EXHIBIT 10.2
EARNOUT AGREEMENT
THIS EARNOUT AGREEMENT (this "Agreement") dated as of February 10,
2006, is entered into by and among New Frontier Media, Inc, a Colorado
corporation (the "Company"), Marc Laurence Greenberg, an individual
("Greenberg"), Richard B. Goldberg, an individual ("Goldberg"), Marc Laurence
Greenberg Trust dated May 11, 2001, and Goldberg Family Trust dated June 15,
2001 (collectively, the "Trusts") (the Trusts are referred to herein from time
to time in the singular as a "Seller, and collectively as the "Sellers" and
Greenberg and Goldberg are referred to collectively as the "Employees").
RECITALS
WHEREAS, the Company, Employees, and Sellers are parties to that
certain Stock Purchase Agreement dated as of February 6, 2006 (the "Purchase
Agreement"); and
WHEREAS, the Employees are parties to certain employment agreements
with the Company dated as of even date hereof (the "Employment Agreements"); and
WHEREAS, the Company has agreed to purchase from the Sellers, and
the Sellers have agreed to sell to the Company, (i) 100% of the capital stock of
MRG Entertainment, Inc., a California corporation, and (ii) 100% of the capital
stock of Lifestyles Entertainment, Inc., a California corporation (collectively,
the "Shares"), on the terms and conditions set forth in the Purchase Agreement;
and
WHEREAS, the Purchase Agreement provides for a purchase price of up
to Twenty-Two Million Dollars ($22,000,000) for the Shares, consisting of, among
other consideration, an aggregate cash amount of up to Two Million Dollars
($2,000,000) pursuant to a performance-based earnout (such earnout, up to
$2,000,000, the "Earnout"); and
WHEREAS, the parties to the Purchase Agreement have agreed that the
determination of the amount and payment of the Earnout is to be in accordance
with the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and provisions herein contained, the parties hereto covenant and agree
as follows:
SECTION 1.
CAPITALIZED UNDEFINED TERMS
Undefined initially capitalized terms used in this Agreement shall have
the meanings ascribed to them in the Purchase Agreement.
SECTION 2.
EARNOUT PAYMENTS
2.1 Nature of Earnout Payments.
(a) Subject to the terms and conditions of this Agreement, the Company
shall pay to Sellers, in cash, up to an aggregate amount of $2,000,000
(such earnout payments, up to $2,000,000, the "Earnout Payments"), to be
paid, if at all, as follows:
(i) in the event the EBITDA (as hereafter defined) of the Targets
for the period between and including January 1, 2006 and December 31,
2006 (the "2006 EBITDA") equals or exceeds $5,250,000, the Company
shall make a one-time lump sum payment to Sellers in the amount of
$666,667;
(ii) in the event the EBITDA of the Targets for the period between
and including January 1, 2007 and December 31, 2007 (the "2007 EBITDA)
equals or exceeds $5,750,000, the Company shall make a one-time lump
sum payment to Sellers in the amount of $666,667; and
(iii) in the event the EBITDA of the Targets for the period between
and including January 1, 2008 and December 31, 2008 (the "2008 EBITDA")
equals or exceeds $6,000,000, the Company shall make a one-time lump
sum payment to Sellers in the amount of $666,667.
(b) The minimum threshold EBITDA amounts of the Targets described in
Sections 2.1(a)(i), (ii) and (iii) (i.e., $5,250,000, $5,750,000 and
$6,000,000 for 2006, 2007 and 2008, respectively) are each hereinafter
referred to individually from time to time as a "Minimum EBITDA Threshold".
2.2 Earnout Payments Partially Cumulative.
(a) The Earnout Payments and the calculations of the bases therefor
shall be partially cumulative, such that (i) in the event the Targets (A)
do not achieve the Minimum EBITDA Threshold (an "EBITDA Shortfall") for
2006 or 2007, as the case may be (a "Lookback Shortfall Period"), but (B)
exceed the Minimum EBITDA Threshold for a measurement period following such
Lookback Shortfall Period (an "Lookback Excess Period"), then Sellers, at
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their option, may add the amount of the Excess EBITDA (as hereafter
defined) achieved for the Lookback Excess Period to the EBITDA achieved for
the preceding Lookback Shortfall Period, in order to enable Sellers to
receive an EBITDA Payment for such Lookback Shortfall Period; and (ii) in
the event the Targets (A) do not achieve the Minimum EBITDA Threshold for
2008, but (B) achieve Excess EBITDA for 2007, then Sellers, at their
option, may add the Excess EBITDA for 2007 to the 2008 EBITDA, in order to
enable Sellers to achieve an EBITDA Payment for 2008. The sum of the amount
of (1) the Excess EBITDA for the applicable Lookback Excess Period or for
2007, as the case may be, and (2) EBITDA for the applicable Lookback
Shortfall Period or the 2008 EBITDA, as the case may be, must equal or
exceed the Minimum EBITDA Threshold for such Lookback Shortfall Period or
2008, as the case may be, in order for Sellers to receive an Earnout
Payment relating to the such Lookback Shortfall Period or 2008, as
applicable. Notwithstanding the foregoing, (x) only the Excess EBITDA for
one Excess Period may be applied to a Lookback Shortfall Period, not to be
applied to more than one such Lookback Shortfall Period; and (y) Sellers
may not add any portion of any Excess EBITDA achieved in 2006 to the 2007
EBITDA or the 2008 EBITDA.
(b) For purposes of this Agreement, "Excess EBITDA" means the amount of
EBITDA in excess of the Minimum EBITDA Threshold for a measurement period
identified in Section 2.1(a)(i), (ii) or (iii).
2.3 Consideration of Other Revenues in Determining EBITDA.
(a) For purposes of this Agreement, in the event the Targets generate
revenues during a measurement period identified in Section 2.1(a)(i), (ii)
or (iii) that (1) are not solely derived from the operations of the
Targets, but (2) are nonetheless generated as a result of the direct
assistance of one or more representatives of the Company ("Indirect Target
Revenues"), the Company shall, for purposes of determining the existence or
non-existence of the Minimum EBITDA Threshold for a particular measurement
period, include the Indirect Target Revenues in calculating EBITDA for such
measurement period; provided, however, it shall be a requirement that, any
Indirect Target Revenues be substantially identifiable and quantifiable to
the Company and its Auditors (as hereafter defined), in order for such
Indirect Target Revenues to be included in the EBITDA calculation for the
current measurement period; and further provided, any Indirect Target
Revenues included in such EBITDA calculation shall be net of all related
expenses in accordance with GAAP, and as otherwise determined in accordance
with Section 3 of this Agreement.
(b) In the event the Employees, in addition to performing their usual
and customary duties under their Employment Agreements, originate or
facilitate relationships, introductions, or other tangible or intangible
items of material value to the Company in conducting its business
activities (other than the business activities of the Targets)
(collectively, "Additional Value Added Activities"), the compensation
committee for the Company, to consist of a majority of independent
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directors ("Compensation Committee"), shall take into consideration, in its
discretion, such Additional Value Added Activities for purposes of
determining whether or not to make an Earnout Payment if and to the extent
that the Minimum EBITDA Threshold is not achieved for a particular
measurement period. Notwithstanding the foregoing: (i) the Company shall
not have any affirmative obligation to make any additional Earnout Payment
not otherwise due and payable in accordance with this Agreement; and (ii)
the existence and amount of value associated with any Additional Value
Added Activities shall be as determined in the sole discretion of the
Compensation Committee.
2.4 Earnout Payment Date. Subject to Section 4.2, any Earnout Payment due
and owing hereunder to Sellers shall be paid within thirty (30) days after the
determination of EBITDA for the current measurement period has been made in
accordance with Section 3 of this Agreement (taking into account any time
required for the CFO or the Audit Committee to make any adjustment based on the
annual audit of the Company's financial statements).
2.5 Pro Rata Payments. For purposes of this Agreement and with respect to
any Earnout Payment due and owing to the Sellers, each Seller shall be entitled,
subject to Section 4.1, to fifty percent (50%) (hereafter referred to as its
"Pro Rata" share) of the amount of each such Earnout Payment.
SECTION 3.
COMPUTATION OF EBIDTA
3.1 Additional Definitions Pertinent to Calculation of EBITDA.
(a) "GAAP" shall mean the then applicable United States generally
accepted accounting principles, consistently applied.
(b) "EBITDA" shall mean, as determined in accordance with GAAP in a
manner consistent with the past practice of the Company, the consolidated
earnings of the operations of the Targets before interest, taxes based on
income, depreciation and amortization, calculated as if the Targets were
being operated as corporations separate and independent from the Company,
for the twelve (12) month period ending on December 31; provided, that any
payments made under this Agreement shall not be taken into account in
determining EBITDA; but further provided, any allocation of expenses
associated with the Targets, including, without limitation, expenses of
employees, benefit plans, insurance policies, taxes, discretionary bonuses
(including any bonuses awarded to Employees under their Employment
Agreements) and any and all other costs and expenses attributable to
Targets, shall be accounted for and applied against EBITDA in a consistent
manner with other affiliates of the Company, all in accordance with the
Company's past practices.
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3.2 Determination of EBITDA. The 2006 EBITDA, 2007 EBITDA and 2008 EBITDA
shall be as determined by the Company's Chief Financial Officer ("CFO") and
approved by the Company's Audit Committee, which shall consist of a majority of
independent directors ("Audit Committee"), based on the consolidated financial
statements of the Targets for the applicable twelve (12) month period ending on
December 31, as prepared by the CFO. The Company shall deliver to the Sellers a
certified copy of the calculation of 2006 EBITDA, 2007 EBITDA and 2008 EBITDA,
as applicable, as determined above, within 120 days following January 1,
together with a written notice (the "Earnout Notice") showing the calculation of
the EBITDA for the applicable year and the corresponding Earnout Payment due and
owing to Sellers, if any. Notwithstanding anything contained in this Section 3.2
to the contrary, the CFO or the Audit Committee shall have the right to
designate and authorize the Company's firm of certified public accountants to
make the determination of 2006 EBITDA, 2007 EBITDA and/or 2008 EBITDA in
connection with the determination of the existence the Minimum EBITDA Threshold
for the corresponding year and shall have the right to adjust such determination
based on the annual audit of the Company's financial statements (the EBITDA
Calculation). The determination of the 2006 EBITDA, 2007 EBITDA and 2008 EBITDA
in accordance with this Section 3.2 shall be binding upon the Company and the
Sellers. Notwithstanding the foregoing, Sellers shall have the right to receive
a copy of the 2006 EBITDA, 2007 EBITDA and 2008 EBITDA at the same time it is
sent to the Audit Committee and shall be permitted to consult with Audit
Committee, if they so choose regarding such calculations.
SECTION 4.
OTHER COVENANTS
4.1 Employment Agreements; Disassociating Event; Material Adverse Effect.
(a) Notwithstanding anything contained in this Agreement to the
contrary and except as expressly provided in Section 4.1(b), a Seller shall
only be entitled to its Pro Rata share of any Earnout Payment if the
Employee associated with such Seller (i) is employed by a Target for the
entire measurement period for which such Earnout Payment relates, and (ii)
is not in violation of any provision set forth in his Employment Agreement
or the Seller Noncompetition Agreement with the Company, at the time an
Earnout Payment is due and owing from the Company to Sellers.
(b) Notwithstanding Section 4.1(a):
(i) In the event an Employee (A) dies, (B) becomes Permanently
Disabled, or (C) is terminated for Cause (as such capitalized terms in
subclauses (B) and (C) are defined in his Employment Agreement) during
the term of this Agreement, then the Seller associated with that
Employee shall not be entitled to receive any portion of any Earnout
Payment and the Company shall have no further obligations under this
Agreement to such Seller.
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(ii) Upon the occurrence of any of the events described in Section
4.1(b)(i)(A) to (C), the Seller associated with the Employee that
continues to be employed by the Company shall continue to be entitled
to receive its Pro Rata share of any Earnout Payments subject to and in
accordance with Sections 2 and 3 earned after the date of death,
Permanent Disability, or termination of the other Employee pursuant to
Section 4.1(b)(i)(C), if the Company determines in its sole discretion
that the death, Permanent Disability or termination of such Employee
has not or will not cause a Material Adverse Effect (as hereafter
defined) on the Company or the Targets.
(iii) In the event both Employees die, become Permanently Disabled
or are no longer employees pursuant to Section 4.1(b)(i)(C) during the
term of this Agreement (or upon the occurrence of any combination of
the foregoing), then neither Seller shall be entitled to any portion of
any Earnout Payment after the occurrence of such events and the Company
shall have no further obligations under this Agreement.
(iv) In the event an Employee (A) is terminated by the Company
without Cause (as such term is defined in his Employment Agreement)
during the term of this Agreement, or (B) resigns from his employment
with the Company for Good Reason (as such term is defined in his
Employment Agreement) during the term of this Agreement (a
"Disassociated Employee", and either such event, a "Disassociating
Event"), then the Seller associated with the Disassociated Employee and
the Seller associated with the Employee that continues to be employed
by the Company in accordance with his Employment Agreement each shall
be entitled to its respective Pro Rata share of any Earnout Payments
earned after the date of such Disassociating Event, subject to and in
accordance with Sections 2 and 3.
(v) In the event both Employees are terminated by the Company
without Cause or resign from their employment with the Company for Good
Reason during the term of this Agreement (or upon the occurrence of a
combination of the foregoing), then each Seller shall be entitled to
its Pro Rata share of the full amount of the Earnout (or the remainder
of the unpaid balance of the Earnout) irrespective of whether the
Company achieves the Minimum EBITDA Threshold for any EBITDA
measurement period contemplated by this Agreement; provided, however,
the Earnout Payments shall be paid prior to February 1st of the year
following the EBITDA calculation. Notwithstanding the foregoing, any
Earnout Payment due and owing pursuant to this Section 4.1(b)(iv) which
is attributable to a past measurement period, shall be paid within
thirty (30) days of the termination or resignation of employment
(without Cause or for Good Reason, as applicable) by the second such
Employee.
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(vi) In the event either or both Employees resigns from his
employment for any reason other than Good Reason, then the Company
shall have no further obligations (payment or otherwise) under this
Agreement to any Seller, including without limitation, any Seller
associated with an Employee that continues to be employed by the
Company, effective immediately from the date of termination pertaining
to such Event.
(c) For purposes of this Agreement, "Material Adverse Effect" shall
mean any circumstances, change in, or effect on the Company or the Targets
or their respective businesses that, when taken together with all other
related circumstances, changes in or effects on the Company or the Targets
or their respective businesses taken as a whole, that is materially adverse
to the condition (financial or otherwise), business, prospects, results of
operations, or assets of the Company or the Targets, taken as a whole.
4.2 Offset Rights. To the extent that the Company is unable to recover
first from the Escrow Amount being held under the Escrow Agreement, the Company
shall have the right, subject to the limitations set forth in Article IX of the
Purchase Agreement to (i) offset and/or recover payment of any Earnout Payments
hereunder up to the full amount of Losses which are Finally Resolved in
accordance with the provisions of the Purchase Agreement; (ii) suspend payment
of any Earnout Payments hereunder in the event the Company obtains an interim
award of emergency relief in accordance with Section 3(c) of one or both of the
Seller Noncompetition Agreements for the duration in which such interim award
for relief remains in place; and/or (iii) offset and/or recover payment of any
Earnout Payments up to the full amount of any losses or damages sustained as a
result of any breach of one or both of the Seller Noncompetition Agreements, as
determined by a non-appealable order or judgment obtained pursuant to Section 3
of such Seller Noncompetition Agreement(s).
SECTION 5.
MISCELLANEOUS
5.1 Binding Effect; Assignment. Except as otherwise provided herein, this
Agreement shall be binding upon and shall be enforceable by each party, its
successors and permitted assigns. No Seller may assign any of its rights or
obligations hereunder without the prior written approval of the Company, which
consent may be withheld in the Company's sole discretion.
5.2 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Colorado, without regard to conflicts
of laws principles thereunder.
5.3 Amendments. This Agreement and its provisions may be amended, changed,
waived, discharged or terminated only by a writing signed by each of the parties
hereto.
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5.4 Notices. All notices, claims, certificates, requests, demands and other
communications under this Agreement shall be made in writing and shall be
delivered in accordance with Section 11.3 of the Purchase Agreement.
5.5 Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things and shall execute and
deliver all such other agreements, certificates, instruments and documents as
any other party may reasonably request to give effect to the terms and intent of
this Agreement.
5.6 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior written or oral understandings or agreements. In the event of any
inconsistency or conflict between any provision of this Agreement and one or
more provisions of the Purchase Agreement, the provision(s) of this Agreement
shall prevail and govern
5.7 Severability. If any provision of this Agreement shall be held by any
court of competent jurisdiction to be invalid or unenforceable to any extent,
the remainder of this Agreement shall not be affected thereby and shall be
enforced to the maximum extent permitted by law.
5.8 Remedies Cumulative. The rights and remedies available under this
Agreement or otherwise available shall be cumulative of all other rights and
remedies and may be exercised successively.
5.9 Counterpart Execution. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Fax signatures shall be
deemed to be originals for all purposes.
5.10 No Third Party Beneficiary. Except as and to the extent expressly
stated otherwise herein, nothing in this Agreement is intended to confer upon
any person or entity other than the parties hereto and their respective
successors and permitted assigns any rights, benefits, or obligations hereunder.
5.11 Attorneys Fees. In any action or arbitration between the parties
relating to this Agreement the enforcement of any of its terms, the prevailing
parties shall in addition to any other award of damage or other remedy be
entitled to its reasonable third party attorney's fees, costs and expenses as
may be fixed by the court or arbitrators.
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IN WITNESS WHEREOF, this Earnout Agreement has been duly executed as of
the date first above written.
THE COMPANY:
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NEW FRONTIER MEDIA, INC.
By: /s/ Michael Weiner
------------------------
Name: Michael Weiner
----------------------
Title: CEO
----------------------
SELLERS:
--------
MARC LAURENCE GREENBERG
TRUST DATED MAY 11, 2001
By: /s/ Marc L. Greenberg
------------------------
Marc L. Greenberg, Trustee
GOLDBERG FAMILY TRUST
DATED JUNE 15, 2001
By: /s/ Richard Goldberg
------------------------
Richard Goldberg, Trustee
ACKNOWLEDGED AND AGREED TO:
/s/ Marc L. Greenberg
- --------------------------------------
Marc Laurence Greenberg, an individual
/s/ Richard B. Goldberg
- ----------------------------------
Richard B. Goldberg, an individual
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