any of their respective affiliates is, or at any time in the three years prior to the date hereof has been, an "interested shareholder" as defined in Section 1704.01 of the GCL. 3.4 Financing. Purchaser has delivered to the Company with its Amendment No. 18 to its Schedule 14D-1 a commitment letter, dated April 19, 1995 (the "Commitment Letter") from Credit Suisse (the "Bank"), on the terms and subject to the conditions of which the Bank has committed to lend funds which, together with other cash funds presently available to Purchaser, are sufficient to consummate the Offer and the Merger, to perform all the obligations of Parent and Purchaser under this Agreement and to pay all related fees and expenses. The Commitment Letter is in full force and effect. 3.5 Solvency. The Surviving Corporation will not be immediately after the Effective Time (and after giving effect to the financing for the Offer and the Merger and the use of the proceeds therefrom) unable to pay its obligations as they become due in the usual course of its affairs. 3.6 Offer Documents; Schedule 14D-9; Proxy Statement. Neither the Offer Documents nor any of the information supplied by Parent or Purchaser in writing specifically for inclusion in the Schedule 14D-9 will, at the respective times the Offer Documents and the Schedule 14D-9 are filed with the Commission and first published, sent or given to the Company's shareholders, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they are made, not misleading. None of the information to be supplied by Parent or Purchaser in writing specifically for inclusion in a proxy or information statement of the Company required to be mailed to the Company's shareholders 12 19 in connection with the Merger (the "Proxy Statement"), or in any amendments or supplements thereto will, at the date the Proxy Statement is first mailed to the Company's shareholders and at the time of the shareholders' meeting in connection with the Merger, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they are made, not misleading. The Offer Documents complied and the Offer Documents and the Proxy Statement, if any, will comply as to form in all material respects with the applicable requirements of the Exchange Act and the rules and regulations thereunder. Parent and Purchaser will promptly correct any information provided by them in writing specifically for inclusion in the Schedule 14D-9 and the Proxy Statement if and to the extent that such information will have become false or misleading in any material respect. Parent and Purchaser will promptly correct any statements in the Offer Documents that have become false or misleading in any material respect and take all steps necessary to cause such Offer Documents as so corrected to be filed with the Commission and disseminated to holders of Common Shares, in each case as and to the extent required by applicable law. 3.7 Acquiring Person Statement. The acquiring person statement delivered to the Company on March 3, 1995 by Luxottica Group and Purchaser relating to the purchase of Common Shares by the Purchaser (the "Acquiring Person Statement") is a valid acquiring person statement under Section 1701.831 of the GCL with respect to the purchase of Common Shares by the Purchaser pursuant to the Offer as amended in accordance herewith and the Merger. The Acquiring Person Statement complied as to form in all material respects with the applicable requirements of the GCL and did not, at the time of first mailing thereof, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they were made, not misleading. 3.8 831 Proxy Statement. The proxy statement filed by Purchaser and Luxottica Group relating to the Original 831 Meeting, as such meeting may be adjourned (together with any amendments or supplements thereto, the "831 Proxy Statement") complied and will comply as to form in all material respects with the applicable requirements of the Exchange Act and the rules and regulations thereunder and did not and will not, at the time of the first mailing thereof and at the time of the 831 Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they were made, not misleading, except that no representation is made by Parent or Purchaser with 13 20 respect to information supplied by the Company in writing specifically for inclusion in the 831 Proxy Statement. 3.9 Fees. Except for the fees payable to CS First Boston Corporation, neither Parent nor Purchaser nor any of Parent's other subsidiaries has paid or become obligated to pay any fee or commission to any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each of Parent and Purchaser that: 4.1 Corporate Organization. The Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective country or state of incorporation and is in good standing as a foreign corporation in each jurisdiction where failure to so qualify or be in good standing is reasonably likely to have a material adverse effect on the business, operations, properties, assets, liabilities or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company and each of its subsidiaries has the requisite corporate power to own, lease and operate its respective properties and assets and to carry on its respective businesses as they are now being conducted. The Company has furnished Parent true and correct copies of its Articles and Code of Regulations, as amended to the date hereof. The Company's Articles and Code of Regulations as so delivered are in full force and effect. The Company has made available to Parent true and correct copies of the articles of incorporation and code of regulations (or comparable governing instruments) of each of its subsidiaries, each of which, as so made available, is in full force and effect. 4.2 Authority. The Company has the requisite corporate power and authority to execute and deliver this Agreement and, except for any required approval of the holders of Common Shares, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly approved by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated, subject only to approval, if necessary, by the holders of the Common Shares. This Agreement has been duly executed and delivered by, and constitutes a valid 14 21 and binding obligation of, the Company, enforceable against the Company in accordance with its terms. 4.3 Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (a) conflict with or result in any breach of, any provision of its Articles or Code of Regulations, or (b) violate, conflict with, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien or other encumbrance upon any of the properties or assets of the Company or any of its subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease agreement or other instrument or obligation to which the Company or any such subsidiary is a party or to which they or any of their respective properties or assets are subject, except for such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens or other encumbrances as may arise in the absence of an appropriate consent or waiver under the agreements or obligations set forth on Schedule 4.3 or which, individually or in the aggregate, will not reasonably be expected to have a Material Adverse Effect, or (c) require any consent, approval, authorization or permit of or from, or filing with or notification to, any Governmental Entity, except (i) pursuant to the Exchange Act, (ii) the filing of Certificates of Merger pursuant to the GCL, the DGCL and the laws of any other state, (iii) filings required under the securities or blue sky laws of the various states, (iv) filings under laws and regulations of any foreign jurisdictions or regulatory authorities to which Parent or Purchaser may be subject, or (v) consents, approvals, authorizations, permits, filings or notifications which, if not obtained or made will not, individually or in the aggregate, have a Material Adverse Effect. 4.4 Capitalization. (a) As of the date hereof, the authorized capital stock of the Company consists of (i) 60,000,000 Common Shares (ii) 750,000 voting preferred shares, without par value, and (iii) 750,000 non-voting preferred shares, without par value. As of the date hereof, there are 8,656 Common Shares held in the Company's treasury and no Common Shares held by any subsidiary of the Company. The Company has issued the Rights pursuant to the Rights Agreement. As of the date hereof, none of the Rights is presently exercisable and each Right is presently evidenced only by certificates for Common Shares and not by any separate certificate representing a Right. (b) As of the close of business on the business day immediately prior to the date hereof, 46,958,375 Common Shares were validly issued and outstanding, fully paid and nonassessable and not subject to preemptive rights. Upon request by Purchaser 15 22 given to the Company at least 24 hours prior to the consummation of the Offer, the Company will furnish to Parent and Purchaser immediately prior to the consummation of the Offer a statement of the number of issued and outstanding Common Shares certified by an appropriate officer of the Company. (c) As of the close of business on the business day immediately prior to the date hereof, (i) the 1978 Key Personnel Stock Option Plan provides for the issuance to officers and employees of the Company or its subsidiaries of Options to purchase up to 1,800,000 Common Shares, the 1983 Key Personnel Stock Option Plan provides for the issuance to officers and employees of the Company or its subsidiaries of Options to purchase up to 2,600,000 Common Shares, the 1985 Outside Directors Stock Option Plan provides for the issuance to directors of the Company of Options to purchase up to 300,000 Common Shares, the 1988 Employee Incentive Plan provides for the issuance to officers and employees of the Company or its subsidiaries of up to 4,450,000 Common Shares as Restricted Shares or pursuant to Options and the 1991 Outside Directors Stock Option Plan provides for the issuance to directors of the Company of Options to purchase up to 300,000 Common Shares. Pursuant to such Plans as of the close of business on the business day immediately prior to the date hereof (i) Options for the purchase of 3,603,900 Common Shares, in an exercise price range of $9.00 to $31.562 per share, and at a weighted average exercise price of $19.54 per share, were outstanding, and (ii) 90,107 Restricted Shares were outstanding. The Company's Associates Discounted Stock Purchase Plan provides for the issuance of up to 5,700 Common Shares in respect of payroll deductions made on or prior to April 28, 1995. (d) Except as set forth in this Section 4.4, there are no shares of capital stock of the Company authorized, issued or outstanding and there are no outstanding subscriptions, options, warrants, rights (other than the Rights), convertible securities or any other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of the Company obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company or obligating the Company to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment. There are no voting trusts or other agreements or understandings to which the Company is a party with respect to the voting of the capital stock of the Company. (e) The Company is, directly or indirectly, the record and beneficial owner of all the outstanding shares of capital stock of each of its subsidiaries, free and clear of any lien, mortgage, pledge, charge, security interests or encumbrance of any kind, and there are no irrevocable proxies with respect to 16 23 any such shares (other than any liens, mortgages, pledges, charges, security interests, encumbrances or irrevocable proxies provided for in the Revolving Credit Agreement dated as of February 19, 1992 among the Company, LensCrafters Inc., the banks listed therein and Wells Fargo Bank, National Association, as Loan Agent, as amended). There are outstanding (i) no securities of the Company or any subsidiary convertible into or exchangeable for shares of capital stock or other voting securities of, or other ownership interests, in any subsidiary of the Company, and (ii) no options, warrants, rights or other agreements or commitments to acquire from the Company or any of its subsidiaries to issue, any capital stock or voting securities of, or other ownership interests in, or any securities convertible into or exchangeable for any capital stock or voting securities of, or other ownership interests in, any of such subsidiaries, and no other obligation of the Company or any of such subsidiaries to grant, extend or enter into any subscription, warrant, right, convertible or exchangeable security or other similar agreement or commitment (the items in clauses (i) and (ii) being referred to collectively as "Subsidiary Securities"). There are no outstanding obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. 4.5 Commission Filings. The Company has heretofore filed all reports with the Commission required to be filed pursuant to the Exchange Act and the rules and regulations thereunder since January 1, 1994 and has made available to Parent true and correct copies of all such reports, including without limitation each registration statement, Current Report on Form 8-K, proxy or information statement, Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed during such period (in the case of each such report, including all exhibits thereto) (the "SEC Documents"). Each SEC Document complied as of its respective filing date in all material respects with all applicable requirements of the Exchange Act and the rules and regulations thereunder. The SEC Documents did not (as of their respective filing dates) contain any untrue statement of a material fact required to be stated therein or necessary in order to make the statements made therein made, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the SEC Documents (including the notes and schedules thereto, "Company's Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present in all material respects (subject, in the case of the unaudited 17 24 statements, to normal audit adjustments) the consolidated financial position of the Company and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. 4.6 Absence of Certain Changes. Except as disclosed in the SEC Documents or as disclosed to Parent by the Company or as otherwise publicly disclosed by the Company, in each case, prior to the execution of this Agreement, since October 31, 1994 there has not been (a) any change in the business, operations, properties, assets, liabilities or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole, which has resulted in a Material Adverse Effect except for changes arising out of industry-wide conditions or resulting from the Offer, this Agreement or the transactions contemplated hereby, (b) in the case of the Company, any declaration, setting aside or, payment of any dividend or other distribution with respect to its capital stock, other than the regular quarterly cash dividends on Common Shares in the amount of $0.08 per Common Share, (c) any material change by the Company in accounting principles or practices, (d) any entry into any agreement, commitment or transaction by the Company which is material to the Company and its subsidiaries, taken as a whole, other than in the ordinary course of business, or (e) any entry into any employment agreement with, or any increase in the rate or terms of compensation payable by the Company or any of its subsidiaries to their respective directors, officers or employees, other than increases made in the ordinary course of business. 4.7 Employee Benefit Plans. (a) Schedule 4.7 contains a complete and accurate list of all existing bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, severance, welfare and fringe benefit plans, employment or severance agreements and all similar arrangements in which any employee or former employee or director or former director of the Company or any of its subsidiaries (the "Employees") participates or to which any such Employees are a party or which are applicable to any of them (the "Plans"). The SEC Documents and/or Schedule 4.7 identifies each such Plan containing a "change of control" provision. Except as set forth in the SEC Documents and/or on Schedule 4.7, neither the Company nor any of its subsidiaries has any formal commitment, whether legally binding or not, to create any additional Plan or to modify or change in any material respect any existing Plan that would affect any Employee. (b) Except as set forth on Schedule 4.7, each Plan has been operated and administered in accordance with its terms and with applicable law, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code"). Each 18 25 Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter for "TRA" (as defined in Rev. Proc. 93-39) from the Internal Revenue Service (the "IRS") or has filed for such a determination letter within the remedial amendment period. There is no material pending or, to the best knowledge of the Company, threatened legal action, suit or claim relating to the Plans. Neither the Company nor any of its subsidiaries nor any plan trustee employed by the Company or its subsidiaries has engaged in a transaction with respect to any Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or any of its subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. (c) No liability under Title IV of ERISA has been or is expected to be incurred by the Company or any subsidiary with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or any single-employer plan of any entity (an "ERISA Affiliate") which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate Plan"). The Company and its subsidiaries have not incurred and do not expect to incur any withdrawal liability with respect to a "multiemployer plan" (within the meaning of Section 3(37) of ERISA) under Title IV of ERISA (regardless of whether based on contributions of an ERISA Affiliate) or any material liability in connection with the reorganization, insolvency or termination of any multiemployer plan. No notice of a "reportable event," within the meaning of Section 4043 of ERISA for which the 30-day reporting requirement has not been waived, has been required to be filed for any Pension Plan or by any ERISA Affiliate Plan within the 12-month period ending on the date hereof. The Pension Benefit Guaranty Corporation (the "PBGC") has not instituted proceedings to terminate any Pension Plan or ERISA Affiliate Plan and no condition exists that presents a material risk that such proceedings will be instituted. (d) All contributions required to be made under the terms of any Plan or ERISA Affiliate Plan have been timely made or adequate reserves in respect thereof have been established on the books of the Company. Neither any Pension Plan nor any ERISA Affiliate Plan has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA and all required payments to the PBGC with respect to each Pension Plan or ERISA Affiliate Plan have been made on or before their due dates. Neither the Company nor its subsidiaries has provided, or is required to provide, security to 19 26 any Pension Plan or to any ERISA Affiliate Plan pursuant to Section 401(a)(29) of the Code. (e) With respect to each Pension Plan which is a single-employer plan covered under Title IV of ERISA and each ERISA Affiliate Plan, as of the last day of the most recent plan year ended prior to the date hereof, the actuarily determined present value of all benefit liabilities (as determined on the basis of the actuarial assumptions contained in the plans' most recent actuarial valuation) did not exceed the then current value of the assets of such Plan, and (i) there has not been an adverse change in the financial condition of such Plan(s) which would have caused a material change in the funded status of such Plan(s) and (ii) there have not been amendments to such Plans that materially increase the present value of such benefit liabilities under such Plans. The withdrawal liability of the Company and the subsidiaries under each Plan which is a multiemployer plan to which the Company, any of its subsidiaries or an ERISA Affiliate has contributed during the preceding 12 months, determined as if a "complete withdrawal" (within the meaning of Section 4203 of ERISA) has occurred as of the date hereof would not be material. (f) Except as set forth on Schedule 4.7, neither the Company nor any of its subsidiaries has any obligations to provide retiree health and life benefits under any Plan, other than benefits mandated by Section 4980B of the Code. Schedule 4.7 also sets forth the amount of accrued post-retirement benefits as of the most recent valuation, and there have not been amendments or other changes that materially increase the amount of such accrued benefits since the date of such valuation. (g) To the knowledge of the Company, all Plans covering foreign Employees comply in all material respects with applicable local law. The Company and its subsidiaries have no material unfunded liabilities with respect to any Pension Plan which covers foreign Employees. (h) With respect to each Plan, the Company has provided or made available to Purchaser, if applicable, true and complete copies of: (s) all Plan documents and all amendments thereto; (t) all trust instruments and insurance contracts; (u) the last two Forms 5500 filed with the IRS; (v) the most recent actuarial report and financial statement; (w) the most recent summary plan description; (x) any and all forms filed with the PBGC; (y) the most recent determination letter issued by the IRS; and (z) any Forms 5310 or 5330 filed with the IRS. (i) Except as set forth on Schedule 4.7 or in the SEC Documents, the consummation of the transactions contemplated by this Agreement will not directly (or indirectly upon a termination of employment): (i) entitle any Employee to 20 27 severance pay, unemployment compensation or any other payment or (ii) accelerate the timing of any payment or the vesting of any rights or increase the amount of any compensation due any Employee. (j) The aggregate amount that will be payable upon and as a result solely of the consummation of the Offer to all officers, directors, employees and agents of the Company and of its subsidiaries solely by virtue of the change in control provisions of the Nonqualified Retirement Plans (as such term is defined in Schedule 4.7(a)) will not exceed the amount set forth on Schedule 4.7(j). 4.8 Taxes. The Company and its subsidiaries have timely filed all material federal, state, local and foreign tax returns and reports required to be filed by them through the date hereof and will timely file all material returns and reports required on or before the Effective Time. Such reports and returns are and will be true, correct and complete. The Company and its subsidiaries have paid and discharged all federal, state, local and material foreign taxes due from them, other than such taxes that are being contested in good faith by appropriate proceedings and are adequately reserved as shown in the audited consolidated balance sheet of the Company dated January 29, 1994 in the SEC Documents (the "Company Balance Sheet") and its most recent quarterly financial statements. Except as set forth in Schedule 4.8, neither the IRS nor any other taxing authority or agency, domestic or foreign, is now asserting or, to the best knowledge of the Company, threatening to assert against the Company or any of its subsidiaries any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. The accruals and reserves for taxes (including interest and penalties, if any, thereon) reflected in the Company Balance Sheet and the most recent quarterly financial statements are adequate in accordance with generally accepted accounting principles. The Company and its subsidiaries have withheld or collected and paid over to the appropriate governmental authorities or are properly holding for such payment all material taxes required by law to be withheld or collected. There are no liens for taxes upon the assets of the Company or any of its subsidiaries other than liens for current taxes not yet due and payable and liens for taxes that are being contested in good faith by appropriate proceedings. Neither the Company nor any of its subsidiaries has agreed to or is required to make any adjustment under Section 481(a) of the Code. Neither the Company nor any of its subsidiaries has made an election under Section 341(f) of the Code. Except for agreements relating to acquisitions or dispositions of businesses or equity securities thereof, there is no contract, agreement or intercompany account system in existence under which the Company or any of its subsidiaries has, or to the knowledge of the Company, may have in the future, an obligation to contribute to the payment of any 21 28 portion of a tax (or pay any amount calculated with reference to any portion of a tax) of any group of corporations of which the Company or its subsidiaries is or was a part. Except as set forth on Schedule 4.8, there are no agreements in effect to extend the period of limitations for the assessment or collection of any tax for which the Company or any of its subsidiaries may be liable. 4.9 Proxy Statement; Schedule 14D-9; Offer Documents. Neither the Schedule 14D-9 nor any of the information supplied by the Company or its subsidiaries in writing specifically for inclusion in the Offer Documents will, at the respective times the Schedule 14D-9 and the Offer Documents are filed with the Commission and first published, sent or given to the holders of Common Shares, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they are made, not misleading. The Proxy Statement will not, at the date the Proxy Statement is first mailed to the holders of Common Shares and at the time of the meeting, if any, of the holders of Common Shares held in connection with the Merger, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they are made, not misleading or necessary to correct any statements in any earlier communication with respect to the shareholders' meeting or the solicitation of proxies therefor which has become false or misleading. The Schedule 14D-9 complied and the Schedule 14D-9 and the Proxy Statement, if any, will comply as to form in all material respects with the applicable requirements of the Exchange Act and the rules and regulations thereunder. The Company will promptly correct any information provided by it in writing specifically for inclusion in the Offer Documents if and to the extent that such information will have become false or misleading in any material respect. The Company will promptly correct any statements in the Schedule 14D- 9 and the Proxy Statement that have become false or misleading and take all steps necessary to cause such Schedule 14D-9 and Proxy Statement as so corrected to be filed with the Commission and disseminated to holders of Common Shares, in each case as and to the extent required by applicable law. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Purchaser or any of their respective affiliates or representatives in writing specifically for inclusion in the Schedule 14D-9 or the Proxy Statement. 4.10 Vote Required. The affirmative vote of the holders of two-thirds of the Common Shares is the only vote of the holders of any class or series of the Company capital stock necessary to approve the Merger. 22 29 4.11 831 Proxy Statement. None of the information to be supplied by the Company for inclusion in the 831 Proxy Statement or in any amendments or supplements thereto which the Company states in writing is provided expressly for such inclusion will, at the time of the first mailing thereof or the 831 Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein made, in light of the circumstances under which they were made, not misleading. 4.12 Company Notice and Statement. The Company's notice of the 831 Meeting and the Company's statement contemplated by Section 1701.831(D)(2) of the GCL, and all amendments and supplements thereto, complied as to form in all material respects with the applicable requirements, if any, of the Exchange Act and the rules and regulations thereunder and did not, at the date such notice and statement were first mailed to the Company's shareholders and at the time of the 831 Meeting, contain any untrue statement of a material fact, except that no representation is made by the Company with respect to information supplied by Parent or Purchaser specifically for inclusion in such notice or statement which Parent or Purchaser stated in writing was provided expressly for such inclusion. 4.13 Fees. Except for the fees payable to James D. Wolfensohn Incorporated neither the Company nor any of its subsidiaries has paid or become obligated to pay any fee or commission to any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby. 4.14 Litigation. Except as disclosed in the SEC Documents prior to the date hereof, there are no civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings pending or, to the knowledge of the management of the Company, threatened against the Company or any of its subsidiaries that, alone or in the aggregate, are reasonably likely to have a Material Adverse Effect. 4.15 Compliance with Laws. Except as disclosed in the SEC Documents prior to the date hereof, the Company and each of its subsidiaries is in compliance with all applicable statutes, regulations, orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. 4.16 Rights Agreement. The Board of Directors of the Company has taken all necessary action under the Rights Agreement 23 30 so that none of the execution or delivery of this Agreement, the purchase of Common Shares pursuant to the Offer or the Merger will cause the Distribution Date (as defined in the Rights Agreement) to occur or the Rights to become exercisable. ARTICLE V COVENANTS 5.1 No Solicitation and Other Actions. (a) Except as set forth in subsection (b) of this Section 5.1, neither the Company nor any of its subsidiaries will, and the Company will direct and use all reasonable efforts to cause the respective officers, directors, employees, agents, advisors and other representatives of the Company or its subsidiaries not to, directly or indirectly, (i) encourage, solicit, participate in or initiate any proposals or offers from any person relating to any Competing Transaction (as hereinafter defined) or (ii) furnish to any other person any information or access to such information with respect to, or otherwise concerning, any Competing Transaction. The Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any third parties conducted heretofore with respect to any proposed Competing Transaction. The Company will promptly notify Parent and Purchaser in the event that any such inquiry, proposal or offer is received by, any such information is requested from or any such negotiation or discussion is sought to be initiated with the Company, and, with respect to any such proposal or offer, setting forth in reasonable detail the principal terms and conditions thereof. The Company will also promptly make available a copy of any acquiring person statement, as defined in Section 1701.831 of the GCL, delivered to the Company by any person (other than Parent, Purchaser or any affiliate of either thereof). (b) Notwithstanding anything contained in this Section 5.1 or any other provision of this Agreement, the Company will not be prohibited by this Agreement from (i) furnishing information to, or entering into discussions or negotiations with, any person or entity that makes an unsolicited proposal to acquire the Company pursuant to a merger, consolidation, share exchange, business combination, sale of all or substantially all the assets, tender or exchange offer or other similar transaction, if, and only to the extent (A) a Director Duty requires it to do so, and (B) that, prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, the Company receives from such person or entity an executed confidentiality agreement on terms not more favorable to such person or entity than the terms contained in the Confidentiality Agreement dated March 31, 1995 among the Company, Purchaser and Luxottica Group (the 24 31 "Confidentiality Agreement"); (ii) complying with Rule 14d-9 or Rule 14e-2 promulgated under the Exchange Act with regard to a tender or exchange offer; (iii) making any disclosure to the Company's shareholders if and to the extent of a Director Duty; or (iv) failing to make, modifying or amending its recommendations, consents or approvals referred to in Sections 1.2, 1.4 or 2.2 hereof in accordance with a Director Duty. As promptly as practicable after the receipt of any executed confidentiality agreement referred to in clause (i)(B) above, the Company will deliver a copy thereof to Parent and the Purchaser. 5.2 Interim Operations. During the period from the date of this Agreement to the time that the designees of Parent have been elected to, and constitute at least two-thirds of, the Board of Directors of the Company pursuant to Section 1.4 hereof (the "Interim Period"), except (i) as specifically contemplated by this Agreement, (ii) in connection with the Asset Purchase Agreement dated as of March 15, 1995 by and among Nine West Group Inc., Footwear Acquisition Corp. and the Company (the "Nine West Agreement"), or (iii) as otherwise approved by Parent in a writing which makes express reference to this Section 5.2: 5.2.1 Conduct of Business. The Company will, and will cause each of its subsidiaries to, conduct their respective businesses only in, and not take any action except in, the ordinary and usual course of business or in accordance with a Director Duty in the event of a circumstance covered by Section 5.1(b). The Company will use reasonable efforts to preserve substantially intact the business organization of the Company and each of its subsidiaries, to keep substantially available the services of its and their present officers and key employees, and to preserve substantially the goodwill of those having business relationships with it or its subsidiaries. 5.2.2 Articles and Code of Regulations. The Company will not, and will not permit any of its subsidiaries to, make or propose any change or amendment to any of their respective articles of incorporation or codes of regulations (or comparable governing instruments). 5.2.3 Capital Stock. The Company will not, and will not permit any of its subsidiaries to, issue or sell any shares of capital stock or any other securities of the Company or any of its subsidiaries or issue any securities convertible into or exchangeable for, or options, warrants to purchase, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or enter into any contract, understanding or arrangement with respect to the 25 32 issuance of, any shares of capital stock or any other securities of the Company or any of its subsidiaries or enter into any arrangement or contract with respect to the purchase or voting of shares of their capital stock, or adjust, split, combine, reclassify, redeem, purchase or otherwise acquire, directly or indirectly, any of their capital stock or other securities, or make any other changes in their capital structures; provided, however, that the Company may issue Common Shares as required by any Company Benefit Plan with an employee stock fund or employee stock ownership plan feature, consistent with applicable securities laws or the exercise of options outstanding as of the date of this Agreement and in accordance with the terms thereof. 5.2.4 Dividends. The Company will not, and will not permit any of its subsidiaries to, declare, set aside, pay or make any dividend or other distribution or payment (whether in cash, stock or property) with respect to, or purchase or redeem, any shares of the capital stock of the Company or any of its subsidiaries other than (a) regular quarterly cash dividends of $0.08 per Common Share and (b) dividends paid by its subsidiaries to the Company with respect to their capital stock. 5.2.5 Employee Plans; Compensation. Except as provided in Section 2.6 or 5.8 hereof or this Section 5.2.5 or as set forth on Schedule 4.7, and except for normal increases in the ordinary course of business consistent with past practice and that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company or pursuant to collective bargaining agreements as presently in effect, the Company will not, and will not permit any of its subsidiaries to, adopt or amend any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit agreements, trusts, plans, funds or other arrangements for the benefit or welfare of any director, officer or employee that increase in any manner the compensation, retirement, welfare or fringe benefits of any director, officer or employee or pay any benefit not required by any existing plan or arrangement (including without limitation the granting of stock options or stock appreciation rights) or take any action or grant any benefit not expressly required under the terms of any existing agreements, trusts, plans, funds or other such arrangements or enter into any contract, agreement, commitment or arrangement to 26 33 do any of the foregoing; provided, however, that, as soon as reasonably practicable, the Company will, subject to the prior approval of Parent, take all necessary actions to assure that all of the Company tax-qualified retirement plans which invest in or hold Common Shares permit the participants in such plans to direct the trustees of such plans in a timely and confidential manner whether to tender the Common Shares allocated to their accounts in such plans. 5.2.6 Loans and Investments. The Company and its subsidiaries will not, except in the ordinary course of business, (a) make any loans, advances or capital contributions to, or investments (other than intercompany accounts and short-term investments pursuant to customary cash management systems of the Company in the ordinary course of business and consistent with past practice) in, any other person other than such of the foregoing as are made by the Company to or in a wholly owned subsidiary of the Company, or (b) incur or assume any indebtedness for borrowed money; provided that the Company and its subsidiaries will not incur or assume any indebtedness for borrowed money which would increase materially the aggregate principal amount of indebtedness of the Company and its subsidiaries for borrowed money except to the extent required for working capital needs and, in any event, the Company and its subsidiaries may, with the prior written consent of Parent and Purchaser, which shall not be unreasonably withheld, refinance any existing indebtedness for borrowed money. 5.2.7 Board of Directors. The Company will not change the number of persons constituting the Board of Directors of the Company. 5.2.8 Litigation; Settlement of Claims. Except with respect to the Ohio Litigation (as hereinafter defined), neither the Company nor any of its subsidiaries will settle or compromise any material claims or litigation or, except in the ordinary course of business, modify, amend or terminate any of its material contracts or waive, release or assign any material rights or claims, or make any payment, direct or indirect, of any liability of the Company or any subsidiary before the same becomes due and payable in accordance with its terms. 5.2.9 Accounting Policies. Neither the Company nor any of its subsidiaries will take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice 27 34 with respect to accounting policies or procedures (including tax accounting policies and procedures). 5.2.10 Tax Elections. Neither the Company nor any of its subsidiaries will make any tax election or permit any insurance policy naming it as a beneficiary or a loss payable payee to be cancelled or terminated without notice to Parent and Purchaser, except in the ordinary course of business. 5.2.11 Business Combination. Neither the Company nor any of its subsidiaries will (i) make any acquisition of, or investment in, assets (in the nature of the acquisition of a business in its entirety) or stock of any other person or entity, (ii) merge or consolidate with any other person or (iii) sell, lease, encumber, or otherwise dispose of or transfer any assets constituting a line of business or material portion thereof. 5.2.12 No Amendment to Rights Agreement. The Company will not amend the Rights Agreement, except as expressly contemplated by this Agreement or in accordance with a Director Duty; provided that no such amendment shall adversely affect the benefit to be afforded to the Offer as a Permitted Offer (as defined in the Rights Agreement). 5.2.13 Shareholder Meetings. The Company will take no action unless compelled by legal process to call its annual meeting of shareholders or to call a special meeting of shareholders of the Company except in accordance with this Agreement unless and until this Agreement has been terminated in accordance with its terms or otherwise if required to do so by a Director Duty. 5.2.14 No Amendment to Nine West Agreement. The Company will not amend, waive any rights or grant any consent under, terminate or otherwise modify the Nine West Agreement (as in effect on the date hereof or as modified pursuant hereto). The Company will use all commercially reasonable efforts necessary to permit the transactions contemplated by the Nine West Agreement to be consummated for the purchase price specified in the Nine West Purchase Agreement. In the event that the closing under the Nine West Agreement occurs prior to the expiration of this covenant, the Company will not make any distribution to its shareholders of any of the purchase price received by the Company in accordance with such agreement. 28 35 5.2.15 Advertising Agreements. The Company will not replace the advertising services provided pursuant to the agreements set forth on Schedule 5.2.15 and will not renew any of such agreements. 5.3 Access and Information. Unless otherwise required in accordance with a Director Duty, from and after the date of this Agreement, the Company will (and will cause each of its subsidiaries to) afford to Parent and its subsidiaries' officers, directors, employees, agents, advisors and other representatives (including counsel, accountants and other professionals retained by Parent) such access during normal business hours throughout the period prior to the Effective Time to the Company's and its subsidiaries' books, records (including tax returns and work papers of the Company's independent auditors), properties, personnel and to such other information, will deliver written materials, and make copies of such written materials, in any case as Parent reasonably requests, upon reasonable notice and in such a manner as will not unreasonably interfere with the conduct of the business of the Company or any of its subsidiaries. Without limiting the generality of the foregoing, the information to which Parent and its subsidiaries' officers, directors, employees, agents, advisors and other representatives may have access in accordance with the preceding sentence include (a) copies of the portions applicable to each of the Company and its subsidiaries of all income and franchise tax returns and any amendments thereto filed by or on behalf of the Company or any of its subsidiaries or any members of a group of corporations including the Company or (to the extent available to the Company) any of its subsidiaries for the taxable years ending between 1988 and 1994, (b) the engagement letter between the Company and James D. Wolfensohn Incorporated pursuant to which fees may be payable in connection with the transactions contemplated hereby, and (c) the schedules to the Nine West Agreement. Subject to the requirements of law, Parent will hold such non-public information it may acquire in its investigation, whether so obtained before or after the execution hereof, in accordance with the Confidentiality Agreement. 5.4 Additional Agreements. Subject to the terms and conditions herein provided and except in accordance with a Director Duty in the event of a circumstance covered by Section 5.1(b), each of the parties hereto agrees to use its reasonable best efforts to take promptly, or cause to be taken, all actions and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable best efforts to obtain all necessary actions or non-actions, extensions, waivers, consents and approvals from all applicable Governmental Entities, effecting all necessary registrations and filings and obtaining any required contractual consents, subject, however, to any 29 36 required vote of the holders of Common Shares. If, at any time after the Effective Time, the Surviving Corporation considers or is advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either of the Constituent Corporations acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or otherwise to carry out the purposes of this Agreement, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of each of the Constituent Corporations or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Constituent Corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out the purposes of this Agreement. 5.5 State Takeover Statutes. Unless this Agreement is earlier terminated in accordance with its terms, the Company will, upon the request of Purchaser, take all reasonable steps to (a) exempt the Company, the Offer and the Merger from the requirements of the GCL, by action of the Company's Board of Directors or otherwise and (b) assist Purchaser in complying with, or in challenging the validity or applicability of, any state takeover law to the Offer or the Merger. 5.6 Proxy Statement. As soon as practicable after the consummation of the Offer, the Company will, if required by applicable law in order to consummate the Merger, prepare the Proxy Statement, file it with the Commission, and cause it to be mailed to all holders of record of Common Shares. Parent, Purchaser and the Company will cooperate with each other in the preparation of the Proxy Statement; without limiting the generality of the foregoing, Parent and Purchaser will furnish to the Company the information relating to Parent and Purchaser required by the Exchange Act to be set forth in the Proxy Statement. 5.7 Solicitation of Proxies for 831 Meeting. Parent and Purchaser will use their best efforts to prepare and file with the Commission a revised 831 Proxy Statement as contemplated by Section 1.3 as promptly as practicable but in no event later than five business days after the date hereof, respond to comments from the Commission, as appropriate, and cause it to be mailed to all holders of record of Common Shares. Parent, Purchaser and, subject to any Director Duty, the Company will cooperate with each other in the preparation of the 831 Proxy Statement; without limiting the generality of the foregoing, the 30 37 Company will furnish to Parent and Purchaser the information relating to the Company required by the Exchange Act to be set forth in the 831 Proxy Statement. 5.8 Indemnification, Insurance and Certain Other Employee-Related Matters. (a) For six years after the Effective Time, Parent will cause the Surviving Corporation to indemnify, defend and hold harmless the present and former officers, directors, employees and agents of the Company and its subsidiaries (each, an "Indemnified Party") after the Effective Time against all losses, claims, damages or liabilities (whether or not arising from any third party claims) (including and collectively, "Losses") arising out of actions or omissions occurring on, prior to or after the Effective Time (individually and collectively, "Losses") to the full extent provided under Ohio law and the Company's Code of Regulations in effect at the date hereof, including without limitation provisions relating to advances of expenses incurred in the defense of any action or suit (including without limitation attorneys' fees of counsel selected by the Indemnified Party reasonably satisfactory to the Surviving Corporation); provided that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under Ohio law and the Company's Code of Regulations will be made by independent counsel selected by the Indemnified Party and reasonably satisfactory to the Surviving Corporation; and provided further that in the event of any claim that is asserted or made within such six-year period, all rights to indemnification in respect of such claim will continue until final disposition thereof. Any Indemnified Party wishing to claim indemnification under this Section 5.7(a), upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify Parent thereof. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) Parent or the Surviving Corporation shall have the right from and after the purchase of Common Shares pursuant to the Offer, to assume the defense thereof and neither Parent nor the Surviving Corporation shall be liable to such Indemnified Party for any legal expenses of separate counsel or any other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof, except that such Indemnified Party shall have the right to employ and be reimbursed by Parent or the Surviving Corporation for the legal expenses of separate counsel if, under applicable standards of professional conduct (as advised by counsel to such Indemnified Party) a conflict of interest on any issue between such Indemnified Party and Parent or the Surviving Corporation, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) neither Parent nor the Surviving Corporation shall be liable for any settlement effected without Parent's prior written consent; and provided further that, except with respect to the advancement to an Indemnified Party of expenses incurred in the defense of any 31 38 action or suit in accordance with the terms of this Section (subject to reimbursement by such Indemnified Party in the event of a final determination by a court of competent jurisdiction that such advances were unlawful and must be reimbursed to Parent or the Surviving Corporation), neither Parent nor the Surviving Corporation shall have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. (b) On or before the business day which is no later than five business days before the expiration date of the Offer, Parent will cause there to be in full force and effect from and after the time Purchaser first accepts for payment Common Shares pursuant to the Offer for the Company and the Surviving Corporation a policy or policies of directors' and officers' liability insurance (the "New Coverage") covering those persons (the "Insured Persons") who are currently covered on the date of this Agreement by the Company's directors' and officers' liability insurance coverage (the "Current Coverage"), which New Coverage will (i) be in the same form and provide at least the same coverage and limits, containing terms which are no less advantageous to the Insured Persons than those provided in the Current Coverage, (ii) be effective so that there will not result any gaps or lapses in coverage with respect to matters occurring prior to the Effective Time, and (iii) with respect to the first $20,000,000 of coverage, be issued by an insurance carrier or carriers which are at least as highly rated by A.M. Best & Co. as Federal Insurance Company. From and after the date of this Agreement, and so long as Parent is in compliance with this clause (b), Parent shall have the sole right to seek the New Coverage and the Company shall not engage in such activity. The Company and/or the Surviving Corporation shall, regardless of whether or not the Merger is consummated, and for six years after the Effective Time maintain in effect the New Coverage; provided, however, that (A) the Surviving Corporation may substitute for the New Coverage such policy or policies providing at least the same coverage and containing terms which are no less advantageous to the Insured Persons if such substitution is effective so that there does not result any gaps or lapses in coverage with respect to matters occurring prior to the Effective Time, and (B) the insurance carrier or carriers issuing such policy or policies with respect to the first $20,000,000 of coverage are at least as highly rated by A.M. Best & Co. as Federal Insurance Company. Notwithstanding the foregoing, if by the date which is five business days prior to the expiration date of the Offer Parent has failed to cause the New Coverage to be in full force and effect as required in the first sentence of this clause (b), without waiving any other rights which it may have pursuant to this Agreement, the Company shall have the right to cause the New 32 39 Coverage to be in full force and effect as provided in the first sentence of this clause (b). (c) In the event the Surviving Corporation or any of its successors or assigns (i) reorganizes or, consolidates with or merges into any other person or entity and will not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person or entity, then, and in each such case, proper provision will be made so that the successors and assigns of the Surviving Corporation assume the obligations set forth in this Section 5.8. (d) For a period of two years following the Effective Time, Parent will cause the Surviving Corporation to continue the (i) employee benefit plans (including without limitation all employee benefit plans within the meaning of Section 3(3) of ERISA), practices and policies which provide employee benefits to officers, directors or employees of the Company or any of its subsidiaries, and (ii) subject to Section 4.7 hereof, compensation arrangements, programs and plans providing employee or executive officer compensation or benefits, to employees of the Company or any of its subsidiaries; provided, however, that (A) the Surviving Corporation may replace the Company's Economic Bridge Program (as such term is defined in Schedule 5.8(d)) with any other plan or plans providing, in the aggregate, for comparable compensation or benefits, recognizing all prior service for eligibility and vesting purposes of the officers, directors or employees with the Company and any of its subsidiaries as service under such Plan, (B) the Surviving Corporation may replace any plan or plans with another plan or plans providing, in the aggregate, for comparable compensation or benefits, as the case may be and recognizing all prior service of the officers, directors or employees with the Company and any of its subsidiaries as service for purposes of eligibility and vesting, but not for benefit accrual purposes, under any such plans; (C) it is understood that neither Parent nor the Surviving Corporation will have any obligation to continue or provide comparable benefits for (x) any stock option or other plan involving the issuance of securities of the Company or any other company, and (y) the Company's non-qualified deferred compensation plans (except to the extent of amounts deferred pursuant to such plan prior to the Effective Time, which amounts will be administered in accordance with the terms of said plan); and (D) the expiration of the two year period following the Effective Time will not affect any rights or obligations under any such plan, practice policy, arrangement or program. (e) Parent agrees that the Company will honor and, on and after the Effective Time, Parent will cause the Surviving Corporation to honor, without offset, deduction, counterclaims, interruptions or deferment (other than withholdings under 33 40 applicable law), all employment, severance, termination, consulting and retirement agreements or arrangements (including the Company's Economic Bridge Plan) to which the Company or any of its subsidiaries is presently a party, all of which are disclosed on Schedule 4.7. (f) Parent currently intends to cause the Surviving Corporation to offer employment immediately following the Effective Time to all employees of the Company and its subsidiaries on terms and conditions comparable to those presently in effect at the Company or its subsidiaries. It is understood and agreed that the foregoing shall not constitute any commitment, contract, understanding or guarantee (express or implied) on the part of the Parent or Surviving Corporation of a post-Effective Time employment relationship of any term or duration or on any terms other than those the Parent or the Surviving Corporation may establish; accepted employment with the Surviving Corporation is "at will" and may be terminated by the Surviving Corporation at any time for any reason (subject to any legally binding agreement or an applicable collective bargaining agreement or any arrangement or commitment identified on Schedule 4.7). 5.9 Notification of Certain Matters. The Company will give prompt notice to Parent and Purchaser, and Parent and Purchaser will give prompt notice to the Company of (a) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause (i) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect or (ii) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied in any material respect, and (b) any failure of the Company or Parent and Purchaser, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.9 will not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 5.10 Compliance with Antitrust Laws. Each of Parent and the Company will use its best efforts to resolve such objections, if any, which may be asserted with respect to the Offer or the Merger under the antitrust laws. In the event a suit is instituted challenging the Offer or the Merger as violative of the antitrust laws, each of Parent and the Company will use their best efforts to resist or resolve such suit. Parent and the Company will use their best efforts to take such action as may be required (a) by the Antitrust Division of the Department of Justice, the Federal Trade Commission, or any foreign government or agency thereof, in order to resolve such objections as any of them may have to the Offer or the Merger under applicable antitrust laws, or (b) by any federal or state 34 41 court of the United States or any comparable court of Canada or any province thereof, in any suit brought by a private party or Governmental Entity challenging the Offer or the Merger as violative of the antitrust laws, in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order which has the effect of preventing the consummation of the Offer or the Merger. 5.11 Publicity. The initial press release announcing this Agreement will be a joint press release, to be issued only with the prior consent of each party, and thereafter the Company and Parent will consult with each other prior to issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any Governmental Entity or with any national securities exchange with respect thereto. 5.12 Disposition of Litigation. Each of Parent, Purchaser and the Company agree, promptly, and in no event later than two business days after the amendment to the Offer contemplated hereby (unless this Agreement has been earlier terminated), to use its best efforts to obtain a dismissal without prejudice of Luxottica Group S.p.A., et al. v. The United States Shoe Corporation, et al., Civil Action No. C-2-95-244 (the "Ohio Litigation") with each party bearing its own costs and attorneys' fees therefor. 5.13 Proxy Contests. Parent and Purchaser hereby agree to withdraw and rescind on behalf of themselves and their affiliates and shall promptly cause to be withdrawn and rescinded all notices and the Schedule 14A filed with the Commission, in each case, relating to the calling of a special meeting for the removal of the directors of the Company. ARTICLE VI CONDITIONS 6.1 Conditions. The obligations of Parent, Purchaser and the Company to consummate the Merger are subject to the satisfaction, at or before the Effective Time, of each of the following conditions, as applicable thereto: 6.1.1 Shareholder Approval. The holders of Common Shares will have duly approved the Merger and adopted this Agreement, if and as required by applicable law. 6.1.2 Purchase of Shares. Purchaser will have accepted for payment and purchased all Common Shares validly tendered and not withdrawn pursuant to the 35 42 Offer; provided that this condition will be deemed to have been satisfied if Purchaser fails to accept for payment or pay for Common Shares pursuant to the Offer in breach of the terms hereof or thereof. 6.1.3 Injunctions; Illegality. The consummation of the Merger will not be prohibited by any order, injunction, decree or ruling of a court of competent jurisdiction or any Governmental Entity (each party agreeing to use its best efforts to rectify any such occurrence), and there will not have been any action taken or any statute, rule or regulation enacted, promulgated or deemed applicable to the Merger by any Governmental Entity which would prevent the consummation of the Merger. ARTICLE VII MISCELLANEOUS 7.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned, notwithstanding any prior approval hereof or of the Merger by the holders of the Common Shares, (a) by the mutual consent of the Boards of Directors of Parent, Purchaser and (by the affirmative vote of a majority of the Continuing Directors) the Company; (b) by Parent and Purchaser, on the one hand, or the Company, on the other hand, if the Offer expires or is terminated or withdrawn without any Common Shares being purchased thereunder; provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(b) will not be available to any party who is (or would, by virtue of such termination, be) in breach of this Agreement; (c) by the Company, if Parent or Purchaser breaches any of the covenants contained in this Agreement, except where any such breaches (i) would not, individually or in the aggregate, materially impair or delay the ability of Purchaser to consummate the Offer or Parent, Purchaser or the Company to effect the Merger, or (ii) have been caused by or result from a breach by the Company of any covenant in this Agreement; (d) by either Parent and Purchaser, on the one hand, or the Company (by the affirmative vote of a majority of the Continuing Directors), on the other hand, if the Merger is not consummated prior to the sixtieth calendar day following the expiration date of the Offer; provided, however, that the right to terminate this Agreement under this Section 7.1(d) will not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (e) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if either one (or any permitted assignee hereunder) is precluded by an order or injunction (other than an order or injunction issued 36 43 on a preliminary basis) of a court of competent jurisdiction from consummating the Merger and all means of appeal and all appeals from such order or injunction have been finally exhausted; and (f) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if the Board of Directors of the Company (i) shall have withdrawn its recommendation, consent to or approval of the Offer, the Merger or this Agreement, or (ii) determined to recommend to holders of the Common Shares or approve a Competing Transaction in the exercise of its Director Duty; provided, however, that the Company shall notify Parent and Purchaser promptly of any determination by its Board of Directors to recommend such Competing Transaction to the holders of the Common Shares or to approve such Competing Transaction, which notice shall in any such event be given: (A) not less than 24 hours prior to the Company's termination of this Agreement under this clause (ii); and (B) not later than substantially simultaneously with the first public announcement of such recommendation or approval. In the event of any termination and abandonment pursuant to this Section 7.1, no party hereto (or any of its directors or officers) will have any liability or further obligation to any other party to this Agreement, except for obligations under Section 7.10 and pursuant to the Confidentiality Agreement and except that nothing herein will relieve any party from liability for any breach of this Agreement. 7.2 Non-Survival of Representations, Warranties and Agreements. The representations and warranties or agreements in this Agreement will terminate at the Effective Time or the earlier termination of this Agreement pursuant to Section 7.1, as the case may be; provided, however, that if the Merger is consummated, Sections 2.4, 2.6 and 5.8 hereof will survive the Effective Time to the extent contemplated by such Sections; and provided further, that Sections 1.2(a), (f) and (g), 4.16, 5.2.12 and 7.10 will in all events survive any termination of this Agreement. 7.3 Waiver and Amendment. Subject to the applicable provisions of the GCL, any provision of this Agreement may be waived at any time by the party which is, or whose shareholders are, entitled to the benefits thereof, and this Agreement may be amended or supplemented at any time, provided that no amendment will be made after any shareholder approval of the Merger which reduces the Merger Price without further shareholder approval, and provided further that any action by the Company to waive or amend any provision of this Agreement will require the approval of a majority of the Continuing Directors. No such waiver, amendment or supplement will be effective unless in a writing which makes express reference to this Section 7.3 and is signed by the party or parties sought to be bound thereby. 7.4 Entire Agreement. This Agreement, including all Schedules and Exhibits hereto, contains the entire agreement 37 44 among Parent, Purchaser and the Company with respect to the Offer, the Merger and the other transactions contemplated hereby and thereby, and supersedes all prior agreements among Parent, Purchaser, and the Company with respect to such matters, except the Confidentiality Agreement, which will remain in full force and effect throughout the Interim Period except for paragraph 5 thereof which is superseded hereby. 7.5 Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of Ohio applicable to contracts made and to be performed in that State. 7.6 Interpretation. The descriptive headings contained herein are for convenience and reference only and will not affect in any way the meaning or interpretation of this Agreement. 7.7 Notices. All notices and other communications hereunder will be in writing and will be given (and will be deemed to have been duly given upon receipt) by delivery in person, by telecopy, cable, telegram, telex or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Company to: The United States Shoe Corporation One Eastwood Drive Cincinnati, Ohio 45227-1197 Attention: James J. Crowe, Esq. Telecopier: (513) 527-7880 With copies to: Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attention: William F. Henze II Telecopier: (212) 755-7306 If to Parent or Purchaser to: Avant-Garde Optics, Inc. 44 Harbor Park Drive Port Washington, New York 11050 Attention: Michael A. Boxer, Esq. Telecopier: (516) 484-9010 With a copy to: Winston & Strawn 175 Water Street New York, New York 10038 Attention: Jonathan Goldstein, Esq. Telecopier: (212) 858-4700 38 45 or to such other address as any party may have furnished to the other parties in writing in accordance herewith. 7.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement. 7.9 Assignment. Purchaser will have the right (a) to assign to Parent or any other direct or indirect wholly owned subsidiary of Luxottica Group any and all rights and obligations of Purchaser under this Agreement, including without limitation the right to substitute in its place Parent or such a subsidiary as one of the constituent corporations in the Merger (such subsidiary assuming all of the obligations of Purchaser in connection with the Merger), provided that any such assignment will not relieve Parent or Purchaser from any of its obligations hereunder, and (b) to transfer to Parent or to any other direct or indirect wholly owned subsidiary of Luxottica Group the right to purchase Common Shares tendered pursuant to the Offer, provided that any such transfer will not relieve Purchaser from any of its obligations hereunder. 7.10 Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Offer, this Agreement and the transactions contemplated hereby and thereby shall be paid by the party incurring such expense. 7.11 Obligation of Parent. Whenever this Agreement requires Purchaser or the Surviving Corporation to take any action, such requirement will be deemed to include an undertaking on the part of Parent to cause Purchaser or the Surviving Corporation to take such action. 7.12 Enforcement of the Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in the United States District Court for the Southern District of Ohio, this being in addition to any other remedy to which they are entitled at law or in equity. 7.13 Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate" means a person that, directly or indirectly, through one or more intermediaries, 39 46 controls, is controlled by, or is under common control with, the first mentioned person; (b) "beneficial owner" with respect to any of the Common Shares means, unless otherwise defined herein, a person who will be deemed to be the beneficial owner of such shares (i) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options, or otherwise or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or associates, or any person with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; (c) "Competing Transaction" means any of the following involving the Company or any of it subsidiaries: (i) any merger, consolidation, share exchange, business combination or other similar transaction; (ii) any sale, lease, exchange, transfer or other disposition of all or a material portion of the assets of the Company and its subsidiaries, taken as a whole, in a single transaction or series of transactions (except in respect of the sale of the Company's Footwear Group to Footwear Acquisition Corp., pursuant to the Nine West Agreement); (iii) any tender offer or exchange offer for 50% or more of the shares of capital stock of the Company or the filing of a registration statement under the Securities Act of 1933 in connection with any such exchange offer; (d) "control" (including the terms "controlled", "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise; and 40 47 (e) "subsidiary" or "subsidiaries" of the Company, Parent or Purchaser, the Surviving Corporation or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, Parent, Purchaser, Surviving Corporation or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. 7.14 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are consummated to the extent possible. 41 48 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. AVANT-GARDE OPTICS, INC. By: /s/ Claudio Del Vecchio ------------------------------ Name: Claudio Del Vecchio LUXOTTICA ACQUISITION CORP. By: /s/ Claudio Del Vecchio ------------------------------ Name: Claudio Del Vecchio THE UNITED STATES SHOE CORPORATION By: /s/ K. Brent Somers ------------------------------ Name: K. Brent Somers 49 Annex A CONDITIONS OF THE OFFER. Notwithstanding any other provision of the Offer, the Purchaser shall not be required to accept for payment, purchase or pay for any Common Shares tendered, and (subject to the terms of the Merger Agreement) may postpone the acceptance for payment, the purchase of, and/or the payment for, Common Shares, and/or may amend or terminate the Offer if (i) the number of Common Shares validly tendered and not withdrawn prior to the expiration date for the Offer, when added to the Common Shares beneficially owned by the Purchaser and its affiliates, constitutes less than two-thirds of the Common Shares outstanding on a fully diluted basis (the "Minimum Share Condition"); (ii) the acquisition of Common Shares pursuant to the Offer by the Purchaser shall not have been authorized by the shareholders of the Company pursuant to Section 1701.831 of the Ohio Revised Code ("Section 831") at a special meeting of the holders of the Common Shares duly and validly called and held in accordance with Section 831 or the Purchaser is not satisfied, in its sole discretion, that Section 831 is invalid or inapplicable to the acquisition of Common Shares pursuant to the Offer (the "Control Share Condition"); or (iii) at any time before acceptance for payment for any such Common Shares (whether or not any Common Shares have theretofor been accepted for payment or paid for pursuant to the Offer), any of the following shall occur: (a) there shall have been instituted or be pending any action or proceeding before any court or governmental, regulatory or administrative agency, authority or commission, domestic or foreign, in each case that has a reasonable likelihood of success, which (i) challenges or seeks to make illegal, materially delay or otherwise directly or indirectly restrain or prohibit the Offer or the Merger or the acquisition by the Purchaser of any Common Shares, or seeks to obtain any material damages with respect to the transactions contemplated by the Merger Agreement; (ii) seeks to prohibit or materially limit the ownership or operation by Luxottica Group, the Purchaser or their affiliates of any material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or to compel Luxottica Group or the Purchaser or any of their affiliates to dispose of or hold separate all or any material portion of the business or assets of the Company and its subsidiaries, taken as a whole, as a result of the transactions contemplated by the Merger Agreement; (iii) seeks to impose material limitations on the ability of Luxottica Group or the Purchaser or any of their affiliates to exercise full rights of ownership of the Common Shares, including without limitation the right to vote any Common Shares purchased by them on all matters properly presented A-1 50 to the shareholders of the Company; or (iv) seeks to prevent Luxottica Group or the Purchaser or any of their affiliates from acquiring, or to require divestiture by Luxottica Group or the Purchaser or any of their affiliates of, any Common Shares; or (b) there shall have been any action taken, or any statute, rule, regulation, judgment, administrative interpretation, order or injunction enacted, promulgated, entered, enforced or deemed applicable to the Company or any affiliate of the Company, or to the Offer or the Merger, which is reasonably expected to result in any of the consequences referred to in clauses (i) through (iv) of paragraph (a) above; or (c) there shall have occurred and be continuing (i) any general suspension of, or limitation on prices for, trading in securities on any national securities exchange or in the over-the-counter market in the United States, (ii) the declaration of any banking moratorium or any suspension of payments in respect of banks or any limitation (whether or not mandatory) on the extension of credit by lending institutions in the United States, (iii) the commencement of a war, material armed hostilities or any other material international or national calamity involving the United States, or (iv) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof; or (d) any Person, entity or "group" (as such term is used in Section 13(d)(3) of the Exchange Act) other than Luxottica Group or any of its affiliates shall have become the beneficial owner (as that term is used in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding Common Shares; or (e) either (i) the Company shall have breached or failed to comply in any material respect with any of its obligations under the Merger Agreement; or (ii) any representation or warranty of the Company contained in the Merger Agreement, which is qualified as to materiality, shall not be true and correct, or any such representation or warranty that is not so qualified, shall not be true and correct in any respect which is reasonably likely to have a material adverse effect on the business, operations, properties, assets, liabilities or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole, in each case either as of when made or as of such expiration or proposed termination of the Offer except as to any representation or warranty which speaks as to a specific date, which must be untrue or incorrect in the foregoing respects as of such specific date; or A-2 51 (f) the Merger Agreement shall have been terminated pursuant to its terms; or (g) the Board of Directors of the Company shall have amended, modified or withdrawn its (i) approval of the transactions contemplated by the Merger Agreement in a manner satisfying the requirements of paragraph 2(A) of Article Seventh of the Articles of Incorporation of the Company, (ii) determination that the Offer and the Merger are fair to and in the best interests of the Company and its shareholders, (iii) approval of the Offer, the Merger Agreement and the Merger, (iv) recommendation that the holders of Common Shares authorize the purchase of Common Shares by the Purchaser for purposes of Section 831, (v) recommendation of acceptance of the Offer, the tender of Common Shares pursuant to the Offer and approval and adoption of this Agreement and the Merger by the holders of Common Shares, (vi) actions taken as contemplated by Section 1704.02(A) of the Ohio Revised Code in order to make Chapter 1704 of the Ohio Revised Code inapplicable to the Merger, or (vii) determination that the Offer is a Permitted Offer (as defined in the Rights Agreement) for purposes of the Rights Agreement (the "Recommendation") or shall have failed to publicly reconfirm such Recommendation upon the request of Luxottica Group or the Purchaser, which is reasonable in the circumstances, or shall have approved or recommended any of the following involving the Company or any of it subsidiaries: (A) any merger, consolidation, share exchange, business combination or other similar transaction; (B) any sale, lease, exchange, transfer or other disposition of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, in a single transaction or series of transactions (except in respect of the sale of the Company's Footwear Group to Footwear Acquisition Corp., pursuant to the Asset Purchase Agreement, dated as of March 15, 1995, among the Company, Nine West Group Inc. and Footwear Acquisition Corp.); or (C) any tender offer or exchange offer for 50% or more of the shares of capital stock of the Company or the filing of a registration statement under the Securities Act of 1933 in connection with any such exchange offer; or shall have resolved to do any of the foregoing; which, in the good faith sole judgment of Luxottica Group or the Purchaser, in any such case and regardless of the circumstances giving rise to any such condition, makes it inadvisable to proceed with the Offer or such acceptance for payment or purchase of or payment for any of the Shares. The foregoing conditions are for the sole benefit of Luxottica Group and the Purchaser. The foregoing conditions, other than the Minimum Share Condition and the Control Share A-3 52 Condition, may be waived by the Purchaser in whole or in part at any time and from time to time in its sole judgment. The failure of Luxottica Group or the Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. A-4 EX-11 5 U.S. SHOE CORP. 10-K405 EXHIBIT 11 1 EXHIBIT 11 THE UNITED STATES SHOE CORPORATION AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE FOR THE YEARS ENDED JANUARY 28, 1995, JANUARY 29, 1994 AND JANUARY 30, 1993 --------------------------------------------------------------------------- (thousands except per share amounts)
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended January 28, January 29, January 30, 1995 1994 1993 ----------- ----------- ----------- Weighted average number of common shares outstanding during the year 46,204 45,746 45,489 -------- -------- -------- Common equivalent shares outstanding (a) 432 -- 33 -------- -------- -------- Average common and common equivalent shares outstanding 46,636 45,746 45,522 ======== ======== ======== Net earnings (loss) $ 16,408 $(15,834) $ 4,368 ======== ======== ======== Net earnings (loss) per common and common equivalent share - $ 0.35 $ (0.35) $ 0.10 ======== ======== ========
Fully diluted earnings per share are not significantly different from primary earnings per share. Notes: (a) Common equivalent shares are shares issuable upon the exercise of stock options, when dilutive, net of shares assumed to have been purchased with the proceeds. EX-21 6 U.S. SHOE CORP. 10-K405 EXHIBIT 21 1 EXHIBIT 21 List of Subsidiaries The company's subsidiaries (all wholly-owned) as of April 20, 1995 were:
Name Place of Incorporation ---- ---------------------- The Shops for Pappagallo, Inc. Ohio Community Urban Redevelopment of Duck Creek, Inc. Ohio LensCrafters Canada, Inc. Ontario LensCrafters International, Inc. Ohio Eyexam2000 of California, Inc. California LensCrafters E.C. Corporation Ohio LensCrafters, Inc. Ohio U.S. Shoe Far East, Ltd. Hong Kong WSR Far East, Ltd. Hong Kong
The company has other subsidiaries not listed above. Such unlisted subsidiaries, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 7 U.S. SHOE CORP. 10-K405 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the company's previously filed Registration Statement File Nos. 33-55759, 33-54285, 33-6501, 2-86625, 2-60244, 33-20051, 33-21106, 33-44514 and 33-51272. ARTHUR ANDERSEN LLP Cincinnati, Ohio, April 26, 1995 EX-27 8 U.S. SHOE CORP. 10-K405 EXHIBIT 27
5 This schedule contains summary financial information extracted from the financial statements as of and for the year ended January 28, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JAN-28-1995 JAN-30-1994 JAN-28-1995 114,553 26,007 98,457 5,207 356,198 669,414 857,491 512,345 1,074,995 429,041 88,820 85,103 0 0 385,417 1,074,995 2,598,308 2,598,308 1,384,945 1,384,945 1,172,741 0 11,836 28,786 12,378 16,408 0 0 0 16,408 .35 .35
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