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EXHIBIT 2.1
EXECUTION COPY
STOCK PURCHASE AGREEMENT
BY AND
AMONG
QUIKSILVER, INC.,
DC SHOES, INC.
AND
SELLERS OF DC SHOES, INC.
EFFECTIVE MARCH 8, 2004
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ARTICLE I - PURCHASE AND SALE OF
SHARES..........................................................................
1
1.1 Purchase
and
Sale..............................................................................
1
1.2 Purchase
Price.................................................................................
1
1.3
Adjustments to Cash
Payment....................................................................
2
1.4
Earnout........................................................................................
4
1.5
Calculation of Earnout
Amount..................................................................
5
1.6 Payment of
Earnout
Amounts.....................................................................
7
1.7 Corporate
Governance During Earnout
Period.....................................................
7
1.8
Acquisitions or Sale of the
Company............................................................
10
1.9
Closing........................................................................................
10
1.10
Closing
Obligations............................................................................
11
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE PRINCIPAL
SELLERS............................. 11
2.1
Organization and Good
Standing.................................................................
12
2.2 Authority;
No
Conflict.........................................................................
12
2.3
Capitalization.................................................................................
13
2.4 Financial
Statements...........................................................................
13
2.5 Books and
Records..............................................................................
14
2.6 Title to
Properties;
Encumbrances..............................................................
14
2.7 Condition
and Sufficiency of
Assets............................................................
15
2.8 Accounts
Receivable............................................................................
15
2.9
Inventory......................................................................................
15
2.10
No Undisclosed
Liabilities.....................................................................
15
2.11
Taxes..........................................................................................
15
2.12
No Material Adverse
Change.....................................................................
17
2.13
Employee
Benefits..............................................................................
17
2.14
Compliance with Legal Requirements; Governmental
Authorizations................................ 17
2.15 Legal
Proceedings;
Orders......................................................................
18
2.16
Absence of Certain Changes and
Events..........................................................
18
2.17
Contracts; No
Defaults.........................................................................
19
2.18
Insurance......................................................................................
21
2.19
Environmental
Matters..........................................................................
22
2.20
Employees......................................................................................
22
2.21
Labor Relations;
Compliance....................................................................
23
2.22
Intellectual
Property..........................................................................
23
2.23
Certain
Payments...............................................................................
26
2.24
Relationships With Related
Persons.............................................................
26
2.25
Brokers or
Finders.............................................................................
26
ARTICLE III - REPRESENTATIONS AND
WARRANTIES OF THE
SELLERS......................................................
27
3.1 Title to
Shares................................................................................
27
3.2 Authority;
No
Conflict.........................................................................
27
3.3 Restricted
Securities..........................................................................
27
3.4 Investment
Intent..............................................................................
28
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3.5 Accredited
Investor
Status.....................................................................
28
3.6
Residence......................................................................................
28
3.7
Legends........................................................................................
28
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
OF
BUYER.............................................................
28
4.1
Organization and Good
Standing.................................................................
28
4.2 Authority;
No
Conflict.........................................................................
29
4.3 SEC
Reports....................................................................................
29
4.4 No
Material Adverse
Change.....................................................................
30
4.5 Issuance
of
Shares.............................................................................
30
4.6 Investment
Intent..............................................................................
30
4.7 Brokers or
Finders.............................................................................
30
ARTICLE V - COVENANTS OF COMPANY AND
SELLERS PRIOR TO CLOSING
DATE............................................... 30
5.1 Access and
Investigation.......................................................................
30
5.2 Operation
of the Businesses of the Acquired
Companies.......................................... 31
5.3 Negative
Covenant..............................................................................
31
5.4 HSR
Filing.....................................................................................
31
5.5 Required
Approvals.............................................................................
31
5.6
Notification...................................................................................
32
5.7 Payment of
Indebtedness by and to Related
Persons.............................................. 32
5.8 No
Negotiation.................................................................................
32
5.9
Commercially Reasonable
Efforts................................................................
32
5.10
Sellers'
Representatives.......................................................................
32
5.11
Audited Financial
Statements...................................................................
34
5.12
Employee
List..................................................................................
34
ARTICLE VI - COVENANTS OF BUYER PRIOR TO
CLOSING
DATE............................................................
34
6.1 Approvals
of Governmental
Bodies...............................................................
34
6.2
Notification...................................................................................
34
6.3 HSR
Filing.....................................................................................
34
6.4
Commercially Reasonable
Efforts................................................................
35
6.5
NYSE...........................................................................................
35
6.6
Options........................................................................................
35
6.7
Strategic
Discussions..........................................................................
35
ARTICLE VII - ADDITIONAL
AGREEMENTS..............................................................................
35
7.1 Removal of
Transfer
Restrictions...............................................................
35
7.2
Preparation of the Buyer Registration
Statement................................................
35
7.3 Certain
Tax
Matters............................................................................
36
7.4
Indemnification of Officers and Directors of the
Company....................................... 37
7.5 Payment of
Blehm Tax
Benefit...................................................................
38
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ARTICLE VIII - CONDITIONS PRECEDENT TO
BUYER'S OBLIGATION TO
CLOSE............................................... 38
8.1 Accuracy
of
Representations....................................................................
38
8.2 Company's
and Sellers'
Performance.............................................................
38
8.3
Consents.......................................................................................
39
8.4 Additional
Documents...........................................................................
39
8.5 No
Proceedings.................................................................................
39
8.6 No Claim
Regarding Stock Ownership or Sale
Proceeds............................................ 39
8.7 No
Injunction..................................................................................
39
8.8 Bank
Consent...................................................................................
39
8.9 HSR Act
Waiting
Period.........................................................................
39
8.10
Adjusted Audited
EBITDA........................................................................
39
ARTICLE IX - CONDITIONS PRECEDENT TO
SELLERS' OBLIGATION TO
CLOSE............................................... 40
9.1 Accuracy
of
Representations....................................................................
40
9.2 Buyer's
Performance............................................................................
40
9.3
Consents.......................................................................................
40
9.4 No
Injunction..................................................................................
40
9.5 HSR Act
Waiting
Period.........................................................................
40
9.6 Buyer's
Counsel Legal
Opinion..................................................................
40
ARTICLE X -
TERMINATION..........................................................................................
40
10.1
Termination
Events.............................................................................
40
10.2
Effect of
Termination..........................................................................
41
ARTICLE XI - INDEMNIFICATION;
REMEDIES...........................................................................
41
11.1
Survival; Right to Indemnification Not Affected by
Knowledge................................... 41
11.2
Indemnification and
Payment of Damages by Principal
Sellers.................................... 42
11.3
Indemnification and Payment of Damages by Non-Principal
Sellers................................ 42
11.4
Indemnification and Payment of Damages by
Buyer................................................ 43
11.5
Time
Limitations...............................................................................
43
11.6
Limitations on
Amount--Sellers.................................................................
43
11.7
Limitations on
Amount--Buyer...................................................................
44
11.8
Right of
Set-Off...............................................................................
44
11.9
Exclusive
Remedy...............................................................................
44
11.10
Procedure for Indemnification--Third Party
Claims.............................................. 44
11.11
Procedure for Indemnification--Other
Claims....................................................
46
11.12
Interpretation
.............................................................................
46
11.13 No
Environmental
Contribution..................................................................
46
ARTICLE XII - GENERAL
PROVISIONS.................................................................................
46
12.1
Expenses.......................................................................................
46
12.2
Public
Announcements...........................................................................
46
12.3
Confidentiality................................................................................
46
12.4
Notices........................................................................................
47
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12.5 Dispute
Resolution.............................................................................
48
12.6 Further
Assurances.............................................................................
48
12.7
Waiver.........................................................................................
49
12.8 Entire Agreement
and
Modification..............................................................
49
12.9 Buyer's and
Sellers'
Schedules.................................................................
49
12.10 Assignments,
Successors, and No Third-Party
Rights............................................. 49
12.11
Severability...................................................................................
50
12.12 Time of
Essence................................................................................
50
12.13 Governing
Law..................................................................................
50
12.14 Equitable
Remedies.............................................................................
50
12.15 Effect of Amendment or
Waiver..................................................................
50
12.16 Opportunity to Consult
Counsel.................................................................
50
12.17
Counterparts...................................................................................
50
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LIST OF EXHIBITS
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Exhibit 1
Definitions
Exhibit 1.4(a)
Earnout Amounts
Exhibit 1.4(b)
Earnout Example #1
Exhibit 1.4(c)
Earnout Example #2
Exhibit 1.4(d)
Earnout Example #3
Exhibit 1.4(e)
Earnout Example #4
Exhibit 1.4(f)
Determination of Subject Percentage
Exhibit 1.4(g)
Earnout Example #5
Exhibit 1.10(a)(ii)
Sellers' Release
Exhibit 1.10(a)(iii)
Employment Agreement
Exhibit 1.10(a)(iv)
Noncompetition Agreement
Exhibit 9.4
Buyer's Counsel Legal Opinion
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STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of March
8,
2004, by and among Quiksilver, Inc., a
Delaware corporation ("Buyer"), DC Shoes,
Inc., a California corporation ("Company"),
and the shareholders of the Company
listed on the signature pages of this
Agreement and Damon Way (such shareholders
and Damon Way are each referred to
individually as a "Seller," and collectively
as the "Sellers"). For purposes of this
Agreement, the terms set forth in
Exhibit 1 shall have the meanings specified
or referred to therein.
R E C I T A L S
A.
Sellers will own all of the issued and outstanding shares of
capital stock of the Company as of the
Closing Date.
B.
Buyer desires to purchase all of the shares of capital stock
of the Company owned by the Sellers (the
"Shares"), and the Sellers desire to
sell the Shares, on the terms and
conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual representations,
warranties and agreements contained herein,
the parties hereto agree as follow:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Purchase
and Sale. Subject to the terms and conditions set
forth in this Agreement, at the Closing,
each of the Sellers will sell and
transfer to Buyer, and Buyer will purchase
from Sellers, that number of Shares
set forth below each Seller's respective
signature on the signature page hereto,
which in the aggregate shall constitute all
of the outstanding shares of capital
stock of the Company, in exchange for their
pro rata share of the Purchase
Price.
1.2 Purchase
Price.
(a) Total
Purchase Price. The aggregate purchase price
payable to the Sellers for the purchase and
sale of their Shares (the "Purchase
Price") shall be the sum of the
following:
(i)
$55,636,000 (the "Cash Payment"), as
adjusted pursuant to Section 1.3; plus
(ii)
the Stock Payment; plus
(iii) the
aggregate Earnout Amounts payable as
provided in Sections 1.4 through 1.7.
1
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(b) Payment to
Sellers at Closing. Subject to Section
1.2(c) below, each Seller will receive the
following at Closing:
(i) a cash
payment which shall equal the product
of (x) such Seller's Participating Percentage, times (y)
$49,636,000;
and
(ii)
the number of shares of Buyer Stock equal to
such (x) Seller's Participating Percentage, times (y) the Stock
Payment.
(c)
Reallocation of Closing Payments.
(i) The
Employee Trust (or the beneficiaries
thereof if terminated prior to Closing) shall receive a cash
payment
(the "Additional Trust Cash Amount") in lieu of the Buyer Stock
which
would otherwise be paid to the Employee Trust under Section
1.2(b)(ii)
(the "Trust Stock Amount"). The Additional Trust Cash Amount shall
be
equal to the product of the Trust Stock Amount, times $17.46.
(ii)
The Trust Stock Amount shall be paid to
Kenneth Block and Damon Way in proportion to their
Participating
Percentages, and the Additional Trust Cash Amount shall be
deducted
from the cash payments to be paid to Messrs. Block and Way
under
Section 1.2(b)(i) in proportion to their Participating
Percentages.
1.3
Adjustments to Cash Payment.
(a) Adjustment
of Cash Payment. The Cash Payment shall
also be (i) reduced by the amount by which,
if any, the Historical Average
Working Capital exceeds the Closing Working
Capital, or (ii) increased by the
amount by which, if any, the Closing
Working Capital exceeds the Historical
Average Working Capital.
(b) Adjustment
Procedure. The determination of the
Working Capital of the Company on the
Closing Date shall be made as follows:
(i) Buyer
shall prepare a balance sheet of the
Company as of the Closing Date in accordance with Company GAAP
(the
"Closing Balance Sheet"). Buyer shall then determine the
Closing
Working Capital based upon the Closing Balance Sheet. Buyer
shall
deliver the Closing Balance Sheet and its determination of the
Closing
Working Capital to the Sellers' Representatives within ninety (90)
days
following the
Closing Date.
(ii)
If within thirty (30) days following
delivery of the Closing Balance Sheet and the calculations of
the
Closing Working Capital the Sellers' Representatives have not
given
Buyer written notice of their objection as to the calculations of
the
Closing Working Capital (the "Dispute Notice"), then the
Closing
Working Capital as calculated by Buyer shall be binding and
conclusive
on the parties and be used in computing the adjustments to the
Cash
Payment. Sellers' Representatives may waive this thirty (30) day
period
by providing written notice to Buyer of their acceptance of the
Buyer's
calculations of the Closing Working Capital.
2
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(iii) If
the Sellers' Representatives deliver to
Buyer the Dispute Notice (which notice shall state the basis of
Sellers' Representatives' objection) within such thirty (30)
day
period, Buyer and Sellers' Representatives shall use
commercially
reasonable efforts for a period of ten (10) days after Buyer's
receipt
of the Dispute Notice (or such longer period as Buyer and
Sellers'
Representatives shall mutually agree upon) to resolve any
disputes
raised by Sellers' Representatives with respect to the calculation
of
the Closing Working Capital, as set forth on the Closing Balance
Sheet,
and Sellers' Representatives and Buyer shall provide information to
the
other party (as reasonably requested) related to the items of
disagreement set forth in the Dispute Notice. Sellers'
Representatives
and their agents shall have all reasonable rights of access to
the
corporate records of the Company for such purposes. If, at the end
of
such ten (10) day period, the Sellers' Representatives and Buyer
fail
to resolve the outstanding issues with respect to the Closing
Balance
Sheet and the calculations of the Closing Working Capital, the
Sellers'
Representatives and Buyer jointly shall select an independent
auditor
of recognized national standing (who is not rendering, and during
the
preceding two (2) year period has not rendered, services to the
Company
or Buyer or any of their respective affiliates) to resolve any
remaining disagreements. If the Sellers' Representatives and Buyer
are
unable to jointly select such independent auditor within fifteen
(15)
days after the date of the Dispute Notice, each party shall select
an
independent auditor of recognized national standing and each
such
selected independent auditor shall select a third independent
auditor
of recognized national standing (who is not rendering, and during
the
preceding two (2) year period has not rendered, services to the
Company
or Buyer or any of their respective affiliates) (such selected
independent auditor whether pursuant to this or the preceding
sentence,
the "Independent Accountant"). If issues are submitted to the
Independent Accountant for resolution, (i) the Sellers'
Representatives
and Buyer shall furnish or cause to be furnished to the
Independent
Accountant such work papers and other documents and information
relating to the disputed issues as the Independent Accountant
may
reasonably request and are available to that party or its agents
and
shall be afforded the opportunity to present to the Independent
Accountant any material relating to the disputed issues and to
discuss
the issues with the Independent Accountant; (ii) the determination
by
the Independent Accountant, as set forth in a notice to be
delivered to
both the Sellers' Representatives and Buyer within twenty (20) days
of
the submission to the Independent Accountant of the issues
remaining in
dispute, shall be final, binding and conclusive on the parties
and
shall be used in the calculations of the Closing Working Capital;
and
(iii) the Sellers and Buyer will each bear fifty percent (50%) of
the
fees and costs of the Independent Accountant for such
determination.
(c) Holdback.
$6,000,000 of the Cash Payment (the
"Holdback Amount") shall be withheld from
the Sellers in proportion to their
respective Participating Percentages. To
the extent the Cash Payment is reduced
pursuant to this Section 1.3 but not by the
entire Holdback Amount, the Holdback
Amount less the amount of such reduction
shall be paid to the Sellers in
proportion to their respective
Participating Percentages within fifteen (15)
days of the final determination of the
Closing Working Capital. If the Cash
Payment is reduced by more than the
Holdback Amount, the amount of any reduction
of the Cash Payment in excess of the
Holdback Amount shall be set-off against
the Earnout Amounts owed to the Sellers in
proportion to their Participating
Percentages, and Buyer shall retain the
entire Holdback Amount. If on the other
hand the Cash Payment was increased as a
result of such final determination,
then the
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Buyer shall pay the Sellers in proportion
to their Participating Percentages the
entire Holdback Amount plus the amount of
such increase within fifteen (15) days
of such determination.
1.4 Earnout.
The Earnout Amounts payable in the aggregate for all
Earnout Periods to the Sellers shall be
determined as follows:
(a) For each
Earnout Period and for each Target Level
listed on Exhibit 1.4(a) attached hereto,
the Earnout Amounts listed on Exhibit
1.4(a) shall be determined separately. If a
Target Level is achieved for an
Earnout Period, then the corresponding
Earnout Amount for such Target Level
shall be due and payable to the Sellers for
such Earnout Period pursuant to the
terms of this Agreement.
(b)
Notwithstanding anything to the contrary herein, if a
Target Level is not achieved for the 2005
Earnout Period, the Earnout Amount for
the 2005 Earnout Period can subsequently be
earned by achieving the combined
Target Levels for the 2005 Earnout Period
and the 2006 Earnout Period. By
achieving such combined Target Levels, the
Sellers would be entitled to the
Earnout Amounts for the 2005 and 2006
Earnout Periods. In addition, if the
Target Level is not achieved for the 2006
Earnout Period, the Earnout Amount for
the 2006 Earnout Period can subsequently be
earned by achieving the combined
Target Levels for the 2006 Earnout Period
and the 2007 Earnout Period. By
achieving such combined Target Levels, the
Sellers would be entitled to the
Earnout Amounts for the 2006 and 2007
Earnout Periods. See Exhibit 1.4(b) for
examples of such calculations.
(c)
Notwithstanding anything to the contrary herein, if a
Target Level is exceeded for the 2004
Earnout Period, 2005 Earnout Period or
2006 Earnout Period, the amount by which
the applicable Target Level was
exceeded in such Earnout Period can be
applied to and aggregated with the Target
Level for the Earnout Period immediately
following for purposes of determining
if such Target Level is achieved for such
immediately following Earnout Period.
See Exhibit 1.4(c) for examples of such
calculations.
(d)
Notwithstanding anything to the contrary herein, if
the Target Level is not achieved for the
2005 Earnout Period, the Earnout Amount
for the 2005 Earnout Period can
subsequently be earned by achieving the combined
Target Levels for the 2005 Earnout Period,
2006 Earnout Period and the 2007
Earnout Period. If such combined Target
Levels are achieved, the Earnout Amounts
for the 2005 Earnout Period, 2006 Earnout
Period and the 2007 Earnout Period
would be been attained and would be due and
payable. See Exhibit 1.4(d) for
examples of such calculations.
(e)
Notwithstanding anything to the contrary herein, if a
Target Level is exceeded for the 2004
Earnout Period, the amount by which the
Target Level was exceeded can be applied to
and aggregated with the Target Level
for the 2006 Earnout Period for purposes of
determining if the Target Level for
the 2006 Earnout Period is achieved. In
addition, if the Target Level is
exceeded for the 2005 Earnout Period, the
amount by which the Target Level was
exceeded can be applied to and aggregated
with the Target Level for the 2007
Earnout Period for purposes of determining
if the Target Level for the 2007
Earnout Period is achieved. See Exhibit
1.4(e) for examples of such
calculations.
4
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(f)
Notwithstanding anything to the contrary herein, if
at least 85% but less than 100% of the
amount of any Target Level for any
Earnout Period is achieved, then the
Subject Percentage (as determined on
Exhibit 1.4(f) attached hereto) of the
Earnout Amount for such Target Level will
be payable with respect to such Earnout
Period. In addition, if a Target Level
is exceeded in the 2006 Earnout Period, the
amount by which such 2006 Target
Level is exceeded may be applied to the
2005 Earnout Period for purposes of
determining the increase in the Subject
Percentage to be paid for the 2005
Earnout Period. Additionally, if a Target
Level Amount is exceeded in the 2007
Earnout Period the amount by which the
Target Level was exceeded can be applied
to the 2005 or the 2006 Earnout Period, so
that the Subject Percentage can be
calculated to increase the amount of the
Earnout Amount payable for such Earnout
Period. In addition, if a Target Level
Amount is exceeded in the 2004, 2005 or
2006 Earnout Periods, the amount by which
the Target Level was exceeded can be
applied to the 2005, 2006 or 2007 Earnout
Period, respectively, so that the
Subject Percentage can be calculated to
increase the amount of the Earnout
Amount payable for such Earnout Period. In
addition, if a Target Level Amount is
exceeded in the 2004 or 2005 Earnout
Periods, the amount by which the Target
Level was exceeded can be applied to the
2006 or 2007 Earnout Period,
respectively, so that the Subject
Percentage can be calculated to increase the
amount of the Earnout Amount payable for
such Earnout Period. See Exhibit 1.4(f)
for examples of such calculations.
(g)
Notwithstanding anything to the contrary herein, if a
Target Level for the last three consecutive
Earnout Periods in the aggregate is
exceeded by ten percent (10%) or more, then
the Earnout Amount corresponding to
each of the three Target Levels will be
increased by 10% and, to the extent not
previously earned, shall be earned. See
Exhibit 1.4(g) for examples of such
calculations.
(h)
Notwithstanding anything to the contrary herein, any
amount in excess of a Target Level in an
Earnout Period which is applied to such
Target Level in another Earnout Period
cannot be applied a second time to
another Earnout Period.
(i) In
addition to the foregoing Earnout Payments,
Sellers shall be paid an Earnout Amount in
the amount of $3,000,000 if the
Company's EBITDA for the 2004 Earnout
Period is at least seventy percent (70%)
of the EBITDA Target Level for the 2004
Earnout Period.
(j)
Notwithstanding anything to the contrary herein, the
total amount paid to the Sellers pursuant
to this Agreement pertaining to the
Earnout Amounts shall not exceed
$57,000,000.
1.5
Calculation of Earnout Amount. The determination of the
Earnout Amounts owed to the Sellers at the
end of each Earnout Period shall be
made as follows:
(a) Buyer
shall prepare a consolidated statement of
income of the Acquired Companies as of the
the last day of each Earnout Period
in accordance with Company GAAP (the
"Earnout Income Statement"). Buyer shall
then determine the Earnout Amount due, if
any, based upon the Earnout Income
Statement and applicable Target Levels for
the Earnout Period detailed therein.
Buyer shall deliver the Earnout Income
Statement and its determination of the
5
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applicable Target Levels and the Earnout
Amount due, if any, to the Sellers'
Representatives within ninety (90) days
following the end of each Earnout
Period.
(b) If within
thirty (30) days following delivery of the
Earnout Income Statement and the
determinations with respect to whether the
applicable Target Level has been met, the
Sellers' Representatives have not
given Buyer written notice of its objection
as to the calculations of the
Earnout Income Statement, the applicable
Target Levels and the Earnout Amount,
if any (the "Earnout Dispute Notice"), then
the determination of the Earnout
Income Statement, the applicable Target
Levels and the Earnout Amount, if any,
as calculated by Buyer shall be binding and
conclusive on the parties and be
used in computing the Earnout Amount due,
if any. Sellers' Representatives may
waive this thirty (30) day period by
providing written notice to Buyer of their
acceptance of Buyer's determination of the
Earnout Income Statement, applicable
Target Levels and the Earnout Amount, if
any.
(c) If the
Sellers' Representatives deliver to Buyer the
Earnout Dispute Notice (which notice shall
state the basis of Sellers'
Representatives objection) within such
thirty (30) day period, Buyer and
Sellers' Representatives shall use
commercially reasonable efforts for a period
of ten (10) days after Buyer's receipt of
the Earnout Dispute Notice (or such
longer period as Buyer and Sellers'
Representatives shall mutually agree upon)
to resolve any disputes raised by Sellers'
Representatives with respect to the
calculation of the Earnout Amount and the
applicable Target Level, as determined
pursuant to the preparation of the Earnout
Income Statement, and Sellers'
Representatives and Buyer shall provide
information to the other party (as
reasonably requested) related to the items
of disagreement set forth in the
Earnout Dispute Notice. Sellers'
Representatives and their agents shall have all
reasonable rights of access to the
corporate records of the Company and Buyer
for such purposes. If at the end of such
ten (10) day period the Sellers'
Representatives and Buyer fail to resolve
the issues outstanding with respect to
the Earnout Income Statement, the
calculations of the Target Levels and the
Earnout Amount, the Sellers'
Representatives and Buyer jointly shall select an
independent auditor of recognized national
standing (who is not rendering, and
during the preceding two (2) year period
has not rendered, services to the
Company or Buyer or any of their respective
affiliates) to resolve any remaining
disagreements. If the Sellers'
Representatives and Buyer are unable to jointly
select such independent auditor within five
(5) days after such fifteen (15) day
period, each party shall select an
independent auditor of recognized national
standing and each such selected independent
auditor shall select a third
independent auditor of recognized national
standing (who is not rendering, and
during the preceding two (2) year period
has not rendered, services to the
Company or Buyer or any of their respective
affiliates) (such selected
independent auditor whether pursuant to
this or the preceding sentence, the
"Earnout Accountant").
(d) If issues
are submitted to the Earnout Accountant for
resolution, (i) each of the Sellers'
Representatives and Buyer shall submit to
the Earnout Accountant their respective
calculation of the applicable Target
Level (each a "Proposed Amount") within two
(2) days after the selection of the
Earnout Accountant; (ii) the Sellers'
Representatives and Buyer shall furnish or
cause to be furnished to the Earnout
Accountant such work papers and other
documents and information relating to the
disputed issues as the Earnout
Accountant may reasonably request and are
available to that party or its agents
and shall be afforded the opportunity to
present to the Earnout Accountant any
material relating to the disputed issues
and to discuss the issues with the
Earnout Accountant; (iii) in determining
the applicable Target Level, the
Earnout Accountant
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must select either the Proposed Amount of
Buyer or the Proposed Amount of
Sellers' Representatives; (iv) the
selection by the Earnout Accountant of one of
the Proposed Amounts, as set forth in a
notice to be delivered to both the
Sellers' Representatives and Buyer within
twenty (20) days of the submission to
the Earnout Accountant of the Proposed
Amounts, shall be final, binding and
conclusive on the parties and shall be used
in the calculations of the
applicable Earnout Amount for the Earnout
Period being disputed; and (v) the
party whose Proposed Amount is not selected
by the Earnout Accountant shall bear
the fees and costs of the Earnout
Accountant for such determination.
(e) Within
fifteen (15) days after determination of an
Earnout Amount pursuant to this Section
1.5, Buyer shall pay to each Seller such
Seller's Participating Percentage of such
Earnout Amount by bank cashiers,
certified check or wire transfer (at the
discretion of Seller). If only a
portion of the Earnout Amount is under
dispute, Buyer shall pay to the Sellers
in accordance with the prior sentence the
amount that is not being disputed. The
Sellers' rights to receive the Earnout
Amount under this Agreement are
non-assignable; provided, however, that the
Sellers shall be allowed to transfer
the right to a trust that is disregarded
for tax purposes.
1.6 Payment of
Earnout Amounts. Within the later of (i) one
hundred twenty (120) days from the end of
each Earnout Period, or (ii) if
applicable, fifteen (15) days of the
decision by the designated accountant
pursuant to Section 1.5 with respect to
such Earnout Period, the Buyer shall pay
to each of the Sellers in cash the amount
equal to the product of (x) the
aggregate Earnout Amount payable for such
Earnout Period as determined above,
times (y) such Seller's Participating
Percentage.
1.7 Corporate
Governance During Earnout Period. Sellers and Buyer
agree that, following the Closing and until
the earlier of October 31, 2007 or
the acceleration of the Earnout, so long as
the Company is On Plan as defined in
1.7(f), the Company shall be managed in
accordance with the following
provisions:
(a) Sellers'
Representatives shall, subject to (i) the
general guidelines set forth in that
certain business plan delivered to Buyer on
the signing of this Agreement and as it may
be revised pursuant to Section
1.7(g) (the "Business Plan"), (ii) Section
1.7(c) below and (iii) the Buyer's
then existing policies and procedures
consistently applied to all domestic
subsidiaries of the Buyer, have authority
to control, in reasonable consultation
with the Buyer, the matters covered by the
Business Plan and the ordinary course
operations of the Company including,
without limitation, (A) capital
expenditures, (B) the incurrence of
indebtedness, (C) accepting new customers
and terminating existing customers, (D)
hiring, promoting or firing design,
merchandising, sales, marketing and
advertising employees of the Company below
the Vice President level, (E) the Company's
designs and products, provided that
the design aesthetic, brand image and brand
positioning of the Company's designs
and products remain consistent with that
existing as of the Closing Date, (F)
selling, marketing or otherwise
distributing Company (other than those specified
in the Strategy Plan) products to
historical customers of the Company and to
other prospective customers that sell
product occupying a comparable position in
the market and (G) hiring new suppliers.
Notwithstanding the foregoing, the
Sellers' Representatives shall not, without
the prior written consent of the
Buyer, (x) incur debt financing from third
parties (y) enter into any Contract
that would impose any obligation or
negative
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covenant (e.g., a most favored nations
provision or a restriction on the ability
to conduct business) on the Buyer or any of
its Subsidiaries (other than the
Company).
(b) The Buyer
or its designee shall, subject to the
general guidelines set forth in the
Business Plan, have authority to control, in
reasonable consultation with the Sellers'
Representatives, the following: (i)
hiring, firing or promoting finance,
production, accounting, distribution,
warehouse, operations, legal and
information technology employees of the Company
below the Vice President level, and (ii)
selecting legal counsel and auditors
for the Company. Notwithstanding the
foregoing, the Buyer shall not take any
action that is materially inconsistent with
the Business Plan or that is
primarily intended to adversely impact the
ordinary course operations of the
Company. Furthermore, neither the Buyer nor
the Company may take any action or
enter into any transaction that is
primarily intended to adversely affect the
Earnout Amounts or Target Levels payable
under this Agreement.
(c)
Notwithstanding any of the foregoing, the following
actions shall not be taken without the
mutual consent of the Sellers'
Representatives, on the one hand, and the
Buyer, on the other hand: (i) hiring,
firing or promoting employees of the
Company at the Vice President or higher
level, (ii) negotiating and entering into
agreements with distributors, (iii)
establishing retail stores, (iv) changing
the channels of sales of the Company's
products from that existing on the Closing
Date (except as otherwise provided in
the Business Plan), (v) disposing or
acquiring of assets (excluding disposing
and acquiring of inventory (including
close-outs with past practice) and
equipment in the ordinary course), (vi)
entering into any contract relating to
the business of the Company not in the
ordinary course operations of the Company
(other than as provided in the Business
Plan), (vii) entering into any
transaction with any affiliate of the
Company or any officer or director of the
Company or their affiliates (including
family members) other than compensation
arrangements in the ordinary course
operations of the Company, or (viii) placing
a security interest on any assets of the
Company.
(d) The
Sellers' Representatives, and appropriate
designees of the Buyer, shall consult
regularly (but in any event at least
quarterly) with each other regarding the
strategic direction of the Company and
to mutually agree on the relevant EBITDA
and Sales Target Levels to the extent
they are not already provided for in the
Business Plan.
(e) Provided
that the Company is On Plan according to
Section 1.7(f), the Buyer will adequately
fund the operations of the Company
consistent with the Business Plan.
(f) For
purposes of this Agreement, the Company will be
considered on plan ("On Plan") unless the
Company fails to achieve 85% of the
EBITDA and the Sales Target Levels during
any Earnout Period.
(g) Neither
the Sellers' Representatives, Company nor the
Buyer may modify the Business Plan of the
Company previously delivered to the
Buyer (the "Original Business Plan")
without the consent of the other; provided,
however, that if the Company's business is
not performing On Plan, the Company
and Sellers' Representatives shall submit a
revised Business Plan to the Buyer
within thirty (30) days of such
determination. The revised Business Plan shall
be reasonably designed to serve the
interests of the business of the Company in
light of business and market circumstances
prevailing at that time (the "Revised
Business Plan Standard"). If the
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<PAGE>
Revised Business Plan is timely submitted
by the Company and Sellers'
Representatives and is approved by the
Buyer, (x) such Revised Business Plan
shall replace the prior Business Plan, (y)
Sellers' Representatives shall
conduct the ordinary course operations of
the Company consistent with such
Revised Business Plan and (z) the
provisions of Section 1.7(f) shall apply. If
such revised Business Plan is not timely
submitted by Sellers' Representative or
is not approved by the Buyer, the Buyer
shall, within thirty (30) days of such
non-approval, prepare and submit to
Sellers' Representatives its own revised
Business Plan that meets the Revised
Business Plan Standard (the "Buyer Business
Plan"). Sellers' Representatives, on the
one hand, and the Buyer, on the other,
shall then have ten (10) days to discuss
and negotiate in good faith the Buyer
Business Plan, after which the Buyer
Business Plan (as modified, if applicable)
shall become the Business Plan. Thereafter,
Sellers and Company shall conduct
the ordinary course operations of the
Company consistent with such Buyer
Business Plan and the provisions of this
Section 1.7 shall apply.
(h) In the
event that the employment of one of the
Sellers' Representatives is terminated by
the Company for Cause, as a result of
death or disability or by a Sellers'
Representative for other than Good Reason,
(as such terms are defined in their
respective Employment Agreements), the
remaining Sellers' Representative employed
by the Company shall be the sole
Sellers' Representative. In the event that
the employment of both Sellers'
Representatives is terminated by the
Company for Cause, as a result of death or
disability or by them other than for Good
Reason, the management of the ordinary
course operations of the Company shall be
at the sole discretion of the Buyer or
its designees and the Company shall
thereafter be operated by the Buyer in a
manner determined in its sole discretion.
However, it is understood and agreed
that in the event that one or both of the
Sellers' Representatives ceases to be
employed by the Buyer for any reason during
the Earnout Period, such termination
of employment shall have no effect on the
other agreements and covenants related
to the Earnout Amounts in this
Agreement.
(i) Buyer
shall maintain, or cause to be maintained,
separate financial statements for the
Company consistent with the Financial
Statements so that the parties hereto can
determine whether the applicable
Target Level for the Earnout Amounts have
been met.
(j) The
allocation of costs and revenue, for the purpose
of calculating the Company EBITDA during
the Earnout Period, on cooperative
contracts involving the joint sale of
products or services of both the Company
and the Buyer's or Buyer's Subsidiaries'
operations that are not related to the
Company will be negotiated in advance in
good faith as if the agreements were
arm's-length.
(k)
Notwithstanding anything in this Agreement to the
contrary, nothing herein shall restrict the
Buyer or its Subsidiaries from
competing with the Company and nothing
herein shall restrict the Company from
competing with the Buyer or its
Subsidiaries.
(l) No Buyer
corporate, management or general
administrative overhead will be allocated
to the Company. Any services provided
by the Buyer to the Company will be at
actual cost incurred for such services,
if applicable. The services and costs
provided by the Buyer to the Company will
be agreed to through good faith
negotiations as if they were arm's length
negotiations.
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<PAGE>
1.8
Acquisitions or Sale of the Company.
(a) Buyer
shall not, and shall not permit any of its
Subsidiaries to, merge, consolidate,
transfer or sell any of the assets of the
Company (except for sales of inventory in
the ordinary course of business of the
Company and the transfer of any or all of
the stock of the Company to a wholly
owned subsidiary of the Buyer) to any
Subsidiary of Buyer during the Earnout
Periods without the prior written consent
of the Sellers' Representatives, which
consent may not be unreasonably withheld.
If Buyer takes any action after the
Closing with respect to the Company that
has the effect of assigning the assets
of the Company to a Subsidiary of Buyer and
such assignment directly or
indirectly results in the termination or
modification of any contracts of the
Company, or the incurrence of any fees or
charges, that adversely affects the
ability of the Company to reach the Target
Levels, then the Target Levels shall
be adjusted accordingly to account for the
adverse economic impact resulting
from such assignment of assets. Should such
an assignment of assets occur,
Sellers' Representatives and Buyer will
work together in good faith to agree on
the amount of the adjustments to Target
Levels to appropriately reflect the
amount of the adverse economic impact.
(b) This
Agreement prohibits the Company from acquiring
by purchase, exchange, or otherwise, any
other Person, whether or not engaged in
a business similar or related to the
business of the Company.
(c) In the
event that substantially all of the assets or
stock of the Company are sold, transferred
or otherwise disposed of by the Buyer
(other than a sale of inventory of the
Company in the ordinary course of
business) (a "Sale Transaction") prior to
October 31, 2007 to any Person other
than a wholly-owned Subsidiary of the
Buyer, the Buyer shall, on the date of the
consummation of such Sale Transaction,
deliver written notice of such Sale
Transaction to the Sellers' Representatives
(such notice, the "Sale Notice"). On
the date of such Sale Transaction, the
Buyer shall pay to each Seller its
Participating Percentage of any Earnout
Amounts for any Earnout Period not then
completed (the "Accelerated Payment").
Notwithstanding the foregoing, if the
Company has not been achieving at least 75%
of the Company Sales and EBITDA
Target Levels for the Earnout Period
immediately prior to the Earnout Period in
which the Sale Notice is delivered, the
Accelerated Payment shall be zero. (d)
On the date of a Sale Transaction, the
Buyer shall pay to each of the Sellers in
cash, by bank cashiers, certified check or
wire transfer (as determined by each
Seller) the amount equal to the product of
(x) Accelerated Payment, times (y)
such Seller's Participating Percentage.
1.9 Closing.
The purchase and sale provided for in this Agreement
(the "Closing") will take place, unless
this Agreement has been previously
terminated pursuant to Section 10.1 hereof,
at the offices of Buyer's counsel at
19900 MacArthur Boulevard, Suite 1050,
Irvine, California 92612 at 10:00 a.m.
(local time) on the third business day
after the satisfaction or (to the extent
permitted by applicable law and this
Agreement) waiver of the conditions set
forth in Articles VIII and IX (other than
those conditions to be satisfied or
waived at the Closing), or at such other
time and place as the parties may
agree. Subject to the provisions of Article
X, failure to consummate the
purchase and sale provided for in this
Agreement on the date and time and at
10
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the place determined pursuant to this
Section 1.9 will not result in the
termination of this Agreement and will not
relieve any party of any obligation
under this Agreement.
1.10
Closing Obligations. At the Closing:
(a) The
Company and Sellers will deliver to Buyer:
(i)
certificates representing the Shares, duly
endorsed (or accompanied by duly executed stock powers) for
transfer to
Buyer;
(ii)
releases in the form of Exhibit 1.10(a)(ii)
executed by Sellers (collectively, "Sellers' Releases");
(iii)
employment agreements in the form of Exhibit
1.10(a)(iii), executed by Damon Way and Kenneth Block,
respectively
(collectively, "Employment Agreements");
(iv)
noncompetition agreements in the form of
Exhibit 1.10(a)(iv), executed by Damon Way and Kenneth Block
(collectively, the "Noncompetition Agreements"); and
(v)
certificates required by Section 8.1(a) and
(b); and
(b) Buyer will
deliver to the Sellers' Representatives on
behalf of the Sellers:
(i) a bank
cashier's or certified check payable
to each Seller (or wire transfer if the Sellers'
Representatives
deliver on behalf of a Seller wire transfer instructions to the
Buyer
prior to Closing) in an amount equal to their pro rata share of
the
Cash Payment;
(ii)
a stock certificate for each Seller equal to
their pro rata share of the Buyer Stock;
(iii) the
certificate required by Section 9.1(a);
(iv)
the Employment Agreements, executed by
Buyer; and
(v) the
Non-Competition Agreements, executed by
Buyer.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE PRINCIPAL SELLERS
Except as
set forth in the attached Company Disclosure Letter (the
"Disclosure Letter") (which lists
exceptions to the following representations
and warranties and also contains matters
required to be disclosed pursuant to
this Article II, each of which corresponds
to the numbered sections contained in
this Article II), the Company and each of
the Principal Sellers jointly and
severally represent and warrant to Buyer as
follows:
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2.1
Organization and Good Standing.
(a) Section
2.1 of the Disclosure Letter contains a
complete and accurate list for each
Acquired Company of its name and its
jurisdiction of organization. Each Acquired
Company is duly organized, validly
existing, and in good standing under the
laws of its jurisdiction of
organization, with the requisite power and
authority to conduct its business as
it is now being conducted and to own or use
the properties and assets that it
purports to own or use. Each Acquired
Company is duly qualified to do business
as a foreign entity and is in good standing
under the laws of each state or
other jurisdiction in which either the
ownership or use of the properties owned
or used by it, or the nature of the
activities conducted by it, requires such
qualification, except where such failure to
be in good standing would not,
individually or in the aggregate,
reasonably be expected to have a Company
Material Adverse Effect.
(b) The
Company has made available to Buyer copies of the
Organizational Documents of each Acquired
Company, as currently in effect.
2.2 Authority;
No Conflict.
(a) This
Agreement constitutes the legal, valid, and
binding obligation of the Company,
enforceable against the Company in accordance
with its terms, subject, as to enforcement,
to (i) applicable bankruptcy,
insolvency, reorganization, moratorium or
similar laws now or hereinafter in
effect affecting creditors' rights
generally and (ii) general principles of
equity. The Company has all the necessary
corporate power and authority to
execute and deliver this Agreement and to
perform its obligations under this
Agreement.
(b) Neither
the execution and delivery of this Agreement
nor the consummation or performance of any
of the Contemplated Transactions
will, directly or indirectly (with or
without notice or lapse of time):
(i) conflict
with, or result in a violation of
(A) any provision of the Organizational Documents of the
Acquired
Companies, or (B) any resolution adopted by the board of directors
or
the stockholders of any Acquired Company;
(ii)
conflict with, or result in a material
violation of, any Legal Requirement or any Order to which any
Acquired
Company may be subject;
(iii)
conflict with, or result in a material
violation of any of the terms or requirements of, or give any
Governmental Body the right to revoke, withdraw, suspend,
cancel,
terminate, or modify, any Governmental Authorization that is held
by
any Acquired Company or that otherwise relates to the business of,
or
any of the assets owned or used by, any Acquired Company;
(iv)
cause Buyer or any Acquired Company to
become subject to, or to become liable for the payment of, any
Tax;
(v) cause any
of the assets owned by any
Acquired Company to be reassessed or revalued by any taxing
authority
or other Governmental Body;
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<PAGE>
(vi)
conflict with, or result in a material
violation or breach of any provision of, or give any Person the
right
to declare a default or exercise any remedy under, or to accelerate
the
maturity or performance of, or to cancel, terminate, or modify,
any
Applicable Contract; or
(vii)
result in the imposition or creation of any
Encumbrance upon or with respect to any of the assets owned or used
by
any Acquired Company.
(c) No
Acquired Company is or will be required to give
any notice to or obtain any Consent from
any Person in connection with the
execution and delivery of this Agreement or
the consummation or performance of
any of the Contemplated Transactions.
2.3
Capitalization. The authorized equity securities of the
Company consist of 100,000,000 shares of
common stock, no par value, of which
10,000,000 shares (collectively, the
"Company Stock") are issued and
outstanding. Sellers will be on the Closing
Date the record and beneficial
owners and holders of all of the Company
Stock, free and clear of all
Encumbrances. Each of the Sellers owns that
number of Shares set forth below
their respective signatures on the
signature page to this Agreement. With the
exception of the Company Stock, all of the
outstanding equity securities and
other securities of each Acquired Company
are owned of record and beneficially
by one or more of the Acquired Companies,
free and clear of all Encumbrances.
Except for restrictions on transfer under
applicable state and federal
securities laws, no legend or other
reference to any purported Encumbrance
appears upon any certificate representing
equity securities of any Acquired
Company. All of the outstanding equity
securities of each Acquired Company have
been duly authorized and validly issued and
are fully paid and nonassessable.
There are no Contracts relating to the
issuance, sale, or transfer of any equity
securities or other securities of any
Acquired Company. None of the outstanding
equity securities or other securities of
any Acquired Company was issued in
violation of the Securities Act or any
other Legal Requirement. No Acquired
Company owns, or has any Contract to
acquire, any equity securities or other
securities of any Person (other than
Acquired Companies) or any direct or
indirect equity or ownership interest in
any other business.
2.4 Financial
Statements.
(a) Section
2.4 of the Disclosure Letter contains (a)
consolidated balance sheets of the Acquired
Companies as at December 31, 2002,
and the related consolidated statements of
income, changes in stockholders'
equity, and cash flow for the two fiscal
years then ended, together with the
report thereon of Nation, Smith, Hermes and
Diamond, independent certified
public accountants, and (b) an unaudited
consolidated balance sheet of the
Acquired Companies as at December 31, 2003
(including the notes thereto, the
"Balance Sheet"), and the related
consolidated statements of income, changes in
stockholders' equity, and cash flow for the
fiscal year then ended (together
with the Balance Sheet, the "Financial
Statements"). Such financial statements
and notes fairly present in all material
respects the financial condition,
results of operations, changes in
stockholders' equity, and cash flow of the
Acquired Companies as at the respective
dates of and for the periods referred to
in such financial statements, all in
accordance with Company GAAP. The financial
statements referred to in this Section 2.4
reflect the consistent application of
such accounting principles throughout the
periods involved. No
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<PAGE>
financial statements of any Person other
than the Acquired Companies are
required by Company GAAP to be included in
the consolidated financial statements
of the Company.
(b) There will
be no material differences between the
Financial Statements and the Audited
Financial Statements.
(c) Except for
transactions, arrangements and other
relationships otherwise specifically
identified in the Financial Statements,
including but not limited to identification
of the information set forth below,
Section 2.4 of the Disclosure Letter sets
forth a true, complete and correct
list of all transactions, arrangements and
other relationships between and/or
among the Acquired Companies, any
affiliates and any unconsolidated entity or
other Person, including but not limited to
any structured finance, special
purpose or limited purpose entity or Person
(each, an "Off-Balance Sheet
Transaction"). Section 2.4 of the
Disclosure Letter also sets forth (a) the
business purpose and activities of each
Off-Balance Sheet Transaction, (b) the
economic substance of each Off-Balance
Sheet Transaction, (c) the key terms and
conditions of each Off-Balance Sheet
Transaction, (d) the Company's and/or
affiliates' potential risk associated with
ach such Off-Balance Sheet
Transaction, (e) the amounts of any
guarantees, lines of credit, standby letters
of credit or commitments or take or pay
contracts, throughput contracts or other
similar types of arrangements, including
tolling, capacity or leasing
arrangements, that could require the
Acquired Companies or any of their
affiliates to provide funding of any
obligations under any such Off-Balance
Sheet Transaction, including but not
limited to guarantees of repayments, make
whole agreements or value guarantees, and
(f) any other information with respect
to each such Off-Balance Sheet Transaction
that could have a Company Material
Adverse Effect.
2.5 Books and
Records. The accounting books and records, minute
books, and stock record books of the
Acquired Companies, copies of which have
been delivered to Buyer, are true and
complete in all material respects. The
minute books of the Acquired Companies
contain materially accurate and complete
records of all meetings held of, and
corporate action taken by, the
stockholders, the boards of directors, and
committees of the boards of directors
of the Acquired Companies. At the Closing,
all such books and records will be in
the possession of the Acquired
Companies.
2.6 Title to
Properties; Encumbrances.
(a) The
Company does not own, and has not previously
owned, any real property. Section 2.6 of
the Disclosure Letter contains a
complete and accurate list of all real
estate leasehold interests owned by any
Acquired Company. All current leases or
subleases of the Company are in full
force and effect, are valid and effective
in accordance with their respective
terms, and there is not, under any of such
leases, any existing material default
or event of default (or event which with
notice or lapse of time, or both, would
constitute a default) by the Company or by
the other party to such lease or
sublease. Complete and correct copies of
such leases and subleases have been
delivered to Buyer.
(b) The
Acquired Companies own all the properties and
assets (whether real, personal, or mixed
and whether tangible or intangible)
that they purport to own located in the
facilities owned or operated by the
Acquired Companies or reflected as owned in
the books and
14
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records of the Acquired Companies,
including all of the properties and assets
reflected in the Balance Sheet (except for
assets held under capitalized leases
and personal property sold since the date
of the Balance Sheet in the ordinary
course of business), and all of the
properties and assets purchased or otherwise
acquired by the Acquired Companies since
the date of the Balance Sheet (except
for personal property acquired and sold
since the date of the Balance Sheet in
the ordinary course of business). All
material properties and material assets
reflected in the Balance Sheet are free and
clear of all Encumbrances.
2.7 Condition
and Sufficiency of Assets. The buildings, plants,
structures, and equipment of the Acquired
Companies are structurally sound, are
in good operating condition and repair, and
are adequate for the uses to which
they are being put, and none of such
buildings, plants, structures, or equipment
is in need of maintenance or repairs except
for ordinary, routine maintenance
and repairs that are not material in nature
or cost. The building, plants,
structures, and equipment of the Acquired
Companies are sufficient for the
continued conduct of the Acquired
Companies' businesses immediately after the
Closing in substantially the same manner as
conducted prior to the Closing.
2.8
Accounts Receivable.
All accounts receivable of the Acquired
Companies that are reflected on the Balance
Sheet or on the accounting records
of the Acquired Companies as of the Closing
Date (collectively, the "Accounts
Receivable") represent valid obligations
arising from sales actually made or
services actually performed in the ordinary
course of business. Unless paid
prior to the Closing Date, the Accounts
Receivable are or will be as of the
Closing Date current and collectible net of
the respective reserves shown on the
Balance Sheet or on the accounting records
of the Acquired Companies as of the
Closing Date (which reserves are adequate
and calculated consistent with past
practice. There is no contest, claim, or
right of set-off, other than returns in
the ordinary course of business, under any
Contract with any obligor of an
Accounts Receivable relating to the amount
or validity of such Accounts
Receivable.
2.9 Inventory.
All inventory of the Acquired Companies, whether or
not reflected in the Balance Sheet,
consists of a quality and quantity usable
and salable in the ordinary course of
business, except for obsolete items and
items of below-standard quality, all of
which have been written off or written
down to net realizable value in the Balance
Sheet or on the accounting records
of the Acquired Companies as of the Closing
Date, as the case may be. All
inventories not written off have been
priced at the lower of cost or market on a
weighted average cost basis.
2.10
No Undisclosed Liabilities. The Acquired Companies have no
liabilities or obligations of any nature
(whether known or unknown and whether
absolute, accrued, contingent, or
otherwise) except for: (i) liabilities or
obligations reflected or reserved against
in the Balance Sheet and current
liabilities incurred in the ordinary course
of business since the date of the
Balance Sheet; and (ii) those liabilities
not required to be reflected on the
Balance Sheet prepared in accordance with
Company GAAP.
2.11
Taxes.
(a) The
Acquired Companies have filed or caused to be
filed (on a timely basis since January 1,
1999) all Tax Returns that are or were
required to be filed by or with respect to
any of them, either separately or as
a member of a group of corporations,
pursuant to
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applicable Legal Requirements. Sellers have
made available to Buyer copies of
all Tax Returns relating to income or
franchise taxes filed since January 1,
1999. The Acquired Companies have paid, or
made provision for the payment of,
all Taxes that have or may have become due
pursuant to those Tax Returns or
otherwise, or pursuant to any assessment
received by Sellers or any Acquired
Company, except such Taxes, if any, as are
listed in Section 2.11 of the
Disclosure Letter and are being contested
in good faith and as to which adequate
reserves (determined in accordance with
Company GAAP) have been provided in the
Balance Sheet.
(b) Section
2.11 of the Disclosure Letter contains a
complete and accurate list of all audits of
all federal and state income Tax
Returns of each Acquired Company, including
a reasonably detailed description of
the nature and outcome of each audit. All
deficiencies proposed as a result of
such audits have been paid, reserved
against, settled, or, as described in
Section 2.11 of the Disclosure Letter, are
being contested in good faith by
appropriate proceedings. Section 2.11 of
the Disclosure Letter describes all
adjustments to the United States federal
income Tax Returns filed by any
Acquired Company or any group of
corporations including any Acquired Company for
all taxable years since January 1, 1999,
and the resulting deficiencies proposed
by the IRS. No Acquired Company has given
or been requested to give waivers or
extensions (or is or would be subject to a
waiver or extension given by any
other Person) of any statute of limitations
relating to the payment of Taxes of
any Acquired Company or for which any
Acquired Company may be liable.
(c) The
charges, accruals, and reserves with respect to
Taxes on the respective books of each
Acquired Company are adequate (determined
in accordance with Company GAAP) and are at
least equal to that Acquired
Company's liability for Taxes for all
fiscal periods through the Balance Sheet.
To the Knowledge of the Company and the
Principal Sellers, there exists no
proposed tax assessment against any
Acquired Company. No consent to the
application of Section 341(f)(2) of the IRC
has been filed with respect to any
property or assets held, acquired, or to be
acquired by any Acquired Company.
All Taxes that any Acquired Company is or
was required by Legal Requirements to
withhold or collect have been duly withheld
or collected and, to the extent
required, have been paid to the proper
Governmental Body or other Person.
(d) All Tax
Returns filed by (or that include on a
consolidated basis) any Acquired Company
are true, correct, and complete. There
is no tax sharing agreement that will
require any payment by any Acquired
Company after the date of this
Agreement.
(e) No claim
has been made during the last five years by
any Governmental Body in a jurisdiction
where any Acquired Company does not file
Tax Returns that such Acquired Company is
or may be subject to taxation by such
jurisdiction.
(f) To the
Knowledge of the Principal Sellers and the
Company, each Acquired Company has
disclosed on its federal income Tax Returns
all positions taken therein that could give
rise to a substantial understatement
of federal income tax within the meaning of
Code Section 6662. No Acquired
Company has entered into any transaction
that would be considered listable or
reportable under Section 6111 or 6112 of
the Code.
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2.12
No Material Adverse Change. Since the date of the Balance
Sheet, there has not been any material
adverse change in the business,
operations, properties, prospects, assets,
or condition of any Acquired Company,
and no event has occurred or circumstance
exists that may result in such a
material adverse change.
2.13
Employee Benefits.
(a) Section
2.13 of the Disclosure Letter contains a list
of all pension, profit sharing, stock
option, employee stock purchase or other
plans providing for deferred, incentive or
other compensation or fringe benefits
to employees, and all other employee
benefit plans to which the Company is a
party or by which it is bound
(collectively, the "Plans").
(b) None of
the Acquired Companies or any ERISA
Affiliate, has any actual or contingent,
direct or indirect, liability in
respect of any employee benefit plan or
arrangement, including any plan subject
to ERISA, other than to make contributions
under or pay benefits pursuant to the
Plans.
(c) All of the
Plans are in material compliance with all
applicable Legal Requirements, and no
"reportable event," as defined in ERISA,
has occurred or is continuing with respect
to any Plan.
(d) No Plan
(i) is subject to Title IV of ERISA, or is
otherwise a defined benefit plan subject to
Title 1 or Title IV of ERISA, or is
a multiple employer plan (within the
meaning of IRC Section 413(c)) or (ii)
provides for post-retirement welfare
benefits other than as may be required
under Section 4980B(f) of the Code or a
"parachute payment" (within the meaning
of IRC Section 280G(b)).
(e)
The
execution and delivery of this Agreement and the
consummation of the Contemplated
Transactions (i) will not result in any
prohibited transaction within the meaning
of Section 406 of ERISA or IRC Section
4975 or (ii) in the payment, vesting or
acceleration of any benefit under any
Plan.
2.14
Compliance with Legal Requirements; Governmental
Authorizations.
(a) Since
January 1, 2000, each Acquired Company has
conducted and currently is conducting its
business and operations in full
compliance with all Legal Requirements
applicable to it, except where such
failure to comply would not, individually
or in the aggregate, reasonably be
expected to cause a Company Material
Adverse Effect.
(b) No event has
occurred or circumstance exists that
(with or without notice or lapse of time)
(i) may constitute or result in a
material violation by any Acquired Company
of, or a failure on the part of any
Acquired Company to comply with, any Legal
Requirement, or (ii) may give rise to
any obligation on the part of any Acquired
Company to undertake, or to bear all
or any portion of the cost of, any remedial
action of any nature.
(c) No
Acquired Company has received, at any time since
January 1, 2000, any notice from any
Governmental Body regarding (i) any actual,
alleged, possible, or potential violation
of, or failure to comply with, any
Legal Requirement, or (ii) any actual,
alleged,
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possible, or potential obligation on the
part of any Acquired Company to
undertake, or to bear all or any portion of
the cost of, any remedial action of
any nature.
(d) Each of
the Acquired Companies is in possession of
all authorizations, licenses, permits,
certificates, approvals and clearances of
any Governmental Entity (collectively, the
"Company Permits") necessary for the
Acquired Company to carry on its business
in substantially the same manner as it
is being conducted as of the date hereof,
except where the failure to obtain a
Company Permit is not material to the
Company's business or would not,
individually or in the aggregate,
reasonably be expected to have a Company
Material Adverse Effect. All Company
Permits are valid and in full force and
effect.
2.15
Legal Proceedings; Orders.
(a) There is
no pending Proceeding:
(i) that has
been commenced by or against any
Acquired Company or that relates to any of the assets owned or used
by
any Acquired Company; or
(ii)
that challenges, or that may have the effect
of preventing, delaying, making illegal, or otherwise interfering
with,
any of the Contemplated Transactions.
To the Knowledge of the Principal Sellers
and the Company, (1) no Proceeding of
the type noted in (a) above has been
Threatened, and (2) no event has occurred
or circumstance exists that may give rise
to or serve as a basis for the
commencement of any such Proceeding. The
Company has made available to Buyer
copies of all pleadings, correspondence,
and other documents relating to each
Proceeding listed in Section 2.15 of the
Disclosure Letter, if any.
(b)
There is no
Order to which any of the Acquired
Companies, or any of the assets owned or
used by any Acquired Company, is
subject; and, to the Knowledge of the
Principal Sellers and the Company, no
officer, director, agent, or employee of
any Acquired Company is subject to any
Order that prohibits such officer,
director, agent, or employee from engaging in
or continuing any conduct, activity, or
practice relating to the business of any
Acquired Company.
2.16
Absence of Certain Changes and Events. Since the date of the
Balance Sheet, the Acquired Companies have
conducted their businesses only in
the ordinary course of business and there
has not been any:
(a) change in
any Acquired Company's authorized or issued
capital stock; grant of any stock option or
right to purchase shares of capital
stock of any Acquired Company; issuance of
any security convertible into such
capital stock; grant of any registration
rights; purchase, redemption,
retirement, or other acquisition by any
Acquired Company of any shares of any
such capital stock; or declaration or
payment of any dividend or other
distribution or payment in respect of
shares of capital stock;
(b) amendment
to the Organizational Documents of any
Acquired Company;
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(c) payment or
increase by any Acquired Company of any
bonuses, salaries, or other compensation to
any stockholder, director, officer,
or employee (except in the ordinary course
of business) or entry into any
employment, severance, or similar Contract
with any director, officer, or
employee;
(d) adoption
of, or increase in the payments to or
benefits under, any profit sharing, bonus,
deferred compensation, savings,
insurance, pension, retirement, or other
employee benefit plan for or with any
employees of any Acquired Company;
(e) damage to
or destruction or loss of any asset or
property of any Acquired Company, whether
or not covered by insurance,
materially and adversely affecting the
properties, assets, business, financial
condition, or prospects of the Acquired
Companies, taken as a whole;
(f) entry
into, termination of, or receipt of notice of
termination of any Contract or transaction
involving a total remaining
commitment by or to any Acquired Company of
at least $75,000, other than in the
ordinary course of business;
(g) sale
(other than sales of inventory in the ordinary
course of business), lease, or other
disposition of any asset or property of any
Acquired Company or mortgage, pledge, or
imposition of any lien or other
encumbrance on any material asset or
property of any Acquired Company, including
the sale, lease, or other disposition of
any of the Intellectual Property
Assets;
(h)
cancellation or waiver of any claims or rights with a
value to any Acquired Company in excess of
$50,000 individually, or $100,000 in
the aggregate;
(i)
material
change in the accounting methods used by any
Acquired Company; or
(j) agreement,
whether oral or written, by any Acquired
Company to do any of the foregoing.
2.17
Contracts; No Defaults.
(a) Except for
those Contracts set forth on Section 2.17
of the Disclosure Letter (each a "Material
Contract" and collectively the
"Material Contracts"), no Acquired Company
is a party to any Contract that:
(i)
involves
performance of services or delivery
of goods or materials by one or more Acquired Companies of an
amount or
value in excess of $75,000 annually, other than purchase orders,
sales
confirmations and contracts relating to marketing or advertising of
the
Company entered into in the ordinary course of business;
(ii)
involves performance of services or delivery
of goods or materials to, or employment by, one or more
Acquired
Companies of an amount or value in excess of $75,000 annually,
other
than purchase orders, sales confirmations and contracts
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relating to marketing or advertising of the Company entered into in
the
ordinary course of business;
(iii) was
not entered into in the ordinary course
of business and that involves expenditures or receipts of one or
more
Acquired Companies in excess of $75,000 annually;
(iv)
is a lease, rental or occupancy agreement,
license, installment and conditional sale agreement, or other
Applicable Contract affecting the ownership of, leasing of, title
to,
use of, or any
leasehold or other interest in, any real or personal
property (except personal property leases and installment and
conditional sales agreements having a value per item or
aggregate
payments of less than $25,000 annually and with terms of less than
one
year);
(v) is a
licensing agreement or other Applicable
Contract with respect to patents, trademarks, copyrights, or
other
intellectual property (including outlet or retail store
agreements),
including agreements with current or former employees, consultants,
or
contractors regarding the appropriation or the non-disclosure of
any of
the Intellectual Property Assets, other than standard
non-disclosure
agreements with employees and consultants;
(vi)
is a joint venture, partnership or other
Applicable Contract (however named) involving a sharing of
profits,
losses, costs, or liabilities by any Acquired Company with any
other
Person;
(vii)
contains covenants that in any way purport
to restrict the business activity of any Acquired Company or
any
Affiliate of an Acquired Company or limits the freedom of any
Acquired
Company or any Affiliate of an Acquired Company to engage in any
line
of business or to compete with any Person;
(viii) provides
for payments to or by any Person
based on sales, purchases, or profits, other than direct payments
for
goods;
(ix)
requires any Acquired Company to incur in
excess of $75,000 annually for capital expenditures;
(x)
is a
writte
