Stock Purchase Agreement

STOCK PURCHASE AGREEMENT BY AND AMONG SAMMY AARON, ANDREW REID, LEE LIPTON, JOHN POLLACK, SAMMY AARON, AS SELLERS' REPRESENTATIVE, G-III LEATHER FASHIONS, INC. AND G-III APPAREL GROUP, LTD. JULY 11, 2005 TABLE OF CONTENTS PAGEARTICLE I DEFINITIONS...................................................1 Section 1.1 Definitions.............................................1ARTICLE II PURCHASE AND SALE.............................................8 Section 2.1 Purchase of the Purchased Shares and the Purchased Interests...............................................8 Section 2.2 Purchase Price..........................................8 Section 2.3 EBITA Payment Procedures................................9 Section 2.4 Inspection Right; EBITA Payment Adjustment.............10 Section 2.5 Purchase Price Adjustment..............................10 Section 2.6 Allocation.............................................11ARTICLE III CLOSING......................................................12 Section 3.1 Closing Time and Place.................................12 Section 3.2 Conditions to the Buyer's Obligation to Close..........12 Section 3.3 Conditions to the Sellers' Obligation to Close.........14ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLERS CONCERNING THE ACQUIRED COMPANIES.......................................14 Section 4.1 Organization and Standing..............................14 Section 4.2 Organizational Documents; Books and Records............15 Section 4.3 Directors; Officers; Managers..........................15 Section 4.4 Subsidiaries or Other Interests........................15 Section 4.5 Capitalization.........................................15 Section 4.6 No Contravention.......................................16 Section 4.7 Compliance with Laws...................................16 Section 4.8 Environmental and Safety Laws..........................17 Section 4.9 Taxes..................................................17 Section 4.10 Employee Benefit Plans and Employee Matters............20 Section 4.11 Insurance..............................................22 Section 4.12 Contracts..............................................22 Section 4.13 Litigation.............................................24 Section 4.14 Suppliers; Customers and Licensors.....................24 Section 4.15 Inventories............................................25 Section 4.16 Relationships with Related Persons.....................25 Section 4.17 Certain Payments.......................................25 Section 4.18 Proprietary Rights.....................................26 Section 4.19 Financial Statements...................................26 Section 4.20 Absence of Certain Changes.............................26 Section 4.21 No Undisclosed Liabilities.............................28 -i- TABLE OF CONTENTS (CONTINUED) PAGE Section 4.22 Accounts Receivable; Accounts Payable; Orders-in-Process......................................28 Section 4.23 Title to and Condition of Property.....................29 Section 4.24 Brokers or Finders.....................................30 Section 4.25 Projections............................................30 Section 4.26 No Misleading Statements...............................30ARTICLE V REPRESENTATIONS AND WARRANTIES OF AND CONCERNING THE SELLERS......................................................30 Section 5.1 Binding Obligations....................................30 Section 5.2 Purchased Shares or Purchased Interests................30 Section 5.3 No Contravention.......................................31 Section 5.4 No Claims..............................................31 Section 5.5 Securities Act Matters.................................31 Section 5.6 Brokers or Finders.....................................32 Section 5.7 No Misleading Statements...............................32ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYER AND G-III........33 Section 6.1 Organization and Standing..............................33 Section 6.2 Authorization and Binding Obligations..................33 Section 6.3 No Contravention.......................................33 Section 6.4 Issuance of the G-III Shares...........................33 Section 6.5 SEC Filings............................................34 Section 6.6 Securities Act Matters.................................34 Section 6.7 Brokers or Finders.....................................34 Section 6.8 No Misleading Statements...............................34ARTICLE VII ADDITIONAL AGREEMENTS........................................35 Section 7.1 Vesting Schedule and Conditions........................35 Section 7.2 Registration of the Registrable G-III Shares...........36 Section 7.3 Covenant Not to Compete; No Solicitation...............42 Section 7.4 Division Bonus Plan....................................44 Section 7.5 Confidentiality........................................44 Section 7.6 Public Disclosure......................................44 Section 7.7 Expenses...............................................44 Section 7.8 Tax Matters............................................44 Section 7.9 Use of Name............................................51 Section 7.10 Sellers' Representative................................51 Section 7.11 June 30, 2005 Financial Statements.....................52 Section 7.12 Cooperation of Independent Accountants.................52 -ii- TABLE OF CONTENTS (CONTINUED) PAGE Section 7.13 G-III Guaranty.........................................52 Section 7.14 The Division...........................................52 Section 7.15 Fabio Operating Agreement Amendment....................52ARTICLE VIII INDEMNIFICATION..............................................52 Section 8.1 Indemnification........................................52ARTICLE IX GENERAL PROVISIONS...........................................56 Section 9.1 Notices................................................56 Section 9.2 Amendment..............................................57 Section 9.3 Extension; Waiver......................................57 Section 9.4 Further Assurances.....................................57 Section 9.5 Entire Agreement; Nonassignability; Parties in Interest...............................................57 Section 9.6 Severability...........................................57 Section 9.7 Specific Performance...................................58 Section 9.8 Remedies Cumulative....................................58 Section 9.9 Governing Law..........................................58 Section 9.10 Jurisdiction...........................................58 Section 9.11 Rules of Construction..................................58 Section 9.12 Effect of Due Diligence................................59 Section 9.13 Counterparts...........................................59 -iii- STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of July 11, 2005, byand among the Marvin Richards Shareholders (as hereinafter defined), the CKMembers (as hereinafter defined) and the Fabio Selling Members (as hereinafterdefined) (the Marvin Richards Shareholders, the CK Members and the Fabio SellingMembers collectively, the "Sellers"), Sammy Aaron, in his capacity as Sellers'Representative pursuant to Section 7.10 hereof, G-III Leather Fashions, Inc., aNew York corporation (the "Buyer") and G-III Apparel Group, Ltd., a Delawarecorporation ("G-III"). RECITALS: WHEREAS, the Marvin Richards Shareholders collectively own all of theoutstanding capital stock of J. Percy For Marvin Richards, Ltd., a New Yorkcorporation ("Marvin Richards"), the CK Members collectively own all of theoutstanding membership interests of CK Outerwear, LLC, a New York limitedliability company ("CK", and together with Marvin Richards, the "AcquiredCompanies"), and the Fabio Selling Members collectively own 50% of theoutstanding membership interests of Fabio Licensing, LLC, a New York limitedliability company ("Fabio"); WHEREAS, the Buyer desires to purchase from the Sellers, and the Sellers,in aggregate, desire to sell all of the outstanding capital stock and membershipinterests of the Acquired Companies and membership interests of Fabio owned bythem to the Buyer, on the terms and conditions set forth herein; and WHEREAS, the Buyer intends to create a new division in which to operate theAcquired Companies and the membership interests in Fabio in connection with itsbusiness (the "Division"). NOW, THEREFORE, in consideration of the mutual covenants of the parties setforth in this Agreement and other good and valuable consideration, the receiptand sufficiency of which is hereby acknowledged, the parties hereto agree asfollows: ARTICLE I DEFINITIONS Section 1.1 Definitions. For purposes of this Agreement: (a) "Aaron Employment Agreement" has the meaning set forth in Section3.2(l). (b) "Accounting" has the meaning set forth in Section 2.3(a). (c) "Accounts Receivable" has the meaning set forth in Section4.22(a). (d) "Acquired Companies" has the meaning set forth in the recitals. (e) "Affiliate" means, with respect to any Person, another Person thatdirectly or indirectly, through one or more intermediaries, controls, iscontrolled by, or is under common control with, such first Person. (f) "Agreement" has the meaning set forth in the preamble. (g) "Applicable Sellers" has the meaning set forth in Section7.2(d)(i). (h) "Audit" shall mean any audit, assessment, or other examination orclaim by any Taxing Authority and any judicial, administrative or otherproceeding or litigation (including any appeal of any such judicial,administrative or other proceeding or litigation), relating to Taxes or TaxReturns. (i) "Authority" means any governmental, regulatory or administrativebody, agency or authority, or any court or judicial authority. (j) "Balance Sheet Date" has the meaning set forth in Section 4.20(a). (k) "Balance Sheets" has the meaning set forth in Section 4.21. (l) "Business Day" means any day other than Saturday, Sunday or otherday on which commercial banks in The City of New York are authorized or requiredby law to remain closed. (m) "Buyer" has the meaning set forth in the preamble. (n) "Buyer Audit" has the meaning set forth in Section 7.8(e)(ii). (o) "Buyer Group" has the meaning set forth in Section 7.3(a). (p) "Buyer Indemnified Persons" has the meaning set forth in Section8.1(b). (q) "Buyer Statement" has the meaning set forth in Section 2.5(a). (r) "Cash Consideration" has the meaning set forth in Section2.2(a)(i). (s) "CK" has the meaning set forth in the recitals. (t) "CK Members" means Sammy Aaron, Andrew Reid, Lee Lipton and JohnPollack. (u) "CK Operating Agreement Amendment" has the meaning set forth inSection 3.2(i). (v) "Closing" has the meaning set forth in Section 3.1. (w) "Closing Date" has the meaning set forth in Section 3.1. -2- (x) "Closing Price" means the price determined by the first of thefollowing clauses that applies: (i) if the Common Stock is then listed or quotedon a national securities exchange or the Nasdaq Stock Market, the averageclosing price per share of the Common Stock on such exchange or market on whichthe Common Stock is then listed or quoted for a period of 20 consecutive days onwhich such exchange or market is open for trading; (ii) if prices for the CommonStock are then quoted on the OTC Bulletin Board, the average closing bid priceper share of the Common Stock so quoted on such OTC Bulletin Board for a periodof 20 consecutive days on which stock prices are quoted on such OTC BulletinBoard; (iii) if prices for the Common Stock are then reported in the "PinkSheets" published by Pink Sheets LLC (or a similar organization or agencysucceeding to its functions of reporting prices), the average closing bid priceper share of Common Stock so reported on such Pink Sheets for a period of 20consecutive days on which stock prices are published on such Pink Sheets; or(iv) in all other cases, the fair market value of a share of Common Stock for aperiod of twenty consecutive Business Days as determined by an independentappraiser selected in good faith by G-III's Board of Directors at the request ofthe Sellers' Representative. (y) "Code" means the Internal Revenue Code of 1986, as amended. (z) "Common Stock" has the meaning set forth in Section 2.2(a)(ii). (aa) "Confidential Information" has the meaning set forth in Section7.3(a). (bb) "Confidentiality Agreements" has the meaning set forth in Section7.5. (cc) "Damages" has the meaning set forth in Section 8.1(b). (dd) "Division" has the meaning set forth in the recitals. (ee) "EBITA" means the Division's earnings before interest and taxesand amortization of intangibles, which shall be equal to the net sales of theDivision less (i) cost of sales, including royalties and license fees and (ii)the expenses set forth on Schedule 1.1(ee) hereto (but only if and to the extentthat such expenses are actually incurred by the Division, other than expensesallocated to the Division in accordance with Schedule 1.1(ee), all as determinedin accordance with the Buyer's accounting and allocation procedures outlined insuch Schedule and utilized in preparing internal financial statements forBuyer's divisions. (ff) "EBITA Payment" has the meaning set forth in Section 2.3(a). (gg) "Employee" means any employee of any Acquired Company or Fabio. (hh) "Employee Bonus Plan" has the meaning set forth in Section 7.4. (ii) "Employee Bonus Plan Payments" has the meaning set forth inSection 7.4. (jj) "Employee Plan" means any plan, program, policy, practice,contract, agreement or other material arrangement providing for compensation,severance, change in control, retention, termination pay, incentive, bonus ordeferred compensation, performance -3- awards, stock or stock-related awards, or other employee benefits or fringes,including each "employee benefit plan," within the meaning of Section 3(3) ofERISA which is maintained, contributed to, or required to be contributed to, byan Acquired Company or any ERISA Affiliate for the benefit of any current orformer Employee (or beneficiary or dependent thereof), or with respect to whichany Acquired Company or any ERISA Affiliate has any liability or obligation. (kk) "ERISA" means the Employee Retirement Income Security Act of1974, as amended. (ll) "ERISA Affiliate" means any person or entity under common controlwith any Acquired Company within the meaning of Section 414(b), (c), (m) or (o)of the Code, and the regulations issued thereunder. (mm) "Escrow Agent" has the meaning set forth in Section 7.1(g). (nn) "Exchange Act" means the Securities Exchange Act of 1934, asamended. (oo) "Fabio" has the meaning set forth in the recitals. (pp) "Fabio Selling Members" means Sammy Aaron, Andrew Reid, LeeLipton and John Pollack. (qq) "Final Statement" has the meaning set forth in Section 2.5(a). (rr) "Financial Statements" has the meaning set forth in Section 4.19. (ss) "Fully Vested G-III Shares" has the meaning set forth in Section2.2(a)(ii). (tt) "G-III" has the meaning set forth in the preamble. (uu) "G-III Shares" means the Fully Vested G-III Shares and theUnvested G-III Shares, collectively. (vv) "GAAP" means United States generally accepted accountingprinciples, consistently applied throughout the periods involved. (ww) "Indemnification Cap" has the meaning set forth in Section8.1(d)(i)(B). (xx) "Indemnified Party" has the meaning set forth in Section8.1(e)(i). (yy) "Indemnifying Party" has the meaning set forth in Section8.1(e)(i). (zz) "Indemnity Claim" means a claim made under Article VIII of thisAgreement. (aaa) "Independent Firm" has the meaning set forth in Section 2.4. (bbb) "IRS" means the United States Internal Revenue Service. -4- (ccc) "knowledge" of a Person means such Person's actual knowledgeafter diligent inquiry of all Persons who may reasonably be expected to haveknowledge of the matter at issue. (ddd) "Licenses" has the meaning set forth in Section 4.7. (eee) "Lien" means any lien, pledge, charge, claim, restriction ontransfer, mortgage, security interest or other encumbrance other than statutoryliens for liabilities not yet due and payable. (fff) "Lipton Employment Agreement" has the meaning set forth inSection 3.2(n). (ggg) "Marvin Richards" has the meaning set forth in the recitals. (hhh) "Marvin Richards Common Stock" has the meaning set forth inSection 4.5. (iii) "Marvin Richards Shareholders" means Sammy Aaron, Andrew Reid,Lee Lipton and John Pollack. (jjj) "Material Adverse Effect" means, with respect to any Person, anychange, effect, event, occurrence or state of facts (or any development that hashad or is reasonably likely to have any change or effect) that is materiallyadverse to the business, financial condition, results of operations or prospectsof such Person and its subsidiaries, taken as a whole. (kkk) "Material Contracts" has the meaning set forth in Section4.12(a). (lll) "Net Assets" means the difference between (x) the sum of thetotal assets of the Acquired Companies and half of the total assets of Fabio asof May 31, 2005, minus (y) the sum of the total liabilities of the AcquiredCompanies and half the total liabilities of Fabio as of May 31, 2005. (mmm) "New Registrable G-III Shares" has the meaning set forth inSection 7.2(d)(i). (nnn) "Notice of Claim" has the meaning set forth in Section8.1(e)(i). (ooo) "Option Price" has the meaning set forth in Section 7.1(a). (ppp) "Order-in-Process" has the meaning set forth in Section 4.22(c). (qqq) "Organizational Documents" means, (i) with respect to MarvinRichards, its certificate of incorporation and bylaws, as currently in force andeffect, or (ii) with respect to CK or Fabio, its articles of organization andoperating agreement, as currently in force and effect. -5- (rrr) "Other Transaction Documents" means the documents, other thanthis Agreement, to be executed by the parties hereto in connection with thetransactions contemplated hereby. (sss) "Pension Plan" means an "employee pension benefit plan," withinthe meaning of Section 3(2) of ERISA. (ttt) "Permitted Liens" has the meaning set forth in Section 4.23(a). (uuu) "Person" means an individual, corporation, partnership, limitedliability company, joint venture, association, trust, unincorporatedorganization or other entity. (vvv) "Post-Closing Tax Period" shall mean any Tax Period, or portionthereof, beginning after the Closing Date. (www) "Pre-Closing Tax Period" shall mean any Tax Period, or portionthereof, ending on or before the Closing Date. (xxx) "Pre-Closing Straddle Period" has the meaning set forth inSection 7.8(c). (yyy) "Pre-Closing Tax Return" has the meaning set forth in Section7.8(d)(i). (zzz) "Projections" has the meaning set forth in Section 4.25. (aaaa) "Promissory Notes" has the meaning set forth in Section 2.2(a). (bbbb) "Proprietary Rights" has the meaning set forth in Section 4.18. (cccc) "Proprietary Rights Agreement" has the meaning set forth inSection 4.10(h). (dddd) "Purchase Option" has the meaning set forth in Section 7.1(a). (eeee) "Purchase Price" has the meaning set forth in Section 2.2. (ffff) "Purchased Interests" has the meaning set forth in Section2.1(b). (gggg) "Purchased Shares" has the meaning set forth in Section 2.1(a). (hhhh) "Real Property" has the meaning set forth in Section 4.23(b). (iiii) "Registrable G-III Shares" means the Fully Vested G-III Sharesand any Unvested G-III Shares that are no longer subject to the Purchase Optionset forth in Section 7.1 as of five (5) Business Days prior to the filing of theRegistration Statement. (jjjj) "Registration Statement" has the meaning set forth in Section7.2(a)(i). -6- (kkkk) "Reid Employment Agreement" has the meaning set forth inSection 3.2(m). (llll) "Restricted Period" has the meaning set forth in Section7.3(a). (mmmm) "Restrictive Covenants" has the meaning set forth in Section7.3(c). (nnnn) "SEC" means the United States Securities and ExchangeCommission. (oooo) "SEC Documents" has the meaning set forth in Section 6.5. (pppp) "Section 338(h)(10) Election" has the meaning set forth in7.8(g)(i). (qqqq) "Securities Act" means the Securities Act of 1933, as amended. (rrrr) "Sellers" has the meaning set forth in the preamble. (ssss) "Sellers Audit" has the meaning set forth in Section 7.8(e)(i). (tttt) "Sellers' Affiliated Companies" means M. Richards Fur Co. LLC,a New York limited liability company, M. Richards Import Corp., a New Yorkcorporation, and MR Apparel Group, Inc., a New York corporation. (uuuu) "Sellers' Representative" has the meaning set forth in Section7.10. (vvvv) "Statement of Objection" has the meaning set forth in Section2.5(a). (wwww) "Straddle Period" shall mean any Tax period beginning beforeand ending after the Closing Date. (xxxx) "Straddle Return" has the meaning set forth in Section7.8(d)(ii). (yyyy) "subsidiary" means, with respect to any Person, any Person ofwhich such party or such other Person, as the case may be (either alone orthrough or together with any other subsidiary), owns, directly or indirectly,stock or other equity interests the holders of which are generally entitled tomore than 50% of the vote for the election of the board of directors or othergoverning body of such Person. (zzzz) "Tax" and "Taxes" includes (i) any U.S. federal, state, localor foreign income, gross receipts, capital, franchise, import, goods andservices, value added, sales and use, estimated (to the extent required by law),alternative minimum, add-on minimum, sales, use, transfer, registration, excise,natural resources, severance, stamp, occupation, premium, windfall profit,environmental, customs, duties, real property, personal property, capital stock,social security, unemployment, disability, payroll, license, employeewithholding, unclaimed property, escheat or other tax of any kind whatsoever,including any interest, penalties or additions to tax or additional amounts inrespect of the foregoing, (ii) any liability for the payment of any amounts ofthe type described in (i) as a result of being a member of a consolidated,combined, -7- unitary or aggregate group for any Tax period, and (iii) any liability for thepayment of any amounts of the type described in (i) or (ii) as a result of beinga transferee or successor to any Person or as a result of any express or impliedobligation to indemnify any other Person. (aaaaa) "Tax Returns" means returns, declarations, reports, claims forrefund, information returns or other documents (including any related orsupporting schedules, statements or information) filed or required to be filedin connection with the determination, assessment or collection of any Taxes ofany party or the administration of any laws, regulations or administrativerequirements relating to any Taxes. (bbbbb) "Taxing Authority" shall mean any U.S. federal, national,foreign, state, municipal or other local government, any subdivision, agency,commission or authority thereof, or any quasi-governmental body or otherauthority exercising any Taxing authority or regulatory authority over Taxes. (ccccc) "Unvested G-III Shares" has the meaning set forth in Section2.2(a)(iii). ARTICLE II PURCHASE AND SALE Section 2.1 Purchase of the Purchased Shares and the Purchased Interests.Subject to and upon the terms and conditions of this Agreement: (a) The Buyer agrees to purchase from each Marvin RichardsShareholder, and each Marvin Richards Shareholder agrees to sell to the Buyer,all of his right, title and interest to his shares of the capital stock ofMarvin Richards, as set forth in Schedule 2.1(a) hereto (collectively, the"Purchased Shares"); and (b) The Buyer agrees to purchase from each CK Member and Fabio SellingMember, and each CK Member and Fabio Selling Member agrees to sell to the Buyer,all of his right, title and interest to his membership interests in CK andFabio, as set forth in Schedule 2.1(b) hereto (collectively, the "PurchasedInterests"),in the case of each of paragraphs (a) and (b) above, free and clear of allLiens, rights or claims of others or other encumbrances (other than restrictionson transfer imposed by the Securities Act or state securities laws), for theconsideration specified in Section 2.2 below. Section 2.2 Purchase Price. The consideration to be paid by the Buyer forall of the Purchased Shares and the Purchased Interests (the "Purchase Price")shall consist of: (a) Promissory notes (the "Promissory Notes") in the form of Exhibit Ahereto payable three business days after the Closing Date, with aggregatepayments under the Promissory Notes consisting of: (i) Nineteen million one hundred eighty five thousand dollars ($19,185,000) (the "Cash Consideration") apportioned among the Sellers as set forth on Schedule 2.2(a)(i) hereto (which Schedule also sets forth the address of each Seller); -8- (ii) 466,666 shares of common stock, par value $0.01 per share, of G-III ("Common Stock", and such 466,666 shares, the "Fully Vested G-III Shares"), apportioned among the Sellers as set forth on Schedule 2.2(a)(ii) hereto; and (iii) 150,000 shares of Common Stock (the "Unvested G-III Shares"), apportioned among the Sellers as set forth on Schedule 2.2(a)(iii) hereto, all of which Unvested G-III Shares shall be subject to the Purchase Option (as hereinafter defined), vesting schedule and conditions set forth in Section 7.1; (b) For the period from the Closing Date to January 31, 2006, anamount equal to the sum of (x) 100% of the Division's EBITA between $7,900,000and $10,900,000 for such period, if the Division's EBITA for such period is atleast $8,900,000, and (y) 50% of the Division's EBITA above $10,900,000 for suchperiod; provided, however, that if the Division's EBITA for such period is lessthan $7,000,000, then, for purposes of Sections 2.2(c) and 7.4, the Division'sEBITA for the one-year period ending on January 31, 2007 shall be reduced on adollar-for-dollar basis by the amount of such deficiency; and provided further,however, that the EBITA Payment (as hereinafter defined) shall not exceed$7,500,000 for the period from the Closing Date to January 31, 2006; (c) Subject to the provisions of Section 2.2(d), for each of theone-year periods ending on January 31, 2007, January 31, 2008 and January 31,2009, an amount equal to 20% of the Division's EBITA for such one-year period(subject, in the case of the Division's EBITA for the one-year period ending onJanuary 31, 2007, to reduction as provided in the proviso set forth at the endof Section 2.2(b)), payable by the Buyer to the Sellers as provided in Section2.3; provided, however, that the Division's EBITA for such one-year period is atleast $8,000,000 (taking into account the preceding parenthetical); and providedfurther, however, that the sum of the EBITA Payment (as hereinafter defined) andthe Employee Bonus Plan Payments (as hereinafter defined) shall not exceed$7,500,0 ...