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
TABLE OF CONTENTS
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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
LIST OF EXHIBITS
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.
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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.
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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.
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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
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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
8
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.
9
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
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:
11
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;
12
(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
13
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
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
15
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.
16
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,
17
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;
18
(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
19
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 written warranty, guaranty, or other
similar undertaking with respect to contractual performance extended by
any Acquired Company other than in the ordinary course of business;
(xi) is a distribution agreement or sales
representative agreement; and
(xii) is an amendment, supplement, or modification
(whether oral or written) in respect of any of the foregoing.
20
(b) Except as set forth in Section 2.17(b) of the
Disclosure Letter:
(i) no Seller (and no Related Person of any
Seller) has or may acquire any rights under, and no Seller has or may
become subject to any obligation or liability under, any Contract that
relates to the business of, or any of the assets owned or used by, any
Acquired Company; and
(ii) to the Knowledge of the Principal Sellers
and the Company, no officer, director, agent, employee, consultant, or
contractor of any Acquired Company is bound by any Contract that
purports to limit the ability of such officer, director, agent,
employee, consultant, or contractor to (A) engage in or continue any
conduct, activity, or practice relating to the business of any Acquired
Company, or (B) assign to any Acquired Company or to any other Person
any rights to any invention, improvement, or discovery.
(c) To the Knowledge of the Principal Sellers and the
Company, each Material Contract is in full force and effect and is valid and
enforceable in accordance with its terms.
(d) Except as set forth in Section 2.17(d) of the
Disclosure Letter:
(i) each Acquired Company is in material
compliance with all applicable terms and requirements of each Contract
under which such Acquired Company has or had any obligation or
liability or by which such Acquired Company or any of the assets owned
or used by such Acquired Company is or was bound;
(ii) to the Knowledge of the Principal Sellers
and the Company, each other Person that has or had any obligation or
liability under any Contract under which an Acquired Company has or had
any rights is in full compliance with all applicable terms and
requirements of such Contract;
(iii) no event has occurred or circumstance exists
that (with or without notice or lapse of time) may reasonably be
expected to contravene, conflict with, or result in a violation or
breach of, or give any Acquired Company or, to the Knowledge of the
Principal Sellers and the Company, any other 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; and
(iv) no Acquired Company has given to or received
from any other Person, at any time, any notice or other communication
(whether oral or written) regarding any actual, alleged, possible, or
potential violation or breach of, or default under, any Contract.
(e) Section 2.17(e) of the Disclosure Letter sets forth a
list of all outlet and retail store locations operated by any Acquired Company
or by a third party pursuant to a contract with an Acquired Company.
2.18 Insurance. The Company has made available to Buyer accurate
and complete copies of all material fire and casualty, general liability,
business interruption, product liability,
21
and sprinkler and water damage insurance policies maintained by the Company, and
if policies have been issued to, but not received by, the Company, binders
relating to such policies (the "Insurance Policies"). Section 2.18 of the
Disclosure Letter contains a list and brief description of all the Insurance
Policies, along with a list of each outstanding claim under such Policies for an
amount in excess of $5,000. The Insurance Policies are in full force and effect
and the Company does not maintain self-insurance practices. The Insurance
Policies, taken together, provide adequate insurance coverage for the assets and
the operations of the Acquired Companies for all risks to which the Acquired
Companies are normally exposed.
2.19 Environmental Matters.
(a) The Acquired Companies (i) are in compliance and are
not subject to any liability with respect to any applicable Environmental Laws,
(ii) are not subject to investigation, suit, claim, action or proceeding,
pending or, to the Knowledge of the Company or the Principal Sellers,
threatened, relating to or arising under Environmental Laws, (iii) hold or have
applied for all Environmental Permits necessary to conduct their current
operations, and (iv) are in material compliance with their respective
Environmental Permits.
(b) To the Knowledge of the Company or the Principal
Sellers, there are no facts, circumstances or conditions that could reasonably
be expected to form the basis for any investigation, suit, claim, action,
proceeding or liability against or affecting any Acquired Company relating to or
arising under Environmental Laws.
(c) No Acquired Company has received any written notice,
demand, letter, claim or request for information alleging that the Acquired
Company may be in violation of, or liable under, any Environmental Law.
(d) No Acquired Company (i) has entered into or agreed to
any consent decree or order or are subject to any judgment, decree or order
relating to compliance with Environmental Laws, Environmental Permits or the
investigation, monitoring, treatment, remediation, removal or cleanup of
Hazardous Materials; or (ii) is an indemnitor in connection with any claim
threatened or asserted in writing by any third-party indemnitee for any
liability under any Environmental Law or relating to any Hazardous Materials.
2.20 Employees.
(a) To the Knowledge of the Principal Sellers and the
Company, no employee or director of any Acquired Company is a party to, or is
otherwise bound by, any agreement or arrangement, including any confidentiality,
noncompetition, or proprietary rights agreement, between such employee or
director and any other Person ("Proprietary Rights Agreement") that in any way
adversely affects or will adversely affect (i) the performance of his duties as
an employee or director of the Acquired Companies, or (ii) the ability of any
Acquired Company to conduct its business, including any Proprietary Rights
Agreement with Sellers or the Acquired Companies by any such employee or
director. To the Principal Sellers' and the Company's Knowledge, no director,
officer, or other key employee of any Acquired Company has provided any Acquired
Company with notice that he or she intends to terminate his employment with such
Acquired Company.
(b) Intentionally Omitted.
22
2.21 Labor Relations; Compliance. Since January 1, 2000, no
Acquired Company has been or is a party to any collective bargaining or other
labor Contract. Since January 1, 2003, there has not been, there is not
presently pending or existing, and to Sellers' and Acquired Companies' Knowledge
there is not Threatened, (a) any strike, slowdown, picketing, work stoppage, or
employee grievance process, (b) any Proceeding against or affecting any Acquired
Company relating to the alleged violation of any Legal Requirement pertaining to
labor relations or employment matters, including any charge or complaint filed
by an employee or union with the National Labor Relations Board, the Equal
Employment Opportunity Commission, or any comparable Governmental Body,
organizational activity, or other labor or employment dispute against or
affecting any of the Acquired Companies or their premises, or (c) any
application for certification of a collective bargaining agent. To Sellers' and
Acquired Companies' Knowledge, no event has occurred or circumstance exists that
could provide the basis for any work stoppage or other labor dispute. There is
no lockout of any employees by any Acquired Company, and no such action is
contemplated by any Acquired Company. Each Acquired Company has complied in all
material respects with all Legal Requirements relating to employment, equal
employment opportunity, nondiscrimination, immigration, wages, hours, benefits,
collective bargaining, the payment of social security and similar taxes,
occupational safety and health, and plant closing. No Acquired Company is liable
for the payment of any compensation, damages, taxes, fines, penalties, or other
amounts, however designated, for failure to comply with any of the foregoing
Legal Requirements.
2.22 Intellectual Property.
(a) Intellectual Property Assets. The term "Intellectual
Property Assets" includes:
(i) the name "DC Shoes" and "DC Shoe Co. USA",
all fictional business names, trading names, registered and
unregistered trademarks, service marks, domain names, and applications
(collectively, "Marks");
(ii) all patents, patent applications, and
inventions and discoveries that may be patentable (collectively,
"Patents");
(iii) all copyrights in both published works and
unpublished works (collectively, "Copyrights"); and
(iv) all know-how, trade secrets, confidential
information, customer lists, software, technical information, data,
process technology, plans, drawings, and blue prints (collectively,
"Trade Secrets"); owned, used, or licensed by any Acquired Company as
licensee or licensor.
23
(b) Agreements. Section 2.22(b) of the Disclosure Letter
contains a complete and accurate list and summary description, including any
royalties paid or received by the Acquired Companies, of all Contracts relating
to the Intellectual Property Assets to which any Acquired Company is a party or
by which any Acquired Company is bound, except for any license implied by the
sale of a product and perpetual, paid-up licenses for commonly available
software programs with a value of less than $20,000 under which an Acquired
Company is the licensee. There are no outstanding and, to Sellers' and Acquired
Companies' Knowledge, no Threatened disputes or disagreements with respect to
any such agreement.
(c) Know-How Necessary for the Business
(i) The Intellectual Property Assets are all
those necessary for the operation of the Acquired Companies' businesses
as they are currently conducted. One or more of the Acquired Companies
is the owner of all right, title, and interest in and to each of the
Intellectual Property Assets, free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims,
and has the right to use without payment to a third party all of the
Intellectual Property Assets, except as set forth in Section 2.22(c) of
the Disclosure Letter.
(ii) To the Knowledge of the Principal Sellers
and the Company, no employee of any Acquired Company has entered into
any Contract that restricts or limits in any way the scope or type of
work in which the employee may be engaged or requires the employee to
transfer, assign, or disclose information concerning his work to anyone
other than one or more of the Acquired Companies.
(d) Patents
(i) Section 2.22(d) of the Disclosure Letter
contains a complete and accurate list and summary description of all
Patents. One or more of the Acquired Companies is the owner of all
right, title, and interest in and to each of the Patents, free and
clear of all liens, security interests, charges, encumbrances,
entities, and other adverse claims.
(ii) All of the issued Patents are currently in
compliance with formal legal requirements (including payment of filing,
examination, and maintenance fees and proofs of working or use), are
valid and enforceable, and are not subject to any maintenance fees or
taxes or actions falling due within thirty days after the Closing Date.
(iii) No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition proceeding. To
Sellers' and Acquired Companies' Knowledge, there is no potentially
interfering patent or patent application of any third party.
(iv) To the Principal Sellers' and the Company's
Knowledge, no Patent is infringed or has been challenged or threatened
in any way. None of the products manufactured and sold, nor any process
or know-how used, by any Acquired Company infringes or is alleged to
infringe any patent or other proprietary right of any other Person.
24
(v) All products made, used, or sold under the
Patents have been marked with the proper patent notice.
(e) Trademarks
(i) Section 2.22(e) of the Disclosure Letter
contains a complete and accurate list, including jurisdictions where
registered (if applicable), of all (A) registered Marks, (B)
applications for registration of Marks and (C) material unregistered
Marks. One or more of the Acquired Companies is the owner of all right,
title, and interest in and to each of the Marks, free and clear of all
liens, security interests, charges, encumbrances, equities, and other
adverse claims.
(ii) All Marks that have been registered with the
United States Patent and Trademark Office and any comparable foreign
patent or trademark offices are currently in compliance with all formal
legal requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are
valid and enforceable, and are not subject to any maintenance fees or
taxes or actions falling due within ninety days after the Closing Date.
(iii) No Mark has been or is now involved in any
opposition, invalidation, or cancellation and, to Sellers' and Acquired
Companies' Knowledge, no such action is Threatened with the respect to
any of the Marks.
(iv) To the Principal Sellers' and the Company's
Knowledge, there is no potentially interfering trademark or trademark
application of any third party.
(v) To the Principal Sellers' and the Company's
Knowledge, no Mark is infringed or has been challenged or threatened in
any way. None of the Marks used by any Acquired Company infringes or is
alleged to infringe any trade name, trademark, or service mark of any
third party.
(f) Copyrights
(i) Section 2.22(f) of the Disclosure Letter
contains a complete and accurate list and summary description of all
Copyrights. One or more of the Acquired Companies is the owner of all
right, title, and interest in and to each of the Copyrights, free and
clear of all liens, security interests, charges, encumbrances,
equities, and other adverse claims.
(ii) All the Copyrights have been registered and
are currently in compliance with formal legal requirements, are valid
and enforceable, and are not subject to any maintenance fees or taxes
or actions falling due within thirty days after the date of Closing.
(iii) To the Principal Sellers' and the Company's
Knowledge, no Copyright is infringed or has been challenged or
threatened in any way. None of the subject matter of any of the
Copyrights infringes or is alleged to infringe any copyright of any
third party or is a derivative work based on the work of a third party.
25
(g) Trade Secrets
(i) The Acquired Companies have taken all
reasonable precautions to protect the secrecy, confidentiality, and
value of their Trade Secrets.
(ii) One or more of the Acquired Companies has
good title and an absolute (but not necessarily exclusive) right to use
the Trade Secrets. The Trade Secrets are not part of the public
knowledge or literature, and, to the Principal Sellers' and the
Company's Knowledge, have not been used, divulged, or appropriated
either for the benefit of any Person (other than one or more of the
Acquired Companies) or to the detriment of the Acquired Companies. No
Trade Secret is subject to any adverse claim or has been challenged or,
to the Knowledge of the Principal Sellers and the Company, Threatened
in any way.
2.23 Certain Payments. Since January 1, 2000, no Acquired Company
or, to the Knowledge of the Principal Sellers and the Company, director,
officer, agent, or employee of any Acquired Company, or any agent of any
Acquired Company, has (i) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any Person, private or public,
regardless of form, whether in money, property, or services in violation of any
Legal Requirement, or (ii) established or maintained any fund or asset that has
not been recorded in the books and records of the Acquired Companies.
2.24 Relationships With Related Persons. No Seller or any Related
Person of Sellers or of any Acquired Company has, or has had, any interest in
any property (whether real, personal, or mixed and whether tangible or
intangible), used in or pertaining to the Acquired Companies' businesses. No
Seller or any Related Person of Sellers or of any Acquired Company is, or since
January 1, 2002 has owned (of record or as a beneficial owner) an equity
interest or any other financial or profit interest in, a Person that has (i) had
business dealings or a material financial interest in any transaction with any
Acquired Company, or (ii) engaged in competition with any Acquired Company with
respect to any line of the products or services of such Acquired Company (a
"Competing Business") in any market presently served by such Acquired Company
except for less than one percent of the outstanding capital stock of any
Competing Business that is publicly traded on any recognized exchange or in the
over-the-counter market. To the Knowledge of the Principal Sellers and the
Company, no Seller or any Related Person of Sellers or of any Acquired Company
is a party to any Contract with, or has any claim or right against, any Acquired
Company.
2.25 Brokers or Finders. Sellers, the Acquired Companies and their
agents have incurred no obligation or liability, contingent or otherwise, for
brokerage or finders' fees or agents' commissions or other similar payment in
connection with this Agreement, other than fees owed to Sage Partners Securities
and its affiliates.
26
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each Seller severally represents and warrants to Buyer as follows:
3.1 Title to Shares. Such Seller is the owner of the number of
Shares indicated below such Seller's signature on the signature page to this
Agreement. No other person or entity has any right, title, or interest,
beneficially or of record, in or to the Shares owned by such Seller and such
Shares are free and clear of any claims, liens, encumbrances, security
agreements, equities, options, charges, or restrictions, and can be delivered
and surrendered to Buyer pursuant hereto without obtaining the consent or
approval of any other person or governmental authority. Upon the transfer and
delivery of such Shares to Buyer in accordance with this Agreement and payment
therefor, Buyer will become the owner and holder of all of such Shares free and
clear of all liens, encumbrances, pledges, claims, charges and restrictions on
transfer.
3.2 Authority; No Conflict.
(a) This Agreement constitutes the legal, valid, and
binding obligation of such Seller, enforceable against such Seller 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. Upon the execution and delivery by Seller of the Seller's Release and
the Noncompetition Agreement (collectively, the "Seller's Closing Documents"),
the Seller's Closing Documents will constitute the legal, valid, and binding
obligations of Seller, enforceable against Seller in accordance with their
respective 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. Seller has the right, power, authority, and capacity to execute and
deliver this Agreement and the Seller's Closing Documents and to perform its,
his or her obligations under this Agreement and the Seller's Closing Documents.
(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) conflict
with, or result in a violation of, or give any Governmental Body or other Person
the right to challenge any of the Contemplated Transactions or to exercise any
remedy or obtain any relief under, any Legal Requirement or any Order to which
Seller, or any of the assets owned or used by Seller, may be subject.
(c) Seller is not 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.
3.3 Restricted Securities. Such Seller understands that the Buyer
Stock will be issued by Buyer without registration under the Securities Act and
without qualification and/or registration under applicable state securities laws
pursuant to exemptions from registration and/or qualification contained in the
Securities Act and applicable state securities laws. Such Seller understands
that the foregoing exemptions depend upon, among other things, the bona fide
27
nature of such Seller's investment intent as expressed herein. Neither the Buyer
Stock nor any interest in the Buyer Stock will be sold, transferred, or
otherwise disposed of by such Seller without registration and/or qualification
under the Securities Act and applicable state securities laws unless the sale or
other disposition is made in compliance with exemptions from such registration
and qualification requirements with respect to such resale or disposition and,
upon the request of Buyer, such Seller, prior to consummation of any such resale
or disposition, provides Buyer an opinion of counsel satisfactory to Buyer to
the effect that the contemplated transfer may be made without violating the
Securities Act or applicable state securities laws.
3.4 Investment Intent. Such Seller is acquiring the Buyer Stock
for investment purposes only, for such Seller's own account and not with a view
to or for sale in connection with any distribution of the Buyer Stock to others
within the meaning of the Securities Act.
3.5 Accredited Investor Status. Such Seller is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act.
3.6 Residence. Such Seller's principal residence is shown below
such Seller's signature on the signature page to this Agreement.
3.7 Legends. Such Seller acknowledges that the certificates
representing any of the Buyer Stock to be issued to such Seller will contain
legends which prohibit an offer to transfer or a transfer of all or any portion
of the Buyer Stock unless the Buyer Stock is registered under the Securities Act
or unless an exemption from registration is available with respect to such
resale or disposition.
Buyer need not register a transfer, and may instruct its transfer agent not to
effect a transfer, of any Securities unless the conditions set forth in Sections
3.3 and 3.7 are satisfied.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as set forth in the attached Buyer's Schedule (which list
exceptions to the following representations and warranties and also contain
matters required to be disclosed pursuant to this Article IV, each of which
corresponds to the numbered sections contained in this Article IV), Buyer
represents and warrants to the Company and the Sellers as follows:
4.1 Organization and Good Standing.
(a) Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, with full corporate 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. Buyer is duly qualified to do business as a foreign
corporation 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.
(b) Buyer has delivered to the Company copies of its
Organizational Documents as currently in effect.
28
4.2 Authority; No Conflict.
(a) This Agreement constitutes the legal, valid, and
binding obligation of Buyer, enforceable against Buyer in accordance with its
terms subject, as to enforcement, to (i) applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect affecting
creditors' rights generally and (ii) general principles of equity.. Upon the
execution and delivery by Buyer of the Employment Agreements (collectively, the
"Buyer's Closing Documents"), the Buyer's Closing Documents will constitute the
legal, valid, and binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms subject, as to enforcement, to (i)
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect affecting creditors' rights generally and (ii)
general principles of equity. Buyer has the absolute and unrestricted right,
power, and authority to execute and deliver this Agreement and the Buyer's
Closing Documents and to perform its obligations under this Agreement and the
Buyer's Closing Documents.
(b) Neither the execution and delivery of this Agreement
by Buyer nor the consummation or performance of any of the Contemplated
Transactions by Buyer will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:
(i) any provision of Buyer's Organizational
Documents;
(ii) any resolution adopted by the board of
directors or the stockholders of Buyer;
(iii) any Legal Requirement or Order to which
Buyer may be subject; or
(iv) any Contract to which Buyer is a party or by
which Buyer may be bound.
Buyer is not and will not be required to 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.
4.3 SEC Reports.
(a) Since January 1, 2001, Buyer has timely filed all
required reports, schedules, and forms with the Securities and Exchange
Commission (collectively, and in each case including all amendments, exhibits
and schedules thereto and documents incorporated by reference therein, the "SEC
Reports"). As of its filing date (or, if amended or superseded by a filing prior
to the date of this Agreement, on the date of such filing), each SEC Report
complied as to form in all material respects with the applicable requirements of
the Securities Act and the Securities Exchange Act, as the case may be. As of
their respective filing dates (or, if amended or superseded by a filing prior to
the date of this Agreement, on the date of such filing), none of the SEC Reports
contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements made therein, in the light of the
circumstances in
29
which they were made, not misleading, except to the extent corrected by a
subsequently filed SEC Report.
(b) The consolidated financial statements (including any
related notes) included in the SEC Reports (the "Buyer Financial Statements")
fairly present in all material respects the consolidated financial position,
statements of equity, cash flows and changes in stockholders' equity of Buyer
for the respective fiscal periods or as of the respective dates therein set
forth; and each of such statements (including the related notes, where
applicable) complies in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto; and each of such statements (including the related notes, where
applicable) has been prepared in accordance with Buyer GAAP consistently applied
during the periods involved, except, in each case, as indicated in such
statements or in the notes thereto, and provided that unaudited interim
financial statements may not contain footnotes and may be subject to normal
year-end audit adjustments.
4.4 No Material Adverse Change. Since October 31, 2003, except as
disclosed in the SEC Reports, there has not been any material adverse change in
the business, operations, properties, prospects, assets, or condition of Buyer,
and no event has occurred or circumstance exists that may result in such a
material adverse change.
4.5 Issuance of Shares. All shares of Buyer Stock to be issued to
Sellers pursuant to this Agreement will, when issued pursuant to the terms of
this Agreement, be duly authorized, validly issued, fully paid and nonassessable
and free of preemptive rights, and free and clear of all liens and encumbrances
and free of any restriction on transfer, other than restrictions on transfer
under applicable federal and state securities laws.
4.6 Investment Intent. Buyer is acquiring the Shares for its own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act.
4.7 Brokers or Finders. Other than fees payable to Citigroup
Global Markets Inc., Buyer and its officers and agents have incurred no
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement and will indemnify and hold Sellers harmless from any such payment
alleged to be due by or through Buyer as a result of the action of Buyer or its
officers or agents.
ARTICLE V
COVENANTS OF COMPANY AND SELLERS PRIOR TO CLOSING DATE
5.1 Access and Investigation. Subject to any Legal Requirement,
between the date of this Agreement and the Closing Date, the Company and
Principal Sellers will, and will cause each Acquired Company and its
Representatives to, (a) afford Buyer and its Representatives and prospective
lenders and their Representatives (collectively, "Buyer's Advisors") reasonable
access during normal business hours to each Acquired Company's personnel,
properties, contracts, books and records, and other documents and data, (b)
furnish Buyer and Buyer's Advisors with copies of all such contracts, books and
records, and other existing documents and data as Buyer may reasonably request,
and (c) furnish Buyer and Buyer's Advisors with such
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additional financial, operating, and other data and information as Buyer may
reasonably request, in each case, so long as such actions (1) do not materially
interfere with the business of the Acquired Companies and (2) would not violate
any Legal Requirement. No information or knowledge obtained in any investigation
pursuant to this Section 5.1 shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to the
obligations of the parties to consummate the transactions contemplated herein.
5.2 Operation of the Businesses of the Acquired Companies. Between
the date of this Agreement and the Closing Date, the Company and Principal
Sellers will, and will cause each Acquired Company to:
(a) conduct the business of such Acquired Company only in
the ordinary course of business;
(b) use commercially reasonable efforts to preserve
intact the current business organization of such Acquired Company, keep
available the services of the current officers, employees, and agents of such
Acquired Company, and maintain the relations and goodwill with suppliers,
customers, landlords, creditors, employees, agents, and others having business
relationships with such Acquired Company;
(c) confer with Buyer concerning operational and
technical matters of a material nature;
(d) otherwise report periodically to Buyer concerning the
status of the business, operations, and finances of such Acquired Company; and
(e) cooperate with Buyer in terminating the Company's DC
Shoes Incentive Plan, DC Shoes 401(k) Plan and the Employee Trust at or prior to
Closing.
5.3 Negative Covenant. Except as otherwise expressly permitted by
this Agreement or disclosed on Section 5.3 of the Disclosure Letter, between the
date of this Agreement and the Closing Date, the Company and Sellers will not,
and will cause each Acquired Company not to, without the prior consent of Buyer,
(i) take any affirmative action, or fail to take any commercially reasonable
action within their or its control, as a result of which any of the changes or
events listed in Section 2.16 is likely to occur or (ii) open or authorize by
license or otherwise the opening of any retail stores (including outlet stores)
other than those set forth in Section 2.17 of the Disclosure Letter.
5.4 HSR Filing. As promptly as practicable after the date of this
Agreement (and in any event, within twenty (20) days after the date hereof), the
Company and Sellers will, in cooperation with Buyer, complete and file with the
appropriate authorities the pre-merger notification forms and any other
documents required under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder (the "HSR Act"). It
is agreed that Buyer shall pay all filing fees due from the parties in
connection with compliance with the HSR Act.
5.5 Required Approvals. As promptly as practicable after the date
of this Agreement, the Company and Sellers will, and will cause each Acquired
Company to, make all filings
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required by Legal Requirements (including, without limitation, such requirements
in connection with the HSR Act and antitrust and competition laws and
regulations of any applicable jurisdiction) to be made by them in order to
consummate the Contemplated Transactions. Between the date of this Agreement and
the Closing Date, the Company and Sellers will, and will cause each Acquired
Company to, (a) reasonably cooperate with Buyer with respect to all filings that
Buyer elects to make or is required by Legal Requirements to make in connection
with the Contemplated Transactions, and (b) reasonably cooperate with Buyer in
obtaining all consents required by the Buyer to consummate the transactions
under this Agreement.
5.6 Notification. Between the date of this Agreement and the
Closing Date, the Company and each Seller will notify Buyer as soon as
practicable in writing if such Seller or any Acquired Company becomes aware of
any fact or condition that causes or constitutes a Breach of any of the
Company's or Sellers' representations and warranties as of the date of this
Agreement. During the same period, the Company and each Seller will notify Buyer
as soon as practicable of the occurrence of any Breach of any covenant of the
Company or Sellers in this Article V or of the occurrence of any event that may
make the satisfaction of the conditions in Article VIII impossible or unlikely.
5.7 Payment of Indebtedness by and to Related Persons.
(a) Except as expressly provided in this Agreement, the
Company and Sellers will cause all indebtedness owed to an Acquired Company by
any Seller or any Related Person of any Seller to be paid in full prior to
Closing.
(b) The Company and Seller will cause all indebtedness
owed to any Seller or any Related Person of any Seller by an Acquired Company to
be paid in full prior to Closing.
5.8 No Negotiation. Until such time, if any, as this Agreement is
terminated pursuant to Article X, the Company and Sellers will not, and will
cause each Acquired Company and each of their Representatives not to, directly
or indirectly solicit, initiate, or encourage any inquiries or proposals from,
discuss or negotiate with, provide any non-public information to, or consider
the merits of any unsolicited inquiries or proposals from, any Person (other
than Buyer) relating to any transaction involving the sale of the business or
assets (other than in the ordinary course of business) of any Acquired Company,
or any of the capital stock of any Acquired Company, or any merger,
consolidation, business combination, or similar transaction involving any
Acquired Company.
5.9 Commercially Reasonable Efforts. Between the date of this
Agreement and the Closing Date, Sellers will use their commercially reasonable
efforts to cause the conditions in Articles VIII and IX to be satisfied.
5.10 Sellers' Representatives.
(a) In order to administer efficiently the rights and
obligations of the Sellers under this Agreement, the Sellers hereby designate
and appoint Damon Way and Kenneth Block as the Sellers' Representatives, to
jointly serve as the Sellers' agent and attorney-in-fact for the limited
purposes set forth in this Section 5.10 of this Agreement.
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(b) Each of the Sellers hereby appoints the Sellers'
Representatives as such Seller's agent, proxy and attorney-in-fact, with full
power of substitution, for all purposes set forth in this Agreement, including,
without limitation, the full power and authority on such Seller's behalf (i) to
consummate the transactions contemplated by this Agreement, (ii) to disburse any
funds received hereunder to the Sellers, (iii) to execute and deliver on behalf
of each Seller any amendment or waiver under this Agreement, (iv) to retain
legal counsel and other professional services, at the expense of the Sellers, in
connection with the performance by the Sellers' Representatives of this
Agreement, and (v) to do each and every act and exercise any and all rights
which such Seller or Sellers are permitted or required to do or exercise under
this Agreement and the other agreements, documents and certificates executed in
connection herewith. Each of the Sellers agrees that such agency and proxy are
coupled with an interest, are therefore irrevocable without the consent of the
Sellers' Representatives and shall survive the death, bankruptcy or other
incapacity of any Seller; provided that such agency and proxy shall terminate if
this Agreement is terminated pursuant to its terms.
(c) Each of the Sellers hereby agrees that any amendment
or waiver under this Agreement and any action taken on behalf of the Sellers to
enforce the rights of the Sellers under this Agreement, and any action taken
with respect to any indemnification claim pursuant to Article XI (including any
action taken to object to, defend, compromise or agree to the payment of such
claim), shall be effective if approved in writing by the Sellers'
Representatives and the holders of a majority of the Shares (including any
Shares held by the Sellers' Representatives), or, in the case of any amendment
or waiver made or given or action taken after the Closing, if so approved by
persons who were the holders of a majority of the Shares immediately prior to
the Closing, and that each and every action so taken shall be binding and
conclusive on every Seller, whether or not such Seller had notice of, or
approved, such amendment or waiver.
(d) The Sellers shall share, on a pro rata basis in
proportion to the number of Shares held by them immediately prior to the
Closing, the professional fees and expenses of any attorneys, accountants or
other advisors retained by the Sellers' Representatives in connection with any
action taken or not taken as the Sellers' Representatives. The Sellers'
Representatives shall be entitled to request in writing payment from each Seller
its ratable portion of amounts payable to attorneys, accountants or other
advisors, which amounts shall be paid upon such request to such individuals or
the Sellers' Representatives, as set forth in the request submitted by the
Sellers' Representatives.
(e) Damon Way and Kenneth Block shall jointly serve as
the Sellers' Representatives until one resigns or is otherwise unable or
unwilling to serve. If one of the Sellers' Representatives resigns, the other
shall assume such role individually. In the event that both Sellers'
Representatives resign from such position or are otherwise unable or unwilling
to serve, the remaining Sellers shall select, by the vote of the holders of a
majority of the Shares, or, if such event occurs after the Closing, the vote of
the holders of a majority of the Shares immediately prior to Closing, a
successor representative to fill such vacancy, shall provide prompt written
notice to Buyer of such change and such substituted representative shall then be
deemed to be the Sellers' Representatives for all purposes of this Agreement.
(f) Upon reasonable notice, Buyer shall, and shall cause
its Subsidiaries and its and their respective representatives to, provide the
Sellers' Representatives reasonable access
33
to all its personnel that were formerly employees of the Company and all
properties, books, Contracts, commitments and records of the Company and its
Subsidiaries to the extent such access is reasonably required for Sellers'
Representatives to fulfill its obligations under this Agreement.
5.11 Audited Financial Statements. The Company and Principal
Sellers will use their commercially reasonable efforts to cause the Audited
Financial Statements to be completed on or prior to April 30, 2004.
5.12 Employee List. The Company and Principal Sellers shall deliver
to Buyer on or prior to Closing a complete and accurate list of the following
information for each employee or director of the Acquired Companies, including
each employee on leave of absence or layoff status: employer; name; job title;
current compensation paid or payable and any change in compensation since
January 1, 2003; vacation accrued; and service credited for purposes of vesting
and eligibility to participate under any Acquired Company's pension, retirement,
profit-sharing, thrift-savings, deferred compensation, stock bonus, stock
option, cash bonus, employee stock ownership (including investment credit or
payroll stock ownership), severance pay, insurance, medical, welfare, or
vacation plan, other Employee Pension Benefit Plan or Employee Welfare Benefit
Plan, or any other employee benefit plan or any Director Plan.
ARTICLE VI
COVENANTS OF BUYER PRIOR TO CLOSING DATE
6.1 Approvals of Governmental Bodies. As promptly as practicable
after the date of this Agreement, Buyer will make all filings required by Legal
Requirements (including, without limitation, such requirements in connection
with the HSR Act and antitrust and competition laws and regulations of any
applicable jurisdiction) to be made by it to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Buyer
will (i) reasonably cooperate with the Company and Sellers with respect to all
filings that the Company and Sellers are required by Legal Requirements to make
in connection with the Contemplated Transactions, and (ii) reasonably cooperate
with Sellers and the Company in obtaining all consents required by the Company
and the Sellers to consummate the transactions under this Agreement; provided
that this Agreement will not require Buyer to dispose of or make any change in
any portion of its business or to incur any other burden to obtain a
Governmental Authorization.
6.2 Notification. Between the date of this Agreement and the
Closing Date, Buyer will notify the Company as soon as practicable in writing if
Buyer becomes aware of any fact or condition that causes or constitutes a Breach
of any of Buyer's representations and warranties as of the date of this
Agreement. During the same period, Buyer will notify the Company as soon as
practicable of the occurrence of any Breach of any covenant of Buyer in this
Article VI or of the occurrence of any event that may make the satisfaction of
the conditions in Article IX impossible or unlikely.
6.3 HSR Filing. As promptly as practicable after the date of this
Agreement, the Buyer will, in cooperation with the Company and Sellers, complete
and file with the appropriate authorities the pre-merger notification forms and
any other documents required under the HSR
34
Act. It is agreed that Buyer shall pay all filing fees due from the parties in
connection with compliance with the HSR Act.
6.4 Commercially Reasonable Efforts. Except as set forth in the
proviso to Section 6.1, between the date of this Agreement and the Closing Date,
Buyer will use its commercially reasonable efforts to cause the conditions in
Articles VIII and IX to be satisfied.
6.5 NYSE. Buyer shall take all actions necessary and advisable to
have the shares of Buyer Stock issuable in accordance with this Agreement
authorized for listing on the New York Stock Exchange, subject to official
notice of issuance.
6.6 Options. Subject to stockholder approval of an amendment to
Buyer's 2000 Stock Option Plan to increase the number of shares reserved for
issuance thereunder, options to purchase an aggregate of 250,000 shares of Buyer
Stock shall be granted effective as of the Closing by the Buyer pursuant to the
Buyer's 2000 Stock Incentive Plan to those employees or consultants of the
Company designated by the Seller's Representatives (collectively, the
"Options").
6.7 Strategic Discussions. The management of the Company and Buyer
agree to meet at a time and location mutually acceptable to the parties prior to
the Closing to discuss the intended future operations of the Company after the
Closing.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Removal of Transfer Restrictions. In the event of any sale of
Buyer Stock issued pursuant to this Agreement by the Sellers, any Legend shall
be removed by the Buyer, or the transfer agent of Buyer at the discretion of the
Buyer, and the Buyer and/or transfer agent shall issue a certificate without any
Legend to such Seller, if (a) the sale of such Buyer Stock is registered under a
registration statement effective under the Securities Act (including
registration pursuant to Rule 415 under the Securities Act) filed by the Buyer
with the SEC (including without limitation the Buyer Registration Statement);
(b) the holder has provided the Buyer with an opinion of counsel, in form,
substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Buyer Stock
may be made without registration under the Securities Act; or (c) such Buyer
Stock is sold in compliance with Rule 144 under the Securities Act.
7.2 Preparation of the Buyer Registration Statement. Buyer shall
use all commercially reasonable efforts to prepare and file with the Securities
and Exchange Commission ("SEC") a registration statement on Form S-3 (the "Buyer
Registration Statement") for an offering to be made on a delayed or continuous
basis pursuant to Rule 415 of the Securities Act registering the resale of the
shares of Buyer Stock to be issued to Danny Way and Colin McKay (the "Holders of
Registrable Securities") pursuant to Article I hereof within thirty (30) days
after the Closing Date. Buyer shall use all reasonable efforts to have the Buyer
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing. Buyer shall also take any reasonable action
required to be taken under any applicable state securities laws in connection
with the resale of Buyer Stock issued pursuant to
35
this Agreement to the Holders of Registrable Securities and the Holders of
Registrable Securities shall furnish all information concerning the Holders of
Registrable Securities as may be reasonably requested in connection with any
such action. Buyer will advise the Holders of Registrable Securities, promptly
after it receives notice thereof, of the time when the Buyer Registration
Statement has become effective or any supplement or amendment has been filed,
the issuance of any stop order, the suspension of the qualification of the Buyer
Stock registered thereon, or any request by the SEC for amendment of the Buyer
Registration Statement or comments thereon and responses thereto or requests by
the SEC for additional information. Buyer shall furnish the Holders of
Registrable Securities with such number of copies of the prospectus contained in
the Buyer Registration Statement, as declared effective by the SEC, as may be
reasonably requested in order to transfer the Buyer Stock pursuant to the Buyer
Registration Statement. At the request of the Holders of Registrable Securities,
the Buyer shall promptly file any required prospectus supplement and will
furnish the Holders of Registrable Securities, without charge, as many copies of
such prospectus supplement of the then effective prospectus supplement in order
to transfer the Buyer Stock pursuant to the Buyer Registration Statement. All
registration expenses incurred by Buyer in connection with the registration of
the shares of Buyer Stock shall be borne by Buyer. Buyer will indemnify each
Seller and each controlling person (as defined in the Securities Act) against
all Damages arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in the Buyer Registration Statement, or
any amendment or supplement thereto; provided that Buyer will not be liable in
any such case to the extent that any Damages arise out of or are based on any
untrue statement or omission or alleged untrue statement or omission, made in
reliance upon and in conformity with written information furnished to Buyer for
use in the Buyer Registration Statement by a Seller. Notwithstanding anything to
the contrary herein, each Seller shall indemnify Buyer and each controlling
person (as defined in the Securities Act) against all Damages arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in the Buyer Registration Statement, or any amendment or supplement
thereto to the extent that any Damages arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to Buyer for use in
the Registration Statement by such Seller. Buyer agrees to use all reasonable
efforts to keep current and effective the Buyer Registration Statement for a
period of three (3) months or until such time as it may be withdrawn pursuant to
the last sentence of this Section 7.2. Buyer may withdraw the Buyer Registration
Statement when the shares of Buyer Stock to be issued pursuant to this Agreement
have been sold by the Sellers or may be sold pursuant to Rule 144 promulgated
under the Securities Act (subject to any volume limitations).
7.3 Certain Tax Matters.
(a) Preparation and Filing of Tax Returns and Payment of
Taxes.
(i) Tax Returns Filed Prior to Closing. The
Sellers' Representatives shall prepare or cause to be prepared and
timely file or shall cause to be timely filed all Tax Returns with
respect to the Acquired Companies or in respect of their businesses,
assets or operations that are required to be filed (taking into account
extensions) prior to the Closing Date. To the extent permitted by
applicable law, such Tax Returns shall be prepared on a basis
reasonably consistent with the past custom and practice of the
36
Acquired Companies. The Sellers' Representatives shall give Buyer a
reasonable opportunity to review such Tax Returns prior to filing and
the Sellers' Representatives shall make such revisions to the returns
as may be reasonably requested by Buyer.
(ii) Tax Returns Filed After Closing -- Tax
Periods Ending on or Before the Closing Date. Buyer shall prepare or
cause to be prepared and file or cause to be filed all Tax Returns for
the Acquired Companies for all periods ending on or prior to the
Closing Date which are filed after the Closing Date. The Buyer shall
give Sellers' Representatives a reasonable opportunity to review such
Tax Returns prior to filing and the Buyer shall make such revisions to
the returns as may be reasonably requested by Sellers' Representatives.
(iii) Tax Returns Filed After Closing -- Tax
Periods Beginning Before and Ending After the Closing Date. The Buyer
shall prepare or cause to be prepared and file or cause to be filed any
Tax Returns of the Acquired Companies for Tax periods which begin
before the Closing Date and end after the Closing Date. The Buyer shall
give Sellers' Representatives a reasonable opportunity to review such
Tax Returns prior to filing and the Buyer shall make such revisions to
the returns as may be reasonably requested by Sellers' Representatives
to the extent such revisions relate to Taxes attributable to the
portion of the period prior to the Closing Date.
(b) Cooperation on Tax Matters; Tax Audits. The Sellers'
Representatives and Buyer and their respective affiliates shall cooperate in
both (i) the preparation of all Tax Returns for any Tax periods for which one
party could reasonably require the assistance of the other party in obtaining
any necessary information and (ii) any subsequent audits, claims, contests,
litigation or other proceedings with respect to Taxes of the Acquired Companies
(collectively, "Tax Proceedings"). Such cooperation shall include, but not be
limited to, furnishing prior years' Tax Returns or return preparation packages
to the extent related to the Acquired Companies illustrating previous reporting
practices or containing historical information relevant to the preparation of
such Tax Returns, and furnishing such other information within such party's
possession requested by the party filing such Tax Returns or participating in
Tax Proceedings, as is relevant to the preparation of such Tax Returns or the
conduct of such Tax Proceedings, respectively. The parties and their respective
affiliates shall make their respective employees and facilities available on a
mutually convenient basis to explain any documents or information provided
hereunder.
7.4 Indemnification of Officers and Directors of the Company.
(a) From and after the Closing, Buyer agrees that it
will, and will cause the Company to, indemnify and hold harmless each present
and former director and officer of the Company and its Subsidiaries other than
the Principal Sellers (the "D&O Indemnified Parties"), against any costs or
expenses (including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities or amounts paid in settlement incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Closing, whether asserted or claimed
prior to, at or after the Closing, to the fullest extent that the Company would
have been permitted under its Organizational Documents and any indemnification
agreements or
37
arrangements in effect on the date hereof to indemnify such D&O Indemnified
Parties subject to applicable Legal Requirements.
(b) In the event that the Company, its Subsidiaries or
Buyer or any of its respective successors or assigns (i) consolidates with or
merges into any other Person and is not the continuing or surviving corporation
or entity of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then, and in each
such case, proper provision will be made so that the successors and assigns of
the Company or Buyer will assume the obligations thereof set forth in this
Section 7.4.
7.5 Payment of Blehm Tax Benefit. To the extent that the Company
actually receives a tax benefit ("Actual Benefit") from the Blehm Tax Benefit,
after either the earlier of an audit of the Blehm Tax Benefit or the statute of
limitations for the tax returns related to the Tax Blehm Benefit have expired,
Buyer shall pay to each Seller the product of one-half of such Actual Benefit
times such Seller's Participating Percentage.
ARTICLE VIII
CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
8.1 Accuracy of Representations.
(a) All of the Company's and Principal Sellers'
representations and warranties contained in this Agreement (other than those in
Article III) must have been true and correct in all respects as of the date of
this Agreement, and must be true and correct in all respects as of the Closing
Date as if made on the Closing Date (except to the extent expressly made as of
an earlier date, in which case as of the earlier date), except where the failure
of such representations and warranties to be true and correct would not,
individually or in the aggregate, result in a Company Material Adverse Effect,
provided the representations and warranties contained in Section 2.3 must be
true in all respects. Buyer shall have received a certificate signed on behalf
of the Company by the chief executive officer of the Company to such effect.
(b) Each of the Sellers' representations and warranties
contained in Article III of this Agreement must have been true and correct in
all material respects as of the date of this Agreement, and must be true and
correct in all material respects as of the Closing Date as if made on the
Closing Date (except to the extent expressly made as of an earlier date, in
which case as of the earlier date), except for the representations and
warranties contained in Section 3.1 shall be true in all respects. Buyer shall
have received a certificate signed on behalf of each Seller to such effect.
8.2 Company's and Sellers' Performance.
(a) All of the covenants and obligations that the Company
and the Sellers are required to perform or to comply with pursuant to this
Agreement at or prior to the Closing must have been duly performed and complied
with in all material respects.
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(b) Each document required to be delivered pursuant to
Section 1.10 must have been delivered.
8.3 Consents. Each of the Consents identified in Section 2.2 of
the Disclosure Letter must have been obtained and must be in full force and
effect, except where the failure to obtain a consent would not reasonably be
expected to cause a Company Material Adverse Effect
8.4 Additional Documents. Each of the following documents must
have been delivered to Buyer:
(a) an opinion of Sellers' counsel, reasonably acceptable
to the Buyer dated the Closing Date, in a form customary related to the
Company's due incorporation and corporate power, due authorization, execution
and delivery of the Agreement, and capitalization (both authorized and
outstanding).
(b) Audited Financial Statements.
8.5 No Proceedings. Since the date of this Agreement, there must
not have been commenced or Threatened against Buyer, or against any Person
affiliated with Buyer, any Proceeding (a) involving any challenge to, or seeking
damages or other relief in connection with, any of the Contemplated Transactions
which could reasonably be expected to have a Buyer Material Adverse Effect or a
Company Material Adverse Effect, or (b) that may have the effect of preventing,
delaying or making illegal, any of the material Contemplated Transactions.
8.6 No Claim Regarding Stock Ownership or Sale Proceeds. There
must not have been made or Threatened by any Person any claim asserting that
such Person (a) is the holder or the beneficial owner of, or has the right to
acquire or to obtain beneficial ownership of, any material amount of stock of,
or any other voting, equity, or ownership interest in, any of the Acquired
Companies, or (b) is entitled to all or any material portion of the Purchase
Price payable for the Shares.
8.7 No Injunction. There must not be in effect any Legal
Requirement or any injunction or other Order that (a) prohibits the sale of the
Shares by Sellers to Buyer, and (b) has been adopted or issued, or has otherwise
become effective, since the date of this Agreement.
8.8 Bank Consent. Buyer shall have received the consent of JP
Morgan, as lead agent for the Buyer's lending group, to this Agreement and the
transactions contemplated hereby.
8.9 HSR Act Waiting Period. All applicable HSR Act waiting
periods, if any, together with any extensions thereof, shall have expired or
terminated.
8.10 Adjusted Audited EBITDA. The Adjusted Audited EBITDA shall
equal or exceed $9,400,000.
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ARTICLE IX
CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell the Shares and to take the other actions
required to be taken by Sellers at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Sellers' Representatives on behalf of Sellers, in whole or in
part):
9.1 Accuracy of Representations. All of Buyer's representations
and warranties contained in this Agreement must have been true and correct in
all respects as of the date of this Agreement and must be true and correct in
all respects as of the Closing Date as if made on the Closing Date (except to
the extent expressly made as of an earlier date, in which case as of such
earlier date), except where the failure of such representations and warranties
to be true and correct would not, individually or in the aggregate, result in a
Buyer Material Adverse Effect. The Company shall have received a certificate
signed on behalf of Buyer by the chief executive officer of Buyer to such
effect.
9.2 Buyer's Performance.
(a) All of the covenants and obligations that Buyer is
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing must have been performed and complied with in all material respects.
(b) Buyer must have delivered each of the documents
required to be delivered by Buyer pursuant to Section 1.10 and must have made
the cash payments required to be made by Buyer pursuant to Section 1.10(b).
9.3 Consents. Each of the Consents identified in Section 2.2 of
the Disclosure Letter must have been obtained and must be in full force and
effect.
9.4 No Injunction. There must not be in effect any Legal
Requirement or any injunction or other Order that (a) prohibits the sale of the
Shares by Sellers to Buyer and (b) has been adopted or issued, or has otherwise
become effective, since the date of this Agreement.
9.5 HSR Act Waiting Period. All applicable HSR Act waiting
periods, if any, together with any extensions thereof, shall have expired or
terminated.
9.6 Buyer's Counsel Legal Opinion. Buyer must have caused an
opinion of Hewitt & O'Neil LLP dated the Closing Date, in the form set forth on
Exhibit 9.4 to be delivered to the Company and the Sellers.
ARTICLE X
TERMINATION
10.1 Termination Events. This Agreement may, by written notice
given prior to or at the Closing to the other parties hereto, be terminated:
40
(a) by the Company if a material Breach of any provision
of this Agreement has been committed by Buyer which (i) would result in a
failure of a condition set forth in Section 9.1 or 9.2 and (ii) is not cured, or
cannot be cured, in all material respects within thirty (30) days after written
notice thereof; provided, however, that the Company's right to terminate this
Agreement under this Section 10.1(a) shall not be available if, at the time of
such intended termination, Buyer has the right to terminate this Agreement under
Section 10.1(b) or (c);
(b) by Buyer if a material Breach of any provision of
this Agreement has been committed by (i) the Company or (ii) any of the Sellers
which (A) would result in a failure of a condition set forth in Section 8.1 or
8.2 and (B) is not cured, or cannot be cured, in all material respects within
thirty (30) days after written notice thereof; provided, however, the Buyer's
right to terminate this Agreement under this Section 10.1(b) shall not be
available if, at the time of such intended termination, the Company has the
right to terminate this Agreement under Sections 10.1(a) or 10.1(c);
(c) (i) by Buyer if any of the conditions in Article VIII
has not been satisfied as of June 1, 2004 and Buyer has not waived such
condition on or before the Closing Date; or (ii) by the Company if any of the
conditions in Article IX has not been satisfied as of June 1, 2004 and the
Company has not waived such condition on or before the Closing Date; provided
that the right to terminate this Agreement under this Section 10.1(c) shall not
be available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Closing to
occur on or before such date; or
(d) by mutual consent of the Company and the Buyer.
10.2 Effect of Termination. Each party's right of termination under
Section 10.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 10.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Sections 12.1 and 12.3 will survive; provided, however,
that if this Agreement is terminated by a party because of the Breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
ARTICLE XI
INDEMNIFICATION; REMEDIES
11.1 Survival; Right to Indemnification Not Affected by Knowledge.
All representations, warranties, covenants, and obligations in this Agreement,
the Schedules, the certificate delivered pursuant to Section 1.10(a)(v), and any
other certificate or document delivered pursuant to this Agreement will survive
the Closing, except those of the Company which shall terminate upon the Closing.
The right to indemnification, payment of Damages or other remedy based on such
representations, warranties, covenants, and obligations will not be affected by
any investigation conducted with respect to, or any Knowledge acquired (or
capable of being acquired) at any time, whether before or after the execution
and delivery of this
41
Agreement, with respect to the accuracy or inaccuracy of or compliance with, any
such representation, warranty, covenant, or obligation. The waiver of any
condition based on the accuracy of any representation or warranty, or on the
performance of or compliance with any covenant or obligation, will not affect
the right to indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
11.2 Indemnification and Payment of Damages by Principal Sellers.
The Principal Sellers, jointly and severally, will indemnify and hold harmless
Buyer, the Acquired Companies, and their respective Representatives,
stockholders, controlling persons, and affiliates (collectively, the "Buyer
Indemnified Persons") for, and will pay to the Buyer Indemnified Persons the
amount of, any loss, liability, claim, damage, expense (including reasonable
costs of investigation and defense and reasonable attorneys' fees) whether or
not involving a third-party claim (collectively, "Damages"), arising, directly
or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by
the Company or the Principal Sellers in this Agreement, the Disclosure Letter,
or any other certificate or document delivered by the Company or the Principal
Sellers pursuant to this Agreement;
(b) any Breach by the Company or any Seller of any
covenant or obligation of the Company or such Seller in this Agreement;
(c) any claim by any Person for brokerage or finder's
fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by any such Person with any Seller or
any Acquired Company (or any Person acting on their behalf) in connection with
any of the Contemplated Transactions;
(d) any claim or action involving or relating to Clay
Blehm (or any affiliate of Clay Blehm) and any of the Acquired Companies or
Buyer relating to the period prior to Closing or the transactions contemplated
by this Agreement;
(e) (i) any Taxes relating to any Tax Returns filed or
required to be filed prior to the Closing Date in excess of the amount accrued
on the Closing Balance Sheet; (ii) any professional fees and other costs
associated with the audit or inquiry relating to Taxes for periods prior to the
Closing Date in excess of the amount accrued on the Closing Balance Sheet
specifically for such items; (iii) any liability of the Company for payroll
taxes together with all interest, penalties, additions to tax and additional
amounts with respect thereto, whether disputed or not on payments or forgiveness
of debt to Clay Blehm in excess of amounts paid or accrued by the Company prior
to the Closing Date; or
(f) Notwithstanding anything to the contrary herein, the
Principal Sellers shall not be liable for any Damages to the Buyer Indemnified
Parties for any breach of Section 2.4(b) hereof if such breach otherwise results
in an adjustment through the EBITDA Reduction or an adjustment under Section
1.3.
11.3 Indemnification and Payment of Damages by Non-Principal
Sellers. Each Non-Principal Seller will indemnify and hold harmless the Buyer
Indemnified Persons for, and will pay to the Buyer Indemnified Persons the
amount of, any Damages arising, directly or indirectly, from or in connection
with:
42
(a) any Breach of any representation or warranty made by
such Seller in this Agreement; or
(b) any Breach by such Seller of any covenant or
obligation of such Seller in this Agreement.
11.4 Indemnification and Payment of Damages by Buyer. Buyer will
indemnify and hold harmless the Company and Sellers and their respective
Representatives and affiliates, and will pay to Sellers the amount of any
Damages arising, directly or indirectly, from or in connection with (a) any
Breach of any representation or warranty made by Buyer in this Agreement or in
any certificate delivered by Buyer pursuant to this Agreement, (b) any Breach by
Buyer of any covenant or obligation of Buyer in this Agreement, (c) any claim by
any Person for brokerage or finder's fees or commissions or similar payments
based upon any agreement or understanding alleged to have been made by such
Person with Buyer (or any Person acting on its behalf) in connection with any of
the Contemplated Transactions; or (d) as set forth in Section 7.2 hereof related
to the Buyer Registration Statement.
11.5 Time Limitations. If the Closing occurs, Sellers will have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, or covenant or obligation, other than those in Sections 2.3, 2.11,
2.13, 2.19 and 3.1, unless on or before February 1, 2006 Buyer notifies Sellers
of a claim specifying the factual basis of that claim in reasonable detail to
the extent then known by Buyer; a claim with respect to Sections 2.3, 2.13, 2.19
or 3.1 may be made at any time; and a claim with respect to Section 2.11 may be
made at any time until all tax liabilities of the Company are decided by final
determination of the Internal Revenue Service, judicial decision or upon thirty
(30) days after the expiration of the statute of limitations, taking into
account any waiver or extension of such applicable statute of limitation. If the
Closing occurs, Buyer will have no liability (for indemnification or otherwise)
with respect to any representation or warranty, or covenant or obligation to be
performed and complied with prior to the Closing Date, unless on or before
February 1, 2006 Sellers notify Buyer of a claim specifying the factual basis of
that claim in reasonable detail to the extent then known by Sellers.
11.6 Limitations on Amount--Sellers.
(a) The Principal Sellers will have no liability (for
indemnification or otherwise) with respect to the matters described in clause
(a) of Section 11.2 (i) until the total of all Damages with respect to such
matters exceeds $3,000,000, and then only for the amount by which such Damages
exceed $3,000,000 or (ii) to the extent the subject matter of the claim is
covered by insurance, and such insurance proceeds have been actually received by
the Buyer Indemnified Persons (net of any costs and expenses incurred in
obtaining such insurance proceeds). If the Sellers pay the Buyer Indemnified
Persons for a claim and subsequently insurance proceeds in respect of such claim
are collected by the Buyer Indemnified Persons, then the Buyer Indemnified
Persons shall remit the insurance proceeds to the Sellers. The Buyer Indemnified
Persons shall use commercially reasonable efforts to obtain from any applicable
insurance company any insurance proceeds in respect of any claim for which the
Buyer Indemnified Persons seek indemnification under this Article XI..
Furthermore, any liability of the Principal Sellers hereunder (for
indemnification or otherwise) shall terminate at such time as the aggregate
amount of Damages paid to Buyer by the Principal Sellers equals $25,000,000.
43
However, this Section 11.6(a) will not apply to (I) any claim for Damages based
on fraud or any intentional Breach by the Company or any Principal Seller of any
covenant or obligation or (II) any claim under Sections 11.2(d) or 11.2(e), and
the Company and the Principal Sellers will be jointly and severally liable for
all Damages with respect thereto.
(b) Any liability of a Non-Principal Seller hereunder
(for indemnification or otherwise) shall be limited so that the aggregate amount
of Damages paid to Buyer by such Non-Principal Seller does not exceed the
portion of the Purchase Price paid or payable to such Non-Principal Seller (with
the value of any Buyer Stock received by such Non-Principal Seller equal to
$17.46 per share).
11.7 Limitations on Amount--Buyer. Buyer will have no liability
(for indemnification or otherwise) with respect to the matters described in
clause (a) of Section 11.4 until the total of all Damages with respect to such
matters exceeds $3,000,000, and then only for the amount by which such Damages
exceed $3,000,000. However, this Section 11.7 will not apply to any Breach of
any of Buyer's representations and warranties of which Buyer had Knowledge at
any time prior to the date on which such representation and warranty is made or
any intentional Breach by Buyer of any covenant or obligation, and Buyer will be
liable for all Damages with respect to such Breaches.
11.8 Right of Set-Off. Upon notice to Sellers' Representatives
specifying in reasonable detail the basis for such set-off, Buyer may set off
any amount to which it may be entitled under this Article XI against amounts
otherwise payable under this Agreement, including but not limited to, the
Earnout Amounts. Neither the exercise of nor the failure to exercise such right
of set-off will constitute an election of remedies or limit Buyer in any manner
in the enforcement of any other remedies that may be available to it.
11.9 Exclusive Remedy. After the Closing, the indemnities provided
in this Article XI shall constitute the sole and exclusive remedy of any
Indemnified Party for Damages arising out of, resulting from or incurred in
connection with the breach of any representation, warranty or agreement made by
the parties in this Agreement; provided, however; that this exclusive remedy for
Damages does not preclude a party from bringing an action for specific
performance or other equitable remedy to require a party to perform its
obligations under this Agreement. Without limiting the generality of the
preceding sentence, no legal action sounding in tort, statute or strict
liability may be maintained by any party. Notwithstanding anything to the
contrary in this Section 11.7, in the event of a fraudulent or willful breach of
the representations, warranties, covenants or agreements contained herein by the
Company or any Seller, the Buyer Indemnified Persons shall have all remedies
available at law or in equity (including for tort) with respect thereto.
11.10 Procedure for Indemnification--Third Party Claims.
(a) Promptly after receipt by an indemnified party under
Sections 11.2, 11.3 or 11.4 of notice of the commencement of any Proceeding
against it, such indemnified party will, if a claim is to be made against an
indemnifying party under such Section, give notice to the indemnifying party of
the commencement of such claim, but the failure to notify the indemnifying party
will not relieve the indemnifying party of any liability that it may have to any
44
indemnified party, except to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnified party's failure
to give such notice.
(b) If any Proceeding referred to in Section 11.10(a) is
brought against an indemnified party and it gives notice to the indemnifying
party of the commencement of such Proceeding, the indemnifying party will,
unless the claim involves Taxes, be entitled to participate in such Proceeding
and, to the extent that it wishes (unless (i) the indemnifying party is also a
party to such Proceeding and the indemnified party determines in good faith that
joint representation would be inappropriate, or (ii) the indemnifying party
fails to provide reasonable assurance to the indemnified party of its financial
capacity to defend such Proceeding and provide indemnification with respect to
such Proceeding), to assume the defense of such Proceeding with counsel
reasonably satisfactory to the indemnified party and, after notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such Proceeding, the indemnifying party will not, as long as it
diligently conducts such defense, be liable to the indemnified party under this
Article XI for any fees of other counsel or any other expenses with respect to
the defense of such Proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such Proceeding, other than
reasonable costs of investigation. If the indemnifying party assumes the defense
of a Proceeding, (i) it will be conclusively established for purposes of this
Agreement that the claims made in that Proceeding are within the scope of and
subject to indemnification; (ii) no compromise or settlement of such claims may
be effected by the indemnifying party without the indemnified party's consent
(such consent to not be unreasonably withheld) unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Proceeding and the indemnifying party does not, within
thirty days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party. Notwithstanding
the foregoing, notice of any claim made against the Company or the Sellers,
other than those arising as result of a breach of the representations and
warranties made in Article III shall be provided to the Sellers'
Representatives, who shall have sole authority to respond to and compromise such
claim in accordance with the foregoing provisions. Likewise, the Sellers'
Representatives shall have the sole authority to seek indemnification from Buyer
pursuant to this Article XI on behalf of the Sellers.
(c) Notwithstanding the foregoing, if an indemnified
party determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
45
(d) Sellers hereby consent to the non-exclusive
jurisdiction of any court in which a Proceeding is brought against any
Indemnified Person for purposes of any claim that an Indemnified Person may have
under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on Sellers with respect to such a
claim anywhere in the world.
11.11 Procedure for Indemnification--Other Claims. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by written notice to the party from whom indemnification is sought.
11.12 Interpretation. The term "Damages" shall not include any
consequential damages, claims for lost profits or punitive damages.
11.13 No Environmental Contribution. The Buyer Indemnified Persons
shall not be able to seek contribution from the Sellers under any requirements
of or obligations imposed by any Environmental Laws and hereby waive all
statutory rights against the Sellers under the Environmental Laws; provided,
this shall not limit in any manner the right of the Buyer Indemnified Persons to
seek and obtain indemnification pursuant to the other provisions of this
Agreement.
ARTICLE XII
GENERAL PROVISIONS
12.1 Expenses. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution, and performance of this
Agreement and the Contemplated Transactions, including all fees and expenses of
agents, representatives, counsel, and accountants. Notwithstanding the
foregoing, in the event the Closing occurs, Sellers will bear the Company's
portion of such expenses. In the event of termination of this Agreement, the
obligation of each party to pay its own expenses will be subject to any rights
of such party arising from a breach of this Agreement by another party.
12.2 Public Announcements. Any public announcement or similar
publicity with respect to this Agreement or the Contemplated Transactions will
be issued, if at all, at such time and in such manner as Buyer and Seller
mutually determine, unless applicable Legal Requirements require otherwise.
Unless consented to by Buyer in advance or required by Legal Requirements, prior
to the Closing the Company and Sellers shall, and shall cause the Acquired
Companies to, keep this Agreement strictly confidential and may not make any
disclosure of this Agreement to any Person. The Company and Buyer will consult
with each other concerning the means by which the Acquired Companies' employees,
customers, and suppliers and others having dealings with the Acquired Companies
will be informed of the Contemplated Transactions, and Buyer will have the right
to be present for any such communication.
12.3 Confidentiality. Between the date of this Agreement and the
Closing Date, Buyer, the Company and Sellers will maintain in confidence, and
will cause the directors, officers, employees, agents, and advisors of Buyer and
the Acquired Companies to maintain in confidence, any written information
obtained in confidence from another party or an Acquired
46
Company in connection with this Agreement or the Contemplated Transactions,
unless (a) such information is already known to such party or to others not
bound by a duty of confidentiality or such information becomes publicly
available through no fault of such party, (b) the use of such information is
necessary or appropriate in making any filing or obtaining any consent or
approval required for the consummation of the Contemplated Transactions, or (c)
the furnishing or use of such information is required by or necessary or
appropriate in connection with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request.
12.4 Notices. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by telecopier (with written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by a nationally recognized overnight
delivery service (receipt requested), in each case to the appropriate addresses
and telecopier numbers set forth below (or to such other addresses and
telecopier numbers as a party may designate by notice to the other parties):
If to Buyer: Quiksilver, Inc.
15202 Graham Street
Huntington Beach, CA 92649
Attention: General Counsel
Facsimile: (714) 889-4250
With Copy to: Hewitt & O'Neil LLP
19900 MacArthur Blvd., Suite 1050
Irvine, CA 92612
Attention: Paul A. Rowe
Facsimile: (949) 798-0511
If to the Company: DC Shoes, Inc.
1333 Keystone Way, Unit A
Vista, CA 92081
Attention: General Counsel
Facsimile: (760) 597-2500
With copy to: Latham & Watkins LLP
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626
Attention: Cary K. Hyden
Facsimile: (714) 755-8290
If to the Sellers: At the address for each such Seller
shown on the signature page
To the Sellers'
Representatives: 1333 Keystone Way, Unit A
Vista, CA 92081
Facsimile: (760) 727-7623
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12.5 Dispute Resolution.
(a) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the exclusive
jurisdiction of any court sitting in the County of Orange, California, or
Federal court of the United States of America, sitting in the County of Orange,
California, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement or the agreements
delivered in connection herewith or the transactions contemplated hereby or
thereby or for recognition or enforcement of any judgment relating thereto, and
each of the parties hereby irrevocably and unconditionally (A) agrees not to
commence any such action or proceeding except in such courts, (B) agrees that
any claim in respect of any such action or proceeding may be heard and
determined in such Orange County court or, to the extent permitted by law, in
such Federal court sitting in Orange County, (C) waives, to the fullest extent
it may legally and effectively do so, any objection which it may now or
hereafter have to the laying of venue of any such action or proceeding in any
such Orange County, State or Federal court and (D) waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the maintenance of
such action or proceeding in any such Orange County, State or Federal court.
Each of the parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Each party to this
Agreement irrevocably consents to service of process in the manner provided for
notices in Section 12.4. Nothing in this Agreement will affect the right of any
party to this Agreement to serve process in any other manner permitted by law.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS
AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS
VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 12.5(b).
12.6 Further Assurances. The parties agree (a) to furnish upon
request to each other such further information, (b) to execute and deliver to
each other such other documents, and (c) to do such other acts and things, all
as the other party may reasonably request for the purpose of carrying out the
intent of this Agreement and the documents referred to in this Agreement.
48
12.7 Waiver. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any delay
by any party in exercising any right, power, or privilege under this Agreement
or the documents referred to in this Agreement will operate as a waiver of such
right, power, or privilege, and no single or partial exercise of any such right,
power, or privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or privilege. To
the maximum extent permitted by applicable law, (a) no claim or right arising
out of this Agreement or the documents referred to in this Agreement can be
discharged by one party, in whole or in part, by a waiver or renunciation of the
claim or right unless in writing signed by the other party; (b) no waiver that
may be given by a party will be applicable except in the specific instance for
which it is given; and (c) no notice to or demand on one party will be deemed to
be a waiver of any obligation of such party or of the right of the party giving
such notice or demand to take further action without notice or demand as
provided in this Agreement or the documents referred to in this Agreement.
12.8 Entire Agreement and Modification. This Agreement supersedes
all prior agreements and understandings between the parties with respect to its
subject matter (including the letter setting forth the indication of interest
between Buyer and the Company dated February 18, 2004) and constitutes (along
with the documents referred to in this Agreement) a complete and exclusive
statement of the terms of the agreement between the parties with respect to its
subject matter. This Agreement may be amended or modified in whole or in part at
any time prior to the Closing Date by an agreement in writing among Buyer, the
Company and the Sellers' Representative.
12.9 Buyer's and Sellers' Schedules.
(a) The disclosures in the Disclosure Letter must relate
only to the representations and warranties in the Section of the Agreement to
which they expressly relate and not to any other representation or warranty in
this Agreement, except to the extent that such other representation and warranty
would reasonably be expected to be pertinent to the disclosures made.
(b) In the event of any inconsistency between the
statements in the body of this Agreement and those in the Buyer's or Disclosure
Letter (other than an exception expressly set forth as such in the applicable
Buyer's or Disclosure Letter with respect to a specifically identified
representation or warranty), the statements in the body of this Agreement will
control.
12.10 Assignments, Successors, and No Third-Party Rights. No party
may assign any of its rights under this Agreement without the prior consent of
the other parties, which will not be unreasonably withheld, except that Buyer
may assign any of its rights under this Agreement to any Subsidiary of Buyer
provided that Buyer shall remain liable for all of its obligations hereunder.
Subject to the preceding sentence, this Agreement will apply to, be binding in
all respects upon, and inure to the benefit of the successors and permitted
assigns of the parties. Nothing expressed or referred to in this Agreement will
be construed to give any Person other than the parties to this Agreement any
legal or equitable right, remedy, or claim under or with respect to this
Agreement or any provision of this Agreement. This Agreement and all of its
provisions and conditions are for the sole and exclusive benefit of the parties
to this Agreement and their successors and assigns.
49
12.11 Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.
12.12 Time of Essence. With regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
12.13 Governing Law. This Agreement and all the transactions
contemplated hereby, and all disputes between the parties under or related to
this Agreement or the facts and circumstances leading to its execution, whether
in contract, tort or otherwise, will be governed by and construed in accordance
with the laws of the State of California without regard to conflicts of laws
principles.
12.14 Equitable Remedies. In addition to legal remedies, to the
extent allowed pursuant to this Agreement or by law, in recognition of the fact
that remedies at law may not be sufficient, the parties hereto (and their
successors) shall be entitled to equitable remedies including, without
limitation, specific performance and injunction.
12.15 Effect of Amendment or Waiver. Each Seller acknowledges that
by operation of Sections 5.10 and 12.8, the Sellers' Representatives will have
the right and power to diminish or eliminate rights of such Sellers under this
Agreement.
12.16 Opportunity to Consult Counsel. Each Seller acknowledges that
such Seller has had full and adequate opportunity to have this Agreement
reviewed by such Seller's independent counsel and to discuss this Agreement with
such counsel.
12.17 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[Signature pages follow]
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement effective as of the date first written above.
"BUYER"
QUIKSILVER, INC., a Delaware corporation
By: /s/ Robert B. McKnight
-------------------------------------
Name: Robert B. McKnight
Title: CEO
"COMPANY"
DC SHOES, INC., a California corporation
By: /s/ Brian Sellstrom
-------------------------------------
Brian Sellstrom
Chief Executive Officer
51
"SELLERS"
/s/ Ken Block /s/ Damon Way
- ----------------------------------- -------------------------------------
Kenneth Block Damon Way
(none) /s/ Suzanne Way
- ----------------------------------- -------------------------------------
Signature of Seller's Spouse Signature of Seller's Spouse
Printed Name: Ken Block Printed Name: Damon Way
Address: 1650 Bella Laguna Address: 1550 Surf Road
Encinitas, CA 92024 Encinitas, CA 92024
Shares: 2.6 million Shares: -0-
/s/ Daniel R. Way /s/ Colin McKay
- ----------------------------------- -------------------------------------
Danny Way Colin McKay
/s/ Kari Way (No Spouse)
- ----------------------------------- -------------------------------------
Signature of Seller's Spouse Signature of Seller's Spouse
Printed Name: Daniel R. Way Printed Name: Colin McKay
Address: 441 Cole Ranch Road Address: 7179 Pintail Dr.
Encinitas, CA 92024 Carlsbad, CA 92009
Shares: 500,000 Shares: 300,000
The Damon Way Revocable Trust u/a DC Shoes, Inc. Employee Share Trust
May 20 1999
By: /s/ Damon Way By: /s/ Ken Block
------------------------------- ---------------------------------
Damon Way, Trustee
Print Name: Ken Block
Address: 1550 Surf Road Title: Trustee
Encinitas, CA 92024
Shares: 2.6 million Shares: 1.0 million
52
EXHIBIT 1
DEFINITIONS
"2004 EARNOUT PERIOD"--the period beginning on November 1, 2003 and
ending October 31, 2004.
"2005 EARNOUT PERIOD"--the period beginning on November 1, 2004 and
ending October 31, 2005.
"2006 EARNOUT PERIOD"--the period beginning on November 1, 2005 and
ending October 31, 2006.
"2007 EARNOUT PERIOD"--the period beginning on November 1, 2006 and
ending October 31, 2007.
"ACQUIRED COMPANIES"--the Company and its Subsidiaries, collectively.
"AGREEMENT"--as defined in the first paragraph of this Agreement.
"APPLICABLE CONTRACT"--any Contract (a) under which any Acquired
Company has or may acquire any rights, (b) under which any Acquired Company has
or may become subject to any obligation or liability, or (c) by which any
Acquired Company or any of the assets owned or used by it is or may become
bound.
"ADJUSTED AUDITED EBITDA" --the Company's EBITDA as derived from the
Audited Financial Statement adding back (i) any excess of total compensation
expense for Kenneth Block and Damon Way (including salary, bonus and travel and
entertainment expenses) over $1,400,000, and (ii) any (a) investment banking
fees (estimated to be $75,000), (b) legal expenses relating to the Company's
settlement with Clay Blehm or Internal Revenue Service audits and (c) any
settlement payments to Clay Blehm, but only to the extent that such items in (i)
and (ii) were deducted in arriving at the Company's EBITDA as derived from the
Audited Financial Statements.
"AUDITED FINANCIAL STATEMENTS" --the consolidated balance sheet of the
Acquired Companies as at December 31, 2003, and the related consolidated
statements of income, changes in stockholders' equity, and cash flow for the
fiscal year then ended, together with the unqualified report thereon of Nation,
Smith, Hermes and Diamond.
"BALANCE SHEET"--as defined in Section 2.4.
"BEST EFFORTS"--the efforts that a prudent Person desirous of achieving
a result would use in similar circumstances to ensure that such result is
achieved as expeditiously as possible.
"BLEHM TAX BENEFIT" --any net tax benefit related to any settlement
payments made to Clay Blehm.
"BREACH"--a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be
Exhibit 1-1
deemed to have occurred if there is or has been (a) any inaccuracy in or breach
of, or any failure to perform or comply with, such representation, warranty,
covenant, obligation, or other provision, or (b) any claim (by any Person) or
other occurrence or circumstance that is or was inconsistent with such
representation, warranty, covenant, obligation, or other provision, and the term
"Breach" means any such inaccuracy, breach, failure, claim, occurrence, or
circumstance.
"BUYER"--as defined in the first paragraph of this Agreement.
"BUYER MATERIAL ADVERSE EFFECT"--any change, event or effect that is
materially adverse to the business, properties, financial condition or results
of operations of the Buyer or any of its Subsidiaries, taken as a whole, except,
in each case, for any such change, event or effect resulting from or arising out
of the execution or public announcement of this Agreement and the transactions
contemplated hereby.
"BUYER'S SCHEDULE"--the schedule delivered by Buyer to the Company and
Sellers concurrently with the execution and delivery of this Agreement.
"BUYER STOCK"--the Common Stock of Buyer.
"CASH PAYMENT"--as defined in Section 1.2.
"CLOSING"--as defined in Section 1.7.
"CLOSING BALANCE SHEET" --as defined in Section 1.3.
"CLOSING DATE"--the date and time as of which the Closing actually
takes place.
"CLOSING WORKING CAPITAL"--the Working Capital as of the Closing less
(i) the Funded Debt as of the Closing and (ii) one-half (1/2) of any net tax
benefit to the Company related to the Employee Trust (assuming such tax benefit
is included in Working Capital as of the Closing); provided, that if such tax
benefit is not included in Closing Working Capital, then one-half (1/2) of any
such tax benefit shall be added to Working Capital to determine Closing Working
Capital.
"COMPANY"--as defined in the first paragraph of this Agreement.
"COMPANY GAAP" --GAAP, applied on a basis consistent with the basis on
which the Financial Statements and the other financial statements referred to in
Section 2.4 were prepared, provided that they were prepared in accordance with
GAAP.
"COMPANY MATERIAL ADVERSE EFFECT"--any change, event or effect that is
materially adverse to the business, properties, financial condition or results
of operations of the Company or the Acquired Companies, taken as a whole,
except, for any such change, event or effect resulting from or arising out of
the execution or public announcement of this Agreement and the transactions
contemplated hereby.
"CONSENT"--any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
Exhibit 1-2
"CONTEMPLATED TRANSACTIONS"--all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Shares by Sellers to Buyer and the sale of the
Buyer Stock to Sellers;
(b) the execution, delivery, and performance of the Employment
Agreements, the Noncompetition Agreements and the Sellers' Releases;
(c) the performance by Buyer, the Company and Sellers of their
respective covenants and obligations under this Agreement; and
(d) Buyer's acquisition and ownership of the Shares and exercise
of control over the Acquired Companies.
"CONTRACT"--any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"DAMAGES"--as defined in Section 10.2.
"EARNOUT AMOUNT"--the amount of the Purchase Price to be paid to the
Sellers after closing in accordance with Sections 1.4 and 1.5
"EARNOUT PERIODS"--the 2004 Earnout Period, 2005 Earnout Period, 2006
Earnout Period and the 2007 Earnout Period.
"EBITDA"--shall mean the Company's net income before provision for
income tax, interest, depreciation and amortization as reflected on the
Company's books and determined in accordance with GAAP.
"EBITDA REDUCTION" --the amount determined as follows:
(a) If the Adjusted Audited EBITDA is at least $10,300,000, the
EBITDA Reduction would be zero.
(b) If the Adjusted Audited EBITDA is at least $9,800,000 but less
than $10,300,000, the EBITDA Reduction would be the product of (i) $10,300,000
less the Adjusted Audited EBITDA, times (ii) 9.
(c) If the Adjusted Audited EBITDA is at least $9,400,000 but less
than $9,800,000, the EBITDA Reduction would be the sum of (i) $4,500,000 plus
(ii) the product of (A) $9,800,000 less the Adjusted Audited EBITDA, times (B)
4.5.
(d) If the Adjusted Audited EBITDA is less than $9,400,000, the
EBITDA Reduction would be $6,300,000.
Exhibit 1-3
"EBITDA TARGET LEVEL"--the target level provided in Exhibit 1.4(a) used
to determine whether Sellers are paid an Earnout Amount based on the Company's
EBITDA during a certain Earnout Period.
"EMPLOYEE TRUST" --DC Shoes, Inc. Employee Share Trust entered into on
November 21, 2000, as amended.
"EMPLOYMENT AGREEMENTS"--as defined in Section 1.4(a)(iii).
"ENCUMBRANCE"--any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal, or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership.
"ENVIRONMENT"--soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES"--any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law.
"ENVIRONMENTAL LAW"--any Legal Requirement designed to minimize,
prevent, punish or remedy the consequences of actions that damage or threaten
the Environment or public health and safety.
"ERISA"--the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"ERISA AFFILIATE"--any person that, together with the Company, would be
treated as a single employer under IRC Section 414.
"EXCHANGE ACT"--the Securities Exchange Act of 1934 or any successor
law, and regulations and rules issued pursuant to that Act or any successor law.
"FACILITIES"--any real property, leaseholds, or other interests
currently or formerly owned or operated by any Acquired Company and any
buildings, plants, structures, or equipment (including motor vehicles, tank
cars, and rolling stock) currently or formerly owned or operated by any Acquired
Company.
"FUNDED DEBT"--the amount by which (i) the total of any long-term
indebtedness (including the current portion of the Term Loan Balance and
excluding the Line of Credit Balance), any indebtedness to any Seller, a Related
Person thereof or Clay Blehm or Related Person thereof, and any indebtedness of
the Company related to professional fees, including legal, accounting and
investor advisor fees, associated with the Contemplated Transactions exceeds
(ii) the Term Loan Balance.
Exhibit 1-4
"GAAP"--generally accepted United States accounting principles, applied
on a consistent basis.
"GOVERNMENTAL AUTHORIZATION"--any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY"--any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other
government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"HISTORICAL AVERAGE WORKING CAPITAL"--the average of the Working
Capital at the end of each calendar month for the twelve month period ended
December 31, 2003.
"HSR ACT"--as defined in Section 5.4.
"INITIAL PURCHASE PRICE"--as defined in Section 1.2.
"INTELLECTUAL PROPERTY ASSETS"--as defined in Section 2.22.
"INTERIM BALANCE SHEET"--as defined in Section 2.4.
"IRC"--the Internal Revenue Code of 1986 or any successor law, and
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS"--the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"KNOWLEDGE"--an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other
matter; or
(b) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
a reasonably comprehensive investigation concerning the existence of such fact
or other matter.
Exhibit 1-5
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving as a director,
officer, partner, executor, or trustee of such Person (or in any similar
capacity) has, or at any time had, Knowledge of such fact or other matter.
"LEGAL REQUIREMENT"--any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"LINE OF CREDIT BALANCE" --all amounts owed by the Company under the
Merrill Lynch Line of Credit as of the Closing Date.
"NONCOMPETITION AGREEMENTS"--as defined in Section 1.8(a)(iv).
"NON-PRINCIPAL SELLERS"-- Sellers other than Principal Sellers.
"OCCUPATIONAL SAFETY AND HEALTH LAW"--any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, and any program, whether governmental or private (including
those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
"ORDER"--any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORGANIZATIONAL DOCUMENTS"--(a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"PARTICIPATING PERCENTAGE"--the percentage of the issued and
outstanding shares of capital stock of the Company immediately prior to the
Closing which are held by such Person and which are sold to Buyer under the
Agreement.
"PERSON"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PLAN"--as defined in Section 2.13.
"PRINCIPAL SELLERS"--Kenneth Block, Damon Way and The Damon Way
Revocable Trust u/a May 20, 1999.
Exhibit 1-6
"PROCEEDING"--any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"PURCHASE PRICE"--as defined in Section 1.2
"RELATED PERSON"--with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and
(d) any Person with respect to which such individual or one or
more members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly
or indirectly controlled by, or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves
as a general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b)
or (c).
For purposes of this definition, (a) the "Family" of an individual includes (i)
the individual, (ii) the individual's spouse, (iii) any other natural person who
is related to the individual or the individual's spouse within the second
degree, and (iv) any other natural person who resides with such individual, and
(b) "Material Interest" means direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting
securities or other voting interests representing at least 5% of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least 5% of the outstanding equity securities or equity
interests in a Person.
Exhibit 1-7
"REPRESENTATIVE"--with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"SALES"--used in determining whether or not a Sales Target Level has
been achieved, the Company's net sales as determined under GAAP.
"SALES TARGET LEVEL"--the target level provided in Exhibit 1.4(a) used
to determine whether Sellers are paid an Earnout Amount based on the Company's
Sales during a certain Earnout Period.
"SECURITIES ACT"--the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"SELLERS"--as defined in the first paragraph of this Agreement.
"SELLERS' RELEASES"--as defined in Section 1.8(a)(ii).
"DISCLOSURE LETTER"--the schedule delivered by the Company and Sellers
to Buyer concurrently with the execution and delivery of this Agreement.
"SHARES"--as defined in the Recitals of this Agreement.
"STOCK PAYMENT"--that number of shares of Buyer Stock determined as
follows: (a) $30,000,000 minus (i) the EBITDA Reduction and (ii) the Term Loan
Balance, divided by (b) $17.46.
"SUBSIDIARY"--with respect to any Person (the "Owner"), any corporation
or other Person of which securities or other interests having the power to elect
a majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries; when
used without reference to a particular Person, "Subsidiary" means a Subsidiary
of the Company.
"TARGET LEVEL"--the EBITDA Target Level or the Sales Target Level, as
the case may be.
"TAX" or "TAXES" --any federal, state, local, foreign income,
alternative or add-on minimum tax, estimated, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, capital profits,
lease, service, license, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, environmental or windfall profit taxes,
customs, duties and other taxes, governmental fees and other like assessments
and charges of any kind whatsoever, together with all interest, penalties,
additions to tax and additional amounts with respect thereto, whether disputed
or not.
"TAX RETURN"--any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required
Exhibit 1-8
to be filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection, or payment of any Tax or in connection
with the administration, implementation, or enforcement of or compliance with
any Legal Requirement relating to any Tax.
"TERM LOAN BALANCE" --all amounts owed by the Company under the Merrill
Lynch Term Loan as of the Closing Date.
"THREATENED"--a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing),
or if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
"WORKING CAPITAL"--means the following, determined in accordance with
GAAP: (i) total consolidated current assets of the Company, excluding any Blehm
Tax Benefit, less (ii) total consolidated current liabilities of the Company,
excluding (a) any portion of the Term Loan Balance, (b) any indebtedness of the
Company to any Seller or a Related Person thereof, (c) any indebtedness of the
Company related to professional fees, including legal, accounting and investor
advisor fees, associated with the Contemplated Transactions, and (d) any Blehm
Tax Benefit.
Exhibit 1-9