ACQUISITION AGREEMENT

Exhibit 10.1

 

ACQUISITION AGREEMENT

 

This Agreement, dated as of August 19, 2005, by and between Wicks Learning Group, LLC, a Delaware limited liability company (“Seller”), and School Specialty, Inc., a Wisconsin corporation (“Buyer”).

 

WHEREAS, Seller owns all of the membership interests of Delta Education, LLC, a Delaware limited liability company (the “Company”), and such membership interests being the “Membership Interests”.

 

WHEREAS, the Company is engaged in the business of publishing, assembling, marketing, selling and distributing books, publications, software, kits, programs and materials for elementary school and secondary school education (the “Business”).

 

NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties herein contained, and upon the terms and subject to the conditions hereinafter set forth, the parties hereto hereby agree as follows:

 

ARTICLE 1

 

Sale and Purchase of Membership Interests

 

1.1 Sale and Purchase . Subject to the terms and conditions hereof, at the Closing (as such term is defined in Section 2.1 below), Seller shall, sell, assign, convey and transfer to Buyer, and Buyer shall purchase from Seller, all right, title and interest of Seller in and to the Membership Interests, free and clear of all Liens (as hereinafter defined).

 

1.2 Purchase Price; Payment . In consideration of the sale, assignment and transfer of the Membership Interests pursuant to Section 1.1 hereof, Buyer shall pay an amount (the “Purchase Price”) equal to $272,000,000, plus the amount of cash and cash equivalents on hand in the Company’s bank, money market and/or securities accounts as of the date (such date being the “Measurement Date”) which is earliest of the Closing Date or the Stated Date (as herein defined), subject to an appropriate reserve for outstanding checks as of the Measurement Date, subject to possible adjustment pursuant to Section 5.15 hereof. It being understood that, from the Purchase Price payable by Buyer to Seller, without double counting: (i) Buyer shall be entitled to deduct therefrom Seller’s share of the Transaction Taxes under Section 5.9 paid by Buyer at Closing, if any, Seller’s share of the HSR Fees and any Excluded Liabilities paid at Closing by Buyer on Seller’s behalf, (ii) the portion of the Purchase Price equal to the outstanding indebtedness of the Company owing to the Lenders as of the Closing Date under the Credit Agreement (the “Debt Amount”) shall be paid by Buyer in accordance with the instructions of the Agent under the Credit Agreement, (iii) $15,000,000 (the “Escrow Amount”) shall be delivered to JPMorgan Chase Bank, or if such entity is not willing to serve as escrow agent, such

other escrow agent as Seller and Buyer shall agree upon, such agreement not to be unreasonable withheld or delayed (the “Escrow Agent”) to be held in escrow pursuant to the terms and conditions of the Escrow Agreement substantially in the form attached hereto as Exhibit 1.2 (the “Escrow Agreement”), and (iv) the balance of the Purchase Price shall be paid to Seller, as hereinafter provided.

 

1.3 Allocation of Purchase Price . The Purchase Price and all other items that comprise the applicable “consideration” (as defined in Treasury Regs. §1.1060-1(c)) shall be allocated in accordance with Exhibit 1.3 hereto. Neither Seller nor Buyer shall, nor shall either of them permit any of its Affiliates (including the Company) to, file any Tax Return, or take a position with a Tax authority, that is inconsistent with the allocation of the Purchase Price set forth on Exhibit 1.3 hereto, or that treats the transactions contemplated by this Agreement in a manner inconsistent with the terms of this Agreement. Each of Seller and Buyer agrees to cooperate with the other party in preparing a Form 8594 in a manner consistent with said Exhibit 1.3 for filing by each of them (or their applicable Affiliates) and to furnish the other party with a copy of such Form 8594 within a reasonable period before its filing due date.

 

ARTICLE 2

 

Closing; Deliveries; Conditions Precedent

 

2.1 Closing .

 

(a) The closing under this Agreement (the “Closing”) shall take place at the offices of Golenbock Eiseman Assor Bell & Peskoe LLP, 437 Madison Avenue, New York, New York, as soon as reasonably practicable, but no later than 10:00 a.m., local time, on the third (3rd) business day on or by which the last condition specified in Section 2.4(c) hereof shall have been fulfilled or waived in accordance with this Agreement, or, if the parties shall mutually agree upon another date, then such other mutually agreed upon date. The date of the Closing is herein called the “Closing Date”.

 

(b) All proceedings to be taken and all documents to be executed and delivered by the parties at the Closing shall be deemed to have been taken and executed simultaneously and no proceedings shall be deemed taken nor any documents executed or delivered until all have been taken, executed and delivered.

 

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2.2 Seller Deliveries . Concurrently with the execution and delivery hereof, Seller is causing to be executed and delivered to Buyer a Back-Up Indemnification Agreement in the form of attached hereto as Exhibit 2.2 (the “Indemnification Agreement”), duly executed by Wicks Communication & Media Partners, L.P. (the “Fund”), Wicks Parallel (Limited) Partnership I, L.P., Gary Facente 2005 Irrevocable Trust, David Cruise, and Steven Korte (collectively, the “Back-Up Indemnitors”). At the Closing, Seller shall deliver to Buyer:

 

(a) an Instrument of Transfer and Assumption, in respect of the Membership Interests, executed by Seller, substantially in the form of Exhibit 2.2(a) hereto (the “LLC Instrument”);

 

(b) a release dated the Closing Date in the form of Exhibit 2.2(b) hereto from Seller in favor of the Company;

 

(c) a Non-Competition and Non-Solicitation Agreement from the Fund substantially in the form of Exhibit 2.2(c) hereto, executed by the Fund;

 

(d) complete and correct copies of the Certificate of Formation (the “Certificate”) and limited liability company agreement (the “Operating Agreement”) of Seller and the Company, certified by an officer of each of Seller and the Company to be true, complete and correct as of the Closing Date;

 

(e) copies of the limited liability company resolutions authorizing the execution and delivery by Seller of this Agreement and consummation of the transactions contemplated hereby, certified by an officer of Seller;

 

(f) a certificate of good standing with respect to each of Seller and the Company, as of a then recent date by the Secretary of State of the State of Delaware;

 

(g) the Escrow Agreement, duly executed by Seller;

 

(h) a certificate of an appropriate officer of Seller certifying as to the incumbency of the officers of Seller, executing this Agreement and the Seller Documents, including specimen signatures; and

 

(i) all other documents required by the terms of this Agreement to be executed and/or delivered by Seller to Buyer at the Closing.

 

2.3 Buyer’s Deliveries . At the Closing, Buyer will pay and/or deliver to Seller (or as otherwise expressly indicated below):

 

(a) in accordance with the instructions of the Agent under the Credit Agreement, the Debt Amount, by wire transfer of immediately available funds;

 

(b) in accordance with instructions of the Escrow Agent, the Escrow Amount, by wire transfer of immediately available funds;

 

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(c) an amount equal to the balance of the Purchase Price as determined in accordance with Section 1.2, above, shall be paid to Seller by wire transfer of immediately available funds to such accounts as Seller shall specify;

 

(d) a release dated the Closing Date in the form of Exhibit 2.3(d) hereto from the Company in favor of Seller and its Affiliates and the officers of the Company named therein;

 

(e) copies of the organizational documents of Buyer, certified by an officer of Buyer to be true, complete and correct as of the Closing Date;

 

(f) a copy of resolutions of Buyer authorizing the execution and delivery of this Agreement and the Buyer Documents and the consummation of the transactions contemplated hereby and thereby, certified by an officer of Buyer;

 

(g) the Buyer Sublease L/C and each Further Buyer L/C, or the Substitute Collateral, as required by Section 2.6 hereof;

 

(h) a certificate of the Secretary or other appropriate officer of each of Buyer certifying as to the incumbency of the officers of Buyer, as applicable, executing this Agreement and the Buyer Documents, and including specimen signatures;

 

(i) a certificate of status with respect to Buyer, issued as of a then recent date by the Wisconsin Department of Financial Institutions;

 

(j) the Escrow Agreement, duly executed by Buyer and Escrow Agent; and

 

(k) all other documents required by the terms of this Agreement to be executed and/or delivered by Buyer at the Closing.

 

2.4 Conditions Precedent to Buyer’s Obligations . The obligations of Buyer under this Agreement to proceed with the Closing are subject, at the option of Buyer, to the fulfillment of the following conditions at or prior to the Closing:

 

(a) the representations and warranties of Seller contained in this Agreement and/or any certificate delivered at the Closing pursuant to this Agreement shall be true and correct when made, except where, in the case of those representations and warranties (or any portion(s) thereof) which are not limited by the term Material Adverse Effect, the failure to be true and correct would not have a Material Adverse Effect, and except for changes permitted by this Agreement, and, except for representations and warranties made as of a specific date, shall also be true and correct at the time of Closing with the same force and effect as though such representations and warranties were made at that time, except where, in the case of those representations and warranties (or any portion(s) thereof) which are not limited by the term Material Adverse Effect, the failure to be true and correct would not have a Material Adverse Effect;

 

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(b) each covenant, agreement and obligation required by the terms of this Agreement to be complied with and performed by Seller at or prior to the Closing, shall have been complied with and performed in all material respects;

 

(c) the waiting period under the HSR Act (as hereinafter defined) shall have expired or been terminated;

 

(d) no United States or state governmental authority or other agency or commission or United States or state court of competent jurisdiction (a “Governmental Authority”) shall have issued, enforced or entered any injunction or other order which is in effect and has the effect of making the transactions contemplated by this Agreement illegal or otherwise restraining or prohibiting consummation of such transactions; provided, however, that Buyer shall have used its best efforts to have any such order or injunction vacated; and

 

(e) there shall be delivered to Buyer an opinion of counsel to Seller, dated as of the Closing Date, substantially in the form of Exhibit 2.4(e) hereto;

 

(f) there shall be delivered to Seller a Non-Competition and Non-Solicitation Agreement for Gary Facente, substantially in the form of Exhibit 2.4(f) hereto.

 

(g) there shall have been delivered to Buyer termination statements and releases of the Lenders in form satisfactory to release the liens and security interests of the Lenders on the properties and assets of the Company and on the Membership Interests, the delivery and effectiveness of which shall be subject to the Lender’s receipt of the Debt Amount pursuant to this Agreement and Buyer’s compliance with Section 2.6 hereof;

 

(h) there shall be delivered to and for the benefit of Buyer a certificate of Seller executed as of the Closing Date that the conditions set forth in subsections (a) and (b) of this Section 2.4 have been fulfilled.

 

2.5 Conditions Precedent to Seller’s Obligations . The obligations of Seller under this Agreement to proceed with the Closing are subject, at the option of Seller, to the fulfillment of each of the following conditions at or prior to the Closing:

 

(a) the representations and warranties of Buyer contained in this Agreement, and/or any certificate delivered at the Closing pursuant to this Agreement, shall be true and correct in all material respects when made, and shall also be true and correct in all material respects at the time of the Closing with the same force and effect as though such representations and warranties were made at that time, except for changes permitted by this Agreement;

 

(b) each covenant, agreement and obligation required by the terms of this Agreement to be complied with and performed by Buyer at or prior to the Closing shall have been duly and properly complied with and performed;

 

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(c) the waiting period under the HSR Act shall have expired or been terminated;

 

(d) no Governmental Authority shall have issued, enforced or entered any injunction or other order which is in effect and has the effect of making the transactions contemplated by this Agreement illegal or otherwise restraining or prohibiting consummation of such transactions; and

 

(e) there shall be delivered to Seller an opinion of counsel to Buyer, dated as of the Closing Date, substantially in the form of Exhibit 2.5(e) hereto.

 

(f) there shall be delivered to the Company a certificate of Buyer executed as of the Closing Date that the conditions set forth in subsections (a) and (b) of this Section 2.5 have been fulfilled.

 

2.6 Sublease Matters and Other L/C Matters . (a) Buyer shall provide at the Closing a letter of credit from a bank or lending institution satisfactory to Seller, such letter of credit to conform to the requirements of the Sublease (the “Buyer Sublease L/C”), and shall take all steps reasonably requested by Seller to have the Buyer Sublease L/C substituted for the letter of credit in the amount of $700,000 provided by the Company (the “Company Sublease L/C”) and held by the Sublessor pursuant to the Sublease, and to have the Company Sublease L/C promptly returned to Seller for cancellation (including without limitation by cooperating in such pre-Closing escrow arrangement with the Sublessor for the receipt, holding and exchange for the Company Sublease L/C of the Buyer Sublease L/C, as Seller shall request).

 

(b) Buyer shall provide at the Closing substitute letters of credit from one or more banks or lending institutions satisfactory to Seller, (or reasonably satisfactory collateral) with respect to the letters of credit identified on Schedule 3.2 of the Disclosure Schedule. Any substitute letters of credit shall conform to the applicable requirements referred to in Schedule 3.2 of the Disclosure Schedule (each such letter of credit being a “Further Buyer L/C”), and Buyer shall take all steps reasonably requested by Seller to have each Further Buyer L/C substituted for the corresponding letter of credit referred to in said Schedule 3.2 (each such letter of credit being a “Further Company L/C”), and to have each Further Company L/C promptly returned to Seller for cancellation (including without limitation by cooperating in such pre-Closing escrow arrangements for the receipt, holding and exchange for each Further Company L/C of the corresponding Further Buyer L/C as Seller shall request.

 

(c) In the event the Company Sublease L/C or any Further Company L/C remains outstanding at the Closing, Buyer shall deposit at the Closing with the agent for the lenders under the Credit Agreement such amount (by wire transfer of immediately available funds to such account as such agent shall designate), one or more back-up letters of credit, or other instrument or documentation (any such amount, letter(s) of credit or instrument or document being herein called an “Substitute Collateral”) as such agent shall require (but not to exceed 110% of the face value of the

 

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Company Sublease L/C or any Further Company L/C that remains outstanding at the Closing), to secure or support all obligations arising out of or which could arise out of the drawing of, any or all of the Company Sublease L/C and each Further Company L/C and fees relating thereto.

 

2.7 Agreements Regarding Certain Employees . Seller acknowledges that Gary Facente may, at his option, continue to be employed by the Company after the Closing Date through October 14, 2005, it being further understood and acknowledged by Buyer that Mr. Facente will at all times continue to be entitled to act as a consultant to and or an officer and/or an employee of EMC Corporation and/or any of its Affiliates (subject to the restrictions set forth in the agreement referred to in Section 2.4(f) above).

 

ARTICLE 3

 

Representations and Warranties of Seller

 

Seller hereby makes each of the following representations and warranties:

 

3.1 Organization, Standing and Qualification; Authority; Capitalization.

 

(a) The Company is a limited liability company validly existing and in good standing under the laws of the State of Delaware. The Company is duly qualified to do business and is in good standing as a foreign limited liability company under the laws of each state where the failure to be so qualified would result in a Material Adverse Effect. The Company has the requisite limited liability company power and limited liability company authority to own and lease its properties and to carry on its business in the places such properties are now owned or leased or where such business is presently conducted. The copies of the Certificate and Operating Agreement heretofore delivered by the Seller are complete and correct.

 

(b) Except as listed on Schedule 3.1(b) of the Disclosure Schedule delivered by the Company concurrently with the execution and delivery of this Agreement (the “Disclosure Schedule”), the Company has no subsidiaries nor any interest, direct or indirect, or has any commitment to purchase any interest, direct or indirect, in any other corporation, partnership, joint venture or other business enterprise or entity which owns or conducts the operations of the Business. Except as indicated in said Schedule 3.1(b) , none of the Business, or the assets or properties of the Company is owned, used or conducted by any affiliate of the Company.

 

(c) Seller is a limited liability company validly existing and in good standing under the laws of Delaware. This Agreement has been duly executed by Seller. This Agreement constitutes the legal, valid and binding obligation of Seller, and each of the Seller Documents shall, when executed and delivered by Seller, constitute the legal, valid and binding obligations of Seller, in each case, assuming due execution of such documents by the other parties thereto.

 

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(d) Seller has all requisite limited liability company power and limited liability company authority to enter into this Agreement and each of the other agreements, certificates and instruments to be executed and delivered by it pursuant hereto (collectively the “Seller Documents”) and to carry out the transactions contemplated hereby and thereby. All limited liability company proceedings required to be taken by Seller relating to the execution, delivery and performance of this Agreement and the Seller Documents and the consummation of the transactions contemplated hereby have been duly taken.

 

(e) The Membership Interests constitute all of the membership interests in the Company and all of the Membership Interests are owned of record and beneficially by Seller. There are not outstanding any securities or rights convertible into or exchangeable for securities of, or membership interests in, the Company and there are no contracts, commitments, understandings or arrangements by which the Company or Seller is bound to issue any membership interests or securities or rights convertible into or exchangeable for membership interests, or options, warrants or rights to purchase any such membership interests. Seller has good title to the Membership Interests, free and clear of all liens, except for Liens in favor of the Lenders under the Credit Agreement which are to be released at Closing upon the Lender’s receipt of the Debt Amount pursuant to this Agreement and Buyer’s compliance with Section 2.6 hereof.

 

3.2 No Violation . Except for the expiration or termination of the waiting period under the HSR Act or as indicated in Schedule 3.2 of the Disclosure Schedule: the execution, delivery and performance by Seller of this Agreement and the Seller Documents and its consummation of the Transactions, will not conflict with or violate the Certificate or Operating Agreement of the Company or of Seller or any lease, license, promissory note, conditional sales contract, indenture, mortgage, deed of trust or other agreement or instrument to which the Company or Seller is a party, or any law, rule or regulation to which the Company or Seller is subject, which in any case would reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect, or violate any court or administrative order by which the Company is bound, and no approval or consent of any governmental authority is necessary for the execution, delivery and performance by Seller of this Agreement which, if not obtained, would reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

 

3.3 Financial Statements . Buyer has been provided copies of (collectively, the “Financial Statements”): (i) the audited balance sheet and related audited statement of income and cash flow of the Company as at and for the fiscal year ended December 31, 2004, and (ii) the unaudited balance sheet and statement of income of the Company as at and for the six (6) months ended July 3, 2005 (such July 3, 2005 balance sheet being the “Recent Balance Sheet”). Except as indicated in and subject to Schedule 3.3 of the Disclosure Schedule, the Financial Statements have been prepared in accordance with GAAP and fairly present in all material respects the financial position of the Company and the results of operations of the Company as of the respective dates thereof and for the entire fiscal periods covered

 

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thereby, subject, in the case of all interim period Financial Statements, to the absence of footnotes and year-end audit adjustments. The Financial Statements are attached to Schedule 3.3 of the Disclosure Schedule.

 

3.4 Absence of Undisclosed Liabilities . The Company has no liability which would be required in accordance with GAAP to be set forth or reserved against on a balance sheet of the Company which has not been set forth on the Recent Balance Sheet or referred to in the notes to the most recent audited consolidated balance sheet included among the Financial Statements, except as indicated on Schedule 3.4 of the Disclosure Schedule, or on any one or more of the other Schedules of the Disclosure Schedule, and except for those (i) incurred after such date in the ordinary course of business, (ii) covered by insurance, indemnification or comparable arrangements, or (iii) which would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

 

3.5 Absence of Certain Changes or Events . Except as set forth in Schedule 3.5 of the Disclosure Schedule, or as contemplated or permitted by this Agreement, since the date of the Recent Balance Sheet; (i) there has not been any salary increase payable by the Company to any of the key employees of the Company, except increases which do not exceed five (5%) percent occurring in the ordinary course of business in accordance with customary practices or as a result of bona fide reclassification or promotion, (ii) there has not been any material increase in the rates or terms of pension and similar employee benefit plans of the Company, except increases occurring in the ordinary course of business in accordance with the Company’s customary practices, (iii) there has not been any material grant by the Company of severance pay in favor of any employee of the Company except in the ordinary course of business in accordance with customary practices, (iv) there has not been any entry into any material agreement or material transaction by the Company outside the ordinary course of business by the Company, (v) there has not been any material change by the Company in its accounting methods, principles or practices, other than as required by GAAP, (vi) the Company has not mortgaged, pledged or granted a security interest on any of its assets, (vii) the Company has not sold, transferred, leased to others or otherwise disposed of any material assets, except in the ordinary course of business and except for cash distributions to Seller, (viii) the Company has not encountered any labor union organizing activity, had any actual or threatened employee strike, work stoppage, slow down or lockout, which has had or is expected to, individually or in the aggregate, have a Material Adverse Effect, (ix) made or agreed to make any modification or amendment to any of the Material Contracts or terminated or agreed to terminate any Material Contract, prior to the expiration of the applicable term thereof, which in any case or in the aggregate would have a Material Adverse Effect, (x) amended the Company’s Certificate of Formation, Operating Agreement or other governing documents, (xi) discharged any material lien upon any material asset of the Company, other than in the ordinary course of business, except liens existing in connection with the Credit Agreement or other indebtedness for borrowed money, (xii) there has not been a Material Adverse Effect, (xiii) the Company has not accelerated, in any material respects, the collection of accounts receivable or the shipment of products, in each case outside the ordinary

 

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course of business, or (xiv) there has not been, in any material respects, the deferment of trade accounts payable outside the ordinary course of business consistent with past practices.

 

3.6 Tax Matters . Except as set forth on Schedule 3.6 of the Disclosure Schedule:

 

(a) The Company has timely filed all material Tax Returns that it has been required to file. All Taxes shown on any such Tax Return have been paid. No material pending claim has been made in writing by an authority in a jurisdiction where the Company does not file Tax Returns that it is subject to taxation by that jurisdiction.

 

(b) No Tax audits or administrative or judicial proceedings are being conducted as of the date of this Agreement with respect to Taxes of the Company. As of the date of this Agreement, there is no material deficiency for any Tax, claim for additional material Taxes, or other dispute or claim concerning any material Tax liability of the Company, claimed, issued or raised by any Tax authority that has not been properly reflected in the Financial Statements and will not be reflected in the Closing Working Capital. Schedule 3.6 of the Disclosure Schedule lists all federal, state, local and foreign income Tax Returns filed with respect to the Company for taxable periods ended on or after December 31, 2001, and prior to the date of this Agreement and indicates those income Tax Returns that have been audited. Seller has delivered to Buyer correct and complete copies of all such income Tax Returns. As of the date of this Agreement, the Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

 

(c) The aggregate unpaid Taxes of the Company (i) did not, as of December 31, 2004, materially exceed the reserve for liability for Taxes set forth on the December 31, 2004 balance sheet of the Company, and (ii) do not materially exceed that reserve as to be adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company.

 

(d) The Company is a single-member domestic limited liability company. No election has been made with respect to the Company under Treasury Regs. §301.7701-3(c)(1)(i) to have the Company treated other than as a disregarded entity.

 

(e) The Company, in all material respects, has withheld and paid over all Taxes required to have been withheld and paid over, and complied, in all material respects, with all information reporting in respect of backup withholding requirements, including maintenance of required records with respect thereto, in respect of amounts paid or owing to any employee, creditor, independent contractor or other third party.

 

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(f) For purposes of this Agreement, “Tax” or “Taxes” means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, windfall profits, franchise, withholding, social security, unemployment, real property, personal property, sales, use, transfer, value added, alternative or add-on minimum, or other tax, including any interest, penalty, or addition thereto, and including any obligation to indemnify or otherwise assume or succeed to the Tax liability of any other person; and “Tax Return” means any return, declaration or report, of Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

3.7 Real Property . Schedule 3.7 of the Disclosure Schedule sets forth a list of all real property owned by the Company and all material leases by the Company of real property used for the operations of the Business (each such parcel of real property being herein called “Real Property”, and collectively the “Real Properties”).

 

3.8 Other Tangible Property . Except as set forth on Schedule 3.8 of the Disclosure Schedule, the books and records of the Company in all material respects reflect the vehicles, machinery, equipment and other tangible personal property owned or leased by the Company. Except as set forth on said Schedule 3.8 and except for Permitted Liens, no material personal property of the Company, used for the operations of the Business is held under any lease, security agreement, conditional sales contract, or other title retention or security arrangement, or is located other than in the possession or under the control of the Company.

 

3.9 Intellectual Property . Schedule 3.9 of the Disclosure Schedule sets forth a list of all, patents, trademarks and service marks and copyrights (and all applications in respect of the foregoing) which are registered and owned by the Company and are material to the Business. Except as set forth in said Schedule 3.9 : the Company owns or has the right to use its Intellectual Property as it is now used in the Business, free and clear of all Liens, other than Permitted Liens, except for Intellectual Property the lack of which would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; there is no infringement or alleged infringement by others of any of the Company’s Intellectual Property which individually or in the aggregate is reasonably expected to have a Material Adverse Effect; and, except as provided in any license or other agreement pursuant to which the Company have obtained the right to use such Intellectual Property, there is no material restriction on Seller’s use of the Intellectual Property relating to the Business substantially consistent with current practice; the Company is not infringing on any trade name, trademark, service mark or copyright of any other person or entity, which infringements are reasonably expected individually or in the aggregate to have a Material Adverse Effect.

 

3.10 Title to Assets; Condition of Property.

 

(a) Except as set forth on Schedule 3.10(a) of the Disclosure Schedule, the Company has good title to the property and assets owned or purported to

 

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be owned by it (other than the Intellectual Property, with respect to which only the representations and warranties of Seller set forth in Section 3.9 hereof shall govern and control), free and clear of all Liens, except for the Permitted Liens.

 

(b) Except as set forth in Schedule 3.10(b) of the Disclosure Schedule, the Real Property owned or leased by the Company and the tangible personal property, that is necessary to the operations of the Business as presently conducted is, to the knowledge of Seller, in operating condition, reasonable wear and tear excepted, except where the failure to be in such condition, or the cost or replacing, correcting or repairing the same, would not have individually or in the aggregate a Material Adverse Effect.

 

3.11 Insurance Policies . Schedule 3.11 of the Disclosure Schedule sets forth a list of material insurance policies held by the Company as of the date of this Agreement concerning the Business. Except as set forth in said Schedule 3.11 , no claims are pending under any such policy which would reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

 

3.12 Contracts . Except as indicated below, Schedule 3.12 of the Disclosure Schedule lists or describes all written contracts, agreements and leases of the Company in effect as of the date of this Agreement which are material to the Company as well as the following to which the Company is a party (the “Material Contracts”):

 

(a) all material leases and subleases of real property by the Company;

 

(b) each contract or agreement for the purchase or lease of personal property with any supplier that involves payments in excess of $50,000 in any single case, other than purchase orders or short-term arrangements (i.e. less than 60 days) entered into in the ordinary course of business;

 

(c) each author or publishing contract or agreement that involves or is reasonably expected to involve royalty or similar payments in excess of $50,000 in respect of the immediately preceding fiscal year or the current fiscal year of the Company;

 

(d) all broker, dealer, manufacturer’s representative or reseller contracts involving payments in excess of $50,000 per annum in any single case to which the Company is a party;

 

(e) any contract or agreement that contemplates or involves (i) the payment or delivery of cash or other consideration to the Company in an amount in excess of one hundred thousand dollars ($100,000), or (ii) the performance of services or sales of products by the Company having a value in excess of one hundred thousand dollars ($100,000), which in either case is not terminable by the Company without material penalty or on not more than 30 days prior notice, other than purchase or sales orders, or short-term arrangements (i.e., less than 60 days), entered into in the ordinary course of business;

 

 

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(f) all contracts or agreements relating to the Company’s indebtedness for borrowed money;

 

(g) any written employment contract currently in effect, other than any involving at-will employment;

 

(h) any contract or agreement for the management of the Business; and

 

(i) any material contract or agreement containing covenants not to compete in any line of business or with any other person in any geographical area or covenants of any other person not to compete with the Business in any line of business or in any geographical area.

 

Except as set forth on Schedule 3.12 of the Disclosure Schedule, Seller has delivered or made available to Buyer, in all material respects, true and correct copies of all such Material Contracts. Notwithstanding anything to the contrary contained herein, Schedule 3.12 of the Disclosure Schedule shall not be required to, and the term “Material Contracts” shall not, include (i) any contracts or agreements relating to the acquisition of any of the properties or assets of the Company if the obligations of the Company thereunder have been fully performed (except for customary assumptions of liabilities of sellers and indemnification obligations as to post-closing operations of acquired businesses), (ii) contracts or agreements granting rights to publish, license, distribute publications, programs or other works that have been performed in full by the Company or do not require future royalty payments or contain other material continuing obligations of the Company or Seller, (iii) purchase, sale and other business or end user orders for products, materials, goods or services in the ordinary course of business, or (iv) other agreements not covered in clause (i), clause (ii) or clause (iii) above entered into in the ordinary course of business involving payments by the Company of less than $50,000 in any single case and less than $500,000 in the aggregate. The Material Contracts identified on Schedule 3.12 of the Disclosure Schedule as “Terminating Contracts” are to be terminated effective as of or prior to the Closing, including, without limitation, in the case of the Employment Agreements, dated as of August 8, 2001, between the Company and Gary Facente (the “Employment Agreement”), those obligations of Gary Facente pursuant to Section 9 of the Employment Agreement, which would otherwise have survived the termination of his employment with the Company. Unless otherwise noted on Schedule 3.12 of the Disclosure Schedule, to the knowledge of Seller, the Material Contracts are in full force and effect (except as the same may terminate or expire or may have terminated or expired in accordance with the terms thereof), and the Company is not in default of, nor has there occurred an event or condition which, with the passage of time or giving of notice (or both) would constitute a Company default of, any Material Contract, which default, and the cost of curing the same, would individually or in the aggregate have a Material Adverse Effect.

 

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3.13 Compliance with Laws . Except as set forth on Schedule 3.13 of the Disclosure Schedule, there is no violation by the Company of any applicable federal, state or local statute, law or regulation (including, without limitation, any applicable building, zoning, or other law, ordinance or regulation, but excluding (i) any environmental matters, it being understood that such matters shall be governed exclusively by Section 3.19 hereof, and (ii) employee benefit or welfare or employment or labor related matters, it being understood that such matters shall, as the case may be, be governed exclusively by Section 3.16 or Section 3.17 hereof) affecting its properties or the operation of the Business, which violation, and the cost of curing the same, would individually or in the aggregate have a Material Adverse Effect.

 

3.14 Litigation . Except as set forth on Schedule 3.14 of the Disclosure Schedule, there is not pending, nor, to the knowledge of Seller, threatened, any suit, legal action, arbitration, or legal or administrative proceeding, against the Company which would reasonably be expected to have a Material Adverse Effect or a material adverse effect on the ability of the Company to consummate the Transactions. The Company is not in material violation of any order, writ, injunction or decree of any Governmental Authority expressly directed at or naming the Company.

 

3.15 Governmental Authorizations . Except as set forth in Schedule 3.15 of the Disclosure Schedule, the Company has all governmental authorizations, licenses, franchises and permits necessary to the operations of the Business, except where the failure to have the same, and the cost of obtaining the same would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

 

3.16 Employee Benefit Matters . (a) Schedule 3.16 of the Disclosure Schedule sets forth all employee benefit plans (within the meaning of Section 3(3) of ERISA) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance, termination or other material benefit plans, programs or arrangements, which are maintained, contributed to or sponsored by the Company for the benefit of any current or former employee of the Company (the plans, programs and arrangements, described herein being the “Employee Plans”). The Company does not have any formal commitment to create any additional material Employee Plan or to materially modify any existing material Employee Plan that would affect any employees or terminated employees of the Company.

 

(b) Except as disclosed on Schedule 3.16 of the Disclosure Schedule, each Employee Plan is in writing and Seller has previously made available to Buyer a true and complete copy of each written Employee Plan and a true and complete copy of the following, if any, prepared in connection with each Employee Plan: (i) a copy of each corresponding trust agreement, (ii) each current summary plan description, (iii) the most recently filed IRS Form 5500, (iv) the most recently received IRS determination letter for such Employee Plan, (v) the most recently prepared actuarial

 

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report and financial statement for such Employee Plan, and (vi) any material, unresolved correspondence with the IRS or the Department of Labor with respect to each such Employee Plan.

 

(c) No Employee Plan is a multiemployer plan (within the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a “Multiemployer Plan”) or a single employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for which the Company is likely to incur liability under Section 4063 or 4064 of ERISA (a “Multiple Employer Plan”).

 

(d) Except as disclosed on Schedule 3.16 of the Disclosure Schedule, each Employee Plan has been operated in all material respects in accordance with the requirements of all applicable laws, regulations and rules, including, without limitation, ERISA and the Code. As of the date of this Agreement, no material action, claim or proceeding is pending or, to the Seller’s knowledge, threatened with respect to any Employee Plan (other than claims for benefits in the ordinary course).

 

(e) Except as disclosed on Schedule 3.16 of the Disclosure Schedule, to Seller’s knowledge, each Employee Plan that is intended to be qualified under Section 401(a) and 501(a) of the Code is so qualified, and each such Employee Plan has been operated in all material respects in accordance with the requirements of ERISA and the Code.

 

(f) To the knowledge of Seller, except as indicated on Schedule 3.16 of the Disclosure Schedule, neither the Company nor any Employee Benefit Plan, nor any “disqualified person” or “party in interest”, as defined under ERISA, with respect to any Employee Plan, has engaged in any transaction which is expected to subject the Company to either a material civil penalty under Section 502(i) or (l) of ERISA or a material tax imposed under Section 4975 or 4976 of the Code.

 

3.17 Labor Matters . Except as set forth on Schedule 3.17 of the Disclosure Schedule:

 

(a) the Company is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company, and, to the knowledge of Seller, as of the date of this Agreement, there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit including such employees;

 

(b) there are no strikes, organized slowdowns or organized work stoppages pending or, to the knowledge of Seller, threatened between the Company and its employees, and the Company has not experienced any such strike, slowdown or work stoppage within the three (3) years prior to the date hereof;

 

(c) the Company is in compliance with all applicable laws relating to the employment of labor, including those related to wages, hours, collective bargaining, in each case except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

 

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(d) to the knowledge of Seller, there is no threatened labor, wage and hour, workers’ compensation, wrongful termination, discrimination or other employment-related grievance or legal or arbitration proceeding with respect to claims of, or obligations to, any current or former employee or group of employees of the Business, which is reasonably expected to have, individually or in the aggregate, a Material Adverse Effect, and

 

(e) to the knowledge of Seller, there is no threatened termination of employment by a key employee of the Company which is reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

 

3.18 Fees . The Company has not paid or become obligated to pay any fee or commission to any broker, finder or investment banker in connection with the Transactions, except as set forth on Schedule 3.18 of the Disclosure Schedule.

 

3.19 Environmental Laws . Except as set forth on Schedule 3.19 of the Disclosure Schedule, to the knowledge of Seller:

 

(a) The operations of the Company at the Real Properties are in compliance with all applicable Environmental Requirements, except where such noncompliance or the cost of curing the same would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Company has not received any written communication as to a currently pending matter relating to any of the Real Properties from a governmental authority that alleges that it is not in such compliance.

 

(b) There are no environmental actions relating to any of the Real Properties pending, or to the knowledge of Seller, threatened against the Company which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(c) The Company engages in no activities, including, without limitation, the release, threatened release, emission, discharge or disposal of any material, of environmental concern that are reasonably likely to form the basis of any environmental action against the Company which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Seller has provided Buyer with true and complete copies of all environmental reports and studies listed on Schedule 3.19 of the Disclosure Schedule.

 

For purposes of this Agreement, the term “material of environmental concern” means any gasoline, oil and other petroleum products, explosives, radioactive materials, lead, pesticide, formaldehyde and related and similar materials, and any other substance, material or chemical defined as a hazardous, toxic or polluting substance, material or chemical by any federal, state or local law, ordinance, rule or regulation, and the term “Environmental Requirement” means any and all federal, state and local laws, ordinances, rules, regulations and requirements, and any and all rules of common law, dealing with or relating to any material of environmental concern, the use or preservation of natural resources, or the pollution, protection or restoration of the environment.

 

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3.20 Officers of the Company. The officers of the Company, and the employees of the Company holding the title of “vice president”, in each case as of the date of this Agreement, are set forth on Schedule 3.20 of the Disclosure Schedule.

 

3.21 Bank Accounts. Set forth on Schedule 3.21 of the Disclosure Schedules is a list of bank accounts of the Company as of the date of this Agreement.

 

3.22 Products . Except as set forth on Schedule 3.22 of the Disclosure Schedules, no claim for product liability has been asserted against the Company during the five (5) year period immediately preceding the date hereof and no event has occurred which might give rise to the assertion of any such claim, in each case which is reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

 

3.23 Product Warranties . Except as set forth on Schedule 3.23 of the Disclosure Schedule, to Seller’s knowledge: (i) no material liability for any warranty claims on the Company’s products exists for the repair or replacement thereof or other damages in connection with such services, sales or deliveries thereof, except for any such claims incurred in the ordinary course of business consistent in all material respects in amount and character with past experience of the Company, and (ii) product labeling of the Company is in conformity with all applicable legal requirements, except for any failure which is not reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. Copies of current Company standard printed terms and conditions of sale, delivery or lease of Company catalog products have in all material respect been provided to Seller.

 

3.24 Customers; Vendors . Schedule 3.24 of the Disclosure Schedule sets forth, with respect to the last fiscal year of the Company and with respect to the seven (7)-month period ended July 31, 2005, a list which reflects in all material respects the dollar amount derived from each of the ten (10) largest (based on dollar amounts purchased from the Company) customers of the Company, and the dollar amount purchased from the ten (10) largest (based on dollar amounts purchased by the Company) vendors (other than licensors, authors, contributors or the like) of the Company. Except as set forth on Schedule 3.24 of the Disclosure Schedule, neither the Company nor Seller has received any written notice of the intention of any of the customers, vendors or third parties to Material Contracts of the Company to cease doing business or reduce in any material respect the business transacted with the Company or to terminate or modify any agreements with the Company (whether upon consummation of the transactions contemplated hereby or otherwise) which would have, individually or in the aggregate, a Material Adverse Effect.

 

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3.25 Relationship with Affiliates . Except as set forth on Schedule 3.25 of the Disclosure Schedule, neither the Seller nor any Affiliate of the Seller has, or since December 31, 2004 has had, any interest in any property being used in or pertaining to the Company’s business, and neither the Seller nor any Affiliate of the Seller is, or since December 31, 2004 has owned a equity interest or any other financial or profit interest in, a Person that has had business dealings or a financial interest in any transaction with the Company.

 

3.26 Certain Understandings . Notw