kl02023_ex10-2.htm

 

    
      

    

    
Exhibit
10.2

     

     

    EXECUTION
VERSION

     

    


     

    


     

    


     

    


     

     

     

     

    


     

    


     

    EARN-OUT
AGREEMENT

     

     

    


     

    by and
among

     

     

    


     

    STEVEN
MADDEN, LTD.,

     

     

    


     

    BIG
BUDDHA, INC.,

     

    and

     

    JEREMY
BASSAN

     

    


    Dated as
of February 10, 2010

     

    


     

     

     


    
      
         


      

      
         


        
          

        

      

      
         


      

    


     

    EARN-OUT
AGREEMENT

     

    This
EARN-OUT AGREEMENT (this “Agreement”), dated as of February 10, 2010 and
effective as of the Closing Date (as defined below), if one occurs, is entered
into by and among Steven Madden, Ltd., a Delaware corporation (“Purchaser”),
Jeremy Bassan (“Seller”) and Big Buddha, Inc., a California corporation (the
“Company”).

     

    RECITALS

     

    WHEREAS,
concurrently herewith, Seller and Purchaser are entering into that certain Stock
Purchase Agreement, dated as of the date hereof (as amended from time to time in
accordance with its terms, the “Stock Purchase Agreement”), pursuant to which
Purchaser shall purchase all of the issued and outstanding shares of capital
stock of the Company from Seller; and

     

    WHEREAS,
pursuant to Section 2.2(a) of the Stock Purchase Agreement, Seller shall be
entitled to receive certain earn-out purchase price payments, subject to the
terms and conditions of this Agreement, in respect of each Earn-Out Year (as
defined below).

     

    NOW,
THEREFORE, in consideration of the premises and the mutual covenants and
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:

     

    1.   Definitions.  As
used in this Agreement, the following terms shall have the meanings
indicated:

     

    “2010
Contingent Purchase Price Payment” shall have the meaning set forth in Section
2(a) hereof.

     

    “2011
Contingent Purchase Price Payment” shall have the meaning set forth in Section
2(b) hereof.

     

    “2012
Contingent Purchase Price Payment” shall have the meaning set forth in Section
2(c) hereof.

     

    “2010
Earn-Out Year” shall mean the twelve month period beginning on April 1, 2010 and
ending on March 31, 2011.

     

    “2011
Earn-Out Year” shall mean the twelve month period beginning on April 1, 2011 and
ending on March 31, 2012.

     

    “2012
Earn-Out Year” shall mean the twelve month period beginning on April 1, 2012 and
ending on March 31, 2013.

     

    “AAA”
shall mean the American Arbitration Association.

     

    “Advance
Payment” shall have the meaning set forth in Section 4(b) hereof.

     

     

    
      
        
        

      

      
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    “Affiliate”
with respect to any Person shall mean any other Person which, directly or
indirectly, is in control of, is controlled by or is under common control with
such specified Person.  For the purposes of this definition,
“control,” when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.  In the
case of any Person who is an individual, such Person’s Affiliates shall include
such Person’s spouse, siblings, parents, children, grandchildren, and trusts for
the benefit of any of the foregoing.

     

    “Agreement”
shall have the meaning set forth in the preamble.

     

    “Applicable
Contingent Purchase Price Payment Date” shall have the meaning set forth in
Section 4 hereof.

     

    “Board of
Directors” shall have the meaning set forth in Section 7(a) hereof.

     

    “Business
Day” means any day that is not a Saturday or Sunday or a legal holiday on which
banks are authorized or required by law to be closed in New York, New
York.

     

    “Cause”
shall have the meaning set forth in the Employment Agreement.

     

    “Change
of Control” shall mean any transaction, event or occurrence or series of
transactions, events or occurrences resulting in (a) one or more Persons or
group of Persons becoming the beneficial owner (as such term defined in Rule
13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as ended) of in
excess of 50% of the voting securities of Purchaser, (b) the voluntary or
involuntary liquidation, dissolution or other winding up of the affairs of
Purchaser, or (c) the sale of all or substantially all of the assets of
Purchaser.

     

    “Closing
Date” shall have the meaning set forth in the Stock Purchase
Agreement.

     

    “Company”
shall have the meaning set forth in the preamble.

     

    “Contingent
Purchase Price Payment” shall mean each of the 2010 Contingent Purchase Price
Payment, the 2011 Contingent Purchase Price Payment and the 2012 Contingent
Purchase Price Payment.

     

    “Contingent
Purchase Price Statement” shall have the meaning set forth in Section 3(a)
hereof.

     

    “Dispute”
shall have the meaning set forth in Section 18 hereof.

     

    “Dispute
Notice” shall have the meaning set forth in Section 3(b)
hereof.

     

    “Disputing
Party” shall have the meaning set forth in Section 18 hereof.

     

    “Earn-Out
Year” shall mean each of the 2010 Earn-Out Year, the 2011 Earn-Out Year and the
2012 Earn-Out Year.

     

     

     

    
      
        
        

      

      
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    “EBITDA”
shall mean the Company’s (a) Net Sales, less, without duplication, the sum of
(i) cost of sales, (ii) selling and distribution expenses (for the
avoidance of doubt, including co-op advertising expenses, but excluding the
expenses specifically provided for in clause (a)(v) of this definition), (iii)
design and production expenses, (iv) general administrative expenses (for
the avoidance of doubt, including in each of the foregoing clauses the net
amount payable under the Services Agreement), (v) ten percent (10%) of all
amounts paid in respect of advertising other than co-op advertising, and (vi)
the net change in prepaid expenses and other assets from the balance at the
beginning of an Earn-Out Year and the balance at the end of such Earn-Out Year,
to the extent such amounts represent costs or expenses incurred in one period
for the benefit of the following period, plus (b) to the extent
included in expenses in clause (a) of this definition, the sum of (i) interest
expense, (ii) fees and expenses (including prepayment penalties) in connection
with financings, (iii) income tax expense (including payments in respect of any
tax sharing or other similar agreement) other than international VAT or other
similar tax, (iv) depreciation and amortization expense, (v) expenses resulting
from FAS 142 or FAS 144, (vi) amortized expenses related to the closing of the
transactions contemplated by the Stock Purchase Agreement and the 338(h)(10)
Election (as defined in the Stock Purchase Agreement), if any, (vii) any
allocation of corporate overhead from Affiliates of the Company or allocation of
profit, loss or expenses from Affiliates of the Company, other than those
allocations specified in the Services Agreement, (viii) any Losses (as defined
in the Stock Purchase Agreement) of the Company which give rise to an indemnity
obligation pursuant to the indemnification provisions of the Stock Purchase
Agreement, to the extent, and only to the extent, that such indemnity
obligations have been honored, (ix) any amounts recovered or recoverable by the
Company from insurance, to the extent, and only to the extent, the Loss
attributable to such insurance arose in the same period, and (x) any relocation
and transition expenses of the Company resulting from the consummation of the
transactions contemplated by the Stock Purchase Agreement.  For
purposes of clause (b)(x) of this definition, relocation and transition expenses
shall include without limitation (i) all Relocation Payments (as such term is
defined in the Stock Purchase Agreement) paid by the Company, Purchaser or any
of its subsidiaries pursuant to Section 8.2 of the Stock Purchase Agreement,
(ii) all relocation expenses reimbursed by the Company or Purchaser pursuant to
Section 2(c) of the Employment Agreement, (iii) severance payments paid by the
Company, Purchaser or any of its subsidiaries pursuant to Section 8.2 of the
Stock Purchase Agreement, (iv) all incremental costs of accounting and other
personnel and systems solely related to the transition of the Company’s
accounting, information systems, employees, customers, suppliers and the like,
(v) all costs related to the closing of the Company’s offices and warehouse in
Santa Cruz, California (including any fees or penalties resulting therefrom),
the move of the Company’s offices and warehouse to the New York Metropolitan
Area and the move of any of the Company’s merchandise to Purchaser’s Los Angeles
warehouse, and (vi) any fees or expenses in connection with the preparation of
any Contingent Purchase Price Statement or any dispute hereunder, the
determination of Net Working Capital under the Stock Purchase Agreement, and any
change in the Company’s accounting methods.  Each figure in clauses
(a) through (b) of this definition shall be determined on a consolidated basis
in accordance with GAAP consistently applied from the Closing Date.

     

    “Employment
Agreement” shall mean the employment agreement, dated as of the date hereof,
between Purchaser and Seller, executed and delivered simultaneously with the
execution and delivery of this Agreement.

     

     

     

    
      
        
        

      

      
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    “Estimate”
shall have the meaning set forth in Section 4(b) hereof.

     

    “Final
Contingent Purchase Price Statement” shall have the meaning set forth in Section
3(c) hereof.

     

    “Final
Financial Statements” shall have the meaning set forth in Section 3(c)
hereof.

     

    “Financial
Statements” means for any Earn-Out Year, unaudited financial statements for the
Company for such Earn-Out Year, which shall be prepared in accordance with
GAAP.

     

    “GAAP”
shall mean United States generally accepted accounting principles, as in effect
on the date of this Agreement, consistently applied.

     

    “Good
Reason” shall have the meaning set forth in the Employment
Agreement.

     

    “Gross
Sales” shall mean the total invoiced amount of products, including but not
limited to seconds and close-outs and including the amount of sales of products
on the www.bigbuddha.com website, and excluding any insurance or freight
invoiced as a separate line item.

     

    “Independent
Accounting Firm” shall have the meaning set forth in Section 3(b)
hereof.

     

    “Intercompany
Transaction” shall have the meaning set forth in Section 8 hereof.

     

    “Net
Sales” shall mean Gross Sales, less (i) returns by customers and (ii) allowances
and trade discounts granted, including co-op allowances, markdown allowances and
any other chargebacks provided for in the books, records and financial
statements of a company.

     

     “Net
Sales Target” shall have the meaning set forth in Section 2(e)
hereof.

     

    “Net
Sales Target Amount” shall have the meaning set forth in Section 2(e)
hereof.

     

    “Notice
of Set-Off Dispute” shall have the meaning set forth in Section 5(b)
hereof.

     

    “Person”
shall mean an individual, partnership, venture, unincorporated association,
organization, syndicate, corporation, limited liability company, or other
entity, trust, trustee, executor, administrator or other legal or personal
representative or any government or any agency or political subdivision
thereof.

     

    “Prime
Rate” shall mean the rate of interest that The JPMorgan Chase Bank (or its
successor and assign) announces from time to time as its prime lending rate as
then in effect, or if no such rate is announced by The JPMorgan Chase Bank (or
its successor or assign), the prime lending rate announced by a New York City
money center bank selected by Purchaser and reasonably acceptable to the
Seller.

     

     

     

    
      
        
        

      

      
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    “Purchaser”
shall have the meaning set forth in the preamble.

     

    “Revised
Contingent Purchase Price Statement” shall have the meaning set forth in Section
3(b) hereof.

     

    “Revised
Financial Statements” shall have the meaning set forth in Section 3(b)
hereof.

     

    “Rules”
shall have the meaning set forth in Section 18 hereof.

     

    “Seller”
shall have the meaning set forth in the preamble.

     

    “Services
Agreement” shall mean that certain services agreement, dated as of the date
hereof, among Purchaser, Seller and the Company.

     

    “Set-Off
Notice” shall have the meaning set forth in Section 5(b) hereof.

     

    “Set-Off
Review Period” shall have the meaning set forth in Section 5(b)
hereof.

     

    “Stock
Purchase Agreement” shall have the meaning set forth in the
recitals.

     

    2.   Contingent Purchase Price
Calculation.

     

    (a)   2010 Contingent Purchase
Price Payment. The aggregate amount of the contingent purchase price
payment payable to Seller with respect to the 2010 Earn-Out Year (the “2010
Contingent Purchase Price Payment”) shall equal the sum of (x) 70% of the EBITDA
for the 2010 Earn-Out Year, plus (y) the Additional
Contingent Amount (as defined below) for the 2010 Earn-Out Year

     

    (b)   2011 Contingent Purchase
Price Payment. The aggregate amount of the contingent purchase price
payment payable to Seller with respect to the 2011 Earn-Out Year (the “2011
Contingent Purchase Price Payment”) shall equal the sum of (x) 70% of the EBITDA
for the 2011 Earn-Out Year, plus (y) the Additional
Contingent Amount for the 2011 Earn-Out Year.

     

    (c)   2012 Contingent Purchase
Price Payment. The aggregate amount of the contingent purchase price
payment payable to Seller with respect to the 2012 Earn-Out Year (the “2012
Contingent Purchase Price Payment”) shall equal the sum of (x) 70% of the EBITDA
for the 2012 Earn-Out Year, plus (y) the Additional
Contingent Amount for the 2012 Earn-Out Year.

     

    (d)   As used
in this Agreement, the term “Additional Contingent Amount” shall mean, with
respect to any given Earn-Out Year, the total of (i) 2.0% of the total amount of
retail Net Sales in such Earn-Out Year of “Big Buddha” brand handbags sold in
Purchaser’s retail stores or on Purchaser’s website, plus (ii) 2.5% of the total
amount of wholesale Net Sales in such Earn-Out Year of “Big Buddha” brand
handbags sold outside of the United States, plus (iii) 2.5% of the total
amount of wholesale Net Sales in such Earn-Out Year of “Big Buddha”

     

     

     

    
      
        
        

      

      
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    brand
merchandise other than handbags, plus (iv) 2.0% of the total
amount of wholesale Net Sales in such Earn-Out Year of any private label
merchandise sold by Purchaser using the same design as any “Big Buddha” brand
handbags.  For purposes of clarity, any amounts included in the
preceding clauses (i) through (iv) shall not be included in the Net Sales of the
Company.

     

    (e)   In the
event that the Company achieves Net Sales of fifty million dollars ($50,000,000)
in any single Earn-Out Year (the “Net Sales Target”), there shall be a one-time
addition to the Contingent Purchase Price Payment for the first Earn-Out Year in
which the Net Sales Target is achieved in an amount equal to two million five
hundred thousand dollars ($2,500,000) (the “Net Sales Target
Amount”).  For the avoidance of doubt, to the extent that the Net
Sales Target Amount is included in a Contingent Purchase Price Payment for any
Earn-Out Year in accordance with the preceding sentence, no similar addition
shall be made to any subsequent Contingent Purchase Price Payments pursuant to
this Agreement.

     

    (f)   For the
avoidance of doubt, the parties acknowledge that (i) no Contingent Purchase
Price Payment shall ever be less than zero, and (ii) each Contingent Purchase
Price is payable whether or not Seller is employed by Purchaser or the Company
at any time during or after the applicable Earn-Out Year.

     

    (g)   Notwithstanding
anything to the contrary in this Agreement, in the event that, prior to the end
of the 2012 Earn-Out Year, Seller’s employment with Purchaser is terminated (a)
by Purchaser without Cause or by Seller for Good Reason or (b) following a
Change of Control of Purchaser, the Contingent Purchase Price Payment payable to
Seller hereunder in respect of the Earn-Out Year in which such employment is
terminated and in respect of each Earn-Out Year thereafter through the 2012
Earn-Out Year shall be equal to the greater of (x) (I) if one of the events
described in clause (a) or (b) occurs in the 2010 Earn-Out Year, $1,200,000, or
(II) if any one of the events described in clause (a) or (b) occurs in the 2011
Earn-Out Year or the 2012 Earn-Out Year, 50% of the Contingent Purchase Price
Payment paid to Seller with respect to the prior Earn-Out Year, and (y) the
Contingent Purchase Price Payment calculated in accordance with Section 2(a),
2(b) or 2(c) hereof, as applicable.

     

    (h)   Notwithstanding
anything to the contrary herein, in the event that the employment of Seller is
terminated by Purchaser without Cause or by Seller with Good Reason and the
Company employs another executive or executives to replace Seller, than any
excess of the compensation and benefits of the executive(s) employed to replace
Seller over the amounts that would have been payable to Seller pursuant to the
Employment Agreement had Seller remained employed by Purchaser shall be
disregarded for purposes of the calculation of EBITDA pursuant to this
Agreement, regardless of the actual amount of such compensation and
benefits.

     

    3.   Contingent Purchase Price
Statement; Dispute.

     

    (a)   As
promptly as practicable, but in any event within seventy-five (75) days after
the end of each Earn-Out Year, Purchaser shall prepare and deliver to Seller
(and the Company shall provide Purchaser with all assistance as may be
reasonably requested by Purchaser in connection with such preparation) (i)
Financial Statements for such Earn-Out Year, (ii) a statement of the Contingent
Purchase Price Payment for such Earn-Out Year, which shall

     

     

    
      
        
        

      

      
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    explain
in reasonable detail the calculations of EBITDA for such Earn-Out Year (a
“Contingent Purchase Price Statement”) and (iii) reasonable supporting
documentation sufficiently detailed to enable Seller to verify the amounts set
forth in such Financial Statements and Contingent Purchase Price
Statement.

     

    (b)   Seller
may dispute such Financial Statements and/or Contingent Purchase Price Statement
for such Earn-Out Year by sending a written notice (a “Dispute Notice”) to
Purchaser within thirty (30) days after Purchaser’s delivery of all of the items
specified in Section 3(a) to the Seller.  The Dispute Notice shall
identify each disputed item on the Financial Statements or Contingent Purchase
Price Statement, specify the amount of such dispute and set forth in reasonable
detail the basis for such dispute.  In the event of any such disputes,
Purchaser and Seller shall attempt, in good faith, to reconcile the items
identified in the Dispute Notice and any related items that may arise during the
process described in this Section 3(b) (including providing information that is
reasonably requested to the other party), and any resolution by them as to any
disputed items shall be final, binding and conclusive on the parties and shall
be evidenced by a writing signed by Purchaser and Seller, including, as
appropriate, revised Financial Statements (“Revised Financial Statements”)
and/or a revised Contingent Purchase Price Statement (a “Revised Contingent
Purchase Price Statement”) reflecting such resolution.  If Purchaser
and Seller are unable to reach such resolution within twenty (20) days after
Seller’s delivery of the Dispute Notice to Purchaser, then Purchaser and Seller
shall promptly submit any remaining disputed items for final binding resolution
to any independent accounting firm mutually acceptable to Purchaser and Seller
(which accounting firm has not, within the prior twenty-four (24) months,
provided services to Purchaser, Seller or the Company or any Affiliate of any of
them).  If Purchaser and Seller are unable to agree upon an
independent accounting firm within thirty (30) days, an independent accounting
firm selected by Purchaser (which accounting firm has not, within the prior
twenty-four (24) months, provided services to Purchaser or the Company or any
Affiliate of either of them) and an independent accounting firm selected by
Seller (which accounting firm has not, within the prior twenty-four (24) months,
provided services to Seller or the Company or any Affiliate of either of them)
shall select an independent accounting firm that has not, within the prior
twenty-four (24) months, provided services to Purchaser, Seller or the Company
or any Affiliate of any of them.  Such independent accounting firm
mutually agreed upon by Purchaser and Seller or selected by the procedure
referenced in the immediately preceding sentence, as the case may be, is
hereinafter referred to as the “Independent Accounting Firm.”  If any
remaining disputed items are submitted to an Independent Accounting Firm for
resolution, (A) each party will furnish to the Independent Accounting Firm such
workpapers and other documents and information relating to the remaining
disputed items as the Independent Accounting Firm may request and are available
to such party, and each party will be afforded the opportunity to present to the
Independent Accounting Firm any material relating to the disputed items and to
discuss the resolution of the disputed items with the Independent Accounting
Firm; (B) each party will use its good faith commercially reasonable efforts to
cooperate with the resolution process so that the disputed items can be resolved
within forty-five (45) days after submission of the disputed items to the
Independent Accounting Firm; (C) the determination by the Independent Accounting
Firm, as set forth in a written notice to Purchaser and Seller (which written
notice shall include, as appropriate, Revised Financial Statements and/or a
Revised Contingent Purchase Price Statement), shall be final, binding and
conclusive on the parties absent manifest error; and (D) the fees and
disbursements of the Independent Accounting Firm shall be allocated by
the

     

     

    
      
        
        

      

      
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    Independent
Accounting Firm between Purchaser and Seller in the same proportion that the
aggregate dollar amount of the disputed items submitted to the Independent
Accounting Firm that are unsuccessfully disputed by Seller (as finally
determined by the Independent Accounting Firm) bears to the total amount of all
disputed items submitted to the Independent Accounting Firm.  By way
of illustration, if Seller disputes $500,000 of items, and the Independent
Accounting Firm determines that Seller’s position is correct as to $400,000 of
the disputed items, then Purchaser would bear 80 percent and Seller would bear
20 percent of such fees and disbursements.

     

    (c)   The
Financial Statements for such Earn-Out Year and the Contingent Purchase Price
Statement or, if either have been adopted pursuant to Section 3(b), the Revised
Financial Statements and/or the Revised Contingent Purchase Price Statement,
shall be deemed to be final, binding and conclusive on Purchaser and Seller
(“Final Financial Statements” and “Final Contingent Purchase Price Statement”)
upon the earliest of (A) the failure of Seller to deliver to Purchaser the
Dispute Notice within thirty (30) days after Purchaser’s delivery to Seller of
all of the items specified in Section 3(a) for such Earn-Out Year; (B) the
resolution by Purchaser and Seller of all disputes, as evidenced by, as
appropriate, Revised Financial Statements and/or a Revised Contingent Purchase
Price Statement; and (C) the resolution by the Independent Accounting Firm of
all disputes, as evidenced by, as appropriate, Revised Financial Statements
and/or a Revised Contingent Purchase Price Statement.  Any Contingent
Purchase Price Payment based on Final Financial Statements and a Final
Contingent Purchase Price Statement shall be made in accordance with Section 4
hereof.

     

    4.   Contingent Purchase Price
Payments.

     

    (a)   Each
Contingent Purchase Price Payment shall be paid and payable by Purchaser or the
Company to Seller with respect to each Earn-Out Year and shall be paid on a date
or dates selected by Purchaser that results in the payment of such Contingent
Purchase Price Payment to Seller in full on or before the tenth (10th)
Business Day after the later of (x) the date on which the Final Financial
Statements and Final Contingent Purchase Price Statement are deemed final,
binding and conclusive for such Earn-Out Year pursuant to Section 3(c) and (y)
the conclusion of the negotiation period with respect to any set-off pursuant to
Section 5 (such date, the “Applicable Contingent Purchase Price Payment
Date”).  In the event that any amounts due under this Section 4 shall
not be paid to Seller on or before the Applicable Contingent Purchase Price
Payment Date, such amounts shall bear interest, calculated from the Applicable
Contingent Purchase Price Payment Date until the date such amounts are paid to
Seller, at a rate per annum equal to the Prime Rate, calculated and payable
monthly, compounded monthly.  Each Contingent Purchase Price Payment
shall be paid in cash and shall be made by wire transfer of immediately
available funds to an account or accounts designated at least two
(2) Business Days prior to the applicable payment date by Seller in
writing.

     

    (b)   Notwithstanding
the foregoing, on or before December 1 of each Earn-Out Year, Purchaser or the
Company shall deliver to Seller (i) Purchaser’s good faith estimate of the
Contingent Purchase Price Payment amount for the nine month period beginning on
April 1 and ending on December 31 of such Earn-Out Year (the “Estimate”) and
(ii) payment in an amount equal to 75% of the applicable Estimate, which payment
shall be an advance on the Contingent

     

     

    
      
        
        

      

      
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    Purchase
Price Payment for such Earn-Out Year (the “Advance Payment”).  On the
Applicable Contingent Purchase Price Payment Date for each Earn-Out
Year:

     

    (i)   if the
Contingent Purchase Price Payment calculated in accordance with Section 2(a)
hereof for such Earn-Out Year exceeds the total amount paid to Seller in respect
of the Advance Payment for the nine month period beginning on April 1 and ending
on December 31 of such Earn-Out Year, Purchaser or the Company shall pay to
Seller with respect to such Earn-Out Year the balance of the Contingent Purchase
Price Payment for such Earn-Out Year, calculated as an amount equal to (x) the
Contingent Purchase Price Payment calculated in accordance with Section 2(a)
hereof for such Earn-Out Year, minus (y) the total amount
paid to Seller in respect of the Advance Payment for the nine month period
beginning on April 1 and ending on December 31 of such Earn-Out Year;
or

     

    (ii)   if the
Contingent Purchase Price Payment calculated in accordance with Section 2(a)
hereof for such Earn-Out Year is less than the total amount paid to Seller in
respect of the Advance Payment for the nine month period beginning on April 1
and ending on December 31 of such Earn-Out Year, Seller shall refund to
Purchaser with respect to such Earn-Out Year an amount equal to (x) the total
amount paid to Seller in respect of the Advance Payment for the nine month
period beginning on April 1 and ending on December 31 of such Earn-Out Year,
minus (y) the
Contingent Purchase Price Payment calculated in accordance with Section 2(a)
hereof for such Earn-Out Year.

     

    5.   Set-Off
Rights.

     

    (a)   Notwithstanding
any provision of this Agreement to the contrary, the parties hereby acknowledge
and agree that, in addition to any other right hereunder, Purchaser shall have
the right, but not the obligation, from time to time to set off against any
Contingent Purchase Price Payment required to be paid by Purchaser to Seller
pursuant to this Agreement any amounts owed at such time by Seller to the
Company or to Purchaser (or any of its Affiliates) hereunder or pursuant to the
Stock Purchase Agreement.

     

    (b)   If
Purchaser elects to exercise its set-off rights hereunder against any amounts
otherwise required to be paid by Purchaser to Seller pursuant to this Agreement,
it shall give Seller written notice of such election (the “Set-Off Notice”) no
later than the date on which the Final Financial Statements and Final Contingent
Purchase Price Statement are deemed final, binding and conclusive pursuant to
Section 3(d), which Set-Off Notice shall include the amount to be set off and a
reasonable description of the circumstances giving rise to Purchaser’s
entitlement to such set-off.  Seller shall have thirty (30) days after
receipt of such Set-Off Notice to review such Set-Off Notice (the “Set-Off
Review Period”), and in the event that Seller has any objections or challenges
to the exercise of the set-off right of Purchaser, Seller shall submit a single
written notice of set-off dispute (“Notice of Set-Off Dispute”) to Purchaser
during such Set-Off Review Period, specifying in reasonable detail the nature of
any asserted objections or challenges.  In the event that Seller does
not submit a Notice of Set-Off Dispute within thirty (30) days of Purchaser’s
delivery of the Set-Off Notice, it shall be conclusively presumed that Seller
and the Company do not object to such Set-Off Notice and such Set-Off Notice
shall be deemed to be final, binding and conclusive on the
parties.   In the event of any such dispute, Seller and Purchaser
shall negotiate in good faith to resolve such dispute for thirty (30) days
after

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

     

    receipt
by Purchaser of the Notice of Set-Off Dispute.  If Seller and
Purchaser are unable to resolve such dispute within such 30-day period, the
amount payable by Purchaser to Seller shall automatically be reduced by the
amount set forth in the Set-Off Notice.  In the event that there is a
final determination that Seller did not owe the Company or Purchaser (or any of
its Affiliates) the amount that has been set off, Purchaser shall promptly repay
to Seller all such amounts that are so determined to have been incorrectly set
off, plus interest, calculated from the date of set-off until the date such
amount is paid to Seller, at a rate per annum equal to the Prime Rate,
calculated and payable monthly, compounded monthly.  For purposes of
this Section 5, a determination shall be final if any and all appeals therefrom
shall have been resolved or if thirty (30) days shall have passed from the
rendering of such determination (or of any determination of appeal therefrom)
and no party shall have commenced any appeal therefrom.

     

    (c)   In the
case of any such set-off by Purchaser pursuant to this Section 5, Seller’s
obligation to make such payment (or any portion thereof) shall be deemed
satisfied and discharged to the extent of such set-off.  The exercise
of such right of set-off by Purchaser in good faith, whether or not finally
determined to be justified, will not constitute a breach under this Agreement or
the Stock Purchase Agreement.

     

    6.   Covenants of
Purchaser.  Purchaser hereby covenants and agrees that, from
the Closing Date until the earlier of (i) the termination of this Agreement or
(ii) the end of the 2012 Earn-Out Year, it will (x) maintain the Company as a
division of Purchaser, which will maintain appropriate accounting books and
records necessary to calculate amounts payable hereunder, and (y) not change the
name of such division to a name that does not include the words “Big Buddha”
without Seller’s prior consent, which consent shall not be unreasonably
withheld.

     

    7.   Corporate Governance During
Earn-Out Period.  Seller and Purchaser agree that until the
earlier of the termination of this Agreement or the end of the 2012 Earn-Out
Year, the Company shall be managed in accordance with the following
provisions:

     

    (a)   The Board
of Directors of the Company (the “Board of Directors”) shall consist of the same
three (3) persons, and Purchaser will vote the Company’s common stock owned by
it in favor of the election of two (2) designees of Purchaser and one (1)
designee of Seller, provided that during his term of employment with the
Company, the designee of Seller shall be himself.  Except as
specifically provided for in Sections 7(b) or 7(c) hereof, the Board of
Directors or its designee shall have authority to control all of the operations
of the Company.

     

    (b)   Notwithstanding
the provisions of Section 7(a) to the contrary, the following actions shall not
be taken without the mutual consent of Seller, on the one hand, and Purchaser or
the Board of Directors, on the other hand: (i) entering into any transaction
with any Affiliate of Purchaser or the Company or any officer or director of
Purchaser or the Company or their respective Affiliates (including family
members), other than compensation arrangements in the ordinary course operations
of the Company consistent with past practice or as provided in the Services
Agreement, (ii) voluntarily liquidating or dissolving the Company, (iii) filing
of a petition under bankruptcy or other insolvency laws, or admitting in writing
that the Company is bankrupt, insolvent or generally unable to pay its debts as
they become due, (iv) issuing any capital stock or other securities of the
Company or granting any option or other right to acquire any capital stock or
other securities of the Company, (v) selling all or substantially all of
the

     

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

     

    stock or
assets of the Company to a third party that is not a one-hundred percent
(100%)-owned subsidiary of Purchaser or Purchaser itself (other than sales of
inventory in the ordinary course of business consistent with the Company’s past
practices) or engaging in a merger transaction (other than mergers solely for
the purpose of reincorporating the Company in the state of Delaware), or (vi)
ceasing the design, marketing, sale or distribution of handbags.  For
the avoidance of doubt, it is acknowledged and agreed among the parties hereto
that the restrictions set forth in clause (v) above shall not apply to a sale of
all or substantially all of the stock or assets of Purchaser or any Affiliate of
Purchaser (other than the Company) or the engagement by Purchaser or any
Affiliate of Purchaser (other than the Company) in any merger
transaction.  Furthermore, neither Purchaser nor the Company may, or
may cause any of its Affiliates to, take any action or enter into any
transaction that is primarily intended to adversely affect any of the Contingent
Purchase Price Payments payable under this Agreement, provided that such
prohibition shall not restrict Purchaser or any of its Affiliates from
manufacturing, selling and distributing any products, including
handbags.

     

    (c)   Notwithstanding
the provisions of Sections 7(a) or 7(b) to the contrary, if Purchaser proposes
to design, market, distribute or sell a brand or line of handbags that is a
derivative of the “Big Buddha” brand through the “Big Buddha” division,
Purchaser shall provide to Seller a one-time opportunity to elect to have such
brand or line taken into account for purposes of calculating EBITDA and/or Net
Sales hereunder (an election to have such brand or line so taken into account,
“Opting In”, and an election not to have such brand or line so taken into
account, “Opting Out”).  If Seller “Opts In” with respect to any such
brand or line, then such brand or line shall be taken into account for purposes
of calculating EBITDA and/or Net Sales hereunder.  If Seller “Opts
Out” with respect to any such brand or line, then such brand or line shall not
be taken into account for purposes of calculating EBITDA and/or Net Sales
hereunder.  For the avoidance of doubt, such election by Seller with
respect to any brand or line shall be deemed final, binding and conclusive and
Seller shall not have the right to change such election at any time
thereafter.  Notwithstanding the foregoing, Purchaser shall have the
right to use all Company IP Rights (as defined in the Stock Purchase Agreement)
in the design, marketing, distribution or sale of such brand or
line.

     

    (d)   Seller
and the appropriate designees of Purchaser shall consult regularly (but in any
event at least quarterly) with each other to mutually agree on EBITDA and
revenue goals.

     

    (e)   Purchaser
shall, subject to Purchaser’s then existing policies, practices and procedures
consistently applied to the Company and to all domestic subsidiaries or
divisions of Purchaser, consult with Seller with respect to the
following:  (i) the determination of the compensation and benefits
payable to the Company’s employees, (ii) the strategic direction and budget of
the Company, (iii) accepting new customers and terminating existing customers,
(iv) hiring, promoting or terminating employees of the Company or transferring
Company employees from or to Purchaser or one of its Affiliates, (v) designing,
selling, marketing or otherwise distributing products to historical and
prospective customers of the Company, and (vi) terminating existing suppliers or
engaging new suppliers; provided that all decisions with respect to the
foregoing shall be in Purchaser’s sole discretion.

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

     

    (f)   In the
event that the employment of Seller is terminated by the Company, including,
without limitation, due to his death or disability, (i) he may be removed from
the Board of Directors and (ii) all decisions regarding the Company shall be at
the sole discretion of Purchaser or its designees and the Company shall
thereafter be operated by Purchaser in a manner determined in its sole
discretion; provided that neither Purchaser nor the Company may take or omit to
take any action that is primarily intended to adversely affect any of the
Contingent Purchase Price Payments under this Agreement.

     

    (g)   Purchaser
shall provide to the Company adequate working capital to facilitate its
operations, as determined by the Board of Directors.

     

    8.   Intercompany Transactions
and Other Activities During Earn-Out Period.  For purposes of
determining any Contingent Purchase Price Payment payable under this Agreement,
Seller and Purchaser agree that until the earlier of the termination of this
Agreement or the end of the 2012 Earn-Out Year, (a) sales of company products to
Purchaser for sale in Purchaser’s retail stores or on Purchaser’s website shall
be priced at cost, and (b) all other transactions between the Company, on the
one hand, and Purchaser or any of its subsidiaries (excluding the Company), on
the other hand (each an “Intercompany Transaction”), shall be at cost or market,
whichever is lower, or shall be adjusted to be upon fair and reasonable terms no
less favorable to either party than would be obtained in a comparable
arm’s-length transaction with an unaffiliated third Person.  The
parties acknowledge and agree that the Services Agreement is or will be on
arm’s-length terms.

     

    9.   Term.  This
Agreement shall be effective on the Closing Date, if one occurs, and shall
continue until the payment of all Contingent Purchase Price Payments pursuant to
Section 4.

     

    10.   Assignment; Binding
Nature.  Neither this Agreement nor any of the rights,
interests or obligations hereunder may be assigned by Seller.  Subject
to the preceding sentence, this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the parties hereto and their respective heirs,
personal representatives, legatees, successors and permitted
assigns.

     

    11.   Amendment.  This
Agreement may be modified or amended only by an instrument in writing, duly
executed by Purchaser, on the one hand, and Seller, on the other
hand.

     

    12.   Notices.  All
notices, demands and communications of any kind which any party hereto may be
required or desires to serve upon another party under the terms of this
Agreement shall be in writing and shall be given by:  (a) personal
service upon such other party; (b) mailing a copy thereof by certified or
registered mail, postage prepaid, with return receipt requested; (c) sending a
copy thereof by Federal Express or equivalent courier service; or (d) sending a
copy thereof by facsimile, in each case addressed as follows:

     

    If to the
Company:

     

     

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    
 

    Big
Buddha, Inc.

    2853
Mission Street

    Santa
Cruz, California 95060

    Attention:  Jeremy
Bassan

    Facsimile:  (831)
421-9805

    


    with
copies to:

    


    Sonnenschein
Nath & Rosenthal LLP

    525
Market Street, 26th
Floor

    San
Francisco, California 94105

    Attention:  Stafford
Matthews, Esq.

    Facsimile
No.: (415) 882-0300

    


    If to
Seller:

    


    Jeremy
Bassan

    208
Woodrow Avenue

    Santa
Cruz, California 95060

    


    with
copies to:

    


    Sonnenschein
Nath & Rosenthal LLP

    525
Market Street, 26th
Floor

    San
Francisco, California 94105

    Attention:  Stafford
Matthews, Esq.

    Facsimile
No.: (415) 882-0300

    


    If to
Purchaser:

    


    Steven
Madden, Ltd.

    52-16
Barnett Ave.

    Long
Island City, New York 11104

    Attention:  Awadhesh
Sinha

    Facsimile:  (718)
446-5599

    


    with
copies to:

    


    Kramer
Levin Naftalis & Frankel LLP

    1177
Avenue of the Americas

    New York,
New York 10036

    United
States of America

    Attention:  James
A. Grayer, Esq.

    Facsimile:  (212)
715-8000

    


    In the
case of service by Federal Express or equivalent courier service or by facsimile
or by personal service, such service shall be deemed complete upon delivery or
transmission, as

     

     

    
      
        
        

      

      
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    applicable.  In
the case of service by mail, such service shall be deemed complete on the fifth
Business Day after mailing.  The addresses and facsimile numbers to
which, and persons to whose attention, notices and demands shall be delivered or
sent may be changed from time to time by notice served as hereinabove provided
by any party upon any other party.

     

    13.   Governing Law;
Jurisdiction.  This Agreement and all the transactions
contem­plated hereby, and all disputes between the parties under or related
to the Agreement or the facts and circumstances leading to its execution,
whether in contract, tort or otherwise, shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York including,
without limitation, Section 5-1401 and 5-1402 of the New York General
Obligations Law and New York Civil Practice Laws and Rules 327.

     

    14.   Negotiated
Agreement.  Purchaser and Seller acknowledge that they have
been advised and represented by counsel in the negotiation, execution and
delivery of this Agreement and accordingly agree that if an ambiguity exists
with respect to any provision of this Agreement, such provision shall not be
construed against any party because such party or its representatives drafted
such provision.

     

    15.   Severability.  If
any provision of this Agreement or the application of any such provision to any
party or circumstances shall be determined by any arbitrator to be invalid or
unenforceable to any extent, the remainder of this Agreement, or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid or unenforceable, shall not be affected thereby,
and each provision hereof shall be enforced to the fullest extent permitted by
law. If the final
determination of an arbitrator declares that any item or provision hereof is
invalid or unenforceable, the parties hereto agree that the arbitrator making
the determination of invalidity or unenforceability shall have the power, and is
hereby directed, to reduce the scope, duration or area of the term or provision,
to delete specific words or phrases and to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so
modified.

     

    16.   Headings.  The
headings in this Agreement are inserted for convenience only and shall not
constitute a part hereof.

     

    17.   Counterparts;
Facsimile.  For the convenience of the parties, any number of
counterparts hereof may be executed, each such executed counterpart shall be
deemed an original, and all such counterparts together shall constitute one and
the same instrument.  Facsimile or electronic transmission of any
signed original counterpart and/or retransmission of any signed facsimile or
electronic transmission shall be deemed the same as the delivery of an
original.

     

    18.   Arbitration.  Except
as otherwise set forth in Section 3(b) hereof, if any dispute or difference of
any kind whatsoever shall arise between the parties to this Agreement (each a
“Disputing Party”) in connection with or arising out of this Agreement, or the
breach, termination or validity thereof (a “Dispute”), then, on the demand of
any Disputing Party, the Dispute shall be finally and exclusively resolved by
arbitration in accordance with the

     

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

     

    Commercial
Arbitration Rules of the AAA (the “Rules”) then in effect, except as modified
herein.  The arbitration shall be held, and the award shall be issued
in, the State of New York.  There shall be one neutral arbitrator
appointed by agreement of the Disputing Parties within thirty (30) days after
receipt by respondent of the demand for arbitration.  If such
arbitrator is not appointed within the time limit provided herein, on the
request of any Disputing Party, an arbitrator shall be appointed by the AAA by
using a list striking and ranking procedure in accordance with the
Rules.  Any arbitrator appointed by the AAA shall be a retired federal
judge or a practicing attorney with no less than fifteen years of experience and
an experienced arbitrator with no less than five completed prior arbitrations
relating to the purchase and sale of a wholesale business.  By
agreeing to arbitration, the Disputing Parties do not intend to deprive any
court of its jurisdiction to issue a pre-arbitral injunction, pre-arbitral
attachment, or other order in aid of arbitration proceedings and the enforcement
of any award.  Without prejudice to such provisional remedies as may
be available under the jurisdiction of a court, the arbitrator shall have full
authority to grant provisional remedies and to direct the Disputing Parties to
request that any court modify or vacate any temporary or preliminary relief
issued by such court, and to award damages for the failure of any Disputing
Party to respect the arbitrator’s orders to that effect.  Any
arbitration proceedings, decisions or awards rendered hereunder and the
validity, effect and interpretation of this arbitration agreement shall be
governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq.  In
arriving at a decision, the arbitrator shall be bound by the terms and
conditions of this Agreement and shall apply the governing law of this Agreement
as designated in Section 13.  The arbitrator is not empowered to award
damages in excess of compensatory damages, and each Disputing Party hereby
irrevocably waives any right to recover punitive, exemplary or similar damages
with respect to any Dispute.  The award shall provide that the fees
and expenses of the arbitration (including the fees of the AAA, the fees and
expenses of the arbitrator and attorneys’ fees of the prevailing Disputing
Party) shall be allocated based on the proportion that the aggregate amount of
disputed items submitted to arbitration that are unsuccessfully disputed by each
Disputed Party (as finally determined by the arbitrator) bears to the total
amount of all disputed items submitted to arbitration.  The award,
which shall be in writing and shall, on the written request of any Disputing
Party, state the findings of fact and conclusions of law upon which it is based,
shall be final and binding on the Disputing Parties and shall be the sole and
the exclusive remedy between the Disputing Parties regarding any claims,
counterclaims, issues or accountings presented to the arbitral
tribunal.  Judgment upon any award may be entered in any court of
competent jurisdiction located in the State of New York, and the parties hereby
consent to the exclusive jurisdiction of the courts located in the State of New
York.  All arbitration proceedings and resulting arbitration awards
shall be strictly confidential and shall not be disclosed by the Disputing
Parties to anyone, except to the extent necessary to disclose to compel
arbitration, enforce any arbitration award or for accounting and financial
reporting or to comply with reporting obligations under applicable securities
laws and regulations.

     

    19.   Entire
Agreement.  This Agreement, the Stock Purchase Agreement, the
Services Agreement and the Employment Agreement, including all schedules and
exhibits hereto and thereto, contain the entire understanding of the parties
hereto with respect to the subject matter hereof.

     

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    15

    
 

    
      
         


      

      
         


        
          

        

      

      
         


      

    


     

    IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
first above written.

    


                   COMPANY:

    


                    BIG BUDDHA,
INC.

    


    


                    By: /s/ Jeremy
Bassan                                 


                   Name: Jeremy Bassan

                   Title:   President

    


    


                   PURCHASER:

    


                    STEVEN MADDEN,
LTD.

    


    


                    By: /s/ Edward
Rosenfeld                           


                   Name: Edward
Rosenfeld

                   Title:   Chief
Executive Officer

    


    


                   SELLER:

    


    


                   /s/ Jeremy
Bassan                                         


                    Jeremy
Bassan