EXHIBIT 2.1
REORGANIZATION AND PURCHASE
AGREEMENT
DATED AS OF MAY 10,
2005,
AMONG
SANDERS MORRIS HARRIS GROUP
INC.,
THE EDELMAN FINANCIAL CENTER,
INC.,
THE EDELMAN FINANCIAL CENTER,
LLC,
AND
FREDRIC M. EDELMAN
TABLE OF CONTENTS
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ARTICLE I
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DEFINITIONS AND
INTERPRETATION
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1.1
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Definitions
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1.2
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Interpretation
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1.3
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Knowledge
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ARTICLE II
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PRE-CLOSING REORGANIZATION; SALES
OF EFC LLC UNITS; CLOSINGS
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2.1
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Pre-Closing Reorganization; The Initial
Closing
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2.2
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Initial Closing
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2.3
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Sale and Purchase of First Tranche EFC LLC
Units; Consideration for First Tranche EFC LLC Units
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2.4
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Adjustment of Consideration for First Tranche
EFC LLC Units
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2.5
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Consents
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2.6
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The Second Closing
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2.7
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Second Closing Consideration
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ARTICLE III
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THIRD CLOSING; SALE OF EFC
SHARES
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3.1
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The Third Closing
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3.2
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Consideration for the EFC Shares
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ARTICLE IV
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PURCHASE PRICE
PARAMETERS
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4.1
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Price Cap
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4.2
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Limitation on Issuances of SMH Shares
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ARTICLE V
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REPRESENTATIONS AND
WARRANTIES
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CONCERNING THE EXISTING EFC
ENTITIES
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5.1
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Organization
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5.2
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Authority Relative to this Agreement and the
Pre-Closing Reorganization
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5.3
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No Violations
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5.4
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Consents and Approvals
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5.5
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Capitalization of EFC Inc
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i
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5.6
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Subsidiaries
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5.7
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Financial Statements
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5.8
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Absence of Certain Changes
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5.9
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No Undisclosed Liabilities
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5.10
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Properties
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5.11
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Taxes and Tax Returns
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5.12
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Litigation
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5.13
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Real Property
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5.14
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Employee Benefit Plans
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5.15
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Material Contracts
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5.16
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Governmental Licenses and Permits; Compliance
with Laws
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5.17
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No Broker-Dealer
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5.18
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Investment Adviser Matters
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5.19
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No Investment Company
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5.20
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Material Customers
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5.21
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Bank Accounts
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5.22
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Officers and Employees
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5.23
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Transactions with Affiliates
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5.24
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Brokers
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5.25
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Investment in SMH Common Stock
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ARTICLE VI
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REPRESENTATIONS AND
WARRANTIES
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CONCERNING THE LLC
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6.1
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Organization of the LLCs
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6.2
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Capitalization of the LLC
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6.3
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No Subsidiaries
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6.4
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Business
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6.5
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Authority Relative to this Agreement and the
Pre-Closing Reorganization
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6.6
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No Violations
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6.7
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Litigation
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6.8
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Tax Matters
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6.9
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Brokers
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ARTICLE VII
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REPRESENTATIONS AND
WARRANTIES
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OF
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SMH
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7.1
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Organization of SMH
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7.2
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Authority Relative to this Agreement
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7.3
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No Violations
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7.4
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Consents and Approval
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7.5
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Capitalization of SMH
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7.6
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SEC Filings
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7.7
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Compliance
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7.8
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SMH Financial Statements
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7.9
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Absence of Certain Changes
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7.10
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No Undisclosed Liabilities
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7.11
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Investment Adviser Matters
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7.12
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Litigation
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7.13
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Brokers
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7.14
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Vote Required
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7.15
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Investment in EFC LLC
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ARTICLE VIII
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COVENANTS OF THE EDELMAN
PARTIES
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8.1
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Confidentiality
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8.2
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Consummation of Transactions
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8.3
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Notifications
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ARTICLE IX
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SMH COVENANTS
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9.1
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Confidentiality
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9.2
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Listing of Shares
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9.3
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Consummation of Transactions
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9.4
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EFS LLC Advisory Registration
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9.5
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Removal of Legends
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ARTICLE X
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[INTENTIONALLY
OMITTED]
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ARTICLE XI
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[INTENTIONALLY
OMITTED]
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ARTICLE XII
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[INTENTIONALLY
OMITTED]
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ARTICLE XIII
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AGREEMENTS PENDING SECOND
CLOSING
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13.1
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Charter Documents
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13.2
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No Issuances
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13.3
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No Operations
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13.4
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No Indebtedness
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iii
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13.5
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Ownership of Retained EFC LLC Units
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13.6
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Tax Status
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13.7
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Maintenance of Existence
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13.8
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Distribution
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13.9
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Liquidating of Subsidiaries
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ARTICLE XIV
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ADDITIONAL
AGREEMENTS
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14.1
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Publicity
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14.2
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Expenses
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14.3
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Restrictive Covenants
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14.4
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Bonus Payment Loan
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14.5
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Lockup Agreement
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14.6
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Visitation Rights
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14.7
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Access to Books and Records
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ARTICLE XV
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TAX MATTERS
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15.1
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Partnership Status
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15.2
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Section 754 Election
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15.3
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Section 338(h)(10) Election
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15.4
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EFC Inc. Tax Matters
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ARTICLE XVI
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NATURE AND
SURVIVAL
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OF
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REPRESENTATIONS AND
WARRANTIES
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16.1
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Survival of Representations and
Warranties
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ARTICLE XVII
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INDEMNIFICATION
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17.1
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Indemnification by Edelman and EFC
Inc
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17.2
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Indemnification by SMH
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17.3
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Requests for Indemnification
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17.4
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No Right to Set Off; Insurance, Tax and Other
Benefits
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17.5
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Exclusivity
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17.6
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Adjustment to Purchase Price
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iv
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ARTICLE XVIII
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AMENDMENT
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18.1
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Amendment
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ARTICLE XIX
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GENERAL PROVISIONS
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19.1
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Non-Business Days
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19.2
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Notices
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19.3
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Entire Agreement
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19.4
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Assignment; Binding Effect
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19.5
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Counterparts
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19.6
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Governing Law
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19.7
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Consent to Jurisdiction
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19.8
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Severability of Provisions
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19.9
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Joint Drafting
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19.10
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Captions
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19.11
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No Third-Party Beneficiaries
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19.12
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Disclosure Schedules
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v
REORGANIZATION AND PURCHASE
AGREEMENT
This Reorganization and Purchase
Agreement (this “ Agreement ”) dated as of
May 10, 2005, is entered into by and among The Edelman
Financial Center, Inc., a Virginia corporation (“ EFC
Inc. ”), The Edelman Financial Center, LLC, a Delaware
limited liability company (“ EFC LLC ”),
Fredric M. Edelman, a resident of Great Falls, Virginia and the
sole shareholder of EFC (“ Edelman ”), and
Sanders Morris Harris Group Inc., a Texas corporation (“
SMH ”).
W I T N E S S E T
H
WHEREAS, EFC Inc. is a holding
company whose Subsidiaries provide financial planning, investment,
and mortgage and insurance brokerage services (the “
Business ”); and
WHEREAS, Edelman owns 8,160 shares
(the “ EFC Shares ”) of common stock, $1.00 par
value per share (“ EFC Common Stock ”), of EFC
Inc., representing all of the issued and outstanding capital stock
of EFC Inc.; and
WHEREAS, EFC Inc. has formed EFC LLC
and holds 508 EFC LLC Units, and EFC Inc. and its Subsidiaries have
formed the other LLCs (as defined herein), to succeed to the
Business upon the transfer to the LLCs of substantially all of the
respective assets of EFC Inc. and its Subsidiaries, and the
assumption by the LLCs of the respective liabilities of EFC Inc.
and such other transferring entities as provided in this Agreement;
and
WHEREAS, on May 9, 2005 EFC LLC
issued two EFC LLC Units to Edelman; and
WHEREAS, upon and following
consummation of the Pre-Closing Reorganization (as defined herein),
and on the terms and subject to the conditions of this Agreement,
EFC Inc. and Edelman propose to sell to SMH, and SMH proposes to
purchase from EFC Inc. and Edelman, direct and indirect ownership
interests in EFC LLC representing 100% of the total membership
interests in EFC LLC; and
WHEREAS, EFC LLC proposes to admit
SMH as a member of EFC LLC on the Initial Closing Date;
NOW THEREFORE, the parties to this
Agreement agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1
Definitions
. In this
Agreement:
“2007 Price Multiple”
means:
(i)
8.0 if the compound annual growth
rate of the LLC Net Income for the period beginning January 1,
2007 and ending December 31, 2007 over the LLC Net Income for
the period beginning January 1, 2005 and ending
December 31, 2005 is 9.99% or less;
(ii)
9.0 if such compound annual growth
rate is greater than 9.99% but not more than 27.5%;
(iii)
10.0 if such compound annual growth
rate is greater than 27.5% but less than 42.5%; and
(iv)
11.0 if such compound annual growth
rate is greater than or equal to 42.5%.
“ 2008 Price Multiple
” means:
(i)
8.0 if the compound annual growth
rate of the LLC Net Income for the period beginning January 1,
2008 and ending December 31, 2008 over the LLC Net Income for
the period beginning January 1, 2005 and ending
December 31, 2005 is 9.99% or less;
(ii)
9.0 if such compound annual growth
rate is greater than 9.99% but not more than 27.5%;
(iii)
10.0 if such compound annual growth
rate is greater than 27.5% but less than 42.5%; and
(iv)
11.0 if such compound annual growth
rate of LLC Net Income is greater than or equal to
42.5%.
“ Additional Shares
” has the meaning specified in Section 3.2.
“ Affiliate ”
means a Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common
control with another Person with the terms “control”
and “controlled” meaning, for this purpose, the power
to direct the management and policies of a Person, directly or
indirectly, whether through the ownership of voting securities or
partnership, membership or other ownership interests, or by
contract or otherwise.
“ Ancillary Agreements
” means, collectively, the EFC LLC Agreement, the
Reorganization Agreements, the Registration Rights Agreement and
the Edelman Employment Agreement.
“ Applicable Payment
” shall have the meaning specified in
Section 4.2.
Applicable Recalculated
Amount ” shall have
the meaning set forth in Section 2.4.
“ Assumed Liabilities
” means all liabilities and obligations of any of the
Existing EFC Entities (whether known or unknown, and whether
contingent or fixed).
“ Bonus Payment Amount
” means (i) the aggregate amount payable to those key
employees of EFC LLC set forth Schedule 1.1 of the EFC
Disclosure Schedule as are entitled to receive a
“Transaction Bonus” pursuant to the terms of their
respective
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employment agreements entered into
on or about the date hereof with EFC LLC plus (ii) such other
amounts as Edelman may determine in his sole discretion pursuant to
Section 4.2(b) of the EFC LLC Agreement.
“ Business ” has
the meaning specified in the recitals to this Agreement.
“ Business Day ”
means any day on which the New York Stock Exchange is open for
trading.
“ Charter Documents
” means, (i) in the case of any Party that is a
corporation, its articles or certificate of incorporation and
bylaws, and each certificate or other document setting forth the
designation, amount and relative rights, limitations and
preferences of any class or series of its capital stock,
(ii) in the case of any Party that is a limited liability
company, its articles or certificate of formation or organization
and its operating or limited liability company agreement or its
regulations, and (iii) in the case of any Party that is a
limited partnership, its certificate of limited partnership and its
limited partnership agreement.
“ Client Assets ”
has the meaning specified in Section 5.20.
“ Code ” means
the United States Internal Revenue Code of 1986, as
amended.
“ Commodity Exchange
Act ” means the Commodity Exchange Act of 1936, as
amended, and the rules and regulations of the SEC promulgated
under that Act.
“ Current Market Price
” means as of any date of determination (other than the
Initial Closing Date), the arithmetic mean of the volume weighted
average sales price of a SMH Share (calculated as the average of
the high and low sales prices multiplied by the daily trading
volume) on each of the ten trading days immediately preceding such
date on the Nasdaq Stock Market or, if the SMH Shares are no longer
quoted thereon, on such other national securities market or
exchange on which SMH Shares are then listed, as reported on that
page of Bloomberg which displays such data, or if such service
is unavailable, such other comparable publicly available service
for displaying such data as may be agreed by the parties hereto
(such agreement not to be unreasonably withheld). In the
event that there is a stock split (or reverse stock split), stock
dividend or other similar event during the relevant measuring
periods under the foregoing calculation, equitable and appropriate
adjustments shall be made in the application of the foregoing
calculation of Current Market Price to take account of such
event.
“ Damages ” mean
all damages, claims, penalties, losses, judgments, fines, and
reasonable costs and expenses (including reasonable
attorneys’ fees, court costs and disbursements) incurred in
connection with any investigation or defense of any of the
foregoing.
“ Disclosure Schedule
” has the meaning specified in Section 19.12.
“ Earn-Out Adjustment
” has the meaning specified in Section 2.4.
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“Earn-Out Adjustment
Statement” has the
meaning specified in Section 2.4.
“ Earn-Out Period
” has the meaning specified in Section 2.4.
“ EBS Inc. ” has
the meaning specified in Section 2.1.
“ EBS LLC ” has
the meaning specified in Section 2.1.
“ EBS LLC Interests
” has the meaning specified in Section 2.1.
“ Edelman ” has
the meaning specified in the introduction to this
Agreement.
“ Edelman Employment
Agreement ” has the meaning specified in
Section 2.1.
“ Edelman Parties
” means EFC Inc., EFC LLC and Edelman,
collectively.
“ EFC Common Stock
” has the meaning specified in the recitals to this
Agreement.
“ EFC Contracts ”
has the meaning specified in Section 5.15.
“ EFC Disclosure
Schedule ” means the disclosure schedule that EFC
Inc. has delivered to SMH before the date of this
Agreement.
“ EFC Employee Plans
” has the meaning specified in Section 5.14.
“ EFC Financial
Statements ” has the meaning specified in
Section 5.7.
“ EFC Inc. ” has
the meaning specified in the introduction to this
Agreement.
“ EFC Inc. Accountants
” has the meaning specified in Section 2.4.
“ EFC Indemnified
Parties ” has the meaning specified in
Section 17.2.
“ EFC LLC ” has
the meaning specified in the introduction to this
Agreement.
“ EFC LLC Agreement
” means the Limited Liability Company Agreement, dated as of
May 10, 2005, among EFC LLC, EFC Inc., and SMH, a copy of
which is attached as Exhibit A to this Agreement.
“ EFC LLC Units ”
means the outstanding membership interests of EFC LLC as of
immediately following the effectiveness of the EFC LLC
Agreement.
“ EFC Shares ”
has the meaning specified in the recitals to this
Agreement.
“ EFS Inc. ” has
the meaning specified in Section 2.1.
“ EFS LLC ” has
the meaning specified in Section 2.1.
“ EFS LLC Interests
” has the meaning specified in Section 2.1.
4
“ EMS Inc. ” has
the meaning specified in Section 2.1.
“ EMS LLC ” has
the meaning specified in Section 2.1.
“ EMS LLC Interests
” has the meaning specified in Section 2.1.
“ ERISA ” means
the Employee Retirement Income Security Act of 1974, as
amended.
“ ERISA Affiliate
” means, with respect to any Person, any trade or business,
whether or not incorporated, which together with that Person would
be deemed a single employer within the meaning of Section 4001
of ERISA or Section 414 of the Code.
“ ETVS Inc. ” has
the meaning specified in Section 2.1.
“ Exchange Act ”
means the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated
thereunder.
“ Existing EFC Entities
” means, collectively, EFC Inc., EFS Inc., ETVS Inc., EMS
Inc. and EBS Inc.
“ Excluded
Assets ” means, collectively:
(i)
all cash balances of the Existing
EFC Entities, as of immediately before the consummation of the
Pre-Closing Reorganization, in excess of $500,000;
(ii)
accounts receivable that are
collected, regardless of when invoiced and collected, relating to
services rendered prior to the Initial Closing;
(iii)
all capital stock of the Existing
EFC Entities held by any of the Existing EFC Entities as of
immediately prior to the consummation of the Pre-Closing
Reorganization, and all EFC LLC Units held by EFC Inc. as of
immediately prior to the consummation of the Pre-Closing
Reorganization (which EFC LLC Units shall be retained by EFC Inc.
following consummation of the Pre-Closing Reorganization and
subsequently transferred directly and indirectly to SMH in
accordance with the terms of this Agreement);
(iv)
all rights to collect upon insurance
policies of the Existing EFC Entities, third-party indemnification
obligations to any of the Existing EFC Entities, or other
obligations on the part of third parties to make reimbursements or
other payments to any of the Existing EFC Entities, in each case to
the extent insuring, indemnifying against or reimbursing for
Damages indemnifiable by Edelman and/or EFC Inc. to SMH and/or any
of its Affiliates pursuant to Article XVII;
(v)
all rights of the Existing EFC
Entities under this Agreement or any of the Ancillary
Agreements;
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(vi)
copies of any books and records
required to be retained by any of the Existing EFC Entities in
accordance with applicable Laws and/or good business practices
(including stock transfer registers); and
(vii)
those additional items set forth on
Schedule 1.1(b) of the EFC Disclosure
Schedule.
“ Financial Planning
Related Agreements ” means any written agreements of the
following types to which any Person is a party or by which it is
bound, as they may have been amended, supplemented, waived or
otherwise modified: (i) agreements for the performance of
financial planning, investment advisory, investment sub-advisory,
Financial Planning Services or securities brokerage services with
respect to securities, real estate, commodities, currencies or any
other asset class for clients or on behalf of third parties;
(ii) agreements for the distribution of securities of any
“investment company” within the meaning of the
Investment Company Act or funds underlying variable annuities,
variable life insurance or other similar products or the
maintenance of shareholder accounts for any of the foregoing
products or the marketing of investment advisory or Financial
Planning Services or the maintenance of accounts for such services;
and (iii) trust agreements, custody agreements, transfer
agent agreements, fund administration agreements, and similar
services agreements with respect to any of the
foregoing.
“ First Tranche EFC LLC
Units ” has the meaning specified in
Section 2.3.
“ GAAP ” means
United States generally accepted accounting principles as in effect
from time to time.
“ Governmental Entity
” means any U.S. federal, state or local court, executive
office, legislature, governmental agency or ministry, commission,
or administrative, regulatory or self-regulatory authority or
instrumentality.
“ Indemnification Cut-Off
Date ” has the meaning specified in
Section 17.1.
“ Initial Closing
” has the meaning specified in Section 2.2.
“ Initial Closing
Consideration ” has the meaning specified in
Section 2.3.
“ Initial Closing Date
” has the meaning specified in Section 2.2.
“ Initial Closing Market
Price ” means as of the Initial Closing Date, the
arithmetic mean of the volume weighted average sales price of a SMH
Share (calculated as the average of the high and low sales prices
multiplied by the daily trading volume) on each of the five trading
days immediately preceding such date, on the Initial Closing Date,
and on the five trading days immediately following such date (a
total of eleven trading days) on the Nasdaq Stock Market or, if the
SMH Shares are no longer quoted thereon, on such other national
securities market or exchange on which SMH Shares are then listed,
as reported on that page of Bloomberg which displays such
data, or if such service is unavailable, such other comparable
publicly available service for displaying such data as
6
may be agreed by the parties hereto
(such agreement not to be unreasonably withheld). In the
event that there is a stock split (or reverse stock split), stock
dividend or other similar event during the relevant measuring
periods under the foregoing calculation, equitable and appropriate
adjustments shall be made in the application of the foregoing
calculation of Initial Closing Market Price to take account of such
event.
“ Investment Advisers
Act ” means the Investment Advisers Act of 1940, as
amended, and the rules and regulations of the SEC promulgated
thereunder.
“ Investment Company
Act ” means the Investment Company Act of 1940, as
amended, and the rules and regulations of the SEC promulgated
thereunder.
“ Financial Planning
Services ” means any services that involve (i) the
management of an investment account or fund (or portions thereof or
a group of investment accounts or funds), or (ii) the giving
of advice with respect to financial planning or the investment
and/or reinvestment of assets or funds (or any group of assets or
funds).
“ Latest EFC Balance
Sheet ” has the meaning specified in
Section 5.7.
“ Latest SMH Balance
Sheet ” has the meaning specified in
Section 7.8.
“ Law ” means a
law, statute, ordinance, rule, code or regulation enacted or
promulgated, or order, directive, instruction or other legally
binding guideline or policy issued or rendered by, any Governmental
Entity.
“ Lien ” means a
material lien, mortgage, deed of trust, deed to secure debt,
pledge, hypothecation, assignment, deposit arrangement, easement,
priority, assessment, security interest, lease, sublease, charge,
adverse non-contingent claim, levy, or other encumbrance of any
kind, excluding restrictions on transferability imposed by federal
and state securities laws and excluding restrictions arising under
this Agreement and the Ancillary Agreements.
“ LLCs ” has the
meaning specified in Section 2.1.
“ LLC Net Income
” means:
(i)
for the fiscal year ended
December 31, 2005, the consolidated pre-tax income of EFC Inc.
and its Subsidiaries for the period prior to the Pre-Closing
Reorganization, plus the consolidated pre-tax income of EFC LLC and
its Subsidiaries for the remaining portion of such fiscal year, as
determined in accordance with GAAP by reference to the financial
statements of EFC Inc. and EFC LLC for the relevant
period;
(ii)
for any subsequent fiscal year of
EFC LLC, the consolidated pre-tax income of EFC LLC and its
Subsidiaries, as determined in accordance with GAAP by reference to
the financial statements of EFC LLC for that fiscal year;
and
7
(iii)
for the Earn-Out Period, the
consolidated pre-tax income of EFC LLC and its Subsidiaries for
that period, as determined in accordance with GAAP by reference to
the financial statements of EFC LLC for the last fiscal quarter of
the fiscal year ended December 31, 2005 and the first three
fiscal quarters of the fiscal year beginning January 1,
2006;
but in each case without taking into
account any items of income, cost, expense, expenditure or
deduction (A) resulting from the transactions contemplated by
this Agreement (including the amortization of goodwill),
(B) representing corporate overhead expense of SMH allocated
to EFC LLC and not approved by the unanimous consent of the Board
of Managers of EFC LLC, (C) for non-cash items represented by
charges or credits to reserves for loss contingencies or potential
loss contingencies (or similar one-time extraordinary items) except
to the extent mutually agreed to by Edelman and SMH acting
reasonably and in good faith, or (D) indemnifiable to EFC LLC
(or any Subsidiary thereof) pursuant to the indemnification
provisions set forth herein; provided, however , that (x) in
the event of a “Significant Acquisition” or
“Significant Sale” (as each such term is defined in the
LLC Agreement), the treatment of any revenues and expenses
generated by the business so acquired or sold (as applicable) for
purposes of this definition shall be as agreed upon by Edelman and
SMH (such agreement not to be unreasonably withheld);
provided , further , that, in the event after the
Effective Time payments are to be made to SMH or any of its
Affiliates (other than the Company and the Subsidiaries) by any
outside service provider of SMH, the Company or any of their
respective subsidiaries (or other applicable third parties), which
payments are in respect of products or services of the Company, any
of the Subsidiaries or any of their respective employees (including
the Key Employees), such payments shall be included as revenues of
the Company for purposes of the calculation of LLC Net
Income.
“ Material Adverse
Effect ” means (i) when used with reference to EFC
Inc., a material adverse effect on the financial condition of EFC
Inc. and its Subsidiaries taken as a whole, or the assets or
results of operations of EFC Inc. and its Subsidiaries as
previously conducted or of EFC LLC and its Subsidiaries as to be
conducted immediately following the Pre-Closing Reorganization, or
a material adverse effect on the ability of EFC Inc. or EFC LLC to
perform its obligations under this Agreement or any Ancillary
Agreement to which it is to be a party, and (ii) when used
with reference to SMH, a material adverse effect on the financial
condition, businesses, assets or results of operations of SMH and
its Subsidiaries taken as a whole, or a material adverse effect on
the ability of SMH to perform its obligations under this Agreement
or any Ancillary Agreement to which it is to be a party.
However, a “ Material Adverse Effect ” does not
include an effect caused by (A) a change in (i) economic
conditions affecting the United States economy as a whole, or
(ii) the general financial market conditions in the United
States (including any changes in interest rates or prices of
securities generally), which, in either case, affects companies in
the investment advisory business (or, in the case of SMH, the
financial services business generally) in a similar fashion and
does not affect the relevant party disproportionately compared with
such other companies or (B) changes in the financial services
industry in general.
“ Lockup Period ”
has the meaning specified in Section 14.5.
8
“ Parties ” means
the parties to this Agreement.
“ Permitted Liens
” means (i) those Liens reflected in the SMH SEC
Filings, in the case of the SMH and its Subsidiaries and their
respective assets or properties, or the EFC Financial Statements,
in the case of EFC Inc., (ii) Liens for water and sewer
charges and current taxes not yet due and payable or being
contested in good faith, and (iii) other Liens (including
mechanics’, couriers’, workers’,
repairers’, landlords’, materialmen’s,
warehousemen’s and other similar Liens) arising in the
ordinary course of business as would not in the aggregate
materially adversely affect the value of, or materially adversely
interfere with the use of, the property subject thereto.
“ Person ” means
an individual, corporation, partnership, association, joint stock
company, limited liability company, Governmental Entity, business
trust, unincorporated organization, or other legal
entity.
“ Pre-Closing
Reorganization ” has the meaning specified in
Section 2.1.
“ Purchase Price Credit
” means the positive difference (if any) resulting from (x)
$20 million minus (y) the Applicable Recalculation
Amount.
“ Putnam Lovell ”
means Putnam Lovell NBF Securities, which has acted as financial
advisor to the Edelman Parties in connection with the transactions
contemplated by this Agreement.
“ Registration Rights
Agreement ” has the meaning specified in
Section 2.1.
“ Regulations ”
means the regulations promulgated under the Code by the Treasury
Department.
“ Reorganization
Agreements ” has the meaning specified in
Section 2.1.
“ Restricted Businesses
” has the meaning specified in Section 14.3.
“ Retained EFC LLC
Units ” means (i) until the Second Closing, the 490
EFC LLC Units to be retained by EFC Inc. after the Initial Closing
and (ii) from and after the Second Closing, the 240 EFC LLC
Units to be retained by EFC Inc. after the Second
Closing.
“ SEC ” means the
Securities and Exchange Commission or any successor
agency.
“ Second Closing
” means the consummation of the purchase and sale of the
Second Tranche EFC LLC Units.
“ Second Closing
Consideration ” has the meaning specified in
Section 2.7.
“ Second Closing Date
” means the third anniversary of the Initial Closing
Date.
“ Second Closing
Statement ” has the meaning specified in
Section 2.7.
9
“ Second Tranche EFC LLC
Units ” means the 250 EFC LLC Units purchased and sold on
the Second Closing Date.
“ Securities Act
” means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated
thereunder.
“ SMH Accountants
” has the meaning specified in Section 2.4.
“ SMH Change of Control
” has the meaning specified in the EFC LLC
Agreement.
“ SMH Common Stock
” shall mean the common stock, $.01 par value per share, of
SMH.
“ SMH Disclosure
Schedule ” means the disclosure schedule that SMH
has delivered to the Edelman Parties before the date of this
Agreement.
“ SMH Indemnified
Parties ” has the meaning specified in
Section 17.1.
“ SMH Options ”
has the meaning specified in Section 7.5.
“ SMH Permits ”
has the meaning specified in Section 7.7.
“ SMH SEC Filings
” has the meaning specified in Section 7.6.
“ SMH Shares ”
means shares of SMH Common Stock.
“ SMH Stock Plans
” has the meaning specified in Section 7.5.
“ S short year ”
has the meaning specified in Section 15.4.
“ Subsidiary ” of
a Party means an Affiliate of that Party more than 50% of the
aggregate voting power (or any other voting, membership,
partnership or joint venture equity interest in the case of a
Person that is not a corporation) of which is beneficially owned by
that Party directly or indirectly through one or more other
Persons.
“ Tax ” means any
tax of any kind, however denominated, including any interest,
penalties or other additions to tax that may become payable in
respect thereof imposed by any U.S. federal, foreign, state or
local Governmental Entity, including all income, gross income,
gross receipts, profits, goods and services, social security, old
age security, sales and use, ad valorem, excise, franchise,
business license, occupation, real property gains, payroll and
employee withholding, unemployment insurance, real and personal
property, stamp, environmental, transfer, workers’
compensation, severance, alternative minimum, windfall, and capital
taxes, and other obligations of the same or a similar nature to any
of the foregoing.
“ Taxing Authority
” means any Governmental Entity responsible for the
imposition, assessment, enforcement or collection of any
Tax.
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“ Tax Returns ”
means all Tax returns, declarations, reports, estimates,
information returns and statements required to be filed with any
Taxing Authority.
“ Third Closing ”
means the consummation of the purchase and sale of the EFC
Shares.
“ Third Closing
Consideration ” has the meaning specified in
Section 3.2.
“ Third Closing Date
” means the second Business Day following the fourth
anniversary of the Initial Closing Date.
“ Third Closing
Statement ” has the meaning specified in
Section 3.2.
“ Total Purchase
Consideration ” means the Initial Closing Consideration,
the Earn-Out Adjustment, if any, the Second Closing Consideration
and the Third Closing Consideration.
“ Transferred EFC LLC
Units ” means (i) the 510 EFC LLC Units to be sold
and transferred to SMH by EFC Inc. and Edelman on the Initial
Closing Date under Section 2.3 and (ii) from and after
the Second Closing, the 250 EFC LLC Units to be sold and
transferred to SMH by EFC Inc. on the Second Closing Date under
Section 2.6, collectively.
“ Transferred Assets
” means all assets, properties, contracts and rights of the
Existing EFC Entities used in the Business, as they shall exist as
of immediately prior to the consummation of the Pre-Closing
Reorganization, including:
(i)
all of their respective assets and
properties reflected in the Latest EFC Balance Sheet, including
cash on hand and on deposit, accounts receivable, inventories of
supplies and fixed assets, except current assets reflected in the
Latest EFC Balance Sheet which shall have been sold, collected or
otherwise disposed of in the ordinary course of the Business after
the date of the Latest EFC Balance Sheet;
(ii)
all of the respective EFS LLC
Interests, EMS LLC Interests and EBS LLC Interests held by each
such Existing EFC Entity (but for the avoidance of doubt, none of
the EFC LLC Units);
(iii)
all of their respective rights under
all EFC Contracts (including the Financial Planning Related
Agreements and the Office Lease Agreement, dated as of
October 21, 1993, between Metropolitan Life Insurance Company
and EFC Inc., as amended to date), other that to the extent
constituting Excluded Assets;
(iv)
all intellectual property used in
the Business, including patents, trademarks, copyrights, domain
names, software, trade secrets, know-how and any registrations or
applications for registration of any of the foregoing;
and
(v)
all goodwill associated with the
Business;
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provided, however
, that the Transferred Assets shall
not include any of the Excluded Assets (which shall be retained by
the Existing EFC Entities following the Initial
Closing).
“ Unused Purchase Price
Credit ” shall mean the remaining amount of the Purchase
Price Credit that at a particular point in time has not previously
been applied to reduce the Second Closing Consideration and/or the
Third Closing Consideration.
1.2
Interpretation
. Initially capitalized terms
defined in this Agreement are equally applicable to both their
singular and plural forms. References in this Agreement to a
designated “Article” or “Section” refer to
an Article or Section of this Agreement, unless otherwise
specifically indicated. All pronouns in this Agreement shall
be construed as including both genders and the neuter. In
this Agreement, “including” is used only to indicate
examples, without limitation to the indicated examples, and without
limiting any generality which precedes it.
1.3
Knowledge . When a representation and warranty in
Article V or VI is made to the “knowledge” of the
Edelman Parties, it means the actual knowledge of any of Edelman,
Edward Moore and Jean Edelman. When a representation and
warranty in Article VII is made to the “knowledge”
of SMH, it means the actual knowledge of any of the Chairman of the
Board, the Chief Executive Officer, the President, the Chief
Financial Officer or the Chief Compliance Officer of
SMH.
ARTICLE II
PRE-CLOSING REORGANIZATION; SALES OF EFC LLC UNITS;
CLOSINGS
2.1
Pre-Closing Reorganization; The
Initial Closing .
(a) Prior to the date hereof, EFC and the other Existing EFC
Entities have formed the following new limited liability companies
to effect a reorganization of the Business in advance of the
Initial Closing:
(i)
EFC Inc. formed EFC LLC, and EFC
LLC issued 998 membership interests to EFC Inc. on May 9,
2005;
(ii)
EFC LLC issued 2 membership
interests to Edelman on May 9, 2005, and prior to the
consummation of the Pre-Closing Reorganization, EFC Inc. and
Edelman owned all of the 1,000 outstanding membership interests in
EFC LLC (all of which outstanding membership interests will be
comprised of EFC LLC Units as of immediately following the
effectiveness of the EFC LLC Agreement provided for
below);
(iii)
Edelman Financial
Services, Inc. (“ EFS Inc. ”) formed
Edelman Financial Services, LLC, a Delaware limited liability
company (“ EFS LLC ”), and prior to the
consummation of the Pre-Closing Reorganization EFS Inc. owned all
of the outstanding membership interests in EFS LLC (the “
EFS LLC Interests ”);
(iv)
Edelman Mortgage
Services, Inc. (“ EMS Inc. ”) formed
Edelman Mortgage Services, LLC, a Delaware limited liability
company (“ EMS LLC ”), and prior to
the
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consummation of the Pre-Closing
Reorganization EMS Inc. owned all of the outstanding membership
interests in EMS LLC (the “ EMS LLC Interests
”); and
(v)
Edelman Business
Services, Inc. (“ EBS Inc. ”) and Edelman
Tax & Valuation Services, Inc. (“ ETVS
Inc. ”) formed Edelman Business Services, LLC, a Delaware
limited liability company (“ EBS LLC ” and,
collectively with EFC LLC, EFS LLC and EMS LLC, the “
LLCs ”), and prior to the consummation of the
Pre-Closing Reorganization they together owned all of the
outstanding membership interests in EBS LLC (the “ EBS LLC
Interests ”).
(b)
On the date
hereof (and prior to the execution and delivery of this Agreement),
the Existing EFC Entities and the LLCs entered into a series of
assignment and assumption agreements (collectively, the “
Reorganization Agreements ”) as follows (copies of
which Reorganization Agreements are attached as Exhibit B
hereto), pursuant to which the following assignments, assumptions
and other reorganization steps automatically will occur in the
following order as of immediately following the execution and
delivery of this Agreement (such assignments and assumptions,
collectively, the “ Pre-Closing Reorganization
”):
(i)
EBS Inc., ETVS Inc. and EBS LLC
entered into an assignment and assumption agreement pursuant to
which, upon the consummation of the Pre-Closing Restructuring, all
of the respective Transferred Assets owned by EBS Inc. and ETVS
Inc. (in each case other than EBS LLC Interests) first will be
contributed by EBS Inc. and ETVS Inc. to EBS LLC in respect of the
EBS LLC Interests then held by EBS Inc., and ETVS Inc., and EBS LLC
will assume all of the respective Assumed Liabilities of EBS Inc.
and ETVS Inc.;
(ii)
EMS Inc. and EMS LLC entered into
an assignment and assumption agreement pursuant to which, upon the
consummation of the Pre-Closing Reorganization (and following the
assignment and assumption described in clause (i) above), all
of the Transferred Assets owned by EMS Inc. (other than EMS LLC
Interests) will be contributed by EMS Inc. to EMS LLC in respect of
the EMS LLC Interests then held by EMS Inc., and EMS LLC will
assume all of the Assumed Liabilities of EMS Inc.;
(iii)
EFS Inc. and EFS LLC entered into
an assignment and assumption agreement pursuant to which, upon the
consummation of the Pre-Closing Reorganization (and following the
assignment and assumption described in clause (ii) above), all
of the Transferred Assets owned by EFS Inc. (other than EFS LLC
Interests) will be contributed by EFS Inc. to EFS LLC in respect of
the respective EFS LLC Interests then held by EFS Inc., and EFS LLC
will assume all of the Assumed Liabilities of EFS Inc.;
(iv)
Upon consummation of and following
the assignment and assumption described in clause (i) through
(iii) above, (A) EBS Inc. and ETVS Inc. will distribute
to EFC Inc. all of the EBS LLC Interests owned by EBS Inc. or ETVS
Inc. (as applicable) (in respect of the capital stock of EBS Inc.
and ETVS Inc. held by EFC Inc., respectively), (B) EMS Inc.
will distribute to EFC Inc. all of the EMS LLC Interests owned by
EMS Inc. (in respect of the capital stock of EMS Inc. held by EFC
Inc.), and
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(C) EFS Inc. will distribute
to EFC Inc. all of the EFS LLC Interests owned by EFS Inc. (in
respect of the capital stock of EMS Inc. held by EFC
Inc.);
(v)
EFC Inc. and EFC LLC entered into
an assignment and assumption agreement pursuant to which, upon the
consummation of the Pre-Closing Reorganization (and following the
distributions described in clause (iv) above), all of the
Transferred Assets owned by EFC Inc. (including all of the EBS LLC
Interests, EMS LLC Interests and EFS LLC Interests then owned by
EFC Inc.) will be contributed by EFC Inc. to EFC LLC in respect of
the EFC LLC Units then held by EFC Inc., and EFC LLC will assume
all of the Assumed Liabilities of EFC Inc.
(c)
On the date
hereof (and prior to the execution and delivery of this Agreement),
(i) SMH, EFC Inc. and EFC LLC entered into the EFC LLC
Agreement, which the parties hereto agree shall become effective as
of immediately following the consummation of the Pre-Closing
Reorganization (and immediately prior to the occurrence of the
Initial Closing), and (ii) EFC LLC and each of the other LLCs
entered into such other LLC’s respective limited liability
company agreement attached as Exhibit C hereto, which
subsidiary LLC agreements the Parties agree shall become effective
as of immediately following the consummation of the Pre-Closing
Restructuring (and immediately prior to the occurrence of the
Initial Closing).
(d)
On the date
hereof (and prior to the execution and delivery of this Agreement),
(i) Edelman and EFC LLC entered into an Employment and
Non-Competition Agreement (the “ Edelman Employment
Agreement ”), a copy of which is attached as
Exhibit D hereto, and (ii) SMH, EFC Inc. and Edelman
entered into a Registration Rights Agreement (the “
Registration Rights Agreement ”), a copy of which is
attached as Exhibit E hereto.
2.2
Initial Closing
. Consummation of the purchase
and sale of the First Tranche EFC LLC Units pursuant to
Section 2.3 of this Agreement (the “ Initial
Closing ”) shall occur on the date of this Agreement (the
“ Initial Closing Date ”) as of immediately
following consummation of the Pre-Closing
Reorganization.
2.3
Sale and Purchase of First
Tranche EFC LLC Units; Consideration for First Tranche EFC LLC
Units . At the
Initial Closing:
(i)
EFC Inc. is hereby selling to SMH,
and SMH is hereby purchasing from EFC Inc., the 508 EFC LLC Units
owned and held by EFC; and
(ii)
Edelman is hereby selling to SMH,
and SMH is hereby purchasing from Edelman, the two EFC LLC Units
owned and held by Edelman (the aggregate 510 Units being hereby
sold under this Section 2.3 being herein called the “
First Tranche EFC LLC Units ”).
The aggregate consideration being
paid for all the First Tranche EFC LLC Units (the “
Initial Closing Consideration ”), subject to
adjustment after the Initial Closing as provided in
Section 2.4, is:
(i)
$15,000,000 of cash;
and
14
(ii)
such number of SMH Shares (rounded
to the nearest whole share) as shall equal (x) $5,000,000 divided
by (y) the Initial Closing Market Price determined as of the
Initial Closing Date;
and is being paid to EFC Inc. and Edelman
ratably in accordance with the number of First Tranche EFC LLC
Units being sold by each of them; provided that Edelman shall
receive all cash consideration for his First Tranche EFC LLC
Units.
As of the Initial Closing, EFC and Edelman
hereby transfer and convey the First Tranche EFC LLC Units to SMH,
SMH is hereby admitted as a member of EFC LLC, and Edelman hereby
withdraws as a member of EFC LLC, in each case as of the time of
such transfer and conveyance. As promptly as practicable, and
in any event no later than ten Business Days following the Initial
Closing, SMH shall cause its transfer agent to prepare and deliver
to EFC Inc. and Edelman that portion of the Initial Consideration
consisting of SMH Shares by delivery of a certificate or
certificates for such SMH Shares included in the Initial
Consideration. Promptly following the opening of business on
the Initial Closing Date (and in any event prior to 11:00 a.m.
EST on such day), SMH shall deliver that portion of the Initial
Consideration consisting of cash by wire transfer of immediately
available funds to EFC Inc. and Edelman at the bank accounts
specified on Section 2.3 of the EFC Disclosure
Schedule.
2.4
Adjustment of Consideration for
First Tranche EFC LLC Units . Subject to Sections 4.1 and 4.2, the
Initial Closing Consideration shall be subject to upward adjustment
following the Initial Closing in accordance with this
Section 2.4.
If for the period beginning
October 1, 2005 and ending September 30, 2006 (the
“ Earn-Out Period ”), LLC Net Income
is:
(a)
at least
$3,646,675, but less than $4,550,648, then the Initial Closing
Consideration shall be increased to an amount equal to 51.0% of the
product of (A) 9.0, multiplied by (B) LLC Net Income for
the Earn-Out Period (such amount, if required to be calculated
under this clause (a), the “ Applicable Recalculated
Amount ”) but only if the Applicable Recalculated Amount
is more than $20,000,000;
(b)
at least
$4,550,648, but less than $5,376,880, then the Initial Closing
Consideration shall be increased to an amount equal to 51.0% of the
product of (A) 10.0, multiplied by (B) LLC Net Income for
the Earn-Out Period (such amount, if required to be calculated
under this clause (b), the “ Applicable Recalculated
Amount ”) but only if the Applicable Recalculated Amount
is more than $20,000,000; or
(c)
at least
$5,376,880, then the Initial Closing Consideration shall be
increased to an amount equal to 51.0% of the product of
(A) 11.0, multiplied by (B) LLC Net Income for the
Earn-Out Period (such amount, if required to be calculated under
this clause (c), the “ Applicable Recalculated Amount
”) but only if the Applicable Recalculated Amount is more
than $20,000,000.
In the event that the Applicable
Recalculated Amount is greater than $20,000,000, such excess (the
“ Earn-Out Adjustment ”) shall be paid 50% in
cash and 50% in such number of SMH Shares (rounded to the nearest
whole share) as shall equal (x) 50% of the Earn-Out
Adjustment
15
divided by (y) the Current Market Price
determined as of the date immediately prior to the date delivery of
such SMH Shares to EFC. The Earn-Out Adjustment (if any)
shall be paid to EFC Inc. and Edelman ratably in accordance with
the number of First Tranche EFC LLC Units sold by each of them;
provided that Edelman shall receive all cash consideration for his
First Tranche EFC LLC Units. The Earn-Out Adjustment (if any)
shall be paid by SMH to EFC Inc. and Edelman promptly (and in any
event within two Business Days) after the date on which the LLC Net
Income for the Earn-Out Period shall have been finally determined
in accordance with this Section 2.4.
Not later than November 15,
2006 SMH shall prepare and deliver to EFC Inc. a written statement
(the “ Earn-Out Adjustment Statement ”) setting
forth in reasonable detail the calculation of LLC Net Income for
the Earn-Out Period and the resulting Earn-Out Adjustment. The
Earn-Out Adjustment Statement shall be final and binding on EFC
Inc. unless within 10 Business Days following the date of delivery
of the Earn-Out Adjustment Statement, EFC Inc. notifies SMH in
writing (a “ Section 2.4 Objection Notice
”) that EFC Inc. does not accept as correct the calculation
of LLC Net Income for the Earn-Out Period and the resulting
Earn-Out Adjustment as reflected in the Earn-Out Adjustment
Statement. If (i) EFC Inc. timely delivers a Section 2.4
Objection Notice and (ii) within five Business Days of the
receipt of the Section 2.4 Objection Notice, the calculation
of LLC Net Income for the Earn-Out Period and the resulting
Earn-Out Adjustment is not established by agreement of EFC Inc. and
SMH, then SMH and EFC Inc. shall respectively instruct SMH’s
then independent public accountants (the “ SMH
Accountants ”) and EFC Inc.’s then independent
public accountants (the “ EFC Inc. Accountants
”) (in the event that either such firm is unable or unwilling
to serve in such capacity pursuant to this provision or any other
provision of this Agreement, SMH or EFC Inc., as the case may be,
shall be entitled to designate another accounting firm, subject to
approval of the other Party, which approval shall not unreasonably
be withheld) to attempt to reach agreement as to the calculation of
LLC Net Income for Earn-Out Period and the resulting Earn-Out
Adjustment. If within ten Business Days after the matter has
been referred to the two accounting firms, they have not reached
agreement on it, then the SMH Accountants and the EFC Inc.
Accountants shall be promptly instructed by SMH and EFC Inc.,
respectively, to designate a third accounting firm of nationally or
regionally recognized standing and not having any material business
relationship with either of the parties hereto (and they shall
promptly disclose any such relationships to the other), which
(acting as experts and not as arbitrators) shall be instructed to
make, as soon as practicable after the matter is referred to such
firm, the calculation of LLC Net Income for the Earn-Out Period and
the resulting Earn-Out Adjustment. The determination of LLC Net
Income for the Earn-Out Period by the third accounting firm shall
be final and binding on all of the Parties.
2.5
Consents . Notwithstanding Section 2.1,
neither this Agreement nor the Reorganization Agreements (nor any
other document related to the consummation of the transactions
contemplated hereby or thereby) shall constitute a contribution,
assignment, assumption, transfer, conveyance or delivery or an
attempted contribution, assignment, assumption, transfer,
conveyance or delivery of any contract of EFC Inc. or any of its
Subsidiaries as to which a consent or authorization is required
from a third party for such contribution, assignment, assumption,
transfer, conveyance or delivery if such consent or authorization
is not obtained (or otherwise is not in full force and effect) as
of the consummation of the Pre-Closing Reorganization (the “
Restricted Contracts ”), and any such
Restricted
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Contracts shall be retained by the applicable
Existing EFC Entity until transferred to the LLCs in accordance
with the remainder of this Section 2.5. EFC Inc. and EFC
LLC shall (and shall cause their respective Subsidiaries to) use
commercially reasonable efforts, and SMH shall cooperate with them,
following the Initial Closing to obtain each such consent and
authorization from a third party relating to each Restricted
Contract as promptly as practicable. Pending the receipt of
such consents and authorizations, the Parties shall cooperate with
each other in any reasonable and lawful arrangements designed to
provide to the LLCs the benefits of use of each Restricted Contract
for its term (or any right or benefit arising thereunder, including
the enforcement for the benefit of the LLCs of any and all rights
of EFC Inc. or any of its Subsidiaries thereunder), and the LLCs
shall bear the costs and liabilities of such Restricted Contracts
from and after the Initial Closing. Once a consent or
authorization for the contribution, assignment, assumption,
transfer, conveyance or delivery of a Restricted Contract is
obtained, the applicable Existing EFC Entity hereby assigns,
transfers, conveys and delivers such Restricted Contract to the
applicable LLC, and such LLC hereby assumes the obligations under
such Restricted Contract assigned to it, in each case pursuant to
the applicable Reorganization Agreement (and with retroactive
economic effect to the time of the consummation of the Pre-Closing
Reorganization), and such assignment and assumption shall for all
purposes hereunder and under the EFC LLC Agreement (including
calculations of LLC Net Income and amounts of distributions) be
deemed to have been transferred to the applicable LLC as of the
consummation of the Pre-Closing Reorganization.
2.6
The Second Closing
. Consummation of the purchase
and sale of the Second Tranche EFC LLC Units pursuant to
Section 2.7 shall occur as of the close of business on the
Second Closing Date. At the Second Closing, EFC Inc. shall
sell to SMH (the transfer and conveyance to occur automatically by
operation of this Agreement and with no requirement of delivery by
Edelman of any further instruments of assignment or conveyance),
and SMH shall purchase from EFC, the Second Tranche EFC LLC Units,
and SMH shall deliver the Second Closing Consideration to EFC Inc.
(a) by wire transfer of immediately available funds to a bank
account designated by EFC Inc. to SMH in writing not later than two
Business Days prior to the Second Closing Date, in the case of the
cash portion of the Second Closing Consideration, and (y) by
delivery within five Business Days after the Second Closing Date of
a certificate or certificates representing SMH Shares, in the case
of the portion of the Second Closing Consideration composed of SMH
Shares.
2.7
Second Closing
Consideration . The
consideration payable by SMH to EFC Inc. at the Second Closing in
respect of the purchase by SMH of the Second Tranche EFC LLC Units
shall consist of the following (the “ Second Closing
Consideration ”):
(a)
an amount in cash
equal to 12.5% of the product of (i) the 2007 Price Multiple
multiplied by (ii) LLC Net Income for the fiscal year ending
December 31, 2007; and
(b)
such additional
number of SMH Shares as shall be determined by dividing
(i) the dollar amount determined under the foregoing clause
(a) by (ii) the Current Market Price determined as of the
Second Closing Date;
provided , however , that any Unused Purchase
Price Credit (or such lesser amount thereof as equals total amount
of the Second Closing Consideration, prior to reduction pursuant to
this
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proviso) shall be applied against payment of,
and shall reduce (but not below zero) the amount of the Second
Closing Consideration.
Not later than April 1, 2008,
SMH shall prepare and deliver to EFC Inc. a written statement (the
“ Second Closing Statement ”) setting forth in
reasonable detail the calculation of LLC Net Income for the fiscal
year ending December 31, 2007 and the resulting Second Closing
Consideration. The Second Closing Statement shall be final
and binding on EFC Inc. unless within 10 Business Days following
the date of delivery of the Second Closing Statement, EFC Inc.
delivers a written notice to SMH (a “ Section 2.7
Objection Notice ”) that EFC Inc. does not accept as
correct the calculation of LLC Net Income for the fiscal year
ending December 31, 2007 and the resulting Second Closing
Consideration as reflected in the Second Closing Statement. If
(i) EFC Inc. timely delivers a Section 2.7 Objection
Notice and (ii) within five Business Days of the receipt of
the Section 2.7 Objection Notice, the calculation of LLC Net
Income for the fiscal year ending December 31, 2007 and the
resulting Second Closing Consideration is not established by
agreement of EFC Inc. and SMH, then SMH and EFC Inc. shall
respectively instruct the SMH Accountants and the EFC Inc.
Accountants to attempt to reach agreement as to the calculation of
LLC Net Income for the fiscal year ending December 31, 2007
and the resulting Second Closing Consideration. If within ten
Business Days after the matter has been referred to the two
accounting firms, they have not reached agreement on it, then SMH
Accountants and the EFC Inc. Accountants shall be promptly
instructed by SMH and EFC Inc., respectively, to designate a third
accounting firm of nationally or regionally recognized standing and
not having any material business relationship with either of the
parties hereto (and they shall promptly disclose any such
relationships to the other), which (acting as experts and not as
arbitrators) shall be instructed to make, as soon as practicable
after the matter is referred to such firm (but in any event no
later than two Business Days prior to the Second Closing Date), the
calculation of LLC Net Income for the fiscal year ending
December 31, 2007 and the resulting Second Closing
Consideration. The determination of LLC Net Income for the fiscal
year ending December 31, 2007 and the resulting Second Closing
Consideration by the third accounting firm shall be final and
binding on all of the Parties.
ARTICLE III
THIRD CLOSING; SALE OF EFC SHARES
3.1
The Third Closing
. Consummation of the purchase
and sale of the EFC Shares pursuant to Section 3.2 shall occur
as of the close of business on the Third Closing Date. At the
Third Closing, Edelman shall sell to SMH (the transfer and
conveyance to occur automatically by operation of this Agreement
and with no requirement of delivery by Edelman of any further
instruments of assignment or conveyance other than a duly completed
and executed stock power), and SMH shall purchase from Edelman, the
EFC Shares, and SMH shall deliver the Third Closing Consideration
to Edelman (a) by wire transfer of immediately available funds
to a bank account designated by Edelman to SMH in writing not later
than two Business Days prior to the Third Closing Date, in the case
of the cash portion of the Third Closing Consideration, and (y) by
delivery within five Business Days after the Third Closing Date of
a certificate or certificates representing SMH Shares, in the case
of the portion of the Third Closing Consideration composed of SMH
Shares.
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3.2
Consideration for the EFC
Shares . The
consideration payable by SMH to Edelman at the Third Closing in
respect of the purchase by SMH of the EFC Shares shall consist of
the following (the “ Third Closing Consideration
”):
(a)
an amount in cash
equal to 12.0% of the product of (i) the 2008 Price Multiple
multiplied by (ii) LLC Net Income for the fiscal year ending
December 31, 2008; and
(b)
such additional
number of SMH Shares as shall be determined by dividing
(i) the dollar amount determined under the foregoing clause
(a) by (ii) the Current Market Price determined as of the
Third Closing Date;
provided , however , that any Unused Purchase
Price Credit (or such lesser amount thereof as equals the total
amount calculated pursuant to clauses (a) and (b) above,
prior to reduction pursuant to this proviso) remaining after the
calculation of the Second Closing Consideration shall be applied
against payment of, and shall reduce (but not below zero) the total
amounts calculated pursuant to clauses (a) and
(b) above.
Not later than April 1, 2009,
SMH shall prepare and deliver to Edelman a written statement (the
“ Third Closing Statement ”) setting forth in
reasonable detail the calculation of LLC Net Income for the fiscal
year ending December 31, 2008 and the resulting Third Closing
Consideration. The Third Closing Statement shall be final and
binding on EFC Inc. and Edelman unless within 10 Business Days
following the date of delivery of the Third Closing Statement,
Edelman delivers a written notice (a “ Section 3.2
Objection Notice ”) to SMH that Edelman does not accept
as correct the calculation of LLC Net Income for the fiscal year
ending December 31, 2008 and the resulting Third Closing
Consideration as reflected in the Third Closing Statement. If
(i) Edelman timely delivers a Section 3.2 Objection
Notice and (ii) within five Business Days of the receipt of
the Section 3.2 Objection Notice, the calculation of LLC Net
Income for the fiscal year ending December 31, 2008 and the
resulting Third Closing Consideration is not established by
agreement of Edelman and SMH, then SMH and Edelman shall
respectively instruct the SMH Accountants and EFC Inc. Accountants
to attempt to reach agreement as to the calculation of LLC Net
Income for the fiscal year ending December 31, 2008 and the
resulting Third Closing Consideration. If within ten Business
Days after the matter has been referred to the two accounting
firms, they have not reached agreement on it, then SMH Accountants
and EFC Inc. Accountants shall be promptly instructed by SMH and
Edelman, respectively, to designate a third accounting firm of
nationally or regionally recognized standing and not having any
material business relationship with either of the parties hereto
(and they shall promptly disclose any such relationships to the
other), which (acting as experts and not as arbitrators) shall be
instructed to make, as soon as practicable after the matter is
referred to such firm (but in any event no later than two Business
Days prior to the Third Closing Date), the calculation of LLC Net
Income for the fiscal year ending December 31, 2008 and the
resulting Third Closing Consideration. The determination of LLC Net
Income for the fiscal year ending December 31, 2008 and the
resulting Third Closing Consideration by the third accounting firm
shall be final and binding on all of the Parties.
3.3
Additional Shares
. On the Business Day
immediately prior to the Third Closing Date, SMH shall contribute
to EFC LLC such additional number of SMH Shares (the “
Additional Shares ”) as shall be determined by
dividing (i) $1.25 million by (ii) the Current
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Market Price determined as of the Third Closing
Date (which SMH Shares shall be delivered in certificated form by
SMH to EFC LLC representing a portion of the Bonus Payment Amount
and which shall be subject to the vesting requirements set forth in
the employment agreements between EFC LLC and the employees of EFC
LLC set forth on Schedule 1.1 of the EFC Disclosure
Schedule).
ARTICLE IV
PURCHASE PRICE PARAMETERS
4.1
Price Cap . Notwithstanding any other provision of
this Agreement to the contrary, the total of the Initial
Consideration, the Earn-Out Adjustment, the Second Closing
Consideration and the Third Closing Consideration shall not exceed
$128.5 million. Once the aggregate value of all cash paid and SMH
Shares delivered to EFC Inc. and/or Edelman as consideration for
EFC LLC Units and/or the EFC Shares reaches $128.5 million, then
all further sales of EFC LLC Units and/or EFC Shares required to be
made under Sections 2.6 or 3.1 shall be made for no further
consideration. For purposes of this Section 4.1, the
“value” of SMH Shares issued under this Agreement shall
be their value as determined by Current Market Value at their
respective dates of delivery, notwithstanding subsequent changes in
Current Market Value.
4.2
Limitation on Issuances of SMH
Shares .
Notwithstanding any other provision of this Agreement to the
contrary, if any required issuance of SMH Shares to EFC Inc. or
Edelman under the terms of this Agreement as payment of purchase
price (an “ Applicable Payment ”), when combined
with all prior issuances of SMH Shares under this Agreement, would
result in the aggregate issuance of (i) SMH Shares with voting
power equal to or exceeding 20% of the voting power of the total
number of SMH Shares outstanding at the date of this Agreement or
(ii) a number of SMH Shares equal to or exceeding 20% of the
total number of SMH Shares outstanding at the date of this
Agreement, then SMH shall make such Applicable Payment in cash
(rather than in SMH Shares).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
CONCERNING THE EXISTING EFC ENTITIES
EFC Inc. and Edelman jointly and
severally represent and warrant to SMH as of immediately prior to
the consummation of the Pre-Closing Reorganization that, except as
set forth in the EFC Disclosure Schedule:
5.1
Organization
. Each of the Existing EFC
Entities is a corporation duly organized and validly existing under
the Laws of the Commonwealth of Virginia. Each of the
Existing EFC Entities has full authority and corporate power to
conduct its business as now conducted, except for failures of any
of the foregoing which individually or in the aggregate would not
reasonably be expected to have a Material Adverse Effect on EFC
Inc. Each of the Existing EFC Entities is qualified to do
business in each jurisdiction in which the nature of its operations
or the location of its properties require it to be so qualified
except where the failure to qualify
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individually or in the aggregate would not
reasonably be expected to have a Material Adverse Effect on EFC
Inc. EFC Inc. has delivered to SMH true, correct and complete
copies of the Charter Documents of each of the Existing EFC
Entities.
5.2
Authority Relative to this
Agreement and the Pre-Closing Reorganization
. EFC Inc. has the requisite
corporate power and authority to enter into and perform its
obligations under this Agreement, and Edelman has the legal
capacity to enter into and perform his obligations
