Investor Rights Agreement - 5/17/96

INVESTOR RIGHTS AGREEMENT


THIS INVESTOR RIGHTS AGREEMENT, is entered into as of this 17th day of May, 1996, by and between The D.W. Lauer Company, a California corporation (the "Company"), Douglas W. Lauer ("Founder"), Gargoyles, Inc., a Washington corporation ("Gargoyles"), and The Timberland Company, a Delaware corporation ("Timberland," together with Gargoyles, the "Shareholders") and permitted assigns, with reference to the following:


The Company, Founder and Shareholders are parties to an Agreement for Purchase of Common Stock of even date herewith (the "Purchase Agreement").


The Company, Founder and Shareholders, for the benefit of the Holders (as defined below) wish to enter into this Investor Rights Agreement.


NOW, THEREFORE, in consideration of the mutual covenants contained herein and in the Purchase Agreement, the parties hereby agree as follows:


1. DEFINITIONS


As used herein, unless the context otherwise requires, the following terms have the following respective meanings:


"Affiliate" of a Person shall mean any Person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with such Person. The term "control" shall mean with respect to a corporation the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the controlled corporation and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. Affiliate of a Person also shall include any director, officer, shareholder, executive or employee of such Person, or any member of any such Person's immediate family, including the parents, spouse, children and other relatives of any such Person.


"Closing Date" shall have the meaning ascribed to it in the Purchase Agreement.


"Commission" means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act (as defined below). 2
"Common Stock" means the shares of common stock, no par value, of the Company and any shares of common stock into which such shares are converted in connection with a recapitalization of the Company.


"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act shall include a reference to the comparable section, if any, of any such similar Federal statute.


"Holder" shall mean Founder and Shareholders to the extent, if any, that they retain rather than distribute to any Person Common Stock, and any Person that receives a distribution of Common Stock therefrom and executes a copy of this Agreement.


"Person" means a corporation, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision or a governmental agency.


"Registrable Securities" means the shares of Common Stock (i) held by Shareholders or (ii) held by Founder. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require registration of them under the Securities Act, or (c) they shall have ceased to be outstanding.


"Registration Expenses" means the out-of-pocket expenses incident to the Company's performance of or compliance with Section 3 hereof, including, without limitation, all registration, filing and applicable national securities exchange fees, all fees and expenses of complying with securities laws, including those of Nasdaq and the NASD, the fees and disbursements of counsel for the Company and of its independent public accountants, printing and reproduction expenses, and similar disbursements and charges; provided, however, that Registration Expenses shall exclude, and the sellers of the Registrable Securities shall pay, the fees and disbursements of counsel and accountants to such sellers and commissions and transfer taxes in respect of the Registrable Securities being registered (the "Excluded Expenses").


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"Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar Federal statute.


2. COVENANTS OF THE COMPANY


The Company covenants that so long as Holders own Common Stock, unless Shareholders shall otherwise consent in writing:


2.1 ACCOUNTING SYSTEM


The Company shall maintain a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied.


2.2 PERIODIC REPORTS, BUDGETS


(a) The Company shall furnish to each Holder, as soon as practicable, and in any event within 90 days after the end of each fiscal year of the Company, an annual report of the Company, including an audited balance sheet as of the end of such fiscal year and the related audited statements of operations, shareholders' equity and cash flows for such fiscal year (or similar statements if the foregoing statements change as the result of changes in generally accepted accounting principles), all of which shall fairly present the financial condition of the Company as of the dates shown and the results of its operations for the periods then ended. Such financial statements shall be accompanied by the unqualified report thereon of a nationally recognized independent public accountant reasonably satisfactory to Shareholders to the effect that such financial statements have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with prior years (except as otherwise specified in such report). The Company shall conduct its business so that such report of the independent public accountants shall not contain any qualifications as to the scope of the audit or with respect to the Company's compliance with generally accepted accounting principles consistently applied, except for changes in methods of accounting in which such accountants concur.


(b) The Company shall furnish to each Holder, as soon as practicable and in any event within 30 days after the end of each fiscal quarter and calendar month, a quarterly or monthly report, as applicable, of the Company consisting of an unaudited balance sheet as of the end of such quarter or month and the related


-3- 4 unaudited statements of operations and cash flows for such quarter or month and for the fiscal year to date, setting forth in each case in comparative form the corresponding figures for (A) the preceding fiscal year and (B) the budget for the current fiscal year. All such reports shall be certified by the chief financial officer of the Company to fairly present the financial condition of the Company as of the dates shown and the results of its operations for the periods then ended and to have been prepared in conformity with generally accepted accounting principles consistently applied except for normal, year-end audit adjustments and except that footnotes may be omitted. The reports for each quarter or calendar month shall include a narrative discussion prepared by the Company describing the business operations of the Company during such quarter or calendar month.


(c) The Company shall furnish to each Holder, as soon as practicable and, for each year after 1996, at least thirty (30) days prior to the end of each fiscal year of the Company an annual operating budget for the Company for the succeeding fiscal year, containing projections of profit and loss, cash flow and ending balance sheets for each month of such fiscal year.


2.3 OTHER REPORTS AND INSPECTION


The Company shall furnish promptly to each Holder copies of any financial statements or reports prepared by the Company for or otherwise furnished to or filed with its shareholders or any lender to the Company or the Commission. The Company shall furnish promptly to any Holder such other documents, reports, financial data and other information as such Holder may reasonably request. The Company shall, upon reasonable prior notice, make available to any Holder or its representatives or designees all properties, assets and business records of the Company for inspection and, in the case of business records, copying and shall use its best efforts to make available to any Holder, the directors, officers and employees of the Company for interviews concerning the business, properties and assets of the Company.


2.4 INSURANCE


The Company shall maintain valid policies of workers' compensation, fire and casualty, liability and other forms of insurance with financially sound insurers in such amounts, with such deductibles and against such risks and losses as are reasonable for the business and assets of the Company. The activities and operations of the Company shall be conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies. The Company shall within thirty (30) days of the date hereof, use its best efforts to obtain and maintain from financially sound and reputable insurer term life insurance on the life of Founder in


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5 the amount of $4.0 million. Such policy shall name Timberland and Gargoyles each as co-loss payees, each with a fifty percent (50%) interest in the proceeds, and shall not be cancelable or amended by the Company without prior approval of the Shareholders. The rights of Shareholders in the proceeds of such insurance policy shall be assignable by any Shareholder to a permitted assignee of such Shareholder's then current entire interest in the Company.


2.5 LICENSES


The Company shall obtain and keep in full force and effect all licenses, permits and other authorizations from governmental authorities utilized by the Company which shall be necessary in any material respect to the conduct of its business, unless such licenses, permits and authorizations are not in full force and effect and are contested diligently and in good faith by the Company.


2.6 MATERIAL CHANGES


The Company shall promptly notify each Shareholder of: (a) any material adverse change or anticipated changes in the condition (financial or otherwise), of the properties, assets, liabilities, businesses, or prospects as contemplated in the current Business Plan or operations of the Company; and (b) any lawsuit, claim, proceeding or investigation, pending, or to the best knowledge of the Company, threatened, or any judgment, order or decree.


2.7 COMPLIANCE WITH APPLICABLE LAWS


The Company shall comply in all material respects with all applicable statutes, laws, ordinances, rules and regulations of any governmental authority and any filing requirements relating thereto, such compliance to include, without limitation, filing in a timely manner (within any applicable extension periods) all tax returns, reports and forms required to be filed under the Internal Revenue Code or under applicable state, local or foreign tax laws and timely paying in full all taxes with respect to such returns, reports and forms, except for immaterial local tax returns or immaterial foreign tax returns and except to the extent such statutes, laws, ordinances, rules, regulations, filing requirements or taxes are being contested diligently and in good faith by the Company (and, in the case of taxes, adequate reserves for payment thereof have been set up), and shall do all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and authority necessary to continue its business.


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2.8 AGREEMENTS WITH EMPLOYEES


(a) The Company shall cause all members of management and all professional employees of the Company to enter into agreements, in form and substance reasonably satisfactory to Shareholders, relating to nondisclosure of confidential information, nonsolicitation of employees and customers of the Company, and assignment of patents, trademarks and copyrights to the Company (the "Protective Agreements").


(b) The Company shall require all future key employees of the Company to enter into Protective Agreements substantially in form attached hereto as Exhibit A.


2.9 VOTING AGREEMENT


(a) Election of Directors. Each Holder hereby agrees to cast all votes to which such Holder is entitled in respect of the Common Stock now or hereafter owned by such Holder, whether at any annual or special meeting of stockholders, by written consent or otherwise, to:


(i) fix the number of directors constituting the board of directors of the Company (the "Board") at five (5) members;


(ii) elect as a director of the Company one individual (the "Timberland Designated Director") that may be designated by Timberland for election;


(iii) elect as a director of the Company one individual that may be designated by Founder for election (the "Founder Designated Director"); and


(iv) elect as a director for the Company three individuals that may be designated by Gargoyles for election (the "Gargoyles Designated Directors").


(b) Removal. The Timberland Designated Director may not be removed without the consent of Timberland, the Founder Designated Director may not be removed without the consent of Founder, and the Gargoyles Designated Directors may not be removed without the consent of Gargoyles.


(c) Successors. In the event a director shall cease to serve for any reason then (i) in the case of the Timberland Designated Director, Timberland shall have the right to nominate a successor Designated Director, (ii) in the case of the Founder Designated Director, Founder shall have the right to nominate a successor Founder Designated Director, and (iii) in the case of any Gargoyles Designated


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7 Director, Gargoyles shall have the right to nominate a successor Gargoyles Designated Director. Each Holder shall, upon receipt of notice identifying such nominee, promptly take all action necessary to cause the appointment of such nominee to the Board pursuant to the Company's By-laws and Certificate of Incorporation, each as amended and in effect from time to time.


(d) For so long as Founder or Timberland has the right to nominate a director, the director nominated by such party shall have the same rights as other directors to vote, receive notice of and attend all meetings of the executive committee or other committee of the Board of Directors; provided further that the director nominated by Timberland shall have the right to serve on any such committee. For so long as a party has the right to nominate a director and such party has specified an individual to be such director or an observer, the Company will promptly deliver to such party's director or observer copies of all minutes and other records of action by, and all documents, reports, financial data and other information prepared for or provided to, the Board. The Company covenants that at all times its Articles of Incorporation or Bylaws will contain provisions indemnifying its directors to the fullest extent permitted under applicable law.


(e) If a party (the "Requesting Party") gives written notice to the other parties (the "Requested Parties") that the Requesting Party desires to remove a director nominated by it, the Requested Parties agree to vote all their voting securities in favor of removing such director if a vote of holders of voting securities shall be required to remove the director, and the Company agrees to take any action necessary to facilitate such removal.


(f) If the any Holder fails or refuses to vote its shares as required hereby, the Timberland, Founder, or Gargoyles, as the case may be, shall have an irrevocable proxy pursuant to the provisions of Section 705(e) of the California General Corporation Law, coupled with an interest, so to vote those securities in accordance herewith, and each party hereby grants to the other parties such irrevocable proxy.


2.10. NEGATIVE COVENANTS


(a) The Company will not, without first obtaining the consent of Gargoyles and Founder or Gargoyles and Timberland:


(i) sell or transfer all or substantially all of any asset of the Company, except sales of inventory in the ordinary course of business;


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(ii) issue, deliver or sell any of its capital stock, or grant an option or rights to subscribe for, purchase or acquire any of its capital stock, or to any Person (except as provided in this Agreement);


(iii) increase the salary or other compensation payable or to become payable by the Company to any of its officers or executives, nor pay, or commit or oblige the Company to pay any bonus (except in accordance with past practice of the Company as heretofore disclosed in writing to Shareholders) or any other additional compensation to any such Person, including (but not limited to) any welfare, pension, retirement or similar payment or arrangement;


(iv) make any change in the business and activities of the Company;


(v) extend credit by any method or in any form or manner in excess of $50,000, other than open account credit extended to customers in the ordinary course of business or loan money or act as guarantor, surety, co-signor, endorser, co-maker, indemnitor or otherwise, in respect of the obligation of any Person, organization or entity;


(vi) incur any indebtedness, other than trade debt incurred in the ordinary course of business, to a Person which is not an Affiliate of the Company or of any stockholder of the Company, provided, however, that the Company may incur indebtedness of up to $100,000 to any such unaffiliated Person; or


(vii) invest directly or indirectly, by way of stock ownership, debt, asset acquisition or otherwise, in any corporation, association, or other entity or enterprise; or


(b) The Company will not, without first obtaining the consent of all of the outstanding shares of Common Stock held by Holders:


(i) amend, restate or otherwise alter the Company's Articles of Incorporation or Bylaws;


(ii) engage in any loan, lease, contract or other transaction, as lender, borrower, lessee, lessor or otherwise, with any Affiliate of the Company or of any stockholder of the Company; provided that, subject to such approval, a Shareholder may make a loan to the Company which (x) bears no greater than a market rate of interest (not to exceed, subject to such approval, such Shareholder's then current borrowing costs), (y) is secured by assets of the Company (other than the


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9 License Agreement), and (z) permits foreclosure on such assets in case of Company default; or


(iii) change the Company's fiscal year.


(c) The Company will not, without first obtaining the unanimous consent of board of directors of the Company, including representatives of each of Founder and Timberland:


(i) declare, set aside or pay a dividend or other distribution with respect to the stock of the Company, or redeem such stock directly or indirectly, or purchase or otherwise acquire any shares of capital stock of the Company.


3. REGISTRATION UNDER SECURITIES ACT


3.1 REGISTRATION


If the Company determines in its sole discretion that it is in the Company's best interest to do so, the Company will use its best efforts to prepare and file a registration statement on Form S-1, S-3 or other applicable form under the Securities Act as to all of the Registrable Securities; provided, however, that the Company has no obligation to file such registration statement. If it determines to file such registration statement, the Company shall provide written notice to each Holder thirty (30) days prior to the filing of such registration statement. The Company will use its best efforts to effect the registration under the Securities Act. The Company may elect to include in the registration statement shares of Common Stock held by the Company or other stockholders of the Company.


3.2 REGISTRATION PROCEDURES


In connection with the registration of Registrable Securities pursuant to Section 3.1, 3.3 or 3.4, the Company will, subject to the terms of this Agreement, as expeditiously as practicable:


(a) prepare and file with the Commission such amendments and supplemen ...