SECURITIES PURCHASE AGREEMENT

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

AMONG

 

HANDLEMAN COMPANY

 

AND

 

THE SHAREHOLDERS, OPTIONHOLDERS AND WARRANTHOLDERS OF

 

CRAVE ENTERTAINMENT GROUP, INC.

 

DATED OCTOBER 18, 2005

TABLE OF CONTENTS

 

 

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SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (“Agreement”) is made as of October 18, 2005 among HANDLEMAN COMPANY, a Michigan corporation (“Buyer”), and THE SHAREHOLDERS, OPTIONHOLDERS AND WARRANTHOLDERS OF CRAVE ENTERTAINMENT GROUP, INC., a California corporation (such California corporation being defined in this Agreement as the “Company”), WHOSE NAMES APPEAR ON THE SIGNATURE PAGES OF THIS AGREEMENT (individually, a “Shareholder”, and collectively, the “Shareholders”). Nima Taghavi, Hossein Taghavi, Reza Taghavi, Michael Maas and the Reza Taghavi Living Trust are collectively referred to in this Agreement as the “Major Shareholders.”

 

RECITALS

 

A. The Company is a distributor and publisher of interactive entertainment (videogames) software, hardware and accessories and provides videogame software, hardware and accessories category management services for certain game retailers (the “Business”).

 

B. Buyer wishes to purchase from the Shareholders, and the Shareholders wish to sell to Buyer, all of the Company’s issued and outstanding capital stock and options and warrants to acquire capital stock, upon the terms and conditions set forth in this Agreement.

 

THEREFORE, the parties agree as follows:

 

1 SALE AND PURCHASE OBLIGATIONS.

 

1.1 Sale and Purchase of Stock.

 

Subject to the terms and conditions of this Agreement, at the Closing (as defined in Section 1.6), Buyer shall buy from the Shareholders, and the Shareholders shall sell and deliver to Buyer, 33,112,583 common shares, no par value per share, of the Company (the “Shares”), options to purchase 4,794,733 common shares, no par value per share of the Company (the “Options”), and warrants to purchase 2,015,745 common shares, no par value per share, of the Company (the “Warrants,” and together with the Shares and the Options, the “Securities”), which Securities constitute all of the issued and outstanding capital stock and rights to acquire capital stock of the Company. The certificates for the Shares and the documents representing the Options and the Warrants shall, when so delivered by the Shareholders, be duly endorsed for transfer to Buyer, or have executed stock powers endorsed to Buyer attached to the Securities, and the Company shall have paid or provided for all requisite documentary and/or stock transfer stamps. The Shareholders shall cause the Company to prepare, execute and deliver at Closing certificates evidencing the Shares registered in Buyer’s name. Such certificates for the Shares shall be accompanied by any other documents that are necessary to transfer to Buyer good and marketable title to the Securities free and clear of all liens, claims, encumbrances, mortgages, pledges, restrictions and security interests, and shall also be accompanied by all of the stock books, stock ledgers, minute books and corporate seals of the Company.

 

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1.2 Consideration for Purchase.

 

1.2.1 Purchase Price.

 

The aggregate consideration for the Securities shall consist of the following, subject to the adjustments described in Sections 1.2.3(b), 1.4 and 1.5 (the “Purchase Price”):

 

(a) Note. The delivery by Buyer to Nima Taghavi, representing the Shareholders (the “Representative”), at the Closing, of a five-day promissory note in the aggregate principal amount of $67,000,000 in the form attached as Exhibit 1.2.1(a) (the “Note”), subject to adjustment pursuant to Sections 1.2.3(b), 1.4 and 1.5, (as adjusted, the “Cash Amount”), plus

 

(b) Escrow Deposit. The deposit by Buyer of $5,000,000 by wire transfer of immediately available funds (the “Escrow Fund”) at the Closing into an escrow account with one of the banks in Buyer’s lending syndicate acceptable to the Majority Shareholders (the “Escrow Agent”) to be distributed by the Escrow Agent pursuant to the terms of an escrow agreement (the “Escrow Agreement”); the Escrow Fund, along with any interest or income earned thereon, shall be used to satisfy any indemnification claims made by Buyer pursuant to Sections 5 or 7, plus

 

(c) Performance Payment. The payment by Buyer to the Shareholders of an aggregate of $2,000,000 by wire transfer of immediately available funds on January 2, 2008 so long as the employment of none of Nima Taghavi, Michael Maas and Robert Dyer with the Company has been terminated (1) by the Company for Cause (as that term is defined in their respective Employment Agreements entered into pursuant to Section 3.1.11), or (2) by Nima Taghavi, Michael Maas or Robert Dyer without Good Reason (as that term is defined in their respective Employment Agreements) on or before December 31, 2007. If only one of Nima Taghavi, Michael Maas or Robert Dyer is not employed by the Company on December 31, 2007 due to the terminated employee’s termination by the Company for Cause or by such terminated employee without Good Reason, then the payment by Buyer to the Shareholders pursuant to this Section 1.2.1(c) shall be $1,500,000 ($1,000,000 if Robert Dyer is the terminated employee). If only two of Nima Taghavi, Michael Maas or Robert Dyer are not employed by the Company on December 31, 2007 due to each such terminated employee’s termination by the Company for Cause or by each such terminated employee without Good Reason or by a combination of such terminations, then the payment by Buyer to the Shareholders pursuant to this Section 1.2.1(c) shall be $1,000,000 ($500,000 if Robert Dyer is one of the terminated employees). If none of Nima Taghavi, Michael Maas or Robert Dyer is employed by the Company on December 31, 2007 due to each such terminated employee’s termination by the Company for Cause or by each such terminated employee without Good Reason or by a combination of such terminations, then there shall be no payment by Buyer to the Shareholders pursuant to this Section 1.2.1(c).

 

(d) Earn Out. The Shareholders shall potentially receive up to an additional $21,000,000 (the “Maximum Earn Out”) as provided in Section 1.2.2.

 

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The imputed interest rate on the payments made pursuant to Sections 1.2.1(c) and (d) is agreed to be 3.8% a year compounded annually.

 

1.2.2 Earn Out.

 

(a) Definitions. The following terms have the following meanings for purposes of this Section 1.2.2:

 

(i) “Earn Out Payment.” “Earn Out Payment” shall mean the amount paid by Buyer to the Shareholders pursuant to Section 1.2.2(b), 1.2.2(c), or 1.2.2(d) (or, if applicable, Section 1.2.2(e)) for the calendar year 2005, 2006 or 2007, respectively, or the total of such payments, as the context requires.

 

(ii) “EBITDA.” “EBITDA” shall mean the Company’s net income before interest, taxes, depreciation and amortization calculated for each calendar year in accordance with United States generally accepted accounting principles (“GAAP”) applied in a manner consistent with the preceding years’ (i.e., prior to the Closing) reporting practices of the Company with the exception of the following (without duplication):

 

(a)

amortization of software development costs that flow through the Company’s cost of goods sold based upon revenue earned by each individual title shall not be added back to income in the determination of EBITDA;

 

(b)

all transaction costs arising out of, and in connection with the preparation, negotiation and Closing of, this Agreement and the transactions described in this Agreement, including, without limitation, the fees and expenses of any accountants, lawyers, investment bankers, or other advisors retained by the Company or the Shareholders (collectively, the “Transaction Costs”) and deducted from the Company’s income shall be added back to the Company’s income in the determination of EBITDA;

 

(c)

all revenue, cost and expense adjustments arising from purchase accounting for the transaction described in this Agreement to the extent such revenue, cost and expense adjustments are included in the determination of the Company’s income, shall be excluded in determining the Company’s income for purposes of the determination of EBITDA;

 

(d)

all of the adjustments set forth in Exhibit 1.4 to the extent they are included in the determination of the Company’s income, shall be excluded in determining the Company’s income for purposes of the determination of EBITDA, except that the 0.5% transaction bonus payable pursuant to

 

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the September 14, 2005 Consulting Agreement between Ron Scott and the Company shall not be added back to the Company’s income in the determination of EBITDA;

 

(e)

except as otherwise provided in paragraph (g), (k) or (l), any compensation to any employee or consultant of the Company regardless of whether based on consummation of the transactions described in this Agreement shall not be added back to the Company’s income in the determination of EBITDA (for example, the 0.5% transaction bonus payable pursuant to the September 14, 2005 Consulting Agreement between Ron Scott and the Company shall not be added back to the Company’s income in the determination of EBITDA);

 

(f)

all payments made to the Shareholders pursuant to Section 1.2.3(a), and the Dividend made to Shareholders before the Closing (regardless of how the Dividend may be categorized), to the extent deducted from the Company’s income for 2005 shall be added back to the Company’s income in the determination of EBITDA for 2005;

 

(g)

all non-cash expenses recorded with respect to the grant of stock options or warrants or the grant of Equity Securities by the Company before the Closing and the specific cash bonus in the amount of $524,688 accrued and paid by the Company before the Closing related to the 2004 stock grant set forth in the footnotes to the Financial Statements, in each case to the extent deducted from the Company’s income for 2005 shall be added back to the Company’s income in the determination of EBITDA for 2005;

 

(h)

if an Indemnified Claim would be deducted from the Company’s income, to the extent the Indemnified Claim is paid to the Buyer or the Company, such Indemnified Claim shall not be deducted from the Company’s income in the determination of EBITDA;

 

(i)

accelerated depreciation due to early cancellation of the Rancho Dominguez lease in 2005 to the extent deducted from the Company’s income for 2005 shall be added back to the Company’s income in the determination of EBITDA for 2005;

 

(j)

any prepayment penalty and/or cancellation fee incurred by the Company as a result of the termination or cancellation of the Company’s revolving line of credit to the extent

 

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deducted from the Company’s income shall be added back to the Company’s income in the determination of EBITDA for the year in which such line of credit is terminated or cancelled; and

 

(k)

any expenses incurred by the Company at the direction of Buyer after the Closing, as well as any corporate allocations of overhead or other costs or expenses after the Closing, in each case (1) that would not have otherwise been incurred by the Company as a non-publicly-traded, stand-alone entity, (2) to the extent (a) unreasonable from a business perspective if the Company were a non-publicly-traded, stand-alone entity, and (b) not approved by Nima Taghavi, and (3) to the extent deducted from the Company’s income, shall be added back to the Company’s income in the determination of EBITDA.

 

(l)

any expenses incurred by the Company at the direction of Buyer after the Closing, as well as any corporate allocations of overhead or other costs and expenses after the Closing, in each case (1) that would not have otherwise been incurred by the Company as a non-publicly-traded, stand-alone entity, (2) that are (a) reasonable from a business perspective if the Company were a non-publicly-traded, stand-alone entity, and (b) not approved by Nima Taghavi, (3) that exceed the benefits of other synergistic initiatives or other cost savings that otherwise would not have been enjoyed by the Company as a non-publicly-traded, stand-alone entity, and (4) to the extent deducted from the Company’s income, shall be added back to the Company’s income in the determination of EBITDA.

 

Buyer shall consult with one or more officers of the Company before such expenses or allocations described in paragraphs (k) and (l) are incurred by the Company that would affect EBITDA in the calculation of each of the 2005 Earn Out, 2006 Earn Out and 2007 Earn Out.

 

(b) 2005 Earn Out. The Earn Out Payment for the calendar year 2005 (the “2005 Earn Out”) shall be $3,000,000; provided, however, that the 2005 Earn Out shall be reduced on a dollar-for-dollar basis by any amount that the actual EBITDA for 2005 is less than $18,000,000 up to a maximum reduction of $3,000,000.

 

(c) 2006 Earn Out. The Earn Out Payment for the calendar year 2006 (the “2006 Earn Out”) shall be $10,000,000; provided, however, that the 2006 Earn Out shall be reduced by $3-1/3 for each dollar that the actual EBITDA for 2006 is less than $20,000,000 up to a maximum reduction of $10,000,000.

 

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(d) 2007 Earn Out. The Earn Out Payment for the calendar year 2007 (the “2007 Earn Out”) shall be $8,000,000; provided, however, that the 2007 Earn Out shall be reduced by $2-2/3 for each dollar that the actual EBITDA for 2007 is less than $22,000,000 up to a maximum reduction of $8,000,000.

 

(e) Earn Out Shortfall Makeup.

 

(i) 2005 Makeup in 2006. If (1) the actual EBITDA for 2005 is at least $15,000,000 but is less than $18,000,000 (resulting in a less than $3,000,000 Earn Out Payment for 2005), and (2) the actual EBITDA for 2006 is more than $20,000,000, Buyer shall make an additional Earn Out Payment (the “2005 Earn Out Make Up”) equal to $1 for each $1 that actual EBITDA for 2006 is more than $20,000,000; provided, however, that the maximum additional Earn Out Payment shall equal $3,000,000 minus the 2005 Earn Out paid pursuant to Section 1.2.2(b).

 

(ii) 2006 Makeup in 2007. If (1) the actual EBITDA for 2006 is at least $17,000,000 but is less than $20,000,000 (resulting in a less than $10,000,000 Earn Out Payment for 2006), and (2) the actual EBITDA for 2007 is more than $22,000,000, Buyer shall make an additional Earn Out Payment (the “2006 Earn Out Make Up”) equal to $3-1/3 for each $1 that actual EBITDA for 2007 is more than $22,000,000; provided, however, that the maximum additional Earn Out Payment shall equal $10,000,000 minus the 2006 Earn Out paid pursuant to Section 1.2.2(c).

 

(iii) 2005 Makeup in 2007. If (1) the actual EBITDA for 2005 is at least $15,000,000 but is less than $18,000,000 (resulting in a less than $3,000,000 Earn Out Payment for 2005), (2) the 2005 Earn Out Make Up is less than ($3,000,000 minus the 2005 Earn Out paid pursuant to Section 1.2.2(b)), and (3) the actual EBITDA for 2007 is more than $22,000,000 plus the amount of EBITDA necessary to make the maximum 2006 Earn Out Make Up, Buyer shall make an additional Earn Out Payment (the “2005 Earn Out Make Up In 2007”) equal to $1 for each $1 that actual EBITDA for 2007 is more than $22,000,000 plus the amount of EBITDA necessary to make the maximum 2006 Earn Out Make Up; provided, however, that the maximum additional Earn Out Payment shall equal $3,000,000 minus the 2005 Earn Out paid pursuant to Section 1.2.2(b) minus the 2005 Earn Out Make Up paid pursuant to Section 1.2.2(e)(i).

 

(f) Disputes; Payment.

 

(i) Buyer Determinations. Buyer will deliver to the Representative its written calculation, in reasonable detail, of the 2005 Earn Out, the 2006 Earn Out, the 2005 Earn Out Make Up (if applicable), the 2007 Earn Out, the 2006 Earn Out Make Up (if applicable) and the 2005 Earn Out Make Up In 2007 (if applicable) (each, a “Calculation”) in accordance with the following timetable: (1) 2005 Earn Out: by March 15, 2006, (2) 2006 Earn Out and 2005 Earn Out Make Up (if applicable): by March 15, 2007, and (3) 2007 Earn Out, 2006 Earn Out Make Up (if applicable) and 2005 Earn Out Make Up In 2007 (if applicable): by March 15, 2008

 

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(ii) Representative Review. The Representative shall have 30 days after receipt of the Calculation (the “Objection Period”) to review it, during which time the Representative may elect to prepare his own calculation of the applicable Earn Out Payment (the “Representative’s Calculation”). If the Representative either fails to deliver a Representative’s Calculation within the Objection Period or notifies the Buyer in writing that he has no objection to the Calculation before the expiration of the Objection Period, the matters set forth in the Calculation shall be conclusive and binding on the parties and the applicable Earn Out Payment shall be paid by Buyer to the Shareholders as provided in Section 1.2.2(f)(vi). If the Representative prepares a Representative’s Calculation and delivers it in writing to the Buyer within the Objection Period, then the parties shall resolve any discrepancy pursuant to this Section 1.2.2(f). To the extent that the Calculation and the Representative’s Calculation agree, such amount shall be paid by the Buyer to the Shareholders as provided in Section 1.2.2(f)(vi).

 

(iii) Disputes Over Calculation. If there is a discrepancy between the Calculation and the Representative’s Calculation, the parties shall meet within 15 days after delivery of the Representative’s Calculation to Buyer (“Meet and Confer Period”) and attempt to resolve their disputes in good faith. If the parties are unable to resolve their disputes within the Meet and Confer Period, they shall agree upon a mediator and shall meet with the mediator within 15 days after the end of the Meet and Confer Period and attempt to resolve their disputes in good faith. Buyer and the Shareholders shall each be responsible for half of the mediator’s fees and costs, subject to Section 1.2.2(f)(iv).

 

(iv) Arbitration. If the parties are unable to resolve their disputes regarding the Earn Out Payment for the applicable period pursuant to the previous paragraphs, either Buyer or the Representative may submit the dispute to binding arbitration by notice to the other party beginning 30 days after the first attempt to resolve the disputes with a mediator. Such arbitration shall be resolved before a single arbitrator, who is an expert in the subject matter of the dispute and a Certified Public Accountant (“CPA”), appointed by the American Arbitration Association or its successor in Orange County, California. The determination of the arbitrator shall be final, absolute and binding upon the parties. The arbitration and the arbitrator shall be governed by the duly promulgated rules and regulations of the American Arbitration Association or its successor then in effect. The Shareholders and Buyer agree that a judgment of any court of applicable jurisdiction may be rendered upon any arbitration award made pursuant to this Section.

 

(v) Expenses. Each party shall be responsible for its own attorneys’, accountants’, experts’ and any other fees and costs relating to such dispute process and one half of the fees and expenses of the arbitrator and of the American Arbitration Association; provided, however, that, unless otherwise

 

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agreed by the parties, if at any point in the dispute resolution process it is finally determined (by the arbitrator or other judicial officer with authority to render a final determination) or agreed (by the parties if a settlement is reached) that the dollar amount in dispute that is resolved in favor of the Shareholders divided by the total dollar amount in dispute (based on the Representative’s Calculation and expressed as a percentage) is (1) 10% or less, the Shareholders shall promptly reimburse the Buyer for all of the Buyer’s fees and costs associated with the dispute (including, but not limited to, the reasonable fees and costs of attorneys, accountants, and experts and any other fees and costs relating to such dispute incurred by Buyer, the fees and expenses of the arbitrator and of the American Arbitration Association incurred by Buyer and the fees and costs of the mediator pursuant to Section 1.2.2(f)(iii) incurred by Buyer, and (2) 60% or more, the Buyer shall promptly reimburse the Shareholders for all of the Shareholders’ fees and costs associated with the dispute (including, but not limited to, the reasonable fees and costs of attorneys, accountants, and experts and any other fees and costs relating to such dispute incurred by the Shareholders, the fees and expenses of the arbitrator and of the American Arbitration Association incurred by the Shareholders and the fees and costs of the mediator pursuant to Section 1.2.2(f)(iii) incurred by the Shareholders.

 

(vi) Payment. Within five business days after the amount of the applicable Earn Out Payment (or, if applicable, the discrepancy between the Calculation and the Representative’s Calculation) is conclusively determined (i.e., when the Calculation becomes conclusive, or when the parties agree on all or part of the applicable Earn Out Payment, or when the parties resolve their dispute by agreement, or when the arbitrator’s decision is final), Buyer shall pay the Shareholders, by wire transfer, any required unpaid Earn Out Payment, plus or minus the net costs of the dispute awarded pursuant to Section 1.2.2(f)(iv); provided, however, that the Buyer shall not be required to deliver the 2005 Earn Out earlier than six (6) months after the date of this Agreement.

 

(g) Buyer’s Earn Out Obligations. After the Closing through December 31, 2007, Buyer shall cause the Company to remain a separate entity and shall engage in the Business exclusively through the Company, except (1) in the United Kingdom, and (2) for merchandising services.

 

1.2.3 Section 338(h)(10) Election; Allocation of Purchase Price.

 

(a) Section 338(h)(10) Election. Buyer, the Company, the Shareholders and the Shareholders’ spouses, as applicable, will jointly make or cause to be made the election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the “Code”) (and any corresponding election under state, local, and foreign Tax law) with respect to the purchase and sale of the Securities under this Agreement (a “Section 338(h)(10) Election”). Buyer, the Company, the Shareholders and the Shareholders’ spouses, as applicable, will (1) cooperate in the preparation and filing of any Section 338(h)(10) Election with respect to the sale of the Securities, (2) take all such action as is required in order to give full effect to the Section 338(h)(10) Election for federal, state,

 

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local and foreign Tax purposes to the greatest extent permitted by law, and (3) file their Tax Returns in a manner consistent with the 338(h)(10) Election and the Purchase Price Allocation. To the extent required by applicable law, the Shareholders will include any income, gain, loss, deduction, or any other Tax item resulting from the Section 338(h)(10) Election on their Tax Returns. Shareholders shall indemnify Buyer, Company and its subsidiaries against any adverse consequences arising out of any failure to pay any such Taxes, except as otherwise provided in Section 1.2.3(b). The Shareholders shall prepare and deliver to the Buyer at Closing a validly executed IRS Form 8023 (and, as applicable, analogous forms required pursuant to state, local or foreign Tax law) providing for a Section 338(h)(10) Election with respect to the purchase and sale of the Securities, with such portions of the forms as relate to the Shareholders and the Company properly completed. Buyer shall be responsible for the filing of, and shall timely file, such forms. After filing such Form 8023 or analogous state, local or foreign tax form (including the Purchase Price Allocation discussed below), Buyer shall provide a fully completed and executed copy to the Shareholders.

 

(b) Adjustment to Purchase Price for Section 338(h)(10) Election . The Purchase Price shall be increased by, and Buyer shall reimburse the Shareholders to the extent of their actually owned Shares (as opposed to options or Warrants) that they have held for more than a year as of the Closing Date for, an amount equal to (1) 23.52941176%, multiplied by (2) the amount of such Shareholders’ gain pursuant to the Section 338(h)(10) Election characterized as ordinary income or otherwise taxed at ordinary income tax rates (as opposed to long-term capital gain rates) to such Shareholder as a result of the Section 338(h)(10) Election and based on the Purchase Price Allocation that would have been taxed at long-term capital gain rates had the transactions described in this Agreement occurred without the Section 338(h)(10) Election. In addition, the Purchase Price shall be increased by, and Buyer shall reimburse the Shareholders to the extent of their actually owned Shares (as opposed to options or warrants), for an amount equal to (1) interest and incremental taxes (to the extent the applicable Shareholder certifies that it actually incurred incremental taxes with no offsetting benefit) with respect to the difference in timing of tax payments (including interest on delinquent income taxes imposed by the Internal Revenue Service, but less any interest on overpaid income taxes paid by the Internal Revenue Service) and any penalties and expenses incurred, divided by (2) 0.78305, all to the extent resulting from a difference in the allocation of the Shareholders’ basis in Shares owned by such Shareholder among the Purchase Price payments (using the installment method), pursuant to Section 453B(h) of the Code, resulting from the 338(h)(10) Election. The Shareholders agree to treat the payments pursuant to the Note under the installment method under Section 453 of the Code. The determination of the amounts of such reimbursements and the resolution of any disputes concerning the amounts shall be made in the same manner as described in Section 1.5.2 with respect to the determination of Working Capital, Net Assets and the Dividend. Buyer shall also pay any Tax imposed on the Company or any of its subsidiaries or both attributable to the making of the Section 338(h)(10) Election, in excess of such amount that would have been payable if no such election had been made, including, without limitation, the State of California franchise tax of the Company equal to 1.5% of the Company’s gain on the deemed sale of its assets.

 

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(c) Allocation of Purchase Price. Buyer and the Shareholders agree to allocate the Purchase Price, the liabilities of the Company and its qualified subchapter S subsidiaries, and all other relevant items (including, for example and without limitation, any adjustments or additions to the Purchase Price pursuant to Sections 1.2.2, 1.2.3(b), 1.4 and 1.5 of this Agreement) (the “Purchase Price Allocation”), in accordance with the allocations provided by Buyer to the Representative before the respective parties’ Tax Returns affected by the Purchase Price Allocation are due. In the event that, after the Purchase Price Allocation is determined, the Purchase Price is adjusted (including adjustments pursuant to Sections 1.2.2, 1.2.3(b), 1.4 and 1.5 of this Agreement), the Purchase Price Allocation shall also be adjusted. To the extent permitted by the Code, the Treasury regulations under the Code or other applicable Tax law, any adjustments to the Purchase Price shall be allocated, to the extent possible, to the classes of assets that were the subject of the adjustments to the Purchase Price, and to the extent that such adjustments do not relate to any specific asset classification, shall be allocated to goodwill. Buyer, the Company and the Shareholders shall file all Tax Returns (including amended returns and claims for refunds) in a manner consistent with the Purchase Price Allocation, including any adjustments to such Purchase Price Allocation made pursuant to this paragraph, and shall use their reasonable best efforts to sustain such allocation in any subsequent Tax audit or dispute.

 

(d) Allocation Among the Shareholders . The Purchase Price (except for the portion of the Purchase Price provided for in Section 1.2.3(b)) shall be allocated among the Securities and the Shareholders as provided in this Section. The “Per Share Consideration” shall equal (1) the Purchase Price (except for the portion of the Purchase Price provided for in Section 1.2.3(b)) plus the exercise price of the Options and the Warrants, divided by (2) the number of all outstanding Shares and the number of the Company’s common shares underlying the Options and the Warrants. Each holder of Shares shall be allocated an amount of the Purchase Price (except for the portion of the Purchase Price provided for in Section 1.2.3(b)) equal to the Per Share Consideration multiplied by the number of Shares held, and each holder of Options, Warrants or both shall be allocated an amount of the Purchase Price (except for the portion of the Purchase Price provided for in Section 1.2.3(b)) equal to the Per Share Consideration multiplied by the number of the Company’s common shares underlying the Options and Warrants held minus the exercise price of such Options and Warrants. The portion of the Purchase Price provided for in Section 1.2.3(b) shall be allocated to the Shareholders in proportion to their share of the Company’s related income.

 

1.3 Dividend.

 

Before the Closing Date, the Shareholders shall cause the Company to declare a dividend payable to the Shareholders in an aggregate amount equal to the federal and state income taxes due from the Shareholders on the Company’s earnings through the Closing Date calculated at the maximum tax rates for state and federal purposes that are taxable to the Shareholders consistent with past practices (i.e., one rate for all of the Shareholders), less any previous distributions to the Shareholders with respect to such taxes on such earnings (the “Dividend”), payable as described in Section 1.5.

 

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1.4 Purchase Price Adjustments Based on Working Capital and Net Assets.

 

The Cash Amount shall be decreased by the amount that the Company’s “Working Capital” (as defined in Section 1.4.1) as of October 31, 2005 is less than $14,037,000 and by the amount that the Company’s “Net Assets” (as defined in Section 1.4.2) as of October 31, 2005 is less than $15,473,000. The attached Exhibit 1.4 sets forth adjustments used to calculate the above “Working Capital” and “Net Assets” targets.

 

1.4.1 “Working Capital.”

 

The Company’s “Working Capital” shall be equal to the book value of the Company’s current assets minus the book value of the Company’s current liabilities as of October 31, 2005 (but including, without limitation, any Tax liabilities of the Company and its subsidiaries resulting from the Closing, the Dividend, and all other liabilities of the Company which result from the transactions contemplated by this Agreement) determined in accordance with GAAP applied in a manner consistent with the Company’s accounting policies, except that the accrued liabilities relating to Coresoft, Inc. and Toys “R” Us described in the notes to Exhibit 1.4 shall equal the amount actually accrued by the Company in its October 31, 2005 balance sheet (but not less than the amount as reflected in Exhibit 1.4 ) in the determination of “Working Capital”.

 

1.4.2 “Net Assets.”

 

The Company’s “Net Assets” shall be equal to the book value of the Company’s assets minus the book value of the Company’s liabilities as of October 31, 2005 (but including, without limitation, any Tax liabilities of the Company and its subsidiaries resulting from the Closing, the Dividend, and all other liabilities of the Company which result from the transactions contemplated by this Agreement) determined in accordance with GAAP applied in a manner consistent with Company’s accounting policies; provided that, to avoid a double adjustment for the same Working Capital item, Net Assets shall be increased by the amount of any excess of $14,037,000 over Working Capital and provided further that the accrued liabilities relating to Coresoft, Inc. and Toys “R” Us described in the notes to Exhibit 1.4 shall equal the amount actually accrued by the Company in its October 31, 2005 balance sheet (but not less than the amount as reflected in Exhibit 1.4 ) in the determination of “Net Assets”.

 

1.5 Initial Estimate and Subsequent Determination of Working Capital, Net Assets and Dividend.

 

1.5.1 Initial Estimate of Working Capital, Net Assets and Dividend.

 

At least five business days before the Closing Date, the Shareholders shall deliver to Buyer an initial estimate (accompanied by a written statement signed by the chief financial officer of the Company that, to the best of his knowledge and belief, such initial estimate is correct) of the Working Capital and Net Assets of the Company as of October 31, 2005 and the Dividend as of the Closing Date (the “Initial Estimate”), which estimates shall be made after sharing the underlying information with Buyer and consulting with Buyer concerning such Initial Estimate. The Initial Estimate shall be considered correct for purposes of determining the estimated Cash Amount (which will be the amount of the Note delivered at the Closing) and the

 

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estimated amount of the Dividend, subject to adjustments after the Closing Date as provided in Section 1.5.2. The Shareholders shall cause the Company to pay such estimated Dividend to the Shareholders on or before the Closing (the “Estimated Dividend”).

 

1.5.2 Subsequent Determination of Working Capital, Net Assets and Dividend.

 

As soon as practicable following the Closing Date (but in no event later than 60 days thereafter), Buyer’s independent certified public accountants (i.e., PricewaterhouseCoopers LLP (“PWC”)) shall conduct an audit of the books and records of the Company as of October 31, 2005 (the Closing Date with respect to the Dividend) and shall determine the Working Capital and Net Assets of the Company as of October 31, 2005, the Dividend amount as of the Closing Date, the actual Cash Amount and any required adjustments to the estimated Cash Amount and the estimated Dividend in accordance with this Agreement. PWC shall present to Buyer and the Representative a report showing their determination of Working Capital and Net Assets of the Company, the Dividend amount, the Cash Amount and any required adjustments to the estimated Cash Amount as of October 31, 2005 and the estimated Dividend as of the Closing Date (collectively, the “Amounts”) and in each case determined in accordance with GAAP applied in a manner consistent with the preceding years’ (i.e., prior to the Closing) reporting practices of the Company and Sections 1.4.1 and 1.4.2.

 

In the event of a dispute between the parties to this Agreement as to any of the Amounts, the Buyer (or the Company with respect to the Dividend) shall pay the Shareholders or the Shareholders shall pay the Buyer (or the Company with respect to the Dividend), as applicable, by wire transfer, the undisputed portion of any required adjustment to the estimated Cash Amount or the estimated Dividend. If the parties are unable to resolve their dispute within 20 business days after receipt of PWC’s report, the Representative, at the Shareholders’ sole cost and expense, may engage another national firm of independent certified public accountants to determine the Amounts. Such accountants shall present to Buyer and the Representative, as representative of the Shareholders, a report showing their determination of the Amounts. If the Representative, on behalf of the Shareholders, fails to engage such accountants within such 20 business day period or if the Working Capital or Net Assets of the Company or the Dividend as determined by such accountants is not at least $50,000 more than the Working Capital or Net Assets of the Company or the Dividend as determined by PWC, PWC’s determination of the Amounts shall be conclusive and binding on the parties to this Agreement.

 

If the Working Capital or Net Assets of the Company or the Dividend as determined by such accountants is at least $50,000 more than the Working Capital or Net Assets of the Company or the Dividend as determined by PWC and the parties are unable to resolve their dispute within 20 business days after such accountants present their report to the parties, the parties shall submit the disputed Amounts for determination by an arbitrator in Orange County, California who shall be CPA, excluding any CPA engaged by Buyer, the Company or the Shareholders, as mutually agreed upon by the Representative, on behalf of the Shareholders, and Buyer. If the Representative, on behalf of the Shareholders, and Buyer are unable to agree on an arbitrator, the Company’s and Buyer’s independent public accountants shall select an arbitrator who satisfies the requirements of this Section.

 

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Each party shall be responsible for its own attorneys’, accountants’, experts’ and any other fees and costs relating to such dispute process and one half of the fees and expenses of the arbitrator and of the American Arbitration Association; provided, however, that, unless otherwise agreed by the parties, if at any point in the dispute resolution process it is finally determined (by the arbitrator or other judicial officer with authority to render a final determination) or agreed (by the parties if a settlement is reached) that the dollar amount in dispute that is resolved in favor of the Shareholders divided by the total dollar amount in dispute (based on the Amounts calculated by the national firm of independent certified public accountants engaged by the Representative to determine the Amounts and expressed as a percentage) is (1) 10% or less, the Shareholders shall promptly reimburse the Buyer for all of the Buyer’s fees and costs associated with the dispute (including, but not limited to, the reasonable fees and costs of attorneys, accountants, and experts and any other fees and costs relating to such dispute incurred by Buyer, the fees and expenses of the arbitrator and of the American Arbitration Association incurred by Buyer and the fees and costs of PWC incurred by Buyer, and (2) 60% or more, the Buyer shall promptly reimburse the Shareholders for all of the Shareholders’ fees and costs associated with the dispute (including, but not limited to, the reasonable fees and costs of attorneys, accountants, and experts and any other fees and costs relating to such dispute incurred by the Shareholders, the fees and expenses of the arbitrator and of the American Arbitration Association incurred by the Shareholders and the fees and costs of the national firm of independent certified public accountants engaged by the Representative to determine the Amounts and incurred by the Shareholders.

 

The Shareholders and Buyer agree that a judgment of any court of applicable jurisdiction may be rendered upon any arbitration award made pursuant to this Section. Within five business days after the earliest of the time PWC’s report becomes conclusive, the time the parties resolve their dispute by agreement, or the time of the arbitrator’s decision, the Buyer (or the Company with respect to the Dividend) shall pay the Shareholders, or the Shareholders shall pay the Buyer (or the Company with respect to the Dividend), as applicable, by wire transfer, any required unpaid adjustment to the estimated Cash Amount or the estimated Dividend.

 

1.6 The Closing.

 

The Closing under this Agreement shall be held at 10:00 a.m. at the offices of Honigman Miller Schwartz and Cohn LLP, 2290 First National Building, 660 Woodward Avenue, Detroit, Michigan 48226-3506 on or before November 30, 2005, or such other day and time as Buyer and the Shareholders shall mutually agree upon. The parties agree to use their commercially reasonable efforts to cause the closing to occur on October 31, 2005 The consummation of the transactions contemplated by this Agreement at such place and time are sometimes referred to in this Agreement as the “Closing”, and such closing date is sometimes referred to as the “Closing Date.” At the Closing, the Shareholders shall deliver the Securities and the Company shall deliver the new certificates pursuant to Section 1.1, Buyer shall pay or deliver the Purchase Price deliverable at Closing pursuant to Section 1.2, and Buyer and the Shareholders shall comply with the applicable covenants and conditions to Closing set forth in Sections 3 and 4.

 

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2 REPRESENTATIONS AND WARRANTIES.

 

2.1 Representation and Warranties of the Major Shareholders.

 

The Major Shareholders, jointly and severally, represent and warrant to Buyer the following as of the date of this Agreement and as of the Closing Date:

 

2.1.1 Organization and Qualification.

 

The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has all requisite power and authority to own, lease and operate its assets and to carry on its Business as now being conducted. The Company is duly qualified and is in good standing to do business as a foreign corporation in each jurisdiction in which the absence of such qualification will have a material adverse effect on the Company. The attached Exhibit 2.1.1 lists all jurisdictions in which the Company is qualified to do business and its registered office and resident agent in each such jurisdiction.

 

2.1.2 Affiliates.

 

Except for those persons or corporations listed on the attached Exhibit 2.1.2 and except for the Shareholders, there are no persons or entities controlling, operating under the control of (including subsidiaries), or operating under common control with, the Company in the operation of the Business of the Company or in any other business, including, without limitation, any such relationship with suppliers or customers of the Company. For purposes of this Section  2.1.2 , control shall mean ownership of 10% or more of the equity interest in an entity or effective control of the management and policies of an entity.

 

2.1.3 Authority Relative to This Agreement.

 

Each Shareholder has all requisite individual and entity power and authority to execute, deliver and comply with its obligations under the terms of this Agreement. The execution, delivery and performance by the Shareholders of this Agreement have been duly authorized by all necessary entity action on the part of the Shareholders. This Agreement has been duly and validly executed and delivered by the Shareholders and constitutes a valid and binding obligation of the Shareholders, enforceable against the Shareholders in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally, and except that is may be limited by general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity.

 

2.1.4 Consents and Approvals; No Violation.

 

Except for the filing of pre-merger notification reports with the United States Federal Trade Commission and the Department of Justice and the expiration or early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and except as set forth in the attached Exhibit 2.1.4 , neither the execution nor the delivery by any Shareholder of this Agreement (including all agreements

 

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provided for in this Agreement) nor compliance with the terms and provisions of this Agreement (including all agreements provided for in this Agreement) nor the mere fact of the continued operation of the Company’s Business after the Closing with Buyer as the sole owner, (1) will require any authorization, consent or approval of any governmental or regulatory authority or of any other person or entity, (2) will violate any provision of the Articles of Incorporation or Bylaws of the Company, (3) will accelerate any obligation under, violate or breach any provision of, constitute a default under, result in the creation of any lien or security interest under, result in the termination of, require the consent, authorization, approval or order of, or registration or filing with, any governmental agency or body or any third party under, or in connection with, any of the terms, covenants, provisions or conditions of (a) any approval, authorization or order of, or registration or filing with, any governmental agency or body or any third party, or (b) any material note, bond, mortgage, indenture, deed of trust, license, franchise, permit, registration or other authorization, lease, contract (including, without limitation, the contracts described in Section 2.1.14) or other instrument, commitment or obligation to which the Company or any of the Shareholders is a party, or by which any of them or any of their respective properties or assets may be bound, which would have a material adverse financial effect upon the Company, (4) will violate any order, writ, injunction, decree, judgment, arbitration award, or material statute, rule, regulation or ruling of any court or governmental authority, United States or foreign, applicable to the Company or any of the Shareholders or to any of their respective properties or assets, all to the extent such requirement, violation, breach or default would have a material adverse effect upon the Company’s or the Shareholders’ ability to perform their obligations under this Agreement, or (5) will, to the best of the Major Shareholders’ knowledge, cause any governmental or regulatory authority to conduct any examination, inspection or audit of the Company.

 

2.1.5 Capitalization.

 

(a) The authorized capital stock and the outstanding capital stock of the Company and the rights, benefits and attributes of such capital stock are as listed on the attached Exhibit 2.1.5 . The shares described on the attached Exhibit 2.1.5 are all of the issued and outstanding shares of capital stock of the Company, and the Shareholders are the sole owners of the Company’s capital stock and any rights to acquire its capital stock. All of the outstanding Shares are validly issued, fully paid, nonassessable, and free of exercisable preemptive rights. The Company is not obligated and has not committed to purchase, redeem or otherwise acquire any of its Shares.

 

(b) Except as listed on the attached Exhibit 2.1.5, there is no oral or written subscription, option, warrant, call, right (preemptive or otherwise), contract, agreement, commitment, understanding, obligation or arrangement relating to the issuance, sale, delivery, purchase or transfer of any equity interests in the Company, including any rights of conversion or exchange under any outstanding security or any other instruments that are executory as of the Closing. The transfer of the Securities to Buyer pursuant to this Agreement will transfer complete ownership and control of the Company to Buyer.

 

(c) At the Closing, the Shareholders shall have, and upon the Closing, Buyer will acquire, good and marketable title to all of the Securities, free and clear of all pledges, warrants, calls, commitments, subscriptions, agreements, voting trusts or agreements, proxies, adverse claims, other claims and options of whatever nature.

 

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2.1.6 Financial Statements.

 

(a) Attached as Exhibit 2.1.6(a) are the audited balance sheets of the Company as at December 31, 2004 and 2003 and the related audited statements of income, retained earnings and cash flows for the years then ended, in each case, including the Notes to such financial statements. These financial statements (the “Financial Statements”) have been prepared in accordance with GAAP on a basis consistent with such statements for prior periods and with such footnotes as are necessary to comply with generally accepted accounting principles. The balance sheets included in the Financial Statements fairly present, as of their dates, the financial condition and assets and liabilities of the Company, and the related statements of income, retained earnings and cash flows included in the Financial Statements fairly present the results of operations and cash flows of the Company for the fiscal years then ended. The Financial Statements contain proper accruals of all liabilities of the Company and such other adjustments that are necessary to fairly present the financial condition, results of operations, cash flows and assets and liabilities of the Company.

 

(b) Attached as Exhibit 2.1.6(b) are the balance sheets of the Company as at June 30, 2005 and 2004 and the related statements of income, retained earnings and cash flows for the three and six months then ended (the “Interim Statements”). The balance sheets contained in the Interim Statements fairly present, as of their dates, the financial condition and assets and liabilities of the Company, and the related statements of income, retained earnings and cash flows included in the Interim Statements fairly present the results of operations and cash flows of the Company for the three and six months then ended. The Interim Statements contain proper accruals of all liabilities of the Company and such other adjustments which are necessary to fairly present the financial condition, results of operations, cash flows and assets and liabilities of the Company.

 

(c) The Company maintains a process designed by, or under the supervision of, its principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the Company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements (“Internal Control Over Financial Reporting”).

 

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2.1.7 Miscellaneous Items Relating to Assets.

 

(a) Title. Except as set forth in the attached Exhibit 2.1.7(a)(I) , the Company has good, valid and marketable title to, or, with respect to assets currently being leased, a valid leasehold interest in, all assets and rights used by it in the operation of the Business, including, without limitation, all of the assets shown in its Financial Statements and Interim Statements, free and clear of all liens, encumbrances, restrictions, security interests, mortgages, pledges, burdens, claims, demands, rights and equities of any nature whatsoever (collectively, “Liens”), except, with respect to the real property owned or leased by the Company, including, without limitation, the real property listed by address on the attached Exhibit 2.1.7(a)(II) (the “Real Property”), which is a complete list of all real property in which the Company has any rights or which the Company uses in connection with the Business, for customary utilities easements and such other encumbrances on, or exceptions to, the Company’s title to the Real Property as shall not materially adversely affect the marketability of such title or its present use and which are acceptable to Buyer in its sole discretion (the “Exceptions”). The use of the Real Property by the Company does not violate any material applicable zoning, building or use statutes, regulations or other laws of any federal, state, county or local entity, authority or agency. There are no restrictions on, or rights in, the assets or rights used in the Company’s business that are inconsistent with the Company’s current use of such assets or rights that would have a material adverse effect upon the Company.

 

(b) Defects. Except for those that would not have a material adverse effect on the Company, there are no defects or damage with respect to the Company’s assets, including, without limitation, the Company’s plants, buildings, structures, leasehold improvements, furniture, fixtures and equipment being used in the Business, except for normal maintenance, repair and replacement and they are in good operating condition and repair, subject to normal wear and tear, and are in conformity with all material applicable laws and regulations.

 

2.1.8 Leases.

 

The attached Exhibit 2.1.8 is a complete list of all leases of real and personal property to which the Company is a party. Except as otherwise disclosed on the attached Exhibit 2.1.8 , each such lease is in good standing, is valid and binding on the parties to such lease, is in full force and effect in accordance with its terms and grants the lessee a valid and enforceable leasehold interest in the property described in the lease, and there is no default by the Company or, to the best of the Major Shareholders’ knowledge, any other party under any such lease nor do any facts exist that with the giving of notice or the passage of time or both would give rise to a default by the Company or, to the best of the Major Shareholders’ knowledge, any other party under any such lease. True copies of all such leases, including all modifications and amendments, have been supplied to Buyer. The Company has fully paid and fully performed all of its obligations and duties under all such leases which are due and arise from, are on account of, or relate to, in any part, facts or events that occurred or will occur on or before the Closing. There are no taxes, assessments or other costs, expenses or charges which are due or paid in arrears relating to the real or personal property leases, for which accruals have not been made or are being contested. Except as set forth on the attached Exhibit 2.1.8 , the Company presently

 

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enjoys and has the right to quiet enjoyment of all property leased by it, and, to the best of the Major Shareholders’ knowledge, there exists no fact that would preclude or interfere with such quiet enjoyment for the full term of each lease and any renewal options related to each lease.

 

2.1.9 Inventories.

 

The inventories of the Company, including, without limitation, supplies and packaging inventories, have been purchased by the Company in the ordinary course of business and in compliance with any applicable requirements for imported goods. Except as set forth on Exhibit 2.1.9 , none of the inventories are on consignment to or by the Company or subject to any sale or return arrangement with the Company or subject to any recapture arrangements. Except as reserved for on the Interim Statements, all items of such inventory are good, usable and saleable in the ordinary course of business, are not damaged or obsolete, are recorded on the Company’s books at the lower of their cost or market value and are not in excess of one year’s supply. The Company’s purchase and sale of inventories do not materially violate any manufacturers’, licensors’ or others’ rights.

 

2.1.10 Accounts Receivables.

 

Except as set forth on Exhibit 2.1.10, t he accounts receivables of the Company have arisen in the ordinary course of its Business, are valid and genuine, are subject to no defenses, set-offs or counterclaims and shall be collected in full in the ordinary course (and in any event on or before one year after the Closing Date) in the aggregate recorded amounts thereof, net of the allowance for uncollectibles as shown on the Interim Statements.

 

2.1.11 Licenses, Patents, Trademarks and Similar Rights.

 

(a) Exhibit 2.1.11(a) lists all of the licenses, patents, trademarks, service marks, trade names, copyrights, computer programs, inventions, proprietary techniques, trade secrets, technology, research and development and know-how (collectively, “Intangibles”) in which the Company has any material rights, liabilities or obligations. With respect to the matters required to be listed on Exhibit 2.1.11(a) , the Company is the sole owner or licensee of all of the Intangibles free from any restriction, right, encumbrance or other burden. Each agreement the subject to which is an Intangible is valid and binding and there are no defaults by the Company or, to the best of the Major Shareholders’ knowledge, any other party or events that with the giving of notice or the passage of time or both could become an event of default by the Company or, to the best of the Major Shareholders’ knowledge, any other party under any such agreement.

 

(b) The attached Exhibit 2.1.11(b) contains a complete and accurate list and description of all contracts pursuant to which the Company has authorized any person to use or pursuant to which any person has the right to use any of the Intangibles owned by the Company and all contracts pursuant to which the Company is authorized by any person to use any of the Intangibles not owned by the Company.

 

(c) Except as set forth in the attached Exhibit 2.1.11(c) , (1) no Intangible, product, license, patent, process, method, substance, part or other material presently being sold or employed or contemplated to be sold or employed by the Company and

 

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developed by the Company or, if not developed by the Company, only to the best of the Major Shareholders’ knowledge, infringes on any rights owned or held by any other person, (2) there is no pending or, to the best of the Major Shareholders’ knowledge, threatened claim or litigation against the Company contesting the right of the Company to sell, assign or use any such Intangible, product, license, patent, process, method, substance, part or other material, and (3) to the best of the Major Shareholders’ knowledge, no Intangible, product, license, patent, process, method, substance, part or other material presently being sold, or proposed to be sold, or employed by any person infringes on or may infringe on any rights of the Company, nor is there pending or proposed, any patent, formulation, invention, device, application, or principle or any statute, law, rule, regulation, standard, or code, that would adversely affect any Intangible, product, process, method, substance, part or other material presently being sold, or proposed to be sold and listed on the attached Exhibit 2.1.11 , or employed by the Company. No default has occurred, or will be caused by the transaction described in this Agreement, in any contract which authorizes the Company to use any of the Intangibles owned by another party which would have a material adverse effect upon the Company.

 

2.1.12 Absence of Undisclosed Liabilities.

 

(a) The Company has no material liabilities, commitments, obligations, loans or indebtedness of any nature whatsoever, including, without limitation, as primary obligor or guarantor, known or unknown, accrued, absolute or contingent, liquidated or unliquidated, and due or to become due, and has not pledged or granted a security interest in any of its assets, and there is no basis for the assertion against the Company of any material debt, liability or obligation, including, without limitation, any liabilities under any securities laws, other than (1) those reflected in the Working Capital or Net Assets adjustments provided in Sections 1.4 and 1.5, and (2) except as set forth on the attached Exhibit 2.1.12(a) . No material default or material breach or alleged material default or material breach exists, and, to the best of the Major Shareholders’ knowledge (and based on what the Major Shareholders should know), no facts or events exist that with the passage of time or the giving of notice or both could give rise to a material default or material breach, on the part of the Company under any of its liabilities, except as otherwise disclosed in the attached Exhibit 2.1.12(a) .

 

(b) Except as set forth in Exhibit 2.1.12(b) , the Company has no power of attorney outstanding or any obligations or liabilities as guarantor, surety, co-signor, endorser, co-maker or indemnitor in respect to the obligations of itself or any person, corporation, partnership, joint venture, association, organization or other entity.

 

(c) The Company has no bank accounts or safe deposit boxes except for those set forth on the attached Exhibit 2.1.12(c) , which sets forth the names and locations of all such banks, the bank account numbers and the persons authorized to draw on or have access to such accounts or boxes.

 

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2.1.13 Absence of Certain Changes or Events.

 

Except (1) as set forth in the attached Exhibit 2.1.13 , (2) for this Agreement and the transactions required by this Agreement, and (3) for any of the following between the date of this Agreement and the Closing Date approved by Buyer, which approval shall not unreasonably be withheld, since January 1, 2005, the Company has operated the Business only in the usual and ordinary manner and has used its best efforts to preserve its present Business operations and organization intact and its present relationships with persons having Business dealings with it, and there has not been:

 

(a) any material adverse change in the Company’s business, prospects, operations, properties, assets, liabilities, competition, earnings, or condition, or any failure by the Company to pay its debts when due;

 

(b) any event or condition of any character which either individually or in the aggregate, might reasonably be expected materially and adversely to affect the Business, prospects, operations, properties, assets, liabilities, competition, earnings or condition, of the Company;

 

(c) any damage, destruction or loss (regardless of whether covered by insurance) materially and adversely affecting the Business, prospects, operation, properties, assets, liabilities, competition, earnings, or condition, of the Company;

 

(d) any declaration, setting aside or payment of any dividend or other distribution, other than the Dividend, or any granting or making of loans by the Company, other than normal trade credit in the ordinary course of business;

 

(e) any increase in the compensation paid, payable or to become payable by the Company to its Shareholders, officers, directors or employees, except such increases that are required by state and federal minimum wage laws or set forth in any written employment agreement of any of the foregoing, any hiring of new, or any changing of existing, officers, directors or management employees or any increase in any bonus, insurance, pension, or other employee benefit plan, payments or arrangement (including loans from the Company) made to, for or with any Shareholders, officers, directors, or employees;

 

(f) any entry into, amendment of, or termination of, any agreement, plan, instrument, commitment, or transaction by the Company, including, without limitation, any merger, consolidation, share exchange, acquisition or disposition of assets, stock or any financing transaction, any employment or severance agreement, any long-term commitment to purchase or lease, or capital expenditure not in the ordinary course of business;

 

(g) any notes or accounts receivable or portions or notes or accounts receivables written off by the Company as uncollectible, other than as reflected on the Interim Statements;

 

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(h) any lien or encumbrance discharged or any obligation or liability paid (including, without limitation, those that are absolute, accrued or contingent) by the Company, other than current liabilities shown on the Interim Statements and current liabilities incurred in the ordinary course of business since their date and other than pursuant to Section 3.1.13;

 

(i) any properties or assets, real, personal or mixed, tangible or intangible, of the Company mortgaged, pledged or subjected to any security interest, lien or encumbrance;

 

(j) any shortage of supplies experienced by the Company;

 

(k) any change by the Company in accounting methods, principles or practices, except as requ