Exhibit 99.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "AGREEMENT") is made and entered into as of
March 7, 2005, by and among SUNSET BRANDS, INC., a Nevada corporation
("PURCHASER"), CONTINENTAL STOCK TRANSFER & TRUST COMPANY (the "ESCROW AGENT"),
U.S. MILLS, INC., a Delaware corporation (the "COMPANY") and IBF Liquidating
Fund, LLC, a Delaware limited liability company (the "SHAREHOLDER
REPRESENTATIVE"), for itself and as representative of the shareholders of the
Company entitled to receive Merger Consideration pursuant to the terms of the
Merger Agreement (as defined below) (such shareholders being referred to herein
as the "SELLING PARTIES").
RECITALS
A. Purchaser, USM Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Purchaser ("MERGER SUB"), the Company and the
Shareholder Representative have entered into an Acquisition Agreement and Plan
of Merger dated as of February 18, 2005 (the "MERGER AGREEMENT"), pursuant to
which Purchaser is acquiring the Company by means of a merger transaction
pursuant to which Merger Sub is merging with and into the Company and certain
holders of the Company's capital stock are receiving the Merger Consideration
(as defined in Section 1.6(b) of the Merger Agreement) from Purchaser.
B. The Merger Agreement contemplates the establishment of an escrow
arrangement to (i) provide for the deposit and release of the Deposit (as
defined in Section 1.7 of the Merger Agreement) consisting of $500,000 in cash
and 500,000 shares of common stock of the Purchaser, (ii) to secure rights to
indemnification, compensation and reimbursement of the Purchaser and Merger Sub
under Article VII of the Merger Agreement, and (iii) to provide for payment of
any Working Capital Adjustment (as defined in the Merger Agreement), to the
extent set forth in Section 1.9 of the Merger Agreement.
C. On the date hereof, the Merger Agreement is being amended (i) to
provide that the Deposit will be deposited into the escrow arrangement
contemplated hereby on the date hereof and (ii) to provide that, on or prior to
the Closing Date, an additional escrow agreement will be entered into by the
parties hereto (or, in lieu of the Escrow Agent, by another escrow agent
reasonably satisfactory to the other parties hereto) (the "INDEMNITY ESCROW
AGREEMENT") to provide for the payment of any Working Capital Adjustment and to
cover the matters contemplated by Article VII of the Merger Agreement.
D. Pursuant to Section 1.17 of the Merger Agreement and Section 8 of this
Agreement, the Shareholder Representative has been irrevocably appointed to
serve as the Shareholder Representative for, among other things, administration
of the provisions of Sections 1.9 and 1.10 of the Merger Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINED TERMS. Capitalized terms used in this Agreement and not otherwise
defined shall have the meanings given to them in the Merger Agreement.
2. ACCOUNTS.
2.1. DEPOSIT ACCOUNT. On the date hereof, Purchaser is depositing with the
Escrow Agent (the "DEPOSIT ACCOUNT") (i) five hundred thousand dollars and no
cents ($500,000.00) in cash (the "DEPOSIT CASH"), and (ii) 500,000 shares of
common stock of Purchaser (the "DEPOSIT SHARES" and collectively, with the
Deposit Cash, the "DEPOSIT AMOUNT") pursuant to Section 1.7 of the Merger
Agreement. The Deposit Shares shall be issued in the name of the Company but
shall not be deemed to be issued to the Company unless and until released to the
Company in accordance with the terms of this Agreement. The Escrow Agent agrees
to accept delivery of the Deposit Amount and to hold the Deposit Amount subject
to the terms and conditions of this Agreement and the Merger Agreement (but the
Escrow Agent shall have no responsibility with respect to the Merger Agreement
other than to perform its obligations as provided in this Agreement). Escrow
Agent agrees to hold the Deposit Cash in a segregated escrow account that will
not bear interest.
2.2. VOTING OF THE DEPOSIT SHARES. Unless and until released to the
Company in accordance with the terms of this Agreement, the Deposit Shares shall
not be deemed to be issued and outstanding to the Company and, to the extent
they are deemed issued and outstanding, shall be voted as directed by the
Purchaser.
2.3. DIVIDENDS, ETC; STOCK SPLITS.
(a) Any shares of Series B Preferred or Sunset Common distributable
or issuable (whether by way of dividend, stock split or otherwise) in respect of
or in exchange for any Deposit Shares shall not be distributed or issued to the
beneficial owners of such Deposit Shares, but rather shall be distributed or
issued to and held by the Escrow Agent in the Deposit Account. Any securities
received by the Escrow Agent in respect of any Deposit Shares held in escrow as
a result of any stock split or combination of shares held in the Deposit
Account, payment of a stock dividend or other stock distribution in or on shares
held in the Deposit Account, or change of any Deposit Shares into any other
securities pursuant to or as a part of a merger, consolidation, acquisition of
property or stock, reorganization or liquidation involving Purchaser or
otherwise, shall be held by the Escrow Agent as, and shall be included within
the definitions of, Deposit Shares. Any cash dividends, dividends payable in
securities of third parties or other distributions of any kind made in respect
of the Deposit Shares will be delivered (net of any withholding or other taxes
required to be paid or withheld by Escrow Agent) and held by the Escrow Agent in
the Deposit Account. The parties hereto agree that Escrow Agent is not required
to file any reports or provide any notices to taxing authorities relating to the
Deposit Account or the transactions contemplated by this Agreement.
(b) All numbers contained in, and all calculations required to be
made pursuant to, this Agreement with respect to the Deposit Shares shall be
adjusted as appropriate to
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equitably reflect the effect of any stock split, reverse stock split, stock
dividend or similar transaction effected by Purchaser after the date hereof;
provided, however, that the Escrow Agent shall have received notice of such
stock split or other action and shall have received the appropriate number of
additional shares of Series B Preferred, Sunset Common or other property, as
applicable, pursuant to this Section 2.3(b). Unless and until the Escrow Agent
receives the certificates representing additional shares of Series B Preferred,
Sunset Common or other property, as applicable, pursuant to this Section 2.3(b),
the Escrow Agent may assume without inquiry that no such stock or other property
has been or is required to be issued with respect to Deposit Shares. Purchaser
undertakes to provide the Escrow Agent prompt notice of any stock split or other
event contemplated by this Section 2.4(b) and to take reasonable efforts to
deliver to the Escrow Agent (whether by instruction to the transfer agent of
Purchaser or otherwise) the certificates representing additional shares of
Series B Preferred, Sunset Common or other property, as applicable, contemplated
by this Section 2.3(b).
2.4. TRANSFERABILITY. The interests of the Company in the Deposit Amount
shall not be assignable or transferable, other than by operation of law. No
assignment or transfer of any of such interests by operation of law shall be
recognized or given effect until Purchaser and the Escrow Agent shall have
received written notice of such assignment or transfer.
2.5. TRUST FUND. The Deposit Amount held in the Deposit Account shall be
held as a trust fund and shall not be subject to any lien, attachment, trustee
process or any other judicial process of any creditor of any Selling Party or of
any party hereto. The Escrow Agent shall hold and safeguard the Deposit Account
until the Deposit Amount is released in accordance with this Agreement.
2.6. DISPOSITION OF DEPOSIT. The Escrow Agent may not exchange any Deposit
Cash or Deposit Shares held by it for cash or any other security.
3. RELEASE OF DEPOSIT AMOUNT.
3.1 Upon receipt of a written notice from Purchaser and the Shareholder
Representative to the effect that the Indemnity Escrow Agreement has been
executed and delivered by the parties thereto, which shall occur on or before
the Closing Date, (i) the Escrow Agent shall release the Deposit Shares to
Purchaser for cancellation, and (ii) the Escrow Agent shall deposit the Deposit
Cash into the escrow account established pursuant to the Indemnity Escrow
Agreement, and this Agreement shall thereafter terminate. Purchaser and the
Shareholder Representative shall provide the Escrow Agent with joint written
notice of the exact Closing Date.
3.2 In the event that the Merger Agreement is terminated prior to Closing
of the Merger for any reason, one or both of Purchaser or the Shareholder
Representative shall give written notice to the Escrow Agent of such termination
and the basis of such termination under the Merger Agreement. Except as
specifically provided to the contrary below or pursuant to written instructions
of Purchaser and the Shareholder Representative specifying different release
provisions, Escrow Agent shall deliver the entire Deposit Amount to Purchaser on
the fifth (5th) Business Day following receipt of notice of termination of the
Merger Agreement. Notwithstanding anything to the contrary set forth above, in
the event that the Agreement is
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terminated on or after April 15, 2005, and Escrow Agent receives (i) joint
instructions from Purchaser and the Shareholder Representative certifying that
the termination of the Merger Agreement was made by the Company and/or by the
Shareholder Representative in accordance with the provisions of Section 9.1 f.
of the Merger Agreement and instructing the Escrow Agent to release the Deposit
Amount, together with any income, gain, dividends or distributions earned or
received on the Deposit Amount (or a portion thereof), to the Company, or (ii) a
final, non-appealable award of any court or arbitrator having jurisdiction over
the matter specifying that the termination of the Merger Agreement was made by
the Company and/or by the Shareholder Representative in accordance with the
provisions of Section 9.1 f. of the Merger Agreement and that the Deposit
Amount, together with any income, gain, dividends or distributions earned or
received on the Deposit Amount (or a portion thereof) shall be released to the
Company, the Escrow Agent shall release the Deposit Amount, together with any
income, gain, dividends or distributions earned or received on the Deposit
Amount (or any portion thereof specified), to the Company.
4. FEES AND EXPENSES.
4.1. The Escrow Agent shall be entitled to receive from time to time fees
in accordance with EXHIBIT A. In accordance with EXHIBIT A, the Escrow Agent
will also be entitled to reimbursement for reasonable and documented
out-of-pocket expenses incurred by the Escrow Agent in the performance of its
duties hereunder and the execution and delivery of this Agreement. Any
pre-Closing fees and expenses shall be paid out of the Deposit Cash, as directed
by the Escrow Agent from time to time consistent with EXHIBIT A.
5. LIMITATION OF ESCROW AGENT'S LIABILITY.
5.1. The Escrow Agent undertakes to perform such duties as are
specifically set forth in this Agreement only and shall have no duty under any
other agreement or document, and no implied covenants or obligations shall be
read into this Agreement against the Escrow Agent. The Escrow Agent shall incur
no liability with respect to any action taken by it or for any inaction on its
part in reliance upon any notice, direction, instruction, consent, statement or
other document believed by it in good faith to be genuine and duly authorized,
nor for any other action or inaction except for its own gross negligence or
willful misconduct. In all questions arising under this Agreement, the Escrow
Agent may rely on the advice of counsel, and for anything done, omitted or
suffered in good faith by the Escrow Agent based upon such advice the Escrow
Agent shall not be liable to anyone. In no event shall the Escrow Agent be
liable for incidental, punitive or consequential damages.
5.2. Purchaser, the Company and the Selling Parties (collectively referred
to as the "INDEMNITORS") jointly and severally agree to indemnify the Escrow
Agent and its officers, directors, employees, agents and shareholders
(collectively referred to as the "INDEMNITEES") against, and hold them harmless
of and from, any and all loss, liability, cost, damage and expense, including
without limitation, reasonable counsel fees, which the Indemnitees may suffer or
incur by reason of any action, claim or proceeding brought against the
Indemnitees arising out of or relating in any way to this Agreement or any
transaction to which this Agreement relates, unless such action, claim or
proceeding is the result of the willful misconduct or gross negligence of the
Indemnitees.
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5.3. If the indemnification provided for in Section 5.2 is applicable, but
for any reason is held to be unavailable, the Indemnitors shall contribute such
amounts as are just and equitable to pay, or to reimburse the Indemnitees for,
the aggregate amount of any and all losses, liabilities, costs, damages and
expenses, including reasonable counsel fees, actually incurred by the
Indemnitees as a result of or in connection with, and any amount paid in
settlement of, any action, claim or proceeding arising out of or relating in any
way to any actions or omissions of the Indemnitors.
6. TERMINATION. This Agreement shall terminate on the Closing Date or, if
earlier, upon the release by the Escrow Agent of the entire Deposit Amount.
7. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent becomes unavailable
or unwilling to continue as escrow agent under this Agreement, the Escrow Agent
may resign and be discharged from its duties and obligations hereunder by giving
its written resignation to the parties to this Agreement. Such resignation shall
take effect not less than thirty (30) days after it is given to all parties
hereto. In such event, the Shareholder Representative and Purchaser may appoint
a successor escrow agent. If the Shareholder Representative and Purchaser fail
to appoint a successor escrow agent within fifteen (15) days after receiving the
Escrow Agent's written resignation, the Escrow Agent shall have the right to
apply to a court of competent jurisdiction for the appointment of a successor
escrow agent. The successor escrow agent shall execute and deliver to the Escrow
Agent an instrument accepting such appointment, and the successor escrow agent
shall, without further acts, be vested with all the estates, property rights,
powers and duties of the predecessor Escrow Agent as if originally named as
Escrow Agent herein. The Escrow Agent shall act in accordance with joint written
instructions from the Shareholder Representative and Purchaser as to the
transfer of the Deposit Account to a successor escrow agent.
8. SHAREHOLDER REPRESENTATIVE. As provided in the Merger Agreement, the
Selling Parties shall be deemed to have approved the appointment of IBF Fund
Liquidating, LLC as the Shareholder Representative, to give and receive notices
and communications, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and comply with orders of courts with
respect to claims of Purchaser hereunder, and to take all actions necessary or
appropriate in the reasonable judgment of the Shareholder Representative for the
accomplishment of the foregoing.
9. MISCELLANEOUS.
9.1. ATTORNEYS' FEES. In any action at law or suit in equity to enforce or
interpret this Agreement or the rights of any of the parties hereunder, the
prevailing party in such action or suit shall be entitled to receive a
reasonable sum for its attorneys' fees and all other reasonable costs and
expenses incurred in such action or suit.
9.2. NOTICES. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received (a) when delivered by hand, or (b)
two (2) business days after sent by registered mail, or (c) one (1) business day
after sent by courier or express delivery service, or (d) upon electronic
confirmation of receipt after sent by facsimile, to the address or facsimile
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telephone number set forth below (or to such other address or facsimile
telephone number as such party shall have specified in a written notice given to
the other parties hereto):
IF TO PURCHASER: Sunset Brands, Inc.
10990 Wilshire Boulevard
Suite 1220
Los Angeles, California 90024
Attention: Chief Executive Officer
Fax: (310) 478-4601
With a copy to: Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars, 7th Floor
Los Angeles, California 90067
Attention: Robert Steinberg, Esq.
Fax: (310) 203-0567
IF TO THE SHAREHOLDER
REPRESENTATIVE:
IBF Fund Liquidating, LLC
c/o Kaye Scholer LLP
425 Park Avenue
New York, New York 10022
Attention: Arthur J. Steinberg, Manager
Fax: (212) 836-8564
With a copy to: Kaye Scholer LLP
425 Park Avenue
New York, NY 10022
Attention: Emanuel S. Cherney, Esq.
Fax: (212) 836-7152
IF TO THE COMPANY: U.S. Mills, Inc.
200 Reservoir Street
Needham, MA 02494-3146
Attention: President
Fax: (781) 444-3411
IF TO ESCROW AGENT: Continental Stock Transfer and Trust Company
17 Battery Place
New York, NY 10004
Attention: Compliance Department
Telephone: (212) 509-4000
Telecopier: (212) 616-7616
The Escrow Agent may assume that any notice of any kind required to be delivered
to the Escrow Agent and any other Person has
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been received by such other Person on the date it has been received by the
Escrow Agent, but the Escrow Agent need not inquire into or verify such receipt.
9.3. HEADINGS. The bold-faced headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
9.4. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
9.5. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the laws of New York that might otherwise govern
under applicable principles of conflicts of law. Each of the parties hereto
irrevocably consents to the exclusive jurisdiction of (a) the Supreme Court of
the State of New York, New York County, and (b) the United States District Court
for the Southern District of New York, for the purposes of any Action arising
out of this Agreement, any related document or certificate or any transaction
contemplated hereby or thereby. Each of the parties hereto agrees to commence
any Action relating hereto either in the United States District Court for the
Southern District of New York or if such Action may not be brought in such court
for jurisdictional reasons, in the Supreme Court of the State of New York, New
York County. Each of the parties hereto further agrees that service of any
process, summons, notice or document by U.S. registered mail to such party's
respective address set forth in Section 9.2 shall be effective service of
process for any Action in New York with respect to any matters to which it has
submitted to jurisdiction in this Section 9.5. Each of the parties hereto
irrevocably and unconditionally waives any objection to the laying of venue of
any Action arising out of this Agreement, or any transaction contemplated hereby
in (i) the Supreme Court of the State of New York, New York County, or (ii) the
United States District Court for the Southern District of New York, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such Action brought in any such court has been
brought in an inconvenient forum.
9.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of each of the parties hereto and each of their
respective permitted successors, assigns, heirs and legatees, if any.
9.7. WAIVER. No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy. No Person shall be deemed to have waived any claim arising
out of this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such Person; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
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9.8. AMENDMENT. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto; provided, however, that any
amendment executed and delivered by the Shareholder Representative shall be
deemed to have been approved by and duly executed and delivered by all of the
Selling Parties.
9.9. SEVERABILITY. In the event that any provision of this Agreement, or
the application of any such provision to any person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
9.10. PARTIES IN INTEREST. Except as expressly provided herein, none of
the provisions of this Agreement, express or implied, is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns, if any.
9.11. ENTIRE AGREEMENT. This Agreement, the Merger Agreement and the other
agreements referred to herein and therein set forth the entire agreement among
the parties hereto with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings, both written and oral, among
or between any of the parties with respect to the subject matter hereof and
thereof.
9.12. WAIVER OF JURY TRIAL. Each of the parties hereto hereby irrevocably
waives any and all right to trial by jury in any action arising out of or
related to this Agreement or the transactions contemplated hereby.
9.13. COOPERATION. Each of the parties hereto agrees to cooperate fully
with the other parties to this Agreement and to execute and deliver such further
documents, certificates, agreements and instruments and to take such other
actions as may be reasonably requested by the other parties hereto in order to
evidence or reflect the transactions contemplated by this Agreement and to carry
out the intent and purposes of this Agreement.
9.14. CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "INCLUDE" and "INCLUDING,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "WITHOUT LIMITATION."
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(d) Except as otherwise indicated, all references in this Agreement
to "SECTIONS" and "EXHIBITS" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
"PURCHASER"
SUNSET BRANDS, INC., a Nevada
corporation
By /s/ Todd Sanders
------------------------
Name: Todd Sanders
Title: President and CEO
"COMPANY"
U.S. MILLS, INC., a Delaware corporation
By /s/ Charles Verde
--------------------
Name: Charles Verde
Title: President
"SHAREHOLDER REPRESENTATIVE"
IBF FUND LIQUIDATING, LLC
By: /s/ Arthur J. Steinberg
-----------------------
Name: Arthur J. Steinberg
Title: Manager
"ESCROW AGENT"
CONTINENTAL STOCK TRANSFER
AND TRUST COMPANY
By /s/ Frank A. DiPaolo
-------------------------
Name: Frank A. DiPaolo
Title: CFO
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EXHIBIT A
Fee Schedule for Escrow Agent
$2,500.00 per annum or any portion thereof payable in advance
Distribution charges:
$10.00 per check
$25.00 per wire
$50.00 per check returned (NSF) check
$50.00 lost check replacement fee
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