MEMBERSHIP INTEREST PURCHASE AGREEMENT

Exhibit 10.20

MEMBERSHIP INTEREST PURCHASE AGREEMENT

 

between

 

NUTRISYSTEM, INC.

(a Delaware corporation),

 

and

 

ELIZABETH LUDLOW

 

the sole member of

 

SLIM AND TONE, LLC

 

MEMBERSHIP INTEREST PURCHASE AGREEMENT

 

INTRODUCTION

 

This MEMBERSHIP INTEREST PURCHASE AGREEMENT is dated as of December 2, 2004. The parties are NUTRISYSTEM, INC., a Delaware corporation (the “Buyer”) and ELIZABETH LUDLOW, an individual and a resident of the Commonwealth of Pennsylvania (the “Seller”). Seller is the sole member and President of SLIM AND TONE, LLC, a Pennsylvania limited liability company (the “Company”).

 

BACKGROUND

 

Seller owns all of the issued and outstanding membership interests (the “Shares”) of the Company. The Buyer desires to purchase from the Seller, and the Seller desires to sell to the Buyer, the Shares on the terms and conditions set forth herein.

 

NOW, THEREFORE, in consideration of the respective covenants, representations and warranties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:

 

1. Definitions.

 

For convenience, certain terms used in more than one part of this Agreement are listed in alphabetical order and defined or referred to below (such terms as well as any other terms defined elsewhere in this Agreement shall be equally applicable to both the singular and plural forms of the terms defined).

 

“Action” is defined in Section 7.5.

 

“Affiliates” means, with respect to a particular party, Persons controlling, controlled by or under common control with that party, as well as any officers, directors and majority-owned entities of that party and of its other Affiliates. For the purposes of the foregoing, ownership, directly or indirectly, of 20% or more of the voting membership interest or other equity interest shall be deemed to constitute control.

 

“Agreement” means this Membership Interest Purchase Agreement, including all schedules and exhibits hereto.

 

“Assets” means, with respect to the Company as the context may require, all assets, properties, business, goodwill and rights of every kind and description, real and personal, tangible and intangible, wherever situated and whether or not reflected on the Current Balance Sheet.

 

“Balance Sheet Date” means September 30, 2004.

 

“Business” means the existing and prospective business, operations, facilities and other Assets, financial condition, results of operations, finances, markets, products, competitive position, raw materials and other supplies, customers and customer relations and personnel of the Company.

 

“Business Day” means any calendar day which is not a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania.

 

“Buyer” is defined in the Introduction.

 

“Cap” is defined in Section 7.3(d).

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et seq.

 

“Change of Control Event” means (i) any sale, lease, exchange, or other transfer of all or substantially all of the assets of the Buyer to any other Person (in one transaction or a series of related transactions), (ii) dissolution or liquidation of the Buyer, or (iii) when any Person, including a “group” as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Buyer’s voting securities (based upon voting power).

 

“Charter Documents” means an entity’s certificate or articles of incorporation or formation, certificate defining the rights and preferences of securities, articles of organization, general or limited partnership agreement, operating agreement, certificate of limited partnership, joint venture agreement or similar document governing the entity.

 

“Claim Notice” is defined in Section 7.3(a).

 

“Claim Response” is defined in Section 7.3(a).

 

“Closing” is defined in Section 3.1.

 

“Closing Date” is defined in Section 3.1.

 

“Code” means the US Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder.

 

“Company” is defined in the Introduction.

 

“Company Intellectual Property” means all Intellectual Property Rights owned or licensed by the Company or used by the Company.

 

“Company Plan” means (x) any pension plan, 401(k) plan, profit-sharing plan, health or welfare plan, and any other employee benefit plan (within the meaning of Section 3(3) of ERISA) that is maintained or sponsored by the Company or to which the Company contributes or for which the Company otherwise has or may have any liability, contingent or otherwise, either directly or as a result of an ERISA Affiliate, and (y) any other benefit arrangement, obligation, or practice, whether or not legally enforceable, to provide benefits, other than salary, as compensation for services rendered, to one or more present or former employees, directors, agents, or independent contractors, that is maintained or sponsored by the Company or to which the Company contributes or for which the Company otherwise has or may have any liability, contingent or otherwise, either directly or as a result of an ERISA Affiliate.

 

“Company Software” means all Software owned or licensed by the Company or used by the Company.

 

“Company Trade Secrets” means all Trade Secrets owned by the Company or used by the Company.

 

“Confidential Information” means any information of a party, including a formula, pattern, list, compilation, device, method, technique or process that derives independent economic value, actual or potential, from not being generally known to the public or to other Persons who can obtain economic value from its disclosure or use.

 

2

“Contract” means any written or oral contract, agreement, lease, plan, instrument or other document, commitment, arrangement, undertaking, practice or authorization that is or may be binding on any Person or its property under applicable Law.

 

“Copyrights” mean all copyrights in both published and unpublished form and all registrations and applications for registration for copyrights in any jurisdiction, and any renewals, modifications and extensions thereof.

 

“Court Order” means any judgment, decree, injunction, order or ruling of any federal, state, local or foreign court or governmental or regulatory body or authority that is binding on any Person or its property under applicable Law.

 

“Current Balance Sheet” means the Company’s unaudited balance sheet as of September 30, 2004.

 

“Damages” is defined in Section 7.1(a).

 

“Default” means (i) a breach, default or violation, (ii) the occurrence of an event that with or without the passage of time or the giving of notice, or both, would constitute a breach, default or violation or (iii) with respect to any Contract, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would give rise to a right of termination, renegotiation or acceleration.

 

“Elizabeth Ludlow Employment Agreement” means the Employment Agreement between the Buyer and the Seller, in a form substantially similar to that attached hereto as Exhibit A.

 

“Encumbrance” means any lien, mortgage, easement, security interest, pledge, charge, claim, community property interest, condition, equitable interest, option, right of first refusal, restriction on transferability, defect of title or other restriction of any nature whatsoever, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership.

 

“Environmental Law” means all Laws and Court Orders as well as any principles under common law in existence as of the Closing Date relating to pollution or protection of the environment or occupational health under which a Person may be held liable for the Release of any Hazardous Substance into the environment.

 

“Escrow Agent” means Sovereign Bank, a federal savings bank duly qualified to carry on business in Philadelphia, Pennsylvania.

 

“Escrow Agreement” means the Escrow Agreement between Buyer, Seller and the Escrow Agent in a form substantially similar to that attached hereto as Exhibit B.

 

“Escrow Funds” is defined in Section 2.3(e).

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and all regulations and rules issued thereunder, or any successor law.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

 

“Financial Statements” means (a) the audited consolidated balance sheets of the Company for the two year period ended December 31, 2003 and the related consolidated statements of operations, changes in Seller’s equity and cash flows for each of the years then ended together with the unqualified audit opinion thereon of the Company’s independent accountants, (b) the unaudited consolidated balance sheet

 

3

of the Company for the nine months ended September 30, 2004 and the related statements of operations and cash flows for the nine months ended September 30, 2003 and 2004, which has been compiled by the Company’s independent accountants, and (c) the notes thereto.

 

“Franchise Agreement” means all franchise agreements and license agreements for Outlets, along with any sublease, collateral assignment of lease, security interest or personal guaranty granted in connection with the foregoing.

 

“GAAP” means generally accepted accounting principles.

 

“Governmental Authorization” means any permits, licenses, franchises, registrations, certificates, variances, exemptions, waivers, consents, approvals and other authorizations granted or otherwise made available by or under the authority of any governmental or regulatory body or authority, including, but not limited to, the US Federal Trade Commission.

 

“Hazardous Substances” means any hazardous, toxic or radioactive substance, material or waste which is regulated as of the Closing Date by any state or local governmental authority or the United States of America.

 

“Indemnified Party” is defined in Section 7.3(a).

 

“Indemnified Buyer Party” is defined in Section 7.1.

 

“Indemnified Seller Party” is defined in Section 7.2.

 

“Indemnitor” is defined in Section 7.3(a).

 

“Initial Payment” is defined in Section 2.3(a).

 

“Intellectual Property Rights” means Patents, Trademarks, Copyrights, Trade Secrets, Software and all other tangible or intangible proprietary information, materials or data.

 

“IRS” means the US Internal Revenue Service.

 

“Knowledge” of a particular fact or matter means actual knowledge of such fact or other matter after having completed a reasonable level of inquiry concerning the existence of such fact or other matter.

 

“Law” means any statute, law, ordinance, regulation, order or rule of any federal, state, local or, foreign governmental or regulatory body or authority.

 

“Lease” is defined in Section 4.13.

 

“Liability” means any direct or indirect liability, indebtedness, obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of or by any Person, absolute or contingent, accrued or unaccrued, due or to become due, liquidated or unliquidated.

 

“Liquidated Claim Notice” is defined in Section 7.3(a).

 

“Litigation” means any lawsuit, action, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry.

 

4

“Material Adverse Effect” means a material adverse effect on the Company or the Business, Assets, financial condition, results of operations, prospects, liquidity, products, competitive position, customers and customer relations of the Company or the Business.

 

“Ordinary course” or “ordinary course of business” means the ordinary course of business that is consistent with past practices.

 

“Outlet” shall mean one Slim and Tone fitness center that is the subject of an executed Franchise Agreement between the Company and a franchisee.

 

“Patents” mean all patents, together with any extensions, reexaminations, reissues, patents of additions, patent applications, divisions, continuations, continuations-in-part, improvements and any subsequent filings in any country of jurisdiction claiming priority therefrom.

 

“Person” means any natural person, corporation, partnership, proprietorship, association, joint venture, trust or other legal entity.

 

“Prime Rate” means the prime lending rate as reported in The Wall Street Journal from time to time as the base rate on corporate loans.

 

“Purchase Price” is defined in Section 2.2.

 

“Release” means any release, spill, emission, leaching, leaking, pumping, injection, deposit, disposal, discharge or dispersal into the indoor or outdoor environment, or into or out of any property.

 

“Required Consents” is defined in Section 4.4.

 

“Response Period” is defined in Section 7.3(a).

 

“Restricted Party” is defined in Section 6.1.

 

“Restricted Period” is defined in Section 6.1.

 

“Restricted Territory” is defined in Section 6.1.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations thereunder.

 

“Shares” is defined in the Introduction.

 

“Software” means any computer software, of any nature whatsoever, and all middleware and firmware, and any and all documentation and object and source code related thereto.

 

“Seller” is defined in the Introduction.

 

“Taxes” shall mean all taxes, duties, charges, fees, levies or other assessment imposed by any taxing authority (including any interest, penalties or additions attributable to or imposed on or with respect to any such assessment).

 

“Tax Returns” means all reports, returns, statements (including estimated reports, returns or statements) and other similar filings required to be filed by a party with respect to any Taxes.

 

“Threshold Amount” is defined in Section 7.3(d).

 

5

“Trademarks” mean trademarks, services marks, trademark and service mark applications, brand names, certification marks, trade dress, Internet domain names and Internet domain name applications, goodwill associated with the foregoing and all registrations in any jurisdictions of, and all applications in any jurisdiction to register, the foregoing, including any extension, modification, renewal of any such registration or application thereof.

 

“Trade Secrets” mean all know-know, trade secrets, customer lists, personnel information, sales and profit figures, distribution and sales methods, supplier lists, technology rights and licenses, specifications and other technical information, data, blue prints, process technology, processes, plans, formulae, rights in research and development, franchises, drawings (including engineering and auto-cad drawings), innovations, inventions, discoveries, ideas, databases and all other proprietary information.

 

“Transaction Documents” means this Agreement and any other certificate, instrument, agreement or document required to be delivered pursuant to the terms hereof.

 

“Transactions” means the sale of the Shares by the Seller to Buyer and the purchase of the Shares by the Buyer from the Seller as described herein and the other transactions contemplated by the Transaction Documents.

 

“Unliquidated Claim” is defined in Section 7.3(a).

 

“US” means the United States of America.

 

2. Sale and Purchase of the Shares; Purchase Price.

 

2.1 Sale and Purchase of the Shares. Subject to the terms and conditions of this Agreement and on the basis of and in reliance upon the representations, warranties, covenants and agreements set forth herein, at the Closing the Seller shall sell to the Buyer and the Buyer shall purchase from the Seller all of the Shares.

 

2.2 Purchase Price. The purchase price for the Shares (the “Purchase Price”), which shall be paid in accordance with Section 2.3, shall be an amount equal to $1,900,000.

 

2.3 Payment of Purchase Price. The Purchase Price shall be payable to the Seller as follows:

 

(a) At the Closing, Buyer shall deliver to the Seller a payment in the amount of $1,000,000 in cash (the “Initial Payment”) by wire transfer of immediately available funds to accounts designated by the Seller in writing to Buyer at least two days prior to the Closing Date.

 

(b) On or before December 31, 2005, Buyer shall deliver to the Seller a payment in the amount of $150,000 in cash (the “2005 Payment”) by wire transfer of immediately available funds to accounts designated by the Seller in writing to Buyer at least two days prior to the 2005 Payment.

 

(c) On or before December 31, 2006, Buyer shall deliver to the Seller a payment in the amount of $150,000 in cash (the “2006 Payment”) by wire transfer of immediately available funds to accounts designated by the Seller in writing to Buyer at least two days prior to the 2006 Payment.

 

(d) On or before December 31, 2007, Buyer shall deliver to the Seller a payment in the amount of $150,000 in cash (the “2007 Payment”) by wire transfer of immediately available funds to accounts designated by the Seller in writing to Buyer at least two days prior to the 2007 Payment.

 

6

(e) At the Closing, Buyer shall deliver an aggregate amount of $450,000 to the Escrow Agent (the “Escrow Funds”) to be held in escrow and distributed by the Escrow Agent in accordance with the Escrow Agreement.

 

(f) Upon a Change of Control Event, the parties agree that any outstanding amounts owed to Seller from the 2005 Payment, the 2006 Payment and the 2007 Payment shall be delivered to the Escrow Agent to be deposited with the Escrow Funds. Buyer and Seller agree to jointly instruct the Escrow Agent to accept such funds and to add, as determined by the date of each Payment, the appropriate amount to the corresponding scheduled disbursement as provided by Section 4 of the Escrow Agreement.

 

3. Closing.

 

3.1 Location; Date. The closing for the Transactions (the “Closing”) shall be held at the offices of Morgan Lewis & Bockius LLP in Philadelphia on December 2, 2004 or at such other date and place as may be mutually agreed by the parties (the “Closing Date”).

 

3.2 Deliveries. At the Closing and as a condition to Closing:

 

(a) The Seller shall deliver to Buyer:

 

(i) The certificates, if any, and other instruments evidencing the Shares in negotiable form (free and clear of all pledges, liens, transfer tax obligations, Encumbrances, claims and other charges thereon of every kind), duly endorsed in blank, or with separate membership interest transfer powers attached thereto and signed in blank;

 

(ii) All of the Required Consents;

 

(iii) An executed copy of each Transaction Document to which the Seller is a party;

 

(iv) The Elizabeth Ludlow Employment Agreement;

 

(v) The Escrow Agreement;

 

(vi) Evidence that the Escrow Funds were delivered to the Escrow Agent;

 

(vii) The Financial Statements; and

 

(viii) Such other documents, instruments, certificates and agreements as may be reasonably required by Buyer to consummate and give effect to the transactions contemplated by this Agreement.

 

(b) Buyer shall deliver to the Seller:

 

(i) The Initial Payment;

 

(ii) An executed copy of each Transaction Document to which a Buyer is a party;

 

(iii) The Escrow Agreement;

 

7

(iv) The Elizabeth Ludlow Employment Agreement; and

 

(v) Such other documents, instruments, certificates and agreements as may be reasonably required by the Seller to consummate and give effect to the transactions contemplated by this Agreement.

 

4. Representations and Warranties of Seller. Seller hereby represents and warrants to Buyer as follows:

 

4.1 Organization and Standing.

 

(a) The Company is a limited liability company, duly organized and validly existing and in good standing under the laws of the Commonwealth of Pennsylvania having full power and authority to carry on the Business as it has been and is now being conducted and to own, lease and operate the Assets. The Company is duly qualified to do business and is in good standing in every jurisdiction in which the Business or the character of the Assets requires such qualification, all of which jurisdictions are disclosed in Schedule 4.1(a).

 

4.2 Capitalization and Ownership.

 

(a) The authorized membership interests of the Company consist of one membership interest, all of which is issued and outstanding, and all of which is owned by Seller. Seller is the record and beneficial holder of the Shares, free and clear of any Encumbrance. All of the Shares have been duly authorized and validly issued, are fully paid and nonassessable, were not issued in violation of the terms of any Contract binding upon the Company or Seller, and were issued in compliance with all applicable Charter Documents of the Company and all applicable federal and state securities or “blue sky” Laws. There are no outstanding options, warrants, convertible securities, Contracts or rights of any kind to purchase or otherwise acquire or receive from the Company any membership interests of, or any securities convertible into, the Common Membership interest or other securities of the Company. No membership interests or other securities of the Company are reserved or authorized for issuance. Seller is not a party to any voting trust, proxy, Contract or other agreement or understanding with respect to the voting or transfer of any capital membership interest of the Company.

 

(b) The Company owns no equity security of any Person and has no other ownership or other investment interest, either of record, beneficially or equitably, in any Person, except for bank, checking and money market accounts and other cash equivalent investments.

 

4.3 Authority and Binding Effect. Seller has the full power, authority, capacity and legal right to execute and deliver this Agreement and the other Transaction Documents, to perform the Transactions to be performed by her hereunder and thereunder, and has taken all actions necessary to secure all approvals required in connection therewith. The execution and delivery of this Agreement and the performance of the Transactions by her will not constitute a Default under the Charter Documents of the Company or any Contract binding upon the Company or Seller. This Agreement constitutes, and the other Transaction Documents will constitute, the legal, valid and binding obligation of Seller, enforceable against her in accordance with their respective terms.

 

4.4 Validity of the Transactions. Except for any consents specified in Schedule 4.4 (the “Required Consents”), neither the execution and delivery of this Agreement by Seller nor the performance of the Transactions (i) will cause a Default under any Law or Court Order which is applicable to the Company or Seller, (ii) require the consent or approval of, or notice to, any party to, any Contract relating to the Business or the Assets or by which the Company or Seller is a party or otherwise bound or affected, or (iii) require the Company or Seller to notify, or obtain any Governmental Authorization from, any governmental or regulatory body or authority.

 

8

4.5 Financial Statements; Books of Account.

 

(a) The Financial Statements are complete, were prepared in accordance with GAAP, consistently applied throughout the periods covered thereby and, subject to any qualifications set forth in the applicable notes and schedules, fairly and accurately present the financial position and results of operations of the Company at the dates and for the periods covered.

 

(b) The books and accounting records of the Company fairly reflect in all material respects (i) all transactions relating to the Company and (ii) all items of income and expense, assets and liabilities and accruals relating to the Company. The Company has not engaged in any material transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company.

 

4.6 Taxes.

 

(a) All Tax Returns required to be filed by the Company or with respect to the Business, its income or Assets have been timely filed and all such Tax Returns were true, correct and complete in all material respects.

 

(b) Except for Taxes not yet due, all Taxes owed with respect to the Company or with respect to the Business, its income or Assets have been paid on a timely basis, whether or not shown on any Tax Return.

 

(c) The amount of the Company’s liability for unpaid Taxes as of the Balance Sheet Date did not exceed the amount of the current liability accruals for Taxes (excluding reserves for deferred Taxes) shown on the Current Balance Sheet, and the amount of the Company’s liability for unpaid Taxes for all periods or portions thereof ending on or before the Closing Date will not exceed the amount of the current liability accruals for Taxes (excluding reserves for deferred Taxes) as such accruals are reflected on the books and records of the Company on the Closing Date.

 

(d) There are no ongoing examinations or claims against the Company for Taxes, and no written notice of any audit, examination or claim for Taxes, whether pending or threatened, has ever been received.

 

(e) The Company is not the beneficiary of any extension of time within which to file any Tax Return, nor has the Company made any requests for such extensions. No claim has ever been made by an authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

 

(f) The Company has a taxable year ended on December 31.

 

(g) The Company currently utilizes the cash method of accounting for income Tax purposes and such method of accounting has not changed since the founding of the Company. The Company has not agreed to and is not required to make by reason of a change in accounting method or otherwise, and could not be required to make by reason of a proposed or threatened change in accounting method or otherwise, any adjustment under Section 481(a) of the Code.

 

9

(h) The Company has not received (and is not subject to) any ruling from any taxing authority and has not entered into (and is not subject to) any agreement with a taxing authority.

 

(i) The Company has withheld and paid over to the proper taxing authorities all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto.

 

(j) Copies of (i) any Tax examinations, (ii) extensions of statutory limitations for the collection or assessment of Taxes and (iii) the Tax Returns of the Company for the last three fiscal years have been made available to Buyer.

 

(k) There are (and as of immediately following the Closing there will be) no Encumbrances on the Assets or Shares of the Company relating to or attributable to Taxes.

 

(l) The Company is not a party to any Tax allocation or sharing agreement. The Company does not have any liability for the Taxes of any person (i) as a transferee or successor, (ii) by contract, or (iii) otherwise.

 

(m) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) installment sale or open transaction disposition made on or prior to the Closing Date or (ii) prepaid amount received on or prior to the Closing Date.

 

(n) The Company has, at all times since its inception, properly been treated as a disregarded entity for federal income tax purposes.

 

4.7 Undisclosed Liabilities. Except as set forth on Schedule 4.7, the Company does not have any Liabilities except for:

 

(a) those Liabilities adeq