Exhibit 2.2
MEMBERSHIP INTEREST PURCHASE
AGREEMENT
Dated as of December 15, 2004
Among
KIDS LINE, LLC,
RUSS BERRIE AND COMPANY, INC.
and
THE VARIOUS SELLERS PARTY HERETO
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:
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.
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.
(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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(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
.”
(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
5
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
6
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.
(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 “ AAgreed 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
7
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.
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
9
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;
10
(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:
11
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:
12
(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.
(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
13
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
14
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:
15
(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;
16
(viii)
cancelled any material debts owed to or material claims held by
Company or any Subsidiary (including, without limitation, the
settlement of any claims or litigation) other than in the ordinary
course of business consistent with past practice;
(ix)
entered into, as lessee, Capitalized Lease Obligations that, in the
aggregate, exceed US$100,000;
(x)
entered into, materially modified or terminated any employment
agreement with an employee of the Company or a Subsidiary (other
than the Employment Agreements);
(xi)
made any change in the accounting principles and practices used by
Company from those applied in the preparation of the Balance Sheet
and the related Statements of Income, members equity and cash flow
for the twelve months ended on the Balance Sheet Date, except as
required by GAAP.
(xii)
amended its Charter Documents, Operating Agreement or the Charter
Documents of any Subsidiary;
(xiii)
amended or waived any of its rights under, or altered the
acceleration of the vesting under, any provision of any of
Company’s or any of its Subsidiary’s equity incentive
plans, any agreement evidencing any outstanding incentive equity,
any restricted equity purchase agreement or other equity incentive
arrangement, or otherwise modified any of the terms of any option,
warrant or other security;
(xiv)
other than the transactions contemplated by this Agreement,
effected or been a party to any merger, consolidation,
amalgamation, share exchange or other business combination, or
adopted a plan (or the resolutions) for a partial or complete
liquidation, dissolution, restructuring, recapitalization,
reorganization, reclassification of any equity interests in the
Company, equity split, division of any equity interests in the
Company, reverse equity split, consolidation of any equity
interests in the Company or similar transaction;
(xv)
established, adopted or amended any bonus, profit sharing,
compensation, severance, termination, equity option, equity
appreciation right, restricted equity, pension, retirement,
deferred compensation or other employee benefit agreements or plans
for the benefit of any director, officer or employee, or paid any
bonus or increased the wages, salary, considerations, fringe
benefits or other compensation or remuneration payable to any
director, officer or employee, except for actions taken in the
ordinary course of business that were consistent with past
practices;
(xvi)
except as reflected in the Tax Returns previously provided to
Purchaser, made or changed any Tax election, filed any amended Tax
Return, entered into any closing agreement, settled any Tax claim
or assessment relating to Company or any Subsidiary, surrendered
any right to claim a refund of Taxes, or took any similar action
relating to the filing of any Tax Return or the payment of any Tax,
if such election, amendment, agreement, settlement, surrender, or
other similar action had the effect of increasing the Tax liability
of Company or any Subsidiary or decreasing any Tax attribute of
Company of any Subsidiary;
17
(xvii)
commenced any action, suit or proceeding seeking an amount in
excess of US$100,000, or settled any pending action, suit or
proceeding at a cost in excess of the greater of (i) US$100,000 and
(ii) the liability reserve on the Balance Sheet;
(xviii)
entry into, termination of, or receipt of notice of termination
(other than in the ordinary course of business) of (a) any license,
distribution, dealer, sales representatives, joint venture, credit
or similar agreement, or (b) any contract (other than purchase
orders issued by Company or received by Company in the ordinary
course of business) or transaction involving a total future
commitment by, or to, the Company or any Subsidiary of at least
$250,000; or
(xix)
agreed in a legally binding manner to do any of the
foregoing.
5.6.
Taxes . Except as set forth on
Schedule 5.6 , (a) Company and its Subsidiaries have filed
on or before the date hereof (or will timely file, in each case
taking into account any extension of time within which to file) all
material Tax Returns required to be filed on or before the date
hereof (or the Closing Date); (b) all such Tax Returns are (or will
be) complete and accurate in all material respects and all Taxes of
Company and each of its Subsidiaries (whether or not shown on such
Tax Returns) have been (or will be) timely paid, other than Taxes
that Company or a Subsidiary is presently contesting in good faith
and for which adequate reserves have been established; (c) neither
Company nor any Subsidiary has waived or been requested to waive
any statute of limitations in respect of Taxes or has granted any
extension of time with respect to a Tax assessment; (d) none of the
Tax Returns referred to in clause (a) of this Section
5.6 have been examined by the Internal Revenue Service or any
state, local or foreign taxing authority; (e) there is no action,
suit, investigation, audit, claim or assessment pending or, to
Sellers’ Knowledge, proposed or threatened with respect to
Taxes of Company or any Subsidiary; (f) there are no liens for
Taxes upon the assets of Company or any Subsidiary, except liens
relating to current Taxes not yet due; (g) all Taxes which Company
or any Subsidiary is required by law to withhold or to collect for
payment have been duly withheld and collected, and have been paid
to the appropriate Governmental Body or accrued, reserved against
and entered on the books of Company; (h) the accruals for Taxes
reflected in the books and records of Company are adequate to cover
any Tax liability of Company through the date thereof; (i) since
January 1, 2001, Company has not been a member of any Company Group
and neither Company nor any of its Subsidiaries has had any direct
or indirect ownership in any corporation, partnership, joint
venture or other entity other than the Subsidiaries; (j) there are
no Tax rulings, requests for rulings, or closing agreements
relating to Company or any Subsidiary which are likely to affect
adversely Company’s liability for Taxes for any period after
the Closing Date; (k) as a result of any “closing
agreement” (as described in Section 7121 of the Code or any
corresponding provision of state or local Tax law), neither Company
nor any Subsidiary will be required to include any item of income
in, or exclude any item of deduction from, any taxable period
beginning on or after the Closing Date; (l) no unresolved claim has
been made by a Taxing authority in a jurisdiction where Company or
any Subsidiary does not pay Taxes or file Tax Returns asserting
that Company or any Subsidiary is or may be subject to Taxes
assessed by such jurisdiction; (m) neither the Company nor any
Subsidiary is currently a party to any Tax allocation or Tax
Sharing Arrangement or has an obligation to make a payment under
such an agreement, except as contained in Company’s Operating
Agreement, (n) for United States federal and any state and local
income tax purposes Company and each Subsidiary that is not
identified as a corporation on Schedule 5.6 has been
properly classified as a partnership for all
18
periods since
formation of the Company (and each such Subsidiary) through the
Closing Date, and neither Company nor any such Subsidiary has
elected to be taxed as an association taxable as a corporation
under Section 7701 of the Code and the regulations promulgated
thereunder, (o) none of the Assets of Company or Subsidiary is
subject to the “Alternative Depreciation System” within
the meaning of Section 168(g) of the Code, tax-exempt use property
within the meaning of Section 168(h) of the Code or tax-exempt
bond-financed property within the meaning of Section 168(g)(5) of
the Code; (p) no power of attorney is currently in effect for
Company or any Subsidiary for any purpose related to Taxes, (q)
none of the Company’s Subsidiaries is a United States real
property holding corporation within the meaning of section
897(c)(2) of the Code, and (r) neither Company nor any of its
Subsidiaries owns an interest in any (i) “domestic
international sales corporation,” (ii) “foreign sales
corporation,” (iii) “controlled foreign
corporation” , or (iv) “passive foreign investment
company” (in each case, as such terms are defined in the
Code). Sellers acknowledge that, for federal income Tax
purposes, Company will terminate on the Closing Date. Sellers
also acknowledge that the Company has made the election referred to
in Section 754 of the Code to adjust the basis of Company’s
property pursuant to Sections 734 and 743 of the Code and that such
election is presently in effect.
(a)
Except as set forth in Schedule 5.7(a) , the assets, rights
and properties owned, leased or licensed by Company and/or its
Subsidiaries include all the material assets, rights and properties
used in the Company Business as presently conducted and, to the
Knowledge of Sellers, proposed to be used. To the
Seller’s Knowledge, the buildings, plants and structures of
the Company and its Subsidiaries are structurally sound, are
generally in good operating condition and repair, and are adequate
for the uses to which they are being put, and none of such
buildings, plants and structures is in need of maintenance or
repairs except for ordinary, routine maintenance and repairs that
could not reasonably be expected to exceed $250,000 in
cost.
(b)
Schedule 5.7(b) lists all powers of attorney granted by
Company that remains outstanding.
(a)
Company and/or one or more of its Subsidiaries owns, holds or
possesses all licenses, franchises, permits, privileges,
immunities, approvals and other authorizations from Governmental
Bodies which are necessary to entitle it to own or lease, operate
and use its assets and to carry on and conduct the Company Business
substantially as currently conducted, except for those permits,
licenses, franchises, privileges, immunities, approvals or other
authorizations which can be obtained at a cost which, in the
aggregate, does not exceed $100,000 (herein collectively called
“ Governmental
Permits ”). A list of
all Governmental Permits presently held by Company and each
Subsidiary, and their expiration dates, is set forth on Schedule
5.8 .
(b)
Except as set forth in Schedule 5.8 , to Sellers’
Knowledge, each of Company and its Subsidiaries has fulfilled and
performed its obligations under each of the Governmental Permits
and there is no breach or default under any such Governmental
Permit (except for such breaches or defaults that can be cured with
expenditures that do not in the aggregate exceed $100,000) and no
event has occurred that permits revocation or termination
of
19
any such
Governmental Permit. Each of the Governmental Permits is
valid, subsisting and in full force and effect (except for such
deficiencies that can be corrected with expenditures which do not
in the aggregate exceed $100,000).
5.9.
Customers and Suppliers
. Schedule 5.9 sets forth the name of Company’s
and its Subsidiaries (taken as a whole) ten largest customers,
based on revenues, for the 12 months ended December 31, 2003 and
the six (6) months ending June 30, 2004 (the “
Customers ”). Except as
set forth on Schedule 5.9 , since December 31, 2003: (a)
there has been no termination, cancellation or material
modification adverse to Company or any Subsidiary of any Contract
or engagement between Company (or any Subsidiary) and any Customer;
(b) to the Sellers’ Knowledge, no Customer has threatened to
so terminate, cancel or materially modify, in a manner adverse to
Company or any Subsidiary, such Contracts or engagements; (c) no
supplier that Company has paid or is under contract to pay
US$250,000 or more in either calendar year 2003 or calendar year
2004 has (i) canceled any Contract or otherwise refused to continue
its engagement with Company, (ii) materially decreased its
services, supplies or materials to Company or any Subsidiary, other
than as a result of Company’s decision not to purchase goods
or services from such Person, (iii) provided Company or any
Subsidiary written notice of any plan or intention to perform any
of the actions described in this clause (c) . To
Seller’s Knowledge, the operations of all manufacturers of
the Company’s products in the People’s Republic of
China (I) are not in violation of any material Requirements of Law,
and (II) do not use prison labor.
Neither the Company nor any
Subsidiary owns real property or has an option to acquire any real
property, or has ever owned real property.
5.11.
Real Property Leases
. Schedule 5.11 sets forth a list of each lease or
similar agreement under which Company or any of its Subsidiaries is
lessee of, or holds or operates, any real property owned by any
third Person (the “ Leased Real Property ”). Except as
set forth in Schedule 5.11 , Company, and each of its
Subsidiaries, is in compliance with all leases covering the Leased
Real Property and neither Company nor any of its Subsidiaries has
received any written notice from any lessor alleging that Company
is not in compliance with the terms of such lease, other than those
claims which have been fully resolved.
(a)
Except as set forth on Schedule 5.12(a) , the Leased Real
Property is used and operated in compliance and conformity with all
material Requirements of Law. Since March 15, 2002, neither
Company nor any of its Subsidiaries has received from any
Governmental Body, any written notice of a material violation of
any applicable zoning or building regulation, ordinance or other
law, order, regulation or other Requirements of Law relating to the
operations of Company Business, and there is no such material,
unresolved violation.
(b)
Except as set forth on Schedule 5.12(b) , (i) to
Sellers’ Knowledge, all buildings or other improvements on
any Leased Real Property comply, in all material respects, with all
applicable ordinances, codes, regulations and other Requirements of
Law, have a valid and subsisting certificate of occupancy for their
present use, and (ii) neither Company nor any
20
Subsidiary has
received any notice from any Governmental Body which is still
outstanding of any failure to obtain any certificate, permit,
license or approval with respect to the Leased Real Property, or
any intended revocation, modification or cancellation of same, and
(iii) to Sellers’ Knowledge, no law or regulation presently
in effect or condition precludes or materially restricts
continuation of the present use by Company or such Subsidiary of
such Leased Real Property.
(c)
To Sellers’ Knowledge, there are no defects in any building
or other improvement on any Leased Real Property that would
materially and adversely affect Company’s or any of its
Subsidiaries’ use of such building or improvement in the
conduct of the Company Business.
(d)
Neither the whole nor any part of Company’s interest in the
Leased Real Property is subject to any pending suit for
condemnation or other taking by any public authority or other
Person. To Sellers’ Knowledge, no condemnation or other
taking of the Leased Real Property has been threatened or
contemplated.
5.13.
Personal Property .
Schedule 5.13 contains a complete and accurate list of all
machinery, equipment, vehicles, furniture and other personal
property owned by Company or any of its Subsidiaries and used in
the Company Business having a current book value of US$10,000 or
more. The equipment owned by the Company and its Subsidiaries
is generally in good operating condition and repair, and is
adequate for the uses to which they it being put, and none of such
equipment is in need of maintenance or repairs except for ordinary,
routine maintenance and repairs that could not be reasonably
expected to exceed $100,000 in cost.
5.14.
Personal Property
Leases . Schedule 5.14 contains a list of each
lease or other agreement or right under which Company or any of its
Subsidiaries is lessee of, or holds or operates, any machinery,
equipment, vehicle or other tangible personal property owned by a
third Person, except for any such lease, agreement or right that is
terminable by Company or the applicable Subsidiary without penalty
or payment on notice of thirty (30) days or less, or which involves
the payment by Company or the applicable Subsidiary of rentals of
less than US$50,000 per year (the “ Personal Property Leases ”) and which does not
have a remaining term of five (5) years or more from the Closing
Date. Except as set forth in Schedule 5.14 , Company
and each applicable Subsidiary has complied in all material
respects with all of the Personal Property Leases and, neither
Company nor any applicable Subsidiary has written received notice
of a claim of non-compliance under any Personal Property
Lease.
(a)
Schedule 5.15(a) contains a list of all of the following
intellectual property (other than computer software programs and
systems) owned by, licensed to, or used by Company or any of its
Subsidiaries in the conduct of the Company Business:
(i)
all United States and foreign patents, patent applications,
continuations, continuations-in-part, reissues, patent disclosures,
or improvements thereto and inventions and discoveries for which
the Company currently intends to seek patent
protection;
(ii)
each United States, state and foreign trademark, service mark,
logo, trade dress and trade name (including any assumed or
fictitious or trade name under which Company or any of its
Subsidiaries is conducting its business or has within the previous
five
21
years conducted
its business), whether registered or unregistered, and pending
applications to register the foregoing;
(iii)
all United States registered and foreign copyrights,
and
(iv)
each unregistered copyright which is used in, and is material to,
the Company Business.
The foregoing are referred to as the
“ Intellectual Property .”
(b)
Schedule 5.15(b) contains a list of all material computer
software programs and software systems owned by, licensed to, or
used by Company or any Subsidiary in the conduct of the Company
Business (“ Software ”), provided ,
however , that Schedule 5.15(b) may omit Software
licensed to Company that is generally available to the public and
Software subject to license agreements that become effective when
the purchaser downloads or uses the software, so long as there are
no material, continuing royalty obligations thereunder. The
computer software, programs and systems used in the Company
Business are either owned by the Company (or the applicable
Subsidiary) or each copy thereof used by Company (or Subsidiary) in
the Company Business has been validly licensed to the Company or
the applicable Subsidiary. The computer software, programs
and systems on the computers of the Company are either owned by the
Company (or the applicable Subsidiary) or each copy thereof has
been validly licensed to the Company or the applicable Subsidiary,
or would not result in liability to the Company in excess of
$100,000.
(c)
Schedule 5.15(c) contains a list and description of all
agreements, commitments, contracts, licenses, sublicenses,
assignments, indemnities and other Contracts which relate or
pertain in any material respect to any Intellectual Property or
Software identified in Sections 5.15(a) and 5.15(b)
. Except as disclosed on Schedule 5.15(c) , neither
Company nor any of its Subsidiaries is in breach of any such
agreement, commitment, contract, license, sublicense, assignment,
indemnity or other Contract which relates in any material respect
to any of the Intellectual Property or Software. There are no
outstanding, and to Sellers’ Knowledge, threatened, disputes
with respect to the foregoing agreements and contracts.
(d)
Except as disclosed on Schedule 5.15(d) , Company and/or its
Subsidiaries either: (i) owns the entire right, title and interest
in and to the Intellectual Property and Software free and clear of
Encumbrances; or (ii) has a valid license or other right to use the
same.
(e)
Except as disclosed on Schedule 5.15(e) , (i) all
registrations for Intellectual Property or Software (in case,
identified as being owned by Company or any applicable Subsidiary)
are valid and in force and used in compliance with all material
Requirements of Laws, and all applications listed on Schedule
5.15(a) or 5.15(b) to register any unregistered Intellectual
Property or Owned Software are pending and in good standing; (ii)
to Sellers’ Knowledge, there are no material infringements by
others of any of the Intellectual Property or Software owned by, or
exclusively licensed to, Company; (iii) no infringement of any
copyright, trademark, service mark, trade name, patent, patent
right, trade secret or other intellectual property right of any
other Person has occurred or results in any way from the operation
of the Company Business; and (iv) no pending claim of any
infringement of any copyright, trademark, service mark, trade name,
patent or patent right or other intellectual
22
property right of
any other Person has been made or asserted in respect of the
operations of the Company Business. Since March 15, 2002,
neither Company or any of its Subsidiaries has received notice of a
claim against Company nor any of its Subsidiaries that any of their
operations, activities, products, software, equipment, machinery or
processes of the Company Business infringe any copyright,
trademark, service mark, trade name, patent or patent right or
other intellectual property right of any other Person, and no such
claim is currently outstanding.
(f)
Except as disclosed on Schedule 5.15(f) : (i) the Software
is not subject to any transfer, assignment, site, equipment, or
other operational limitations; (ii) Company has developed the
Software it owns (the “ Owned Software ”) through its own
efforts and for its own account without the aid or use of any
consultants, agents, independent contractors or Persons (other than
Persons that are employees of Company and who do not retain any
intellectual property rights in the Owned Software); (iii) to
Sellers’ Knowledge, the Owned Software does not infringe any
copyright, trademark, service mark, trade name, patent, patent
right, trade secret or other property right of any other Person;
and (iv) there are no agreements or arrangements in effect with
respect to the marketing, distribution, licensing or promotion of
the Owned Software by any other Person.
(g)
Except as disclosed on Schedule 5.15(g) , all former and
current employees, agents, consultants, or contractors who have
contributed to or participated in the creation or development of
any material Intellectual Property or Software on behalf of Company
(or any predecessor in interest thereto) either: (i) are bound by a
“work-for-hire” agreement under which Company is deemed
to be the original owner/author of all property rights therein; or
(ii) have executed an assignment or an agreement to assign in favor
of Company (or such predecessor in interest, as applicable) of all
right, title and interest in such material.
(h)
The Intellectual Property and Software constitute all intellectual
property assets necessary for the operation of the Company Business
as presently conducted.
5.16.
Accounts Receivable
. The accounts receivable reflected in the Unaudited
Financial Statements, and all accounts receivable arising since the
date thereof, have arisen from bona fide transactions by Company or
its Subsidiaries in the ordinary course of its business and
represent bona fide claims for payment for goods sold or services
provided prior to the date hereof.
5.17.
Title to Property .
Company and/or one of its Subsidiaries has good title to all of the
assets reflected on the Unaudited Financial Statements as being
owned by it and all of the assets thereafter acquired by it (except
to the extent that such assets have been disposed of after the
Interim Balance Sheet Date in the ordinary c
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