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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________ to ______________
Commission File Number 0-24026
MAXWELL SHOE COMPANY INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2599205
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
101 Sprague Street
P.O. Box 37
Readville (Boston), MA 02137
(Address of principal executive offices) (Zip code)
(617) 364-5090
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- ---------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock,
par value $.01 per share
(Title of class)
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]
The aggregate market value of the Class A Common Stock of the
registrant held by non-affiliates of the registrant on January 21, 1999 based on
the closing price of the Class A Common Stock on the NASDAQ National Market
System on such date was $101,702,582.
The number of shares of the registrant's Class A Common Stock
outstanding at January 21, 1999 was 8,795,899 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1999 Annual
Stockholders Meeting are incorporated by reference into Part III herein.
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MAXWELL SHOE COMPANY INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended October 31, 1998
Caption Page
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PART I
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Item 1. Business.................................................. 3
Item 2. Properties................................................ 16
Item 3. Legal Proceedings......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....... 16
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 17
Item 6. Selected Financial Data................................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 19
Item 8. Consolidated Financial Statements and Supplementary Data.. 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 39
PART III
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Item 10. Directors and Executive Officers of the Registrant........ 39
Item 11. Executive Compensation.................................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 39
Item 13. Certain Relationships and Related Transactions............ 39
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 40
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PART I
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Item I. Business
General
All references herein to the "Company" mean Maxwell Shoe Company Inc., a
Delaware corporation, and its predecessors and its consolidated subsidiaries,
unless the context otherwise requires. The Company's fiscal year ends on
October 31; all references herein to a fiscal year mean the twelve-month period
ended on the October 31 of the particular year.
The Company designs, develops and markets casual and dress footwear for
women and children under multiple brand names, each of which is targeted to a
distinct segment of the footwear market. The Company offers casual and dress
footwear for women in the moderately priced market segment under the Mootsies
Tootsies brand name, in the upper moderately priced market segment under the Sam
& Libby brand name and in the better market segment under the Jones New York and
Jones New York Sport brand names. The Company also sells moderately priced and
upper moderately priced children's footwear under both the Mootsies Tootsies and
Sam & Libby brand names. The Company designs and develops private label
footwear for selected retailers under the retailers' own brand names. The
Company has licensed the J.G. Hook tradename to source and develop private label
products for retailers who require brand identification. The Company has
licensed the Dockers/(R)/ Khakis brand name to increase its brand offerings in
the upper moderate and better industry segment. In addition, the Company sells
footwear closeouts that it has purchased at discounts from other manufacturers.
Since 1987, when the Company first focused on its branded footwear
strategy, the Company has increased net sales every year and consistently
maintained profitability. In fiscal 1998, the Company's net sales and net
income increased 23.6% and 46.9%, respectively, as compared to fiscal 1997. The
Company's financial success has been largely a result of its ability to design,
develop and market footwear with contemporary styles at affordable prices.
Retail prices for the Company's footwear generally range from $20 to $70 for the
Mootsies Tootsies and Sam & Libby brand offerings and from $40 to $90 for the
Jones New York Sport and Jones New York product lines. Substantially all of the
Company's products are manufactured overseas by independent factories selected
by the Company and its overseas agents. The Company sells its footwear primarily
to department stores and specialty stores in the United States as well as
through national catalog retailers and cable television consumer shopping
channels.
The Company's strategy is to leverage its existing competitive strengths,
including but not limited to its strong manufacturing relationships and focused
brand management and to increase profitably its share of the women's and
children's footwear markets by further strengthening its existing footwear
brands and its private label business and expanding its brand portfolio through
a combination of acquisition, licensing and development of additional brands in
the future.
Through advertising, promotion and packaging, the Company has built
consumer and retail recognition for the Mootsies Tootsies and Mootsies Kids
brand names, and management believes that Mootsies Tootsies is currently one of
the largest selling brands in the moderately priced segment of the women's
casual and dress footwear industry. In 1994 and 1995, the Company expanded its
branded product portfolio through the introduction of the Jones New York and
Jones New York Sport footwear brands. Both product lines allow the Company to
capitalize on the strong brand name recognition and reputation for style,
quality and value enjoyed by Jones New York in the better segments of the
women's apparel industry. The Company continued its brand expansion through the
acquisition of the Sam & Libby worldwide trademarks and tradenames in 1996. The
Company has re-positioned the Sam & Libby brand from its prior focus on the
junior women's market segment to the late 20's, career-oriented women market
segment, and management believes that sales under the Sam & Libby lines should
increase significantly in the future upon completion of this brand re-
positioning and the introduction of additional products under such brand name.
The Company believes that there is a growing demand among retailers for footwear
to market on a first cost basis with brand names. The Company licensed the J.G.
Hook name in 1997 to sell as a first cost product for retailers who require
brand identification. In late 1998, the Company licensed the Dockers/(R)/
Khakis footwear brand name for women, in order to increase its brand offerings
in the upper moderate and better industry segments.
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The Company competes primarily in the women's casual and dress footwear
market, which emphasizes contemporary fashion, quality and value. The Company
believes that there has been a shift in the "moderate" segment of the women's
casual and dress footwear market toward value priced footwear. The Company has
positioned its Mootsies Tootsies line to take advantage of this shift by
offering value priced footwear that reflects current fashion trends. The Sam &
Libby brand is directed to appeal to the fashion forward customers in the upper
moderate price range that has been less affected by this shift. The Company
plans for Dockers/(R)/ Khakis footwear for women to compete in the upper
moderate and better industry segments. The initial shipments for Dockers/(R)/
Khakis footwear for women are planned for the fall 1999 retail-selling season.
The Company believes that the better segment of this market has not been as
affected by this shift due to a continuing interest in higher quality and brand
name products, such as the Company's Jones New York and Jones New York Sport
brands.
The Company, originally a closeout footwear business founded in 1949, was
incorporated as Maxwell Shoe Company Inc. in Massachusetts in 1976. During the
late 1980s, the Company shifted its focus to designing, developing and marketing
full lines of branded women's footwear. In order to implement this new
strategy, the Company hired experienced senior management to strengthen its
organizational infrastructure, developed cost-efficient product sourcing,
implemented an advertising program and improved internal systems. In March
1994, Maxwell Shoe Company Inc. became a Delaware incorporated company.
Business Strategy
The Company's strategy is to leverage its existing competitive strengths
to increase profitably, its share of the women's and children's footwear markets
by further developing its existing footwear brands and its private label
business and expanding its brand portfolio through a combination of acquisition,
licensing and development of additional brands in the future.
Competitive Strengths. The Company has developed certain core operating
---------------------
strengths which have been significant sources of growth to date and which
management believes will help the Company achieve further growth in the future.
Such operating strengths include:
. Portfolio of Established Brands. Through advertising and promotion, the
Company has built consumer and retail recognition for its Mootsies
Tootsies and Mootsies Kids brand names and has established Mootsies
Tootsies as one of the largest selling brands in the moderately priced
segment of the women's casual and dress footwear industry. The Company
continued its brand expansion through the acquisition of the Sam & Libby
worldwide trademarks and tradenames in 1996. The Company offers its
Jones New York and Jones New York Sport footwear lines with the intention
of capitalizing on the strong brand name recognition and reputation for
style, quality and value enjoyed by the Jones New York and Jones New York
Sport in the better segments of the women's apparel industry. The
Company licensed the Dockers/(R)/ Khakis footwear for women brand in
order to increase its brand offering in the upper moderate and better
industry segments. The Company has also licensed the J. G. Hook name to
sell as a first cost product for retailers who require brand
identification. The Company continues to seek licensing or acquisition
opportunities in order to expand its current portfolio of brands.
. Strong Manufacturing Relationships. The Company believes that one of the
contributing elements of its growth has been its strong relationships
with overseas buying agents and manufacturers capable of meeting the
Company's requirements for quality and price in a timely fashion. The
Company's increased use of China-based manufacturing facilities has
resulted in lower manufacturing costs while continuing to meet the
Company's high quality standards. Universal Max Trading, the Company's
principal buying agent in The Peoples Republic of China ("China"), has
agreed to exclusively source and monitor product manufacturing for the
Company in China. Universal Max Trading has a dedicated manufacturing
facility and a recently opened tanning facility in China which
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will further improve the Company's product development and sourcing
capabilities. The Company continues to seek to develop other exclusive
relationships with buying agents whose access to numerous manufacturing
facilities will enable the Company to maximize its sourcing flexibility.
. Emphasis on High Volume Moderate Through Better Segments of the Footwear
Market. The Company believes that its strategy of focusing on the high
volume moderate through better segments of the women's and children's
footwear markets and of providing value-priced products reduces the risks
associated with changing fashion trends. The Company also attempts to
reduce the risks of changing fashion trends and product acceptance
through market research and development and testing of a broad range of
styles prior to placing orders with its manufacturers. The Company
believes that this approach mitigates the risks of carrying obsolete
inventory and poor retail sell-through.
. Comprehensive Customer Relationships. The Company supports its customers
by maintaining an in-stock inventory position for selected styles in
order to minimize the time necessary to fill customers' orders. In
addition, the Company provides its customers with electronic data
interchange (EDI) capability (see "--Distribution"), co-op advertising,
point of sale displays and assistance in evaluating which products are
likely to appeal to their retail customers. Management believes that the
Company has earned a strong reputation among its customers by
consistently providing quality products at attractive prices. In return,
the Company's customers provide certain information to the Company on
current retail selling trends which helps the Company identify and
interpret fashion trends.
Growth Strategy. By leveraging the above competitive strengths, the Company
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has pursued and will continue to pursue growth through various initiatives,
including, but not limited to, the following:
. Growing the Company's Existing Brands. Management seeks to increase sales
of the Company's products under each of the Company's existing brands by:
(i) offering a broader assortment of products and styles under such brand
names, (ii) further penetrating the Company's existing retail channels
through increased display area and additional stores, (iii) developing
new retail channel relationships appropriate to the Company's product
offerings and (iv) increasing the use of advertising to strengthen brand
awareness among retailers and consumers.
. Increasing the Company's Private Label Business. The Company entered the
private label footwear market in order to leverage its offshore
manufacturing experience and existing infrastructure by providing
selected retailers with private label products for sale under their own
house brands. This business enables the Company to sell products to new
customers as well as strengthening the Company's relationship with
certain of its existing customers. The Company believes that there is a
growing demand among retailers for footwear to market under their own
brand names, and the Company has licensed the J. G. Hook name to sell as
a first cost product for retailers who require brand identification.
. Adding Brands to the Company's Portfolio. Management believes that the
footwear industry segments in which the Company operates remain highly
fragmented, although consolidation has been accelerating recently as
fewer companies control more brands and retailers generally purchase
footwear merchandise from a reduced number of manufacturers. The Company
intends to continue capitalizing on this ongoing consolidation by
expanding its existing brand portfolio which will appeal to different
market segments of the footwear industry. Management believes that
creating, acquiring or licensing additional brands will enable the
Company to increase its sales by satisfying the needs of a broader range
of customers. The Company intends to sell these new brands through the
Company's existing customers as well as new customers which the Company
seeks to develop. The acquisition of the Sam & Libby brand and the
licensing of the Jones New York and Dockers/(R)/ Khakis brands represent
the Company's most recent efforts to expand into new market segments. The
Company intends to continue to explore entering other market segments
through acquisition or licensing of additional brands. The Company
believes that it is well positioned to continue pursuing this strategy
due to its relatively strong and unencumbered balance sheet.
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Product Lines
The Company's products consist of eight lines of brand name footwear as
well as private label footwear for selected retailers for sale under their own
house brands. Each of the branded product lines is targeted to appeal to a
different market segment of the footwear industry. The characteristics of the
product lines sold by the Company are summarized in the following table:
<TABLE>
<CAPTION>
General Retail
Price Range
----------------
Style Industry Segment Shoes Boots
------------ ------------------- ------- -------
<S> <C> <C> <C> <C>
Mootsies Tootsies........................ Contemporary Moderate $25-$40 $35-$55
Mootsies Kids............................ Contemporary Moderate $20-$25 $30-$40
Sam & Libby and Just Libby............... Updated Upper Moderate $35-$50 $45-$70
Sam & Libby Kids......................... Updated Upper Moderate $25-$45 $35-$55
Dockers/(R)/ Khaki....................... Casual Upper Moderate-Better $40-$65 -
Jones New York........................... Contemporary Better $65-$90 -
Jones New York Sport..................... Classic Casual Better $40-$75 $60-$85
J.G. Hook Private Label.................. All Budget-Moderate $12-$20 $25-$30
</TABLE>
Mootsies Tootsies
The Mootsies Tootsies brand line provides consumers with a wide selection
of footwear with contemporary styles and quality at affordable prices primarily
targeted at women ages 18 to 34. The line includes approximately 30 new styles
each spring and fall season, as well as a number of core styles that are updated
periodically based on fashion trends. The line principally consists of casual
shoes, dress shoes, boots and sandals. Styles are available in a wide variety of
colors and materials, including leather, sueded leather and fabric. All footwear
in the line is designed to have soft construction for comfort.
Mootsies Kids
The Mootsies Kids brand line is targeted at girls in the misses market
(ages 8 to 12) who desire contemporary footwear. The line consists of
approximately 20 new styles each spring and fall that, in many cases, represent
a miniature version of the Mootsies Tootsies line. The children's line is
focused on casual shoes, party shoes, boots and sandals.
Sam & Libby and Just Libby
The Sam & Libby line is updated casual and dress footwear targeted at
female fashion customers, ages 21 to 35, and contains approximately 30 styles
per season, consisting of casual shoes, dress shoes, boots and sandals. The
acquisition of the Sam & Libby brand with its trademarks registered in over 20
countries will bolster the Company's efforts to develop and grow
internationally, although the Company's expansion to overseas markets will be a
long-term effort. A wholly owned subsidiary of the Company has granted to SLJ
Retail LLC ("SLJ Retail") a license to sell Sam & Libby and Just Libby women's
footwear products. See "--License Agreements--SLJ Retail."
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Sam & Libby Kids
The Sam & Libby Kids line is geared toward girls ages 8 to 14 and is
targeted towards the updated and more fashion-conscious girl. The line will have
approximately 20 styles each season often similar to the Sam & Libby women's
styles. The children's line is focused on dress shoes, casual shoes, casual
athletic shoes, boots and sandals.
Dockers/(R)/ Khaki
The Dockers/(R)/ Khakis footwear for women line targets women between the
ages of 25-34 and has been designed to provide women with a new choice in
stylish, comfortable casual footwear. The footwear line will compliment the
Dockers/(R)/ Khakis for women apparel products and are specifically designed to
be worn with Khakis, complimenting a wide variety of versatile looks.
Jones New York
The Jones New York footwear line focuses on contemporary, quality footwear
targeted at career oriented women 30 years and older. The line capitalizes on
the name recognition and reputation enjoyed by the Jones New York apparel line
produced by the Company's licensor and is designed to complement Jones New York
apparel. The Company's Jones New York footwear line consists of approximately 25
styles per season with all leather uppers and soles.
Jones New York Sport
The Jones New York Sport line appeals to the Jones New York casual
sportswear customer by providing leisure footwear to career oriented women. The
line contains approximately 20 styles per season. The Company has granted a
sub-license to SLJ Retail to use the Jones New York trademark in connection with
certain activities, including retail sale of women's footwear merchandise
bearing such trademark. See "--License Agreements--SLJ Retail."
J. G. Hook and Private Label Products
In response to the growing demand among retailers for footwear to market
under their own brand names, the Company designs and sources private label
women's and children's footwear for selected retailers. The Company's private
label business has minimal overhead and capital requirements primarily because
the Company utilizes its existing branded product styles (thereby incurring no
additional product development costs) and because the Company does not incur any
costs related to purchasing, importing, shipping or warehousing of inventory,
all of which costs are borne by the retailer. The Company has licensed the J. G.
Hook name to sell as a first cost product for retailers who require brand
identification.
The following table sets forth the percentage of the Company's sales
generated by each of its major product categories for the periods indicated:
<TABLE>
<CAPTION>
Year Ended October 31
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Category 1996 1997 1998
-------- ---------- ---------- ---------
<S> <C> <C> <C>
Women's........................................... 85.4% 84.9% 86.5%
Children's........................................ 14.2 14.8 13.3
Other............................................. 0.4 0.3 0.2
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Total............................................. 100.0% 100.0% 100.0%
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</TABLE>
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Closeout Business
The Company sells certain product styles that it purchases at volume
discounts from other footwear manufacturers. These products, which are typically
either slow moving or factory seconds, are sold to discount retailers. At times,
the Company holds closeout products in inventory until the next fashion season.
Retail Joint Venture
In April 1997, the Company completed a transaction to operate approximately
130 retail Sam & Libby and Jones New York women's footwear stores through SLJ
Retail. The Company and the Butler Group LLC, a wholly-owned subsidiary of
General Electric Capital Corporation, owned initially 49% and 51% of SLJ Retail,
respectively. A subsidiary of the Company has been designated as the manager of
SLJ Retail. The Company accounts for its ownership under the equity method of
accounting since it owns less than 50% of the equity of SLJ Retail. The Company
also holds an option through February 1, 2000 to purchase additional equity in
the joint venture to increase its equity ownership by approximately 5%. Under
certain circumstances, the Company may be obligated to acquire the ownership
interest of the Butler Group at a value based upon the operating results of SLJ
Retail.
On June 24, 1998 the Company and Butler Group LLC entered into a new
financing agreement where Butler could contribute up to $6 million in additional
capital, at its election. The Butler Group's equity interest in SLJ Retail
could increase up to 72% of SLJ Retail's equity depending on the amount of
additional capital. As of January 7, 1999 Butler contributed $4 million of
additional capital under the agreement and increased its equity in SLJ Retail to
65%. Also, under the agreement, the Company agreed to defer certain management
fees and Butler agreed to defer certain fees and interest due it.
Under the Services Agreement with SLJ Retail, which, effective January 19,
1999, was terminated by the Company, Mr. James Tinagero, the Executive Vice
President of the Company was required to devote at least 25% of his time to SLJ
Retail's business. Under the Option Agreement among the Company, SLJ Retail and
Butler, Butler has certain rights to require the Company to purchase all or a
portion of its interest in SLJ Retail for cash or Common Stock of the Company.
There is no assurance that any exercise by Butler of its rights under such
Option Agreement would not have a material adverse effect on the Company's
financial condition and results of operations. On January 19, 1999, the Company
resigned as Manager of SLJ Retail and terminated the Services Agreement.
SLJ Retail is in the process of reducing its store base of Sam & Libby and
Jones New York stores from 99 to 53 retail locations. SLJ Retail expects to
complete the related store closings by March 1, 1999. Because SLJ Retail is an
unconsolidated affiliate of the Company, the store reduction actions will have
no impact on the Company's financial results.
On December 16, 1998, SLJ Retail entered into a forbearance extension
agreement with its banks which lapses on April 30, 1999. The lenders have
terminated their commitments to make additional loans and issued letters of
credit; but they agreed not to accelerate the loans before April 30, 1999,
subject to certain conditions. There is no assurance that the forbearance
extension agreement will be extended beyond April 30, 1999, and if it is not
extended, the lenders can exercise any appropriate remedy at that time. SLJ
Retail does not currently have a bank facility to issue, extend, renew letters
of credit or borrow additional funds.
Butler has extended financial support to SLJ Retail in the form of
providing loan guarantees, opening letters of credit for purchases of spring
1999 goods and contributed additional equity capital. There is no assurance
that Butler will continue to provide financial support for the SLJ Retail
business.
Cash flow from operations of SLJ Retail is currently insufficient to fund
the SLJ Retail business on an ongoing basis. Unless and until a successful
turnaround of the SLJ Retail business can be executed, SLJ Retail business will
require additional cash to fund working capital requirements. The Company has no
requirement to provide for such working capital. No assurances can be given that
any such turnaround can be executed.
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Design and Product Development
The Company seeks to identify fashion trends and to translate such trends
into contemporary footwear that appeal to its target market segments'
requirements for style, quality, fit and price. Management believes that its
philosophy of marketing contemporary styles to a broad audience rather than
"fashion forward" styles reduces the risks associated with changing fashion
trends.
Each branded product line has its own design team, including design staff,
sales staff and a brand manager in an effort to design footwear that appeals to
the characteristics of that line's market segment. The designers research and
confirm market trends by: (i) traveling extensively to fashion markets in the
United States and Europe, (ii) attending trade shows, (iii) subscribing to
fashion and color information services and (iv) commissioning market studies. In
addition, product development efforts benefit from interaction with retailers,
who provide information on current retail selling trends, and the Company's
buying agents, who provide information on industry trends. The designers for the
Jones New York and Jones New York Sport lines also meet regularly with the Jones
New York apparel group to exchange product and fashion concepts. See "--License
Agreements Jones New York." Each line initially consists of between 100 and
200 prototypes each season from which the design team selects the styles that it
believes will satisfy the target market segment's requirements for style,
quality, fit and price. Each line is further refined following presentations at
industry shows.
Marketing and Customer Support
Each branded product line has its own sales organization, including a
divisional executive who oversees all aspects of selling the line and works with
a network of independent sales representatives located throughout the United
States. Certain of the independent sales representatives sell only the Company's
brands, and the rest of the independent sales representatives sell brands that
do not compete directly with the Company's brands. The Company develops spring
and fall product lines for each of its brands. Each line is first introduced at
industry trade shows prior to on-site sales visits by the independent sales
representatives and the Company's divisional head responsible for the line. In
addition, the Company maintains showrooms in New York and Boston where buyers
view products and place orders. While the Company's products are distributed
primarily in the United States, the Company also sells to independent wholesale
distributors in Canada.
In fiscal 1998, the Company sold products to approximately 1,500 accounts
with over 7,000 retail locations. The Mootsies Tootsies retailers, which market
moderately priced apparel merchandise, include the Federated Department Stores,
Kohl's and Belks. The Jones New York and Jones New York Sport footwear lines are
distributed to those retailers who typically market merchandise at higher retail
price points, including Macy's, May Co., Dayton Hudson and Bloomingdale's. The
Sam & Libby footwear lines are distributed to retailers such as Federated, May
Co., Bon Ton and Nordstrom. The retail industry has periodically experienced
consolidation, and any future consolidation may result in loss of customers of
the Company and lower profit margins on the Company's footwear. The Company
also markets its branded products through national catalog retailers such as
Spiegel, Nordstrom and Chadwicks of Boston and through home shopping clubs such
as QVC and Home Shopping Network.
The Company's largest customer, The TJX Companies, Inc. ("TJX"), the
successor entity from the combination of Marshall's and T. J. Maxx, accounted
for 19% and 18% of the Company's net sales in fiscal 1997 and fiscal 1998,
respectively, including revenues from closeouts. The Company's top three
customers accounted for 32% and 31% of net sales for fiscal 1997 and fiscal
1998, respectively. While the Company seeks to build long-term customer
relationships, revenues from any particular customer can fluctuate from period
to period due to such customer's purchasing patterns. In addition, the Company
believes that although purchasing decisions have generally been made
independently by each department store customer, there is a trend among
department store customers toward more centralized purchasing decisions. The
retail industry has also periodically
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experienced consolidation, and any future consolidation may result in loss of
customers of the Company and lower profit margins on the Company's footwear. In
the future, the Company's wholesale customers may consolidate, undergo
restructuring or reorganizations, or realign their affiliations, any of which
could decrease the number of stores that carry the Company's products or
increase the ownership concentration within the retail industry. Any termination
or significant disruption of the Company's relationships with one or more of the
Company's major customers could have a material adverse effect on the Company's
financial condition or results of operations. See Note 1 of "Notes to
Consolidated Financial Statements."
The Company believes that its reputation for quality products and
relationships with retailers will also be useful during the introduction of new
brands that it may develop or acquire to fill other niches in the women's
footwear market.
The Company supports its customers through a variety of programs, including
its in-stock inventory position for selected styles, the availability of EDI,
co-op advertising and point of sale displays. In addition, the Company assists
its customers in evaluating which products are more likely to appeal to their
retail customers. Customers may return defective products in quantities of more
than six pairs for full credit. Customer allowances are based on the Company's
ability to meet the particular customer's objectives and specifications.
Advertising and Promotion
The Company works closely with its retailers in promoting its brands
through its own and cooperative national consumer print advertising, in-store
merchandising, point of sale promotions, in-store events, distinctive packaging
and active solicitation of fashion editorial space. The Company increased its
advertising and promotional expenditures during fiscal 1998 in order to maximize
the growth potential of its Sam & Libby lines. In fiscal 1999, the Company
plans to continue to increase Sam & Libby advertising expenditures, as well as
participate in the Jones Apparel national ad campaign. The Company intends to
launch an initial advertising campaign for Dockers/(R)/ Khakis footwear for
women in fiscal 1999.
Print advertisements for Mootsies Tootsies are designed to build brand
awareness, rather than market a particular footwear product, by linking the
brand to a consumer's lifestyle. The advertisements run in fashion/lifestyle
publications like Glamour and Cosmopolitan as well as in general interest
publications like People. Utilizing the print media, the Company seeks to reach
a large percentage of its target audience, women ages 18 to 34, with a number of
advertisements each selling season. The Company's print advertising campaign for
its Jones New York and Jones New York Sport footwear is intended to build rapid
consumer awareness and acceptance of the footwear by taking advantage of the
recognition of the Jones New York apparel name. In addition, the Company has
gained additional media attention through fashion editorial publications.
Print advertisements for Sam & Libby are designed to build brand awareness
by creating a lifestyle viewpoint that appeals to the modern consumer. The
advertisements will appear in fashion publications such as Vogue, Glamour and
Cosmopolitan.
The Company also participates with its retail customers in cooperative
advertising programs intended to take the brand awareness created by the
national print advertising and channel it to local retailers where consumers can
buy the Company's brands. This includes local advertising on radio, television,
and newspaper as well as Company participation in major catalogs for retailers
such as Spiegel. The Company's co-op efforts are intended to maximize
advertising resources by having its retailers share in the cost of promoting the
Company's brands. Also the Company believes that co-op advertising encourages
the retailer to merchandise the brands properly and sell them aggressively on
the sales floor.
The Company uses point-of-sale advertising to further promote its products
in the store. Point-of-sale techniques used by the Company includes packaging,
point-of-sale displays, counter cards, banners and other visual merchandising
displays. These materials mirror the look and feel of the national print
advertising in order to reinforce brand image at the point-of-sale. Management
believes these efforts stimulate impulse sales and repeat purchases.
10
<PAGE>
Manufacturing
Mootsies Tootsies, Mootsies Kids, Sam & Libby and Jones New York footwear
are manufactured primarily in China and Brazil because of the ability of the
suppliers in these countries to manufacture quality products at affordable
prices. The Jones New York footwear brand is also manufactured in Spain and
Italy because Spanish and Italian suppliers can meet the Company's quality
requirements for this product line and the Spanish and Italian reputation for
quality footwear is consistent with the Jones New York image. Dockers/(R)/
Khakis footwear for women will be primarily manufactured in China.
The Company does not have contracts with any of the factories that produce
its footwear. The Company relies on its relationships with buying agents who are
responsible for securing raw materials, selecting manufacturers, monitoring the
manufacturing process, inspecting finished goods and coordinating shipments to
the Company. These agents work regularly with numerous factories with the
capacity to meet the Company's product specifications for quality, fit, volume
and price. By using buying agents rather than manufacturing products itself, the
Company is able to maximize production flexibility while avoiding significant
capital expenditures, work-in-process inventory and costs of managing a
production work force. To date, the Company has not encountered significant
delivery or quality problems. The Company works with buying agents with access
to numerous manufacturing facilities in order to maximize the Company's sourcing
flexibility. The Company believes it has built strong relationships with its
agents and manufacturing facilities over time and through volume of business.
Management believes that its buying agents do not represent other direct
competitor branded footwear lines, and Universal Max Trading, the Company's
principal buying agent in China, has agreed to act exclusively for the Company
in China. The Company pays its buying agents a percentage of the order price of
products shipped to the Company. The Company manufactures none of its products
and does not own any manufacturing facilities or equipment.
Prior to the start of production, the Company submits specifications for
products to the buying agent, who then provides a confirmation sample of each
style for inspection by the Company. During production, the Company makes
periodic reviews of products at the factory in addition to inspections conducted
by the buying agent. The Company also inspects products upon receipt at its
warehouse.
The Company maintains an in-stock position for selected styles of its
footwear in order to minimize purchasing costs and the time necessary to fill
customer orders. In order to maintain an in-stock position, the Company places
orders for selected footwear with its manufacturers prior to the time the
Company has received customers' orders for such footwear. In order to reduce the
risk of overstocking, the Company seeks to assess demand for its products by
soliciting input from its customers and monitoring retail sell-through
throughout the selling season.
The Company believes that its ability to satisfy customer order demands is
enhanced by designing its products to use common elements in raw materials,
lasts and dyes. Whenever possible, the Company seeks to use factories that have
previously produced the Company's footwear because the Company believes that
this enhances continuity and quality while holding down production costs.
The Company protects itself against currency fluctuations by purchasing
products in U.S. dollars from China and Brazil. In order to minimize volatility
in the price of products from Spain, the Company buys forward exchange contracts
for Spanish pesetas in connection with the placement of orders for products.
Distribution
Following manufacture, the Company's products are packaged in retail boxes
bearing bar codes and shipped to the Company's warehouse facilities in Boston,
Westwood and Brockton, Massachusetts. When an order is received, it is filled in
the warehouse and shipped to the customer by whatever means the customer
requests, which is usually by common carrier.
11
<PAGE>
In fiscal 1998, the Company invested more than $3 million in a new
warehouse management and conveyor system. This system will allow the Company to
increase its shipping efficiency and consolidate its warehouse space
requirements by closing the Westwood facility in the second fiscal quarter of
1999.
The Company has an electronic data interchange system to which some of the
Company's larger customers are linked. This system allows these customers to
automatically place orders with the Company, thereby eliminating the time
involved in transmitting and inputting orders. The Company is working to add
more of its customers to the system and to expand system capability to include
direct billing, payment and shipping information.
Restrictions on Imports
The Company's operations are subject to compliance with relevant laws and
regulations enforced by the United States Customs Service and to the customary
risks of doing business abroad, including fluctuation in the value of
currencies, increases in customs duties and related fees resulting from position
changes by the United States Customs Service, import controls and trade barriers
(including the unilateral imposition of import quotas), restrictions on the
transfer of funds, work stoppages and, in certain parts of the world, political
instability causing disruption of trade. These factors have not had a material
adverse impact upon the Company's operations to date. Imports into the United
States are also affected by the cost of transportation, the imposition of import
duties and increased competition from greater production demands abroad. The
United States or the countries in which the Company's products are manufactured
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duty or tariff levels,
which could affect the Company's operations and its ability to import products
at current or increased levels. The Company cannot predict the likelihood or
frequency of any such events occurring.
The Company's use of common elements in raw materials, lasts and dyes give
the Company the flexibility to duplicate sourcing in various countries in order
to reduce the risk that the Company may not be able to obtain products from a
particular country.
The Company's imported products are subject to United States customs duties
and, in the ordinary course of its business, the Company may, from time to time,
be subject to claims for duties and other charges. United States customs duties
currently range from 10% to 37.5% on the principal products currently imported
by the Company. Because the Company has had no disputes with the United States
Customs Service in the past, the Company is allowed to and does submit its
footwear products to United States customs officials for pre-classification and
customs duties rates determination prior to importation of such footwear
products from abroad.
For fiscal 1998, approximately 94% of the Company's footwear was imported
from China. After a serious dispute with the United States Trade Representative
("USTR") over the protection of intellectual property rights in China,
including the threat by USTR to impose trade sanctions, the Chinese government
agreed to meet its enforcement obligations. That agreement is now being
monitored by USTR and the failure of China to comply with its obligations could
result in trade sanctions in the future, including the imposition of retaliatory
tariffs that might affect the Company's imports of footwear from China. From
time to time there have been other trade disputes with China, involving such
things as market access, textile quotes, automotive industry policies and
agricultural products. These and other such matters could also present problems
in the future that might lead to trade sanctions affecting the Company's imports
of footwear.
Imports from China continue to enter the United States on a conditional
normal-trade-relations ("NTR") basis. Pursuant to NTR status, products imported
by the Company from China currently receive the lower tariff rates made
available to most of the United States' major trading partners. In the case of
China, however, this NTR treatment is made possible under the Trade Act of 1974
by virtue of certain Presidential findings that waive restrictions that would
otherwise render China ineligible for NTR treatment. The President has waived
these restrictions each year since 1979. There can be no assurance that China
will continue to enjoy NTR status in the future. If goods manufactured in China
enter the United States without the benefit of NTR treatment, such goods will be
subject to significantly higher duty rates, ranging between 20% and 66% of
customs value. Any such increased duties or tariffs could significantly increase
the cost or reduce the supply of goods from China.
12
<PAGE>
Backlog
At October 31, 1996, 1997, and 1998, the Company had unfilled customer
orders of $50.0 million, $61.6 million and $68.0 million respectively. This is
an increase of 10.4% for fiscal year end 1998 over fiscal year end 1997. The
backlog at a particular time is affected by a number of factors, including
seasonality and the scheduling of manufacturing and shipment of products. Orders
generally may be canceled by customers without financial penalty. Accordingly, a
comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of eventual actual shipments to customers. To date, the
Company has not experienced material returns of its products or material
cancellations of orders. The Company expects that substantially all of its
backlog as of October 31, 1998 will be filled during the first six months of
fiscal 1999.
License Agreements
Jones New York
In July 1993, the Company entered into a license agreement (the "Jones
License Agreement") with Jones Investment Co., Inc. ("Jones") under which the
Company has the exclusive right to use the Jones New York and Jones New York
Sport names in connection with the development, manufacturing and marketing of
women's footwear (other than performance athletic shoes and bedroom slippers).
The Jones License Agreement covers the United States (including its territories)
and Canada and expires in December 2002. In April 1997, the Company and Jones
amended the Jones License Agreement to, among other things: (i) grant the
Company three, five-year options to extend the Jones License Agreement through
December 2017, subject to the Company meeting certain minimum net sales amounts,
(ii) extend the Jones License Agreement to cover the retail sale of Jones New
York women's footwear by SLJ Retail, (iii) require the Company and SLJ Retail to
pay certain royalties to Jones, and (iv) permit Jones to terminate the Jones
License Agreement with respect to the retail sale of Jones New York women's
footwear by SLJ Retail only if the Company is no longer the managing member of
SLJ Retail or if SLJ Retail defaults on any of its royalty payments. The Jones
License Agreement also requires the Company to spend a specified minimum amount
each year on advertising the Jones New York and Jones New York Sport footwear
lines, which obligation may be satisfied through cooperative advertising. The
Jones License Agreement prohibits the Company from manufacturing, selling,
distributing or promoting any merchandise which would compete as to style; price
or quality with the Jones New York and Jones New York Sport footwear lines.
Hence, the Company is restricted from expanding its brand portfolio and
acquiring new product lines, which would compete both as to style and price with
the Jones New York and Jones New York Sport women's footwear while this license
is in effect. A breach by the Company of its obligations under the Jones
License Agreement would permit Jones to terminate such license agreement. The
Jones License Agreement could also be terminated by the licensor for certain
other reasons, including any occurrence of an event where the beneficial
ownership of the Company changes in a manner so as to change the actual control
of the Company.
13
<PAGE>
Dockers/(R)/ Khakis
On November 13, 1998, the Company entered into a license agreement (the
"Dockers/(R)/ Khakis Agreement") with Levi Strauss Co. under which the Company
has the exclusive right to use the Dockers/(R)/ Khakis name in connection the
development, manufacturing and marketing of footwear for women. The
Dockers/(R)/ Khakis License Agreement covers the United States (including its
territories and possessions) and expires on December 31, 2001. The Company may
renew the license for one (1) additional four (4) year term ending December 31,
2005, upon meeting certain terms and conditions. The Company will pay Levi
Strauss Co. a royalty on all net sales and is responsible for a guaranteed
minimum royalty payment during each year of the agreement. The licensor can
terminate the agreement for a variety of reasons, including but not limited to
default in performing any of the terms of the agreement and bankruptcy of the
licensee.
J.G. Hook
In April 1997, the Company entered into a license agreement (the "J.G.
Hook License Agreement") with J.G. Hook, Inc. pursuant to which the Company
received the right to design, develop and market women's and children's shoes
under the J.G. Hook and Hook Sport brand names in exchange for payment of
royalties based on net sales of products marketed under such brand names. The
J.G. Hook License Agreement was for an initial 18-month period ending September
30, 1998, with two one-year extension options. In September 1998, the Company
exercised its first one-year option and renewed the agreement through September
1999. The J.G. Hook License Agreement is subject to early termination for
various specified reasons, including any failure by the Company to meet its
royalty obligations thereunder. The Company plans to use the J.G. Hook label to
sell footwear on a first cost basis.
SLJ Retail
In April 1997, the Company entered into a sub-license agreement (the "SLJ
Retail Sub-License Agreement") with SLJ Retail pursuant to which the Company
granted to SLJ Retail a sub-license throughout the United States to use the
Jones New York and Jones New York Sport trademarks in connection with the
manufacturing, promotion and retail sale of women's footwear merchandise bearing
such trademarks. The initial term of the SLJ Retail Sub-License Agreement
expires in December 2002 but is extended automatically for the same period of
time as any extension by the Company of the Jones License Agreement. The SLJ
Retail Sub-License Agreement is subject to early termination for various
reasons, including any termination of the Jones New York License Agreement or if
the Company or its subsidiaries is not a managing member of SLJ Retail.
In April 1997, the Company entered into a retail license agreement (the
"SLJ Retail Sam & Libby License Agreement") with SLJ Retail pursuant to which
the Company granted to SLJ Retail a license, throughout the United States and
such other locations outside the United States in which the Company or its
affiliates may from time to time sell Sam & Libby and Just Libby women's
footwear products, to use the Sam & Libby and Just Libby trademarks in
connection with the manufacturing, advertising, merchandising, promotion and
retail sale of women's footwear merchandise bearing such trademarks; provided
however, that such license does not extend to products to which Inter-Pacific
Corporation ("IPC") has the exclusive rights. Under the SLJ Retail Sam &
Libby License Agreement, SLJ Retail does not have to pay any royalty to the
Company in consideration of the license granted and the services to be performed
by the Company under such agreement. The initial term of the SLJ Retail Sam &
Libby License Agreement expires on January 31, 2047, subject to earlier
termination upon the occurrence of certain specified events.
Inter-Pacific Corporation
In January 1997, the Company entered into a license agreement with IPC.
IPC is a 40 year old California-based seller and distributor of men's, women's
and children's footwear. IPC has the exclusive rights to design, manufacture
and distribute Sam & Libby beachwear type footwear (E.V.A. sandals, jellies,
aqua socks and
14
<PAGE>
injected molded slides) for men, women and children for an initial period from
January 1997 to May 2000. IPC may also design and manufacture women's slippers
bearing the Sam & Libby trademark. For the use of the Sam & Libby tradename, IPC
will pay the Company royalties at a rate based on sales volume, subject to
payment of minimum royalties of $396,000 over the initial term of the agreement.
Upon satisfaction of certain conditions, IPC may exercise its option to extend
the license agreement until May 2003.
Trademarks
Mootsies Tootsies and Mootsies Kids are registered trademarks of the
Company in the United States. In addition, these trademarks have been registered
in Canada, Japan and Taiwan and trademark registration applications are pending
in several other countries. The Company's United States trademark registration
for Mootsies Tootsies expires in 2000 and the registration for Mootsies Kids
expires in 2003, although both are renewable.
Sam & Libby, Just Libby, New Nineties and Jeff & Kristi are registered
trademarks of Sprague Company, a 100% owned subsidiary of the Company. These
trademarks were acquired by the Company in August 1996 from Sam & Libby, Inc.
and are registered trademarks in the United States (see Note 1 of "Notes to
Consolidated Financial Statements"). In addition, the Sam & Libby and Just
Libby trademarks are registered in over 20 countries worldwide. Sprague's United
States trademark registration of Sam & Libby expires in 2001 and the
registration of Just Libby expires in 2005, although both are renewable. In
January 1997, the Company entered into a license agreement with IPC, a 40 year
old California-based seller and distributor of men's, women's and children's
footwear to license the Sam & Libby trademarks for slippers and E.V.A. sandals,
pursuant to which the Company will receive certain royalties and other revenues.
Jones New York and Jones New York Sport are registered trademarks of Jones
in the United States. Under the Jones License Agreement, Jones has the sole
right to defend against any infringement of these trademarks.
Dockers/(R)/ Khakis is a registered trademark of the Levi Strauss Co. in
the United States. Under the Dockers/(R)/ Khakis Agreement, Levi Strauss Co.
has the sole right to defend against any infringement of this trademark.
Competition
The women's and kids' fashion footwear markets are highly competitive. The
Company's products compete against other branded footwear and, in the case of
Mootsies Tootsies, against private label footwear sold by many large retailers,
including some of the Company's customers. Many of the Company's competitors
have substantially greater financial, distribution and marketing resources, as
well as greater brand awareness than the Company. In addition, the general
availability of offshore manufacturing capacity allows easy access by new market
entrants. The Company believes its ability to compete successfully is based on
its ability to design, develop and market value priced footwear that reflects
current fashion trends.
Employees
At October 31, 1998, the Company employed 149 people, including officers,
administrative, selling and warehouse personnel. None of the Company's employees
are represented by a union. The Company considers its relationship with its
employees to be good.
15
<PAGE>
Item 2. Properties
The Company's headquarters, which includes approximately 10,000 square feet
of office space and 130,000 square feet of warehouse space, is located in
Boston, Massachusetts, approximately 49,000 square feet of which is leased to an
unaffiliated third party. This facility is leased by the Company under a lease
that expires in 2001. The Company also leases a 64,000 square foot warehouse
located near its headquarters in Westwood, Massachusetts. This lease expired in
December 1998. The Company is currently a tenant at will, with plans to vacate
this facility in the second fiscal quarter of 1999. The Company also leases a
215,000 square feet warehouse in Brockton, Massachusetts. This lease expires in
2007, subject to two five-year options. The Company also holds an option
exercisable in the year 2001 to lease for six years, with two additional five-
year options, an additional 240,000 square feet of space in the same warehouse
facility. The Company also leases a 4,000 square feet showroom in New York City
under a lease that expires in 2001. The Company believes that these facilities
are adequate for its current needs and that it will be able to obtain additional
space at a reasonable cost if required in the future.
Item 3. Legal Proceedings
The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation that will have a material adverse effect on its
business operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
16
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Class A Common Stock is traded on the NASDAQ National Market System under
the symbol MAXS. The following table sets forth for the fiscal periods indicated
the range of high and low sale prices of the Class A Common Stock as reported by
NASDAQ:
<TABLE>
<CAPTION>
1997 January 31, April 30, July 31, October 31,
---- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Low......................... 6 1/2 7 1/8 7 1/2 10 3/4
High........................ 8 3/8 8 3/4 13 15
<C>
1998 January 31, April 30, July 31, October 31,
---- ------------ ------------ ------------ ------------
Low......................... 10 1/2 13 7/8 17 1/2 9 13/16
High........................ 14 5/8 19 1/2 23 3/8 20 1/2
</TABLE>
The Class A Common Stock is listed on the automatic quotation system of the
National Association of Securities Dealers under the symbol MAXS.
The number of stockholders of record of the Class A Common Stock on October
31, 1998 was 33. However, based on available information, the Company believes
that the total number of Class A Common stockholders, including beneficial
stockholders, is approximately 1600.
Dividend Policy
The Company has not paid cash dividends on the Common Stock to date since the
payment of certain distributions in connection with the termination of the S
Corporation status of the Company prior to the consummation of the Company's
initial public offering. In addition, because the Company currently intends to
retain any earnings for development of its business, the Company does not intend
to pay cash dividends on its Common Stock in the foreseeable future. Any
determination to pay cash dividends on the Common Stock in the future will be at
the sole discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions.
17
<PAGE>
Item 6. Selected Financial Data
The following selected financial data are derived from audited financial
statements of the Company. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Statement of Income Data:
Net sales............................................ $100,931 $101,870 $104,337 $134,211 $165,921
Cost of sales........................................ 72,117 77,912 79,915 98,230 121,032
-------- -------- -------- -------- --------
Gross profit......................................... 28,814 23,958 24,422 35,981 44,889
Selling, general and administrative
expenses(1)(2).................................... 23,695 13,581 15,413 20,982 25,122
-------- -------- -------- -------- --------
Operating income..................................... 5,119 10,377 9,009 14,999 19,767
Interest expense..................................... 662 255 38 110 34
Other expense (income), net.......................... (101) 399 (579) 325 (156)
-------- -------- -------- -------- --------
Income before income taxes........................... 4,558 9,723 9,550 14,564 19,889
Income taxes......................................... 1,709 3,889 3,629 5,534 6,624
-------- -------- -------- -------- --------
Net income........................................... $ 2,849 $ 5,834 $ 5,921 $ 9,030 $ 13,265
======== ======== ======== ======== ========
Earnings per share(3)
Basic............................................... $0.77 $0.78 $1.19 $1.61
======== ======== ======== ========
Diluted............................................. $0.70 $0.72 $1.06 $1.44
======== ======== ======== --------
Shares used to compute earnings per share(3)
Basic............................................... 7,588 7,588 7,588 8,222
======== ======== ======== ========
Diluted............................................. 8,311 8,261 8,537 9,226
======== ======== ======== ========
<CAPTION>
October 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $28,770 $35,097 $35,523 $44,441 $69,802
Total assets......................................... 36,621 39,979 46,920 60,179 91,005
Total debt (including current maturities)............ 123 787 611 469 1,628
Total stockholders' equity........................... $29,850 $35,684 $41,605 $50,635 $79,309
</TABLE>
(1) Operating results for fiscal 1994 were significantly affected by officers'
compensation expense, which totaled $12,381. Operating income before
officers' compensation for fiscal 1994 was $17,500.
(2) Includes a $7,000 one-time compensation expense incurred in the first
quarter of fiscal 1994 in connection with the grant of an option to the
Company's President to purchase 888,412 shares of Class A Common Stock,
which option was granted in exchange for the termination of a pre-existing
deferred compensation arrangement.
(3) Earnings per share have not been presented for fiscal year 1994 since such
amounts are not deemed meaningful due to the significant changes in the
Company's income tax status and compensation arrangements subsequent to the
initial public offering in April 1994. Prior to the initial public
offering, as a Subchapter S corporation the Company was not required to
provide for federal income taxes and incurred significantly greater
officers' compensation expense.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Certain statements contained in this Form 10-K regard matters that are not
historical facts and are forward looking statements (as such term is defined in
the rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to: changing consumer
preferences, competition from other footwear manufacturers, loss of key
employees, general economic conditions and adverse factors impacting the retail
footwear industry, and the inability by the Company to source its products due
to political or economic factors or the imposition of trade or duty
restrictions. The Company undertakes no obligation to release publicly the
results of any revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
The following table sets forth net sales by product line or category of
business:
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------------------------
1996 1997 1998
------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
(In millions--except percentages)
Mootsies Tootsies.......................... $ 60.8 58.3% $ 71.0 52.9% $ 79.7 48.0%
Jones New York Footwear.................... 24.0 23.0 32.2 24.0 42.2 25.5
Sam & Libby................................ -- -- 14.6 10.9 17.2 10.3
Private Label Footwear..................... 14.5 13.9 13.6 10.1 22.2 13.4
Closeout................................... 5.0 4.8 2.8 2.1 4.6 2.8
------ ----- ------ ----- ------ -----
$104.3 100.0% $134.2 100.0% $165.9 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Net sales were $165.9 million in fiscal 1998 compared to $134.2 million in
fiscal 1997, an increase of 23.6%. This increase was due to a 31.1%, 12.3% and
17.8% rise in net sales of Jones New York, Mootsies Tootsies, and Sam & Libby
footwear, respectively, over the prior year. Private label unit sales increased
63.1% over the prior fiscal year.
Gross profit was $44.9 million in fiscal 1998 compared to $36.0 million in
fiscal 1997, an increase of 24.8%. Gross margins were substantially unchanged in
fiscal 1998 as compared to fiscal 1997. Selling, general and administrative
expenses increased $4.1 million during fiscal 1998 from fiscal 1997 due to an
increase in administrative charges relating to increased net sales.
Other income was $122,000 for fiscal 1998 compared to other expenses of
$435,000 for fiscal 1997. In fiscal 1998, management fees from the SLJ Retail
LLC joint venture ($500,000), interest income from cash equivalents ($447,000),
and royalty income ($176,000) were offset by expenses related to a public stock
offering ($503,000), and amortization of expenses relating to the acquisition of
the Sam & Libby trademark ($367,000). During fiscal 1997, amortization expense
relating to the acquisition of the Sam & Libby trademark was $367,000 and losses
of $76,000 were realized from foreign exchange contracts, offset by $132,000 in
interest income from cash equivalents. Interest expense in fiscal 1998 was
incurred for capital leases and short term borrowings. The Company had no short
term borrowings in fiscal 1998.
19
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Net sales were $134.2 million in fiscal 1997 compared to $104.3 million in
fiscal 1996, an increase of 28.7%. This increase was due to a 34.2% and 16.8%
rise in net sales of Jones New York and Mootsies Tootsies footwear,
respectively, over the prior year, and the additional $14.6 million in net sales
generated by the Sam & Libby division, offset by a decrease of 6.2% in net
sales generated by private label footwear.
Gross profit was $36.0 million in fiscal 1997 compared to $24.4 million in
fiscal 1996, an increase of 47.5%. Gross margins also increased in fiscal 1997
from fiscal 1996 due to improved gross margins in the branded lines of footwear
and a decrease in the proportion of net sales derived from lower margin private
label sales. Selling, general and administrative expenses increased $5.6
million during fiscal 1997 from fiscal 1996 due to an increase in aggregate
compensation and corresponding fringe benefits expenses resulting from the
addition of new personnel required for the launching of the Company's Sam &
Libby division and administrative charges relating to increased net sales and
improved profitability.
Other expenses were $325,000 for fiscal 1997 compared to other income of
$579,000 for fiscal 1996. During fiscal 1997, amortization expense relating to
the acquisition of the Sam & Libby trademark was $367,000 and losses of $76,000
were realized from foreign exchange contracts, offset by $132,000 in interest
income from cash equivalents. During fiscal 1996, the account was comprised
principally of net gains from forward exchange contracts entered into in
anticipation of future purchase of inventory denominated in foreign currencies
and interest income from the investment of cash equivalents. In fiscal 1997,
other expenses included interest expense of $110,000 compared to $38,000 for
fiscal 1996. Interest expense in fiscal 1997 was incurred for capital leases and
short term borrowings. The Company had no short term borrowings in fiscal 1996.
Liquidity and Capital Resources
The Company has relied primarily upon internally generated cash flows from
operations, borrowings under its credit facility, and borrowings from
stockholders (when the Company was privately held) to finance its operations and
expansion. Cash provided (used) by operating activities totaled approximately
$9.5 million in fiscal 1996, ($6.5) million in fiscal 1997 and $5.7 million in
fiscal 1998. At October 31, 1998, working capital was $69.8 million as compared
to $44.4 million at October 31, 1997. Working capital may vary from time to
time as a result of seasonal requirements, the timing of early factory shipments
and the Company's in-stock position, which requires increased inventories, and
the timing of accounts receivable collections. Capital expenditures were $5.7
million for the year ended October 31, 1998.
In fiscal 1998, cash provided by operations was $5.7 million as compared to
cash used by operations in fiscal 1997 of $6.5 million. The increase in cash
provided in fiscal 1998 was due to increased net income and lower increase of
accounts receivable and inventory balances as compared to fiscal 1997.
On April 27, 1998, the Company completed a public stock offering of an
aggregate of 6,145,792 shares of Class A Common Stock at $17.50 per share. Of
the shares sold, 5,044,167 Class A shares were sold by members of the founder's
family and a trust for their benefit upon conversion of a like number of Class B
shares and exercise of stock options, and 300,000 Class A shares were sold by
the Company Chairman and CEO pursuant to the exercise of stock options. The
Company did not receive any proceeds from the sale of shares by the selling
stockholders. In addition, the Company sold 801,625 shares of Class A Common
Stock pursuant to the full exercise of an over-allotment option granted by the
Company to the underwriters. The Company received $13.2 million from the
exercise of the over-allotment option and $1.3 million from the exercise of
stock options. The Company no longer has any Class B shares outstanding. The
Company expensed $.5 million of costs related to the sale of shares by the
selling stockholders pursuant to prior contractual obligations of the Company.
The exercise of the CEO's options resulted in a tax benefit of $.9 million for
1998. The benefit results from the realization of a portion of a deferred tax
asset previously recorded and fully reserved in connection with the granting of
the options in 1994. The Company's effective tax rate for 1998 is 33%. If the
Company's fiscal 1998 diluted earnings per share was calculated on the same
basis as fiscal 1997, (i.e. no $.5 million cost related to the public stock
offering and an effective tax rate of 38%) the adjusted diluted earnings per
share for fiscal 1998 would have been $1.37 per share, as compared to the actual
reported $1.44 diluted earnings per share.
20
<PAGE>
The Company currently has a $35.0 million discretionary demand credit facility
bearing interest at either the Bank of Boston's base rate or Adjusted Eurodollar
Rate plus one percent (1.0%), renewable annually under certain conditions. This
demand line of credit will cover the aggregate amount of demand loans
outstanding plus the letter of credit exposure amount. As of October 31, 1998,
there were no outstanding borrowings, $17.4 million was outstanding under
letters of credit and $17.6 million was available for future borrowings.
Year 2000 Readiness
The Company is in the process of installing a computerized warehouse
inventory management system in its Brockton, Massachusetts facility, as well as
new hardware and software for the Company's computer needs. The Company is
dependent upon complex computer systems for certain phases of its operations,
including sales, distribution and delivery. Since many of the Company's older
computer software programs recognize only the last two digits of the year in any
date (e.g., "97" for "1997"), some software may fail to operate properly in 1999
or 2000 if the software is not reprogrammed or replaced (the "Year 2000
Problem"). This could result in system failures or miscalculations leading to
disruptions in the Company's operations, including, among other things, a
temporary inability to process transactions, receive inventory from suppliers,
ship inventory to customers, or engage in similar business activities. The
Company believes that many of its customers also have Year 2000 Problems which
could adversely affect the Company. One area in which customers' Year 2000
Problems could adversely impact the Company and its operations relates to
electronically received orders for the Company's products through Electronic
Data Interchange (EDI). Significant customers have been identified and the
Company has opened communication with them in regards to the Year 2000 Problem.
Correspondence has been sent to all significant customers and the Company has
been told by a large majority that they expect to be Year 2000 compliant prior
to the creation of material Year 2000 Problems. The Company plans to perform
follow-up inquiries with these significant customers. In the event some
customers are not Year 2000 compliant, the Company's contingency plan includes
utilization of existing manual order receiving capabilities. The Company
currently receives approximately 15-20% of orders for its products in this
manner. The Company intends to spend up to $1.0 million in fiscal 1999 to
upgrade its computer systems and address the Year 2000 Problem and currently
expects its computer systems to be substantially Year 2000 compliant by June
1999. The Company plans to fund this expenditure with current cash resources or
equipment financing arrangements. It is not possible at present to quantify the
financial effect of the Year 2000 Problem if it is not timely resolved.
However, the Company presently believes that the cost of fixing the Year 2000
Problem will not have a material effect on the Company's financial condition or
results of operations.
Although the Company anticipates no material business disruption will occur as
a result of the Year 2000 issue, the Year 2000 issue is unique and the failure
to correct a material Year 2000 issue could result in an interruption, or a
failure of, certain normal business activities or operations, such as loss of
communications with store locations, inability to process transactions,
inability for malls to operate, and the disruption of the supply of product and
distribution channel. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to
general uncertainty inherent in the Year 2000 Problem, resulting from the
uncertainty of the Year 2000 readiness of third parties, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The Company's Year 2000 Plan is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 issue and the
readiness of its material third parties. The Company believes that with the
completion of the Plan as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The Company anticipates that it will be able to satisfy its cash requirements
for fiscal 1999 including its expected growth, primarily with cash flow from
operations, supplemented by borrowings under its demand credit facility.
21
<PAGE>
Effects Of Inflation
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's revenues or
profitability.
Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements required in response to this section are
submitted as part of Item 14(a) of this Report.
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Maxwell Shoe Company Inc.
We have audited the accompanying consolidated balance sheets of Maxwell Shoe
Company Inc. as of October 31, 1997 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended October 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Maxwell
Shoe Company Inc. at October 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
December 16, 1998
23
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands -- except per share amounts)
<TABLE>
<CAPTION>
October 31,
----------------------------------------
ASSETS 1997 1998
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 3,129 $ 18,731
Accounts receivable, trade (net of allowance for doubtful accounts and
discounts of $739 in 1997, $581 in 1998)............................. 28,594 35,655
Inventory, net......................................................... 20,141 22,928
Prepaid expenses....................................................... 251 430
Prepaid income taxes................................................... -- 1,177
Deferred income taxes.................................................. 1,526 1,074
--------------- --------------
Total current assets...................................................... 53,641 79,995
Property and equipment, net............................................... 1,393 6,231
Trademarks, net........................................................... 5,133 4,767
Other assets.............................................................. 12 12
--------------- --------------
$ 60,179 $ 91,005
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 2,197 $ 3,824
Accrued expenses....................................................... 6,767 5,938
Deferred income taxes.................................................. 111 306
Current portion of capital lease obligation............................ 125 125
--------------- ---------------
Total current liabilities................................................. 9,200 10,193
Long-term deferred income taxes........................................... -- 1,283
Capital lease obligation.................................................. 344 220
Stockholders' equity:
Preferred stock, par value $.01, 1,000 shares
authorized, none outstanding.......................................
Class A common stock, par value $.01, 20,000 shares authorized,
2,525 shares outstanding in 1997, 8,794 shares outstanding in 1998.. 25 88
Class B common stock, par value $.01, 10,000 shares authorized,
5,063 shares outstanding in 1997..................................... 51 --
Additional paid-in capital............................................... 27,312 43,015
Deferred compensation.................................................... (306)
Retained earnings........................................................ 23,247 36,512
--------------- ---------------
Total stockholders' equity.................................................. 50,635 79,309
--------------- ---------------
$ 60,179 $ 91,005
=============== ===============
</TABLE>
See accompanying notes.
24
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- except per share amounts)
<TABLE>
<CAPTION>
October 31,
--------------------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales.................................................. $ 104,337 $ 134,211 $ 165,921
Cost of sales.............................................. 79,915 98,230 121,032
--------------- --------------- ---------------
Gross profit............................................... 24,422 35,981 44,889
Operating expenses:
Selling.................................................. 5,589 7,903 10,241
General and administrative............................... 9,824 13,079 14,881
--------------- --------------- ---------------
15,413 20,982 25,122
--------------- --------------- ---------------
Operating income........................................... 9,009 14,999 19,767
Other expenses (income)
Interest................................................. 38 110 34
Other, net............................................... (579) 325 (156)
--------------- --------------- ---------------
(541) 435 (122)
--------------- --------------- ---------------
Income before income taxes................................. 9,550 14,564 19,889
Income taxes............................................... 3,629 5,534 6,624
--------------- --------------- ---------------
Net income................................................. $ 5,921 $ 9,030 $ 13,265
=============== =============== ===============
Earnings per share
Basic.................................................... $.78 $1.19 $1.61
Diluted.................................................. $.72 $1.06 $1.44
Shares used to compute earnings per share:
Basic.................................................... 7,588 7,588 8,222
Diluted.................................................. 8,261 8,537 9,226
</TABLE>
See accompanying notes.
25
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
October 31,
--------------------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income................................................. $ 5,921 $ 9,030 $ 13,265
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization............................ 242 672 1,214
Deferred income taxes.................................... 240 (685) 1,930
Doubtful accounts provision.............................. 50 125 125
Changes in operating assets and liabilities:
Accounts receivable................................... 931 (11,866) (7,186)
Inventory............................................. 219 (7,966) (2,787)
Prepaid expenses...................................... 706 (124) (487)
Accounts payable...................................... (48) 1,317 1,627
Income taxes payable.................................. 433 (433) --
Accrued expenses...................................... 791 3,467 (829)
--------------- --------------- ---------------
Net cash provided (used) by operating activities........... 9,485 (6,463) 6,872
Investing activities:
Purchase of trademark...................................... (5,500) -- --
Purchases of property and equipment........................ (101) (659) (5,686)
--------------- --------------- ---------------
Net cash used by investing activities...................... (5,601) (659) (5,686)
Financing activities:
Proceeds from sale of common stock......................... -- -- 13,246
Proceeds from exercise of stock option..................... -- -- 1,294
Payments on capital lease obligation....................... (176) (142) (124)
--------------- --------------- ---------------
Net cash (used) provided by financing activities........... (176) (142) 14,416
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents....... 3,708 (7,264) 15,602
Cash and cash equivalents at beginning of year............. 6,685 10,393 3,129
--------------- --------------- ---------------
Cash and cash equivalents at end of year................... $ 10,393 $ 3,129 $ 18,731
=============== =============== ===============
Interest paid.............................................. $ 38 $ 110 $ 34
=============== =============== ===============
Income taxes paid.......................................... $ 2,380 $ 6,807 $ 4,847
=============== =============== ===============
</TABLE>
See accompanying notes.
26
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
------------- ---------------
Number Number Additional Deferred
of of Paid-In Compen- Retained
Shares Amount Shares Amount Capital sation Earnings Total
------ ------ ------ ------ --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995...... 2,525 $ 25 5,063 $ 51 $ 27,312 $ 8,296 $ 35,684
Net income for 1996............. 5,921 5,921
------ ------ ------ ------ --------- -------- -------- -------
Balance at October 31, 1996...... 2,525 25 5,063 51 27,312 14,217 41,605
Net income for 1997............. 9,030 9,030
------ ------ ------ ------ --------- -------- -------- -------
Balance at October 31, 1997...... 2,525 25 5,063 51 27,312 23,247 50,635
Net income for 1998............. 13,265 13,265
Shares converted................ 5,063 51 (5,063) (51) --
Sale of common stock............ 802 8 13,238 13,246
Options exercised............... 404 4 1,290 1,294
Tax benefit from options
exercised..................... 869 869
Options granted................. 306 $ (306) --
------ ------ ------ ------ --------- -------- -------- -------
Balance at October 31, 1998...... 8,794 $ 88 0 $ 0 $ 43,015 $ (306) $ 36,512 $79,309
===== ====== ====== ====== ========== ======== ======= =======
</TABLE>
See accompanying notes.
27
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands -- except per share amounts)
October 31, 1998
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
Concentration of Credit Risk
The Company sells footwear for women and children to retailers located
throughout the United States, Canada and Japan. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. Credit losses have been within or below management's
expectations. In fiscal 1996, 1997 and 1998 one customer accounted for
approximately 15%, 19% and 18% respectively, of net sales. During 1996, this one
customer was acquired by another customer of the Company. Had these two
customers been treated as one account for fiscal year 1996, they would have
accounted for approximately 22% of net sales.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recognition of Revenue
Sales are recognized upon shipment of products.
Cash and Cash Equivalents
Cash, checking accounts and all highly-liquid debt instruments with
original maturities three months or less are deemed to be cash and cash
equivalents.
Inventory
Inventory is valued at the lower of cost or market, using the first-in,
first-out method.
28
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
Long Term Assets
Property and equipment are stated at cost. Depreciation is provided using
both straight line and accelerated methods over the estimated useful lives of
these assets or the lease term, if shorter. The estimated useful lives of these
assets are as follows:
Asset Useful Life
----- -----------
Furniture and fixtures........................ 5 Years
Warehouse equipment........................... 7 Years
Leasehold improvements........................ 7 Years
Computer equipment............................ 5 Years
In August 1996, the Company acquired the rights to the Sam & Libby and certain
related trademarks and tradenames for $5.5 million cash. The trademarks and
tradenames are being amortized on a straight line basis over 15 years, their
estimated useful lives. Amortization began in 1997 when sale of product with the
trademark names commenced. Accumulated amortization at October 31, 1997 and 1998
was $367 and $733, respectively.
Operating Expenses
General and administrative expenses include the cost of warehousing and
shipping operations.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense (including
cooperative advertising with retailers) amounted to $1,546, $2,502 and $3,852
for the years ended October 31, 1996, 1997 and 1998, respectively.
Income Taxes
The Company utilizes the liability method for accounting for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and law that will be in effect when the
differences reverse. Deferred tax assets may be reduced by a valuation allowance
to reflect the uncertainty associated with their ultimate realization.
Earnings Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The Company adopted
Statement 128 in fiscal 1998 and, accordingly, all earnings per share amounts
for all periods have been presented, and where necessary, restated to conform to
the Statement 128 requirements.
29
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
Basic income per share is computed based on the weighted average number of
common shares outstanding during the period. Diluted income per share is
computed based on basic shares outstanding increased by incremental shares
assumed issued for dilutive common stock equivalents in the form of stock
options.
Forward Exchange Contracts
The Company uses forward exchange contracts to manage its foreign currency
exposure. Realized and unrealized gains and losses on contracts that hedge
anticipated cash flows are determined by comparison of contract values to
current market values upon execution of a contract (realized) and at each
balance sheet date for open contracts (unrealized). Resulting gains and losses
are recognized in other income and expense ($275 gain in 1996, $76 loss in 1997
and $13 gain in 1998).
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees,
generally with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and, accordingly, recognizes no compensation expense for
the stock option grants when the exercise price equals the fair value of the
shares at the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." These provisions require the Company to disclose pro forma net
income and earnings per share amounts as if compensation related to grants of
stock options were recognized based on the fair value of such options (see
Note 5).
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income" (FAS 130) and Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
(FAS 131). FAS 130 establishes standards for reporting and displaying
comprehensive income and its components. FAS 131 establishes standards for
public companies to report information about operating segments in financial
statements, and supersedes FAS 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirements to report information about
major customers. FAS 130 and FAS 131 are effective for the Company in fiscal
1999. The Company does not believe the adoption of these Statements will have a
material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
provides for the recognition and measurement of derivatives and hedging
activities. The Statement is effective for years beginning after June 15, 1999,
however companies may early adopt as of the beginning of any fiscal quarter.
Management of the Company does not expect the adoption of this Statement to have
a material impact on the Company's financial statements.
30
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Warehouse equipment................................................ $ 1,278 $ 4,298
Furniture and fixtures............................................. 641 756
Leasehold improvements............................................. 635 863
Computer equipment................................................. 485 2,807
Other.............................................................. 4 4
--------- ---------
3,043 8,728
Less accumulated depreciation...................................... 1,650 2,497
--------- ---------
Property and equipment, net........................................ $ 1,393 $ 6,231
========= =========
</TABLE>
At October 31, 1997 and 1998, property and equipment included assets recorded
under capital leases of $1,047. Accumulated depreciation of such assets was $637
and $765 at October 31, 1997 and 1998, respectively. Depreciation expense,
including amortization of assets recorded under capital leases, for the years
ended October 31, 1996, 1997 and 1998 amounted to $242, $305 and $847,
respectively.
3. Bank Borrowings
The Company currently has a $35.0 million discretionary demand credit facility
bearing interest at either the Bank of Boston's base rate or Adjusted Eurodollar
Rate plus one percent (1.0%), renewable annually under certain conditions. The
credit agreement provides that the bank will both advance funds directly to the
Company and issue letters of credit on behalf of the Company. As of October 31,
1998, there were no outstanding borrowings, $17.4 million was outstanding under
letters of credit and $17.6 million was available for future borrowings.
4. Accrued Expenses
Accrued expenses consist of the following at October 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Inventory purchases................................................ $ 3,394 $ 3,076
Compensation....................................................... 2,653 1,687
Employee benefit plan contribution................................. 248 283
Other.............................................................. 472 892
--------- ---------
$ 6,767 $ 5,938
========= =========
</TABLE>
5. Stockholders' Equity
Preferred Stock
The Company's Charter authorizes the issuance of 1,000,000 shares of
preferred stock. The Company's Charter provides that the Board of Directors of
the Company may authorize the issuance of one or more series of
31
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
preferred stock having such rights, including voting, conversion and redemption
rights, and such preferences, including dividend and liquidation preferences, as
the Board may determine without any further action by the stockholders of the
Company. There are no shares of preferred stock currently outstanding.
Common Stock
Each share of Class B Common Stock is freely convertible into one share of
Class A Common Stock at the option of the Class B stockholders. Holders of Class
A Common Stock are entitled to one vote for each share held of record, and
holders of Class B Common Stock are entitled to ten votes for each share held of
record. The Class A Common Stock and the Class B Common Stock vote together as a
single class on all matters submitted to a vote of stockholders (including the
election of directors), except that, in the case of a proposed amendment to the
Company's Certificate of Incorporation that would alter the powers, preferences
Maxwell Shoe Company, Inc., or special rights of either the Class A Common Stock
or the Class B Common Stock, the class of Common Stock to be altered shall vote
on the amendment as a separate class. Shares of Common Stock do not have
cumulative voting rights with respect to the election of directors.
On April 27, 1998, the Company completed a public stock offering of an
aggregate of 6,145,792 shares of Class A Common Stock at $17.50 per share. Of
the shares sold, 5,044,167 Class A shares were sold by members of the founder's
family and a trust for their benefit upon conversion of a like number of Class B
shares and exercise of stock options, and 300,000 Class A shares were sold by
the Company Chairman and CEO pursuant to the exercise of stock options. The
Company did not receive any proceeds from the sale of shares by the selling
stockholders. In addition, the Company sold 801,625 shares of Class A Common
Stock pursuant to the full exercise of an over-allotment option granted by the
Company to the underwriters. The Company received $13.2 million from the
exercise of the over-allotment option and $1.3 million from the exercise of
stock options. The Company no longer has any Class B shares outstanding. The
Company expensed $.5 million of costs related to the sale of shares by the
selling stockholders pursuant to prior contractual obligations of the Company.
Stock Options
Under the 1994 Stock Incentive Plan (the Plan), the Board of Directors has
reserved 750,000 shares of Class A Common Stock for issuance upon exercise of
options or grants of other awards under the Plan. On June 1, 1998, the Plan was
amended to increase the number of shares by 300,000 of Class A Common Stock for
issuance upon exercise of options or grants of other awards under the Plan.
Except for options granted to non-employee directors, which vest immediately,
options generally vest annually over a four-year period.
In September 1998, the Company granted 30,000 options to certain employees
to purchase stock at $1.00 per share. Based on the market price of the
Company's stock on the date of grant, the Company recorded deferred compensation
expense of $306, which will be recognized ratably over the vesting period of
five years.
32
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
Presented below is a summary of the status of the stock option plan and
related transactions:
<TABLE>
<CAPTION>
Year ended October 31,
-----------------------------------------------------------
1996 1997 1998
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year....... 294,250 $ 9.47 670,850 $ 7.46 735,850 $ 7.15
Granted........................................ 382,500 $ 5.96 129,500 $ 6.45 145,000 $ 14.03
Exercised...................................... 0 $ 0.00 0 $ 0.00 (104,257) $ 8.17
Canceled....................................... (5,900) $ 10.38 (64,500) $ 9.00 (94,293) $ 7.13
------- ------- --------
Options outstanding at end of year............. 670,850 $ 7.46 735,850 $ 7.15 682,300 $ 8.46
======= ======= ========
Options exercisable at end of year............. 102,324 214,405 437,696
======= ======= ========
</TABLE>
The following table summarizes information about stock options outstanding
under the stock option plan at October 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (Years) Price Shares Price
- ----------------------- ---------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$1.00.................................... 30,000 10.0 $ 1.00 0 --
$5.00 - $ 7.75.......................... 408,900 8.6 $ 6.06 280,830 $ 6.07
$9.00 - $10.38........................... 128,400 6.1 $ 9.79 115,200 $ 9.88
$17.00 - $17.50.......................... 115,000 9.5 $ 17.43 41,666 $ 17.32
---------- ----------
682,300 8.1 $ 8.46 437,696 $ 8.15
========== ==========
</TABLE>
At October 31, 1997 and 1998, there were 14,150 shares and 263,443 shares
available, respectively, for future grants under stock option plans.
In 1994, in consideration for the termination of a deferred compensation
agreement, the Board of Directors approved a non-transferable stock option grant
to the CEO for the purchase of 888,412 shares of Class A Common Stock at an
exercise price of $1.50 per share. The grant was outside of the Company's stock
option plan, and the stock options were immediately exercisable. In connection
with the public stock offering, the CEO exercised a portion of these options to
purchase 300,000 shares of common stock. At October 31, 1998, 588,412 shares
remained outstanding.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123) utilizes the fair value method of
accounting for employee stock options. Under this method, compensation expense
for stock-based compensation plans is measured at the grant date based on the
fair value of the award and is recognized over the service period. In
accordance with FAS 123, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, no compensation expense is recognized as long as
the exercise price equals the market price of the underlying stock on the date
of grant.
33
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options and other stock-
based compensation granted subsequent to October 31, 1995 under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 5.26% to
6.89%; dividend yield of 0%; volatility factor of the expected market price of
the Company's common stock of 63.4% for 1996 and 1997 and 61.2% for 1998; and a
weighted average expected life of 5.1 years for options granted in 1996 and 1997
and 5.0 years for options granted in 1998. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
<TABLE>
<CAPTION>
Year ended
October 31,
----------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Pro forma:
Net income.................................................... $ 5,758 $ 8,731 $ 12,662
Earnings per share:
Basic........................................................ $ 0.76 $ 1.15 $ 1.54
Diluted...................................................... $ 0.70 $ 1.02 $ 1.37
Options granted whose exercise price equals
market price on grant date
Weighted average fair value of options granted............... $ 3.53 $ 4.07 $ 9.99
Weighted average exercise price.............................. $ 5.96 $ 6.74 $ 17.44
Options granted whose exercise price is less than
market price on grant date
Weighted average fair value of options granted............... -- $ 4.74 $ 10.52
Weighted average exercise price.............................. -- $ 6.00 $ 1.00
</TABLE>
During the initial phase-in period, the effects of applying FAS 123 for
recognizing compensation expense may not be representative of the effects on
reported net income or loss for future years because the options granted by the
Company vest over several years and additional awards may be made in future
years.
Stockholder Rights Plan
The Company adopted a Stockholder Rights Plan, under which each outstanding
share of the Company's Class A common stock carries one Common Stock Purchase
Right. The rights may only become exercisable under certain circumstances
involving acquisition of the Company's common stock by a person or group of
persons without the prior written consent of the Company's board. Depending on
the circumstances, if the rights become exercisable, the holder of rights may be
entitled to purchase shares of the Company's Class A common stock or shares of
common stock of the acquiring person at discounted prices. The rights will
expire on November 2, 2008 unless they are earlier exercised, redeemed or
exchanged.
34
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
6. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of October 31 were as
follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets
Stock option compensation...................................... $ 2,800 $ 1,854
Inventory reserve.............................................. 571 482
Allowance for doubtful accounts................................ 295 232
Accrued compensation........................................... 386 0
Inventory capitalization....................................... 274 360
---------- ---------
4,326 2,928
Valuation allowances for deferred tax assets....................... (2,800) (1,854)
---------- ---------
Total deferred tax assets.......................................... 1,526 1,074
Deferred tax liabilities:
Trademark...................................................... 0 1,283
Property and equipment......................................... 111 306
---------- ---------
Total deferred tax liabilities..................................... 111 1,589
---------- ---------
Net deferred tax assets (liabilities).............................. $ 1,415 $ (515)
========== =========
</TABLE>
FAS 109 requires a Company to recognize a valuation allowance if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. In connection with the stock option compensation discussed in Note 5,
the Company recorded a valuation allowance in 1994 for the related deferred tax
asset. The stock option compensation is deductible for tax purposes upon
exercise of the option. During 1998, a portion of the options were exercised
and a proportionate share of the valuation allowance was reduced resulting in a
tax benefit of $946, which is included in the income tax provision.
Furthermore, for tax purposes, the Company recognized additional compensation
expense for the difference between the market price at the date of grant and the
market price at the date of exercise. This additional tax benefit of $869 has
been recorded as a reduction of current taxes payable and an increase in
additional paid-in-capital.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
Current:
<S> <C> <C> <C>
Federal................................. $ 3,011 $ 5,023 $ 3,844
State................................... 378 1,196 850
----------- ----------- -----------
Total current............................... 3,389 6,219 4,694
Deferred:
Federal................................. 204 (582) 1,559
State................................... 36 (103) 371
----------- ----------- -----------
Total deferred.............................. 240 (685) 1,930
----------- ----------- -----------
$ 3,629 $ 5,534 $ 6,624
=========== =========== ===========
</TABLE>
35
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate...................................... 34% 34% 35%
State income taxes, net of federal tax benefit....... 5 5 5
Stock option compensation............................ 0 0 (5)
Other................................................ (1) (1) (2)
-------- -------- --------
Effective tax rate....................................... 38% 38% 33%
======== ======== ========
</TABLE>
7. Profit-Sharing Plan
The Company has a contributory 401(k) profit-sharing plan covering
substantially all employees. Employees may contribute up to 15% of their pre-
tax salary subject to statutory limitations. The plan requires the Company to
match 100% of employee contributions up to 2% of total employee compensation.
The plan also allows for additional discretionary Company contributions. Total
plan expense amounted to $200, $300 and $350 for fiscal years 1996, 1997 and
1998, respectively.
8. Commitments
The Company leases equipment and office and warehouse space under long-term
non-cancelable operating leases which expire at various dates through January
31, 2007. These leases require the Company to pay the real estate taxes on the
real property. The Company also leases equipment under capital leases.
At October 31, 1998, future minimum payments under such leases were as
follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
1999.................................................................. $ 151 $ 1,221
2000.................................................................. 142 1,184
2001.................................................................. 123 1,199
2002.................................................................. 0 672
Later years........................................................... 0 2,550
------- ---------
Total minimum lease payments.......................................... 416 $ 6,826
=========
Amounts representing interest......................................... (71)
-------
Capital lease obligation (including current portion).................. $ 345
=======
</TABLE>
Rent expense for the years ended October 31, 1996, 1997 and 1998 was $639,
$831 and $981, respectively.
The Company is a licensee under three agreements which allow for the
manufacture and sale of various items of footwear. The agreements require the
payment of royalties on qualified product sales and generally guarantee minimum
royalty payments regardless of sales volume. In April 1997, the Company
exercised its option to renew the license agreement with Jones Investment Co.,
Inc. (the Jones Agreement) through December 31, 2002 which requires a minimum
royalty payments ranging from $800 to $1,250 per annum during the period ending
December 31, 2002. The April 1997 amendment also granted the Company three
five-year option periods to renew through December 2017, subject to satisfying
certain conditions. The three option periods require
36
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
minimum royalty payments of $1,250 per annum. In April 1997, the Company entered
into a license agreement with J. G. Hook, Inc. (the Hook agreement) for an
initial 18 month period ending September 30, 1998, with two one-year option
periods. In September 1998, the Company exercised its first one year option and
renewed the agreement through September 1999. On November 13, 1998, the Company
entered into a license agreement with Levi Strauss Co. which allows for the
manufacture and sale of a full range of women's casual footwear under the
Dockers(R) brand name. The agreement requires the payment of royalties on
qualified sales and guarantees minimum royalty payments. The minimum royalty
ranges from $144 to $864 through the initial term ending December 31, 2001.
There is one four-year option to renew through December 31, 2005, subject to
satisfying certain conditions.
In January 1997, the Company entered into a license agreement with Inter-
Pacific Corporation (IPC), which provides IPC with the exclusive rights to
design, manufacture and distribute Sam & Libby beachwear type footwear for an
initial term of January 1997 to May 2000. For the use of the Sam & Libby
tradename, IPC will pay the Company royalties based on qualified product sales
subject to payment of minimum royalties of $396 over the initial term of the
agreement. Upon satisfaction of certain conditions, IPC may exercise its option
to extend the license agreement until May 2003.
On April 14, 1997 the Company completed a transaction to own and operate
retail women's footwear stores through a joint venture, SLJ Retail LLC (SLJ),
which sells a complete selection of women's footwear under the Sam & Libby and
Jones New York brand names. Initially, the joint venture was 49% owned by the
Company, which will account for its ownership under the equity method, and 51%
owned by the Butler Group, Inc., a wholly owned subsidiary of General Electric
Capital Corporation. The Company also holds an option through February 1, 2000
to purchase additional equity in the joint venture to increase its equity
ownership by approximately 5%. Under certain circumstances, the Company may be
obligated to acquire the ownership interest of the Butler Group at a value based
upon the operating results of SLJ Retail. The Company also entered into an
agreement to provide management services to SLJ Retail.
Summarized financial information of SLJ Retail as of October 31, 1998 and
for the year then ended is as follows: current assets - $12,286, non-current
assets - $5,836, current liabilities - $8,866, non-current liabilities -
$32,958, net sales - $41,405, gross profit - $19,270 and net operating loss -
($22,756). The Company has not recognized any portion of SLJ Retail's net
operating losses through October 31, 1998 because, under the equity method of
accounting, the Company does not recognize any losses beyond the carrying value
of its investment in SLJ Retail, which is zero.
Simultaneously with the formation of SLJ Retail, the Company entered into a
sub-license agreement with SLJ Retail pursuant to which the Company granted to
SLJ Retail a sub-license of its rights under the Jones Agreement noted above.
The initial term of this sub-license agreement expires in December 2002, but is
extended automatically for the same period of time as any extension by the
Company of the Jones Agreement. The sub-license agreement is subject to early
termination for various reasons, including any termination of the Jones
Agreement. In addition, the Company entered into a retail license agreement (the
"Retail License Agreement") with SLJ Retail pursuant to which the Company
granted to SLJ Retail a license, throughout the United States and such other
locations outside the United States, in which SLJ Retail may manufacture and
sell Sam & Libby women's footwear products, provided however, that such license
does not extend to products to which IPC has the exclusive rights. Under the
Retail License Agreement, SLJ Retail does not have to pay any royalty to the
Company in consideration of the license granted. The initial term of the Retail
License Agreement expires on January 31, 2047, subject to earlier termination
upon the occurrence of certain specified events.
37
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands -- except per share amounts)
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Numerator:
Net income........................................ $5,921 $9,030 $13,265
====== ====== =======
Denominator:
Denominator for basic earnings per share
Weighted average shares....................... 7,588 7,588 8,222
Denominator for diluted earnings per share
Dilutive stock options........................ 673 949 1,004
------ ------ -------
Adjusted weighted average shares and assumed
conversions................................... 8,261 8,537 9,226
====== ====== =======
Earnings per share
Basic............................................. $ .78 $ 1.19 $ 1.61
====== ====== =======
Diluted........................................... $ .72 $ 1.06 $ 1.44
====== ====== =======
</TABLE>
10. Supplementary Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results for the fiscal
years ended October 31, 1997 and October 31, 1998.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
January 31, April 30, July 31, October 31,
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fiscal 1997
Net sales................................ $28,764 $31,073 $36,833 $37,541
Gross profit............................. 7,261 9,161 10,173 9,386
Net income............................... 1,662 2,190 2,965 2,213
Earnings per share
Basic.................................. $ .22 $ .29 $ .39 $ .29
======= ======= ======= =======
Diluted................................ $ .20 $ .26 $ .35 $ .25
======= ======= ======= =======
Fiscal 1998
Net sales................................ $36,328 $39,786 $47,386 $42,421
Gross profit............................. 9,837 10,924 13,056 11,072
Net income............................... 2,230 3,145 4,468 3,422
Earnings per share
Basic.................................. $ .29 $ .41 $ .51 $ .40
======= ======= ======= =======
Diluted................................ $ .26 $ .35 $ .46 $ .36
======= ======= ======= =======
</TABLE>
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.
39
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements:
The following financial statements of the Company are included in response to
Item 8 of this report.
<TABLE>
<CAPTION>
Page Reference
Form 10K
--------------
<S> <C>
Report of Independent Auditors............................................. 23
Balance Sheets as of October 31, 1997 and 1998............................. 24
Statements of Income for each of the three years in the period ended
October 31, 1998......................................................... 25
Statements of Cash Flows for each of the three years in the period ended
October 31, 1998......................................................... 26
Statements of Changes in Stockholders' Equity for each of the three years
in the period ended October 31, 1998..................................... 27
Notes to Financial Statements.............................................. 28
(a) (2) Financial Statements:
Schedule II -- Valuation and qualifying accounts for the years
ended October 31, 1996, 1997 and 1998.................................... 45
</TABLE>
Schedules other than those listed above have been omitted since they are
either not
required, not applicable, or the information is otherwise included.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of
fiscal 1998.
(c) Exhibits
3.1 Certificate of Incorporation of Maxwell Shoe Company Inc.
(incorporated by reference to exhibit 3.1 to the registrant's
Form S-1 Registration Statement No. 33-74768)
3.2 Bylaws of Maxwell Shoe Company Inc., as amended (incorporated by
reference to exhibit 3.2 to the registrant's Form S-1
Registration Statement No.33-74768)
4.1 Specimen Maxwell Shoe Company Inc. Class A Common Stock
Certificate (incorporated by reference to exhibit 4.1 to the
registrant's Form 10-K for the fiscal year ended October 31,
1994)
4.2 Specimen Maxwell Shoe Company Inc. Class B Common Stock
Certificate (incorporated by reference to exhibit 4.2 to the
registrant's Form 10-K for the fiscal year ended October 31,
1994)
4.3 Rights Agreement dated as of November 2, 1998 between Maxwell
Shoe Company Inc. and BankBoston, N.A., as Rights Agent
(incorporated by reference to Exhibit 99.1 to the registrant's
Form 8-K filed on November 12, 1998)
10.1 Amended 1994 Stock Incentive Plan (incorporated by reference to
exhibit 4.1 to the registrant's Form S-8 Registration Statement
No. 333-55723)
40
<PAGE>
10.2.1 Form of Employee Nonqualified Stock Option Agreement pursuant to
1994 Stock Incentive Plan (incorporated by reference to exhibit
10.2.1 to the registrant's Form S-1 Registration Statement No.
33-74768)
10.2.2 Form of Employee Incentive Stock Option Agreement pursuant to
1994 Stock Incentive Plan (incorporated by reference to exhibit
10.2.2 to the registrant's Form S-1 Registration Statement No 33-
74768)
10.2.3 Form of Nonemployee Director Stock Option Agreement pursuant to
1994 Stock Incentive Plan (incorporated by reference to exhibit
10.2.3 to the registrant's Form S-1 Registration Statement No.
33-74768)
10.3 Form of Restricted Stock Agreement pursuant to 1994 Stock
Incentive Plan (incorporated by reference to exhibit 10.3 to the
registrant's Form S-1 Registration Statement No. 33-74768)
10.4 Form of Indemnity Agreement between Maxwell Shoe Company Inc. and
each of its directors and executive officers (incorporated by
reference to exhibit 10.4 to the registrant's Form S-1
Registration Statement No. 33-74768)
10.5 Form of Tax Indemnification Agreement between Maxwell Shoe
Company Inc. and each of Maxwell V. Blum, Eleanor S. Blum, Betty
Ann Blum and Marjorie Blum (incorporated by reference to exhibit
10.5 to the registrant's Form S-1 Registration Statement No.
33-74768)
10.6 Lease dated as of May 15, 1991 by and between George Shapiro,
Arthur S. Goldberg and Sidney Shapiro, Trustees of the Shapiro
Properties Realty Trust, as lessor, and Maxwell Shoe Company
Inc., as lessee (incorporated by reference to exhibit 10.7 to the
registrant's Form S-1 Registration Statement No. 33-74768)
10.7 Lease dated as of November 17, 1993 by and between Trustees of
Bradshaw Westwood Trust, as landlord, and Maxwell Shoe Company
Inc., as tenant (incorporated by reference to exhibit 10.8 to the
registrant's Form S-1 Registration Statement No.33-74768)
10.8 Agreement of Lease between Anon Realty Associates, L.P., as
successor lessor to 1414 Americas Company and Maxwell Shoe
Company Inc., as lessee (incorporated by reference to exhibit
10.9 to the registrant's Form S-1 Registration Statement No.
33-74768)
10.9 Demand Credit Facility Agreement dated September 2, 1998
between Maxwell Shoe Company Inc. and BankBoston, N.A.
10.10 Form of Registration Rights Agreement between Maxwell Shoe
Company Inc. on the one hand and Maxwell V. Blum, Betty A. Blum,
Marjorie Blum, Mark J. Cocozza, and Joseph Aborn, as trustee of
the Eleanor S. Blum Trust (incorporated by reference to exhibit
10.13 to the registrant's Form S-1 Registration Statement No.
33-74768)
10.11 License Agreement dated July 1, 1993 between Jones Investment
Co., Inc. and Maxwell Shoe Company Inc. (incorporated by
reference to exhibit 10.12 to the registrant's Form S-1
Registration Statement No. 33-74768)
10.12 Employment Agreement dated as of April 27, 1998 between Maxwell
Shoe Company Inc. and Mark J. Cocozza
10.13 Employee Agreement dated as of April 27, 1998 between Maxwell
Shoe Company Inc. and James J. Tinagero.
10.14 Stock Option and Registration Rights Agreement dated as of
January 26, 1994 between Maxwell Shoe Company Inc. and
Mark J. Cocozza (incorporated by reference to exhibit 10.15 to
the registrant's Form S-1 Registration Statement No. 33-74768)
41
<PAGE>
10.15 Master Lease Agreement dated as of July 18, 1994 between Maxwell
Shoe Company Inc. and BancBoston Leasing Inc. (incorporated by
reference to exhibit 10.23 to the registrant's Form 10-K for the
fiscal year ended October 31, 1994)
10.16 Assumption Agreement dated July 7, 1995 between BancBoston
Leasing Inc. and Maxwell Shoe Company Inc. (incorporated by
reference to exhibit 10.24 to the registrant's Form 10-K for the
fiscal year ended October 31, 1995)
10.17 Letter Agreement dated January 25, 1995 between Legas Realty
Corp., as successor lessor to S.L. Green Properties Inc., as
successor to Anon Realty Associates, L.P., and Maxwell Shoe
Company Inc. (incorporated by reference to exhibit 10.25 to the
registrant's Form 10-K for the fiscal year ended October 31,
1995)
10.18 First Amendment to License Agreement dated October 2, 1995
between Jones Investment Co., Inc., and Maxwell Shoe Company Inc.
(incorporated by reference to exhibit 10.26 to the registrant's
Form 10-K for the fiscal year ended October 31, 1995)
10.19 Sublease Agreement dated June 16, 1997 between Macy's East,
Inc. and Maxwell Shoe Company Inc. (incorporated by reference to
exhibit 10.32 to the registrant's Form 10-K for the fiscal year
ended October 31, 1997)
10.20 Lease Agreement dated June 16, 1997 between John H. Finley, III
as trustee of Brockton Oak Real Estate Trust and Maxwell Shoe
Company Inc. (incorporated by reference to exhibit 10.33 to the
registrant's Form 10-K for the fiscal year ended October 31,
1997.
10.21 Contribution Agreement dated as of April 14, 1997, by and among
The Butler Group Inc., Maxwell Shoe Company Inc., and Maxwell
Retail Inc. (incorporated by reference to exhibit 10.1 to the
registrant's Form 8-K filed on May 5, 1997)
10.22 Operating Agreement of SLJ Retail LLC dated as of April 14, 1997
by and between the Butler Group, Inc. and Maxwell Retail Inc.
(incorporated by reference to exhibit 10.2 to the registrant's
Form 8-K filed on May 5, 1997)
10.23 First Amendment to Operating Agreement dated as of June 24, 1998
by and among Butler Group LLC. and Maxwell Retail Inc.
10.24 Option Agreement dated as of April 14, 1997 by and among The
Butler Group Inc., Maxwell Shoe Company Inc., Maxwell Retail Inc.
and SLJ Retail LLC (incorporated by reference to exhibit 10.3 to
the registrant's Form 8-K filed on May 5, 1997)
10.25 First Amendment to Option Agreement dated as of June 24, 1998 by
and among Maxwell Shoe Company Inc., Maxwell Retail Inc. and SLJ
Retail LLC.
10.26 Services Agreement dates as of April 14, 1997 by and between
Maxwell Shoe Company Inc. and SLJ Retail LLC (incorporated by
reference to exhibit 10.4 to the registrant's Form 8-K filed on
May 5, 1997)
10.27 First Amendment to Services Agreement dated as of June 24, 1998
by and among Maxwell Shoe Company Inc. and SLJ Retail LLC.
10.28 Non-Compete Agreement dated as of April 14, 1997 by and among
SLJ Retail LLC, Maxwell Shoe Company Inc. Maxwell V. Blum, Betty
Ann Blum, Marjorie W. Blum, Mark J. Cocozza, David Andelman, as
trustee of the Eleanor S. Blum Trust, Maxwell Retail Inc. and
Sprague Company (incorporated by reference to exhibit 10.5 to the
registrant's Form 8-K filed on May 5, 1997)
10.29 Retail Opportunity Agreement dates as of April 14, 1997 by and
among SLJ Retail LLC, Maxwell Shoe Company Inc., Maxwell V. Blum,
Betty Ann Blum, Marjorie W. Blum, David Andelman, as trustee of
the Eleanor S. Blum Trust, Maxwell Retail Inc. and Sprague
Company (incorporated by reference to exhibit 10.6 to the
registrant's Form 8-K filed on May 5, 1997)
42
<PAGE>
10.30 Registration Rights Amendment dates as of April 14, 1997 by and
among Maxwell Shoe Company Inc., The Butler Group Inc., Maxwell
V. Blum, Betty Ann Blum, Marjorie W. Blum, Mark J. Cocozza and
David Andelman, as trustee of the Eleanor S. Blum Trust
(incorporated by reference to exhibit 10.7 to the registrant's
Form 8-K filed on May 5, 1997)
10.31 Second Amendment to License Agreement dated as of April 14, 1997
by and between Maxwell Shoe Company Inc. and Jones Investment
Co., Inc. (incorporated by reference to exhibit 10.8 to the
registrant's Form 8-K filed on May 5, 1997)
10.32 Trademark Sublicense Agreement dated as of April 14, 1997 by and
between Maxwell Shoe Company Inc. and SLJ Retail LLC
(incorporated by reference toexhibit 10.9 to the registrant's
Form 8-K filed on May 5, 1997)
10.33 Sublease Agreement dated June 16, 1997 between Macy's East Inc.
and Maxwell Shoe Company Inc.
10.34 Contribution Agreement dated as of June 24, 1998 by and among
The Butler Group LLC, Maxwell Shoe Company Inc, and Maxwell
Retail Inc.
21 Subsidiaries of Maxwell Shoe Company, Inc.
23 Consent of Independent Auditors
27 Financial Data Schedule
43
<PAGE>
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.
MAXWELL SHOE COMPANY, INC.
/s/ Mark J. Cocozza
By ------------------------------------
Mark J. Cocozza,
Chairman and Chief Executive Officer
January 21, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MARK J. COCOZZA Chairman of the Board and January 21, 1999
------------------------------------ Chief Executive Officer
Mark J. Cocozza (Principal Executive Officer)
/s/ JAMES J. TINAGERO Executive Vice President and Director January 21, 1999
------------------------------------ (Principal Financial Officer)
James J. Tinagero
/s/ RICHARD J. BAKOS Vice President Finance and January 21, 1999
------------------------------------ Chief Financial Officer
Richard J. Bakos (Principal Accounting Officer)
/s/ STEVEN C. GOLDSTEIN Controller January 21, 1999
------------------------------------
Steven C. Goldstein
/s/MAXWELL V. BLUM Director January 21, 1999
------------------------------------
Maxwell V. Blum
/s/ STEPHEN A. FINE Director January 21, 1999
------------------------------------
Stephen A. Fine
/s/ JONATHAN K. LAYNE Director January 21, 1999
------------------------------------
Jonathan K. Layne
/s/ MALCOLM L. SHERMAN Director January 21, 1999
------------------------------------
Malcolm L. Sherman
</TABLE>
44
<PAGE>
MAXWELL SHOE COMPANY INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions1 Period
- ------------------------------------------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended October 31, 1996
Allowance for doubtful accounts......... $853 $ 50 $173 $730
Year ended October 31, 1997
Allowance for doubtful account.......... $730 $125 $116 $739
Year ended October 31, 1998
Allowance for doubtful account.......... $739 $125 $283 $581
</TABLE>
- --------------
/1/Uncollectible accounts written off, net of recoveries.
<PAGE>
Schedule A
----------
DEFINITIONS
-----------
Accountants: Ernst & Young LLP, Arthur Andersen & Co., LLP or other
-----------
independent certified public accountants of nationally-recognized standing.
Adjusted Eurodollar Rate: As applied to any Interest Period, the rate per
------------------------
annum determined pursuant to the following formula:
AER = [ IOR ]*
--------------
[1.00 - RP]
AER = Adjusted Eurodollar Rate
IOR = Interbank Offered Rate
RP = Reserve Percentage
*The amount in brackets shall be rounded upwards, if necessary, to the next
higher 1/100th of 1%.
Where:
The "Interbank Offered Rates" applicable to any Eurodollar Loan for
-----------------------
any Interest Period means the rate of interest (rounded upward, if
necessary, to the nearest 1/16th of 1%) determined by the Bank to be the
prevailing rate per annum at which deposits in U.S. dollars are offered to
the Bank by first-class banks in the interbank eurodollar market where the
eurodollar and foreign currency and exchange operations in respect of its
Eurodollar Loans are then being conducted on or about 10:00 a.m. (Boston
time) two (2) Business Days before the first day of such Interest Period in
an amount approximately equal to the principal amount of the Eurodollar
Loan to which such Interest Period is to apply for a period of time
approximately equal to such Interest Period; and
The "Reserve Percentage" applicable to any Interest Period means the
------------------
aggregate of the rates (expressed as a decimal) applicable to the Bank
during such Interest Period under regulations issued from time to time by
the Board of Governors of the Federal Reserve System (or other governmental
authority having jurisdiction with respect thereto) for determining the
maximum reserve requirement (including, without limitation, any basic,
supplemental, emergency or marginal reserve requirement) of the Bank with
respect to "Eurocurrency liabilities" as that term is defined under such
regulations.
The Adjusted Eurodollar Rate shall be adjusted automatically as of the
effective date of any change in the Reserve Percentage.
<PAGE>
Base Rate: The higher of (i) the annual rate of interest announced from
---------
time to time by the Bank at its head office as its Base Rate, and (ii) the
Federal Funds Effective Rate plus 1/2 of 1% per annum. The Base Rate is not
necessarily intended to be the lowest rate of interest determined by the Bank in
connection with extensions of credit.
Base Rate Loan: Any Demand Loan bearing interest calculated by reference
--------------
to the Base Rate.
Borrower: See the Preamble.
--------
Business Day: (i) For all purposes other than as covered by clause (ii)
------------
below, any day, other than a Saturday, Sunday or legal holiday, on which banks
in Boston, Massachusetts are open for the transaction of a substantial part of
their commercial banking business; and (ii) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
Eurodollar Loans, any day that is a Business Day described in clause (i) and
that is also a day for trading by and between banks in U.S. Dollar deposits in
the relevant interbank eurodollar market.
Cash Management Agreement: Any Cash Management Master Agreement entered
-------------------------
into between the Bank and the Borrower from time to time, as from time to time
in effect, including all schedules and addenda attached thereto, relating to
cash management, sweep account or similar services provided by the Bank to the
Borrower allowing for daily advances and repayments in connection with the
Borrower's daily operations and working capital requirements.
Code: The Internal Revenue Code of 1986 and the rules and regulations
----
promulgated thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.
Demand Loan: See Section 1.1
-----------
Demand Loan Account: See Section 1.2
-------------------
Demand Note: See Section 1.1
-----------
Encumbrances: See Section 11.2.
------------
Environmental Laws: Any and all applicable federal, state and local
------------------
environmental, health or safety statutes, laws, regulations, rules, ordinances,
policies and rules or common law (whether now existing or hereafter enacted or
promulgated), of all governmental agencies, bureaus or departments which may now
or hereafter have jurisdiction over the Borrower or any of its Subsidiaries and
all applicable judicial and administrative and regulatory decrees, judgments and
orders, including common law rulings and determinations, relating to the effect
of the environment on human health and safety or injury to, or the protection
of, the environment, including, without limitation, all requirements pertaining
to reporting, licensing,
-2-
<PAGE>
permitting, investigation, remediation and removal of emissions, discharges,
releases or threatened releases of Hazardous Materials, pollutants or
contaminants whether solid, liquid or gaseous in nature, into the environment or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of such Hazardous Materials, pollutants or
contaminant. Without limiting the generality of the foregoing, the term shall
encompass each of the following statutes and regulations promulgated thereunder,
and amendments and successors to such statutes and regulations, as enacted and
promulgated from time to time: (a) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, (42 U.S.C. (S)(S)9601 et seq.); (b) the
------
Resource Conservation and Recovery Act of 1976 (42 U.S.C. (S)(S)6901 et seq. );
------
(c) the Hazardous Materials Transportation Act (49 U.S.C. (S)(S)1801 et seq.);
------
(d) the Toxic Substances Control Act (15 U.S.C. (S)(S)2601 et seq.); (e) the
------
Clean Water Act (33 U.S.C. (S)(S)1251 et seq.); (f) the Clean Air Act (42 U.S.C.
------
(S)(S)7401 et seq.); (g) the Safe Drinking Water Act (42 U.S.C. (S)300 et seq.);
------
(h) the National Environmental Policy Act of 1969 (42 U.S.C. (S)(S)4321);
(i) the Superfund Amendment and Reauthorization Act of 1986 (codified in 42
U.S.C.); and (j) Title III of the Superfund Amendment and Reauthorization Act
(42 U.S.C. (S)(S)11001 et seq.) and any state or local laws of similar substance
------
and effect.
ERISA: The Employee Retirement Income Security Act of 1974 and the rules
-----
and regulations thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.
Eurodollar Loan: Any Demand Loan bearing interest at a rate calculated by
---------------
reference to the Adjusted Eurodollar Rate.
Expiration Date: April 30, 1999, subject to renewal for one or more
---------------
additional one-year periods at the Bank's sole discretion, unless sooner
terminated by demand by the Bank in the Bank's sole discretion.
Federal Funds Effective Rate: For any day, a fluctuating interest rate per
----------------------------
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day that is a Business Day, the
average of the quotations for such day on such transactions received by the Bank
from three Federal funds brokers of recognized standing selected by the Bank.
GAAP: For all purposes of this agreement, GAAP shall mean the generally
----
accepted accounting principles in effect from time to time, applied on a
consistent basis with past financial statements (except for changes with which
the Accountants concur).
Guaranty or Guarantees: All guarantee(s), endorsement(s) (other than
----------------------
endorsements of instruments for collection in the ordinary course of business)
or other contingent or surety obligation(s) of the Borrower with respect to
obligations of others, whether or not reflected on the Borrower's balance sheet,
including any obligation to furnish funds, directly or indirectly (whether by
virtue of partnership arrangements, by agreement to keep-well or otherwise),
-3-
<PAGE>
through the purchase of goods, supplies or services, or by way of stock
purchase, capital contribution, advance or loan, or to enter into a contract for
any of the foregoing, for the purpose of payment of obligations of any other
person or entity.
Hazardous Material: Any substance (a) the presence of which requires or
------------------
may hereafter require notification, investigation or remediation under any
Environmental Law; (b) which is or becomes defined as a "hazardous waste",
"hazardous material", "hazardous material or oil" or "hazardous substance" or
"controlled industrial waste" or "pollutant" or "contaminant" or "chemical
substance or mixture" under any present or future Environmental Law or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. (S)(S)9601 et
--
seq.) and any applicable local statutes and the regulations promulgated
- ---
thereunder; (c) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of the United States, any state of the United States,
or any political subdivision thereof to the extent any of the foregoing has or
had jurisdiction over the Borrower; or (d) without limitation, which contains
gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated
biphenyls.
Interest Period: With respect to each Eurodollar Loan, the period
---------------
commencing on the date of the making or continuation of or conversion to such
Eurodollar Loan and ending one, two, three or six months thereafter, as the
Borrower may elect in request made pursuant to Section 3(a) or (b); provided
that:
(i) any Interest Period (other than an Interest Period determined
pursuant to clause (iv) below) that would otherwise end on a day that
is not a Business Day shall be extended to the next succeeding
Business Day unless, in the case of Eurodollar Loans, such Business
Day falls in the next calendar month, in which case such Interest
Period shall end on the immediately preceding Business Day;
(ii) if the Borrower shall fail to give notice as provided in Section
3(b), the Borrower shall be deemed to have requested a conversion of
the affected Eurodollar Loan to a Base Rate Loan on the last day of
the then current Interest Period with respect thereto;
(iii) any Interest Period relating to a Eurodollar Loan that begins on the
last Business Day of a calendar month (or on a day for which there is
not numerically corresponding day in the calendar month at the end of
such Interest Period) shall, subject to clause (iv) below, end on the
last Business Day of a calendar month;
(iv) any Interest Period related to a Eurodollar Loan that would otherwise
end after the Expiration Date shall end on the Expiration Date; and
(v) notwithstanding clause (iv) above, no Interest Period relating to a
Eurodollar Loan shall have a duration of less than one month.
-4-
<PAGE>
LC Draw Obligation: The Borrower's obligation to reimburse the Bank on
------------------
account of any drawing under any Letter of Credit as provided in Section 5.3.
LC Exposure Amount: At any time, the sum of (i) the aggregate undrawn face
------------------
amount of all Letters of Credit outstanding at such time, and (ii) the aggregate
amount of all drawings under Letters of Credit for which the Bank shall not have
been reimbursed by the Borrower as provided in Section 5.3.
Bank: See the Preamble.
----
Letter of Credit: See Section 5.1.
----------------
Letter of Credit Documents: See Section 5.7.
--------------------------
Line of Credit: See Section 1.1.
--------------
Letter of Credit Fee: See Section 2.8(i).
--------------------
Letter of Credit Fee Schedule: A schedule attached hereto, as the same may
-----------------------------
be amended, modified or supplemented from time to time by the Bank and the
Borrower.
Loan Documents: Collectively, this Agreement, the Note, the Letters of
--------------
Credit, and any and all other agreements, instruments, certificates or reports
executed by the Borrower in connection with this Agreement, as amended from time
to time.
Loans: Collectively, the Demand Loans.
-----
Margin Stock: See Section 10.8.
------------
Obligations: Any and all obligations of the Borrower or any of its
-----------
Subsidiaries to the Bank or any Bank of every kind and description, direct or
indirect, absolute or contingent, primary or secondary, due or to become due,
now existing or hereafter arising, arising under this Agreement, the Demand
Note, the Letters of Credit, or any of the other Loan Documents.
PBGC: The Pension Benefit Guaranty Corporation or any entity succeeding to
----
any or all of its functions under ERISA
Periodic Reports: All regular and periodic reports filed or required to be
----------------
filed by the Borrower within the S.E.C. or any securities exchange, including,
without limitation, reports on Form 10K, Form 10Q or Form 8K).
Person: Any individual, corporation, limited liability company,
------
partnership, joint venture, trust or unincorporated organization or any
government or any agency or political subdivision thereof.
-5-
<PAGE>
Plan: At any time, an employee pension or other benefit plan that is
----
subject to Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (a) maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group or (b) if such Plan is established or maintained pursuant
to a collective bargaining agreement or any other arrangement under which more
than one employer makes contributions and to which the Borrower or any member of
the Controlled Group is then making or accruing an obligation to make
contributions or has within the preceding five Plan years made contributions.
S.E.C.: The U.S. Securities and Exchange Commission.
------
Subsidiary: (a) Any corporation, association, joint stock company,
----------
business trust or other similar organization of which 50% or more of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by the
Borrower or a Subsidiary of the Borrower; or (b) any other such organization the
management of which is directly or indirectly controlled by the Borrower or a
Subsidiary of the Borrower through the exercise of voting power or otherwise.
-6-
<PAGE>
LETTER OF CREDIT FEE SCHEDULE
-----------------------------
The following prices will be charged to the Borrower for all letters of
credit issued by the Bank for beneficiaries in India, Italy, Panama and United
States. These letters of credit will continued to be advised and negotiated by
an overseas bank as designated by the beneficiary.
Issuance Waived
Amendments Waived
Negotiation 1/10% (min. $40.00)
Telex Advice $15.00
Cancellation/Unitilized $50.00
Discrepancy processing $60.00 per drawing
Funds Transfer $25.00 per transfer
<PAGE>
EXHIBIT A
---------
DEMAND PROMISSORY NOTE
----------------------
$35,000,000 Boston, Massachusetts
September ____, 1998
FOR VALUE RECEIVED, MAXWELL SHOE COMPANY INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to BANKBOSTON, N.A. (the "Bank"), or
-------- ----
order, ON DEMAND or, if no demand is made, on the Expiration Date (as defined in
the Demand Loan Agreement referred below), the principal amount of $35,000,000
or, if less, the aggregate unpaid principal amount of advances made by the Bank
to the Borrower pursuant to the letter agreement dated as of the date hereof by
and between the Borrower and the Bank (as amended or extended from time to time,
the "Demand Loan Agreement"), together with interest thereon at the rate or
---------------------
rates provided in the Demand Loan Agreement, payable in arrears, without set-
off, deduction or counterclaim, ON DEMAND or, if no demand is made, on the dates
specified in the Demand Loan Agreement, and at the maturity of this Note,
whether by payment or prepayment, demand or otherwise.
Overdue principal (whether at maturity, by reason of acceleration or
otherwise) and, to the extent permitted by applicable law, overdue interest and
fees or any other amounts payable under the Demand Loan Agreement due to the
Borrower's failure to pay the same in full shall bear interest from and
including the due date thereof until paid, at a rate per annum equal to 2% above
the rate of interest otherwise applicable thereto, which interest shall be
compounded daily and payable on demand. The foregoing shall in no way affect
the Bank's right to exercise any of its rights or remedies, including those
provided in the Demand Loan Agreement arising upon such failure to pay or
otherwise.
All payments under this Note shall be made at the head office of the
Bank at 100 Federal Street, Boston, Massachusetts 02110 (or at such other place
as the Bank may designate from time to time in writing) in lawful money of the
United States of America in federal or other immediately available funds.
The Borrower may prepay this Note in whole or in part at any time upon
the terms provided in the Demand Loan Agreement. Amounts so paid and other
amounts may be borrowed and reborrowed by the Borrowers hereunder from time to
time as provided in the Demand Loan Agreement.
This Note is the "Demand Note" referred to in, and is entitled to the
benefits of, the Demand Loan Agreement and other agreements and instruments
evidencing and/or securing the indebtedness hereunder (the "Demand Loan
-----------
Documents"), which Demand Loan Documents are
- ---------
<PAGE>
hereby incorporated herein by reference; but neither this reference to the
Demand Loan Documents nor any provision thereof shall affect or impair the
absolute and unconditional obligation of the Borrower to pay the principal of
and interest on this Note as herein provided.
The Borrower hereby waives presentment, demand, notice of dishonor,
protest and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Note.
All agreements between the Borrower and the Bank are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness or otherwise, shall the amount paid
or agreed to be paid for the use or forbearance of the indebtedness evidenced
hereby exceed the maximum amount which the Bank is permitted to receive under
applicable law. If, from any circumstances whatsoever, fulfillment of any
provision hereof or of the Demand Loan Agreement, at the time performance of
such provision shall be due, shall involve exceeding such amount, then the
obligation to be fulfilled shall automatically be reduced to the limit of such
validity and if, from any circumstances the Bank should ever receive as interest
an amount which would exceed such maximum amount, such amount which would be
excessive interest shall be applied to the reduction of the principal balance
evidenced hereby and not to the payment of interest. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof, provided,
--------
however, that in the event there is a change in the law which results in a
- -------
higher permissible rate of interest, then this Note shall be governed by such
new law as of its effective date. This provision shall control every other
provision of all agreements between the Borrower and the Bank.
If this Note shall not be paid when due and shall be placed by the
holder hereof in the hands of any attorney for collection, through legal
proceedings or otherwise, the Borrower will pay reasonable attorneys' fees to
the holder hereof (including without limitation any allocation costs of the
Bank's in-house counsel) together with reasonable costs and expenses of
collection, including, without limitation, any such attorneys' fees, costs and
expenses relating to any proceedings with respect to the bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation of
the Borrower or any party to any instrument or agreement securing this Note, all
is provided in the Demand Loan Agreement.
<PAGE>
This instrument shall have the effect of an instrument executed under
seal and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
WITNESS: MAXWELL SHOE COMPANY INC.
By:
- ---------------------------------- ------------------------------
<PAGE>
DEMAND PROMISSORY NOTE
----------------------
$35,000,000 Boston, Massachusetts
September 2, 1998
FOR VALUE RECEIVED, MAXWELL SHOE COMPANY INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to BANKBOSTON, N.A. (the "Bank"), or
-------- ----
order, ON DEMAND or, if no demand is made, on the Expiration Date (as defined in
the Demand Loan Agreement referred below), the principal amount of $35,000,000
or, if less, the aggregate unpaid principal amount of advances made by the Bank
to the Borrower pursuant to the letter agreement dated as of the date hereof by
and between the Borrower and the Bank (as amended or extended from time to time,
the "Demand Loan Agreement"), together with interest thereon at the rate or
---------------------
rates provided in the Demand Loan Agreement, payable in arrears, without set-
off, deduction or counterclaim, ON DEMAND or, if no demand is made, on the dates
specified in the Demand Loan Agreement, and at the maturity of this Note,
whether by payment or prepayment, demand or otherwise.
Overdue principal (whether at maturity, by reason of acceleration or
otherwise) and, to the extent permitted by applicable law, overdue interest and
fees or any other amounts payable under the Demand Loan Agreement due to the
Borrower's failure to pay the same in full shall bear interest from and
including the due date thereof until paid, at a rate per annum equal to 2% above
the rate of interest otherwise applicable thereto, which interest shall be
compounded daily and payable on demand. The foregoing shall in no way affect
the Bank's right to exercise any of its rights or remedies, including those
provided in the Demand Loan Agreement arising upon such failure to pay or
otherwise.
All payments under this Note shall be made at the head office of the
Bank at 100 Federal Street, Boston, Massachusetts 02110 (or at such other place
as the Bank may designate from time to time in writing) in lawful money of the
United States of America in federal or other immediately available funds.
The Borrower may prepay this Note in whole or in part at any time upon
the terms provided in the Demand Loan Agreement. Amounts so paid and other
amounts may be borrowed and reborrowed by the Borrowers hereunder from time to
time as provided in the Demand Loan Agreement.
This Note is the "Demand Note" referred to in, and is entitled to the
benefits of, the Demand Loan Agreement and other agreements and instruments
evidencing and/or securing the indebtedness hereunder (the "Demand Loan
-----------
Documents"), which Demand Loan Documents are hereby incorporated herein by
- ---------
reference; but neither this reference to the Demand Loan Documents nor any
provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
<PAGE>
The Borrower hereby waives presentment, demand, notice of dishonor,
protest and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Note.
All agreements between the Borrower and the Bank are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness or otherwise, shall the amount paid
or agreed to be paid for the use or forbearance of the indebtedness evidenced
hereby exceed the maximum amount which the Bank is permitted to receive under
applicable law. If, from any circumstances whatsoever, fulfillment of any
provision hereof or of the Demand Loan Agreement, at the time performance of
such provision shall be due, shall involve exceeding such amount, then the
obligation to be fulfilled shall automatically be reduced to the limit of such
validity and if, from any circumstances the Bank should ever receive as interest
an amount which would exceed such maximum amount, such amount which would be
excessive interest shall be applied to the reduction of the principal balance
evidenced hereby and not to the payment of interest. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof, provided,
--------
however, that in the event there is a change in the law which results in a
- -------
higher permissible rate of interest, then this Note shall be governed by such
new law as of its effective date. This provision shall control every other
provision of all agreements between the Borrower and the Bank.
If this Note shall not be paid when due and shall be placed by the
holder hereof in the hands of any attorney for collection, through legal
proceedings or otherwise, the Borrower will pay reasonable attorneys' fees to
the holder hereof (including without limitation any allocation costs of the
Bank's in-house counsel) together with reasonable costs and expenses of
collection, including, without limitation, any such attorneys' fees, costs and
expenses relating to any proceedings with respect to the bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation of
the Borrower or any party to any instrument or agreement securing this Note, all
is provided in the Demand Loan Agreement.
This instrument shall have the effect of an instrument executed under
seal and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
WITNESS: MAXWELL SHOE COMPANY INC.
By: /s/ Mark Cocozza, President
- ---------------------------------- ---------------------------
Mark Cocozza, President
<PAGE>
Exhibit 10.9
September 2, 1998
Maxwell Shoe Company Inc.
101 Sprague Street
Hyde Park, Massachusetts 02136
RE: Demand Credit Facility
----------------------
Ladies and Gentlemen:
The purpose of this letter is to set forth our mutual understanding
concerning a discretionary demand credit facility to be established in favor of
Maxwell Shoe Company Inc., a Delaware corporation (the "Borrower"), by
--------
BankBoston, N.A. (the "Bank") in a maximum principal amount of $35,000,000
----
(hereinafter, the "Maximum Credit Amount"). Capitalized terms used and not
---------------------
otherwise defined herein are defined in Schedule A hereto.
----------
1. Demand Line of Credit.
---------------------
1.1 Demand Line of Credit. Subject to the terms and conditions contained
---------------------
in this Agreement, the Bank has established in favor of the Borrower a demand
line of credit (the "Line of Credit") under which the Bank may make
--------------
discretionary advances (the "Demand Loans") in such amounts as may be requested
------------
by the Borrower, provided that the sum of (a) the aggregate amount of Demand
--------
Loans outstanding hereunder (after giving effect to all amounts requested) plus
----
(b) the LC Exposure Amount, shall at no time exceed the Maximum Credit Amount.
The Line of Credit shall expire on the Expiration Date, unless sooner terminated
at the sole discretion of the Bank. The Demand Loans shall be evidenced by the
Borrower's demand promissory note in the form attached as Exhibit 1 hereto (the
---------
"Demand Note"), payable to the order of the Bank, which Demand Note is hereby
-----------
incorporated herein by reference and made a part hereof.
THE PARTIES ACKNOWLEDGE AND AGREE THAT DEMAND LOANS UNDER THE LINE OF CREDIT
WILL BE MADE, AND THE LINE OF CREDIT MAY BE TERMINATED OR REDUCED AT ANY TIME,
BY THE BANK IN ITS SOLE DISCRETION AND THAT THE BANK MAY MAKE DEMAND FOR
REPAYMENT OF THE DEMAND LOANS AT ANY TIME IN ITS SOLE DISCRETION. WITHOUT
LIMITING IN ANY WAY THE BANK'S DISCRETION REGARDING THE DEMAND LOANS OR THE LINE
OF CREDIT, THE BORROWER ACKNOWLEDGES AND AGREES THAT THE AGREEMENTS SET FORTH IN
THIS AGREEMENT ARE MADE SOLELY AS AN INDUCEMENT TO THE BANK TO ESTABLISH THE
LINE OF CREDIT HEREUNDER AND SHALL NOT IN ANY WAY RESTRICT OR COMPROMISE THE
<PAGE>
BANK'S DISCRETIONARY RIGHTS TO DEMAND PAYMENT UNDER THE DEMAND NOTE. YOU HEREBY
FURTHER ACKNOWLEDGE AND AGREE THAT THE AGREEMENTS CONTAINED HEREIN ARE
CONDITIONS PRECEDENT TO THE ESTABLISHMENT OF THE LINE OF CREDIT AND THE MAKING
OF THE DEMAND LOANS, AND THAT SUCH AGREEMENTS SHALL NOT BE DEEMED FOR ANY REASON
TO BE ALL INCLUSIVE OR TO APPLY TO OR GOVERN EVENTS OR CIRCUMSTANCES WHICH MAY
OCCUR, OR CONCERNS WHICH MAY ARISE, AFTER THE DATE HEREOF.
The occurrence of a breach of any covenant of the Borrower herein, or the
determination by the Bank that any representation or warranty now or hereafter
made by the Borrower to the Bank was not true or accurate in any material
respect when given, shall not be a prerequisite to the Bank's making demand or
requiring payment of Demand Loans or refusing to make Demand Loans. The Bank
agrees to notify the Borrower promptly following any reduction or termination of
the Line of Credit.
1.2. Demand Loan Account. The Bank shall record in an account on its
-------------------
books (the "Demand Loan Account") in accordance with customary accounting
-------------------
practices (a) all Demand Loans, (b) all payments made by the Borrower on account
of Demand Loans and other amounts payable by the Borrower hereunder, and (c) all
interest, fees, charges and expenses payable by the Borrower hereunder. At the
option of the Bank, prior to the Expiration Date, all payments of interest on
the Demand Note and all LC Draw Obligations shall be charged directly to the
Demand Loan Account. The debit balance of the Demand Loan Account shall reflect
the amount of the Borrower's obligations to the Bank from time to time in
respect of Demand Loans and other amounts payable by the Borrower hereunder. At
least once each month the Bank may render a statement of account showing as of
its date the debit balance of the Demand Loan Account which, unless within 30
days of such date notice to the contrary is received by the Bank from the
Borrower, shall be deemed true and correct absent demonstrable error.
1.3. Loan Disbursements. The proceeds of Demand Loans made by the Bank
------------------
shall be deposited by the Bank in immediately available funds in the Borrower's
primary operating account with the Bank.
2. Interest.
--------
2.1. Interest Rates.
--------------
(a) At the Borrower's option, subject to the terms hereof, each Demand Loan
(or one or more portions thereof) shall bear interest from the date advanced
until payment in full at (a) the Base Rate or (b) the Adjusted Eurodollar Rate
plus one percent (1.0%).
- ----
(b) Interest on Demand Loans bearing interest based upon the Base Rate
("Base Rate Loans") shall be due and payable, without setoff, deduction or
- -----------------
counterclaim, quarterly in arrears on the last day of each calendar quarter,
beginning June 30, 1998, and ON DEMAND. The rate on Base Rate Loans shall
change on the date of any change in the applicable Base Rate.
-2-
<PAGE>
(c) Interest on Demand Loans bearing interest based upon the Adjusted
Eurodollar Rate ("Eurodollar Loans") shall be due and payable, without setoff,
----------------
deduction or counterclaim, in arrears, on the last day of the related Interest
Period, and ON DEMAND; provided, however, in the case of any Demand Loan having
an Interest Period longer than three (3) months, such interest shall be due and
payable every three (3) months after the beginning thereof and ON DEMAND.
(d) Interest on Eurodollar Loans shall be computed on the basis of the
actual number of days elapsed over a 360-day year and interest on Base Rate
Loans and fees and expenses hereunder shall be computed on the basis of the
actual number of days elapsed over a 365-day year. Except as otherwise provided
in the definition of the term "Interest Period" with respect to the Eurodollar
Loans, if any payment hereunder or under the Demand Note shall be due and
payable on a day which is not a Business Day, such payment shall be deemed due
on the next following Business Day and interest shall be payable at the
applicable rate specified herein through such extension period.
2.2. Default Rate. To the extent permitted by law, interest on overdue
------------
principal, interest and other amounts due under the Demand Note or this
Agreement shall be payable on demand at a rate per annum equal to 2% above the
otherwise applicable interest rate.
3. Requests for Demand Loans; Types of Demand Loans.
------------------------------------------------
(a) Except as otherwise provided in the Cash Management Agreement, requests
by the Borrower for Demand Loans shall be made in a manner satisfactory to the
Bank. Each such request shall be made by the Borrower no later than (a) 11:00
A.M. (Boston time) on the proposed date of any Base Rate Loan and (b) 1:00 P.M.
(Boston time) on the third Business Day prior to the proposed date of any
Eurodollar Loan. Each such request shall specify (i) the principal amount
thereof, (ii) the proposed date thereof, (iii) if such Demand Loan is an
Eurodollar Loan, the Interest Period thereof and (iv) whether a Base Rate Loan
or a Eurodollar Loan. Each such request shall be irrevocable and binding on the
Borrower and shall obligate the Borrower to accept (if the Bank, in its sole
discretion, agrees to honor a request for a Demand Loan) the Demand Loan so
requested on the proposed date. Each Eurodollar Loan requested shall be in a
minimum amount of $1,000,000; provided, that at no time shall there be more than
five separate Interest Periods applicable to outstanding Eurodollar Loans. The
Borrower may elect from time to time to convert any outstanding Demand Loan to a
Base Rate Loan or Eurodollar Loan, as the case may be, provided that (i) with
--------
respect to any such conversion of Eurodollar Loans to Base Rate Loans, the
Borrower shall provide the Bank with notice in the form requested by the Bank by
11:00 A.M. (Boston time) on the date of such proposed conversion; (ii) with
respect to any such conversion of Base Rate Loans to Eurodollar Loans, the
Borrower shall provide such notice by 1:00 P.M. (Boston Time) at least two (2)
Business Days prior to the date of such proposed conversion; (iii) with respect
to any such conversion of a Eurodollar Loan into Base Rate Loan, such conversion
shall only be made on the last day of the
-3-
<PAGE>
related Interests Period; (iv) no Base Rate Loans may be converted into
Eurodollar Loans after the earlier of demand on the Demand Note or the
Expiration Date; and (v) any conversion of less than all of the outstanding Base
Rate Loans into Eurodollar Loans shall be in a minimum aggregate principal
amount of $1,000,000.
(b) The Borrower may continue any Eurodollar Loan as such upon the
expiration of the related Interest Period by providing the Bank with two (2)
Business Days' written notice thereof in the form requested by the Bank;
provided that no Eurodollar Loans may be continued after demand on the Demand
- --------
Note or the Expiration Date. Base Rate Loans shall be deemed to continue as
such until Bank's receipt of an appropriate notice requesting conversion thereof
to Eurodollar Loans.
4. Payments and Prepayments of Principal.
--------------------------------------
4.1. Prepayments, Etc. The principal amount of the Demand Note may be
----------------
prepaid, in whole or in part, at any time without premium or penalty, other than
any payments due in accordance with Section 4.3 in respect of Eurodollar Loans
so prepaid. Amounts so prepaid under the Demand Note may be borrowed and
reborrowed from time to time, subject to the Bank's sole discretion. In the
event the outstanding principal amount of Demand Loans plus the Letter of
Credit Exposure exceeds the Maximum Credit Amount, the Borrower shall
immediately pay such excess amount in cash to the Bank to be credited to the
Demand Loan Account, together with any payments due in accordance with Section
4.3.
4.2. Payments. On demand, or if no demand is made prior to the Expiration
--------
Date, on the Expiration Date, the Borrower shall repay, without set-off,
deduction or counterclaim, all outstanding principal under the Demand Note,
together with all unpaid interest thereon and all fees and other amounts due
hereunder
4.3. Payments Before End of Interest Period. The Borrower agrees to
--------------------------------------
indemnify and hold the Bank harmless from and against any loss, cost or expense
(including interest or fees payable to Banks of funds obtained by it in order to
maintain any Eurodollar Loans less reinvestment income, and in any event
----
excluding loss of anticipated profits) it may sustain as a consequence of
(a) the Borrower's failure to pay the principal amount of any Eurodollar Loan as
and when due (whether at the Expiration Date, by reason of demand or otherwise)
or the payment of any Eurodollar Loan on a date that is not the last day of the
Interest Period applicable thereto, (b) default by the Borrower in making a
borrowing or conversion after the Borrower has given a notice relating thereto,
or (c) the making of any payment of a Eurodollar Loan or the making of any
conversion of any such Eurodollar Loan to a Base Rate Loan on a day that is not
the last day of the applicable Interest Period with respect thereto, including
interest or fees payable to Banks of funds obtained in order to maintain any
such Eurodollar Loans. The Borrower shall pay such amount within 15 days after
presentation by the Bank of a statement setting forth the amount and the Bank's
calculation thereof pursuant hereto, which statement shall be deemed true and
correct absent demonstrable error.
-4-
<PAGE>
5. Letters of Credit
-----------------
5.1. Issuance of Letters of Credit. Subject to all the terms and
------------------------------
conditions of this Agreement, from time to time prior to the earlier of the
Expiration Date or demand hereunder, the Bank may, in its sole discretion, issue
for the account of the Borrower one or more irrevocable documentary or stand-by
letters of credit (the "Letters of Credit"). The sum of (a) the LC Exposure
-----------------
Amount plus (b) the aggregate amount of Demand Loans outstanding shall at no
----
time exceed the Maximum Credit Amount. The occurrence of a breach of any
covenant of the Borrower herein, or the determination by the Bank that any
representation or warranty now or hereafter made by the Borrower to Bank was not
true or accurate in any material respect when given, shall not be a prerequisite
to the Bank's refusing to issue any Letter of Credit hereunder or to demand
payment hereunder.
5.2 Conditions to Issuance of Letters of Credit; Etc.
------------------------------------------------
(a) In its sole discretion, the Bank may, from time to time, agree to
issue, extend or renew any Letter of Credit subject to the following conditions:
(i) Such Letter of Credit may provide for payment in U.S. Dollars or
other currencies as requested by the Borrower and shall expire
by its terms no later than the earlier to occur of (A) five (5)
Business Days prior to the Expiration Date and (B) one year from
the date of its issuance (which expiration date may be extended
in the sole discretion of the Bank for additional one year
periods ending prior to the date referred to in clause (A),
above);
(ii) The form and terms of each Letter of Credit shall be acceptable
to the Bank; and
(iii) Each Letter of Credit shall be issued to support obligations of
the Borrower incurred in the ordinary course of its business.
(b) Whenever the Borrower desires to have a Letter of Credit issued,
extended or renewed, the Borrower will furnish to the Bank a written application
(on the Bank's customary form) therefor which shall (A) be received by the Bank
not less than three Business Days prior to the proposed date of issuance,
extension or renewal in the case of a stand-by Letter of Credit, and one
Business Day prior to the proposed date of issuance, extension or renewal, in
the case of a documentary Letter of Credit (unless Borrower furnishes such
request to the Bank through the Bank's "trade key services" procedures in which
event such request shall be received by the Bank on the same Business Day) and
(B) specify (1) such proposed date (which must be a Business Day), (2) the
expiration date of such Letter of Credit, (3) the name and address of the
beneficiary of the Letter of Credit, (4) the amount of such Letter of Credit,
and (5) the purpose and proposed form of such Letter of Credit. Each Letter of
Credit shall be subject to the Uniform Customs Act and, to the extent not
inconsistent therewith, the laws of the Commonwealth of Massachusetts. In the
event and to the extent that any provision of such
-5-
<PAGE>
application shall be inconsistent with any provision of this Agreement, then the
provisions of this Agreement shall govern.
5.3. LC Draw Obligations of the Borrower. In order to induce the Bank to
------------------------------------
issue, extend and renew each Letter of Credit (which the Bank may do in each
instance in its sole discretion), the Borrower hereby agrees to reimburse or pay
to the Bank:
(a) except as otherwise expressly provided in clause (b), after notice from
the Bank that any draft presented under such Letter of Credit has been honored
by the Bank (i) the amount paid by the Bank under or with respect to such Letter
of Credit, plus interest accrued thereon as provided below, and (ii) the amount
of any taxes, fees, charges or other reasonable costs and expenses incurred by
the Bank in connection with any payment made by the Bank under or with respect
to such Letter of Credit; and
(b) on the Expiration Date or earlier, if demand is made by the Bank, an
amount equal to the LC Exposure Amount, which amount shall be held by the Bank
as cash collateral for all existing unpaid and potential LC Draw Obligations.
Interest shall accrue on any and all amounts remaining unpaid by the Borrower
under this Section 5.3 at any time from the date a draft under a Letter of
Credit is honored until the date the LC Draw Obligation is paid by the Borrower
at the rate of interest specified in Section 2.2 and shall be payable to the
Bank on demand.
5.4. Demand Loans to Satisfy LC Draw Obligations. Unless the Borrower has
-------------------------------------------
previously satisfied an LC Draw Obligation as demanded, the Bank, in its sole
discretion, may make a Demand Loan which is a Base Rate Loan, and the Borrower
shall be deemed to have elected to satisfy such LC Draw Obligation arising under
Section 5.3 above by borrowing a Demand Loan which is a Base Rate Loan in the
amount thereof and applying the proceeds thereto.
5.5. Refunded Amounts. Unless the Borrower has otherwise failed to
-----------------
satisfy its obligations hereunder upon demand, the Bank shall reimburse the
Borrower upon the expiration of each Letter of Credit with respect to which the
Borrower has satisfied an LC Draw Obligation pursuant to the cash collateral
requirement of Section 5.3(b), an amount equal to the difference between the
amount of such cash collateral delivered to the Bank for such Letter of Credit,
less the amounts of such cash collateral used to pay LC Draw Obligations and
taxes, fees, charges and other reasonable costs and expenses of the Bank in
connection therewith.
5.6 Borrower's Obligations Absolute. The Borrower assumes all risks in
-------------------------------
connection with the Letters of Credit. The Borrower's obligations with respect
to Letters of Credit under this Agreement shall be absolute and unconditional
under any and all circumstances or any condition precedent whatsoever or any
setoff, counterclaim or defense to payment which the Borrower may have or have
had against the Bank or any beneficiary of a Letter of Credit. The Borrower
also agrees that the Bank shall not be responsible for, and the Borrower's LC
Draw Obligations shall not be affected by, among other things, (i) the validity,
-6-
<PAGE>
genuineness or enforceability of documents or of any endorsements thereon, even
if such documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged, or (ii) any dispute between or among the
Borrower, the beneficiary of any Letter of Credit or any financing institution
or other party to which any Letter of Credit may be transferred or any claims or
defenses whatsoever of the Borrower against the beneficiary of any Letter of
Credit or any such transferee. The Bank shall not be liable for any error,
omission, interruption or delay in transmission, dispatch or delivery of any
message or advice, however transmitted, in connection with any Letter of Credit.
The Borrower agrees that any action taken or omitted by the Bank under or in
connection with each Letter of Credit and the related drafts and documents, if
done in good faith and in the absence of gross negligence and willful
misconduct, shall be binding upon the Borrower and shall not subject the Bank to
any liability to the Borrower. The Bank shall be entitled to rely, and shall be
fully protected in relying upon, any Letter of Credit, draft, writing,
resolution, notice, consent, certificate, affidavit, letter, telegram, telecopy,
telex or teletype message, statement, order or other document believed by it to
be genuine and correct and to have been signed, sent or made by the proper
Person and upon advice and statements of legal counsel, independent accountants
and other experts selected by the Bank.
5.7 Letter of Credit Fee. In order to induce the Bank to issue, extend
--------------------
and renew each Letter of Credit, the Borrower hereby agrees to pay a fee (in
each case, a "Letter of Credit Fee") to the Bank, for each day on the undrawn
--------------------
amount under such Letter of Credit on such day at a rate per annum equal to the
standard set forth on the Letter of Credit Fee Schedule attached hereto and made
a part hereof. In addition, the Borrower shall pay to the Bank any and all
standard charges customarily made by the Bank in connection with such issuance,
extension or renewal.
6. Changed Circumstances.
---------------------
6.1. Eurodollar Loans. In the event that:
----------------
(a) on any date on which the Adjusted Eurodollar Rate would otherwise
be set, the Bank shall have determined in good faith (which
determination shall be final and conclusive) that adequate and
fair means do not exist for ascertaining the Interbank Offered
Rate in the interbank eurodollar market where the eurodollar and
foreign currency and exchange operations of the Bank in respect
of its Eurodollar Loans are then being conducted, or
(b) at any time the Bank shall have determined in good faith (which
determination shall be final and conclusive) that:
(i) the making or continuation of, or conversion of any Base
Rate Loan to, a Eurodollar Loan has been made impracticable
or unlawful by (1) the occurrence of a contingency that
materially and adversely affects the interbank eurodollar
market by reference to which the Bank determined an
applicable Adjusted Eurodollar
-7-
<PAGE>
Rate or where the eurodollar and foreign currency and
exchange operations in respect of the Bank's Eurodollar
Loans are then being conducted or (2) compliance by the Bank
in good faith with any future applicable law or governmental
regulation, guideline or order or interpretation or change
thereof by any governmental authority charged with the
interpretation or administration thereof or with any request
or directive of any such governmental authority (whether or
not having the force of law); or
(ii) the Adjusted Eurodollar Rate shall no longer represent the
effective cost to the Bank for U.S. dollar deposits in the
interbank market for eurodollar deposits where the
eurodollar and foreign currency and exchange operations in
respect of the Bank's Eurodollar Loans are then being
conducted;
then, and in any such event, the Bank shall so notify the Borrower. Until the
Bank notifies the Borrower that the circumstances giving rise to such notice no
longer apply, the obligation of the Banks to allow selection by the Borrower of
Eurodollar Loans shall be suspended. If at the time the Bank so notifies the
Borrower, the Borrower has previously given the Bank a request for a Eurodollar
Loan or has notified the Bank of the Borrower's intention to convert Base Rate
Loans to one or more Eurodollar Loans but such Demand Loans have not yet gone
into effect, such notification shall be deemed to be void and the Borrower may
choose not to borrow such Demand Loans or to borrow, convert or continue such
Loans as Base Rate Loans. Upon such date as the Bank shall specify in such
notice, the Borrower shall prepay all outstanding Eurodollar Loans, together
with interest thereon (but with no obligation to pay any amounts required to be
paid pursuant to Section 5.3(b)). In the event that the Bank determines at any
time following the giving of notice pursuant to this clause that the Bank may
lawfully make Eurodollar Loans, the Bank shall give notice to the Borrower of
such determination, whereupon the Borrower's right to request Eurodollar Loans
shall be restored.
6.2. All Credit Extensions. (i) If any change the date hereof in any
---------------------
existing or any new law, regulation, treaty or official directive or the
interpretation or application thereof by any court or by any governmental
authority charged with the administration thereof or the compliance with any
guideline or request of any central bank or other governmental authority
(whether or not having the force of law):
(A) subjects the Bank to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by the Borrower
or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of the Bank imposed by
the United States of America or any political subdivision thereof
or the jurisdiction in which the Bank is organized or in which it
maintains its principal office or in which it maintains the Demand
Loans), or
-8-
<PAGE>
(B) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or Eurodollar Loans
or Letters of Credit issued by the Bank (other than such
requirements as are already included in the determination of the
Adjusted Eurodollar Rate), or
(C) imposes upon the Bank any other adverse condition with respect to
the Eurodollar Loans or the Letters of Credit or otherwise with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to the Bank,
reduce the income receivable by the Bank or impose any expense with respect to
any Demand Loan or Letter of Credit (in each case without duplication of amounts
described in Section 6.1), the Bank shall so notify the Borrower. The Borrower
agrees to pay to the Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, 15 days after presentation by the Bank of a statement in
the amount and setting forth the Bank's calculation thereof, in sufficient
detail to permit the Borrower to verify the calculation thereof, which statement
shall be deemed true and correct absent demonstrable error.
7. Capital Adequacy.
-----------------
The Bank shall notify the Borrower if the Bank determines that (a) the
adoption of or change in any law, rule, regulation or guideline regarding
capital requirements for banks or bank holding companies, or any change in the
interpretation or application thereof by any governmental authority charged with
the administration thereof, in any case, after the date hereof, or (b) any
change in the manner or nature of compliance by the Bank or its parent bank
holding company with any guideline, request or directive of any such entity
regarding capital adequacy (whether or not having the force of law), has the
effect of reducing the return on the Bank's or such holding company's capital as
a consequence of such agreement to make Demand Loans or issue Letters of Credit
hereunder to a level below that which the Bank or such holding company could
have achieved but for such adoption, change or compliance (taking into
consideration the Bank or such holding company's then existing policies with
respect to capital adequacy) by any amount deemed by the Bank to be material.
The Borrower agrees to pay to the Bank the amount of such reduction of return of
capital as and when such reduction is determined, within fifteen (15) days after
presentation by the Bank of a statement in the amount and setting forth the
Bank's calculation thereof, in sufficient detail to permit the Borrower to
verify such calculation, which statement shall be deemed true and correct absent
demonstrable error. In determining such amount, the Bank may use any reasonable
averaging and attribution methods used by such Person in similar circumstances.
The Bank shall not be entitled to compensation under this Section 7 attributable
to any period prior to 90 days before the Bank delivers notice to the Borrower
as to such determination.
-9-
<PAGE>
8. Accounts.
--------
The Borrower agrees to maintain its primary operating and disbursement
accounts with the Bank. The Borrower shall further maintain with the Bank all
accounts required pursuant to the Cash Management Agreements. The Borrower
authorizes the Bank to charge to any deposit account(s) which the Borrower
maintains with the Bank, the principal, interest, fees, charges, and expenses
provided for in this Agreement, any Letter of Credit or the Demand Note.
9. Use of Proceeds.
---------------
The proceeds of the Demand Loans shall be used for working capital purposes
and general corporate purposes; provided, however, the Borrower agrees that it
-------- -------
will not, without the prior written consent of the Bank, use proceeds of the
Demand Loans in excess of $5,000,000 to fund all or any part of the purchase
price for an acquisition of any other Person or its assets. The Letters of
Credit shall be used for letter of credit requirements of the Borrower.
10. Representations and Warranties.
------------------------------
To induce the Bank to enter into this Agreement, the Borrower represents
and warrants as follows, which representations and warranties shall survive the
delivery of the Demand Note, the making of all Demand Loans and the issuance of
all Letters of Credit:
10.1. Organization and Qualification. The Borrower (i) is a corporation
-------------------------------
duly formed, validly existing and in good standing under the laws of the State
of Delaware, (ii) has all requisite corporate power to own its property and
conduct its business as now conducted and as presently contemplated, (iii) is
duly qualified and in good standing as a foreign corporation, and duly
authorized to do business, in each jurisdiction where the nature of its
properties or business requires such qualification, except where the failure to
so qualify will not have a material adverse effect on the Borrower's assets,
business, prospects or condition, financial or otherwise (hereinafter, a
"Material Adverse Effect") and (iv) except as set forth in the Borrower's
- ------------------------
Periodic Reports, has no subsidiaries.
10.2. Authorization, Compliance. The execution, delivery and performance
-------------------------
of this Agreement and the Demand Note (collectively, as hereafter amended and
modified from time to time, the "Loan Documents") and the transactions
--------------
contemplated by this Agreement and the other Loan Documents are within the
corporate power and authority of the Borrower and have been authorized by all
necessary corporate proceedings, and do not and will not (i) require any consent
or approval of the stockholders of the Borrower, (ii) violate the charter
documents or by-laws of the Borrower, (iii) violate any law, rule, order or
regulation applicable to the Borrower, (iv) contravene any provision of, or
constitute (with due notice or lapse of time or both), a default under, any
other agreement, instrument, order or undertaking binding on the Borrower, or
(v) result in the creation or imposition of any lien or encumbrance on any of
the properties, assets or rights of the Borrower, except to the extent that any
such violation, contravention, default or result described in clauses (iii),
(iv) and (v) above does not, individually or in the aggregate, have a Material
Adverse Effect.
-10-
<PAGE>
10.3. Consents, Validity. The execution, delivery and performance by the
------------------
Borrower of the Loan Documents and the transactions contemplated therein do not
require any approval or consent of, or filing or registration with, any
governmental or other agency or authority or any other party. The Loan
Documents are the legal, valid and binding obligations of the Borrower,
enforceable in accordance with their respective terms.
10.4. Financial Statements. The Borrower has furnished the Bank the
--------------------
Borrower's financial statements included in the Periodic Reports filed to date.
All such financial statements were prepared in accordance with GAAP applied on a
consistent basis throughout the periods specified and present fairly the
financial position of the Borrower as of such dates and the results of
operations for the periods then ended. There are no liabilities, contingent or
otherwise, not disclosed in such financial statements that involve a material
amount. Since the date of the most recent Periodic Report filed by the
Borrower, there have been no changes in the assets, liabilities, financial
condition, business or prospects of the Borrower, other than changes in the
ordinary course of business or changes which have not, in the aggregate, had a
Material Adverse Effect.
10.5. Taxes. The Borrower has filed all federal, state and other material
-----
tax returns required to be filed, and has paid or made adequate provision for
the payment of all material federal, state and other taxes, charges and
assessments shown thereon to be due except where the failure to pay the same is
being contested in good faith with adequate reserves provided therefor on the
books of the Borrower.
10.6. Litigation. There is no litigation, arbitration, proceeding or
----------
investigation pending, or, to the Borrower's knowledge, threatened, against or
affecting the Borrower that, if adversely determined, would reasonably be likely
(a) to result in a judgment not fully covered by insurance, where the uncovered
portion thereof could have a Material Adverse Effect, or a forfeiture of all or
any material part of the Borrower's property, or (b) otherwise to have a
Material Adverse Effect.
10.7. Compliance with Laws and Agreements. The Borrower is not in (i)
-----------------------------------
violation of any provision of law (including without limitation all laws
relating to injury to, or protection of, human health or the environment and the
Employee Retirement Income Security Act of 1974, as amended), or any order,
judgment or decree of any court or other agency of government, the violation of
which would reasonably be likely to have a Material Adverse Effect, or (ii)
default in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement or instrument to which it is
a party, which default could have a Material Adverse Effect.
10.8. Margin Stock. The Borrower does not own nor does it have any
------------
present intention of acquiring, and no portion of any Demand Loan is to be used
for the "purpose of purchasing or carrying", any "margin stock" or "margin
security" as such terms are used in Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. 221 and 224, as amended.
-11-
<PAGE>
11. Covenants.
---------
The Borrower covenants and agrees that, until the Line of Credit is
terminated and so long as any Demand Loan or Letter of Credit remains
outstanding:
11.1. Financial Reporting. The Borrower will furnish to the Bank:
-------------------
(a) as soon as available, but in any event within 120 days after each
fiscal year-end, the balance sheet of the Borrower as at the end of, and related
statements of income, changes in retained earnings and cash flow for, such year,
prepared in accordance with GAAP, and audited and certified by the Accountants
on an unqualified basis;
(b) as soon as available, but in any event within 45 days after the end of
each fiscal quarter, the balance sheet of the Borrower as at the end of, and
related statements of income for the portion of the fiscal year then ended and
the fiscal quarter then ended, prepared by the Borrower and certified by the
Borrower's chief financial officer in accordance with GAAP;
(c) within 60 days after the beginning of each fiscal year, pro forma
projections for the Borrower for such fiscal year, prepared on a monthly basis,
including projected balance sheets, income statements, cash flow statements and
such other statements as the Bank may reasonably request and in form and
substance satisfactory to the Bank, all prepared on a basis consistent with the
audited financial statements required by Section 11.1(a);
(d) from time to time, such other financial data and information about the
Borrower and its assets, as the Bank may reasonably request; and
(e) promptly upon the distribution or filing of same, registration
statements, prospectives and amendments and supplements thereto and copies of
all Periodic Reports, and all reports and other significant communications
distributed to the Borrower's shareholders or filed with the S.E.C.
11.2. Indebtedness; Encumbrances. The Borrower will not create, incur,
--------------------------
assume or suffer to exist (a) any direct or contingent indebtedness except:
(i) existing indebtedness as of the date hereof, (ii) indebtedness to the Bank,
(iii) ordinary course endorsements, (iv) purchase money indebtedness, (v)
capital leases and (vi) other indebtedness (in addition to (i)-(v)) at any one
time outstanding not in excess of $1,000,000 or (b) any mortgage, pledge,
security interest, lien or other charge or encumbrance, including the lien or
retained security title of a conditional vendor upon or with respect to any of
its property or assets ("Encumbrances"), or assign or otherwise convey any right
------------
to receive income, except: (i) Encumbrances in favor of the Bank;
(ii) Encumbrances for taxes, fees, assessments and other governmental charges
which are not yet delinquent; (iii) subordinate landlords' and lessors' liens in
respect of rent not in default or liens in respect of pledges or deposits under
worker's compensation, unemployment insurance, social security laws or similar
legislation (other than ERISA) or in connection with appeal and similar bonds
incidental to litigation; (iv) mechanics', laborers' and materialmen's and
similar liens, if
-12-
<PAGE>
the obligations secured by such liens are not then delinquent; (v) liens
securing the performance of bids, tenders, contracts (other than for the payment
of money); (vi) statutory obligations incidental to the conduct of its business
and that do not in the aggregate materially detract from the value of the
Borrower's property or materially impair the use thereof; and (vii) Encumbrances
securing purchase money indebtedness, provided that the obligations secured
thereby do not exceed the lesser of cost or fair market value of the property
covered thereby and each such Encumbrance is at all times limited solely to the
item or items of property so acquired.
11.3. Maintenance and Insurance. The Borrower will comply with all laws
-------------------------
and maintain and keep its properties in good repair, working order and
condition, and from time to time make all needful and proper repairs, renewals,
replacements, additions and improvements thereto so that its business may be
properly and advantageously conducted at all times. The Borrower at all times
will maintain insurance, in such amounts (including, without limitation, so-
called "all-perils" coverage at replacement value, "broad form" liability
coverage and business interruption insurance and, as to motor vehicles,
collision insurance), against such hazards and liabilities and for such purposes
as the Bank shall determine is reasonable to insure the value of its assets and
as is customary in the industry for companies of established reputation engaged
in the same or similar businesses and owning or operating similar properties
(the Bank having approved the Borrower's current insurance coverage). The Bank
shall be named as additional insured and shall be given 30 days' advance notice
of any cancellation or material change in form of insurance.
11.4. Negative Pledges, Etc. Without the Bank's prior written consent,
----------------------
the Borrower will not enter into any agreement (excluding this Agreement)
prohibiting (a) the Borrower from amending or otherwise modifying this
Agreement, or (b) the creation or assumption of any Encumbrance upon the
properties, revenues or assets of the Borrower, whether now owned or hereafter
acquired.
11.5. Other Covenants. Without the Bank's prior written consent, the
---------------
Borrower will not (a) make any dividend or distribution to the Borrower's
shareholders, (b) dissolve, liquidate, merge or consolidate with any other
Person or (c) sell, lease or otherwise dispose of assets or properties, other
than (i) in the ordinary course of business and (ii) sales of assets or
properties having a fair market value (as determined in good faith by the
Borrower) of less than $3,000,000 in each instance. The Borrower shall,
promptly upon the Bank's request, execute and deliver such further instruments
and take such further action as may reasonably be requested by the Bank from
time to time to effect the purposes of the Loan Documents.
12. Certain Remedies After Demand; Etc.
----------------------------------
In the event the Borrower shall fail to pay all of the amounts owed to the
Bank under this Agreement and the Demand Note on or before the earlier to occur
of demand by the Bank or the Expiration Date, or in the event of the filing of
any bankruptcy proceeding by or against the Borrower under the Federal
Bankruptcy Code, (a) the Line of Credit shall terminate and the Bank may
exercise any and all rights it has under any of the Loan Documents, or at law or
in equity, and proceed to protect the Bank's rights by any action at law, in
equity or other
-13-
<PAGE>
appropriate proceedings and (b) the Borrower shall, on written demand by the
Bank, deliver to the Bank cash collateral in an amount equal to the LC Exposure
Amount. After the entire LC Exposure Amount shall have been satisfied and all
other direct or indirect obligations of the Borrower to the Bank hereunder shall
have been paid in full, the balance, if any, of such cash collateral shall be
returned to the Borrower.
13. General.
-------
No failure or delay by the Bank in exercising any right, power or privilege
hereunder or under any other Loan Document shall operate as a waiver thereof;
nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein and in the Demand Note are cumulative and not
exclusive of any rights or remedies otherwise provided by agreement or law.
Neither this Agreement nor the Demand Note nor any provision hereof or thereof
may be amended, waived, discharged or terminated except by a written instrument
signed by the Bank and, in the case of amendments, by the Borrower. THIS
AGREEMENT AND THE DEMAND NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER SEAL
AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS
PROVISIONS CONTAINED THEREIN). This Agreement shall be binding upon and inure
to the benefit of the Borrower and the Bank and their respective successors and
assigns, including any holder of the Loan Documents; provided that the Borrower
--------
may not assign or transfer its rights or obligations hereunder. This Agreement
may be signed in any number of counterparts with the same effect as if the
signatures hereto were upon the same instrument.
14. WAIVER OF JURY TRIAL.
--------------------
EACH OF THE BORROWER AND THE BANK AGREES THAT NEITHER IT NOR ANY ASSIGNEE
OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING,
COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT,
ANY NOTE OR ANY OTHER LOAN DOCUMENT OR THE DEALINGS OR THE RELATIONSHIP BETWEEN
THE BORROWER OR THE BANK, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY
OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE
PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO,
AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR
THE BORROWER HAS AGREED WITH OR REPRESENTED TO ANY OTHER THAT THE PROVISIONS OF
THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
15. Consent to Jurisdiction.
-----------------------
THE BORROWER HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS AND THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MASSACHUSETTS, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM
WHICH AN APPEAL MAY BE TAKEN OR
-14-
<PAGE>
OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT,
ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF THE BORROWER'S OBLIGATIONS
UNDER OR WITH RESPECT TO THE DEMAND NOTE OR ANY OTHER LOAN DOCUMENT OR ANY OF
THE TRANSACTIONS CONTEMPLATED THEREBY, AND EXPRESSLY WAIVES ANY AND ALL
OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS.
16. Notices.
-------
Unless otherwise specified herein, all notices hereunder to any party
hereto shall be in writing and shall be deemed to have been given when (a)
delivered by hand, (b) three days after mailing by certified mail, return
receipt requested, or (c) immediately after delivery, by telex, answerback
received or electronic facsimile transmission, or to the telegraph company or
overnight courier; in each case addressed to such party at its address indicated
below:
(a) If to the Borrower:
Maxwell Shoe Company Inc.
101 Sprague Street
Hyde Park, MA 02137
Attention: Richard J. Bakos
Telecopier No.: (617) 364-9058
and with a copy to:
Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, CA 90071
Attention: Brian D. Kilb, Esq.
Telecopier No.: (213) 229-7520
(b) If to the Bank:
BankBoston, N.A.
100 Federal Street
Mail Stop: 01-07-07
Boston, Massachusetts 02110
Attention: Jeffrey R. Westling, Director
Telecopier No.: (617) 434-4426
with a copy to:
James I. Rubens, Esq.
Edwards & Angell, LLP
101 Federal Street, 23rd Floor
Boston, Massachusetts 02110
Telecopier No.: (617) 439-4170
or to any other address specified by such party in writing.
-15-
<PAGE>
If the foregoing correctly sets forth your understanding as to the matters
contained herein, please sign and return the enclosed counterpart of this
Agreement to the Bank.
BANKBOSTON, N.A.
By: /s/ Barbara D. Searle, Vice President
--------------------------------------
Barbara D. Searle, Vice President
ACCEPTED AND AGREED
TO AS OF September 2, 1998
MAXWELL SHOE COMPANY INC.
By: /s/ Mark Cocozza, President
---------------------------
Mark Cocozza, President
-16-
<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
--------------------
This agreement (the "Agreement") is made as of the 27 day of April, 1998
(the "Effective Date"), by and between Mark J. Cocozza (the "Employee") and
Maxwell Shoe Company Inc., a Delaware corporation (the "Company").
WHEREAS, the Board of Directors of the Company (the "Board") recognizes the
Employee's past and continuing contribution to the growth and success of the
Company and desires to assure the Company of the Employee's continued employment
in an executive capacity and to compensate him therefor; and
WHEREAS, the Company and the Employee each wishes that this Agreement
supersede and render void the terms of that certain Employment Agreement dated
as of January 26, 1994 by and between the Company and the Employee; and
WHEREAS, the Employee wishes to continue his employment by the Company and
to commit himself to serve the Company on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Position, Responsibilities and Term of Employment.
-------------------------------------------------
1.01 Position and Responsibilities. The Employee shall serve as Chairman
-----------------------------
of the Board, Chief Executive Officer and President of the Company and in such
additional management position(s) as the Board shall designate. In this
capacity the Employee shall, subject to the by-laws of the Company and to the
direction of the Board, have general supervisory responsibility for the
operations of the Company's business. The Employee shall be accountable to the
Board and shall perform and discharge, faithfully, diligently and to the best of
his ability, his duties and responsibilities hereunder. The Employee shall
devote substantially all of his working time and efforts to the business and
affairs of the Company.
1.02 Term. Subject to the provisions of Sections 1.03, 1.04, 1.05 and
----
1.06 hereof, the term of this Agreement shall commence on the Effective Date and
shall expire on the fifth anniversary of the Effective Date.
1.03 Termination on Account of the Employee's Death. In the event of the
----------------------------------------------
Employee's death during the term of this Agreement, this Agreement shall
terminate except as provided in this Section 1.03. Following the Employee's
death, the beneficiary or beneficiaries indicated below shall be entitled to the
following benefits:
(a) For a period of six months subsequent to the date of the Employee's
death, the Company shall continue to pay an amount equal to the Employee's
Base Salary (as defined in Section 2.01 hereof) to Susan M. Cocozza, the
Employee's beneficiary, or such other beneficiary or beneficiaries as he
may later designate
<PAGE>
(or to his estate, if he fails to make such designation) at the salary rate
in effect on the date of his death, said payments to be made on the same
periodic dates as salary payments would have been made to the Employee had
he not died.
(b) For a period of six months subsequent to the date of the Employee's
death, the Employee's surviving spouse, if any, shall continue to receive
all benefits described in Section 2.04 hereof in effect on the date of his
death. For purposes of determining the amount of such benefits, the
Employee shall be deemed to have remained in the employ of the Company,
with an annual salary at the rate in effect on the date of his death. In
addition, service credits under the benefit plans will continue to accrue
during such six-month period as if the Employee had remained an employee of
the Company. If benefits or service credits contemplated by the previous
two sentences cannot be provided under any benefit plan because of a
prohibition in the terms of the plan, the Company shall pay or provide
directly for payment of any benefits which would have been payable if the
terms of such benefit plan allowed for the crediting required by the two
previous sentences.
The Employee may change the beneficiary for the purposes of this Section 1.03 by
making a written designation and delivering such designation to the Secretary of
the Company. If the Employee makes more than one such written designation, the
designation last received by the Chairman of the Board before the Employee's
death shall control.
1.04. Termination for Cause. The Company shall have the right, after
---------------------
fourteen (14) days' written notice to the Employee, to terminate his employment
for cause. For purposes of this Agreement, cause ("Cause") shall mean (a)
committing fraud, misappropriation or embezzlement in the performance of duties
as an employee of the Company, (b) conviction of a felony involving a crime of
moral turpitude, (c) willful disregard of any written directive of the Board
that is not inconsistent with the Company's Certificate of Incorporation, by-
laws or applicable law, (d) an act of the Employee constituting willful material
breach by the Employee of any material provision of this Agreement or (e) the
Employee willfully engaging in any business activity that materially conflicts
with Employee's duties owed to the Company. Any termination of the Employee for
Cause after a Change of Control occurs (as defined in Section 4.03(a) hereof)
must relate to an act or omission of the Employee occurring after the Change of
Control occurs.
1.05 Termination for Other than Cause. Subject to the provisions of
--------------------------------
Section 4 hereof, the Employee's employment may be terminated by either party by
giving thirty (30) days written notice to the other party. If the Employee
terminates his employment, it shall be considered to be a termination of the
Employee's employment by the Company for other than Cause if any of the
following events shall occur: if the Company (a) fails to appoint (or elect)
the Employee to the position or positions listed in Section 1.01 hereof; (b)
fails to comply with the provisions of Section 2 hereof; (c) engages in conduct
that, against the Employee's volition, would cause the Employee to commit
fraudulent acts or would expose the Employee to criminal liability; (d) reduces
or attempts to reduce the Employee's annual compensation (as described in
Section 2
2
<PAGE>
hereof); (e) takes or attempts to take from the Employee a title or an
office; or (f) effects or attempts to effect a significant change in the
Employee's responsibilities and/or duties which constitutes a demotion in the
judgment of the Employee (such judgment being exercised in good faith).
1.06 Extensions. On the fifth anniversary of the Effective Date, and on
----------
each subsequent annual anniversary of the Effective Date thereafter, this
Agreement shall be automatically extended for an additional year unless either
party notifies the other in writing more than six months prior to the relevant
anniversary date that this Agreement is no longer to be extended.
2. Compensation.
------------
2.01 Base Salary. For the period beginning with the date hereof through
-----------
October 31, 1998, the Company shall pay to the Employee for the services to be
rendered hereunder a base salary (the "Base Salary") at an annual rate of
$525,000 and, for periods beginning after October 31, 1998, the Base Salary
shall be determined by the Company's Compensation and Stock Option Committee;
provided, however, that such Base Salary shall be paid at an annual rate not
less than $525,000. The Employee's Base Salary shall be payable in periodic
instruments in accordance with the Company's usual practice for its senior
executive officers.
2.02 Performance Bonus. The Employee shall be eligible to receive an
-----------------
annual performance bonus (the "Performance Bonus"), the amount of which shall be
determined pursuant to the Company's Senior Management Incentive Plan
established by the Company's Compensation and Stock Option Committee. Any
Performance Bonus earned under this Section 2.02 shall be payable in accordance
with the Company's normal practices with respect to bonus payments made to the
Company's senior executive officers; provided, however, that any such
Performance Bonus shall be paid not later than thirty (30) days after audited
financial statements with respect to the Company's fiscal year during which such
bonus was earned become available.
2.03 Stock Option. The Company and the Employee acknowledge that, on the
------------
Effective Date, the Company granted a nonqualified stock option to the Employee
to purchase 75,000 shares of the Company's Class A Common Stock at an exercise
price per share equal to the fair market value on the Effective Date and subject
to certain time and stock price performance vesting provisions as set forth in
that certain Stock Option Agreement between the Company and the Employee, dated
as of April 27, 1998 (the "Stock Option Agreement"), a copy of which is attached
hereto as Exhibit A.
2.04 Participation in Benefit Plans. The Employee shall be entitled to
------------------------------
participate in, and receive benefits under, all the Company employee benefit
plans and arrangements in effect on the Effective Date for as long as such plans
and arrangements may remain in effect (including, but not limited to,
participation in any pension and profit-sharing plan adopted by the Company, any
employee stock option plan and all group life, health, dental, disability and
other insurance) or any substitute or additional plans, policies or arrangements
made available in the future to the executives and key management employees of
the Company, subject to and on a
3
<PAGE>
basis consistent with the terms, conditions and overall administration of such
plans, policies and arrangements. Nothing paid to the Employee under any plan,
policies or arrangement presently in effect or made available in the future
shall be deemed to be in lieu of other compensation to the Employee hereunder as
described in this Section 2.
2.05 Vacation Days; Sick Leave. The Employee shall be entitled to annual
-------------------------
vacation time and sick leave without reduction in Base Salary in the same amount
and manner as other senior executive officers of the Company.
2.06 Expenses. During the term of his employment hereunder, the Employee
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by him (in accordance with the policies and procedures established by
the Board for its senior executive officers) in performing services hereunder,
provided that the Employee properly accounts therefor in accordance with Company
policy.
3. Rights and Obligations Binding on Employee, the Company and its
---------------------------------------------------------------
Successor(s).
- ------------
This Agreement and the rights and obligations of the parties hereto shall
bind and inure to the benefit of each of the parties hereto and shall also bind
and inure to the benefit of any successor or successors, or assignee or
assignees, of the Company. Except as to any such successor or assignee of the
Company, neither this Agreement nor any rights, obligations or benefits
hereunder may be assigned by the Company or by the Employee. As used in this
Agreement, a "successor" or "assignee" of the Company shall include but not be
limited to (a) any person or entity succeeding the Company, whether by sale or
exchange of stock or assets, merger, consolidation, recapitalization, or a
reorganization of any kind, including but not limited to all reorganizations
defined in section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), or (b) any person or entity receiving, directly or indirectly, any
substantial portion of the business, properties or assets of the Company, in any
type of transfer, including, but not limited to, any sale, exchange or other
transfer of any assets of the Company, or any transfer in connection with the
liquidation and/or dissolution of the Company, or the bankruptcy of the Company.
For any such transaction in which the successor or assignee does not succeed to
the obligations of the Company under this Agreement by operation of law, the
Company agrees that it shall be a precondition to the closing of such
transaction that the successor or assignee expressly assume the Company's
obligations under this Agreement. Except as provided in Section 4.03 hereof,
the rights and obligations of the parties to this Agreement shall not be limited
in any way or affected by a Change of Control (as defined in Section 4.03 (a)
hereof).
4. Consequences of Early Termination of Agreement.
----------------------------------------------
4.01 Termination by the Company Other than for Cause. If the Company
-----------------------------------------------
terminates this Agreement other than for Cause (including if the Employee
terminates this Agreement under the circumstances described in the second
sentence of Section 1.05 hereof), then the Employee (or the Employee's
beneficiary designated pursuant to Section 1.03 hereof if the Employee is
deceased at the time of payment) shall continue, throughout the remainder of
what would have been the normal term of this Agreement, to receive such
compensation and benefits as are provided to the Employee pursuant to Section 2
hereof; provided, however, that in no event shall
4
<PAGE>
the Employee receive, during the period beginning with the date of termination
of the Employee's employment and the end of what would have been the normal term
of this Agreement, an aggregate amount of compensation and benefits less than
one and one-half (11/2) times the Employee's total compensation (including, for
purposes of computing total compensation under this Section 4.01, the amount of
any bonus or employee benefits accrued during the relevant period) earned during
the twelve-month period immediately preceding the effective date of such
termination. The Employee's right to receive such compensation and benefits
shall not be subject to any obligations on the part of the Employee to perform
any work or other obligations on behalf of the Company, its successor(s) or
assignee(s), or to mitigate his damages; provided, however, that if the Employee
actually receives compensation for services rendered to any person other than
the Company, which services were rendered after the date the Employee was
terminated by the Company and before the date constituting the end of what would
have been the normal term of this Agreement, then the amount of any such
compensation shall be subtracted from the amount otherwise owed to the Employee
by the Company pursuant to this Section 4.01. For the purposes of determining
the amount of benefits to which the Employee shall continue to be entitled
pursuant to Section 2.04 above, the Employee shall be deemed, throughout the
period of his entitlement pursuant to this Section 4.01, to have remained in the
employ of the Company with an annual salary at the rate in effect on the date of
his termination of employment. If continuation of any of the benefits described
in Section 2.04 cannot be provided as contemplated by this Section 4.01 on
account of a prohibition in the terms of a benefit plan, the Company shall pay
or provide directly for payment of any benefits which would have been payable if
the terms of such plan allowed for the crediting anticipated in this Section
4.01.
4.02 Termination by the Company for Cause. If the Company terminates this
------------------------------------
Agreement for Cause, then the Company shall thereafter have no further
obligations or liability to the Employee under this Agreement; provided,
however, that the Employee shall be entitled to receive within thirty (30) days
after the effective date of such termination such compensation and benefits as
are accrued and unpaid on the effective date of such termination.
4.03 Termination Following Change of Control. If there is a Change of
---------------------------------------
Control while this Agreement is in effect, the provisions of this Section 4.03
shall apply and shall continue to apply for a one-year period following the
Change of Control, regardless of whether or not this Agreement is terminated.
If during the one-year period following a Change of Control the Employee's
employment is terminated by the Company without Cause, the Employee (or the
Employee's beneficiary designated pursuant to Section 1.03 hereof if the
Employee is deceased at the time of payment) shall receive such compensation as
is provided to the Employee pursuant to subsection (b) of this Section 4.03.
After said one-year period following said Change of Control, this Section 4.03
shall no longer apply, and all of the other provisions of this Agreement shall
apply and remain in full force and effect.
(a) For the purposes of this Section 4.03, Change of Control shall mean the
occurrence of one or more of the following three events:
5
<PAGE>
(i) any one beneficial stockholder or affiliated group of beneficial
stockholders becomes at any time the beneficial holder of twenty-five
percent (25%) or more of the aggregate voting power of the issued and
outstanding securities of the Company with rights to vote for the
election of directors of the Company;
(ii) at any time after any "reorganization" involving the Company, as
such term is defined in section 368 of the Code, or any other type of
reorganization, recapitalization, merger, consolidation or sale of
assets involving the Company, or a contested election of a Company
director, or any combination of the foregoing, the individuals who
were directors of the Company immediately prior thereto shall cease to
constitute a majority of the Board; or
(iii) at any time after a tender offer or exchange offer for voting
securities of the Company (other than by the Company), the individuals
who were directors of the Company immediately prior thereto shall
cease to constitute a majority of the Board.
(b) If the Employee becomes entitled to receive compensation pursuant to
this Section 4.03, then, in addition to any payments to which the Employee
is entitled under Section 4.01 hereof, the Employee shall receive within
thirty (30) days of the termination of his employment a lump-sum payment
equal to three (3) times the Employee's average annual total compensation
(including, for purposes of computing total compensation under this Section
4.03, the amount of any bonus and employee benefits accrued during the
relevant period) earned during the five-year period immediately preceding
the effective date of the change of control (such payment hereinafter
referred to as the "Termination Payment"). If any amount payable to the
Employee pursuant to this Section 4.03 would subject the Employee to the
excise tax imposed by section 4999 of the Code, then the amount of the
Termination Payment that the Employee would otherwise have been entitled to
receive under this Section 4.03 shall be reduced to the amount that
maximizes the amount of the Termination Payment net of such excise tax.
4.04 Other Terminations. If the Employee terminates his employment under
------------------
this Agreement under such circumstances as would not cause the Employee to be
deemed to be terminated by the Company for other than Cause as provided in the
second sentence of section 1.05 hereof, and Section 4.03 does not apply to such
termination, then the Employee shall be entitled to receive within thirty (30)
days after the effective date of such termination such compensation and benefits
as are accrued and unpaid on the effective date of such termination, and neither
party to this Agreement shall thereafter have any further liability to the other
under this Agreement.
6
<PAGE>
5. Miscellaneous.
-------------
5.01 Governing Law. This Agreement shall be construed in accordance with
-------------
and governed for all purposes by the laws of The Commonwealth of Massachusetts.
5.02 Interpretation. In case any one or more of the provisions contained
--------------
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
5.03 Legal Fees. Any legal expenses incurred by either party to this
----------
Agreement in enforcing its rights hereunder (including any legal expenses
incurred with respect to any arbitration proceeding pursuant to Section 5.04
hereof) shall be borne and paid solely by such party. Notwithstanding the
foregoing or anything to the contrary contained in this Agreement, no provision
of this Agreement shall be construed as a limitation on or waiver of any rights
that one party to this Agreement may have to be reimbursed by the other party to
this Agreement for such first party's attorneys' fees pursuant to any statute or
other applicable law.
5.04 Arbitration of Disputes. Any controversy or claim arising out of, or
-----------------------
relating to, any provision of this Agreement shall be settled by binding
arbitration in accordance with the laws of The Commonwealth of Massachusetts by
three arbitrators, one of whom shall be appointed by the Company, one by the
Employee, and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators, which shall be as provided in this
Section 5.04. Judgment on the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
5.05 Notices. Any notice required or permitted to be given hereunder
-------
shall be effective when received and shall be sufficient if in writing and if
personally delivered or sent by certified or registered mail, return receipt
requested, to the party to receive such notice at its address set forth below or
at such other address as a party may by notice specify to the other.
If to the Company: If to the Employee:
Maxwell Shoe Company Inc. Mark J. Cocozza
101 Sprague Street 1 Pendant Court
P.O. Box 37 Andover, MA 01810
Readville (Boston), MA 02137
Attn: James J. Tinagero,
Executive Vice President
With a copy to: With a copy to:
Jonathan K. Layne, Esq. Thomas E. Peckham, Esq.
Gibson, Dunn & Crutcher LLP Peckham, Lobel, Casey, Prince & Tye
333 South Grand Avenue Boston, MA 02109
Los Angeles, CA 90071
7
<PAGE>
5.06 Confidential Information. The Employee will not disclose to any
------------------------
other person or entity (except as required by applicable law or in connection
with the performance of his responsibilities hereunder), or use for his own
benefit, any confidential information of the Company obtained by him incident to
his employment with the Company. The term "confidential information" includes,
without limitation, financial information, business plans, prospects and
opportunities which have been discussed or considered by the Company's
management but does not include any information which has become public other
than on account of the Employee's failure to comply with the provisions of this
Section 5.06.
5.07 Non-Competition. The Employee agrees that, for a period of eighteen
---------------
(18) months following the date of termination of this Agreement (other than a
termination that results solely from the expiration of the initial or extended
normal term of this Agreement contemplated by Sections 1.02 and 1.06 hereof), he
will not directly or indirectly own, manage, operate, control or participate in
the ownership, management, operation or control of, or be connected as an
officer, employee, partner, director or otherwise with, or have any financial
interest in, or aid or assist anyone else in the conduct of, or solicit any
employees of the Company on behalf of, any entity or business which competes
directly with the footwear or retail businesses conducted by the Company or by
any group, division or subsidiary of the Company, in any area where such
business is being conducted or is proposed to be conducted at such date of
termination; provided, however, that this provision shall not apply if this
Agreement is terminated as provided in the parenthetical phrase set forth above
in this sentence. It is understood and agreed that, for the purposes of the
foregoing provisions of this Section 5.07, (i) no business shall be deemed to be
a business conducted by the Company, or any group, division or subsidiary of the
Company, unless not less than five percent (5%) of the Company's consolidated
gross sales or operating revenues is derived from, or not less than five percent
(5%) of the Company's consolidated assets is devoted to, such business; and (ii)
no business conducted by any entity by which the Employee is employed or in
which he is interested or with which he is connected or associated shall be
deemed competitive with any business conducted by the Company unless it is one
from which five percent (5%) or more its consolidated gross sales or operating
revenues is derived, or to which five percent (5%) or more of its consolidated
assets is devoted; provided, however, that if the actual gross sales or
operating revenues or assets of such entity derived from or devoted to such
business is equal to or in excess of ten percent (10%) of the most nearly
comparable figure for the Company, such business of such entity shall be deemed,
to be competitive with a business of the Company. Furthermore, ownership of five
percent (5%) or less of the voting stock of any publicly held corporation shall
not constitute a violation of this Section 5.07.
5.08 Amendment and Waiver. This Agreement may not be amended, supplemented
--------------------
or waived except by a writing signed by the party against which such amendment,
supplement or waiver is to be enforced. The waiver by any party of a breach of
any provision of this Agreement shall not operate to waive, or be construed as a
waiver of, any other breach of that provision nor as a waiver of any breach of
another provision.
8
<PAGE>
5.09 Binding Effect. Subject to the provisions of Section 3 hereof, this
--------------
Agreement shall be binding on the successors and assigns of the parties hereto.
5.10 Other Agreements. This Agreement supersedes and renders void the terms
----------------
of any previously executed employment, including but not limited to that certain
Employment Agreement dated January 26, 1994 between the Company and the
Employee, and/or compensation agreements between the parties, which shall no
longer be considered to have any force or effect.
5.11 Counterparts. This Agreement may be executed in two counterparts,
------------
each of which is an original but which shall together constitute one and the
same instrument.
Upon execution below by both parties, this Agreement will enter into full
force and effect as of April 27, 1998.
MAXWELL SHOE COMPANY INC. THE EMPLOYEE
By: /s/ James J. Tinagero /s/ Mark J. Cocozza
James J. Tinagero Mark J. Cocozza
Executive Vice President
9
<PAGE>
Exhibit A
---------
Stock Option Agreement
10
<PAGE>
Exhibit 10.13
EMPLOYMENT AGREEMENT
--------------------
This agreement (the "Agreement") is made as of the 27th day of April, 1998
(the "Effective Date"), by and between James J. Tinagero (the "Employee") and
Maxwell Shoe Company Inc., a Delaware corporation (the "Company").
WHEREAS, the Board of Directors of the Company (the "Board") recognizes the
Employee's past and continuing contribution to the growth and success of the
Company and desires to assure the Company of the Employee's continued employment
in an executive capacity and to compensate him therefor; and
WHEREAS, the Employee wishes to continue his employment by the Company and
to commit himself to serve the Company on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Position, Responsibilities and Term of Employment.
-------------------------------------------------
1.01 Position and Responsibilities. The Employee shall serve as Executive
-----------------------------
Vice President of the Company and in such additional management position(s) as
the Chief Executive Officer of the Company shall designate. In this capacity
the Employee shall, subject to the by-laws of the Company and to the direction
of the Chief Executive Officer of the Company, report directly to and shall have
such responsibilities for the Company's business as may be designated by the
Company's Chief Executive Officer. The Employee shall perform and discharge,
faithfully, diligently and to the best of his ability, his duties and
responsibilities hereunder. The Employee shall devote substantially all of his
working time and efforts to the business and affairs of the Company.
1.02 Term. Subject to the provisions of Sections 1.03, 1.04, 1.05 and
----
1.06 hereof, the term of this Agreement shall commence on the Effective Date and
shall expire on the third anniversary of the Effective Date.
1.03 Termination on Account of the Employee's Death. In the event of the
----------------------------------------------
Employee's death during the term of this Agreement, this Agreement shall
terminate except as provided in this Section 1.03. Following the Employee's
death, the beneficiary or beneficiaries indicated below shall be entitled to the
following benefits:
(a) For a period of six months subsequent to the date of the Employee's
death, the Company shall continue to pay an amount equal to the Employee's
Base Salary (as defined in Section 2.01 hereof) to Employee's spouse, the
Employee's beneficiary, or such other beneficiary or beneficiaries as he
may later designate (or to his estate, if he fails to make such
designation) at the salary rate in effect on the date of his death, said
payments to be made on the same periodic dates as salary payments would
have been made to the Employee had he not died.
<PAGE>
(b) For a period of six months subsequent to the date of the Employee's
death, the Employee's surviving spouse, if any, shall continue to receive
all benefits described in Section 2.04 hereof in effect on the date of his
death. For purposes of determining the amount of such benefits, the
Employee shall be deemed to have remained in the employ of the Company,
with an annual salary at the rate in effect on the date of his death. In
addition, service credits under the benefit plans will continue to accrue
during such six-month period as if the Employee had remained an employee of
the Company. If benefits or service credits contemplated by the previous
two sentences cannot be provided under any benefit plan because of a
prohibition in the terms of the plan, the Company shall pay or provide
directly for payment of any benefits which would have been payable if the
terms of such benefit plan allowed for the crediting required by the two
previous sentences.
The Employee may change the beneficiary for the purposes of this Section 1.03 by
making a written designation and delivering such designation to the Chairman of
the Board. If the Employee makes more than one such written designation, the
designation last received by the Chairman of the Board before the Employee's
death shall control.
1.04. Termination for Cause. The Company shall have the right, after
---------------------
fourteen (14) days' written notice to the Employee, to terminate his employment
for cause. For purposes of this Agreement, cause ("Cause") shall mean (a)
committing fraud, misappropriation or embezzlement in the performance of duties
as an employee of the Company, (b) conviction of a felony involving a crime of
moral turpitude, (c) willful disregard of any written directive of the Board
that is not inconsistent with the Company's Certificate of Incorporation, by-
laws or applicable law, (d) an act of the Employee constituting willful material
breach by the Employee of any material provision of this Agreement or (e) the
Employee willfully engaging in any business activity that materially conflicts
with Employee's duties owed to the Company. Any termination of the Employee for
Cause after a Change of Control occurs (as defined in Section 4.03(a) hereof)
must relate to an act or omission of the Employee occurring after the Change of
Control occurs.
1.05 Termination for Other than Cause. Subject to the provisions of
--------------------------------
Section 4 hereof, the Employee's employment may be terminated by either party by
giving thirty (30) days written notice to the other party. If the Employee
terminates his employment, it shall be considered to be a termination of the
Employee's employment by the Company for other than Cause if any of the
following events shall occur: if the Company (a) fails to appoint (or elect)
the Employee to the position or positions listed in Section 1.01 hereof; (b)
fails to comply with the provisions of Section 2 hereof; (c) engages in conduct
that, against the Employee's volition, would cause the Employee to commit
fraudulent acts or would expose the Employee to criminal liability; (d) reduces
or attempts to reduce the Employee's annual compensation (as described in
Section 2 hereof); (e) takes or attempts to take from the Employee a title or an
office; or (f) effects or attempts to effect a significant change in the
Employee's responsibilities and/or duties which constitutes a demotion in the
judgment of the Employee (such judgment being exercised in good faith).
2
<PAGE>
1.06 Extensions. On the third anniversary of the Effective Date, and on
----------
each subsequent annual anniversary of the Effective Date thereafter, this
Agreement shall be automatically extended for an additional year unless either
party notifies the other in writing more than six months prior to the relevant
anniversary date that this Agreement is no longer to be extended.
2. Compensation.
------------
2.01 Base Salary. For the period beginning with the date hereof through
-----------
October 31, 1998, the Company shall pay to the Employee for the services to be
rendered hereunder a base salary (the "Base Salary") at an annual rate of
$325,000 and, for periods beginning after October 31, 1998, the Base Salary
shall be determined by the Company's Compensation and Stock Option Committee;
provided, however, that such Base Salary shall be paid at an annual rate not
less than $325,000. The Employee's Base Salary shall be payable in periodic
instruments in accordance with the Company's usual practice for its senior
executive officers.
2.02 Performance Bonus. The Employee shall be eligible to receive an
-----------------
annual performance bonus (the "Performance Bonus"), the amount of which shall be
determined pursuant to the Company's Senior Management Incentive Plan
established by the Company's Compensation and Stock Option Committee. Any
Performance Bonus earned under this Section 2.02 shall be payable in accordance
with the Company's normal practices with respect to bonus payments made to the
Company's senior executive officers; provided, however, that any such
Performance Bonus shall be paid not later than thirty (30) days after audited
financial statements with respect to the Company's fiscal year during which such
bonus was earned become available.
2.03 Stock Option. The Company and the Employee acknowledge that, on the
------------
Effective Date, the Company granted a nonqualified stock option to the Employee
to purchase 25,000 shares of the Company's Class A Common Stock at an exercise
price per share equal to the fair market value on the Effective Date and subject
to certain time vesting provisions as set forth in that certain Stock Option
Agreement between the Company and the Employee, dated as of April 27, 1998 (the
"Stock Option Agreement"), a copy of which is attached hereto as Exhibit A.
2.04 Participation in Benefit Plans. The Employee shall be entitled to
------------------------------
participate in, and receive benefits under, all the Company employee benefit
plans and arrangements in effect on the Effective Date for as long as such plans
and arrangements may remain in effect (including, but not limited to,
participation in any pension and profit-sharing plan adopted by the Company, any
employee stock option plan and all group life, health, dental, disability and
other insurance) or any substitute or additional plans, policies or arrangements
made available in the future to the executives and key management employees of
the Company, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans, policies and arrangements. Nothing paid
to the Employee under any plan, policies or arrangement presently in effect or
made available in the future shall be deemed to be in lieu of other compensation
to the Employee hereunder as described in this Section 2.
3
<PAGE>
2.05 Vacation Days; Sick Leave. The Employee shall be entitled to annual
-------------------------
vacation time and sick leave without reduction in Base Salary in the same amount
and manner as other senior executive officers of the Company.
2.06 Expenses. During the term of his employment hereunder, the Employee
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by him (in accordance with the policies and procedures established by
the Board for its senior executive officers) in performing services hereunder,
provided that the Employee properly accounts therefor in accordance with Company
policy.
3. Rights and Obligations Binding on Employee, the Company and its
---------------------------------------------------------------
Successor(s).
- ------------
This Agreement and the rights and obligations of the parties hereto shall
bind and inure to the benefit of each of the parties hereto and shall also bind
and inure to the benefit of any successor or successors, or assignee or
assignees, of the Company. Except as to any such successor or assignee of the
Company, neither this Agreement nor any rights, obligations or benefits
hereunder may be assigned by the Company or by the Employee. As used in this
Agreement, a "successor" or "assignee" of the Company shall include but not be
limited to (a) any person or entity succeeding the Company, whether by sale or
exchange of stock or assets, merger, consolidation, recapitalization, or a
reorganization of any kind, including but not limited to all reorganizations
defined in section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), or (b) any person or entity receiving, directly or indirectly, any
substantial portion of the business, properties or assets of the Company, in any
type of transfer, including, but not limited to, any sale, exchange or other
transfer of any assets of the Company, or any transfer in connection with the
liquidation and/or dissolution of the Company, or the bankruptcy of the Company.
For any such transaction in which the successor or assignee does not succeed to
the obligations of the Company under this Agreement by operation of law, the
Company agrees that it shall be a precondition to the closing of such
transaction that the successor or assignee expressly assume the Company's
obligations under this Agreement. Except as provided in Section 4.03 hereof,
the rights and obligations of the parties to this Agreement shall not be limited
in any way or affected by a Change of Control (as defined in Section 4.03 (a)
hereof).
4. Consequences of Early Termination of Agreement.
----------------------------------------------
4.01 Termination by the Company Other than for Cause. If the Company
-----------------------------------------------
terminates this Agreement other than for Cause (including if the Employee
terminates this Agreement under the circumstances described in the second
sentence of Section 1.05 hereof), then the Employee (or the Employee's
beneficiary designated pursuant to Section 1.03 hereof if the Employee is
deceased at the time of payment) shall continue, throughout the remainder of
what would have been the normal term of this Agreement, to receive such
compensation and benefits as are provided to the Employee pursuant to Section 2
hereof; provided, however, that in no event shall the Employee receive, during
the period beginning with the date of termination of the Employee's employment
and the end of what would have been the normal term of this Agreement, an
aggregate amount of compensation and benefits less than one and one-half (1 1/2)
times the Employee's total compensation (including, for purposes of computing
total
4
<PAGE>
compensation under this Section 4.01, the amount of any bonus or employee
benefits accrued during the relevant period) earned during the twelve-month
period immediately preceding the effective date of such termination. The
Employee's right to receive such compensation and benefits shall not be subject
to any obligations on the part of the Employee to perform any work or other
obligations on behalf of the Company, its successor(s) or assignee(s), or to
mitigate his damages; provided, however, that if the Employee actually receives
compensation for services rendered to any person other than the Company, which
services were rendered after the date the Employee was terminated by the Company
and before the date constituting the end of what would have been the normal term
of this Agreement, then the amount of any such compensation shall be subtracted
from the amount otherwise owed to the Employee by the Company pursuant to this
Section 4.01. For the purposes of determining the amount of benefits to which
the Employee shall continue to be entitled pursuant to Section 2.04 above, the
Employee shall be deemed, throughout the period of his entitlement pursuant to
this Section 4.01, to have remained in the employ of the Company with an annual
salary at the rate in effect on the date of his termination of employment. If
continuation of any of the benefits described in Section 2.04 cannot be provided
as contemplated by this Section 4.01 on account of a prohibition in the terms of
a benefit plan, the Company shall pay or provide directly for payment of any
benefits which would have been payable if the terms of such plan allowed for the
crediting anticipated in this Section 4.01.
4.02 Termination by the Company for Cause. If the Company terminates this
------------------------------------
Agreement for Cause, then the Company shall thereafter have no further
obligations or liability to the Employee under this Agreement; provided,
however, that the Employee shall be entitled to receive within thirty (30) days
after the effective date of such termination such compensation and benefits as
are accrued and unpaid on the effective date of such termination.
4.03 Termination Following Change of Control. If there is a Change of
---------------------------------------
Control while this Agreement is in effect, the provisions of this Section 4.03
shall apply and shall continue to apply for a one-year period following the
Change of Control, regardless of whether or not this Agreement is terminated.
If during the one-year period following a Change of Control the Employee's
employment is terminated by the Company without Cause, the Employee (or the
Employee's beneficiary designated pursuant to Section 1.03 hereof if the
Employee is deceased at the time of payment) shall receive such compensation as
is provided to the Employee pursuant to subsection (b) of this Section 4.03.
After said one-year period following said Change of Control, this Section 4.03
shall no longer apply, and all of the other provisions of this Agreement shall
apply and remain in full force and effect.
(a) For the purposes of this Section 4.03, Change of Control shall mean the
occurrence of one or more of the following three events:
(i) any one beneficial stockholder or affiliated group of beneficial
stockholders becomes at any time the beneficial holder of twenty-five
percent (25%) or more of the aggregate voting power of the issued and
outstanding securities of the Company with rights to vote for the
election of directors of the Company;
5
<PAGE>
(ii) at any time after any "reorganization" involving the Company, as
such term is defined in section 368 of the Code, or any other type of
reorganization, recapitalization, merger, consolidation or sale of
assets involving the Company, or a contested election of a Company
director, or any combination of the foregoing, the individuals who
were directors of the Company immediately prior thereto shall cease to
constitute a majority of the Board; or
(iii) at any time after a tender offer or exchange offer for voting
securities of the Company (other than by the Company), the individuals
who were directors of the Company immediately prior thereto shall
cease to constitute a majority of the Board.
(b) If the Employee becomes entitled to receive compensation pursuant to
this Section 4.03, then, in addition to any payments to which the Employee
is entitled under Section 4.01 hereof, the Employee shall receive within
thirty (30) days of the termination of his employment a lump-sum payment
equal to the Employee's total compensation (including, for purposes of
computing total compensation under this Section 4.03, the amount of any
bonus and employee benefits accrued during the relevant period) earned
during the eighteen-month period immediately preceding the effective date
of the change of control (such payment hereinafter referred to as the
"Termination Payment"). If any amount payable to the Employee pursuant to
this Section 4.03 would subject the Employee to the excise tax imposed by
section 4999 of the Code, then the amount of the Termination Payment that
the Employee would otherwise have been entitled to receive under this
Section 4.03 shall be reduced to the amount that maximizes the amount of
the Termination Payment net of such excise tax.
4.04 Other Terminations. If the Employee terminates his employment under
------------------
this Agreement under such circumstances as would not cause the Employee to be
deemed to be terminated by the Company for other than Cause as provided in the
second sentence of section 1.05 hereof, and Section 4.03 does not apply to such
termination, then the Employee shall be entitled to receive within thirty (30)
days after the effective date of such termination such compensation and benefits
as are accrued and unpaid on the effective date of such termination, and neither
party to this Agreement shall thereafter have any further liability to the other
under this Agreement.
5. Miscellaneous.
-------------
5.01 Governing Law. This Agreement shall be construed in accordance with
-------------
and governed for all purposes by the laws of The Commonwealth of Massachusetts.
5.02 Interpretation. In case any one or more of the provisions contained
--------------
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
6
<PAGE>
5.03 Legal Fees. Any legal expenses incurred by either party to this
----------
Agreement in enforcing its rights hereunder (including any legal expenses
incurred with respect to any arbitration proceeding pursuant to Section 5.04
hereof) shall be borne and paid solely by such party. Notwithstanding the
foregoing or anything to the contrary contained in this Agreement, no provision
of this Agreement shall be construed as a limitation on or waiver of any rights
that one party to this Agreement may have to be reimbursed by the other party to
this Agreement for such first party's attorneys' fees pursuant to any statute or
other applicable law.
5.04 Arbitration of Disputes. Any controversy or claim arising out of, or
-----------------------
relating to, any provision of this Agreement shall be settled by binding
arbitration in accordance with the laws of The Commonwealth of Massachusetts by
three arbitrators, one of whom shall be appointed by the Company, one by the
Employee, and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators, which shall be as provided in this
Section 5.04. Judgment on the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
5.05 Notices. Any notice required or permitted to be given hereunder
-------
shall be effective when received and shall be sufficient if in writing and if
personally delivered or sent by certified or registered mail, return receipt
requested, to the party to receive such notice at its address set forth below or
at such other address as a party may by notice specify to the other.
If to the Company: If to the Employee:
Maxwell Shoe Company Inc. James J. Tinagero
101 Sprague Street 790 Boylston Street, Apt. 23B
P.O. Box 37 Boston, MA 02199
Readville (Boston), MA 02137
Attn: Mark J. Cocozza,
Chairman
With a copy to:
Jonathan K. Layne, Esq.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
7
<PAGE>
5.06 Confidential Information. The Employee will not disclose to any
------------------------
other person or entity (except as required by applicable law or in connection
with the performance of his responsibilities hereunder), or use for his own
benefit, any confidential information of the Company obtained by him incident to
his employment with the Company. The term "confidential information" includes,
without limitation, financial information, business plans, prospects and
opportunities which have been discussed or considered by the Company's
management but does not include any information which has become public other
than on account of the Employee's failure to comply with the provisions of this
Section 5.06.
5.07 Non-Competition. The Employee agrees that, for a period of twelve (12)
---------------
months following the date of termination of this Agreement (other than a
termination that results solely from the expiration of the initial or extended
normal term of this Agreement contemplated by Sections 1.02 and 1.06 hereof), he
will not directly or indirectly own, manage, operate, control or participate in
the ownership, management, operation or control of, or be connected as an
officer, employee, partner, director or otherwise with, or have any financial
interest in, or aid or assist anyone else in the conduct of, or solicit any
employees of the Company on behalf of, any entity or business which competes
directly with the footwear or retail businesses conducted by the Company or by
any group, division or subsidiary of the Company, in any area where such
business is being conducted or is proposed to be conducted at such date of
termination; provided, however, that this provision shall not apply if this
Agreement is terminated as provided in the parenthetical phrase set forth above
in this sentence. It is understood and agreed that, for the purposes of the
foregoing provisions of this Section 5.07, (i) no business shall be deemed to be
a business conducted by the Company, or any group, division or subsidiary of the
Company, unless not less than five percent (5%) of the Company's consolidated
gross sales or operating revenues is derived from, or not less than five percent
(5%) of the Company's consolidated assets is devoted to, such business; and (ii)
no business conducted by any entity by which the Employee is employed or in
which he is interested or with which he is connected or associated shall be
deemed competitive with any business conducted by the Company unless it is one
from which five percent (5%) or more of its consolidated gross sales or
operating revenues is derived, or to which five percent (5%) or more of its
consolidated assets is devoted; provided, however, that if the actual gross
sales or operating revenues or assets of such entity derived from or devoted to
such business is equal to or in excess of ten percent (10%) of the most nearly
comparable figure for the Company, such business of such entity shall be deemed,
to be competitive with a business of the Company. Furthermore, ownership of five
percent (5%) or less of the voting stock of any publicly held corporation shall
not constitute a violation of this Section 5.07.
5.08 Amendment and Waiver. This Agreement may not be amended, supplemented
--------------------
or waived except by a writing signed by the party against which such amendment,
supplement or waiver is to be enforced. The waiver by any party of a breach of
any provision of this Agreement shall not operate to waive, or be construed as a
waiver of, any other breach of that provision nor as a waiver of any breach of
another provision.
5.09 Binding Effect. Subject to the provisions of Section 3 hereof, this
--------------
Agreement shall be binding on the successors and assigns of the parties hereto.
8
<PAGE>
5.10 Other Agreements. This Agreement supersedes and renders void the terms
----------------
of any previously executed employment and/or compensation agreements between the
parties, which shall no longer be considered to have any force or effect.
5.11 Counterparts. This Agreement may be executed in two counterparts,
------------
each of which is an original but which shall together constitute one and the
same instrument.
Upon execution below by both parties, this Agreement will enter into full
force and effect as of April 27, 1998.
MAXWELL SHOE COMPANY INC. THE EMPLOYEE
By: /s/ Mark J. Cocozza /s/ James J. Tinagero
------------------------------------- ----------------------
Mark J. Cocozza James J. Tinagero
Chairman and Chief Executive Officer
9
<PAGE>
Exhibit A
---------
Stock Option Agreement
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 18,731
<SECURITIES> 0
<RECEIVABLES> 36,236
<ALLOWANCES> 581
<INVENTORY> 22,928
<CURRENT-ASSETS> 79,995
<PP&E> 8,728
<DEPRECIATION> 2,497
<TOTAL-ASSETS> 91,005
<CURRENT-LIABILITIES> 10,193
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 79,221
<TOTAL-LIABILITY-AND-EQUITY> 91,005
<SALES> 165,921
<TOTAL-REVENUES> 165,921
<CGS> 121,032
<TOTAL-COSTS> 121,032
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 19,889
<INCOME-TAX> 6,624
<INCOME-CONTINUING> 13,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,265
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.44
</TABLE>
<PAGE>
Exhibit 10.34
- --------------------------------------------------------------------------------
ADDITIONAL CAPITAL CONTRIBUTION AGREEMENT
by and between
BUTLER GROUP LLC
and
SLJ RETAIL LLC
June 24, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ARTICLE I. DEFINITIONS
-----------
<S> <C> <C>
1.1 Certain Defined Terms.................. 1
---------------------
ARTICLE II. ADDITIONAL CAPITAL CONTRIBUTIONS
--------------------------------
2.1 Additional Capital Contributions....... 3
--------------------------------
2.2 Issuance of Additional Member Interests 3
---------------------------------------
2.3 Requests for Capital Contributions..... 4
----------------------------------
2.4 Use of Proceeds........................ 4
---------------
ARTICLE III. CONDITIONS PRECEDENT
--------------------
3.1 Initial Capital Contribution........... 4
----------------------------
3.2 First Capital Contribution Subsequent
to the Closing Date 5
-------------------
3.3 Subsequent Capital Contributions....... 5
--------------------------------
3.4 All Capital Contributions.............. 5
-------------------------
ARTICLE IV. BUTLER'S REPRESENTATIONS AND WARRANTIES
---------------------------------------
4.1 Existence.............................. 6
---------
4.2 Authority.............................. 6
---------
ARTICLE V. THE COMPANY'S REPRESENTATIONS AND WARRANTIES
--------------------------------------------
5.1 Organization and Qualification......... 7
------------------------------
5.2 Authority.............................. 7
---------
5.3 Valid Obligations...................... 7
-----------------
5.4 Approvals.............................. 7
---------
5.5 Compliance with Laws and Agreements.... 7
-----------------------------------
5.6 Financial Statements................... 7
--------------------
5.7 Litigation............................. 8
----------
5.8 Senior Credit Agreement................ 8
-----------------------
5.9 Full Disclosure........................ 8
---------------
ARTICLE VI. MISCELLANEOUS
-------------
6.1 Expenses............................... 8
--------
6.3 Assignment............................. 9
----------
6.4 Notices................................ 9
-------
6.5 Binding Effect......................... 11
--------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
6.6 No Third Party Beneficiary............. 11
--------------------------
6.7 Waiver................................. 11
------
6.8 Counterparts........................... 11
------------
6.9 Entire Agreement....................... 11
----------------
6.10 Governing Law.......................... 11
-------------
6.11 Waiver of Jury Trial................... 12
--------------------
6.12 Opinion of Butler's Counsel............ 12
---------------------------
</TABLE>
ii
<PAGE>
ADDITIONAL CAPITAL CONTRIBUTION AGREEMENT
THIS ADDITIONAL CAPITAL CONTRIBUTION AGREEMENT (this "Agreement") is made
---------
and entered into as of June 24, 1998 by and between SLJ RETAIL LLC, a Delaware
limited liability company (the "Company"), and BUTLER GROUP LLC, a Delaware
-------
limited liability company ("Butler").
------
RECITALS
--------
A. Maxwell Retail Inc., a Delaware corporation ("Maxwell Retail"), and
--------------
Butler are all of the Members of the Company and, as such, are parties to an
Operating Agreement dated as of April 14, 1997 (the "Operating Agreement"),
-------------------
pursuant to which the Company has been formed and is governed.
B. Capitalized terms used in this Agreement and not otherwise defined
herein will have the definitions set forth in the Operating Agreement, unless
otherwise clearly indicated to the contrary herein.
C. An Event of Default has occurred under the Senior Credit Agreement and
the Company has requested that Butler make certain additional cash contributions
to the capital of the Company, for the uses and purposes set forth herein, in
order to induce the Senior Lenders to forbear from exercising their rights and
remedies provided under the Senior Credit Agreement as more fully set forth
herein.
D. Butler is willing to make such additional cash contributions to the
capital of the Company on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and intending to be legally bound, the parties
hereto agree as follows:
ARTICLE I.
DEFINITIONS
-----------
1.1 Certain Defined Terms. When used in this Agreement, the terms set
---------------------
forth below are defined as follows:
"Accountants" means Ernst & Young LLP, or other independent certified
-----------
public accountants of nationally-recognized standing retained by the Company.
<PAGE>
"Agreement" means this Additional Capital Contribution Agreement, including
---------
all schedules and exhibits hereto, as the same may be amended, modified,
supplemented or extended from time to time.
"Amendments" means each of the Amendments contemplated by Section
---------- -------
3.1(d)(i)-(iv) hereof.
- --------------
"Business Day" means each day of the week except Saturday, Sunday and any
------------
day on which banking institutions are authorized by law to close in the States
of New York or Georgia.
"Butler" means Butler Group LLC, a Delaware limited liability company,
------
together with its transferees, successors and assigns.
"Capital Contribution" has the meaning set forth in Section 2.1.
-------------------- -----------
"Closing Date" means the date on which all the conditions stated in
------------
Sections 3.1 and 3.4 of this Agreement have been satisfied or waived and the
- ------------ ---
initial Capital Contribution has been made.
"Company" means SLJ Retail LLC, a Delaware limited liability company.
-------
"Company Documents" has the meaning set forth in the Contribution
-----------------
Agreement.
"Default" has the meaning set forth in the Senior Credit Agreement.
-------
"Event of Default" has the meaning set forth in the Senior Credit
----------------
Agreement.
"Financial Statements" has the meaning set forth in Section 5.6.
-------------------- -----------
"Forbearance Agreement" has the meaning set forth in Section 3.1(d)(v).
--------------------- -----------------
"GAAP" means generally accepted accounting principles in effect from time
----
to time, applied on a consistent basis with past financial statements (except
for changes with which the Accountants concur).
"Operating Agreement" has the meaning set forth in the Recitals to this
-------------------
Agreement.
"Person" means any individual, corporation, limited liability company,
------
partnership, joint venture, trust or unincorporated organization or any
government or any agency or political subdivision thereof.
"Senior Agent" means BankBoston, N.A., in its capacity as Agent under the
------------
Senior Credit Agreement.
2
<PAGE>
"Senior Credit Agreement" means the Credit Agreement dated as of April 14,
-----------------------
1997 among the Company, the Senior Lenders and the Senior Agent, together with
all renewals, modifications, extensions, refinancings, substitutions and
replacements thereof.
"Senior Lenders" means the lenders from time to time parties to the Senior
--------------
Credit Agreement.
ARTICLE II.
ADDITIONAL CAPITAL CONTRIBUTIONS
--------------------------------
1.2 Additional Capital Contributions. From time to time on and after the
--------------------------------
Closing Date until and including January 29, 1999, subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, Butler agrees to make cash capital contributions to the
Company (individually, a "Capital Contribution" and, collectively, the "Capital
-------------------- -------
Contributions") in an aggregate amount of up to $6,000,000. The first such
- -------------
Capital Contribution to be made on the Closing Date shall be in the amount of
not less than $2,000,000 nor more than $3,000,000 and each subsequent Capital
Contribution shall be in an amount of not less than $500,000 and in integral
multiples of $100,000; provided that the last such Capital Contribution may, if
--------
the Company requests the entire $6,000,000 in Capital Contributions contemplated
hereby, be in an amount equal to $6,000,000 less the aggregate amount of all
Capital Contributions previously funded hereunder. In no event shall there be
more than six separate Capital Contributions funded under this Agreement.
1.3 Issuance of Additional Member Interests. Upon the making of each
---------------------------------------
Capital Contribution contemplated by Section 2.1 above, Butler will be deemed
-----------
to hold without further action on the part of the Manager or either of the
parties hereto, that additional number of Class B Member Units as is determined
by reference to the following table:
<TABLE>
<CAPTION>
Aggregate Capital Additional Class Cumulative Additional
Contributions B Member Units Class B Member Units
- -------------------------------- ---------------- ---------------------
<S> <C> <C>
Equal to $2,000,000 1,538 1,538
Greater than $2,000,000 but 962 2,500
equal to or less than $3,000,000
Greater than $3,000,000 but 1,136 3,636
equal to or less than $4,000,000
Greater than $4,000,000 but 1,364 5,000
equal to or less than $5,000,000
Greater than $5,000,000 1,666 6,666
</TABLE>
3
<PAGE>
1.4 Requests for Capital Contributions. The Company shall give Butler
----------------------------------
irrevocable written, telex or facsimile notice (promptly confirmed in writing)
of each request that Butler make a Capital Contribution hereunder not later than
11:00 A.M., Atlanta, Georgia time, no less than five (5) Business Days before
the date on which it proposes that a Capital Contribution be made (except for
the initial Capital Contribution to be made on the Closing Date). Such notice
shall (i) specify the date of such Capital Contribution (which shall be a
Business Day), (ii) state the amount thereof, and (iii) be accompanied by the
closing certificate referenced in Section 3.4(e).
--------------
1.5 Use of Proceeds. (a) The proceeds from the initial Capital
---------------
Contribution to be made on the Closing Date shall be used by the Company for
working capital; and (b) the proceeds of each Capital Contribution made
subsequent to the Closing Date shall be used by the Company (i) for working
capital; (ii) to fund the expense of Store closings and lease terminations
permitted by Section 7.5(c)(xx) of the Operating Agreement; and (iii) to fund
the expenses of the relocation of the headquarters operations of the Company to
space in the Boston, Massachusetts area as contemplated by Section 1(e) of the
Services Agreement, to the extent permitted by Section 7.5(c)(xxi) of the
Operating Agreement.
ARTICLE III.
CONDITIONS PRECEDENT
--------------------
1.6 Initial Capital Contribution. Butler's obligation hereunder to make
----------------------------
the initial Capital Contribution is subject to the satisfaction on or before the
Closing Date of the condition precedent that Butler shall have received the
following, each in form and substance satisfactory to Butler and its counsel:
(1) Approvals and Consents. Copies, certified by the Chairman of the
----------------------
Company of all consents, authorizations and approvals, if any, required in
connection with the execution, delivery and performance by the Company of this
Agreement and each of the Amendments to which the Company is a party;
(2) Opinion of Counsel. The written legal opinion of Gibson, Dunn &
------------------
Crutcher LLP, special counsel to Maxwell, Maxwell Retail and Sprague,
substantially in the form of Exhibit A to this Agreement;
---------
(3) Certificate of the Company's Secretary. A certificate of the Secretary
--------------------------------------
of Maxwell Retail, certifying the names of the officers of Maxwell Retail
authorized to sign this Agreement and each of the Amendments on behalf of the
Company, together with a sample of the true signature of each such officer; and
(4) Amendments and Forbearance Agreement. Copies of each of the following,
------------------------------------
duly executed and delivered by the respective parties thereto:
4
<PAGE>
(1) A First Amendment to the Operating Agreement, substantially in the form
of Exhibit B hereto;
---------
(2) A First Amendment to the Services Agreement, substantially in the form
of Exhibit C hereto;
---------
(3) A First Amendment to the Option Agreement, substantially in the form of
Exhibit D hereto;
- ---------
(4) A First Amendment to the Retail License Agreement, substantially in the
form of Exhibit E hereto; and
---------
(5) A Forbearance Amendment with respect to the Senior Credit Agreement,
substantially in the form of Exhibit F hereto (the "Forbearance Agreement").
--------- ----------------------
1.7 First Capital Contribution Subsequent to the Closing Date. The
---------------------------------------------------------
obligation of Butler to make the first Capital Contribution subsequent to the
Closing Date shall be subject to the following conditions precedent:
(1) Second Amendment to Credit Agreement. The Company shall have entered
------------------------------------
into a Second Amendment to the Senior Credit Agreement, in form and substance
satisfactory to Butler, pursuant to which the Senior Lenders agree, among other
things, to waive any Events of Default then outstanding under the Senior Credit
Agreement and to modify the financial covenants set forth therein to conform to
the Company's expected future financial performance; and
(2) Opinion of Counsel. Butler shall have received the written legal opinion
------------------
of counsel to the Company selected in accordance with Section 7.3 of the
Operating Agreement, substantially in the form of Exhibit G to this
Agreement.
1.8 Subsequent Capital Contributions. The obligation of Butler to make any
--------------------------------
Capital Contribution subsequent to the Closing Date (including the first Capital
Contribution subsequent to the Closing Date) shall be subject to the condition
precedent that Butler shall have received a request conforming to the
requirements of Section 2.3.
-----------
1.9 All Capital Contributions. The obligation of Butler to make all
-------------------------
Capital Contributions hereunder (including the initial Capital Contribution to
be made on the Closing Date) shall be subject to the following conditions
precedent:
(1) No Default or Event of Default Under Senior Credit Agreement. Except as
------------------------------------------------------------
otherwise set forth in the Forbearance Agreement with respect to the initial
Capital Contribution to be made on the Closing Date, the Company shall be in
compliance with all the terms and provisions contained in the Senior Credit
Agreement on its part to be observed or performed, and at the time
5
<PAGE>
of and immediately after such Capital Contribution (giving effect to the Second
Amendment referred to in Section 3.2(a) with respect to all Capital
--------------
Contributions to be made subsequent to the Closing Date), no Default or Event of
Default shall have occurred and be continuing;
(2) No Maxwell Change of Control or Maxwell Default. No Change of Control
-----------------------------------------------
of Maxwell shall have occurred and no Maxwell Default shall have occurred and be
continuing;
(3) Compliance with Company Documents. The Company shall be in compliance
---------------------------------
with all the terms and provisions contained in this Agreement and in each of the
Company Documents on its part to be observed and performed;
(4) Representations and Warranties. The representations and warranties set
------------------------------
forth in Article V hereof shall be true and correct in all material respects
---------
with the same effect as though made on and as of such date (except insofar as
such representations and warranties relate expressly to an earlier date); and
(5) Closing Certificate. The Company shall have delivered to Butler a
-------------------
certificate of the Chairman of the Company to the effect that each of the
conditions precedent set forth in clauses (a)-(d) above has been satisfied
as of the date of such Capital Contribution.
ARTICLE IV.
BUTLER'S REPRESENTATIONS AND WARRANTIES
---------------------------------------
Butler represents and warrants to the Company as follows:
1.10 Existence. Butler is a limited liability company duly organized,
---------
validly existing and in good standing under the laws of the State of Delaware.
1.11 Authority. Butler has all requisite power and authority to execute,
---------
deliver and perform under this Agreement. The execution, delivery and
performance by Butler of this Agreement have been duly authorized by all
necessary action, corporate or otherwise, on the part of Butler. This Agreement
has been duly executed and delivered by Butler. This Agreement is a legal, valid
and binding agreement of Butler enforceable against Butler in accordance with
its terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights generally
and to general principles of equity regardless whether enforcement is considered
in a proceeding at law or in equity.
6
<PAGE>
ARTICLE V.
THE COMPANY'S REPRESENTATIONS AND WARRANTIES
--------------------------------------------
To induce Butler to enter into this Agreement, the Company represents and
warrants to Butler as follows:
1.12 Organization and Qualification. The Company (a) is a limited liability
------------------------------
company duly organized, validly existing and in good standing under the laws of
the State of Delaware; (b) has all requisite power and authority, as the case
may be, to own its property and conduct its business as now conducted and as
presently contemplated; and (c) is duly qualified and in good standing in each
jurisdiction where the nature of its properties or its business (present or
proposed) requires such qualification, except where the failure to so qualify
will not materially adversely affect its business.
1.13 Authority. The execution, delivery and performance of this Agreement
---------
and each of the Amendments are within the limited liability company authority of
the Company, have been authorized by all necessary limited liability company
proceedings on the part of the Company, and do not and will not contravene any
provision of law or the certificate of formation or Operating Agreement of the
Company, or breach any provisions of, or constitute a Default or Event of
Default under the Senior Credit Agreement or a default under any other material
agreement (including any lease, any agreement with any member of the Company or
its affiliates, agreement, any license agreement or any supplier contracts),
instrument, judgment, order, decree, permit, license or undertaking binding upon
or applicable to the Company or any of its properties.
1.14 Valid Obligations. This Agreement and each of the Amendments to which
-----------------
the Company is a party and all of their respective terms and provisions are
legal, valid and binding obligations of the Company, enforceable in accordance
with their terms.
1.15 Approvals. The execution, delivery and performance of this Agreement
---------
and each of the Amendments to which the Company is a party do not require any
approval or consent of, or filing or registration with, any governmental or
other agency or authority or any other Person, except as have been obtained and
a copy thereof delivered to Butler.
1.16 Compliance with Laws and Agreements. The Company is not in violation
-----------------------------------
of (a) any provision of its certificate of formation or the Operating Agreement,
or (b) except as otherwise set forth in Schedule 5.5, any provisions of any
------------
material indenture, agreement or instrument to which it is a party or by which
it is bound or, to the best of the Company's knowledge and belief, of any
provision of law, or (c) any order, judgment or decree of any court or other
agency of government.
1.17 Financial Statements. The Company has furnished to Butler (i) its
--------------------
balance sheet as of January 31, 1998 and the related statements of operations
and cash flows for the period from March 7, 1997 (date of inception) through
January 31, 1998, accompanied by the audit report thereon of Ernst & Young LLP,
and (ii) its unaudited balance sheet as of May 2, 1998 and the related unaudited
income statement and cash flow statements for the fiscal quarter then ended (the
7
<PAGE>
"Financial Statements"). The Financial Statements fairly present the financial
- ---------------------
position of the Company as at the respective dates thereof and the results of
operations and cash flows of the Company for the respective periods then ended,
determined in accordance with GAAP. Except as reflected in the Financial
Statements, at the date hereof, the Company has no indebtedness or other
liabilities, debts or obligations, whether accrued, absolute, contingent or
otherwise, and whether due or to become due, including, but not limited to,
liabilities or obligations on account of taxes or other governmental charges,
that are required to be reflected in financial statements of the Company
prepared in accordance with GAAP.
1.18 Litigation. Except as set forth in Schedule 5.7, there is no
----------
litigation, proceeding or governmental investigation, administrative or
judicial, pending or, to the Company's knowledge, threatened against or
affecting the Company or its properties in which there is a reasonable
possibility of an outcome that could have a material adverse effect on the
business, properties or condition (whether financial or otherwise) of the
Company or its ability to perform its obligations under this Agreement or any of
the Amendments to which it is party.
1.19 Senior Credit Agreement. Except as otherwise set forth in the
-----------------------
Forbearance Agreement, each of the representations and warranties of the Company
set forth in the Senior Credit Agreement is true and correct in all material
respects as of the date hereof.
1.20 Full Disclosure. No statement of fact made by or on behalf of the
---------------
Company in this Agreement or in any certificate or schedule furnished to Butler
pursuant hereto, in light of all information provided to Butler, contains any
untrue statement of a material fact or omits to state any material fact
necessary to make statements continued therein or herein not misleading. There
is no fact currently known to the Company which has not been disclosed to Butler
in writing which materially adversely affects, or, as far as the Company can
reasonably foresee, will materially adversely affect, the business, operations,
properties, assets, condition (financial or otherwise) or prospects, of the
Company, or the ability of the Company to perform its obligations hereunder and
under each of the Company Documents.
8
<PAGE>
ARTICLE VI.
MISCELLANEOUS
-------------
1.21 Expenses. Butler agrees that it will pay all fees and expenses
--------
incurred by it in connection with the negotiation, execution and delivery of
this Agreement and the Amendments (including all fees and expenses of counsel
for Butler). The Company agrees that it will pay all fees and expenses incurred
by it in connection with the negotiation, execution and delivery of this
Agreement and the Amendments (including all fees and expenses of counsel for the
Company), and the Company further agrees that it will arrange for all fees and
expenses incurred by Maxwell, Maxwell Retail and Sprague in connection with the
negotiation, execution and delivery of this Agreement and the Amendments
(including all fees and expenses of counsel for Maxwell, Maxwell Retail or
Sprague) to be paid solely by Maxwell, without recourse back to the Company for
the reimbursement thereof.
1.22 INDEMNIFICATION. THE COMPANY SHALL ABSOLUTELY AND UNCONDITIONALLY
---------------
INDEMNIFY AND HOLD BUTLER (INCLUDING ALL TRANSFEREES, SUCCESSORS AND ASSIGNS)
HARMLESS AGAINST ANY AND ALL CLAIMS, DEMANDS, SUITS, ACTIONS, CAUSES OF ACTION,
DAMAGES, LOSSES, SETTLEMENT PAYMENTS, OBLIGATIONS, COSTS, EXPENSES AND ALL OTHER
LIABILITIES WHATSOEVER WHICH SHALL AT ANY TIME OR TIMES BE INCURRED OR SUSTAINED
BY IT OR BY ANY OF ITS SHAREHOLDERS, MEMBERS, DIRECTORS, OFFICERS, EMPLOYEES,
SUBSIDIARIES, AFFILIATES OR AGENTS ON ACCOUNT OF, OR ARISING SOLELY OUT OF, THE
BREACH BY THE COMPANY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR COVENANTS SET
FORTH IN THIS AGREEMENT.
1.23 Assignment. The Company may not sell, assign, delegate or transfer
----------
this Agreement, or any of its rights, interests or obligations hereunder.
Subject to the terms and conditions of the Operating Agreement with respect to
Member Interests, Butler may sell, assign, delegate or transfer this Agreement,
and any of its rights, interests or obligations hereunder at any time without
the consent of the Company, so long as such assignee shall fully assume all of
the obligations of Butler hereunder. Butler shall promptly notify the Company of
any sale, assignment, delegation or transfer of the foregoing.
1.24 Notices. All notices that are required or may be given pursuant to
-------
this Agreement must be in writing and delivered personally, by a recognized
courier service, by a recognized overnight delivery service, by telecopy or by
registered or certified mail, postage prepaid, to the parties at the following
addresses (or to the attention of such other person or such other address as any
party may provide to the other parties by notice in accordance with this Section
-------
6.4):
- ---
If to Butler:
------------
c/o GE Capital Equity Capital Group, Inc.
120 Long Ridge Road
Stamford, Connecticut 06927
Attention: William R. Kraus
Facsimile: (203) 961-2585
9
<PAGE>
With copies to:
--------------
General Electric Capital Corporation
120 Long Ridge Road
Stamford, Connecticut 06927
Attention: Counsel -- Equity Capital Group
Facsimile: (203) 357-3047
and
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Attention: John Hays Mershon, Esq.
Facsimile: (404) 572-5149
If to the Company:
-----------------
SLJ Retail LLC
400 Technology Court
Suite F
Smyrna, Georgia 30082
Attention: President
Facsimile: (770) 801-0075
With copies to:
--------------
Counsel to the Company, at such address and facsimile
number as is provided by counsel to the Company
and
Maxwell Retail Inc.
101 Sprague Street
Hyde Park, Massachusetts 02136
(or, if by mail, P.O. Box 37
Readville, Massachusetts 02137)
Attention: James J. Tinagero
Facsimile: (617) 364-9058
and
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Jonathan K. Layne, Esq.
Facsimile: (213) 229-7520
10
<PAGE>
Any such notice or other communication will be deemed to have been given and
received (whether actually received or not) on the day it is personally
delivered or delivered by courier or overnight delivery service or sent by
telecopy or, if mailed, when actually received.
1.25 Binding Effect. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their successors, legal representatives, and
permitted assigns.
1.26 No Third Party Beneficiary. This Agreement is made solely and
specifically between and for the benefit of the Company and Butler, their
respective successors and the assigns of Butler permitted under Section 6.3. No
-----------
Person whatsoever other than the Company, Butler, their respective successors
and Butler's permitted assigns (including, without limitation, the Manager or
any Affiliate of the parties hereto or of the Manager), will have any liability
whatsoever under this Agreement, have any rights, interest or claims hereunder
or be entitled to any benefits under or on account of this Agreement as a third
party beneficiary or otherwise.
1.27 Waiver. No failure by any party to insist upon the strict performance
------
of any covenant, duty, agreement, or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof will constitute waiver of
any such breach or any other covenant, duty, agreement, or condition.
1.28 Counterparts. This Agreement may be executed in one or more
------------
counterparts (which may include counterparts delivered by telecopier), all of
which together will constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart.
1.29 Entire Agreement. This Agreement contains the entire understanding of
----------------
the parties relating to the subject matter hereof and supersedes all prior
written or oral and all contemporaneous oral agreements and understandings
relating to the subject matter hereof. This Agreement cannot be modified or
amended except in writing signed by the party against whom enforcement is
sought.
1.30 Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND
-------------
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE. BUTLER AND THE COMPANY HEREBY
CONSENT AND AGREE THAT THE COURTS OF THE STATE OF NEW YORK, SITUATED IN THE
COUNTY OF NEW YORK, OR, AT BUTLER'S OPTION, THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BUTLER AND ANY THE COMPANY PERTAINING
TO THIS AGREEMENT OR TO ANY MATTER ARISING
11
<PAGE>
OUT OF OR RELATED TO THIS AGREEMENT. VENUE OF ANY ACTION BROUGHT HEREUNDER SHALL
BE DEEMED TO BE IN NEW YORK COUNTY, NEW YORK. BUTLER AND THE COMPANY EXPRESSLY
SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND BUTLER AND THE COMPANY HEREBY WAIVE ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL
--------------------
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.
1.31 Waiver of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH
--------------------
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION (WITHOUT SUBMITTING TO ARBITRATION), EACH OF THE PARTIES HERETO
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY OF THE
DOCUMENTATION CONTEMPLATED HEREBY.
1.32 Opinion of Butler's Counsel. Butler agrees to furnish to the Company,
---------------------------
at Butler's expense, an opinion of counsel to Butler addressed to the Company,
substantially to the effect set forth in Article IV hereof (subject to customary
----------
qualifications and exceptions), on or before the making of the first Capital
Contribution hereunder subsequent to the Closing Date.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
executed this Agreement as of the date first written above.
SLJ RETAIL LLC
By: MAXWELL RETAIL INC., its Manager
By:______________________________
James J. Tinagero
Chairman
BUTLER GROUP LLC
By:________________________________
William R. Kraus
President
12
<PAGE>
Schedule 5.5
------------
Failure to Comply with Certain Agreements
-----------------------------------------
As of the date of this Agreement, the Company has failed to comply with
certain material indentures, agreements or instruments to which it is a party or
by which it is bound, as follows:
1. The Company has failed to comply with the Senior Credit Agreement to
the extent set forth in the Forbearance Agreement.
2. The Company has failed to provide certain letters of credit to Jones
Investment Co., Inc. ("Jones") required by Section 3.1.1 of the Jones New York
Trademark Sublicense (but Jones has not requested that such letters of credit be
provided).
3. The Company is in default under certain of its store leases.
4. The Company is in arrears in payments due to certain of its suppliers.
13
<PAGE>
Schedule 5.7
------------
Certain Litigation
------------------
As of the date of this Agreement, the following litigation is pending
against the Company:
1. Lawsuits by landlords of the Company alleging that the Company has
failed to pay rent or to fulfill certain of its other obligations under store
leases.
2. Product liability lawsuits being defended by the Company's insurance
carriers.
3. Various EEOC and similar employee grievances arising in the ordinary
course of the Company's business.
14
<PAGE>
EXHIBIT 23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Maxwell Shoe Company Inc.
We have audited the accompanying consolidated balance sheets of Maxwell Shoe
Company Inc. as of October 31, 1997 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended October 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Maxwell
Shoe Company Inc. at October 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
December 16, 1998
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-83438 and Form S-8 No. 333-55723) pertaining to the 1994 Stock
Incentive Plan of Maxwell Shoe Company Inc. of our report dated December 16,
1998, with respect to the consolidated financial statements of Maxwell Shoe
Company Inc. included in the Annual Report (Form 10-K) for the year ended
October 31, 1998.
Our audits also included the consolidated financial statement schedule of
Maxwell Shoe Company Inc. listed in Item 14(a)(2). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the consolidated financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
January 18, 1999
