1
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
DATED AS OF SEPTEMBER 22, 1999
AMONG
JAKKS PACIFIC, INC.,
COLORBOK PAPER PRODUCTS, INC.
AND
THE SHAREHOLDERS OF
COLORBOK PAPER PRODUCTS, INC.
2
TABLE OF CONTENTS
PAGE
----
1. Certain Definitions 2
2. Purchase of the Shares 15
3. The Agent and the Paying Agent 21
4. Representations and Warranties of the Company and the Shareholders 22
5. Representations and Warranties of JAKKS 33
6. Certain Covenants 36
7. Conditions to Closing 42
8. Closing 45
9. Additional Covenants 48
10. Termination 58
11. Indemnification 60
12. Miscellaneous 67
12.1 Survival of Representations and Warranties 67
12.2 Limitation of Authority 67
12.3 Fees and Expenses 67
12.4 Notices 67
12.5 Amendment 69
12.6 Waiver 70
12.7 Governing Law 70
12.8 Arbitration 70
12.9 Jurisdiction 70
12.10 Remedies 71
12.11 Severability 72
12.12 Counterparts 72
12.13 Further Assurances 72
12.14 Binding Effect 72
12.15 Assignment 72
12.16 Titles and Captions 73
12.17 Grammatical Conventions 73
2
3
12.18 References 73
12.19 Knowledge 73
12.20 No Presumptions 74
12.21 Exhibits and Schedules 74
12.22 Entire Agreement 75
3
4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of September 22, 1999 by and
among JAKKS Pacific, Inc., a Delaware corporation ("JAKKS"), Colorbok Paper
Products, Inc., a Michigan corporation (the "Company"), and the shareholders of
the Company listed on Schedule I (the "Shareholders")
W I T N E S S E T H :
WHEREAS, the Company has heretofore been engaged in the Flying Colors
Business (hereinafter defined) and the Divested Business (as hereinafter
defined); and
WHEREAS, JAKKS desires to acquire the Flying Colors Business, but not to
acquire the Divested Business; and
WHEREAS, the Shareholders own all of the outstanding capital stock of
the Company and desire to sell to JAKKS, and JAKKS desires to purchase from the
Shareholders, all such capital stock; and
WHEREAS, to enable JAKKS to acquire only the Flying Colors Business, and
not the Divested Business, prior to the purchase of such capital stock of the
Company, the Company will transfer the Divested Business to the Divestee (as
hereinafter defined), transfer all of its interest in the Divestee to the
Shareholders, and change its name from "Colorbok Paper Products, Inc." to
"Flying Colors Toys, Inc.," and the Divestee will change its name to "Colorbok
Paper Products, LLC";
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto hereby agree as follows:
4
5
1. Certain Definitions.
1.1 "Account" means any account receivable or other right to receive
payment arising from the sale of merchandise or services in the Business, any
loan or extension of credit or any other sale, lease, exchange or other
disposition of any assets of the Company by, or for the account of, the Company,
whether or not in the ordinary course of business.
1.2 "Acquisition" means the purchase of the Shares and the related
transactions contemplated by the Acquisition Agreements.
1.3 "Acquisition Agreement" means this Agreement, the Agent
Agreement, the Paying Agent Agreement and each agreement and certificate to be
executed and delivered at the Closing pursuant to this Agreement, including the
New Lease, the Transition Services Agreement, the Special Indemnity Agreement
and the Employment Agreements, but excluding any agreement relating to the
Divestiture to which JAKKS is not a party.
1.4 "Affiliate" of a Person means another Person directly or
indirectly controlling, controlled by, or under common control with, such
Person; for this purpose, "control" of a Person means the power (whether or not
exercised) to direct the policies, operations or activities of such Person by
virtue of the ownership of, or right to vote or direct the manner of voting of,
securities of such Person, or pursuant to agreement or Law or otherwise.
1.5 "Agent" means ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, as agent of the Shareholders
pursuant to the Agent Agreement.
1.6 "Agent Agreement" means the Shareholders' Agent Agreement of even
date herewith among the Shareholders and the Agent.
5
6
1.7 "Agreement" means this Stock Purchase Agreement, as amended or
supplemented.
1.8 "Assets" means the assets of the Company.
1.9 "Bank" means Bank One, Michigan, a Michigan banking corporation.
1.10 "Bank Loan" means the bank loan and revolving credit facility
under the Amended and Restated Revolving Credit Agreement dated August 17, 1999,
between the Company and the Bank.
1.11 "Basic Closing Purchase Price" means $34,500,000, less the
Sellers' Transfer Fees.
1.12 "▇▇▇▇▇▇" means ▇▇▇▇▇▇▇ ▇▇▇▇▇▇.
1.13 "Business" means the business of designing, developing,
manufacturing, marketing and otherwise dealing and trading in or with
stationery, scrapbooks, activity sets, novelties, lunch boxes, gifts and toys
and all business activities incidental thereto.
1.14 "Certificate of Amendment" means the Certificate of Amendment to
the Articles of Incorporation of the Company, substantially in the form of
Exhibit A, to be executed and filed pursuant to Section 6.8.
1.15 "Closing" means the closing of the Acquisition as provided in
Article 8.
1.16 "Closing Date" means the date of the Closing.
6
7
1.17 "Closing Debt Payments" means the sum of the amounts required to
be paid by JAKKS in cash at the Closing pursuant to Section 8.9 in respect of
the Bank Loan and pursuant to Section 8.10 in respect of the indebtedness set
forth on Schedule 8.10.
1.18 "Closing Net Liquid Assets" means cash, Accounts and inventory of
the Company, less total liabilities (including provision for all Taxes accrued
for any period ending prior to the Closing Date and accrual of all costs
incurred in connection with the engagement of the Company Accountants for the
audit that has been completed with regard to the Company's fiscal year ended May
31, 1999, but not reflecting any charge or accrual for Transfer Fees) of the
Company in each case attributable to Flying Colors and after giving effect to
the Divestiture (notwithstanding that the Divestiture may not have been effected
prior to the Closing Date), as of the close of business on the day preceding the
Closing Date, determined in accordance with GAAP on a basis consistent with that
applied in the Company's fiscal year ended May 31, 1999.
1.19 "Closing Net Worth" means total assets of the Company (including
without limitation cash, Accounts, inventory, refundable Taxes (excluding the
Tax refunds described on Schedule 9.9(e)), deferred Taxes, prepaid expenses,
royalty advances and net property, plant and equipment), less total liabilities
(including provision for all Taxes accrued for any period ending prior to the
Closing Date and accrual of all costs incurred in connection with the engagement
of the Company Accountants for the audit that has been completed with regard to
the Company's fiscal year ended May 31, 1999, but not reflecting any charge or
accrual for Transfer Fees) of the Company, in each case attributable to Flying
Colors and after giving effect to the Divestiture (notwithstanding that the
Divestiture may not have been effected prior to the Closing Date), as of the
close of business on the day preceding the Closing Date, determined in
accordance with GAAP on a basis consistent with that applied in the Company's
fiscal year ended May 31, 1999.
7
8
1.20 "Closing Purchase Price" means the Basic Closing Purchase Price
reduced by the Interim Net Income, including the Deferred Closing Purchase
Price, if any, as increased or decreased by the Purchase Price Adjustment.
1.21 "Code" means the Internal Revenue Code of 1986, as amended, and
the treasury regulations promulgated thereunder.
1.22 "Company Accountants" means ▇▇▇▇▇▇ & ▇▇▇▇▇, LLP, the Company's
regularly engaged independent certified public accountants and auditors.
1.23 "Consent" means any approval, authorization, consent or
ratification by or on behalf of any Person that is not a party to this
Agreement, or any waiver of, or exemption or variance from, any Contract, Permit
or Order.
1.24 "Contract" means any material contract (including without
limitation any material purchase, sale, supply or service order or agreement, or
material real property or equipment lease) to which the Company or a Shareholder
is a party that relates to the Business or the Assets, as described on Schedule
1.24. For the purposes hereof, a Contract is "material" if (a) it relates to a
transaction or series of transactions involving the expenditure or receipt by
the Company of an amount in excess of $50,000 (or the transfer of property with
a fair market value in excess of $50,000), (b) a breach or default thereunder
would have a Material Adverse Effect, (c) it relates to any transaction not in
the ordinary course of business or (d) it (i) is a License Agreement or (ii)
prohibits or limits the Company's use of a Trade Right of another Person or
(iii) provides for any other Person to use or exploit, or prohibits or limits
any other Person's use of, a Trade Right of the Company and, in any such case,
involves the expenditure or receipt by the Company of an amount in excess of
$25,000.
8
9
1.25 "Deferred Closing Purchase Price" has the meaning set forth in
Section 2.4.
1.26 "Divested Assets" means the non-Flying Colors Assets to be
transferred to the Divestee in the Divestiture.
1.27 "Divested Business" means the non-Flying Colors Business subject
to the Divestiture.
1.28 "Divested Liabilities" means the liabilities of the Company set
forth on Schedule 1.28.
1.29 "Divestee" means the Person to whom the Divested Business is
transferred in the Divestiture.
1.30 "Divestiture" means the transaction by which the Divested
Business is to be transferred by the Company pursuant to Section 6.10.
1.31 "Earn-Out" means that portion of the Purchase Price payable,
under certain conditions, to the Shareholders pursuant to Section 2.5.
1.32 "Earn-Out Payment Date" means a date on which any portion of the
Earn-Out is payable pursuant to Section 2.5.
1.33 "Earn-Out Period" means the 12-month period beginning on (and
including) the first day of the first month beginning on or after the Closing
Date and ending on (and including) the day immediately prior to the first
anniversary of such date and the two succeeding 12-month periods beginning on
(and including) the first and second anniversaries of such date.
9
10
1.34 "Employee Plan" means an employee benefit plan (including a
multi-employer plan) as defined in Section 3(3) of ERISA.
1.35 "Employment Agreement" means one of the employment agreements,
substantially in the form of Exhibit B, to be entered into at the Closing by
JAKKS and Pokempner and ▇▇▇▇▇▇, respectively.
1.36 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
1.37 "Excepted Lien" means a Lien created or imposed after the date
hereof that:
(a) is for Taxes that are not delinquent, Taxes that can be
paid later without penalty or Taxes that are being contested in good
faith and by appropriate Proceedings;
(b) is imposed by Law, such as carriers', warehousemen's and
mechanics' Liens and other similar Liens arising in the ordinary course
of business, to secure payment of obligations not more than 60 days past
due or which are being contested in good faith by appropriate
Proceedings and for which adequate reserves have been set aside on the
Company's books;
(c) arises out of pledges or deposits under worker's
compensation Laws, unemployment insurance, old age pensions or other
social security or retirement benefits, or similar legislation;
(d) is a utility easement, building restriction or other
10
11
encumbrance or charge against real property which is of a nature
generally existing with respect to properties of a similar character and
which does not in any material way affect their marketability or
interfere with their use in the Business; or
(e) is a purchase money security interest on specific assets
securing the obligation to pay the purchase price thereof.
1.38 "Flying Colors" means the portion of the Business and Assets,
subject to related liabilities, relating to Flying Colors Products.
1.39 "Flying Colors Products" means products included in product lines
marketed by or on behalf of the Company before the Closing or by JAKKS, the
Company or any of their respective Affiliates after the Closing, in each case,
either under the Flying Colors brand name or as private label products
developed, manufactured, designed, sold or purchased by the Company.
1.40 "GAAP" means generally accepted accounting principles in the
United States.
1.41 "Governmental Authority" means any United States or foreign
federal, state or local government or governmental authority, agency or
instrumentality, or any court or arbitration panel of competent jurisdiction, or
any recognized professional or industry association or organization which
establishes policies or standards or otherwise regulates or supervises services
and activities related to the Business or the Assets.
1.42 "Gross Profit" means, in any period beginning on or after the
Closing Date, Sales less cost of goods (consisting of materials, direct labor,
costs of components and ex-factory costs of manufacturing of finished goods and
inbound freight) and license royalties
11
12
(including guaranteed or minimum royalties and non-refundable royalty advances
to the extent allocable to such period under GAAP applied on a basis consistent
with that of prior periods) payable in respect of product sales included in
Sales in such period, all as determined in accordance with the accounting
principles and practices consistently applied in the determination by the
Company and the Company Accountants prior to the Closing of the gross profit as
defined above, except with the following adjustments:
(a) All inventory shall be valued consistently and on the
first-in,-first-out method.
(b) If JAKKS requires the Company to purchase items of
inventory, components thereof or other goods or services from JAKKS or
an Affiliate of JAKKS or any other Person and the Agent objects thereto
in writing within 60 days of the Agent becoming aware of such
requirement, the cost of such inventory, components, goods or services
shall be adjusted and treated as if purchased at prices the Company
would have otherwise obtained for similar quantities of similar quality
items, components, goods or services.
1.43 "Gross Profit Margin" means, in any period beginning on or after
the Closing Date, the ratio (expressed as a percentage) of Gross Profit to Sales
in such period.
1.44 "Hazardous Material" means any contaminant, pollutant or toxic or
hazardous waste, effluent or other substance or material, including without
limitation any radioactive, explosive, flammable, corrosive or infectious
substance or material, or any substance or material containing asbestos,
polychlorinated biphenyls or urea formaldehyde or which is otherwise subject to
any Law, Permit or Order relating to the protection of the environment or human
health or safety.
1.45 "HSR Act" means the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act
of 1976,
12
13
as amended.
1.46 "HSR Form" means a Notification and Report Form for Certain
Mergers and Acquisitions required to be filed pursuant to the HSR Act in
connection with the Acquisition.
1.47 "Interim Net Income" means the after-tax net income or loss of
the Company attributable to Flying Colors and after giving effect to the
Divestiture (notwithstanding that the Divestiture may not have been effected
prior to October 1, 1999) for the period beginning on (and including) October 1,
1999 and ending on (and including) the day preceding the Closing Date,
determined in accordance with GAAP on a basis consistent with that applied in
the Company's fiscal year ended May 31, 1999.
1.48 "Landlord" means ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ and Pokempner, d/b/a Shore
Properties, or their successor as owner of the real property known as ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
1.49 "Law" means any statute, rule, regulation or ordinance of any
Governmental Authority.
1.50 "Lease" means a lease of real property described on Schedule
1.50.
1.51 "License Agreement" means a license, royalty or other Contract
pursuant to which the Company has the right to use or exploit any Trade Right of
another Person.
1.52 "Lien" means any security interest, conditional sale or other
title retention agreement, mortgage, pledge, lien, charge, encumbrance or other
adverse claim or interest.
1.53 "Lien Report" means a report in customary form of a Lien search
or survey
13
14
conducted by JAKKS with respect to the Company prior to the Closing.
1.54 "Material Adverse Effect" means a material adverse effect on
Flying Colors, taken as a whole, unless such material adverse effect results
from any transaction, event or circumstance involving the Divested Business and
the Shareholders promptly take all necessary action to cause such transaction,
event or circumstance no longer to have such material adverse effect, including,
by way of example, but without limitation, depositing sufficient funds in escrow
to provide for the payment of any loss, liability, obligation, damage or expense
(including reasonable attorneys' fees and disbursements) or arranging for the
settlement of any Proceeding or the resolution of any dispute relating to the
same without any cost or expense to JAKKS or the Company.
1.55 "New Lease" means the Lease, substantially in the form of Exhibit
C, to be entered into at the Closing by the Company and the Landlord.
1.56 "Notice" means giving any notice to, or making any declaration or
filing, or registration or recordation, with any Person.
1.57 "Order" means any judgment, order, writ, decree, award,
directive, ruling or decision of any Governmental Authority.
1.58 "Paying Agent" means a Person appointed to serve as the
Shareholders' paying agent pursuant to the Paying Agent Agreement.
1.59 "Paying Agent Agreement" means the Paying Agent Agreement to be
entered into among the Shareholders and the Paying Agent, as contemplated by
Section 6.12.
1.60 "Permit" means any permit, license, certification, qualification,
franchise or
14
15
privilege issued or granted by any Governmental Authority.
1.61 "Person" includes without limitation a natural person,
corporation, joint stock company, limited liability company, partnership, joint
venture, association, trust, Governmental Authority, or any group of the
foregoing acting in concert.
1.62 "Pokempner" means ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇.
1.63 "Prime Rate" means, on any date, the rate of interest announced
by the Bank as its base or reference rate for prime commercial customers in
effect on such date.
1.64 "Proceeding" means any action, suit, arbitration, audit,
investigation or other proceeding, at law or in equity, before or by any
Governmental Authority.
1.65 "Purchase Price" means the aggregate of the Closing Purchase
Price, including the Deferred Closing Purchase Price, if any, and the Earn-Out.
1.66 "Purchase Price Adjustment" means the adjustment to the Purchase
Price to be made pursuant to Section 2.3.
1.67 "Real Property" means any real property subject to a Lease.
1.68 "Restricted Business" means that portion of the Business relating
to (a) molded, plastic, spray-masked, large and medium activity cases, as
evidenced by the "Rugrats" activity cases, or (b) the marketing, distribution or
sale of any products competitive with the Flying Colors Products if such
products are marketed, distributed or sold to or through the toy departments of
national or regional mass merchandise chains.
15
16
1.69 "Retained Divestee Contract" means a contract listed under the
heading "Divested Business License Agreements," "Customer and Supplier
Contracts" (in the latter case as it relates to the Divested Business) or
"Software Agreements" on Schedule 1.24 and that relates to the Divested Business
but as to which the Company shall not have obtained prior to the Closing
(notwithstanding the provisions of Section 6.1) the Consent of any counterparty
thereto required as a condition to the assignment thereof to the Divestee, or
otherwise to avoid a default thereunder, in connection with the Divestiture.
1.70 "Sales" means, in any period ending prior to the Closing Date,
the net sales of the Company in such period attributable to Flying Colors and,
in any period beginning on or after the Closing Date, the net sales of the
Company in such period determined on a "stand alone" basis in accordance with
the accounting principles and practices consistently applied in the
determination by the Company and the Company Accountants prior to the Closing of
the Company's net sales as reflected in its regularly prepared statements of
operations, including those included in its audited 1997, 1998 and 1999
Financial Statements.
1.71 "Sellers' Transfer Fees" means the portion of the Transfer Fees
to be borne by the Shareholders in an amount equal to (a) the aggregate amount
of all Transfer Fees, if such amount does not exceed $200,000 or (b) if such
amount does exceed $200,000, the sum of (i) $200,000 and (ii) one-half of the
excess, if any, of the aggregate amount of all Transfer Fees over $400,000.
1.72 "Shareholder" means a Person who owns any Shares of record as
listed on Schedule I.
1.73 "Shares" means the outstanding shares of Stock.
1.74 "Special Indemnity Agreement" means the Special Indemnity
Agreement,
16
17
substantially in the form of Exhibit D, to be entered into at the Closing by the
Company, the Divestee and JAKKS.
1.75 "Stock" means the common stock, $1.00 par value, of the Company.
1.76 "Tax" means any United States or foreign federal, state, local
income, excise, sales, property, withholding, social security or franchise tax
or assessment, and any interest, penalty or fine due thereon or with respect
thereto.
1.77 "Termination Fee" has the meaning given in Section 10.3.
1.78 "Trade Right" means a patent, claim of copyright, trademark,
trade name, brand name, service ▇▇▇▇, logo, symbol, trade dress or design, or
representation or expression of any thereof, or registration or application for
registration thereof, or any other invention, trade secret, technical
information, know-how, proprietary right or intellectual property.
1.79 "Transaction" means, whether effected in one transaction or a
series of transactions: (a) any merger, consolidation, reorganization or other
business combination pursuant to which the assets, business or operations of
Flying Colors are sold, acquired, combined with, or otherwise transferred to
another Person, (b) an acquisition, directly or indirectly, by another Person of
more than 50% of the capital stock outstanding of the Company or all or
substantially all of the assets of Flying Colors by way of a tender or exchange
offer, negotiated purchase or otherwise, or (c) the acquisition, directly or
indirectly, by another Person of control of the Company or the ability to effect
such control, through a proxy contest or otherwise; provided, however, that a
Transaction will not include sales of Company securities by the Company to any
Shareholder or by any Shareholder to any other Shareholder or to a family member
or trust or other Person for estate planning purposes.
17
18
1.80 "Transfer Fee" means a payment required to be made because of the
Acquisition to obtain any Consent of any counterparty to any Contract or
otherwise continue any Contract in effect after the Closing.
1.81 "Transition Services Agreement" means the Transition Services
Agreement, substantially in the form of Exhibit E, to be entered into at the
Closing by the Company and the Divestee.
1.82 "Waiver Documents" means a Termination Agreement in the form of
Schedule 1.82A to be entered into at the Closing by the Company, the
Shareholders, ▇▇▇▇ ▇▇▇▇▇▇▇, individually, Jentra Investment Limited Partnership
and ▇▇▇ ▇▇▇▇▇, and a Waiver in the form of Schedule 1.82B to be entered into at
the Closing by the Shareholders, ▇▇▇▇ ▇▇▇▇▇▇▇, individually, and the Company.
2. Purchase of the Shares.
2.1 At the Closing, each Shareholder shall sell, assign, transfer and
deliver to JAKKS the Shares then owned by such Shareholder.
2.2 Subject to Section 2.4, at the Closing JAKKS shall pay the
Closing Purchase Price (notwithstanding that JAKKS may dispute the amount of the
Purchase Price Adjustment or the Interim Net Income, in which case, such dispute
shall be subject to resolution in accordance with Section 9.8) to the Paying
Agent (for the benefit and account of the several Shareholders as set forth on
Schedule 2.2).
2.3 The Purchase Price Adjustment shall be determined as follows:
(a) On or before the second business day preceding the
18
19
Closing Date, the Agent shall give to JAKKS a written Notice setting
forth therein a good faith estimate of the Closing Net Worth, the
Closing Net Liquid Assets and the Interim Net Income and a brief
statement of the basis for the determination thereof. The calculation of
the Purchase Price Adjustment pursuant to this Section 2.3 in order to
pay the Closing Purchase Price on the Closing Date shall be made based
on the good faith estimates set forth in such Notice.
(b) If (i) the Closing Net Worth equals or exceeds $3,000,000
and (ii) the Closing Net Liquid Assets equal or exceed $2,100,000, the
Purchase Price Adjustment shall increase the Closing Purchase Price by
an amount equal to the least of (A) the excess, if any, of the Closing
Net Worth over $3,000,000, (B) the excess, if any, of the Closing Net
Liquid Assets over $2,100,000 and (C) $2,000,000.
(c) If either (i) the Closing Net Worth is less than
$3,000,000 or (ii) the Closing Net Liquid Assets are less than
$2,100,000, the Purchase Price Adjustment shall decrease the Closing
Purchase Price by an amount equal to the greater of (A) the excess, if
any, of $3,000,000 over the Closing Net Worth and (B) the excess, if
any, of $2,100,000 over the Closing Net Liquid Assets.
2.4 If the sum of the Closing Purchase Price plus the Closing Debt
Payments exceeds the sum of the Basic Closing Purchase Price plus $18,000,000,
JAKKS shall pay in cash at the Closing only that portion of the Closing Purchase
Price equal to the sum of the Basic Closing Purchase Price plus $18,000,000,
reduced by the Closing Debt Payments, and the balance thereof (the "Deferred
Closing Purchase Price") shall be payable by JAKKS to the Paying Agent (for the
benefit and account of the several Shareholders as set forth on Schedule 2.2) in
monthly installments as follows:
(a) Subject to Subsection 2.4(c), if and when the Company
actually
19
20
receives payments in any calendar month ending after the Closing Date in
respect of Accounts arising prior to the Closing Date, the Company shall
set such payments aside and, on or before the 10th day of the next
succeeding calendar month, pay over to the Paying Agent the same, until
the entire amount of the Deferred Closing Purchase Price shall have been
paid to the Paying Agent.
(b) JAKKS shall cause the Company to collect payments in
respect of Accounts arising prior to the Closing Date in accordance with
JAKKS' customary collection practices. JAKKS shall not take any action
to cause any Account debtor to not pay, or to delay payment of, the
Accounts arising prior to the Closing Date. If an Account debtor does
not specify the invoice to which a payment relates, such payment shall
be credited against the earliest outstanding Account owed by such
debtor.
(c) In any case, JAKKS shall pay the entire Deferred Closing
Purchase Price prior to the 120th day following the Closing Date.
2.5 In addition to the Closing Purchase Price, each Shareholder shall
be entitled to receive a portion of the Earn-Out in the amount and payable in
the manner and upon the terms and conditions set forth below:
(a) The Earn-Out shall be in an amount determined in
accordance with Schedule 2.5.
(b) The Earn-Out, if any, for each Earn-Out Period shall be
paid as soon as practicable, but in any event not later than 60 days,
after the end of such Earn-Out Period.
(c) On each Earn-Out Payment Date, JAKKS shall pay the
20
21
Earn-Out, if any, for the applicable Earn-Out Period to the Paying Agent
(for the benefit and account of the several Shareholders in the
percentages set forth on Schedule 2.5).
(d) Notwithstanding any other provision hereof, no Earn-Out
shall be payable for any Earn-Out Period unless the Gross Profit Margin
in such period shall equal or exceed 29%.
(e) Notwithstanding any other provision of this Section 2.5,
if (i) the Company terminates the employment of ▇▇▇▇▇▇ or ▇▇▇▇▇▇▇▇▇ for
cause (pursuant to Section 13 of his Employment Agreement), or (ii)
▇▇▇▇▇▇ or Pokempner terminates his employment other than for good reason
(pursuant to Section 14 of his Employment Agreement), then, in either
such case, the Earn-Out shall continue to be payable in accordance with
the terms and conditions of this Agreement for the Earn-Out Period in
which such termination of employment occurs, but shall not be payable
for any subsequent Earn-Out Period.
(f) Notwithstanding any other provision of this Section 2.5,
if JAKKS terminates the employment of ▇▇▇▇▇▇ or ▇▇▇▇▇▇▇▇▇, other than
for cause (pursuant to Section 13 of his Employment Agreement), or if
▇▇▇▇▇▇ or Pokempner terminates his employment with JAKKS for good reason
(pursuant to Section 14 of his Employment Agreement), then, in either
such case, the provisions of this subsection (f) shall apply:
(i) If JAKKS terminates the employment of ▇▇▇▇▇▇ as
described in this subsection (f) or if ▇▇▇▇▇▇ terminates his
employment with JAKKS as described in this
21
22
subsection (f), then ▇▇▇▇▇▇ shall be referred to in this
subsection (f) as the "Terminated Executive." If JAKKS terminates
the employment of Pokempner as described in this subsection (f)
or if Pokempner terminates his employment with JAKKS as described
in this subsection (f), then Pokempner shall be referred to in
this subsection (f) as the "Terminated Executive."
(ii) Promptly upon termination of the employment of the
Terminated Executive, JAKKS shall pay to the Paying Agent (for
the benefit and account of the several Shareholders in the
percentages set forth on Schedule 2.5) an amount (the
"Accelerated Earn-Out") equal to fifty percent (50%) of the
maximum Earn-Out that would otherwise be payable to the
Terminated Executive in accordance with the terms and conditions
of this Agreement for the Earn-Out Period in which such
termination occurs.
(iii) The amount of the Accelerated Earn-Out shall be
offset against any Earn-Out that would thereafter otherwise be
payable by JAKKS in accordance with the terms and conditions of
this Agreement for such Earn-Out Period.
(iv) Any Earn-Out payable for any subsequent Earn-Out
Period shall continue to be payable in accordance with the terms
and conditions of this
22
23
Agreement.
(g) JAKKS and the Shareholders contemplate that, after the
Closing, ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ shall be responsible for the development,
creation, merchandising, marketing and sales of, and acquisitions of
licenses for, products of the Company and for the sourcing, procurement
and purchasing of products for new product launches, in each case,
subject to general oversight and direction from JAKKS, all as more fully
set forth in the Employment Agreements.
(h) During the Earn-Out Period, JAKKS shall operate and manage
the business of the Company in good faith in the ordinary course of
business and consistent with prudent business practices. JAKKS shall
not, during the Earn-Out Period, unreasonably require that the business
of the Company be operated substantially differently than Flying Colors
was operated in the past (unless the prior practices are unreasonable or
imprudent), including without limitation substantially changing existing
business plans and policies of the Company in a manner that materially
increases the expenses or decreases the revenues of the Company in a
manner that adversely affects the calculation of Gross Profit for
purposes of the Earn-Out. Without limiting the generality of the
foregoing, and notwithstanding anything to the contrary in this
Agreement, any sales after the Closing Date of Flying Colors Products,
whether by JAKKS, the Company or any of their Affiliates, shall be
included in the definition of Sales for purposes of calculation of the
Earn-Out.
(i) JAKKS shall not require the Company to acquire any
additional businesses without the consent of ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇. If
JAKKS, ▇▇▇▇▇▇ and Pokempner so agree to any acquisition of an additional
business by the Company, JAKKS and the Agent shall negotiate in good
faith as to if, how and to what extent any such acquisition shall affect
or amend the provisions of this Agreement relating to the
23
24
Earn-Out.
2.6 Of the Purchase Price, the amount of $1,000,000 is being paid at
the Closing in consideration of the Shareholders' covenant not to compete
provided in Section 9.2 (with such $1,000,000 allocated among the Shareholders
in accordance with Schedule 2.2). The entire balance of the Purchase Price is
being paid solely to acquire the Shares. No party hereto shall (or permit any of
its Affiliates to) report or treat any part of the Purchase Price as allocable
in any other manner.
3. The Agent and the Paying Agent.
3.1 Except as provided in Section 3.2, any party hereto may rely upon
any Notice given by the Agent on behalf of any Shareholder with respect to any
election, determination or other action to be made or taken by him hereunder as
the act and deed of such Shareholder. It shall be sufficient to deliver to the
Agent at his address set forth in Section 12.4 below any Notice or other
document to be delivered hereunder to any Shareholder and it shall be the sole
responsibility of the Agent to deliver any Notice or other document so delivered
to him in such manner as he and the Shareholders, or any of them, may agree. As
between JAKKS and any other party to this Agreement, each election,
determination or other action of the Agent in connection with this Agreement
shall be binding upon all of the Shareholders, and no Shareholder shall have any
right to object, dissent from, or protest or otherwise contest the same or take
any separate action relating to the same; provided that the foregoing shall not
limit or affect any right or remedy any Shareholder may have against the Agent,
whether pursuant to this Agreement or otherwise.
3.2 Any payment to be made hereunder to or for the account of any
Shareholder shall be made by federal funds wire transfer to an account to be
specified by the Paying Agent in writing two days prior to the Closing Date
unless and until the Agent shall
24
25
give written Notice to JAKKS in accordance with Section 12.4 of any other means
of payment to the Paying Agent, and any payment so made shall constitute, as
between JAKKS and the Shareholders, payment in full of the amount thereof. It
shall be the sole responsibility of the Paying Agent to hold for the account of
the Shareholders and to disburse to them such funds as JAKKS may pay to it
pursuant hereto.
4. Representations and Warranties of the Company and the Shareholders.
The Company and the Shareholders, jointly and severally, hereby
represent and warrant to JAKKS as follows:
4.1 The Company is a corporation duly organized, validly existing and
in good standing under the Laws of the State of Michigan and has full power and
authority to own the Assets and carry on the Business as and in the places where
such Assets are now owned or such Business is now being conducted. Complete and
correct copies of the Company's Articles of Incorporation, including all
amendments thereto, certified by the Michigan Department of Consumer and
Industry Services, and the Company's Bylaws, including all amendments thereto,
certified by the Secretary of the Company, have been delivered to JAKKS. The
Company is Permitted to transact business as a foreign corporation in each
jurisdiction where such Permit is required under applicable Law in light of the
location or character of the Assets or the operation of the Business, except
where the failure so to be Permitted would not have a Material Adverse Effect,
and each such jurisdiction is listed on Schedule 4.1. The only capital stock
that the Company is authorized to issue consists of 50,000 shares of Stock.
Except as set forth on Schedule I or Schedule 4.1, each Shareholder owns
beneficially and of record all of the Shares set forth opposite such
Shareholder's name on Schedule I, free and clear of all Liens or any restriction
with respect to the voting or disposition thereof (other than restrictions of
general applicability imposed by federal or state securities Laws), and such
Shares constitute in the aggregate all of the Shares. All of the
25
26
Shares are duly authorized, validly issued, fully paid and nonassessable. No
shares of capital stock of the Company are reserved for issuance, and, except as
set forth on Schedule 4.1, there are no agreements, commitments or arrangements
providing for the issuance or sale of any thereof, or any issued or outstanding
options, warrants or other rights to purchase, or securities or instruments
convertible into or exchangeable for, any capital stock of the Company.
4.2 The Company has full corporate power and authority, and each
Shareholder has the legal capacity, power and authority, to execute and deliver
this Agreement and each other Acquisition Agreement to which it is a party and
to assume and perform its obligations hereunder and thereunder. The execution
and delivery by the Company of this Agreement and each other Acquisition
Agreement to which it is a party and the performance of its obligations
hereunder and thereunder have been duly authorized by all requisite corporate
action on the part of the Company. This Agreement has been, and each other
Acquisition Agreement to which the Company or any Shareholder is a party will
be, duly executed and delivered by it, and this Agreement is, and each other
Acquisition Agreement to which the Company or any Shareholder is a party, when
so executed and delivered, will be, its legally valid and binding obligation,
enforceable against it in accordance with their respective terms, subject to (a)
bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or
hereafter in effect relating to creditors' rights generally and (b) equitable
principles limiting the availability of specific performance, injunctive relief
and other equitable remedies. Except as set forth on Schedule 4.2, the execution
and delivery of this Agreement by the Company or any Shareholder do not, and the
execution and delivery of each other Acquisition Agreement by the Company or any
Shareholder and the performance by the Company and the Shareholders of their
respective obligations hereunder and thereunder will not, violate any provision
of the Company's Articles of Incorporation or Bylaws and do not and will not
conflict with or result in any breach of any condition or provision of, or
constitute a default under, or create or give rise to any adverse right of
termination or cancellation by, or excuse
26
27
the performance of, any other Person under, any Contract, or result in the
creation or imposition of any Lien upon any of the Assets or have a Material
Adverse Effect by reason of the terms of, any Contract, indenture, instrument,
Lien or Order relating to the Business to which the Company or any Shareholder
is a party or is subject or which is binding upon any of them or the Assets.
4.3 Except for the filing by the Company of an HSR Form and the
expiration or early termination of the waiting period under the HSR Act and
except as set forth on Schedule 4.3, no Consent of, or Notice to, any Person is
required as to the Company or any Shareholder in connection with its execution
and delivery of this Agreement or any other Acquisition Agreement to which it is
a party, or the performance of its obligations hereunder or thereunder.
4.4 Except as set forth on Schedule 4.4, no Proceeding to which the
Company or any Shareholder is a party is pending or, to the Company's knowledge,
threatened against or affecting the Business, the Assets or the operations of
the Company in which an unfavorable Order would have a Material Adverse Effect,
or prohibit, invalidate, or make unlawful, in whole or in part, the Acquisition,
this Agreement or any other Acquisition Agreement, or the carrying out of the
provisions hereof or thereof. The Company is not in default in respect of any
Order, nor is there any Order enjoining the Company or any Shareholder in
respect of, or the effect of which is to prohibit or curtail the Company's or
any Shareholder's performance of, its obligations hereunder or thereunder.
4.5 The Company has delivered to JAKKS the Company's balance sheets
at May 31, 1997, 1998 and 1999 (the "Balance Sheets") and the related statements
of operations and cash flows for each of the Company's fiscal years then ended
(collectively, the "Financial Statements"), together with the unqualified audit
report of the Company Accountants thereon, all of which Financial Statements are
complete and correct in all material respects, have been
27
28
prepared in accordance with GAAP, and present fairly in all material respects
the financial position of the Company at such dates and the results of its
operations for each of the periods then ended. The Company has no liabilities or
obligations of any kind, contingent or otherwise, relating to the Business or
the Assets which are required under GAAP to be reflected on the Balance Sheet at
May 31, 1999 which are not so reflected thereon, except as set forth on Schedule
4.5, and all of the liabilities and obligations set forth on such Schedule have
arisen in the ordinary course of business (except as set forth on such
Schedule).
4.6 Except as set forth on Schedule 4.6 or another Schedule or
specifically disclosed elsewhere herein, since May 31, 1999 there has not been
any Material Adverse Effect, nor has the Company:
(a) incurred any damage, destruction or similar loss, whether
or not covered by insurance, materially affecting the Business or the
Assets;
(b) other than in the ordinary course of business, sold,
assigned or transferred any of the Assets or any interest therein;
(c) incurred any obligation or liability relating to the
Business or the Assets, or paid, satisfied or discharged any obligation
or liability relating to the Business or the Assets prior to the due
date or maturity thereof, except, in each case, current obligations and
liabilities in the ordinary course of business;
(d) other than in the ordinary course of business, created,
incurred, assumed, granted or suffered to exist any Lien on any of the
Assets;
(e) other than in the ordinary course of business, waived any
right of material value relating to the Business or the Assets or
cancelled, forgiven or
28
29
discharged any debt relating to the Business or the Assets owed to it or
claim relating to the Business or the Assets in its favor; or
(f) effected any transaction relating to the Business or the
Assets other than in the ordinary course of business.
4.7 Schedule 4.7 is a complete and correct list of the Assets,
separately identifying, to the extent practicable, the Divested Assets. Except
as set forth on Schedule 4.7, the Assets, other than the Divested Assets,
consist of all assets required to conduct the Flying Colors Business as
currently conducted. The Company owns all of the Assets free and clear of all
Liens, except for the Liens listed on Schedule 4.7. Except as set forth on
Schedule 4.7, all Assets, other than the Divested Assets, consisting of
equipment or other tangible property, are in good operating condition and in a
good state of maintenance and repair. The Company does not own, directly or
indirectly, any capital stock of, or other equity interest or participation in,
any other Person or any option, warrant or other right to purchase, or any
security or instrument convertible into or exchangeable for, any such capital
stock or other equity interest or participation.
4.8 All Contracts in effect on the date hereof are listed on Schedule
1.24. There is no material breach or default by the Company or, to the Company's
knowledge, by any other party under any such Contract, all of which are in full
force and effect. True and complete copies of all such Contracts have been
delivered or made available to JAKKS.
4.9 Except as set forth on Schedule 4.9, the Company's inventory
(other than inventory included in the Divested Assets) consists solely of
merchandise usable or salable in the ordinary course of business. Since May 31,
1999, there has been no change in the inventory reflected on the Balance Sheet
at May 31, 1999, except in the ordinary course of business or for any change
made in connection with the Divestiture or as set forth on
29
30
Schedule 4.9.
4.10 Except as set forth on Schedule 4.10, the Accounts result from
bona fide sales to non-Affiliate customers in the ordinary course of business.
4.11 The Company has all Permits and all Consents required for it to
conduct the Business as presently conducted, a complete and correct list of
which is set forth on Schedule 4.11, and all such Permits and Consents are in
full force and effect and no cancellation or suspension of any thereof is
pending or, to the Company's knowledge, threatened. Except as set forth on
Schedule 4.11, the applicability and validity of all such Permits and Consents
relating to Flying Colors will not be materially adversely affected by the
consummation of the Acquisition. The Company is in compliance with each Law
applicable to it and the Business, including without limitation with respect to
occupational safety, environmental protection and employment practices.
4.12 Schedule 4.12 is a complete and correct list (including, if
applicable, date of application, filing or registration, as the case may be, and
the registration and application number) of each Trade Right relating to the
Business, whether or not registered in the name of or applied for by the
Company, in which the Company has any right or interest, whether through any
agreement or otherwise. Except as otherwise listed on Schedule 4.12, the Company
is not a licensor or a licensee in respect of any such Trade Right. The Trade
Rights listed on Schedule 4.12 are adequate for the Company to conduct the
Flying Colors Business as now operated. To the Company's knowledge, except as
set forth on Schedule 4.12, (a) no Trade Right of the Company relating to the
Business conflicts with or infringes on, and there has been no misappropriation
or unauthorized use by the Company of, any Trade Right of any other Person, and
(b) no Trade Right of any other Person conflicts with or infringes on, and there
has been no misappropriation or unauthorized use by any other Person of, any
Trade Right of the Company relating to the Business.
30
31
4.13 The Company does not own, lease, use or occupy any real property
except the Real Property leased by the Company as described on Schedule 4.13,
which Schedule lists the applicable Lease, the area and the current uses
thereof. Each Lease is legal, valid and binding as between the Company and each
other party thereto, and the Company is a tenant in good standing thereunder,
free of any material breach or default whatsoever and quietly enjoys the Real
Property subject thereto. The Company does not sublease any Real Property, nor
is any Real Property used or occupied by any other Person. The Real Property is
zoned for the purposes for which such Real Property is currently being used. The
Company has legal and valid occupancy permits and other required Permits for the
Real Property. No improvement, fixture or equipment on the Real Property, nor
the lease, use or occupancy thereof, is in violation of any applicable Law. No
Real Property is subject to any Law, Order or Lien which would materially
adversely affect its use or value for the purposes now made of it, or has been
condemned or otherwise taken by any Governmental Authority, and, to the
Company's knowledge, no condemnation or taking is threatened or contemplated.
4.14 No Hazardous Material has been generated, used, stored, released
or disposed of at, or transported to or from, the Real Property or in connection
with the Business, and no Law, Permit, Order or Proceeding applicable to the
Company or the Assets requires any clean-up or remediation or participation in
or contribution to any such clean-up or remediation.
4.15 The Company is not a member of any consolidated, combined or
unitary group for federal income Tax purposes. The Company has duly filed all
Tax and information returns and reports required to have been filed by it, each
of which is complete and correct in all material respects. Except as set forth
on Schedule 4.15, the Company has paid all Taxes due to any Governmental
Authority required to have been paid by it and has created sufficient reserves
or made provision for all Taxes accrued but not yet due and payable by it. The
31
32
Company has paid to the proper Governmental Authorities all customs, duties and
similar or related charges required to be paid by it with respect to the
importation of goods into the United States. Except as set forth on Schedule
4.15, no Governmental Authority is now asserting or, to the Company's knowledge,
threatening to assert any deficiency or assessment for additional Taxes with
respect to the Company, nor, to the Company's knowledge, is there any reasonable
basis for any such deficiency or assessment. Except for Tax years that have been
closed by the applicable statute of limitations, all of the Tax years of the
Company ended after its fiscal year ended May 31, 1994 remain open. To the
Company's knowledge, except as set forth on Schedule 4.15, no audit by any
Governmental Authority has been threatened or proposed for any fiscal year of
the Company from or after its fiscal year ended May 31, 1994. The Company has
not waived or consented to any tolling of any limitation period with respect to
any Tax liability. The Company has delivered to JAKKS complete and correct
copies of the federal income Tax returns of the Company for each of its fiscal
years ended May 31, 1996, 1997 and 1998. The Company has not filed any
subsequent federal income Tax returns.
4.16 Schedule 4.16 sets forth a complete and correct list of all
Employee Plans either maintained or to which contributions have been made by the
Company and all contributions made to each Employee Plan for each of the three
most recently ended fiscal years of the Company. Except as set forth on Schedule
4.16, the Company has no liability on account of any such Employee Plan, for (a)
contributions accruing under any such Employee Plan with respect to periods
prior to the date hereof; (b) fiduciary breaches by the Company, any employee of
the Company or any other Person under ERISA or any other applicable Law; or (c)
income Taxes by reason of non-qualification of any such Employee Plan. Except as
set forth on Schedule 4.16, with respect to each such Employee Plan, the Company
has delivered or made available to JAKKS copies of (i) the plan, any related
trust documents and amendments thereto, (ii) the most recent summary plan
description and annual report, if applicable, and (iii) the most recent
actuarial valuation, if applicable. No event has occurred for which, and there
exists no condition or set of circumstances under which, (A) the Company
32
33
or any Employee Plan would be subject to any material liability under any Law,
including without limitation Section 502(i) of ERISA or Section 4975 of the
Code, or (B) the Company would incur any liability with respect to an Employee
Plan that is a multi-employer plan, other than, in either case, the payment of
Pension Benefit Guaranty Corporation premiums and contributions. With respect to
each Employee Plan, (I) the Company is in compliance in all material respects
with the requirements prescribed by all applicable Laws, including without
limitation ERISA and the Code, and Orders, and (II) there is no Proceeding
(other than routine claims for benefits) pending or, to the Company's knowledge,
threatened, with respect to any Employee Plan or against the assets of any
Employee Plan.
4.17 The Company is not a party to any collective bargaining, union
representation or other labor contract or arrangement; except as set forth on
Schedule 4.17, the Company has not received any Notice from any labor union or
group of employees that such union or group represents or intends to represent
any of the employees of the Company involved in the Business; and, to the
Company's knowledge, no strike or work interruption by any of the Company's
employees involved in the Business is planned, threatened or imminent. Except as
set forth on Schedule 4.17, at no time during the past five years has the
Company experienced any strikes, work stoppages or demands for collective
bargaining by any union or labor organization or any other group of employees
involved in the Business, or been involved in or the subject of any grievance,
dispute or controversy by or with any union or labor organization or any other
group of employees involved in the Business or any Proceeding based on or
related to any employment grievance, dispute or controversy or, to the Company's
knowledge, received any Notice of any of the foregoing.
4.18 Schedule 4.18 is a complete and correct list of the names and
current annual salary, bonus, commission and perquisite arrangements, written or
unwritten, for each current employee of the Company, separately identifying each
such employee whose employment by the Company is proposed to be terminated in
connection with the Divestiture. Other than in
33
34
connection with the Divestiture or except as set forth on Schedule 4.18, to the
Company's knowledge, no employee listed thereon intends to terminate his or her
employment relationship with the Company.
4.19 Except as set forth on Schedule 4.19, no Shareholder and no
Affiliate of the Company or any Shareholder or any relative, associate or agent
of any of them has any interest in any property of the Company, including
without limitation any contract for the furnishing of services by, or rental of
real or personal property from or to, or requiring payments to, any Shareholder
or such Affiliate. Schedule 4.19 also sets forth all memberships in resort,
recreational or entertainment facilities or organizations owned or paid for, or
the dues for which are borne, by the Company, and all vehicles, apartments and
other facilities owned, leased or operated by the Company and not listed on any
other Schedule hereto. The Company has delivered to JAKKS complete and correct
copies of all written agreements referred to on Schedule 4.19.
4.20 Schedule 4.20 is a complete and correct list of the names and
addresses of the ten largest suppliers and ten largest customers of Flying
Colors during the Company's fiscal year ended May 31, 1999 and the total sales
to or purchases from such customers or suppliers made by the Company during such
fiscal year. No supplier or customer of the Company representing in excess of 5%
of Flying Colors' purchases or sales during such fiscal year has, to the
Company's knowledge, given Notice to the Company that it intends to terminate,
discontinue or substantially reduce its business with the Company with respect
to Flying Colors by reason of the transactions contemplated by this Agreement or
otherwise.
4.21 Schedule 4.21 is a complete and correct list (including the
insurer, policy number and term and type of insurance) of all insurance
maintained by the Company. All such insurance is in full force and effect. To
the Company's knowledge, no insurer has given Notice that it intends to cancel
or refuse to renew any insurance listed on Schedule 4.21 and
34
35
there is no reasonable basis for any such cancellation or non-renewal. No
insurer has disputed or, to the Company's knowledge, intends to dispute any
claim made under any policy listed on Schedule 4.21, and, to the Company's
knowledge, no event has occurred and no circumstance exists which would excuse
the performance by any insurer of any of its obligations under any such policy
with respect to such claim. Since June 1, 1996, the Company has not been refused
any insurance relating to the Business for which it has applied, nor has any
insurance relating to the Business carried by the Company been cancelled (other
than at the Company's request).
4.22 Except as set forth on Schedule 4.22, (a) the Company has not
employed or engaged any Person to act as a broker, finder or other intermediary
in connection with the Acquisition, and (b) no Person is entitled to any fee,
commission or other compensation relating to any such employment or engagement
by the Company. Any fee, commission or other compensation payable to any Person
listed on Schedule 4.22 is solely the obligation of the Shareholders (and not
the Company) and shall be promptly paid in full by the Shareholders (and not the
Company).
4.23 Each Shareholder has duly appointed the Agent to act as such
Shareholder's agent and attorney-in-fact with respect to the Acquisition in
accordance with the Agent Agreement, a correct and complete copy of which has
been heretofore delivered to JAKKS, and authorized the Agent to take any action
necessary in connection with (a) the implementation of this Agreement on behalf
of such Shareholder, (b) the waiver of any condition to the obligations of such
Shareholder to close the Acquisition, or (c) the compromise or settlement of any
dispute hereunder, all as more fully set forth therein.
4.24 The Company has delivered to JAKKS, at least two business days
prior to the date of this Agreement, a Business Transferor's Notice to
Transferee of Unemployment Tax Liability and Rate on MESC Form 1027 ("Form
1027") relating to the Acquisition in accordance with applicable law. The
information reported on such Form 1027 makes no
35
36
adjustment for the Divestiture (which has not been completed as of the date of
receipt of such Form 1027 or as of the date of this Agreement and, for Michigan
unemployment tax purposes, will be deemed to be effected prior to the Closing).
4.25 No representation or warranty by the Company or any Shareholder
in this Agreement or any other Acquisition Agreement (excluding the Agent
Agreement and the Paying Agent Agreement) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
or facts contained herein or therein not misleading.
5. Representations and Warranties of JAKKS.
JAKKS hereby represents and warrants to the Company and the Shareholders
as follows:
5.1 JAKKS is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has full power and
authority to own its assets and carry on its business as and in the places where
such assets are now owned or such business is now being conducted. Complete and
correct copies of JAKKS' Certificate of Incorporation, including all amendments
thereto, certified by the Secretary of State of Delaware, and Bylaws, including
all amendments thereto, certified by the Secretary of JAKKS, have been delivered
to the Shareholders.
5.2 JAKKS has full corporate power and authority to execute and
deliver this Agreement and each other Acquisition Agreement to which it is a
party and to assume and perform its obligations hereunder and thereunder. The
execution and delivery by JAKKS of this Agreement and each other Acquisition
Agreement to which it is a party and the performance of its obligations
hereunder and thereunder have been duly authorized by all
36
37
requisite corporate action on its part. This Agreement has been, and each other
Acquisition Agreement to which it is a party will be, duly executed and
delivered by JAKKS, and this Agreement is, and each other Acquisition Agreement
to which it is a party, when so executed and delivered, will be, a legally valid
and binding obligation of JAKKS, enforceable against it in accordance with their
respective terms, subject to (a) bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to
creditors' rights generally, and (b) equitable principles limiting the
availability of specific performance, injunctive relief and other equitable
remedies. The execution and delivery of this Agreement by JAKKS do not, and the
execution and delivery of each other Acquisition Agreement by JAKKS and the
performance by JAKKS of its obligations hereunder and thereunder will not,
violate any provisions of its Certificate of Incorporation or Bylaws and do not
and will not conflict with or result in any breach of any condition or provision
of, or constitute a default under, or create or give rise to any adverse right
of termination or cancellation by, or excuse the performance of, any other
Person, under any material agreement, or result in the creation or imposition of
any Lien upon it or any of its assets or the acceleration of the maturity or
date of payment or other performance of any of its obligations or have a
material adverse effect on JAKKS' business or assets by reason of the terms of,
any agreement, license, lease, indenture, instrument, Lien or Order to which it
is a party or is subject or which is binding upon it or its assets.
5.3 Except for the filing of an HSR Form and the expiration or early
termination of the waiting period under the HSR Act, no Consent of, or Notice
to, any Person is required as to JAKKS in connection with its execution and
delivery of this Agreement or any other Acquisition Agreement to which it is a
party, or the performance of its obligations hereunder or thereunder.
5.4 No Proceeding is pending, or, to the best of JAKKS' knowledge,
threatened against or affecting its business, assets, operations or financial or
other condition in
37
38
which an unfavorable Order would have a material adverse effect on JAKKS'
business or assets or prohibit, invalidate, or make unlawful, in whole or in
part, the Acquisition, this Agreement or any other Acquisition Agreement, or the
carrying out of the provisions hereof or thereof. JAKKS is not in default in
respect of any Order nor is there any Order enjoining it in respect of, or the
effect of which is to prohibit or curtail its performance of, its obligations
hereunder or thereunder.
5.5 JAKKS has not employed or engaged any Person to act as a broker,
finder or other intermediary in connection with the Acquisition, and no Person
is entitled to any fee, commission or other compensation relating to any such
employment or engagement by JAKKS.
5.6 JAKKS is acquiring the Shares for its own account, for investment
and not with a view to, or in connection with, or with any present intention of,
any resale or other distribution thereof.
5.7 JAKKS (a) is an informed and sophisticated purchaser, (b)
possesses such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of its investment under this
Agreement, (c) has engaged and consulted with expert legal, accounting and tax
advisors experienced in the evaluation of transactions such as the Acquisition,
and (d) has conducted a review and examination of information provided to it
regarding the Shareholders, the Company, the Business, the Assets, the Shares,
the Acquisition Agreements and the transactions contemplated thereby, including
information which JAKKS considers necessary or advisable to enable it to make an
informed decision concerning its purchase of the Shares.
5.8 JAKKS will have on the Closing Date sufficient funds to pay the
Closing Purchase Price.
38
39
5.9 JAKKS has received, at least two business days prior to the date
of this Agreement, a Form 1027 relating to the Acquisition. The information
reported on such Form 1027 makes no adjustment for the Divestiture (which has
not been completed as of the date of receipt of such Form 1027 or as of the date
of this Agreement and, for Michigan unemployment tax purposes, will be deemed to
be effected prior to the Closing).
5.10 No representation or warranty by JAKKS in this Agreement or any
other Acquisition Agreement contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements or facts
contained herein or therein not misleading.
6. Certain Covenants.
6.1 From and after the date hereof and until the Closing, the parties
hereto shall use their respective commercially reasonable best efforts, and
shall cooperate with each other, to cause the consummation of the Acquisition in
accordance with the terms and conditions hereof, including using commercially
reasonable best efforts to obtain the Consent of any Governmental Authority
(including any Consent required under the HSR Act) required by reason of the
Acquisition or any other Person required by reason of the Acquisition with
respect to each Contract. Without limiting the generality of the foregoing,
promptly after the date of this Agreement, each party shall prepare and make (or
cause to be prepared and made) any required Notices under any applicable Laws to
the extent necessary to consummate the Acquisition, including any Notices
required by the HSR Act. Each party hereto shall promptly consult with the other
parties with regard to, and provide any necessary information and reasonable
assistance to the other party in connection with, all Notices made and other
information supplied by such party with or to any Governmental Authority in
connection with this Agreement or the Acquisition. Each party shall furnish to
any such Governmental
39
40
Authority such necessary information and reasonable assistance as such
Governmental Authority may reasonably request in connection with the foregoing.
6.2 From and after the date hereof and until the Closing, except for
(a) any transfer of Shares by any Shareholder to any other Shareholder or (b)
any redemption, repurchase or other reacquisition of Shares by the Company or
the retirement or cancellation of any thereof, in either case in connection with
the Divestiture, no Shareholder shall, without the prior written consent of
JAKKS, sell, assign, transfer (including without limitation by gift) or
otherwise dispose of any Shares owned of record by such Shareholder, or any
interest therein or right thereto; or pledge, hypothecate or otherwise create,
incur or suffer to exist any Lien thereon; or agree or otherwise become legally
obligated to do any thereof; and, unless JAKKS otherwise consents, no such
transfer or disposition of Shares to any Person shall be valid or effective as
between such Shareholder and such Person, unless such Person executes and
becomes a party to this Agreement and each other Acquisition Agreement to which
the Shareholder (as such) transferring such Shares is a party (and Schedule I
hereto shall thereupon be amended accordingly).
6.3 From and after the date hereof and until the Closing, except as
otherwise provided on Schedule 6.3 or elsewhere herein or as JAKKS may otherwise
consent (which consent shall not be unreasonably withheld), the Shareholders
shall cause the Company to, and the Company shall:
(a) conduct the Business in ordinary course;
(b) use its commercially reasonable best efforts to preserve
the Flying Colors Business and the Flying Colors Assets and maintain its
relationship with customers and other Persons with which it has material
business dealings with respect to Flying Colors;
40
41
(c) not (i) sell, lease, transfer or dispose of any Flying
Colors Asset, other than sales of merchandise from inventory in the
ordinary course of business or disposal of defective, obsolete or
otherwise unusable Assets, or (ii) terminate any Contract relating to
Flying Colors, except upon expiration of the term thereof as provided
therein;
(d) use its commercially reasonable best efforts to maintain
all Permits and Consents listed on Schedule 4.11 relating to Flying
Colors;
(e) use its commercially reasonable best efforts to maintain
all insurance listed on Schedule 4.21 in full force and effect;
(f) except as required under a Contract or in the ordinary
course of business consistent with the Company's past practices, not
increase the compensation or other employment benefits payable to or for
the benefit of any employee of the Company;
(g) except for the filing of the Certificate of Amendment, not
amend its Articles of Incorporation or Bylaws;
(h) not merge or consolidate with any other Person or effect
any capital reorganization;
(i) not acquire (other than in the ordinary course of
business) any business or assets of any other Person, or make any
capital expenditure in excess of $25,000;
41
42
(j) not issue or reserve for issuance any shares of its
capital stock or issue or grant any options, warrants or other rights to
purchase, or securities or instruments convertible into or exchangeable
for, any capital stock of the Company or agree or otherwise become
legally obligated to issue or grant any thereof; and
(k) not redeem, repurchase or otherwise reacquire any Shares
or retire or cancel any capital stock;
provided that no provision of this Agreement shall be construed to prohibit or
restrict (i) any action reasonably necessary or appropriate to effect the
Divestiture or (ii) the Company from declaring, setting aside, paying or making
any dividend or other distribution to the Shareholders if such action, dividend
or distribution would not reasonably be expected to cause any closing condition
set forth in Article 7 not to be satisfied.
6.4 From and after the date hereof and until the Closing, the Company
shall furnish to JAKKS such information with respect to the Business and Assets
as JAKKS may from time to time reasonably request and shall permit JAKKS and its
authorized representatives access, during regular business hours and upon
reasonable Notice, to conduct, at JAKKS's sole expense, a physical inventory of
the Assets, to inspect the Real Property, to examine the books and records of
the Company and to make inquiries of responsible Persons designated by the
Company with respect thereto; provided that any information so disclosed to
JAKKS shall not constitute an additional representation or warranty of the
Company or any Shareholder beyond those expressly set forth in Article 4, and
provided further that all such information shall be subject to Section 6.7.
6.5 From and after the date hereof and until the Closing, except for
a press release, substantially in the form of Exhibit F, to be made by JAKKS
promptly after the execution of this Agreement, no party hereto shall make any
press release or other public
42
43
announcement with respect to this Agreement or the Acquisition, without the
prior written consent of the other parties (which consent shall not be
unreasonably withheld), unless such announcement is required by Law, in which
case the other party shall be given Notice of such requirement prior to such
announcement and the parties shall consult with each other as to the scope and
substance of such disclosure.
6.6 From and after the date hereof, none of the Company, any
Shareholder, any Affiliate thereof, or any director, officer, employee or other
agent or representative of any of them, shall, directly or indirectly, accept,
solicit or entertain any offer or proposal for, affirmatively respond to any
inquiry regarding, or enter into any negotiations or discussions with any Person
other than JAKKS with respect to, any transaction other than the Divestiture
involving the sale or other disposition (including without limitation by or
through the merger or consolidation of the Company with any other Person) of the
Business or any Assets (other than in the ordinary course of business) or any
capital stock of the Company. The Agent or the Shareholders shall promptly
advise JAKKS of the receipt of any such inquiry, offer or proposal and the
material terms thereof.
6.7 JAKKS acknowledges that all information relating to or concerned
with the Business and affairs of the Company, including without limitation all
Trade Rights, product information, customer and supplier lists, marketing and
sales data, personnel and financing and Tax matters is proprietary to the
Company and that its confidentiality is absolutely essential to the operation of
the Business. Until the Closing, all of such information shall be subject to the
obligations provided in that certain letter agreement dated as of May 28, 1999
(a copy of which is attached hereto as Schedule 6.7) to which the parties hereby
agree to be bound and which is incorporated herein by this reference.
6.8 Prior to the Closing, the Company shall file the Certificate of
Amendment with the Michigan Department of Consumer and Industry Services.
43
44
6.9 The Company shall deliver to the Divestee, at least two business
days prior to the date of the definitive agreements for the Divestiture, a Form
1027 relating to the Divestiture, which, for Michigan unemployment tax purposes,
shall be deemed to be effected prior to the Closing. The Company shall file with
the Michigan Employment Security Commission a Form UA 1772 (Discontinuance or
Disposition of Business or Assets), substantially in the form of Exhibit G,
promptly after the Divestiture but before the Closing, to report the Divestiture
as a transfer of business and the Divestee as the successor/transferee under MCL
421.22(c).
6.10 The Shareholders shall cause the Company to effect the
Divestiture prior to the Closing in accordance with the procedures set forth on
Schedule 6.10. The Divested Business shall consist of the Divested Assets,
including without limitation the Company's corporate name and any Trade Right
incorporating "Colorbok," subject to the Divested Liabilities. The Shareholders
shall (a) cause the Divestee to discharge prior to the Closing or to assume
prior to the Closing and discharge when due all Divested Liabilities and (b)
cause the structure and mechanics of the Divestiture to not result in any
additional costs or liabilities (including contingent liabilities) to JAKKS or
the Company, except for any such costs and liabilities accrued as part of
Closing Net Worth.
6.11 The Shareholders shall use their respective commercially
reasonable best efforts to cause at the Closing (a) the Landlord to enter into
the New Lease; and (b) the Divestee to enter into the Special Indemnity
Agreement and the Transition Services Agreement.
6.12 Prior to the Closing, the Shareholders shall enter into the
Paying Agent Agreement with the Paying Agent, pursuant to which the Shareholders
shall appoint the Paying Agent to act as the Shareholders' agent to receive,
hold and disburse any funds paid to it
44
45
hereunder. The Shareholders shall cause the Paying Agent to provide to JAKKS the
wire transfer information required by Section 3.2. Upon execution and delivery
of the Paying Agent Agreement, the Shareholders shall cause a true and complete
copy thereof to be delivered to JAKKS.
7. Conditions to Closing.
7.1 The obligation of JAKKS to consummate the Acquisition in
accordance herewith shall be subject to the satisfaction (or waiver) prior to
the Closing of each of the following conditions:
(a) the failure of any representations and warranties made by
the Company and the Shareholders herein to be true in all material
respects on and as of the Closing Date and any failures of the Company
or any Shareholder to perform or comply with their respective
obligations and conditions hereunder shall not, in the aggregate, have
had or be reasonably expected to have a Material Adverse Effect;
(b) no Order or Law shall be in effect which prohibits
consummation of the Acquisition;
(c) the waiting period under the HSR Act shall have expired or
been terminated;
(d) (i) each Consent of, or Notice to, any Governmental
Authority required for the consummation of the Acquisition or
other Person listed on Schedule 7.1(d) shall have been obtained
or given;
(ii) none of the parties hereto shall have received any
Notice withdrawing or adversely amending the Consent of Mattel,
45
46
Inc. to the Acquisition, which Consent is set forth in Exhibit H;
(e) there shall not have occurred, since the date of this
Agreement, any Material Adverse Effect;
(f) the Lien Report shall not disclose any Lien, other than a
Lien set forth on Schedule 4.7 or an Excepted Lien;
(g) the Divestiture shall have been effected prior to or
concurrently with the Closing;
(h) the Shareholders shall have entered into the Paying Agent
Agreement;
(i) JAKKS shall have received at the Closing a certificate on
behalf of the Company of the Company's Chief Executive Officer to the
effect that to such officer's knowledge:
(i) Sales for the Company's fiscal year ended May 31,
1999 were at least $49,084,000;
(ii) Closing Net Worth shall be positive; and
(iii) Closing Liquid Net Assets shall be positive; and
(j) the Company and the Shareholders shall execute and/or
deliver at the Closing all the documents so to be executed and/or
delivered by them and take all other actions at the Closing so to be
taken by them, pursuant to Article 8.
46
47
7.2 The obligation of the Shareholders to consummate the Acquisition
in accordance herewith shall be subject to the satisfaction (or waiver) prior to
or at the Closing of each of the following conditions:
(a) the representations and warranties made by JAKKS herein
shall be true in all material respects on and as of the Closing Date;
(b) JAKKS shall have, in all material respects, performed and
complied with all obligations and conditions to be performed or complied
with by it hereunder;
(c) no Order or Law shall be in effect which prohibits
consummation of the Acquisition;
(d) the waiting period under the HSR Act shall have expired or
been terminated;
(e) each Consent of, or Notice to, any Governmental Authority
required for the consummation of the Acquisition shall have been
obtained or given; and
(f) JAKKS shall execute and/or deliver at the Closing all the
documents and monies so to be executed and/or delivered by it and take
all other actions at the Closing so to be taken by it, pursuant to
Article 8.
7.3 Notwithstanding anything to the contrary in this Agreement, any
party hereto shall have the right to waive (or to consummate the Acquisition
without satisfaction of)
47
48
any condition to such party's obligation to consummate the Acquisition as set
forth in Article 7, and to the extent that any party so waives (and consummates
the Acquisition without satisfaction of) any such condition, such party shall
have no right or remedy against any other party hereto for failure of such
condition to have been satisfied, including without limitation any right to
indemnification under Article 11, any of the rights or remedies contemplated by
Section 12.10 or any right to any adjustment to the Purchase Price as a result
of the failure of such condition to have been satisfied; provided that the
foregoing shall not limit any party's right or remedy based upon or arising from
any breach or default hereunder (notwithstanding that such breach or default
involves or relates to the same transaction, event or circumstance constituting
such condition).
8. Closing.
8.1 The Closing shall be held at the offices of Feder, Kaszovitz,
Isaacson, Weber, ▇▇▇▇▇ & Bass LLP, ▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇
▇▇▇▇▇ on the earliest practicable date, and in any event within five days, after
the satisfaction (or waiver) of all conditions to the Closing provided in
Article 7 shall have been satisfied, or at such other place or on such other
date, and at such time, as the parties hereto may agree. The execution and/or
delivery of each document to be executed and/or delivered at the Closing and
each other action to be taken at the Closing shall be subject to the condition
that every other document to be executed and/or delivered at the Closing is so
executed and/or delivered and every other action to be taken at the Closing is
so taken, and all such documents and actions shall be deemed to be executed
and/or delivered or taken, as the case may be, simultaneously.
8.2 At the Closing, the Shareholders shall deliver to JAKKS:
(a) certificates representing the Shares, each duly endorsed
for transfer to JAKKS or together with a duly executed stock power in
favor of JAKKS;
48
49
(b) all Consents listed on Schedule 7.1(d);
(c) the resignations, effective at the Closing, of all of the
Company's directors and officers immediately prior to the Closing;
(d) the Waiver Documents;
(e) the certificate referred to in Section 7.1(i);
(f) a Notice setting forth the Retained Divestee Contracts;
and
(g) certificates of the Company's Chief Executive Officer and
the Shareholders, respectively, to the effect that all the conditions to
Closing set forth in Sections 7.1(a), (d), (e) and (g) have been
satisfied; provided that any such certificate may update any
representation or warranty of the Company or any Shareholder made in any
Acquisition Agreement by setting forth therein any additional
information or change to any schedule relating to such representation or
warranty or by adding a schedule to relate to any such representation or
warranty.
8.3 At the Closing, JAKKS shall:
(a) pay and deliver the Closing Purchase Price to the Paying
Agent in the manner provided in Sections 2.2 and 3.2; and
(b) deliver to the Company and the Shareholders a certificate
of JAKKS' Chief Executive Officer to the effect that all the conditions
to Closing set
49
50
forth in Sections 7.2(a), (b) and (e) have been satisfied.
8.4 At the Closing:
(a) JAKKS and Pokempner shall each execute and deliver to the
other the Employment Agreement for Pokempner; and
(b) JAKKS and ▇▇▇▇▇▇ shall each execute and deliver to the
other the Employment Agreement for ▇▇▇▇▇▇.
8.5 At the Closing, the Company and the Landlord shall each execute
and deliver to the other the New Lease.
8.6 At the Closing, the Company and the Divestee shall each execute
and deliver to the other the Transition Services Agreement.
8.7 At the Closing, JAKKS, the Company and the Divestee shall each
execute and deliver to the other the Special Indemnity Agreement.
8.8 At the Closing, JAKKS shall cause the Company to pay all Transfer
Fees.
8.9 At the Closing, JAKKS shall pay on behalf of the Company or shall
cause the Company to pay the entire indebtedness of the Company to the Bank
under the Bank Loan, and JAKKS shall cause the Company to, and the Company
shall, give such Notice to the Bank and take such other actions as are
reasonably necessary and appropriate to terminate the Bank Loan on the Closing
Date.
50
51
8.10 At the Closing, JAKKS shall pay on behalf of the Company or shall
cause the Company to pay any indebtedness of the Company on the Closing Date
with respect to the loans or other obligations set forth on Schedule 8.10.
9. Additional Covenants.
9.1 JAKKS and the Company shall use their respective commercially
reasonable best efforts to cause each guaranty or similar agreement and any
related security agreement (including any mortgage or deed of trust relating to
real property) made by any Shareholder or any family relation thereof or any
Affiliate of any of them to be terminated, and to obtain from the Bank such
Notices or other documents as are customarily obtained to evidence and confirm
such termination, as soon as practicable after the Closing.
9.2 From and after the Closing Date and until December 31, 2002, no
Shareholder shall, directly or indirectly through any Affiliate or other
intermediary (a) engage in the Restricted Business, or serve as a partner,
member, manager, director, officer or employee of, or consultant or advisor to,
or in any manner own, control, manage, operate or otherwise participate or
invest in (in each case, other than as required or permitted in the Employment
Agreements), any Person that engages in the Restricted Business, or authorize
the use of its name in connection therewith, or (b) for itself or on behalf of
any other Person, employ, engage or retain any Person (other than a Shareholder)
who at any time during the preceding 12-month period shall have been an employee
of the Company, except for the employment, in connection with the Divestiture,
of those employees of the Company to be employed by the Divested Business, as
set forth on Schedule 4.18, or contact any supplier, customer or employee of the
Company for the purpose of soliciting or diverting any such supplier, customer
or employee from the Company. The foregoing provisions notwithstanding, any
Shareholder may invest his funds in securities of an issuer if the
51
52
securities of such issuer are listed for trading on a registered securities
exchange or actively traded in the over-the-counter market and the Shareholders'
aggregate holdings therein represent less than 5% of the total number of shares
or principal amount of the securities of such issuer then outstanding. In
addition, no provision of this Section 9.2 is intended or shall be deemed to
preclude the Divestee or any Person acting on its behalf from engaging any sales
representative or conducting business or dealing with any vendor, supplier or
customer in the ordinary course of the Divested Business. The Shareholders
acknowledge that the provisions of this Section, and the period of time,
geographic area and scope and type of restrictions on their activities set forth
herein, are reasonable and necessary for the protection of JAKKS and are an
essential inducement to JAKKS entering into this Agreement.
9.3 From and after the Closing Date, the Shareholders shall keep
absolutely confidential all confidential or proprietary information on the
Closing Date relating to or concerned with Flying Colors, including without
limitation all of the Company's Trade Rights relating to Flying Colors, product
information, customer and supplier lists, marketing and sales data, personnel
and financing and Tax matters relating thereto. The Shareholders acknowledge
that the confidentiality of all such information is absolutely essential to the
operation of the Flying Colors Business. No Shareholder shall, at any time after
the Closing Date, use or disclose to any Person any such information, without
JAKKS' prior written consent, except as may be required by Law or an Order (in
which case such Shareholder shall promptly give notice to JAKKS of any demand,
subpoena, Order or legal process requiring disclosure so that JAKKS may oppose
such disclosure or seek a protective Order or other confidential treatment of
such information), unless (a) such use or disclosure is permitted under an
Employment Agreement or (b) such use or disclosure is reasonably necessary to
conduct the Divested Business or (c) such Shareholder can demonstrate that such
information (i) has become, at any time after the Closing Date, generally
available in the public domain or (ii) was already known to a Person to whom he
discloses such information other than, in either case, through the disclosure of
such information in violation of any confidentiality obligation to or
52
53
for the benefit of JAKKS or the Company that is known or should have been known
to the disclosing Shareholder.
9.4 From and after the Closing Date and until December 31, 2002,
JAKKS shall not, directly or indirectly through any Affiliate (including without
limitation the Company) or other intermediary (a) engage in the Divested
Business, or serve as a partner, member, manager, director, officer or employee
of, or consultant or advisor to, or in any manner own, control, manage, operate
or otherwise participate or invest in, any Person that engages in the Divested
Business, or authorize the use of its name in connection therewith, or (b) for
itself or on behalf of any other Person, employ, engage or retain any Person
(other than a Shareholder) who at any time during the preceding 12-month period
shall have been an employee of the Company listed on Schedule 4.18 or an
employee of the Divested Business, or contact any supplier, customer or employee
of the Divested Business for the purpose of soliciting or diverting any such
supplier, customer or employee from the Divested Business. The foregoing
provisions notwithstanding, JAKKS may invest its funds in securities of an
issuer if the securities of such issuer are listed for trading on a registered
securities exchange or actively traded in the over-the-counter market and JAKKS'
aggregate holdings therein represent less than 5% of the total number of shares
or principal amount of the securities of such issuer then outstanding. JAKKS
acknowledges that the provisions of this Section, and the period of time,
geographic area and scope and type of restrictions on its activities set forth
herein, are reasonable and necessary for the protection of the Divestee and are
an essential inducement to the Shareholders entering into this Agreement.
9.5 From and after the Closing Date, JAKKS and the Company shall keep
absolutely confidential all confidential or proprietary information on the
Closing Date relating to or concerned with the Divested Business, including
without limitation all of its Trade Rights, product information, customer and
supplier lists, marketing and sales data, personnel and financing and Tax
matters relating thereto. JAKKS and the Company acknowledge that
53
54
the confidentiality of all such information is absolutely essential to the
operation of the Divested Business. Neither JAKKS nor the Company shall, at any
time after the Closing Date, use or disclose to any Person any such information,
without the Divestee's prior written consent, except as may be required by Law
or an Order (in which case JAKKS or the Company, as the case may be, shall
promptly give notice to the Divestee of any demand, subpoena, Order or legal
process requiring disclosure so that the Divestee may oppose such disclosure or
seek a protective Order or other confidential treatment of such information),
unless (a) such use or disclosure is reasonably necessary (i) to conduct the
Flying Colors Business or (ii) to respond to any matter affecting the Company
after the Closing or (b) JAKKS or the Company can demonstrate that such
information (i) has become, at any time after the Closing Date, generally
available in the public domain or (ii) was already known to a Person to whom it
discloses such information other than, in either case, through the disclosure of
such information in violation of any confidentiality obligation to or for the
benefit of the Divestee that is known or should have been known to JAKKS or the
Company.
9.6 No party hereto shall, at any time after the date hereof,
directly or indirectly disparage or demean, or make, encourage, support or
concur in any statement (written or oral) which disparages or demeans in any
manner, whether for a commercial purpose or otherwise, any other party hereto or
any Affiliate thereof, or any stockholder, director, officer, employee or agent
of any of them; provided that no provision of this Section 9.6 shall be
construed to prohibit or restrict any statement by any Person made in
furtherance or defense of any claim or in the course of any Proceeding or the
resolution of any dispute pursuant to Section 9.8.
9.7 In addition to the provisions of Section 2.5, JAKKS shall cause
the Company to, and the Company shall, operate the Flying Colors Business
throughout the Earn-Out Periods, in a manner consistent with JAKKS' customary
business practices and policies, and neither JAKKS nor the Company shall take
any action for the purpose of reducing the
54
55
Earn-Out or limiting or adversely affecting the ability of the Shareholders to
achieve the Earn-Out under Section 2.5. JAKKS and the Company shall maintain
complete and correct records relating to the determination of the Earn-Out, and
shall permit the Shareholders and their authorized representatives, from time to
time during normal business hours and upon reasonable prior written Notice, to
examine and to audit such records (including ledgers, work papers and other
relevant documents and information) in order to confirm JAKKS' and the Company's
compliance with the provisions of this Section 9.7 and to verify the Earn-Out
for any Earn-Out Period. JAKKS and the Company shall cooperate with such
examination and make available appropriate financial and accounting personnel to
respond to inquiries relating thereto. Any information so disclosed to any
Shareholder or his authorized representative shall be subject to the
confidentiality restrictions of Section 9.3; provided that no provision of
Section 9.3 shall be construed to prohibit or restrict any statement by any
Person made in furtherance or defense of any claim or in the course of any
Proceeding or the resolution of any dispute pursuant to Section 9.8.
9.8 If (a) JAKKS and the Shareholders, or any of them, disagree with
the determination of any amount made or certified by another party hereto,
within 30 days of delivery of evidence of such determination or certificate,
including without limitation the Earn-Out for any Earn-out Period, or (b) any
party asserts in writing, within 60 days after the Closing Date, that the
determination of the Closing Net Worth, the Closing Net Liquid Assets or the
Interim Net Income differ from the good faith estimates thereof set forth in the
Notice given to JAKKS pursuant to Section 2.3(a), then, in either such case,
such party shall give written Notice (the "Dispute Notice") to the other parties
to such effect, setting forth therein any change proposed by it and, in
reasonable detail, its objections to such determination and the reasons for such
change. In such event, unless the parties involved promptly, and, in any event,
within 30 days of the giving of the Dispute Notice, resolve all such objections
and agree upon the determination of the amount in dispute, the determination
thereof shall be promptly referred to their respective regular independent
certified public accountants, who shall confer
55
56
and attempt to resolve the objections as to such determination set forth in or
arising as a consequence of the Dispute Notice. If, within 30 days of such
referral, such accountants resolve such dispute and determine the amount, they
shall give Notices to the parties involved to such effect, setting forth therein
the amount as so determined and the basis therefor, and such determination shall
be final and binding on the parties involved. If such accountants do not make
such determination within such 30-day period, the parties involved shall refer
such dispute to Pricewaterhouse Coopers or such other accountants to which JAKKS
and the Shareholders may agree (the "Neutral Accountants"). Unless the Neutral
Accountants expressly determine otherwise, each of the parties involved shall
submit to the Neutral Accountants (a) within 10 days of the engagement thereof,
and in such form and manner as they may prescribe, a statement setting forth
such party's position with respect to each of the objections or other issues set
forth in or arising as a consequence of the Dispute Notice, together with any
exhibits or other supporting documents relating thereto, and send a copy thereof
to each other party involved, and (b) within 10 days thereafter, and in such
form and manner as the Neutral Accountants may prescribe, a rebuttal statement
responding to the initial statement of each other party, together with any
exhibits or other supporting documents relating thereto, and send a copy thereof
to each other party involved. The Neutral Accountants shall conduct a hearing if
all the parties involved so request in their respective statements, and may
conduct a hearing, whether or not any (but fewer than all) the parties involved
so request, if the Neutral Accountants reasonably deem it necessary for the
performance of their engagement; provided that any such hearing shall be held
only upon reasonable prior written Notice to all parties involved and only if
all such parties have an opportunity to appear and present evidence at such
hearing. The Neutral Accountants may require any party hereto (whether or not a
party to the dispute) to submit or produce additional statements, documents or
information, to appear and testify at any hearing or other proceeding, or
otherwise to produce tangible or oral evidence to the extent such Neutral
Accountants reasonably deem necessary or appropriate for them to determine any
amounts to be determined by them pursuant to their engagement. Based on such
submissions and the evidence presented
56
57
at any hearing, the Neutral Accountants shall resolve all obligations and other
issues set forth in or arising as a consequence of the Dispute Notice and
determine the amount to be determined by them pursuant to their engagement, and
give Notice to the parties involved, setting forth therein such amounts and the
basis of determination thereof, such determination to be final and binding on
the parties involved. Upon agreement or determination of any portion of any
amount covered by the Dispute Notice, any payment or adjustment based thereon
shall be paid promptly, and in any event within 10 days of such agreement or
determination, with interest accrued thereon from the date on which such payment
should have been made (i.e., the Closing Date for any amounts relating to the
Closing Purchase Price (other than the Deferred Closing Purchase Price)) through
the date of payment thereof at the Prime Rate. Any such payment to the
Shareholders shall be made to the Paying Agent (for the benefit and account of
the several Shareholders in the manner in which such payment would otherwise be
required to be made in accordance with Article 2) in accordance with Section
3.2. Any such payment to JAKKS shall be made to JAKKS by federal funds wire
transfer to an account set forth in a written Notice theretofore given by JAKKS
to the Agent or, if no such Notice is received by the Agent, by mailing to JAKKS
at its address set forth in Section 12.4 a bank cashier's check payable to the
order of JAKKS. Each party shall cooperate with the other parties and make
available to such other parties financial information reasonably requested by
such other parties for the determination of amounts contemplated by this
Agreement. The fees and expenses of a party's independent certified public
accountants incurred in the determination of any amount as provided herein shall
be separately borne by such party. The fees and expenses of the Neutral
Accountants incurred, if required pursuant to this Section 9.8, shall be borne
and promptly paid equally by JAKKS, on the one hand, and the Shareholders, on
the other.
9.9 After the Closing, each of JAKKS and the Company shall:
(a) permit the Shareholders to prepare and file (and JAKKS
hereby
57
58
irrevocably authorizes the Agent to prepare and file on behalf of the
Company) all United States federal and state income Tax returns or
reports of the Company for any period ending on or before the Closing
Date which shall not have been filed prior to the Closing Date;
provided, however, that at least 30 days prior to the proposed date of
filing thereof, the Shareholders shall deliver a copy thereof to JAKKS,
which may review the same and, if it so desires, have a reasonable
opportunity to make inquiries or discuss the same with the Agent or
other appropriate personnel designated by the Shareholders, and the
Shareholders shall make any revision thereto requested by JAKKS which
may affect its interests and is reasonably acceptable to the
Shareholders;
(b) not make any amendment to any Tax return or report of the
Company for any period ending on or before the Closing Date without the
prior written consent of the Agent, if such amendment would result in a
material liability to any Shareholder, unless at least 30 days prior to
the filing thereof, JAKKS gives to the Agent written Notice of such
amendment, and the Agent fails to deliver to JAKKS within 20 days of his
receipt of the Notice of such amendment a written Notice objecting to
such amendment, setting forth therein in reasonable detail a reasonable
basis for such objection and the changes, if any, he asserts are
required to be made therein, in which case, JAKKS and the Agent shall
promptly confer and attempt to resolve such objections or, if they fail
to promptly do so, submit such dispute for resolution in accordance with
Section 9.8;
(c) not agree to any extension or tolling of any statute of
limitations under any applicable Tax Law with respect to any matter for
which any Shareholder may have any liability, without the prior written
consent of such Shareholder;
(d) maintain, until the seventh anniversary of the Closing
58
59
Date, all accounting ledgers, books and records of the Company with
respect to the periods ending on or before the Closing Date and permit
any Shareholder reasonable access thereto in connection with the
preparation of financial reports, Tax returns, Tax audits or the defense
or prosecution of any Proceeding;
(e) pay to the Paying Agent (or, if the Paying Agent Agreement
has been terminated, to the Agent) (for the benefit and account of the
several Shareholders in the percentages set forth on Schedule 2.2) the
refunds of Taxes described on Schedule 9.9(e); and
(f) pay to the Paying Agent (or, if the Paying Agent Agreement
has been terminated, to the Agent) (for the benefit and account of the
several Shareholders in the percentages set forth on Schedule 2.2) any
other refund of Taxes of the Company for any period ending on or before
the Closing Date (including without limitation any refund resulting from
any audit of the Company's Tax returns for any such period), except to
the extent that any portion of such refund was included as an asset in
Closing Net Worth, and cooperate with the Shareholders in filing any
amended Tax return or claim for refund for any such period necessary to
obtain such a refund.
Any information delivered to the Agent or any Shareholder pursuant to this
Section 9.9 shall be subject to the confidentiality restrictions of Section 9.3
and any information delivered to JAKKS pursuant to this Section 9.9 shall be
subject to the confidentiality restrictions of Section 9.5.
9.10 JAKKS shall not offer for sale, sell, assign, transfer, pledge,
hypothecate or otherwise dispose of any of the Shares, without registration
under the Securities Act of 1933, as amended, and any applicable state
securities Laws, except pursuant to an exemption from
59
60
such registration under such Act and Laws.
9.11 JAKKS shall be responsible for any severance payments required to
be made in connection with the termination of employment of the employees listed
on Schedule 9.11 (which also sets forth, as to each such employee, the amount of
such severance payment and the basis therefor) and for any severance payments or
other employment termination expenses required to be made in connection with the
termination of employment of any of the employees identified on Schedule 4.18
who are designated thereon to remain employees of the Company or to become
employees of JAKKS (rather than to become employees of the Divestee), and the
Shareholders shall be responsible for any other severance payments or other
employment termination expenses required to be paid in connection with the
Acquisition.
9.12 JAKKS hereby consents to the engagement of the Company
Accountants at any time by the Divestee, any Shareholder or any Affiliate of any
of them, including without limitation representation of any of them in
connection with any dispute relating to any Acquisition Agreement or the
Acquisition, notwithstanding JAKKS' engagement of the Company Accountants to
audit the separate financial statements of Flying Colors or any conflict that
may arise by reason thereof.
9.13 (a) After the Closing Date:
(i) JAKKS shall not take any action to perform or,
subject to Subsection 9.13(b), to terminate any Retained Divestee
Contract, except as reasonably directed by the Agent; provided
that any loss, liability, obligation, damage or expense suffered
or incurred on account of any such Retained Divestee Contract
shall be borne solely by the Divestee and the Shareholders and
any payment required to be made by JAKKS or the Company shall be
advanced, at its request, to JAKKS or the Company, as the case
may
60
61
be;
(ii) JAKKS shall, and shall cause the Company to,
promptly remit or deliver to the Divestee any payment or property
actually received by JAKKS or the Company pursuant to any
Retained Divestee Contract, except that JAKKS or the Company, as
the case may be, may retain any such payment or property and
credit the same against any amount owed by the Divestee or the
Shareholders with respect to any Retained Divestee Contract
pursuant to Subsection 9.13(a)(i); and
(iii) JAKKS and the Company shall cooperate with the
Divestee and take any commercially reasonable action requested by
the Divestee, at the sole cost and expense of the Divestee and
the Shareholders, to obtain any required Consent of any
counterparty to any Retained Divestee Contract required as a
condition to the assignment thereof to the Divestee, or otherwise
to avoid a default thereunder, in connection with the
Divestiture.
(b) After the 120th day after the Closing Date, JAKKS or the
Company may terminate any Retained Divestee Agreement or take any other
commercially reasonable action to relieve JAKKS, the Company and their
respective Affiliates of any further obligation, liability, cost or
expense thereunder, and the Divestee shall bear and promptly pay to
JAKKS or the Company, as the case may be, the actual cost and expense
incurred by JAKKS or the Company by reason of such termination or other
actions.
9.14 ▇▇▇▇▇▇ grants to JAKKS an exclusive, fully-paid, royalty-free
license to use the Trade Rights under the patents and patent applications
described on Schedule 4.12 as the patent applications of ▇▇▇▇▇▇ for a period of
six years after the Closing Date.
61
62
10. Termination.
10.1 This Agreement may be terminated at any time prior to the
Closing:
(a) by the mutual agreement of JAKKS and the Shareholders;
(b) by any party (if such party is not in breach of or default
under this Agreement) giving written Notice to such effect to the other
parties if the Closing shall not have occurred on or before October 25,
1999, or such later date as the parties shall have agreed upon prior to
the giving of such Notice;
(c) by (i) JAKKS, upon written Notice to such effect to the
Shareholders, in the event of a breach or default by any party hereto
other than JAKKS that has or is reasonably likely to have a Material
Adverse Effect; provided that written Notice of such breach or default
is given to the breaching or defaulting party and such breach or default
is not cured within 30 days of such Notice; or (ii) any party other than
JAKKS, upon written Notice to such effect to the other parties, in the
event of a material breach by or default of JAKKS; provided that written
Notice of such breach or default is given to JAKKS, and such breach or
default is not cured within 30 days of such Notice; or
(d) by any party if any Governmental Authority issues an Order
or takes any other action restraining, enjoining or otherwise
prohibiting, or seeking material damages in respect of, any transaction
contemplated by any Acquisition Agreement and such Order becomes final
and non-appealable, or any Law having the same effect becomes applicable
to any party hereto.
62
63
10.2 Upon termination of this Agreement pursuant to Section 10.1, all
obligations of the parties shall terminate except those under Section 6.7,
Section 10.3 and Articles 11 and 12; provided that no such termination shall
relieve any party of any liability to another party by reason of any breach of
or default under this Agreement.
10.3 (a) If (i) JAKKS terminates this Agreement pursuant to Section
10.1(c) or (ii) all the conditions precedent set forth in Section 7.2 are
satisfied (except for any such condition which is not satisfied by reason of any
breach of or default under this Agreement by any Shareholder or the Agent) and
the Shareholders nevertheless (A) fail to set a Closing as provided in Section
8.1 or (B) fail to close the Acquisition in accordance with Article 8
notwithstanding that JAKKS is ready, able and willing to close in accordance
with Article 8, and, in the case of either clause (i) or clause (ii), there
occurs a Transaction within a period of six months after the date of such
termination, in the case of clause (i), or the date proposed by JAKKS or agreed
to by the parties, in the case of clause (ii), the Shareholders and the Company
shall pay to JAKKS a termination fee in the total amount of $2,000,000 (the
"Termination Fee").
(b) The Termination Fee shall be payable by wire transfer of
immediately available funds to an account designated by JAKKS
concurrently with the closing of the Transaction.
(c) The Termination Fee shall constitute liquidated damages to
JAKKS in respect of all losses, liabilities, damages and expenses
suffered or incurred by JAKKS by reason of the termination of this
Agreement or the failure of the Shareholders to close in accordance with
Section 10.3, and, notwithstanding any other provision hereof, including
without limitation those of Section 12.10, shall be in lieu of any other
remedy or relief otherwise available to JAKKS by reason thereof. The
parties hereto acknowledge that it would be impracticable to ascertain
the amount of all
63
64
losses, liabilities, damages and expenses that would be suffered or
incurred by JAKKS under the circumstances described in Section 10.3(a)
and that the amount of the Termination Fee is a fair and reasonable
estimate of such losses, liabilities, damages and expenses and provides
a reasonable and certain amount to compensate JAKKS therefor.
11. Indemnification.
11.1 The Shareholders, jointly and severally, shall indemnify and
defend JAKKS and, after the Closing, the Company and each director, officer,
employee and agent of JAKKS and after the Closing, the Company against, and hold
each of them harmless from, any loss, liability, obligation, damage or expense
(including reasonable attorneys' fees and disbursements) which any of them may
suffer or incur incidental to any claim or any Proceeding against any of them to
the extent based upon or resulting from:
(a) the failure of any representation or warranty made by the
Company or the Shareholders in any Acquisition Agreement (excluding the
Agent Agreement and the Paying Agent Agreement) to be true in all
material respects on the date hereof and on the Closing Date;
(b) the Company's or the Shareholders' failure, in all
material respects, to perform or to comply with any covenant required
hereunder to be performed or complied with by the Company or a
Shareholder prior to the Closing or by any Shareholder at any time
hereafter;
(c) the failure of Pokempner or ▇▇▇▇▇▇ to enter into his
Employment Agreement in the form of Exhibit B;
64
65
(d) the matters described on Schedule 11.1(d); or
(e) any transaction, event or circumstance to the extent
relating to the Divested Business, whether occurring or existing before,
at or after the Closing.
11.2 JAKKS shall indemnify and defend each Shareholder and, prior to
the Closing, the Company and each director, officer, employee or agent of any
Shareholder or, prior to the Closing, the Company against, and hold each of them
harmless from, any loss, liability, obligation, damage or expense (including
reasonable attorneys' fees and disbursements) which any of them may suffer or
incur incidental to any claim or any Proceeding against any of them to the
extent based upon or resulting from:
(a) the failure of any representation or warranty made by
JAKKS in any Acquisition Agreement to be true in all material respects
on the date hereof and on the Closing Date;
(b) JAKKS' failure, in all material respects, to perform or to
comply with any covenant required hereunder to be performed or complied
with by JAKKS;
(c) any transaction, event or circumstance relating to the
Business occurring or existing at any time unless JAKKS is entitled to
indemnification with respect thereto under Section 11.1; provided that
for purposes of determining whether JAKKS is entitled to indemnification
with respect thereto under Section 11.1, Section 11.4 shall be
disregarded if the indemnification obligation under this Section 11.2(c)
relates to a claim by third party; or
(d) any claim by any creditor of the Company that the
65
66
Acquisition (excluding the Divestiture) (together with any related or
subsequent financing transactions engaged in by JAKKS or the Company
within 18 months after the Closing Date) violates any applicable
bankruptcy, insolvency, fraudulent transfer or fraudulent conveyance
Laws or Laws limiting the availability of funds for distribution to
shareholders.
11.3 Promptly after Notice to an indemnified party of any claim or the
commencement of any Proceeding by a third party involving any loss, liability,
obligation, damage or expense referred to in Section 11.1 or 11.2, such
indemnified party shall, if a claim for indemnification in respect thereof is to
be made against an indemnifying party, give written Notice to the latter of the
commencement of such claim or Proceeding, setting forth in reasonable detail the
nature thereof and the basis upon which such party seeks indemnification
hereunder; provided that the failure of any indemnified party to give such
Notice shall not relieve the indemnifying party of its obligations under such
Section, except to the extent that the indemnifying party is actually prejudiced
by the failure to give such Notice. In case any such Proceeding is brought
against an indemnified party, and provided that proper Notice is duly given, the
indemnifying party shall assume and control the defense thereof insofar as such
Proceeding involves any loss, liability, obligation, damage or expense in
respect of which indemnification may be sought hereunder, with counsel selected
by the indemnifying party (and reasonably satisfactory to such indemnified
party), and, after Notice from the indemnifying party to such indemnified party
of its assumption of the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof (but
the indemnified party shall have the right, but not the obligation, to
participate at its own cost and expense in such defense by counsel of its own
choice) or for any amounts paid or foregone by the indemnified party as a result
of the settlement or compromise thereof (without the written consent of the
indemnifying party), except that, if both the indemnifying party and the
indemnified party are named as parties or subject to such Proceeding and either
such party
66
67
reasonably determines with advice of counsel that a material conflict of
interest between such parties may exist in respect of such Proceeding, the
indemnifying party may decline to assume the defense on behalf of the
indemnified party or the indemnified party may retain the defense on its own
behalf, and, in either such case, after Notice to such effect is duly given
hereunder to the other party, the indemnifying party shall be relieved of its
obligation to assume the defense on behalf of the indemnified party, but shall
be required to pay any reasonable legal or other expenses, including without
limitation reasonable attorneys' fees and disbursements incurred by the
indemnified party in such defense; provided, however, that the indemnifying
party shall not be liable for such expenses on account of more than one separate
firm of attorneys (and, if necessary, local counsel) at any time representing
such indemnified party in connection with any Proceeding or separate Proceedings
in the same jurisdiction arising out of or based upon substantially the same
allegations or circumstances. If the indemnifying party shall assume the defense
of any such Proceeding, the indemnified party shall cooperate fully with the
indemnifying party and shall appear and give testimony, produce documents and
other tangible evidence, allow the indemnifying party access to the books and
records of the indemnified party and otherwise assist the indemnifying party in
conducting such defense. No indemnifying party shall, without the consent of the
indemnified party, which consent shall not be unreasonably withheld, consent to
entry of any judgment or enter into any settlement or compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect of such
claim or Proceeding. Provided that proper Notice is duly given, if the
indemnifying party shall fail promptly and diligently to assume the defense
thereof, if and in the manner required hereunder, the indemnified party may
respond to, contest and defend against such Proceeding (but the indemnifying
party shall have the right to participate at its own cost and expense in such
defense by counsel of its own choice) and may make in good faith any compromise
or settlement with respect thereto, and recover the entire cost and expense
thereof, including, without limitation, reasonable attorneys' fees and
disbursements and all amounts paid or foregone as a result of such Proceeding,
or the settlement or compromise thereof, from the
67
68
indemnifying party. Any indemnification required to be made hereunder shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills or invoices are received or loss,
liability, obligation, damage or expense is actually suffered or incurred.
11.4 Any other provision hereof notwithstanding:
(a) no Shareholder or, prior to the Closing, the Company shall
be required to indemnify any Person unless and until the aggregate
amount of loss, liability, obligation, damage or expense as to which
indemnification would be required from all the Shareholders and the
Company, collectively, under Section 11.1(a) (but for the provisions of
this Section 11.4) exceeds $500,000, and thereafter the Shareholders
and, prior to the Closing, the Company shall be required, in the manner
and to the extent otherwise provided in this Article, to indemnify any
Person and to pay all amounts otherwise required to be paid by the
Shareholders and, prior to the Closing, the Company but only to the
extent that the entire loss, liability, obligation, damage or expense
suffered or incurred by such Person and any other Person so entitled to
indemnification pursuant to Section 11.1(a) exceeds $500,000;
(b) the aggregate amount required to be paid by the
Shareholders and, prior to the Closing, the Company, under Sections
11.1(a), 11.1(b), 11.1(c) and 11.1(d) pursuant to this Article shall not
exceed $16,000,000;
(c) the aggregate amount of indemnification payable by any
Shareholder under Section 11.1(a), 11.1(b), 11.1(c) and 11.1(d) shall
not exceed such Shareholder's share of the Purchase Price actually
received by such Shareholder;
(d) the indemnification obligations provided herein shall
68
69
terminate with respect to any claim for indemnification arising (i)
under Section 11.1(a) or Section 11.2(a) or (ii) under Section 11.1(b)
or 11.2(b) with respect to performance or compliance with any covenant
provided in Article 6 or elsewhere herein which by its terms is required
to be performed or complied with prior to or at the Closing (each, a
"Pre-Closing Covenant") that is, in any such case, not made prior to the
first anniversary of the Closing Date, except that any claim under the
last four sentences of Section 4.1 or Section 4.14, 4.15 or 4.16 or
arising under Section 11.1(b) (other than with respect to a Pre-Closing
Covenant), 11.1(d) or 11.1(e) or arising under Section 11.2(b) (other
than with respect to a Pre-Closing Covenant), 11.2(c) or 11.2(d) shall
not be so limited under this Section and shall terminate in accordance
with the statute of limitations of applicable Law;
(e) if JAKKS is entitled to receive indemnification from the
Shareholders pursuant to Section 11.1, JAKKS may, upon 14 days prior
written Notice to the Shareholders, offset and retain the amount thereof
from any Earn-Out otherwise payable to the Shareholders hereunder;
(f) Neither JAKKS nor any other indemnified parties shall be
entitled to any indemnification under Section 11.1 to the extent that:
(i) JAKKS or any such other indemnified party actually
receives or is entitled to receive any amount in respect of any
loss, liability, obligation, damage or expense from other
sources, including without limitation insurance or third-party
indemnity; provided that JAKKS or such other indemnified party
uses commercially reasonable best efforts to collect any such
amount, except that neither JAKKS nor any such other indemnified
party shall be required to commence any Proceeding to collect any
such amount; and provided further that, if JAKKS or any such
other indemnified party fails to collect any amount which it is
so entitled to receive and JAKKS or any
69
70
such other indemnified party receives the indemnification it is
entitled to receive pursuant to Section 11.1, JAKKS or such other
indemnified party shall assign to the indemnifying party JAKKS'
or such other indemnified party's rights to collect such amount;
or
(ii) such loss, liability, obligation, damage or expense
results in a benefit to JAKKS included in the Purchase Price,
including the Purchase Price Adjustment; and
(g) JAKKS shall not be entitled to any indemnification under
Section 11.1 if it receives the Termination Fee.
12. Miscellaneous.
12.1 Survival of Representations and Warranties. Subject to Section
11.4(d), the representations and warranties of each party hereto shall survive
the Closing, notwithstanding any investigation or inquiry made by any other
party hereto.
12.2 Limitation of Authority. Except as expressly provided herein, no
provision hereof shall be deemed to create any partnership, joint venture or
joint enterprise or association among the parties hereto, or to authorize or to
empower any party hereto to act on behalf of, obligate or bind any other party
hereto.
12.3 Fees and Expenses. Each party hereto shall bear such fees and
expenses as may be incurred by it in connection with this Agreement, the other
Acquisition Agreements and the Acquisition.
12.4 Notices. Any Notice or demand required or permitted to be given
or made
70
71
hereunder to or upon any party hereto shall be deemed to have been duly given or
made for all purposes if (a) in writing and sent by (i) messenger or an
overnight courier service against receipt, or (ii) certified or registered mail,
postage paid, return receipt requested, or (b) sent by telecopy (confirmed
orally), telex or similar electronic means, provided that a written copy thereof
is sent on the same day by postage-paid first-class mail, to such party at the
following address:
to JAKKS: JAKKS Pacific, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: President
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to: Feder, Kaszovitz, Isaacson,
Weber, ▇▇▇▇▇ & Bass LLP
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
to the Company,
the Agent or any
Shareholder (in each
case, prior to the
Closing): Colorbok Paper Products, Inc.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
MUST BE MARKED
"PERSONAL AND CONFIDENTIAL"
71
72
to the Agent or any
Shareholder (in each case,
after the Closing): ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Flying Colors Toys, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
MUST BE MARKED
"PERSONAL AND CONFIDENTIAL"
to the Paying Agent: The First National Bank of Chicago
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇ ▇▇▇▇▇▇▇
with a copy, in each case,
to: ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and ▇▇▇▇
2290 First National Building
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇, Esq.
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Barris, Sott, Denn & Driker, PLLC
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ #▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇ Share
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
72
73
or such other address as any party hereto may at any time, or from time to time,
direct by Notice given to the other parties in accordance with this Section.
Except as otherwise expressly provided herein, the date of giving or making of
any such Notice or demand shall be, in the case of clause (a) (i), the date of
the receipt; in the case of clause (a) (ii), three business days after such
Notice or demand is sent; and, in the case of clause (b), the business day next
following the date such Notice or demand is sent.
12.5 Amendment. No amendment of this Agreement shall be valid or
effective, unless in writing and signed by or on behalf of the parties hereto.
12.6 Waiver. No course of dealing or omission or delay on the part of
any party hereto in asserting or exercising any right hereunder shall constitute
or operate as a waiver of any such right. No waiver of any provision hereof
shall be effective, unless in writing and signed by or on behalf of the party to
be charged therewith. No waiver shall be deemed a continuing waiver or waiver in
respect of any other or subsequent breach or default, unless expressly so stated
in writing.
12.7 Governing Law. This Agreement shall be governed by, and
interpreted and enforced in accordance with, the laws of the State of New York
without regard to principles of choice of law or conflict of laws.
12.8 Arbitration. Any claim, dispute or controversy between or among
any of the parties hereto (other than a claim, dispute or controversy subject to
Section 9.8), including without limitation with respect to any claim, dispute or
controversy involving the Termination Fee, shall be submitted to arbitration in
New York City in accordance with the then current Commercial Arbitration Rules
of the American Arbitration Association. JAKKS, on the one hand, and the
Shareholders and, prior to the Closing, the Company, on the other, shall each
pay one-half of any filing fees or other administrative costs to be paid in
advance of or during such Proceeding. There shall be a single arbitrator. The
arbitrator shall render a
73
74
reasoned decision with respect to such Proceeding which shall include, in
addition to the imposition of monetary damages or any other remedy or relief
available hereunder, an allocation of the costs thereof. The decision of the
arbitrator shall be final and binding upon the parties to such Proceeding, and
judgment thereon may be entered in any court of competent jurisdiction. No party
hereto shall be liable for punitive damages, unless such party is found to have
committed fraud or willful malfeasance against another party hereto.
12.9 Jurisdiction. Subject to the provisions of Section 12.8, each of
the parties hereto hereby irrevocably consents and submits to the jurisdiction
of the Supreme Court of the State of New York and the United States District
Court for the Southern District of New York in connection with any Proceeding
arising out of or relating to this Agreement or the Acquisition, waives any
objection to venue in the County of New York, State of New York, or such
District, and agrees that service of any summons, complaint, Notice or other
process relating to such Proceeding may be effected in the manner provided by
clause (a) (ii) of Section 12.4.
12.10 Remedies. Notwithstanding the provisions of Section 12.8, in the
event of any actual or prospective breach or default by any party hereto, any
other party hereto shall be entitled to equitable relief, including remedies in
the nature of rescission, injunction and specific performance; provided that
JAKKS shall seek, and shall be entitled to, rescission as a remedy for any such
breach or default only if and to the extent that (a) an award of monetary
damages in any amount would not constitute adequate relief to compensate JAKKS
for, or otherwise remedy any such breach or default (without regard to the fact
that the amount of monetary damages actually recoverable from the Shareholders
hereunder is limited by the provisions of Section 11.4), and (b) the basis for
rescission is either (i) a willful actual breach of any Acquisition Agreement
(excluding the Agent Agreement and the Paying Agent Agreement) or (ii) an actual
breach or another defect in the Acquisition that is so substantial and
fundamental so as to strongly tend to defeat the object of the parties in
entering into the
74
75
Acquisition Agreements, in either case which breach or defect has or would
reasonably be expected to have a Material Adverse Effect. Subject to the
provisions of Sections 9.8, 10.3, 12.8 and this Section 12.10 and Article 11,
all remedies hereunder are cumulative and not exclusive, and nothing herein
shall be deemed to prohibit or limit any party from pursuing any other remedy or
relief available at law or in equity for such actual or prospective breach or
default, including the recovery of damages; provided, however, that the
indemnification provisions of Article 11 shall be the sole and exclusive remedy,
as among the parties hereto, with respect to any claim for monetary damages
under this Agreement; and provided, further, that no party hereto shall be
liable under this Agreement, pursuant to Article 11 or otherwise, for lost
profits or other consequential damages.
12.11 Severability. The provisions hereof are severable and in the
event that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
12.12 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original and which together shall constitute
one and the same agreement.
12.13 Further Assurances. Each party hereto agrees to cooperate fully
with the other parties in connection with preparing and filing any Notices or
documents in connection with the Acquisition. Each party hereto shall promptly
execute, deliver, file or record such agreements, instruments, certificates and
other documents and perform such other and further acts as any other party
hereto may reasonably request, or as may otherwise be reasonably
75
76
necessary or proper, to consummate and perfect the Acquisition.
12.14 Binding Effect. Subject to Section 12.15, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement is not intended, and shall not
be deemed, to create or confer any right or interest for the benefit of any
Person not a party hereto, except for the rights of and benefits to the Divestee
provided herein or in the Special Indemnity Agreement.
12.15 Assignment. This Agreement, and each right, interest and
obligation hereunder, may not be assigned by any party hereto without the prior
written consent of the other parties hereto, and any purported assignment
without such consent shall be void and without effect; provided that any
Shareholder may assign its right to receive all or any portion of the Purchase
Price without the consent of any other party hereto.
12.16 Titles and Captions. The titles and captions of the Articles and
Sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
12.17 Grammatical Conventions. Whenever the context so requires, each
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
12.18 References. The terms "herein," "hereto," "hereof," "hereby" and
"hereunder," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
12.19 Knowledge. For the purposes of this Agreement, the phrase "to the
76
77
Company's knowledge" with respect to any matter means the actual knowledge of
(a) ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ and, in addition, with regard to each
particular Section of this Agreement so qualified by such phrase, those
individuals, if any, set forth on Schedule 12.19 with regard to such Section,
who are, in each such case, the employees of the Company principally responsible
for the respective matters subject to such phrase or (b) any Shareholder, as
such, in each case, after commercially reasonable inquiry, except that any
Shareholder may rely, as to any matter so qualified, on a certificate of an
officer of the Company to the effect that such Shareholder may rely on a
certificate with respect to each of the representations and warranties of the
Company and the Shareholders set forth in this Agreement; provided that such
matter is within the scope of authority of such officer and such reliance is
reasonable and justified. In addition, for purposes of this Agreement, the
"knowledge" of any officer means the knowledge of such officer, after
commercially reasonable inquiry.
12.20 No Presumptions. Each party hereto acknowledges that it has
participated, with the advice of counsel, in the preparation of this Agreement.
No party hereto is entitled to any presumption with respect to the
interpretation of any provision hereof or the resolution of any alleged
ambiguity herein based on any claim that any other party hereto drafted or
controlled the drafting of this Agreement.
12.21 Exhibits and Schedules. The Exhibits and Schedules hereto are an
integral part of this Agreement and are incorporated in their entirety herein by
this reference. Capitalized terms not otherwise defined in the Exhibits or
Schedules to this Agreement have the meanings given to them in this Agreement.
Notwithstanding anything to the contrary in any Acquisition Agreement, (i) the
disclosure of any item on any Exhibit or Schedule to this Agreement will be
deemed to be a disclosure of such item for all purposes of all Acquisition
Agreements, including a disclosure of such item on each other Exhibit and
Schedule to this Agreement, and (ii) matters reflected in any Exhibit or
Schedule to this Agreement are not necessarily limited to matters required to be
reflected in any such Exhibit or Schedule, any
77
78
such additional matters are set forth for informational purposes and do not
necessarily include other matters of a similar nature and inclusion of any
matter in any Exhibit or Schedule to this Agreement will not be considered an
admission that such matter is or may be "material" or would constitute a
Material Adverse Effect for purposes of any Acquisition Agreement or otherwise.
The foregoing is not intended to affect or eliminate the requirement set forth
in this Agreement that any matters set forth on the Exhibits or Schedules to
this Agreement (including those for informational purposes) do not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements or facts contained therein not misleading.
12.22 Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements, commitments or arrangements relating thereto, except for the
provisions of the letter agreement referred to in Section 6.7, which shall
remain in full force and effect until the Closing, including without limitation
the non-binding term sheet dated June 21, 1999 and all prior drafts thereof.
Each party hereto is relying solely upon the agreements, covenants,
representations and warranties of the parties set forth herein or in another
Acquisition Agreement, and no party hereto is entitled to rely on any other
information provided to, or acquired by, it in any other manner (including
without limitation any presentation made or any other documents delivered by the
management of the Company or any Shareholder or any representative of any of
them).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
78
79
IN WITNESS WHEREOF, JAKKS and the Company, by their respective duly
authorized officers, and the other parties hereto have duly executed this
Agreement as of the date set forth in the Preamble hereto.
COLORBOK PAPER PRODUCTS, INC. JAKKS PACIFIC, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------------- --------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Chief Executive Officer Title: President and
Chief Operating Officer
/s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
----------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇▇
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
----------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
/s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
----------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇
79
80
▇▇▇▇▇-▇▇▇▇▇▇▇ IRREVOCABLE
TRUST DATED DECEMBER 17, 1997
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇
----------------------------
▇▇▇▇ ▇▇▇▇▇▇▇, Trustee
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
-------------------------------
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, individually
and as Agent
/s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
80
81
INDEX TO EXHIBITS AND SCHEDULES
Exhibit A Form of Certificate of Amendment
Exhibit B Form of Employment Agreement
Exhibit C Form of New Lease
Exhibit D Form of Special Indemnity Agreement
Exhibit E Form of Transition Services Agreement
Exhibit F Form of Press Release
Exhibit G Form UA 1772
Exhibit H Consent of Mattel, Inc.
Schedule I Shareholders, Etc.
Schedule 1.24 Certain Contracts
Schedule 1.28 Divested Liabilities
Schedule 1.50 Real Property Leases
Schedule 1.82A Termination Agreement
Schedule 1.82B Waiver
Schedule 2.2 Allocation of Closing Purchase Price
Schedule 2.5 Earn-Out
Schedule 4.1 Foreign Qualifications; Capitalization
Schedule 4.2 Violations, Conflicts, Etc.
Schedule 4.3 Consents and Notices
Schedule 4.4 Proceedings; Orders
Schedule 4.5 Certain Liabilities
Schedule 4.6 Certain Changes
Schedule 4.7 Assets; Liens
Schedule 4.9 Inventory Exceptions
Schedule 4.10 Accounts
81
82
Schedule 4.11 Certain Permits and Consents
Schedule 4.12 Trade Rights
Schedule 4.13 Certain Property
Schedule 4.15 Taxes
Schedule 4.16 Employee Plans
Schedule 4.17 Labor Matters
Schedule 4.18 Employees
Schedule 4.19 Related Party Transactions; Other Employee Costs
Schedule 4.20 Certain Suppliers and Customers
Schedule 4.21 Insurance
Schedule 4.22 Brokers
Schedule 6.3 Certain Actions
Schedule 6.7 Confidentiality and Exclusivity Agreement
Schedule 6.10 Divestiture
Schedule 7.1(d) Necessary Consents
Schedule 8.10 Certain Indebtedness
Schedule 9.9(e) Certain Tax Refunds
Schedule 9.11 Severance Obligations
Schedule 11.1(d) Certain Indemnified Claims
Schedule 12.19 "Knowledge" Individuals
82
83
SCHEDULE I - SHAREHOLDERS, ETC.
PERCENTAGE OF SHARE
NAME AND ADDRESS NUMBER OF SHARES OWNERSHIP
---------------- ---------------- ---------
▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ 3,216 13.498
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
11390 Bellwood
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ 2,406 10.099
▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ 206 0.865
▇▇▇▇▇-▇▇▇▇▇▇▇ Irrevocable Trust
dated December 17, 1997,
▇▇▇▇ ▇▇▇▇▇▇▇, Trustee
c/o ▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ 2,584 10.846
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ 7,706 32.344
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ 7,707 32.348
------ -------
Total 23,825 100.0%
*Assumption:
The foregoing list treats the shares purchased from ▇▇▇ ▇▇▇▇▇▇▇▇ by ▇▇▇▇ and
▇▇▇▇ on March 1, 1996 as owned by ▇▇▇▇ and Josh even though some of these shares
remain in escrow.
84
SCHEDULE 1.28 - DIVESTED LIABILITIES
All liabilities and obligations of the Company relating to the Divested
Business or any of the Divested Assets, including, without limitation, any of
the following relating to the Divested Business or any of the Divested Assets:
(a) accounts and notes payable, including any borrowings from banks
or financial institutions;
(b) obligations of the Company to fill and otherwise perform purchase
orders to the extent relating to the Divested Business and to the
extent such orders are unfulfilled or unperformed at the time of
the Divestiture;
(c) accrued royalties payable;
(d) accrued operating expenses;
(e) all liabilities and obligations to employees of the Company who,
under Section 4.18 of the Agreement and Schedule 4.18, are to
become employees of the Divestee at the time of the Divestiture,
including, without limitation, accrued compensation and benefits
(including, without limitation, accrued salaries, wages, profit
sharing, 401(k) withheld and vacations) with regard to such
employees;
(f) accrued Taxes; and
(g) all liabilities and obligations relating to the Assigned
Agreements (as defined on Schedule 4.7).
Except as otherwise provided in this paragraph, the Divested Liabilities
will be determined as of the time of the Divestiture in a commercially
reasonable manner, consistent with the manner used in the preparation of the
unaudited, estimated, consolidating balance sheet of the Company as of May 31,
1999 allocating assets and liabilities between Flying Colors and the Divested
Business, a copy of which balance sheet is attached hereto (the "May 31, 1999
Consolidating Balance Sheet"). Notwithstanding the foregoing, the Agent will
have the right to determine, in his sole discretion, which of the Company's
borrowings from banks or financial institutions and which of the Company's
accrued Taxes are to be included as Divested Liabilities by inclusion of such
borrowings and/or Taxes as Divested Liabilities on the Estimated Consolidating
Balance Sheet or the Final Consolidating Balance Sheet.
At the time at which the Agent delivers to JAKKS estimates of Closing
Net Worth, Closing Net Liquid Assets and the Interim Net Income, the Agent will
also deliver to JAKKS an unaudited,
85
estimated, consolidating balance sheet of the Company as of the day preceding
the Closing Date, which balance sheet will estimate the allocation of assets and
liabilities between Flying Colors and
(Schedule 1.28 continued)
the Divested Business as of such date in the manner described in the preceding
paragraph (the "Estimated Consolidating Balance Sheet"). At the time after the
Closing at which the Agent has a right under Section 9.8 of the Agreement to
deliver to JAKKS the Agent's final calculation of Closing Net Worth, Closing Net
Liquid Assets and Interim Net Income the Agent will also have a right to deliver
to JAKKS its final determination of the consolidating balance sheet of the
Company as of such date (the "Final Consolidating Balance Sheet"), which balance
sheet will provide the Agent's final estimation of such allocation.
86
SCHEDULE 2.5 - EARN OUT
Earn-Out Period Gross Profit Earn-Out
--------------- ------------ --------
First less than or equal to $0
$19,550,000
more than $19,550,000, Amount determined
but less than $22,950,000 by Formula (A) below
equal to or greater than
$22,950,000 $4,500,000
Second less than $21,505,000 $0
more than $21,505,000, Amount determined
but less than $25,245,000 by Formula (B) below
equal to or greater than $4,500,000
$25,245,000
Third less than or equal to $0
$23,460,000
more than $23,460,000, Amount determined
but less than $27,540,000 by Formula (C) below
equal to or greater than $4,500,000
$27,540,000
(A) The sum of (1) $2,500,000 and (2) the product of (a) $2,000,000 and (b)
a fraction, the numerator of which is the excess of (i) Gross Profit in
the first Earn-Out Period over (ii) $19,550,000, and the denominator of
which is $3,400,000.
(B) The sum of (1) $2,500,000 and (2) the product of (a) $2,000,000 and (b)
a fraction, the numerator of which is the excess of (i) Gross Profit in
the second Earn-Out Period over (ii) $21,505,000, and the denominator of
which is $3,740,000.
(C) The sum of (1) $2,500,000 and (2) the product of (a) $2,000,000 and (b)
a fraction, the numerator of which is the excess of (i) Gross Profit in
the third Earn-Out Period over (ii) $23,460,000, and the denominator of
which is $4,080,000.
87
(Schedule 2.5 continued)
Each portion of the Earn-Out will be divided among and paid to the Shareholders
by the Paying Agent as follows:
Shareholder Percent of Each Earn-Out Payout
----------- -------------------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ 31.749%
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 5.050
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ .433
▇▇▇▇ ▇▇▇▇▇▇▇, Trustee 5.423
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ 41.172
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ 16.174
-------
100.001
88
SCHEDULE 6.10 - DIVESTITURE
1. The Company has caused CPP Acquisition, LLC, a new Michigan limited
liability company ("NewCo"), to be created. All of the membership
interests in NewCo are owned by the Company.
2. The Company will contribute the Divested Assets to NewCo, subject to the
Divested Liabilities.
3. Immediately prior to the Closing, the Company will make a distribution
to its shareholders of the Company's membership interests in NewCo. The
Company's shareholders will, therefore, own the membership interests in
NewCo.
4. NewCo will change its name to Colorbok Paper Products, LLC.
89
SCHEDULE 7.1(d) - NECESSARY CONSENTS
Consents and/or Notices of the following Licensors under the following License
Agreements:
1. Agreement dated September 15, 1998 between MTV Networks and Colorbok
Paper Products, Inc. (Blue's Clues)
2. Agreement dated February 1, 1998 between MTV Networks and Colorbok Paper
Products, Inc., as amended November 4, 1998 (Blue's Clues)
3. Merchandise License Agreement dated August 1, 1997 between MTV Networks
and Colorbok Paper Products, Inc. (Rugrats)
4. License Agreement dated September 3, 1998 between Sanrio, Inc. and
Flying Colors, as amended October 26, 1998, November 16, 1998 and
January 28, 1999
5. Agreement dated June 16, 1999 between MTV Networks and Colorbok Paper
Products, Inc. (Blue's Clues)
6. Agreement dated June 16, 1999 between MTV Networks and Colorbok Paper
Products, Inc. (Rugrats)
90
SCHEDULE 8.10 - CERTAIN INDEBTEDNESS
All amounts due and owing in connection with the loan from Jentra Investment
Limited Partnership, of which ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇ are partners, to the
Company in the principal amount of $650,000.
All amounts due and owing in connection with the loan from Jentra Investment
Limited Partnership to the Company in the principal amount of $570,000.
All amounts due and owing in connection with the loan from ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Revocable Living Trust to the Company in the principal amount of $190,000.
All amounts due and owing in connection with the loan from ▇▇▇ ▇▇▇▇▇, who is
▇▇▇▇ ▇▇▇▇▇▇▇' daughter, to the Company in the principal amount of $230,000.
91
SCHEDULE 9.9(e) - CERTAIN TAX REFUNDS
Michigan Refunds Applied For
(Amended Returns Filed Under RAB 1998-1) TAX AMOUNT
---------------------------------------- ----------
Fiscal Year Ended May 31, 1995 $ 53,489
Fiscal Year Ended May 31, 1996 $ 13,346
Fiscal Year Ended May 31, 1997 $ 19,224
Federal Refund
--------------
Fiscal Year Ended May 31, 1999 $350,000
(estimate based upon
preliminary return)
92
SCHEDULE 11.1(d) - CERTAIN INDEMNIFIED CLAIMS
1. Franchise Taxes in Item 1 of Schedule 4.15.
2. Taxes payable on account of the audit, if any, referred to in Item 2 of
Schedule 4.15 (without limitation under Section 11.4(a)).