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EXHIBIT 2.1
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ASSET PURCHASE AGREEMENT
by
and among
EQUITY MARKETING, INC.,
a Delaware corporation
as "Parent"
JOHNSON GROSSFIELD, INC.,
a Delaware corporation
as "Acquiror",
JOHNSON GROSSFIELD, INC.,
a Minnesota corporation
as "Seller", and
MARC GROSSFIELD
and
THOM JOHNSON
as "Shareholders"
Dated: January 16, 2004
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TABLE OF CONTENTS
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ARTICLE I.
DEFINITIONS..........................................................................
1
1.1.
Defined
Terms...............................................................
1
1.2.
Other Defined
Terms.........................................................
12
ARTICLE II. PURCHASE AND SALE OF ASSETS;
PURCHASE PRICE.........................................
13
2.1.
Transfer of
Assets..........................................................
13
2.2.
Assumption of
Liabilities...................................................
13
2.3.
Nonassumption of
Liabilities................................................
14
2.4.
Purchase
Price..............................................................
14
2.5.
Pre-Closing Balance
Sheet...................................................
15
2.6.
Post-Closing
Adjustment.....................................................
15
2.7.
Earnout.....................................................................
16
2.8.
Transfer
Taxes..............................................................
20
ARTICLE III.
CLOSING............................................................................
20
3.1.
Closing.....................................................................
20
3.2.
Deliveries at
Closing.......................................................
21
3.3.
Other Closing
Transactions..................................................
22
3.4.
Other
Deliveries............................................................
22
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
OF THE SELLER PARTIES................................ 23
4.1.
Organization of
Seller......................................................
23
4.2.
Subsidiaries................................................................
23
4.3.
Authorization...............................................................
23
4.4.
Consents and
Approvals......................................................
24
4.5.
Absence of Certain Changes or
Events........................................ 24
4.6.
Facilities..................................................................
25
4.7.
Assets......................................................................
26
4.8.
Contracts and
Commitments...................................................
26
4.9.
Permits.....................................................................
29
4.10. No
Conflict or
Violation....................................................
29
4.11. Financial
Statements........................................................
29
4.12.
Undisclosed
Liabilities.....................................................
30
4.13. Books and
Records...........................................................
30
4.14.
Litigation..................................................................
30
4.15. Labor
Matters...............................................................
30
4.16. Compliance
with Law.........................................................
31
4.17. No
Brokers..................................................................
31
4.18. No Other
Agreements to Sell the Assets or Capital Stock of Seller...........
31
4.19.
Intellectual
Property.......................................................
32
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4.20. Employee
Matters............................................................
33
4.21.
Transactions with Certain
Persons........................................... 35
4.22. Certain
Payments............................................................
35
4.23. Tax
Matters.................................................................
36
4.24.
Insurance...................................................................
36
4.25. Accounts
Receivable.........................................................
37
4.26. Other
Current
Assets........................................................
37
4.27. Customers
and Suppliers.....................................................
38
4.28. Compliance
with Environmental Laws..........................................
38
4.29.
Billings....................................................................
38
4.30. Banking
Relationships.......................................................
39
4.31. Investment
Intent...........................................................
39
ARTICLE V. REPRESENTATIONS AND WARRANTIES
OF THE ACQUIROR PARTIES............................... 40
5.1.
Organization of the Acquiror
Parties........................................ 40
5.2.
Authorization...............................................................
40
5.3. No
Conflict or
Violation....................................................
41
5.4. SEC
Filings.................................................................
41
ARTICLE VI. COVENANTS OF THE SELLER PARTIES
AND THE ACQUIROR PARTIES............................ 42
6.1.
Confidentiality and
Non-Competition.........................................
42
6.2.
Further
Assurances..........................................................
44
6.3. No
Solicitation.............................................................
44
6.4.
Notification of Certain
Matters............................................. 45
6.5.
Investigation by the Acquiror
Parties....................................... 45
6.6.
Conduct of
Business.........................................................
45
6.7.
Employee
Matters............................................................
46
6.8.
Corporate Name of
Seller....................................................
46
6.9.
Interim Services and Facilities
Agreement................................... 47
6.10. Additional
Holdback Escrow..................................................
47
ARTICLE VII. CONSENTS TO
ASSIGNMENT.............................................................
47
7.1.
Consents to
Assignment......................................................
47
ARTICLE VIII. CONDITIONS TO THE SELLER
pARTIES' OBLIGATIONS.....................................
48
8.1.
Representations, Warranties and
Covenants................................... 48
8.2. No
Actions or Court
Orders..................................................
48
8.3.
Authorization...............................................................
48
8.4.
Ancillary
Agreements........................................................
48
8.5.
Other
Deliveries............................................................
48
ARTICLE IX. CONDITIONS TO THE ACQUIROR
PARTIES' OBLIGATIONS.....................................
48
9.1.
Representations, Warranties and
Covenants................................... 49
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9.2.
Consents; Regulatory Compliance and
Approvals............................... 49
9.3. No
Actions or Court
Orders..................................................
49
9.4.
Material
Changes............................................................
49
9.5.
Other
Deliveries............................................................
49
ARTICLE X. ACTIONS BY THE SELLER PARTIES
AND THE ACQUIROR PARTIES AFTER THE CLOSING.............
49
10.1.
Books and
Records; Tax Matters..............................................
49
10.2. Survival
of Representations, Etc.
......................................... 50
10.3.
Indemnification.............................................................
50
10.4.
Escrow......................................................................
53
10.5. Bulk
Sales..................................................................
53
10.6.
Taxes.......................................................................
53
10.7.
Insurance...................................................................
54
10.8. Exclusive
Remedy............................................................
54
10.9. Right of
Offset.............................................................
54
ARTICLE XI.
TERMINATION.........................................................................
54
11.1.
Termination.................................................................
54
11.2. Procedure
and Effect of Termination.........................................
55
ARTICLE XII.
MISCELLANEOUS......................................................................
55
12.1.
Assignment..................................................................
55
12.2.
Notices.....................................................................
55
12.3. Choice of
Law...............................................................
56
12.4. Entire
Agreement; Amendments and
Waivers.................................... 56
12.5.
Counterparts................................................................
57
12.6.
Expenses....................................................................
57
12.7.
Severability................................................................
57
12.8.
Headings....................................................................
57
12.9.
Publicity...................................................................
57
12.10. Cumulative
Remedies.........................................................
57
12.11. No Third-Party
Beneficiaries................................................
57
12.12. Arbitration;
Process........................................................
57
12.13. WAIVER OF JURY
TRIAL........................................................
58
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LIST OF EXHIBITS
Exhibit A--List of Excluded Claims, Causes of Action and Other
Rights
Exhibit B--Assignment and Assumption of Contract Rights
Exhibit C--Assignment of Intellectual Property
Exhibit D--Bill of Sale
Exhibit E--Escrow Indemnification Agreement
Exhibit F--List of Excluded Assets
Exhibit G--Interim Services and Facilities Agreement
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Exhibit H--Registration Rights Agreement
Exhibit I--Opinion of Seller's Counsel
Exhibit J--General Release
Exhibit K--Employment Agreement
LIST OF SCHEDULES
Schedule 2.7--Inter-Division Commissions
Schedule 4.1--Foreign Qualifications
Schedule 4.2--Subsidiaries
Schedule 4.4--Consents and Approvals
Schedule 4.5--Absence of Certain Changes or Events
Schedule 4.7--Assets
Schedule 4.8--Contracts and Commitments
Schedule 4.9--Permits
Schedule 4.10--Conflict or Violations
Schedule 4.11--Financial Statements
Schedule 4.12--Undisclosed Liabilities
Schedule 4.14--Litigation
Schedule 4.15(b)--Employment Losses
Schedule 4.17--Brokers
Schedule 4.19(a)--Patents, Trademarks and Copyrights
Schedule 4.19(b)--License, Sublicense and Royalty Agreements
Schedule 4.20--Seller Employee Plans
Schedule 4.21--Transactions with Certain Persons
Schedule 4.23(c)--Tax Deficiencies
Schedule 4.24--Insurance
Schedule 4.26--Other Current Assets
Schedule 4.27--Customers and Suppliers
Schedule 4.28--Environmental
Schedule 4.29--Billings
Schedule 4.30--Banking Relationships
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ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of
January 16, 2004 (the "Execution Date"), is
entered into by and among EQUITY
MARKETING, INC., a Delaware corporation
("Parent"), JOHNSON GROSSFIELD, INC., a
Delaware corporation wholly owned by Parent
(individually "Acquiror" and
together with Parent, collectively, the
"Acquiror Parties"), JOHNSON GROSSFIELD,
INC., a Minnesota corporation ("Seller"),
MARC GROSSFIELD, an individual
resident of Minnesota ("Grossfield"), and
THOM JOHNSON, an individual resident
of Minnesota (individually "Johnson" and
together with Grossfield, collectively,
"Shareholders"). The Shareholders and
Seller are sometimes collectively referred
to herein as the "Seller Parties".
RECITALS
WHEREAS, Seller wishes to sell to Acquiror, and Acquiror
wishes to purchase from Seller, the Assets
(as defined below) at the price and
under the specified terms and conditions as
set forth herein;
WHEREAS,
as all of the shareholders of Seller, the
Shareholders will benefit from the sale of
the Assets to Acquiror.
AGREEMENT
NOW THEREFORE, in consideration of the respective covenants
and promises contained herein and for other
good and valuable consideration, the
receipt and adequacy of which is hereby
acknowledged, the parties hereto agree
as follows:
ARTICLE I.
DEFINITIONS
1.1.
Defined Terms. As used herein, the terms below shall have the
following meanings. Any such term, unless
the context otherwise requires, may be
used in the singular or plural, depending
upon the reference.
"Accounts Receivable" shall mean all accounts and notes
receivable (whether current or noncurrent)
of Seller pertaining to the Business,
including trade accounts receivable
(including accounts receivable for any
products shipped prior to the Closing Date
but not invoiced) outstanding as of
the Closing Date, and any other rights of
Seller to receive payments pertaining
to the Business as of the Closing Date in
respect of goods shipped, products
sold or services rendered prior to the
Closing Date.
"Action" shall mean any action, complaint claim, suit,
litigation, proceeding, labor dispute,
arbitral action, governmental audit,
inquiry, criminal prosecution, civil or
criminal investigation or unfair labor
practice charge or complaint.
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"Affiliate" shall mean, when used with reference to any
specified Person, any other Person directly
or indirectly controlling,
controlled by, or under direct or indirect
common control with, such specified
Person. For the purposes of this
definition, "control," when used with respect
to any specified Person, means the power to
direct or cause the direction of
management or policies of such Person,
directly or indirectly, whether through
the ownership of voting securities, by
contract or otherwise; and the terms
"controlling" and "controlled" have
meanings correlative of the foregoing.
"Allocations" shall mean Corporate Services Allocation,
Operations and Sourcing Fee, and Rent and
Facilities Cost Allocation,
collectively.
"Assets" shall mean all of the right, title and interest of
Seller in and to the business, properties,
assets and rights of any kind,
whether tangible or intangible, real or
personal and constituting, or used in
connection with, or related to, the
Business, including, without limitation, all
of Seller's right, title and interest in
the following:
(a) all
Accounts Receivable (whether current or
noncurrent);
(b) all
Contract Rights, to the extent transferable;
(c) all
Personal Property Leases;
(d) all
Personal Property Leasehold Estates;
(e) all
Fixtures and Equipment;
(f) all
Inventory;
(g) all Books
and Records;
(h) all
Intellectual Property of Seller pertaining to the
Business;
(i) all
Permits;
(j) all
available supplies, sales literature, promotional
literature, customer, supplier and
distributor lists, art work, display units,
telephone and fax numbers and purchasing
records related to the Business;
(k) all rights
under or pursuant to all warranties,
representations and guarantees made by
suppliers in connection with the Assets
or services furnished to Seller pertaining
to the Business or affecting the
Assets, to the extent such warranties,
representations and guarantees are
assignable;
(l) all
refunds, deposits, prepayments and prepaid
expenses of Seller pertaining to the
Business; and
(m) all
claims, causes of action, choses in action,
rights of recovery and rights of set-off of
any kind, against any person or
entity pertaining to the Business,
including without
2
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limitation any liens, security interests,
pledges or other rights to payment or
to enforce payment in connection with
products delivered by Seller on or prior
to the Closing Date other than those set
forth on Exhibit A attached hereto;
but excluding therefrom (in each case) the
Excluded Assets.
"Assignment and Assumption of Contract Rights" shall mean the
Assignment and Assumption of Contract
Rights, substantially in the form attached
hereto as Exhibit B to be entered into at
the Closing by and between Seller and
Acquiror.
"Assignment of Intellectual Property" shall mean the
Assignment of Intellectual Property Rights,
substantially in the form attached
hereto as Exhibit C, to be executed at the
Closing by Seller in favor of
Acquiror.
"Balance Sheet" shall mean the reviewed balance sheet of
Seller at December 31, 2002, together with
the notes thereto.
"Balance Sheet Date" shall mean December 31, 2002.
"Balance Sheet Liabilities" shall mean the Assumed Liabilities
to be set forth on the Pre-Closing Balance
Sheet and the Closing Balance Sheet.
"Base EBITDA" shall mean One Million One Hundred Sixty-One
Thousand Dollars ($1,161,000).
"Benefit Arrangement" shall mean any employment, consulting,
severance or other similar contract,
arrangement or policy and each plan,
arrangement (written or oral), program,
agreement or commitment providing for
insurance coverage (including, without
limitation, any self-insured
arrangements), workers' compensation,
disability benefits, supplemental
unemployment benefits, vacation benefits,
retirement benefits, life, health,
disability or accident benefits (including,
without limitation, any "voluntary
employees' beneficiary association" as
defined in Section 501(c)(9) of the Code
providing for the same or other benefits)
or for deferred compensation,
profit-sharing bonuses, stock options,
stock appreciation rights, stock
purchases or other forms of incentive
compensation or post-retirement insurance,
compensation or benefits which is not a
Welfare Plan, Pension Plan or
Multiemployer Plan.
"Bill of Sale" shall mean the Bill of Sale, substantially in
the form attached hereto as Exhibit D, to
be executed at the Closing by Seller
in favor of Acquiror.
"Books and Records" shall mean all business records, tangible
data, documents, management information
systems (including related computer
software), files, customer lists, supplier
lists, blueprints, specifications,
designs, drawings, plans, operation or
maintenance manuals, bids, personnel
records, invoices, sales literature, all
Tax Returns and all worksheets, notes,
files or documents related thereto, and all
other books and records maintained
by Seller pertaining to the Business.
3
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"Business" shall mean any business of Seller, including
without limitation, Seller's business
activities related to premium fulfillment
and program management and custom design
and manufacturing of promotional toys,
premiums and other items, but excluding
Seller's media planning and media buying
business (the "Cable Media Division") or
Seller's strategic planning and
creative promotion business (the "Strategic
and Creative Division").
"Business Day" shall mean a day other than Saturday, Sunday or
any day on which banks located in the State
of California are authorized or
obligated to close.
"Closing Net Working Capital" shall mean Current Assets minus
Balance Sheet Liabilities, in each case, as
of the Closing Date.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Contract" shall mean any agreement, contract, note, loan,
evidence of indebtedness, purchase order,
letter of credit, indenture, security
or pledge agreement, franchise agreement,
undertaking, practice, covenant not to
compete, employment agreement, license,
instrument, obligation or commitment to
which Seller is a party or is bound,
whether oral or written, related to the
Business but excluding all Personal
Property Leases and Facility Leases.
"Contract Rights" shall mean all of Seller's rights and
obligations under the Contracts and
Personal Property Leases identified on
Schedule 4.8 as "Assumed Contracts" or
"Assumed Leases" and under any Contracts
or Personal Property Leases not so listed
which Acquiror, in its sole
discretion, elects to accept and
assume.
"Corporate Services Allocation" shall mean a cost allocation
for the value of the financial, legal and
other services provided at the
corporate headquarters (i.e. Parent) level
to the Business. The Corporate
Services Allocation shall consist of (i)
the actual direct costs incurred at the
corporate headquarters level on behalf of
the Business (e.g., dedicated finance
personnel, outside counsel fees, regulatory
filing fees, and other direct costs
mutually agreed by Grossfield and Parent)
and (ii) an allocation of indirect
costs for the value of services provided at
the corporate headquarters level
equal to one percent (1%) of the net sales
of the Business in excess of 2003 net
sales (calculated in accordance with GAAP
consistently applied) plus $2,000,000.
(For example, if net sales of the Business
in 2003 are $16,000,000 and net sales
in 2004 are $19,000,000, the Corporate
Services Allocation for 2004 would be
direct costs plus $10,000.)
"Court Order" shall mean any judgment, decision, consent
decree, injunction, ruling or order of any
federal, state or local court or
governmental agency, department or
authority that is binding on any person or
its property under applicable law.
"Current Assets" shall mean the current assets (excluding
intercompany receivables of Seller or the
Business) of the Business (to the
extent included in the Assets) determined
in accordance with GAAP.
"Current
Liabilities" shall mean the current liabilities of
the Business incurred in the ordinary
course of business determined in
accordance with GAAP and excluding any (i)
liabilities (including accrued
liabilities) for Taxes of the Seller
Parties, (ii) liabilities to the
Shareholders, including any liabilities
that may arise as a result of the
consummation of the
4
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transactions contemplated by this
Agreement, (iii) liabilities to any Person
that may arise as a result of the
consummation of the transactions contemplated
by this Agreement, (iv) severance
liabilities, (v) indebtedness for borrowed
money, and (vi) Excluded Liabilities.
"Default" shall mean (a) a breach of or default under any
Contract or Lease, (b) the occurrence of an
event that with the passage of time
or the giving of notice or both would
constitute a breach of or default under
any Contract or Lease, or (c) the
occurrence of an event that with or without
the passage of time or the giving of notice
or both would give rise to a right
of termination, renegotiation or
acceleration under any Contract or Lease.
"Disclosure Schedule" shall mean a schedule executed and
delivered by the Seller Parties to Acquiror
as of the date hereof which sets
forth the exceptions to the representations
and warranties contained in Article
IV hereof and certain other information
called for by this Agreement. Unless
otherwise specified, each reference in this
Agreement to any numbered schedule
is a reference to that numbered schedule
which is included in the Disclosure
Schedule.
"EBITDA" shall mean (a) with respect to the year 2004, the
actual earnings before interest, taxes,
depreciation and amortization of the
Business for the period from the Closing
Date until December 31, 2004, derived
from financial statements prepared in
accordance with GAAP, plus the 2004 Pro
Forma Adjustment, less Allocations and plus
Inter-Division Commissions, or (b)
with respect to the years 2005, 2006, 2007
and 2008,the actual earnings before
interest, taxes, depreciation and
amortization of the Business, derived from
financial statements prepared in accordance
with GAAP, less Allocations and plus
Inter-Division Commissions.
"EBITDA Threshold" shall mean One Million Four Hundred Eleven
Thousand Dollars ($1,411,000).
"Employee Plans" shall mean all Benefit Arrangements,
Multiemployer Plans, Pension Plans and
Welfare Plans which are, or within the
past six years were, sponsored, maintained,
contributed to or required to be
contributed to by Seller or any of its
ERISA Affiliates or under which Seller or
any of its ERISA Affiliates may incur any
liability.
"Encumbrance" shall mean any claim (as defined in Section
101(5) of the Bankruptcy Code), lien,
pledge, option, charge, easement, security
interest, deed of trust, mortgage,
right-of-way, encroachment, building or use
restriction, conditional sales agreement,
encumbrance or other right of third
parties, whether voluntarily incurred or
arising by operation of law, and
includes, without limitation, any agreement
to give any of the foregoing in the
future, and any contingent sale or other
title retention agreement or lease in
the nature thereof.
"Environmental Laws" shall mean all applicable federal, state,
or local laws, statutes, or regulations,
which regulate or relate to the
protection or clean up of the environment;
the use, treatment, storage,
transportation, handling, disposal or
release of hazardous substances, or the
health and safety of persons or
property.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
5
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"ERISA Affiliate" shall mean, with respect to any Person, any
entity which is (or at any relevant time
was) a member of a "controlled group of
corporations" with, under "common control"
with, or a member of an "affiliated
service group" with, such Person as defined
in Section 414(b), (c), (m) or (o)
of the Code, but only with respect to such
time that such entity was an ERISA
Affiliate.
"Escrow Agent" shall mean a bank or other institution
reasonably acceptable to Acquiror and
Seller to be designated by Acquiror and
Seller prior to the Closing.
"Escrow Indemnification Agreement" shall mean that certain
Escrow Indemnification Agreement, to be
entered into at the Closing pursuant to
Section 10.4 hereof, by and among the
Acquiror Parties, the Seller Parties and
the Escrow Agent, substantially in the form
attached hereto as Exhibit E.
"Estimated Closing Net Working Capital" shall mean Current
Assets minus Balance Sheet Liabilities, in
each case as set forth on the
Pre-Closing Balance Sheet.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations
promulgated thereunder.
"Excluded Assets" shall mean the following assets of Seller
which are not to be acquired by Acquiror
hereunder:
(a) all cash
and cash equivalents;
(b) all
Permits, to the extent not transferable;
(c) all
claims, causes of action, choses in action,
rights of recovery and rights of set-off of
any kind against any Person arising
out of or relating to the Assets to the
extent related to the Excluded
Liabilities;
(d) all
obligations of the Shareholders or their
Affiliates to Seller; and
(e) such
assets set forth on Exhibit F attached hereto.
"Excluded Liabilities" shall mean any and all Liabilities of
any of the Seller Parties (including any
Liability to or in respect of any
employee or former employee of Seller or
its ERISA Affiliates, including,
without limitation any Liability under any
employment agreement that is not an
Assumed Contract, whether or not written,
between Seller and any person, and any
Liability under or with respect to any
Employee Plan), other than the Assumed
Liabilities; including, without limitation,
all liabilities and obligations
pertaining to the Cable Media Division or
the Strategic and Creative Division,
all noncurrent Liabilities of Seller, all
Facility Leases of Seller, all
obligations of the Seller to the
Shareholders or their Affiliates and all
intercompany payables of Seller.
"Execution Date Value" shall mean the average closing price
per share of the Parent's Common Stock on
the Nasdaq National Market over the
thirty (30) day period preceding the
Execution Date.
6
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"Facilities" shall mean all plants, offices, manufacturing
facilities, stores, warehouses,
improvements, administration buildings, and all
real property and related facilities of
Seller.
"Facility Leases" shall mean all of the leases of Facilities
listed on Schedule 4.8(a)(xiii).
"Financial
Statements" shall mean the Twelve-Month Financial
Statements and the Interim Financial
Statements.
"Fixtures and Equipment" shall mean all of the furniture,
fixtures, furnishings, machinery,
automobiles, trucks, spare parts, supplies,
equipment, tooling, molds, patterns, dies
and other tangible personal property
owned by Seller which are used in
connection with or related to the Business,
wherever located and including any such
Fixtures and Equipment in the possession
of any of Seller's suppliers, including all
warranty rights with respect
thereto.
"GAAP" shall mean generally accepted accounting principles in
the United States.
"Insurance Policies" shall mean the insurance policies of
Seller listed on Schedule 4.24.
"Intellectual Property" shall mean any and all rights in or
affecting intellectual or industrial
property or other proprietary rights,
existing now or in the future in the United
States or anywhere in the universe.
Intellectual Property includes, without
limitation, any and all rights in, to,
or subsisting in the following:
(a) all issued
patents, reissued or reexamined patents,
revivals of patents, divisions,
continuations and continuations-in-part of
patents, all renewals and extensions
thereof utility models, and certificates of
invention, regardless of country or formal
name;
(b) all
published or unpublished nonprovisional and
provisional patent applications, including
the right to file other or further
applications, reexamination proceedings,
invention disclosures and records of
invention;
(c) all
copyrights, copyrightable works, semiconductor
topography and mask work rights, including,
without limitation, all rights of
authorship, use, publication, reproduction,
distribution, performance,
transformation, moral rights and ownership
of copyrightable works, semiconductor
topography works and mask works, the right
to create derivative works, and all
applications for registration,
registrations, renewals and extensions of
registrations, together with all other
interests accruing by reason of
international copyright, semiconductor
topography and mask work conventions;
(d) all trademarks,
service marks, logos, trade names,
domain names, 1-800, 1-888, 1-877 and other
"vanity" telephone numbers, together
with the goodwill of the business
associated therewith, all applications for
registration and registrations thereof,
renewals thereof, the right to bring
opposition and cancellation proceedings and
any and all rights under the laws of
trade dress;
7
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(e) all
proprietary information and materials, whether or
not patentable or copyrightable, and
whether or not reduced to practice,
including without limitation all
technology, ideas, research and development,
inventions, designs, manufacturing and
operating specifications and processes,
know-how, formulae, customer and supplier
lists, shop rights, designs, drawings,
patterns, trade secrets and technical data,
computer programs, and all hardware,
software and processes; and
(f) all other
intangible assets, properties and rights
(whether or not appropriate steps have been
taken to protect, under applicable
law, such other intangible assets,
properties or rights) including, without
limitation, all claims, causes of action
and rights to sue for past, present and
future infringement or unconsented use of
any of the Intellectual Property, the
right to file applications and obtain
registrations, and all rights arising
therefrom and pertaining thereto and all
products, proceeds and revenues arising
from or relating to any and all of the
foregoing.
"Inter-Division Commissions" shall have the meaning set forth
on Schedule 2.7.
"Interim Balance Sheet" shall mean the reviewed balance sheet
of the Business dated the Interim Balance
Sheet Date.
"Interim Balance Sheet Date" shall mean August 31, 2003.
"Interim Financial Statements" shall mean the Interim Balance
Sheet and the reviewed statements of
operations, changes in stockholders' equity
and cash flow of the Business for the eight
month period ended on the Interim
Balance Sheet Date.
"Interim Services and Facilities Agreement" shall mean the
Interim Facilities and Services Agreement,
substantially in the form attached
hereto as Exhibit G to be entered into at
the Closing by and between Seller and
Acquiror.
"Inventory" shall mean all of Seller's inventory held for
resale pertaining to the Business and all
of Seller's raw materials, unbilled
receivables, deferred costs, work in
process, finished products, wrapping,
supply and packaging items and similar
items pertaining to the Business, in each
case, wherever the same may be located.
"IRS" shall mean the Internal Revenue Service.
"Leasehold Improvements" shall mean all leasehold improvements
situated in or on the Leased Real Property
and owned by Seller.
"Leased Real Property" shall mean all leased property
described in the Facility Leases.
"Liabilities" shall mean any direct or indirect liability,
indebtedness, obligation, commitment,
expense, claim, deficiency, guaranty or
endorsement of or by any Person of any
type, whether accrued, absolute,
contingent, matured, unmatured or other,
and shall include all reserves.
8
<PAGE>
"Material Adverse Effect" or "Material Adverse Change" shall
mean any significant adverse effect or
change in the condition (financial or
other), business, results of operations,
prospects, assets, Liabilities or
operations of the Business, taken as a
whole, or on the ability of the Seller or
the Shareholders to consummate the
transactions contemplated hereby, or any
event or condition which would, with the
passage of time, constitute a "Material
Adverse Effect" or "Material Adverse
Change"; provided, however, that changes or
events (a) resulting from the entry into
this Agreement or the public
announcement thereof, (b) resulting from
conditions specifically affecting the
premium fulfillment, program management and
custom design and manufacturing of
promotional toys and premiums businesses
(excluding any such conditions that
result in material adverse changes or
developments in United States financial
markets (including as a result of the
occurrence of any outbreak or escalation
of national or international hostilities,
acts of terrorism involving the United
States or declaration of a national
emergency or war by the United States), the
material effect of which does not dissipate
within ten (10) Business Days), (c)
the Acquiror Parties have Knowledge of, or
(d) are described on Seller's
disclosure schedule attached hereto shall
not constitute a "Material Adverse
Effect" or a "Material Adverse Change"
hereunder.
"Multiemployer Plan" shall mean any "multiemployer plan," as
defined in Section 3(37) or 4001(a)(3) of
ERISA.
"Operations and Sourcing Fee" shall mean a cost allocation for
the value of operations and sourcing
services provided by an Affiliate to the
Business. The Operations and Sourcing Fee
shall consist of (i) the actual direct
costs incurred at the Affiliate on behalf
of the Business (e.g., dedicated
sourcing personnel in Hong Kong, outside ,
and other direct costs mutually
agreed by Grossfield and Parent) and (ii)
an allocation of indirect costs for
the value of services provided at the
Affiliate level equal to one percent (1%)
of the net sales of the Business in excess
of 2003 net sales (calculated in
accordance with GAAP consistently applied)
plus $2,000,000. (For example, if net
sales of the Business in 2003 are
$16,000,000 and net sales in 2004 are
$19,000,000, the Operations and Sourcing
Fee for 2004 would be direct costs plus
$10,000.)
"ordinary course of business" or "ordinary course" or any
similar phrase shall mean the ordinary
course of the Business and consistent
with Seller's past practice.
"Organizational Documents" shall mean (a) the articles or
certificate of incorporation, all
certificates of determination and designation,
and the bylaws of a corporation; (b) the
partnership agreement and any statement
of partnership of a general partnership;
(c) the limited partnership agreement
and the certificate or articles of limited
partnership of a limited partnership;
(d) the operating agreement, limited
liability company agreement and the
certificate or articles of organization or
formation of a limited liability
company; (e) any charter or similar
document adopted or filed in connection with
the creation, formation or organization of
any other Person; and (f) any
amendment to any of the foregoing.
"Owned Real Property" shall mean all real property owned in
fee by Seller, including, without
limitation, all rights, easements and
privileges appertaining or relating
thereto, all buildings, fixtures, and
improvements located thereon and all
Facilities thereon, if any.
9
<PAGE>
"Parent's Common Stock" shall mean the common stock, $.001 par
value, of Equity Marketing, Inc.
"" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean any "employee pension benefit plan"
as defined in Section 3(2) of ERISA (other
than a Multiemployer Plan).
"Permits" shall mean all material licenses, permits,
franchises, approvals, authorizations,
consents or orders of, or filings with,
any governmental authority, whether
foreign, federal, state or local, or any
other person, necessary or desirable for
the past, present or anticipated
conduct of, or relating to the operation of
the Business by Seller.
"Permitted Encumbrances" shall mean the Encumbrances set forth
in Schedule 4.7.
"Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited
partnership, limited liability
company, joint venture, estate, trust,
association, organization, labor union,
or other entity or governmental body.
"Personal Property Leasehold Estates" shall mean all of
Seller's rights and obligations as lessee
under the Personal Property Leases.
"Personal Property Leases" shall mean all of the existing
leases with respect to the personal
property of Seller listed on Schedule
4.8(a)(xiv) and leases with respect to the
personal property of Seller which are
not required to be listed on Schedule
4.8(a)(xiv).
"Registration Rights Agreement" shall mean the Registration
Rights Agreement in substantially the form
attached hereto as Exhibit H to be
entered into at the Closing by and between
the Seller and Parent.
"Regulations" shall mean any laws, statutes, ordinances,
regulations, rules, notice requirements,
court decisions, agency guidelines,
principles of law and orders of any
foreign, federal, state or local government
and any other governmental department or
agency, including, without limitation,
Environmental Laws, energy, motor vehicle
safety, public utility, zoning,
building and health codes, occupational
safety and health and laws respecting
employment practices, employee
documentation, terms and conditions of employment
and wages and hours.
"Rent and Facilities Cost Allocation" shall mean a cost
allocation for the fair value of corporate
facilities occupied or used by the
Business (e.g., dedicated use of a
corporate warehouse facility).
"Representative" shall mean any officer, director, principal,
attorney, agent, employee or other
representative.
"Seller Employee Plan" shall mean any Employee Plan in which
any employee, former employee, director, or
former director of Seller or its
subsidiaries participates, has
participated, or is eligible to participate on
the Closing Date.
10
<PAGE>
"Seller Parties' Knowledge" or "Knowledge of the Seller
Parties" or "Seller's Knowledge" shall mean
the Knowledge of any of Seller,
Grossfield or Johnson, in each case,
following due inquiry, including due
inquiry of Michael Jacobson. "Knowledge"
shall mean (a) in the case of a natural
Person, the actual knowledge of such Person
or what such Person reasonably
should have known if such Person used due
care in the performance of his or her
duties or could be expected to discover or
otherwise become aware of in the
course of conducting a reasonably
comprehensive investigation regarding the
accuracy of any representation or warranty
contained in this Agreement, and (b)
in the case of any other Person, the actual
knowledge after reasonable inquiry,
or what should have been known if due care
were used, by the officers, managers,
general partner or other natural Person
fulfilling similar duties on behalf of
or with respect to such Person.
"Subsidiary" shall mean (a) any corporation in an unbroken
chain of corporations beginning with Seller
if each of the corporations other
than the last corporation in the unbroken
chain then owns stock possessing fifty
percent (50%) or more of the total combined
voting power of all classes of stock
in one of the other corporations in such
chain, (b) any partnership in which
Seller is a general partner, or (c) any
partnership in which Seller possesses a
fifty percent (50%) or greater interest in
the total capital or total income of
such partnership.
"Tax" shall mean (a) any net income, alternative or add-on
minimum tax, gross income, gross receipts,
sales, use, ad valorem, value added,
transfer, franchise, profits, license,
registration, recording, documentary,
conveyancing, gains, withholding, payroll,
employment, excise, severance, stamp,
occupation, premium, property,
environmental or windfall profit tax, custom duty
or other tax, governmental fee or other
like assessment or charge of any kind
whatsoever, together with any interest,
penalty, addition to tax or additional
amount imposed by any governmental
authority responsible for the imposition of
any such tax (United States or foreign),
(b) liability for the payment of any
amount described in clause (a) as a result
of being or having been a member of
an affiliated, consolidated, combined or
unitary group, and (c) liability for
the payment of any amounts of the type
described in clause (a) as a result of
being party to any agreement or any express
or implied obligation to indemnify
any other Person.
"Taxpayer" shall mean (a) the Shareholders, (b) Seller and (c)
each member of any group with respect to
which the Shareholders or Seller files
or has filed a consolidated, combined or
unitary Tax Return.
"Tax Return" shall mean a report, return or other information
required to be supplied to a governmental
agency with respect to Taxes,
including, where permitted or required,
combined or consolidated returns for any
group of entities that includes Seller.
"Twelve-Month Financial Statements" shall mean the reviewed
balance sheet and the reviewed statements
of operations, changes in
stockholders' equity and cash flow of
Seller for the twelve month period ended
on the Balance Sheet Date.
"Welfare Plan" shall mean any "employee welfare benefit plan"
as defined in Section 3(1) of ERISA.
11
<PAGE>
"2004 Pro
Forma Adjustment" shall mean the actual earnings
before interest, taxes, depreciation and
amortization of the Business for the
period from January 1, 2004 until the
Closing Date, derived from the 2004
Pre-Closing Interim Statement.
1.2.
Other Defined Terms. The following terms shall have the
meanings defined for such terms in the
Sections set forth below:
<TABLE>
<CAPTION>
Term
Section
----
-------
<S>
<C>
Acquiror Indemnitees
10.3(a)
Additional Contracts
2.2(a)
Additional Holdback
6.10
Adjustment Amount
2.6(b)
Ancillary Agreements
4.3
Assumed Contracts
2.2(a)
Assumed Leases
2.2(a)
Assumed Liabilities
2.2(a)
Business Financial Statements
2.7(a)
Claim
10.3(d)
Claim Notice
10.3(d)
Closing
3.1
Closing Balance Sheet
2.6(a)
Closing Date
3.1
Competitive Activities
6.1(b)
Damages
10.3(a)
Earnout Payments
2.7(a)
Earnout Period
2.7(a)
Employment Agreement
6.7(f)
Escrow Amount
2.4(d)
Holdback Amount
2.4(c)
Indemnification Basket
10.3(g)
Independent Accountant
2.7(b)
Notifying Party
6.4
Parent SEC Reports
5.4
Payback Mechanism
6.10
Pre-Closing Balance Sheet
2.5(a)
Pre-Closing Tax Period
10.5(a)
Post-Closing Tax Period
10.5(a)
Proposed Acquisition Transaction
6.3
Purchase Price
2.4(a)
Purchase Price Allocation Schedule
2.4(b)
Rehired Employee
6.7(a)
Release Trigger
6.10
Restricted Person
6.1(a)
SEC
5.4
Seller Indemnitees
10.3(b)
Seller's Account
2.4(a)
</TABLE>
12
<PAGE>
<TABLE>
<S>
<C>
Shortfall Amount
2.6(b)
WARN Act
4.15(b)
2004 Pre-Closing Interim Statement
2.7(f)
</TABLE>
ARTICLE II.
PURCHASE AND SALE OF ASSETS; PURCHASE PRICE
2.1.
Transfer of Assets. Upon the terms and subject to the
conditions contained herein, on the Closing
Date, Seller hereby agrees to sell,
convey, transfer, assign and deliver to
Acquiror, and Acquiror hereby agrees to
purchase, acquire and accept from Seller,
the Assets, free and clear of all
Encumbrances other than Permitted
Encumbrances.
2.2.
Assumption of Liabilities.
(a) Upon the
terms and subject to the conditions
contained herein, at the Closing, Acquiror
agrees to assume (i) all Liabilities
accruing, arising out of, or relating to
periods, events or occurrences
happening after the Closing Date under (a)
the Contracts, Permits, Facility
Lease and Personal Property Leases
identified on Schedule 4.8 as "Assumed
Contracts" or "Assumed Leases"; (b) any
Contract or Lease pertaining to the
Business not required to be set forth on
Schedule 4.8 which (1) is commercially
reasonable as to its terms binding Seller,
(2) is terminable by Seller within
twelve (12) months of Closing, without
adverse recourse, (3) is reflected in the
Books and Records, (4) was entered into as
a result of an arms' length
negotiation in the ordinary course of
business and (5) would not, together with
other such Contracts described in clause
(b), create a Material Adverse Effect;
and (c) under any other Contracts or
Personal Property Leases that are not
Assumed Contracts pursuant to the foregoing
clauses (a) or (b) which Acquiror
elects to accept and assume in its sole
discretion (the "Additional Contracts"),
excluding in each case any Liability for
any Default under any Contract or Lease
occurring on or prior to the Closing Date,
and excluding, in each case, any
intercompany Contracts of Seller or the
Business, (ii) all Current Liabilities,
and (iii) liability for real property,
personal property and similar ad valorem
taxes specifically apportioned to Acquiror
pursuant to Section 10.7 hereof
(collectively, the "Assumed
Liabilities").
(b) If Seller
discovers an Additional Contract, it shall
promptly give the Acquiror Parties written
notice of such Additional Contract
and a copy of such Additional Contract, and
the Acquiror Parties shall have
fifteen (15) days after the date such
notice is received to notify Seller
whether Acquiror elects to assume such
Additional Contract in its sole
discretion. If the Acquiror Parties fail to
notify Seller of Acquiror's
intention to assume such Additional
Contract during such fifteen (15) day
period, Seller may assume that Acquiror
does not intend to assume such
Additional Contract. If the Acquiror
Parties discover an Additional Contract,
Acquiror may assume such Additional
Contract in its sole discretion by giving
Seller written notice of its intention to
assume such Additional Contract. Any
Additional Contracts which Acquiror elects
to assume pursuant to this Section
2.2(b) shall be deemed Assumed Contracts
for purposes of this Agreement and the
Assignment and Assumption of Contract
Rights.
13
<PAGE>
2.3.
Nonassumption of Liabilities. Notwithstanding any other
provisions of this Agreement, except for
the Assumed Liabilities expressly
specified in Section 2.2 above, Acquiror
shall not assume or otherwise be
responsible for any of the Excluded
Liabilities.
2.4.
Purchase Price.
(a) Upon the
terms and subject to the conditions
contained herein, at the Closing, in
consideration for the transfer of the
Assets pursuant to Section 2.1 of this
Agreement, Acquiror shall pay the
Purchase Price (as defined herein) by
depositing in an account designated by
Seller (which account shall be designated
by Seller in writing at least three
(3) Business Days prior to the Closing)
(the "Seller's Account"): (i) the sum of
Three Million Four Hundred Thousand Dollars
($3,400,000), plus the Estimated
Closing Net Working Capital as set forth in
the calculation accompanying the
Pre-Closing Balance Sheet pursuant to
Section 2.5 (the "Purchase Price"), and
less (ii) the Holdback Amount and the
Escrow Amount. The portion of the Purchase
Price to be deposited in the Seller's
Account at the Closing shall be paid in
cash by wire transfer of immediately
available funds to the Seller's Account.
(b) Seller and
Acquiror agree that as soon as reasonably
practical after the Closing, and prior to
the filing of any Tax Return which
includes information related to the
transactions contemplated by this Agreement,
the Purchase Price and the Assumed
Liabilities shall be allocated among the
Assets in accordance with an allocation
schedule (the "Purchase Price Allocation
Schedule") proposed by Acquiror and
reasonably acceptable to Seller, which shall
be prepared in a manner required by Section
1060 of the Code and other
applicable law and delivered by Acquiror to
Seller no later than forty-five (45)
days after the Closing. In connection with
the Purchase Price Allocation
Schedule, Seller and Acquiror shall discuss
the allocation of the Purchase Price
and attempt in good faith to reach
agreement with respect thereto. Seller and
Acquiror shall prepare mutually acceptable
and substantially identical initial
and supplemental IRS Forms 8594 "Asset
Acquisition Statements Under Section
1060" consistent with the Purchase Price
Allocation Schedule (giving effect to
mutually agreed-upon adjustments to the
allocation set forth on the Purchase
Price Allocation Schedule as a result of
any required adjustments to the
Purchase Price or payment of any Earnout
Payment pursuant to this Article II)
which the parties shall use to report the
transactions contemplated by this
Agreement to the applicable Taxing
authorities.
The consideration paid at Closing (consisting of the Assumed
Liabilities and the portion of the Purchase
Price paid at Closing) shall be
allocated first to the Assets other than
goodwill. If the consideration paid at
Closing exceeds the purchase price
allocated to the Assets other than goodwill,
(i) such excess consideration shall be
allocated to goodwill, and (ii) the
additional consideration paid after
Closing, including the Adjustment Amount (if
it is positive), the excess of the Holdback
Amount, the Escrow Amount, and the
Earnout, shall be allocated to goodwill. If
the consideration paid at Closing is
less than the purchase price allocated to
the Assets other than goodwill, (i)
the consideration paid at Closing shall be
allocated first to current assets,
then to non-current tangible assets, and
finally to non-current intangible
assets (other than goodwill), (ii) the
additional consideration paid after
Closing shall be allocated to the items
described in the immediately preceding
clause (i) in that same order to the extent
of the remaining purchase price
allocated to those items, and (iii) any
remaining additional
14
<PAGE>
consideration paid after Closing shall be
allocated to goodwill. All allocations
of consideration shall be based upon the
purchase price allocation determined
under this Section 2.4(b).
(c) The
"Holdback Amount" shall be an amount equal to Two
Hundred Fifty Thousand Dollars ($250,000)
which Acquiror, at the Closing, shall
hold pending the final determination of the
Adjustment Amount (as defined in
Section 2.6 below). Following the final
determination of the Adjustment Amount,
any remaining Holdback Amount will be
deposited with the Escrow Agent under the
Escrow Indemnification Agreement as
provided in Section 6.10 below.
(d) The
"Escrow Amount" shall be the number of shares of
Parent's Common Stock equal to Five Hundred
Thousand Dollars ($500,000) divided
by the Execution Date Value, rounded up to
the next whole share. At the Closing,
Acquiror shall, pursuant to the Escrow
Indemnification Agreement (as described
in Section 10.4), deliver the shares of
Parent's Common Stock representing the
Escrow Amount to the Escrow Agent.
2.5.
Pre-Closing Balance Sheet. No later than ten (10) days before
the Closing Date, Seller shall prepare and
deliver to Acquiror (a) an unaudited
balance sheet dated the Closing Date (the
"Pre-Closing Balance Sheet"), and (b)
a reasonably detailed calculation of the
Estimated Closing Net Working Capital.
The Pre-Closing Balance Sheet shall be
prepared by Seller's personnel in
accordance with GAAP consistently applied,
and shall fairly in all material
respects present the Current Assets and
Balance Sheet Liabilities of the
Business as of the Closing Date. Seller
shall consult with Acquiror and its
accountants with respect to the preparation
of the Pre-Closing Balance Sheet.
2.6.
Post-Closing Adjustment.
(a) Closing
Balance Sheet. No later than thirty (30)
calendar days following the Closing Date,
Acquiror shall prepare and deliver to
Seller (i) a balance sheet dated the
Closing Date (the "Closing Balance Sheet"),
and (ii) a reasonably detailed calculation
of the Adjustment Amount. The Closing
Balance Sheet shall be prepared in
accordance with GAAP, and shall fairly in all
material respects present the Current
Assets and Balance Sheet Liabilities of
the Business as of the Closing Date. The
Closing Balance Sheet shall be
accompanied by reasonably detailed
schedules indicating a calculation of the
Closing Net Working Capital as set forth on
the Closing Balance Sheet.
(b) Adjustment
Amount. The "Adjustment Amount" shall be
an amount equal to (i) Closing Net Working
Capital, minus (ii) Estimated Closing
Net Working Capital.
(i) If the
Adjustment Amount is a positive
number, then Acquiror shall deposit the
Holdback Amount with the Escrow Agent
pursuant to Section 6.10 hereof and pay to
Seller an amount equal to the
Adjustment Amount.
(ii)
If the Adjustment Amount is a negative
number, the absolute value of which is less
than or equal to the Holdback
Amount, then Acquiror shall retain from the
Holdback Amount an amount equal to
the absolute value of the Adjustment Amount
and shall deposit the balance of the
Holdback Amount with the Escrow Agent
pursuant to Section 6.10 hereof.
15
<PAGE>
(iii) If
the Adjustment Amount is a negative
number, the absolute value of which is
greater than the Holdback Amount,
Acquiror shall retain the Holdback Amount
and Acquiror shall have a right of
offset against both the Escrow Amount and
the Earnout Payments in an amount
equal to the absolute value of the
Adjustment Amount less the Holdback Amount
plus interest on such difference calculated
from the Closing Date at the rate of
five percent (5%) per annum (the "Shortfall
Amount"). Seller Parties' obligation
to pay the Shortfall Amount shall be joint
and several.
(c) Disputed
Adjustment Amount; Payment of Adjustment
Amount. If Acquiror shall disagree with the
Adjustment Amount, it shall notify
Seller of such disagreement in writing
specifying in detail the particulars of
such disagreement within fifteen (15)
Business Days after Acquiror's receipt of
the Closing Balance Sheet. To the extent
that any portion of the Adjustment
Amount due Seller is not in dispute, within
fifteen (15) Business Days after
Acquiror's receipt of the Closing Balance
Sheet, Acquiror shall deposit with
Escrow Agent or pay to Seller that portion
of the Adjustment Amount which is not
in dispute in the manner set forth in
Section 2.6(b).
(d) Resolution
of Disputed Adjustment Amount. Acquiror
and Seller shall use their reasonable
efforts for a period of fifteen (15)
Business Days after Acquiror's delivery of
such notice (or such longer period as
Acquiror and Seller shall mutually agree
upon) to resolve any disagreements
raised by Acquiror with respect to the
calculation of the Adjustment Amount. If,
at the end of such period, Acquiror and
Seller are unable to resolve such
disagreements, Acquiror and Seller shall
jointly select an independent auditor
of recognized national standing to resolve
any remaining disagreements; provided
that Ernst & Young LLP will be the
independent auditor if Acquiror and Seller
cannot agree on the selection of such
independent auditor. The determination by
such independent auditor shall be final,
binding and conclusive on the parties.
Acquiror and Seller shall use their
reasonable efforts to cause the independent
auditor to make its determination within
thirty (30) calendar days of accepting
its selection. Within ten (10) Business
Days after the date of determination of
such independent auditor, Acquiror shall
make any deposits with the Escrow Agent
or payments to Seller required in
accordance with the determination of the
independent auditor. The fees and expenses
of such independent auditor shall be
borne by Acquiror and Seller Parties in
proportion to the aggregate amount of
all disputed items as to which such party's
claim was unsuccessful (i.e., if
there are $100,000 of disputed items and
the independent auditor determines that
Seller's claim prevails with respect to
$25,000 of such disputed items and
Acquiror's claim prevails with respect to
$75,000 of such disputed items, then
Seller Parties would be obligated to pay
seventy five percent (75%) of the fees
and expenses and Acquiror would be
obligated to pay twenty five percent (25%) of
the fees and expenses).
(e) Payment of
Adjustment Amount. All payments made by
Acquiror to Seller pursuant to this Section
2.6, shall be made by wire transfer
of immediately available funds to an
account designated by Seller.
2.7.
Earnout.
(a) In
connection with this Section 2.7, Acquiror shall
deliver to the Seller no later than ninety
(90) calendar days following the end
of each of the first five fiscal years
of
16
<PAGE>
Acquiror following the Closing Date (it
being understood that the first of such
fiscal years shall be the year ending
December 31, 2004) (the "Earnout Period"),
an income statement for the Business (the
"Business Financial Statements"). The
Business Financial Statements shall set
forth the EBITDA attributable to the
Business.
(i) Based upon
the EBITDA of the Business for
the fiscal year 2004 ("2004 EBITDA"),
Acquiror shall pay to Seller:
(A) an amount
equal to one hundred
percent (100%) of the amount by which 2004
EBITDA up to the EBITDA Threshold exceeds
Base EBITDA, subject to a maximum payment of
Two Hundred Fifty Thousand Dollars
($250,000) ("Earnout Payment A-1"), plus
(B) an amount
equal to fifty percent
(50%) of the amount by which 2004 EBITDA
exceeds Base EBITDA plus Two Hundred Fifty
Thousand Dollars ($250,000), subject to a
maximum payment of Six Hundred Fifty
Thousand Dollars ($650,000) ("Earnout
Payment B-1").
(ii)
Based upon the EBITDA of the Business for
the fiscal year 2005 ("2005 EBITDA"),
Acquiror shall pay to Seller:
(A) an amount
equal to one hundred
percent (100%) of the amount by which the
sum of 2004 EBITDA up to the EBITDA
Threshold and 2005 EBITDA up to the EBITDA
Threshold exceeds two (2) times Base EBITDA,
subject to a maximum payment, inclusive of
Earnout Payment A-1, of Five Hundred
Thousand Dollars ($500,000) ("Earnout
Payment A-2"), plus
(B) an amount
equal to fifty percent
(50%) of the amount by which the sum of 2004
EBITDA and 2005 EBITDA exceeds two (2) times
Base EBITDA plus Five Hundred Thousand
Dollars ($500,000), subject to a maximum
payment, inclusive of Earnout Payment B-1,
of One Million Three Hundred Thousand
Dollars ($1,300,000) ("Earnout Payment
B-2").
(iii)
Based upon the EBITDA of the Business for
the fiscal year 2006 ("2006 EBITDA"),
Acquiror shall pay to Seller:
(A) an amount
equal to one hundred
percent (100%) of the amount by which the
sum of 2004 EBITDA up to the EBITDA
Threshold, 2005 EBITDA up to the EBITDA
Threshold
and 2006 EBITDA up to the EBITDA
Threshold exceeds three (3) times Base
EBITDA, subject to a maximum payment,
inclusive of Earnout Payment A-1 and Earnout
Payment A-2, of Seven Hundred Fifty Thousand
Dollars ($750,000) ("Earnout Payment A-3"),
plus
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(B) an amount
equal to fifty percent
(50%) of the amount by which the sum of 2004
EBITDA, 2005 EBITDA and 2006 EBITDA exceeds
three (3) times Base EBITDA plus Seven
Hundred Fifty Thousand Dollars ($750,000),
subject to a maximum payment, inclusive of
Earnout Payment B-1 and Earnout Payment B-2,
of One Million Nine Hundred Fifty Thousand
Dollars ($1,950,000) ("Earnout Payment
B-3").
(iv)
Based upon the EBITDA of the Business for
the fiscal year 2007 ("2007 EBITDA"),
Acquiror shall pay to Seller:
(A) an amount
equal to one hundred
percent (100%) of the amount by which the
sum of 2004 EBITDA up to the EBITDA
Threshold, 2005 EBITDA up to the EBITDA
Threshold, 2006 EBITDA up to the EBITDA
Threshold and 2007 EBITDA up to the EBITDA
Threshold exceeds four (4) times Base
EBITDA, subject to a maximum payment,
inclusive of Earnout Payment A-1, Earnout
Payment A-2 and Earnout Payment A-3, of One
Million Dollars ($1,000,000) ("Earnout
Payment A-4"), plus
(B) an amount
equal to fifty percent
(50%) of the amount by which the sum of 2004
EBITDA, 2005 EBITDA, 2006 EBITDA and 2007
EBITDA exceeds four (4) times Base EBITDA
plus One Million Dollars ($1,000,000),
subject to a maximum payment, inclusive of
Earnout Payment B-1, Earnout Payment B-2 and
Earnout Payment B-3, of Two Million Six
Hundred Thousand Dollars ($2,600,000)
("Earnout Payment B-4").
(v) Based upon
the EBITDA of the Business for
the fiscal year 2008 ("2008 EBITDA"),
Acquiror shall pay to Seller:
(A) an amount
equal to one hundred
percent (100%) of the amount by which the
sum of 2004 EBITDA up to the EBITDA
Threshold, 2005 EBITDA up to the EBITDA
Threshold, 2006 EBITDA up to the EBITDA
Threshold, 2007 EBITDA up to the EBITDA
Threshold and 2008 EBITDA up to the EBITDA
Threshold exceeds five (5) times Base
EBITDA, subject to a maximum payment,
inclusive of Earnout Payment A-1, Earnout
Payment A-2, Earnout Payment A-3 and Earnout
Payment A-4 of One Million Two Hundred Fifty
Thousand Dollars ($1,250,000) ("Earnout
Payment A-5"), plus
(B) an amount
equal to fifty percent
(50%) of the amount by which the sum of 2004
EBITDA, 2005 EBITDA, 2006 EBITDA, 2007
EBITDA and 2008 EBITDA exceeds five (5)
times Base EBITDA plus One Million Two
Hundred Fifty Thousand Dollars ($1,250,000),
subject to a maximum payment, inclusive of
Earnout
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Payment B-1, Earnout Payment B-2, Earnout
Payment B-3 and Earnout Payment B-4, of
Three Million Two Hundred Fifty Thousand
Dollars ($3,250,000) ("Earnout Payment
B-5").
Any amounts required to be paid pursuant to this Section
2.7(a) are collectively referred to as
"Earnout Payments" and shall be payable
as provided in Section 2.7(c). The maximum
aggregate Earnout Payments that
Acquiror can be required to make under this
Section 2.7(a) shall be Four Million
Five Hundred Thousand Dollars
($4,500,000).
(b) Unless
Seller gives written notice to Acquiror on or
before the fifteenth (15th) Business Day
after Seller's receipt of the final
Business Financial Statements to be
delivered pursuant to this Section 2.7,
specifying in reasonable detail all
disputed items and the basis therefor,
Seller shall be deemed to have accepted the
Business Financial Statements and
the amount of the associated Earnout
Payment, if any. If Seller so notifies
Acquiror of its objection to the Business
Financial Statements, Seller and
Acquiror shall, within thirty (30) calendar
days following such notice, attempt
to resolve their differences in good faith,
and any resolution by them as to any
disputed amounts shall be final, binding
and conclusive. If, at the end of such
thirty (30) calendar day period, Seller and
Acquiror are unable to resolve such
disagreements, Acquiror and Seller shall
jointly select an independent auditor
of recognized national standing to resolve
any remaining disagreements; provided
that Ernst & Young LLP will be the
independent auditor if Acquiror and Seller
cannot agree on the selection of such
independent auditor (the "Independent
Accountant"). Acquiror and Seller shall use
their reasonable efforts to cause
the Independent Accountant to make its
determination within thirty (30) calendar
days of accepting its selection. The
determination by the Independent Accountant
shall be final, binding and conclusive on
the parties. The fees and expenses of
the Independent Accountant shall be borne
by Acquiror and Seller Parties in
proportion to the aggregate amount of all
disputed items as to which such
party's claim was unsuccessful (i.e., if
there is a $100,000 dispute regarding
the amount of the Earnout Payment and the
Independent Accountant determines that
Seller's claim prevails with respect to
$25,000 of such disputed amount and
Acquiror's claim prevails with respect to
$75,000 of such disputed amount, then
Seller Parties would be obligated to pay
seventy five percent (75%) of the fees
and expenses and Acquiror would be
obligated to pay twenty five percent (25%) of
the fees and expenses).
(c) Subject to
Section 10.8 below, within thirty (30)
calendar days after (i) receipt by Seller
of the Business Financial Statements
for any year of the Earnout Period which
reflect an Earnout Payment due to
Seller, or (ii) in the event of a
disagreement, the date of resolution of such
disagreement by the Parties or the date of
determination by the Independent
Accountant pursuant to Section 2.7(c) (it
being understood that this clause (ii)
shall only apply to any disputed portion of
the Earnout Payments), the
applicable Earnout Payment shall be paid by
Acquiror fifty percent (50%) in cash
and fifty percent (50%) in shares of
Parent's Common Stock at the greater of the
Execution Date Value or the average closing
price per share of the Parent's
Common Stock on the Nasdaq National Market
over the thirty (30) day period
preceding the end of the fiscal year on
which such Earnout Payment is based. The
shares of Parent's Common Stock issued as
part of the Earnout Payments shall
carry "piggy-back" registration rights as
provided in the form of Registration
Rights Agreement attached hereto as Exhibit
H.
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(d) In
connection with the operation of the Business
after the Closing, Acquiror agrees to
maintain separate divisional books and
records for the Business in accordance with
GAAP, consistently applied. Acquiror
and each of the Seller Parties agree to act
in good faith during the Earnout
Period relative to the Business and not to
take actions that would be unfairly
prejudicial or discriminatory to the
Business for the purpose of adversely
affecting Seller's interest in receiving an
Earnout Payment.
(e) Upon
delivery of the Business Financial Statements,
Acquiror shall afford to Seller and its
accounting representatives prompt and
reasonable access upon reasonable notice to
all information reasonably necessary
to verify calculation of the Earnout
Payments. Acquiror shall make its employees
who are familiar with such matters, its
independent outside accounting firm
available to Seller and its representatives
on a mutually convenient basis at
reasonable times during normal business
hours to provide an explanation of such
materials and to provide such other
information as Seller and its
representatives may reasonably request in
connection with its review of the
Business Financial Statements.
(f) Within thirty
(30) days of the Closing Balance Sheet
becoming final in accordance with the
procedures set forth in Section 2.6 above,
the Seller Parties shall deliver to
Acquiror an unaudited statement of
operations of the Business for the period
from January 1, 2004 to the Closing
Date (the "2004 Pre-Closing Interim
Statement") prepared in accordance with GAAP
and consistent with the final Closing
Balance Sheet. In the event that Acquiror
does not agree with the 2004 Pre-Closing
Interim Statement, any disputed amount
will be reflected in Acquiror's 2004
Earnout Payment calculation delivered in
accordance with Section 2.7(a) above, and
the parties shall resolve their
differences in accordance with the
procedures provided for in Section 2.7(b)
above.
2.8.
Transfer Taxes. Seller shall pay, and Seller shall indemnify
and hold harmless Acquiror from, all
transfer, conveyance or similar Taxes
imposed as a result of the transactions
contemplated by this Agreement. Seller
and Acquiror shall cooperate in timely
making all filings, returns, reports and
forms as may be required in connection with
Sellers' payment of such Taxes.
Seller and Acquiror, as appropriate, shall
execute and deliver all instruments
and certificates necessary to enable the
other to comply with any filing
requirements relating to any such
Taxes.
ARTICLE III.
CLOSING
3.1.
Closing. The closing of the transactions contemplated herein
(the "Closing") shall be held at 10:00 a.m.
local time at the offices of Parent,
6330 San Vicente Blvd., Los Angeles 90048
on February 2, 2004, or at such other
time or place as Acquiror and Seller may
mutually agree in writing; provided,
however, that the Closing shall be deemed
effective as of 11:59 p.m. on January
31, 2004 (such date being the "Closing
Date").
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3.2.
Deliveries at Closing.
(a) Deliveries
by the Acquiror Parties. Subject to the
terms and conditions of this Agreement, in
reliance on the representations,
warranties and agreements of the Seller
Parties contained herein, in
consideration of the sale, assignment and
transfer of the Assets, the Acquiror
Parties agree to deliver (or cause to be
delivered) to Seller at the Closing the
following agreements and documents, all
satisfactory in form and substance to
Seller and its legal counsel:
(i) the wire
transfer of the portion of the
Purchase Price to be paid to Seller at the
Closing;
(ii)
certificates executed by the Secretary or an
Assistant Secretary of each of Parent and
Acquiror certifying as of the Closing
Date (A) a true and complete copy of the
Organizational Documents of Parent and
Acquiror certified as of a recent date by
the Secretary of State of the State of
Delaware, (B) a true an complete copy of
the resolutions of the board of
directors of Parent and Acquiror
authorizing the execution, delivery and
performance of this Agreement and the
consummation of the transactions
contemplated hereby and (C) incumbency
matters;
(iii)
certificates of good standing and/or
subsistence of Parent and Acquiror, dated
as of a recent date prior to the
Closing, issued by the Secretary of State
of the State of Delaware; and
(iv)
certificates executed by an officer of each
of Parent and Acquiror certifying that as
of the Closing Date (A) all
representations and warranties of Parent
and Acquiror contained in Article V
shall be true and correct in all respects
on and as of the Closing with the same
effect as though such representations and
warranties had been made on and as of
the date of the Closing, and (B) each of
Parent and Acquiror shall have
performed and satisfied in all respects all
agreements and covenants required
hereby to be performed by it prior to or on
the Closing Date; except in each
case for any such failure to so perform
and/or the inaccuracy of any
representation which, individually or in
the aggregate, has not resulted in and
would not reasonably be expected to result
in a Material Adverse Effect or a
Material Adverse Change.
(b) Deliveries
by the Seller Parties. Subject to the
terms and conditions of this Agreement, in
reliance upon the representations,
warranties and agreements of Acquiror
contained herein and in consideration of
the Purchase Price to be paid to Seller,
the Seller Parties agree to deliver (or
cause to be delivered) to Acquiror at the
Closing the following agreements and
documents, all satisfactory in form and
substance to Acquiror and its legal
counsel:
(i) a
certificate executed by the Secretary or
an Assistant Secretary of Seller certifying
as of the Closing Date (A) a true
and complete copy of the Organizational
Documents of Seller certified as of a
recent date by the Secretary of State of
the State of Minnesota, (B) a true an
complete copy of the resolutions of the
Shareholders of Seller and the board of
directors of Seller authorizing the
execution, delivery and performance of this
Agreement and the consummation of the
transactions contemplated hereby and (C)
incumbency matters;
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(ii)
certificates of good standing and/or
subsistence of Seller, dated as of a recent
date prior to the Closing, issued by
the Secretary of State of the State of
Minnesota;
(iii) a
certificate executed by each of the Seller
Parties certifying that as of the Closing
Date (A) all representations and
warranties of the Seller Parties contained
in Article IV shall be true and
correct in all respects on and as of the
Closing with the same effect as though
such representations and warranties had
been made on and as of the date of the
Closing, and (B) each of the Seller Parties
shall have performed and satisfied
in all respects all agreements and
covenants required hereby to be performed by
it prior to or on the Closing Date; except
in each case for any such failure to
so perform and/or the inaccuracy of any
representation which, individually or in
the aggregate, has not resulted in and
would not reasonably be expected to
result in a Material Adverse Effect or a
Material Adverse Change;
(iv)
an opinion of Gray, Plant, Mooty, Mooty &
Bennett, P.A., counsel to the Seller
Parties, dated as of the Closing Date, in
the form attached hereto as Exhibit I;
(v) evidence
of receipt of all consents set
forth on Schedule 3.2(b)(v);
(vi)
an affidavit from Seller stating, under
penalties of perjury, Seller's taxpayer
identification number and that Seller is
not a foreign person pursuant to Section
1445(b)(2) of the Code; and
(vii) a
Release executed by the Shareholders in
favor of Acquiror, in the form attached
hereto as Exhibit J.
3.3.
Other Closing Transactions. In addition, subject to the terms
and conditions of this Agreement, the
applicable Acquiror Parties and the
applicable Seller Parties shall deliver or
cause to be delivered to each other
party at the Closing:
(a) the Bill
of Sale;
(b)
the
Assignment and Assumption of Contract Rights;
(c) the
Assignment of Intellectual Property;
(d) the Escrow
Indemnification Agreement;
(e) the
Interim Services and Facilities Agreement; and
(f) the
Employment Agreement.
3.4.
Other Deliveries. In addition, subject to the terms and
conditions of this Agreement, the Seller
Parties shall deliver or cause to be
delivered to Acquiror at the Closing such
other documents and instruments as in
the opinion of counsel for Acquiror may be
reasonably required to effectuate the
terms of this Agreement and to comply with
the terms hereof.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES
Each of the Seller Parties jointly and severally hereby
represents and warrants to Acquiror as
follows, except as otherwise set forth on
the Disclosure Schedule, which
representations and warranties are, as of the
date hereof, and will be, as of the Closing
Date, true and correct:
4.1.
Organization of Seller. Seller is a corporation duly
organized, validly existing and in good
standing under the laws of the State of
Minnesota with full power and authority to
conduct its business as it is
presently being conducted, to own and or
use the properties and assets that it
purports to own or use, and to perform all
its obligations under its Contracts.
Grossfield and Johnson are all of the
shareholders of Seller. Seller is duly
qualified to do business as a foreign
corporation and is in good standing in
each jurisdiction listed on Schedule 4.1,
being all the jurisdictions in which
the character of its properties owned or
leased or the nature of its activities
make such qualification necessary, other
than where the failure to be so
qualified would not have a Material Adverse
Effect. Copies of the Organizational
Documents of Seller, and all amendments
thereto, heretofore delivered to
Acquiror are true, accurate and complete as
of the date hereof.
4.2.
Subsidiaries. Except as set forth on Schedule 4.2, Seller does
not have any Subsidiaries. None of the
Subsidiaries set forth on Schedule 4.2
have any right, title or interest in or to
any assets used or useful with, or
related to, the Business. Except as set
forth on Schedule 4.2, Seller has no
direct or indirect stock or other equity or
ownership interest (whether
controlling or not) in any corporation,
association, partnership, limited
liability company, joint venture or other
entity.
4.3.
Authorization. Each Seller Party has all requisite power and
authority, and has taken all action
necessary, to execute and deliver this
Agreement and the other agreements,
instruments, documents and certificates to
be executed and delivered by any of the
Seller Parties pursuant hereto
(collectively, the "Ancillary Agreements")
and to consummate the transactions
contemplated hereby and thereby and to
perform its obligations hereunder and
thereunder. The execution and delivery of
this Agreement and the Ancillary
Agreements by the Seller Parties
