MEMBERSHIP INTEREST PURCHASE AGREEMENT

MEMBERSHIP INTEREST PURCHASE AGREEMENT (“Agreement”), dated as of December 15, 2004, among Russ Berrie and Company, Inc., a New Jersey corporation (“Purchaser”), Kids Line, LLC, a Delaware limited liability company (the “Company”), CPC/KL Holdings, LLC, a Delaware limited liability company (“CPC”), in its capacity as the owner of the Class A Unit, Class B Unit, Class C Unit and Class D Unit (each as defined below) issued by the Company, the persons identified on Schedule 2.2 hereto as owners of the “Cashed Out Class E Units” (the “Cashed Out Class E Unitholders”), the persons identified on Schedule 2.2 hereto as owners of the “Deferred Payout Class E Units” (“Deferred Payout Class E Unitholders”), CS Equity, LLC, a Delaware limited liability company (“Warrantholder”), the persons identified on Schedule 2.2 hereto as owners of the Cashed Out Class G Units (“Cashed Out Class G Unitholders”), and the Class G Unitholders identified on Schedule 2.2 hereto as owners of the “Deferred Payout Class G Units” (the “Deferred Payout Class G Unitholders”), and the Unitholders Representatives named in Section 8.1 hereof.  CPC, the Cashed Out Class E Unitholders, the Deferred Payout Class E Unitholders, the Warrantholders, the Cashed Out Class G Unitholders, and the Deferred Payout Class G Unitholders are all sometimes collectively referred to as the “Sellers”).  The Deferred Payout Class E Unitholders and the Deferred Payout Class G Unitholders are sometimes collectively referred to as the “Deferred Payout Sellers,” and the Deferred Payout Class E Units and the Deferred Payout Class G Units are sometimes collectively referred to as the “Deferred Payout Units.”  The aggregate of the Warrants, the Cashed Out Class E Units and the Cashed out Class G Units are sometimes collectively referred to as the “Cashed Out Units,” and the holders of the Cashed Out Units are sometimes collectively referred to as the “Cashed Out Unitholders.’

WITNESSETH:

WHEREAS, the Company was organized on December 28, 2001 and is governed pursuant to that certain Amended and Restated Limited Liability Company Agreement dated as of March 15, 2002, as amended by that certain First Amendment to Amended and Restated Limited Liability Company Agreement dated as of December 31, 2003 and as further amended by that certain Second Amendment to Amended and Restated Limited Liability Company Agreement dated as of June 1, 2004 and the Third Amendment to Amended and Restated Limited Liability Company Agreement dated December 14, 2004 (as so amended, the “Operating Agreement”);

WHEREAS, pursuant to the Operating Agreement, the Company is authorized to issue the following membership interests: one (1) Class A Unit (the “Class A Unit”), which Class A Unit has been issued, is outstanding and owned by CPC; one (1) Class B Unit (the “Class B Unit”), which Class B Unit has been issued, is outstanding and is owned by CPC; one (1) Class C Unit (the “Class C Unit”), which Class C Unit has been issued, is outstanding, and is owned by CPC; one (1) Class D Unit (the “Class D Unit”), which Class D Unit has been issued, is outstanding, and is owned by CPC; eighty-seven thousand seven hundred eighty (87,780) Class E Units (the “Class E Units”), all of which Class E Units have been issued and are outstanding; two thousand two hundred twenty (2,220) Class F Units (the “Class F Units”), all of which are

 

reserved for issuance upon exercise of the Warrant described below (no portion of which has been exercised to date); ten thousand (10,000) Class G Units (the “Class G Units”), eight thousand (8,000) of which have been issued and are outstanding (the Class A Unit, the Class B Unit, the Class C Unit, the Class D Unit, the Class E Units, the Class F Units issuable upon exercise of the Warrant described below, and the Class G Units are sometimes hereinafter referred to as the “Units”);

WHEREAS, the Company previously issued Class F Units Purchase Warrant Certificates which presently entitle the Warrantholder to purchase in the aggregate 2,220 Class F Units (the “Warrants”);

WHEREAS, Purchaser desires to purchase all of the Units and Warrants and the Sellers are willing to sell the Units and Warrants to Purchaser, in each case, on the terms and subject to the conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, it is hereby agreed among the parties as follows:

ARTICLE I
DEFINITIONS

1.1.          Definitions Set Forth in Annex I.  In this Agreement, capitalized terms have the meanings specified or referred to in Annex I attached hereto and made part hereof, and shall be equally applicable to both the singular and plural forms.  Any capitalized terms used but not otherwise defined herein have the meanings provided in the Operating Agreement.  Any agreement referred to in Annex I shall mean such agreement as amended, supplemented and modified from time to time to the extent permitted by the applicable provisions thereof and by this Agreement.

ARTICLE II
THE MEMBERSHIP INTEREST PURCHASE AND SALE; PURCHASE PRICE

2.1.          Purchase and Sale of Units and Warrants.  Subject to the terms and conditions hereof, each Seller agrees to sell, transfer and assign to Purchaser, and Purchaser agrees to purchase, all of such Seller’s right, title and interest in and to its Units and the Warrants.  Such purchase will include all rights and claims, if any, which the Seller may have as a holder of Units or Warrants against Company.

2.2.          Units Consideration.

(a)           At the Closing (but effective as of the Effective Time), subject in all events to the provisions of Sections 2.3(a), 2.3(d), 2.6 and 3.2:

(i)            The Purchaser shall purchase from CPC the Class A Unit for cash in an amount equal to the Class A Preference Amount outstanding at the Effective Time, plus the accrued and unpaid Class A Return thereon, less the amount, if any, owing by CPC to Company under Section 3.2 of the Operating Agreement, all as set forth on Schedule 2.2(a)(i);

 

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(ii)           The Purchaser shall purchase from CPC the Class B Unit for cash in an amount equal to the Class B Preference Amount outstanding at the Effective Time, plus the accrued and unpaid Class B Return, all as set forth on Schedule 2.2(a)(ii).

(iii)          The Purchaser shall purchase from CPC the Class C Unit for cash in an amount equal to US $5,000,000, plus the accrued and unpaid Class C Return thereon, as set forth on Schedule 2.2(a)(iii).

(iv)          The Purchaser shall purchase from CPC the Class D Unit for cash in an amount equal to US$11,000,000, plus the accrued and unpaid Class D Return thereon, as set forth on Schedule 2.2(a)(iv).

(v)           The Purchaser shall purchase from the Cashed Out Class E Unitholders all of the Cashed Out Class E Units for an aggregate amount equal to the product of the total number of Cashed Out Class E Units multiplied by the Cash Purchase Price Per Unit.  As among the Cashed Out Class E Unitholders, the amounts payable under this Section 2.2(a)(v) shall be paid to the Cashed Out Class E Unitholders as set forth on Schedule 2.2(a)(v) hereto .

(vi)          The Purchaser shall purchase from the Warrantholder the Warrants for cash in an amount equal to the Cash Purchase Price Per Unit multiplied by 2,220.

(vii)         The Purchaser shall purchase from each Cashed Out Class G Unitholder all the Cashed Out Class G Units owned by such Person for the respective amounts set forth on Schedule 2.2(a)(vii), which aggregates the product of the number of Cashed Out G Units owned by such Person multiplied by the Cash Purchase Price Per Unit.

(viii)        The Purchaser shall purchase from all the Deferred Payout Class E Unitholders and from all the Deferred Payout Class G Unitholders all Deferred Payout Units held by such persons for an aggregate amount equal to the Earnout Consideration, such Earnout Consideration to be calculated and paid in accordance with Section 2.6 below.

(b)           Schedule 2.2(b) reflects all of the Class E and Class G Units presently outstanding.  All Class E Units held by the holders identified with an asterisk shall be Deferred Payout Class E Units.  All Class G Units held by the holders identified with the symbol (#) shall be Deferred Payout Class G Units.  The Class E Units held by California KL Holdings, Inc. shall be partially Deferred Payout Class E Units and partially Cashed Out Class E Units determined as follows:  First, the aggregate “value” of the Deferred Payout Class E Units and Deferred Payout Class G Units held by all holders with either an asterisk or a (#) shall be determined by multiplying the number of Deferred Payout Class E Units and Deferred Payout Class G Units held by such persons by the Cash Purchase Price Per Unit.  Such aggregate amount shall be subtracted from $17,000,000 and the difference shall be divided by the Cash Purchase Price Per Unit.  The quotient so derived shall equal the number of Class E Units held by California KL Holdings Inc., which shall be Deferred Payout Class E Units, and the balance of the Class E Units held by California KL Holdings Inc. (formerly “Kids Line, Inc.” and hereafter “CKLH”)  shall be Cashed Out Class E Units.

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2.3.          Cash Purchase Price; Earnout Consideration; Estimated Cash Purchase Price.

(a)           Notwithstanding anything herein to the contrary, the purchase price payable with respect to all Units shall be the sum of  (i) $128,000,000, plus the amount added under clause (2) of subdivision (b) below, and minus the amounts subtracted under clauses (4) and (5) of subdivision (b) below, and as increased or decreased by the provisions of subdivision (c) below (“Cash Purchase Price”) plus (ii) the Earnout Consideration defined and described in Section 2.6 (the aggregate of the consideration payable under clauses (i) and (ii) hereof being the “Purchase Price”).

(b)           The “Cash Purchase Price Per Unit” shall equal (i) the result obtained by totaling (1) $145,000,000, plus (2) Company’s consolidated cash balance as at the Closing Date (not to exceed $150,000), minus (3) all sums payable pursuant to Sections 2.2 (a)(i), (ii), (iii), and (iv) hereof, minus (4) all fees, costs and expenses due from Company to GAH, legal counsel, McGladrey & Pullen LLP and others providing services to the Sellers or Company in connection with, or in respect of, the Sale,  to the extent approved by the Unitholders Representatives and advised by the Unitholders Representatives to Purchaser at least two (2) Business Days prior to the Closing Date (collectively, the “Transaction Costs”), and minus (5) the aggregate Debt of the Company; and (ii) dividing such result by 98,000.

(c)           If the  Net Working Capital is greater than the Target Net Working Capital by more than $500,000, the Cash Purchase Price shall be subject to increase, on a dollar for dollar basis from first dollar, by an amount equal to the excess of the Net Working Capital over the Target Net Working Capital. If the Target Net Working Capital is greater than the Net Working Capital by more than $500,000, the Cash Purchase Price shall be subject to decrease, on a dollar for dollar basis from first dollar, by an amount equal to the excess of the Target Net Working Capital over the Net Working Capital.  Any such adjustment of the Cash Purchase Price (increase or decrease) shall be borne by (or inure to the benefit of) the Cashed Out Unitholders based on  their relative Pro Rata Share.

(d)           Two (2) Business Days prior to the Closing Date, Sellers shall cause Company to deliver to Purchaser a certificate executed on behalf of Company by the Company’s chief financial officer, dated the date of its delivery, stating that there has been conducted under the supervision of such Person a review of all relevant information and data then available and setting forth in reasonable detail the estimated Net Working Capital as of the Effective Time (“Estimated Net Working Capital”) and the estimated Cash Purchase Price (assuming that the Net Working Capital is equal to the Estimated Net Working Capital) (“Estimated Cash Purchase Price”), each as of the Effective Time.  The Estimated Cash Purchase Price divided by 98,000 shall be the “Estimated Cash Purchase Price Per Unit.”

2.4.          Determination of Cash Purchase Price.

(a)           As promptly as practicable following the Closing Date (but not later than sixty (60) days after the Closing Date), Purchaser shall:

(i)            prepare a consolidated balance sheet of Company as of the Effective Time (the “Preliminary Balance Sheet”), a calculation of the actual Net Working

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Capital (“Preliminary Working Capital Statement”), which Preliminary Balance Sheet shall be prepared in accordance with GAAP, except that it will not have notes attached thereto;

(ii)           determine the Cash Purchase Price in accordance with the provisions of this Agreement (such Cash Purchase Price as determined by the Purchaser being referred to as the “Preliminary Cash Purchase Price”), except that in determining the Cash Purchase Price Company shall conclusively be deemed to have $130,000 in consolidated cash as at the Effective Time.

(iii)          determine whether any Working Capital Adjustment is to be made in accordance with Section 2.3(c), and, if so, the amount thereof (the “Tentative Working Capital Adjustment”); and

(iv)          deliver to the Unitholders Representatives the Preliminary Balance Sheet, the Preliminary Working Capital Statement and a certificate setting forth the Preliminary Cash Purchase Price and the Tentative Working Capital Adjustment (the “Preliminary Accounting Report”).

(b)           Promptly following receipt of the Preliminary Accounting Report and the Preliminary Working Capital Statement, Unitholders Representatives may review the same and, within thirty (30) days after the date of such receipt (the “Review Period”), may deliver to Purchaser a certificate setting forth any objections to the Preliminary Balance Sheet, the Preliminary Working Capital Statement, the Preliminary Cash Purchase Price and/or the Tentative Working Capital Adjustment as set forth in the Preliminary Accounting Report and the Preliminary Working Capital Statement, together with a summary of the reasons therefor and calculations which, in the view of the Unitholders Representatives, are necessary to eliminate such objections.  In the event Unitholders Representatives do not so object within the Review Period, the Preliminary Accounting Report and all of the components thereof shall be final and binding as the “Closing Date Balance Sheet,” the Cash Purchase Price and the Working Capital Adjustment, respectively, for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.

(c)           In the event the Unitholders Representatives object to the Preliminary Balance Sheet, the Preliminary Cash Purchase Price, the Tentative Working Capital Adjustment or any other element of the Preliminary Accounting Report within the Review Period in writing as described above, Purchaser and Unitholders Representatives shall use their reasonable efforts to resolve by written agreement (the “Agreed Adjustments”) any differences as to the Preliminary Accounting Report and, in the event the Unitholders Representatives and Purchaser so resolve any such differences, the Preliminary Accounting Report, as adjusted by the Agreed Adjustments, shall be final and binding and shall determine the Closing Date Balance Sheet and the Cash Purchase Price, respectively, for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.

(d)           In the event any objections raised by Unitholders Representatives are not resolved by Agreed Adjustments within the 30-day period next following such Review Period, then Purchaser and Unitholders Representatives shall submit the objections that are then unresolved to Ernst & Young LLP (or if Ernst & Young LLP is unwilling, or unable, to resolve such objections to such other nationally recognized accounting firm acceptable to both Purchaser and Unitholders Representatives) and such firm (the “Agreed Accounting Firm”) shall be

 

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directed by Purchaser and Unitholders Representatives to resolve the unresolved objections (based solely on the presentations by Purchaser and by Unitholders Representatives as to whether any disputed matter had been determined in accordance with GAAP, consistently applied with prior periods) as promptly as reasonably practicable and to deliver written notice to each of Purchaser and Unitholders Representatives setting forth its resolution of the disputed matters.  The Preliminary Balance Sheet, the Preliminary Cash Purchase Price and the Tentative Working Capital Adjustment, after giving effect to any Agreed Adjustments and to the resolution of disputed matters by the Agreed Accounting Firm, shall be final and binding as the Closing Date Balance Sheet, the Cash Purchase Price and the Working Capital Adjustment, respectively, for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.

(e)           The parties hereto shall make available to Purchaser, Unitholders Representatives and, if applicable, the Agreed Accounting Firm, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare or review the Preliminary Accounting Report or any matters submitted to the Agreed Accounting Firm.  The fees and expenses of the Agreed Accounting Firm hereunder shall be paid 50% by Purchaser and 50% by Unitholders Representatives first from the Reserve and then from the Cashed Out Unitholders (based on their Pro Rata Share) to the extent of any excess.

2.5.          Adjustment.  Promptly (but not later than five (5) days) after the determination of the final, binding Cash Purchase Price pursuant to Section 2.4:

(a)           if the Cash Purchase Price Per Unit is greater than the Estimated Cash Purchase Price Per Unit, Purchaser shall pay to each Cashed Out Unitholder an amount equal to the excess of the Cash Purchase Price Per Unit over the Estimated Cash Purchase Price Per Unit multiplied by the number of Cashed Out Units held by such Cashed Out Unitholder, plus interest thereon from the Closing Date at the Agreed Rate.  If Net Working Capital is greater than Target Net Working Capital by more than $500,000, Purchaser shall pay to each Cashed Out Unitholder an amount equal to  the full amount of the difference between Net Working Capital and Target Net Working Capital (taking into account any adjustments made in connection with the calculation of the Estimated Net Working Capital) divided by the number of Cashed Out Units, multiplied by the number of Cashed Out Units sold by such Person, plus  interest on such amount from the Closing Date to the date of payment thereof at the Agreed Rate; or

(b)           if the Estimated Cash Purchase Price Per Unit exceeds the Cash Purchase Price Per Unit, Unitholders Representatives shall pay to Purchaser, first from the Reserve (with the amount of such payment debited on the basis of the relative number of Cashed Out Units owned) and thereafter from each Cashed Out Unitholder in an amount equal to the excess of the Estimated Cash Purchase Price Unit multiplied by the number of Cashed Out Units held by the Cashed Out Unitholder, plus interest thereon, from the Closing Date to the date of payment thereof at the Agreed Rate.  If the Target Net Working Capital exceeds Net Working Capital by more than $500,000, Unitholders Representatives shall pay to Purchaser, first from the Reserve (with the amount of such payment debited on the basis of the relative number of Cashed Out Units owned), and from the Cashed Out Unitholders (to the extent of any excess), an amount equal to (i) the full amount of the difference between Target Net Working Capital and Net Working Capital (taking into account any adjustments made in connection with the calculation of

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Estimated Net Working Capital), plus (ii) interest on such amount from the Closing Date to the date of payment thereof at the Agreed Rate.

(c)           Any payments due from a Person pursuant to subdivision (a) or (b) hereof may be netted against sums due a Person under subdivision (a) or (b) hereof, so that only a net payment shall be made.  Any net payments to a Cashed Out Unitholder shall be made by wire transfer pursuant to instructions given in writing no later than three (3) days prior to the date that the final, binding Cash Purchase Price is determined in accordance with Section 2.4.  Any net payments due Purchaser shall be made by wire transfer pursuant to instructions given in writing to Unitholders Representatives no later than three (3) days prior to the date the final binding Cash Purchase Price is determined in accordance with Section 2.4 hereof.

2.6.          Earnout Consideration

(a)           As consideration for the purchase of the Deferred Payout Units at the Closing, Purchaser will pay to the Deferred Payout Sellers 11.724% of the Agreed Enterprise Value of the Company as of the Measurement Date (“Earnout Consideration”), at the times specified in this Section 2.6.  The Earnout Consideration shall be allocated among the Deferred Payout Unitholders based on the relative number of Deferred Payout Units sold, provided that the maximum amount payable to California KL Holdings, Inc. with respect to its Deferred Payout Units shall be $13,500,000 (with the understanding that any amounts in excess thereof shall not be credited to any other Deferred Payout Seller).  Purchaser shall estimate, in good faith, the Earnout Consideration not later than ten (10) days prior to the third anniversary of the Closing Date and shall send a copy of its estimate (and supporting calculations) to each Deferred Payout Unitholder not later than such date.  On the Business Day immediately preceding the third anniversary of the Closing Date, Purchaser shall pay to each Deferred Payout Seller (to such accounts specified to Purchaser in writing no later than 3 Business Days after receipt of Purchaser’s estimate) an amount equal to such person’s ratable share (based on the relative number of Deferred Payout Units) of an amount equal to 90% of the estimated Earnout Consideration (“Estimated Earnout Payment”).  Such amount shall not be subject to refund or return.  On or prior to the 60th day after the Measurement Date, Purchaser shall provide to each Deferred Payout Seller a detailed calculation of the Earnout Consideration together with payment of such person’s ratable share of the excess, if any, of the Earnout Consideration over the Estimated Earnout Payment.  If any Deferred Payout Seller disputes the calculations of the Earnout Consideration, the procedures set forth in Sections 2.4(c) and (d) hereof shall apply to the resolution of such dispute, provided that, in lieu of the Unitholders Representatives participating in such procedure (and being responsible for one-half the fee of the Agreed Accounting Firm), the first Deferred Payout Seller who sets forth its objection in writing, shall represent all the Deferred Payout Sellers and shall be responsible for paying the entirety of the one-half of the fees and costs of the Agreed Accounting Firm not payable by Purchaser.  The “Agreed Enterprise Value” shall be the product of (i) the Company’s EBITDA during the twelve (12) months ending on the Measurement Date and (ii) the applicable multiple determined from Schedule 2.6 hereto.

(b)           Throughout the Measurement Period, Purchaser agrees to (i) operate the Company, in good faith, in the ordinary course of business and in a manner which is not intended to frustrate or diminish the amount of the Earnout Consideration, (ii) maintain the Company’s existence as a limited liability company (or to operate it as a separate division of Purchaser or a

 

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subsidiary of Purchaser) and (iii) refrain from liquidating, dissolving, selling assets (other than inventory and surplus equipment sold in the ordinary course of business), merging, consolidating or reorganizing Company’s business structure (except as permitted by clause (ii) above), or selling any of the equity interests in Company.  Without limiting the generality of the foregoing, Purchaser agrees that it will (v) only effect material changes to the Company’s business operations, or manner of conducting business, intended in its good faith judgment to increase the profitability of the Company during the Measurement Period, (w) maintain separate books and records for the Company; (x) direct business opportunities that pertain solely to Company’s business to Company, with the understanding that with respect to business opportunities that pertain to lines of business conducted by both Purchaser (and/or any subsidiary or division of Purchaser) and the Company, Purchaser will direct such opportunities in a manner that it deems appropriate in good faith; (y) not transfer or license any material operating assets, rights or properties from Company to Purchaser or any other subsidiary or division of Purchaser, and (z) not burden the Company with corporate charges, overhead or other allocated costs, provided, however, that the Company may make a reasonable allocation (based on relative sales) of shared out-of-pocket third-party costs, i.e., insurance costs and audit fees, and may charge the Company with out-of-pocket third party costs incurred for the direct benefit of Company.

(c)           Payment of the Earnout Consideration shall be subject to the terms of the Subordination Agreement among Ableco Finance LLC as agent for the holders of Senior Indebtedness (“Senior Indebtedness Agent”), CKLH as agent for the Deferred Payout Sellers (“Subordinated Debt Agent”), Purchaser and others (“Subordination Agreement”) and shall be secured by Encumbrances, junior to the Encumbrances granted to the Senior Indebtedness Agent, on all of the assets of Purchaser and its Affiliates by which the Senior Indebtedness is secured.  In the event any payment of the Earnout Consideration is not paid when due (as set forth in Section 2.6(a) hereof), whether by virtue of the Subordination Agreement or otherwise, the Earnout Consideration shall bear interest from and after the date due to be paid, and until actually paid, at the Agreed Rate.

(d)           Each Deferred Payout Seller hereby constitutes and appoints CKLH as its agent to act on its behalf concerning (i) the Earnout Consideration, (ii) execution and delivery of the Subordination Agreement and all of the security documents relating to the Earnout Consideration, and (iii) enforcement of all rights thereunder.

ARTICLE III
CLOSING

3.1.          Closing Date.  The Closing of the Sale (the “Closing”) shall take place at the New York offices of Kaye Scholer LLP at 10:00 A.M., local time, on December 15, 2004.  The date on which the Closing is actually completed is hereinafter sometimes referred to as the “Closing Date.”  The sale will be effective as of 11:59 P.M. (PST) on December 14, 2004 (“Effective Time”)

3.2.          Payment of Purchase Price; Repayment under Revolving Credit Agreement; Payment of Transaction Costs.  At the Closing, (a) the Purchaser shall pay (i) to CPC the amount payable pursuant to Section 2.2(a)(i) hereof, which sums shall be disbursed to pay indebtedness of CPC to General Electric Capital Corporation (“GECC”) in an equivalent amount; (ii) to CPC the amount payable pursuant to Section 2.2(a)(ii) hereof, which sum shall be disbursed to pay

 

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indebtedness of CPC to CapitalSource Finance, LLC; (iii) to CPC the amount payable pursuant to Section 2.2(a)(iii) hereof, which sum shall be disbursed to pay all indebtedness of CPC to California KL Holdings, Inc. and Greif & Co. as set forth on Schedule 3.2(a); (iv) to CPC the amount payable pursuant to Section 2.2(a)(iv) hereof; and (v) the amount of Debt (including accrued interest) owing by Company to CPC under the CPC/Company Revolving Credit Agreement, the amount of which shall be certified by Company to Purchaser not less than 2 days prior to the Closing Date and which shall be disbursed by Purchaser to pay indebtedness of CPC to GECC in an equivalent amount; (b) the Purchaser shall pay (i) to each Seller of Cashed Out Units the amounts reflected on Schedule 3.2(b) hereof (by wire transfer pursuant to written wire transfer instructions given by Unitholders Representatives to Purchaser not less than one day prior to the Closing Date), which in the aggregate shall equal the Estimated Cash Purchase Price Per Unit multiplied by the number of Cashed Out Units (c) the Purchaser shall pay to Company, funds in an amount necessary for the payment of the Transaction Costs, to be paid to the parties owed such Transaction Costs.  Notwithstanding the foregoing, there shall be subtracted from sums otherwise payable pursuant to subdivision (b) (i) of this Section 3.2 the sum of US$14,500,000 which amount shall be paid by Purchaser to Unitholders Representatives for the purposes of funding the Reserve.  The sums so subtracted from payments otherwise due from such Seller pursuant to this Section 3.2 shall be charged against such Seller based on their relative Percentage Share.

3.3.          Purchaser’s Additional Deliveries.  At the Closing, Purchaser shall deliver (or cause to be delivered), if and to the extent not previously delivered, to Unitholders Representatives all of the following:

(a)           a copy of the Charter Documents of Purchaser, certified as of a recent date by the Secretary of State of the State of New Jersey;

(b)           a certificate of good standing of Purchaser, issued as of a recent date by the Secretary of State of the State of New Jersey;

(c)           a certificate of the Secretary or an Assistant Secretary of Purchaser, dated the Closing Date, in form and substance reasonably satisfactory to Company, as to (i) no amendments to the Charter Documents of Purchaser since April 30, 1987 (ii) the current bylaws of Purchaser; (iii) the resolutions of the Board of Directors of Purchaser authorizing the execution and performance of this Agreement and the transactions contemplated herein; and (iv) attesting to the incumbency and signatures of the officers of Purchaser executing this Agreement and any Purchaser Ancillary Agreements;

(d)           opinions of Wilentz Goldman  Spitzer P.A., and Kaye Scholer LLP, counsel to Purchaser, each dated the Closing Date and in the forms agreed by Purchaser and the Unitholders Representatives; and

(e)           each of the Employment Agreements, approved by the Purchaser, as sole member, for execution by Company;

(f)            security agreements, pledge agreements, collateral assignments, account control agreements, UCC-1 financing statements and such other security documents as Unitholders Representatives reasonably request and satisfactory to the Senior Indebtedness

 

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Agent to reflect, evidence and perfect the Encumbrances granted to CKLH, as agent for the Deferred Payout Sellers to secure the Earnout Consideration, in form and substance substantially as are executed in favor of the Senior Indebtedness Agent..

(g)           such other documents as Sellers may reasonably request for facilitating the consummation or performance of any of the transactions contemplated by this Agreement.

3.4.          Sellers’ Deliveries.  At the Closing, Sellers shall deliver (or cause to be delivered), if and to the extent not previously delivered, to Purchaser all of the following:

(a)           each of the Employment Agreements, duly executed by the Sellers who are parties thereto;

(b)           certificates in form satisfactory to Purchaser from each Seller in accordance with Treasury Regulations Section 1.1445-2(b)(2) that such Seller is not a foreign person;

(c)           the certificates evidencing the Warrants, and assignments executed by each Seller of its Units (and of the Warrants), in forms and substance reasonably satisfactory to Purchaser;

(d)           releases executed by each of Company and Michael Levin, Joanne Levin, Charles Ginn, and MEJ Management & Consulting, Inc. confirming the termination of all existing employment agreements, consulting agreements and other compensation arrangements, as set forth on Schedule 3.4(d) and releasing claims which such persons may have against Company or which Company may have against such persons, each without the payment of any monetary consideration thereunder, in form and substance reasonably satisfactory to Purchaser;

(e)           customary releases executed by each Seller in favor of the Company, in form and substance reasonably satisfactory to Purchaser;

(f)            an acknowledgment (in form and substance reasonably satisfactory to Purchaser) executed by CPC, to the effect that the CPC/Company Revolving Credit Agreement is terminated, and all liens released in connection therewith;

(g)           resignations of each of the managers and Pre-Sale Directors of Company;

(h)           all third party and governmental consents required to be obtained by Sellers with respect to the consummation of the transactions contemplated by this Agreement except as reflected in Schedule 3.4(h);

(i)            termination of the documents and instruments listed on Schedule 3.4(i);

(j)            relevant UCC 3’s including those set forth on Schedule 3.4(j);

(k)           intercreditor agreements among holders of the Senior Indebtedness and the Deferred Payout Sellers, in form and substance satisfactory to CKLH and the Senior Indebtedness Agent;

 

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(l)            an opinion of Sidley Austin Brown & Wood llp as special counsel for CPC and CKLH, dated the Closing Date, and in form agreed by Purchaser and such Sellers;

(m)          such other documents as Purchaser may reasonably request for facilitating the consummation or performance of any of the transactions contemplated by this Agreement.

3.5.          Company’s Deliveries.  At the Closing, Company shall deliver (or cause to be delivered), if and to the extent not previously delivered, to Purchaser all of the following:

(a)           a copy of Company’s Charter Documents, certified as of a recent date by the Secretary of State of the State of Delaware;

(b)           a certificate of good standing of Company, issued as of a recent date by the Secretary of State of the State of Delaware;

(c)           a certificate of good standing or other evidence of current qualification to do business in each of California and in each other jurisdiction where Company presently is conducting business;

(d)           a certificate of the Secretary or an Assistant Secretary of Company, dated the Closing Date, in form and substance reasonably satisfactory to Purchaser, (i) confirming no amendments to the Charter Documents; (ii) attaching the Operating Agreement of Company, as amended to date; (iii) attaching a true and complete list of all holders of issued and outstanding Units, of any class or series, as at the Closing Date; (iv) resolutions of the Board of Directors of Company authorizing the execution and performance of this Agreement and the transactions contemplated herein; and (iv) attesting to the incumbency and signatures of the signatories of Company executing this Agreement or any Related Document;

(e)           an opinion of Sidley Austin Brown & Wood LLP, counsel to Company, dated the Closing Date and in the form agreed by Company and Purchaser;

(f)            all Consents required to be obtained by Sellers or Company with respect to the consummation of the transactions contemplated by this Agreement, except as reflected on Schedule 3.4(h) hereto.

(g)           stock certificates evidencing the 48,750 shares of Subsidiary pledged to GECC;

(h)           such other document as Purchaser may reasonably request for facilitating the consummation or performance of any of the transactions contemplated by this Agreement.

ARTICLE IV
INDIVIDUAL REPRESENTATIONS AND WARRANTIES OF SELLERS

As an inducement to Purchaser to enter into this Agreement and to consummate the transactions contemplated hereby, each Seller (individually as to itself and not jointly and severally) hereby represents and warrants to Purchaser and agrees as follows:

 

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4.1.          Authority; Enforceability.  It has the full power, authority and legal capacity to execute and deliver this Agreement and the Seller Ancillary Agreements to which it is a party, and to perform its obligations hereunder and thereunder.  The execution and delivery by it of this Agreement and the Related Documents to which it is a party, and the performance by it of its obligations hereunder and thereunder, have been duly authorized by it.  It has duly executed and delivered this Agreement and the Related Documents to which it is a party and, assuming due authorization, execution and delivery by the other parties hereto and thereto, this Agreement and the Related Documents to which it is a party constitute its legal, valid and binding agreement, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

4.2.          Membership Interests in the Company.  It owns, beneficially and of record, the Units (or the Warrants) indicated adjacent to its name in Schedule 4.2, free and clear of Encumbrances other than those reflected on Schedules 3.4(i)(I)(a) and 3.4(i)(I)(b).  Upon consummation of the Sale, the Purchaser will have acquired from such Seller ownership to such Units and Warrants, free and clear of all Encumbrances (other than Encumbrances created by the Purchaser).

4.3.          No Conflicts.  Except as set forth in Schedule 4.3, neither the execution and delivery of this Agreement, any of Seller Ancillary Agreements to which it is a party nor the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will:

(a)           result in a breach of or constitute a default or an event with or without giving of notice or the lapse of time, or both, creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon such Seller’s Units, under (1) if the Seller is not an individual, such Seller’s Charter Documents or bylaws or other organizational documents, (2) any material contract, agreement, license, franchise, permit or other authorization to which that Seller is a party, by which it is bound or which it possesses, (3) any Court Order to which such Seller is a party or any of its assets is subject or by which it is bound, or (4) any Requirements of Laws applicable to such Seller; or

(b)           require the Consent, or the giving or making by such Seller of any notice, declaration, filing or registration with, any Person.

ARTICLE V
PROPORTIONATE REPRESENTATIONS AND WARRANTIES OF SELLERS

As an inducement to Purchaser to enter into this Agreement and to consummate the transactions contemplated hereby, each Seller, individually and proportionately (based on the relative number of Units owned by such Seller) and not jointly and severally, hereby represents and warrants to Purchaser and agrees as follows:

5.1.          Organization and Capital Structure.

 

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(a)           Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware.  Company is duly qualified to transact business as a foreign entity and is in good standing in each of the jurisdictions listed in Schedule 5.1(a), which are the only jurisdictions in which the ownership, lease or operation of Company’s assets or properties, or the nature of Company’s business, makes qualification therein by Company necessary.  Company has full power and authority to own or lease and to operate its assets and to carry on its business as now conducted and to perform its obligations under all applicable executory agreements and to execute and deliver, and perform its obligations under, any agreements delivered by Company in connection with the transactions contemplated hereby.  True and complete copies of the Company’s Charter Documents and all amendments thereto and of the Company’s Operating Agreement, as amended, have been delivered to Purchaser.

(b)           The authorized and outstanding equity capital of Company, as set forth in Schedule 5.1(b), is true, correct and complete.  All of the Units have been validly issued and are validly outstanding.  Except as set forth in Schedule 5.1(b), there are no agreements, arrangements, options, warrants, calls, rights or commitments of any character relating to the issuance, sale, purchase or redemption of any Units or other equity interest of Company, whether on conversion of other securities or otherwise.  None of the issued and outstanding Units has been issued in violation of, or is subject to, any preemptive or subscription rights.  Schedule 5.1(b) sets forth the equity interests issuable upon conversion of all outstanding convertible securities of the Company, and exercise of any outstanding warrants, options and other rights to purchase equity interests.  Company has no securities (or other contractual obligations) in the nature of stock/unit appreciation rights, phantom stock/units, stock/unit participation, profit participation (except as set forth in the Employment Agreements set forth on Schedule 5.20) or similar instruments or plans.  Except as set forth on Schedule 5.1(b), Company has no obligation or right to purchase, redeem or otherwise acquire any equity interests, nor is Company subject to any right of first refusal, put, call, pre-emptive rights or antidilution agreements with respect to any of Company’s equity interests.  Company’s equity interests have not been registered on any national securities exchange or market pursuant to the 1934 Act, nor been registered or qualified for sale under any securities law of any other jurisdiction.  None of the Company’s equity interests have been certificated.

5.2.          Subsidiaries and Investments.

(a)           Schedule 5.2(a) contains a list of each corporation, limited liability company, partnership, joint venture or other entity in which Company owns, directly or indirectly, 50% or more of the outstanding voting securities or equity interests or is a general partner or controls (each such corporation, limited liability company, partnership, joint venture or other entity being herein called a “Subsidiary”).  Schedule 5.2(a) contains the name, the jurisdiction of incorporation or organization, the authorized share or other equity capital, the number and percentage of issued and outstanding shares, units or other equity interests of each of the Subsidiaries owned, directly or indirectly, of record or beneficially by Company or any of the Subsidiaries or any other owner.

(b)           Each of the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is in good standing in the jurisdictions listed in Schedule 5.2(a).  Each of the Subsidiaries has full power and authority to

 

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own or lease and operate its assets and to carry on its business as now conducted and to execute, deliver, and perform its obligations under, any agreements delivered by such Subsidiary in connection with the transactions contemplated hereby.  True and complete copies of the Charter Documents and all amendments thereto and of the bylaws, as amended, of each of the Subsidiaries have been delivered to Purchaser.

(c)           All of the shares of outstanding capital stock or other equity interests of each of the Subsidiaries are validly issued, fully paid and nonassessable.  Except as set forth in this Agreement and in Schedule 5.1(b), (i) there are no agreements, arrangements, options, warrants, calls, rights or commitments of any character (A) relating to the issuance, sale, purchase or redemption of any capital stock, partnership interest or other equity interest of any of the Subsidiaries, except in each case for any of the foregoing that are set forth in any of Company Agreements as set forth in Schedule 5.1(b), or (B) requiring Company or any of the Subsidiaries to purchase, redeem or otherwise acquire any capital stock, partnership interest or other equity interest held by others, (ii) none of the issued and outstanding shares of capital stock or limited liability company interests or other equity interests of any Subsidiary owned by Company has been issued in violation of, or is subject to, any preemptive or subscription rights, (iii) there are no voting trust agreements or any other similar agreements relating to voting, dividend, ownership or transfer rights of any shares of capital stock or partnership interests or other equity interests of any Subsidiary, and (iv) Company has good and valid title to, and beneficial ownership of, the shares of stock or other equity interests shown on Schedule 5.2(a) as being owned by Company, free from all Encumbrances other than liens set forth on Schedule 5.2(c), which will be released at the Closing.  No Subsidiary has issued any stock appreciation rights, “phantom stock,” stock participation, profit participation or similar rights, nor are there any outstanding options, warrants, convertible securities, commitments, agreements or other rights to purchase or acquire securities or equity interests in any Subsidiary.  There is no outstanding first refusal, put, call, pre-emptive right or antidilution agreement with respect to issuance or purchase of any securities or other equity interests of, or in, such Subsidiary.

(d)           Except as set forth on Schedule 5.2(a), neither the Company nor any Subsidiary directly or indirectly, (i) owns, of record or beneficially, any outstanding voting securities or other equity interests in any corporation, partnership, limited liability company, joint venture or other entity or (ii) controls any corporation, partnership, limited liability company, joint venture or other entity.  Neither the Company nor its Subsidiaries has any Contract to acquire any equity securities or other securities of any Person or any direct or indirect equity or ownership interest in any other business.

5.3.          No Conflicts.  Except as set forth in Schedule 5.3, neither the execution and delivery of this Agreement, any of Seller Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will:

(i)            result in a breach of or constitute a default or an event with or without giving of notice or the lapse of time, or both, creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon, any of Company’s (or any Subsidiary’s) assets, under (1) Company’s Charter Documents or Operating Agreement or under the Charter Documents of any Subsidiary, (2) any Company Agreement, (3) any material license, franchise, permit or other authorization

 

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that Company or any Subsidiary possesses, (4) any Court Order to which Company or any Subsidiary is a party or any of their assets or the Company Business is subject or by which they are bound, or (5) any Requirements of Laws applicable to Company or any Subsidiary; or

(ii)           require the Consent, or the giving or making by Company (or any Subsidiary) of any notice,  declaration, filing or registration with, any Person.

5.4.          Financial Statements.  Schedule 5.4 contains (i) the consolidated balance sheet of Company as of December 31, 2003, the related statements of income, comprehensive income (collectively the “Statement of Income”), members’ equity and cash flows for the year then ended, together with the appropriate notes to such financial statements, accompanied by the report thereon of the Auditors, (ii) the balance sheet of Company dated as of December 31, 2002, the related statements of income, members’ equity and cash flows from period from inception through date of such statement, together with the appropriate notes to such financial statements, accompanied by the report thereon of Rose, Snyder & Jacobs LLP (the statements referred to in clauses (i) and (ii) are referred to herein as the “Audited Financial Statements”), and (iii) the unaudited consolidated balance sheet of Company and its Subsidiaries as of June 30, 2004 (the “Interim Balance Sheet Date”) and the related unaudited statement of income for the six (6) months then ended (collectively, the “Unaudited Financial Statements”).  Except as disclosed in the notes thereto, the Audited Financial Statements and the Unaudited Financial Statements have been prepared in conformity with GAAP consistently applied with prior periods and fairly present in all material respects the financial condition and the results of operations, changes in members’ equity and cash flow of Company (and those Subsidiaries that as of the applicable dates were subject to consolidated reporting under GAAP) at the dates of such balance sheets and the results of its operations and cash flows for the respective periods indicated, except that the Unaudited Financial Statements are subject to normal year-end audit adjustments and will not have notes attached thereto.  Schedule 5.4 contains a description of all non-audit services performed by the Company’s auditors for the Company and any Subsidiary since the beginning of the immediately preceding fiscal year of the Company and the fees paid for such services.  The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted United States accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  The organizational records and minute books of the Company and its Subsidiaries have been maintained substantially in accordance with all applicable Requirements of Laws and are complete and accurate in all material respects.  Financial books and records and accounts of the Company and its Subsidiaries used in the preparation of the Company’s financial statements (x) have been maintained in accordance with good business practices on a basis consistent with prior years and (y) accurately and fairly reflect the basis for the Company’s consolidated financial statements.

5.5.          Operations Since January 1, 2004.

(a)           Except as set forth in Schedule 5.5, since January 1, 2004, there has been:

 

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(i)            no material adverse change in the assets, business, financial condition or results of operations of Company and its Subsidiaries, taken as a whole, and, to Sellers’ Knowledge, no event has occurred or circumstances exists and that is likely to result in such a material adverse change; and

(ii)           no damage, destruction, loss or claim, or other interruption in the use of its assets, whether or not covered by insurance, or condemnation or other taking in an amount or with respect to assets having a value in excess of $100,000.

(b)           Except as set forth in Schedule 5.5, since January 1, 2004, the Company Business has been conducted in the ordinary course of business, consistent with past practice.  Without limiting the generality of the foregoing, since January 1, 2004, except as set forth in Schedule 5.5, neither Company or any of its Subsidiaries has:

(i)            authorized, materially modified the terms of, issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any of its equity interests or any security convertible into its equity interests;

(ii)           authorized, issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any bonds, notes or other debt instruments, or incurred any Debt, other than in the ordinary course of business consistent with past practice;

(iii)          made any investment in any other person (other than a Subsidiary) that, when added to all other similar investments since the Balance Sheet Date, exceeded US$250,000 in the aggregate;

(iv)          paid any obligation or liability (absolute or contingent) other than in the ordinary course of business consistent with past practice;

(v)           declared or made, or agreed to declare or make, any payment of dividends or distributions in respect of its Units (other than tax distributions and distributions on the Class A Unit, Class B Unit, Class C Unit and Class D Unit consistent with past practice), or purchased or redeemed, or agreed to purchase or redeem, any equity interest;

(vi)          undertaken or committed to undertake capital expenditures that, when added to all other capital expenditures since the Balance Sheet Date, exceeded US$200,000 in the aggregate;

(vii)         sold, leased (as lessor), transferred or otherwise disposed of (including, without limitation, any transfers from Company or any Subsidiary to any of its Affiliates other than a Subsidiary), or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance on, any of the assets reflected on the Balance Sheet or any assets acquired by Company or any Subsidiary after the Balance Sheet Date, other than (A) transactions in the ordinary course of business, (B) transactions that involve assets having a current value not in excess of US$200,000 in the aggregate, or (C) Permitted Encumbrances;

 

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(viii)