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Sizzler International - LLC Membership Interest Purchase Agreement
EXHIBIT 10.1
LLC MEMBERSHIP INTEREST PURCHASE AGREEMENT
Dated as of
May 23, 2000
by and between
Sizzler International, Inc.,
(the "Purchaser")
FFPE Holding Company, Inc.
(the "Seller")
Oscar Sarkisian and Martha Patricia Sarkisian
(Individually and as Co-Trustees of
Sarkisian Family Trust UDT dated 7/19/95),
John Sarkisian, Bernadette Sarkisian, and
Tamara Sarkisian-Celmo (Individually
and as Trustee of the Tamara Sarkisian-Celmo
Family Trust UDT dated 10/16/97)
(the "Principals" and the "Shareholders")
S&C Company, Inc.
(the "Old Company")
and
FFPE, LLC
(the "New Company")
TABLE OF CONTENTS
Page ARTICLE I SALE OF LLC MEMBERSHIP INTEREST........................ 2
ARTICLE II REPRESENTATIONS OF THE SELLING PARTIES................. 11
ARTICLE III REPRESENTATIONS OF THE PURCHASER....................... 22
ARTICLE IV ADDITIONAL AGREEMENTS OF THE SELLING PARTIES........... 23
ARTICLE V ADDITIONAL AGREEMENTS OF THE PURCHASER................. 29
ARTICLE VI CONDITIONS............................................. 31
ARTICLE VII SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION........... 32
ARTICLE VIII TERMINATION............................................ 37
ARTICLE IX DEFINITIONS............................................ 38
ARTICLE X MISCELLANEOUS.......................................... 48
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LLC MEMBERSHIP INTEREST PURCHASE AGREEMENT
------------------------------------------
This LLC Membership Interest Purchase Agreement (this "Agreement") is entered into and dated as of May 23, 2000 by and among SIZZLER INTERNATIONAL, INC., a Delaware corporation (the "Purchaser"), FFPE HOLDING COMPANY, INC., a Delaware corporation ("Seller"), OSCAR SARKISIAN ("Oscar"), and MARTHA PATRICIA SARKISIAN ("Pat"), individually and as CO-TRUSTEES OF SARKISIAN FAMILY TRUST UTD DATED 7/19/95 (the "Oscar and Martha Trust"), JOHN SARKISIAN ("John"), BERNADETTE SARKISIAN ("Bernadette"), TAMARA SARKISIAN-CELMO ("Tamara"), individually and as Trustee of the Tamara Sarkisian-Celmo Family Trust UTD Dated 10/16/97 (the "Tamara Trust"), S&C COMPANY, INC., a California corporation (the "Old Company"), and FFPE, LLC, a Delaware limited liability company (the "New Company"). Unless the context otherwise requires, capitalized terms used in this Agreement shall have the meanings given to them in Article 9 of this Agreement.
RECITALS:
---------
A. The Purchaser, together with its subsidiaries, owns and operates, and franchises to others, restaurants that do business under the Sizzler(R) service mark in the United States and abroad, and owns and operates Kentucky Fried Chicken(R) or KFC(R) restaurants in Queensland, Australia.
B. The Seller is a newly formed Delaware corporation. The Shareholders are the owners of all of the outstanding shares of capital stock of Seller. The Principals are the officers and/or directors of the Seller, the Old Company and the New Company.
C. The New Company is a newly formed Delaware limited liability company. The Selling Parties have represented to the Purchaser that (a) the New Company has, or before the Closing Date will have, a single class of Membership Interest and (b) the Seller is, or before the Closing Date will be, the owner of all of the outstanding Units of the New Company.
D. The New Company is, or on or before the Closing Date shall be, the successor of, and the surviving entity in a merger with, the Old Company.
E. The Old Company, a California corporation, has been engaged in the operation of the Restaurants and, on or before the Closing, is expected to become the predecessor to, and to merge into, the New Company.
F. On the terms and conditions set forth herein, (a) the Seller desires to sell, and the Purchaser desires to purchase, 82 units of the New Company, which units (the "Purchased Units") shall represent 82% of all of the outstanding Units of the New Company, and (b) the Selling Parties and the Purchaser desire to carry out the Transactions.
AGREEMENT:
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In consideration of the foregoing recitals and the mutual representations, warranties, and covenants contained in this Agreement, the parties to this Agreement agree as follows:
ARTICLE I
SALE OF LLC MEMBERSHIP INTEREST
Section 1.1 Sale of LLC Membership Interest. For the Purchase Price, and
------------------------------- subject to the terms and conditions herein stated, on the Closing Date the Seller shall sell, assign, transfer and deliver to the Purchaser, and the Purchaser shall purchase and acquire from the Seller, all of the Purchased Units.
Section 1.2 Closing. The sale referred to in Section 1.1 (the "Sale")
------- shall take place at the offices of Sheppard, Mullin, Richter & Hampton LLP, 501 W. Broadway, Nineteenth Floor, San Diego, California 92101 at 10:00 A.M., PST, on the Closing Date. The parties hereby agree that the effective time of the Closing for Federal income tax purposes shall be at 12:01 A.M., PST, on the Closing Date.
Section 1.3 Selling Parties' Deliveries. At the Closing, the Selling
--------------------------- Parties shall deliver or cause to be delivered, in form, substance and manner reasonably satisfactory to the Purchaser, the following items:
(a) to the Purchaser's order, the Unit Certificate evidencing the Purchased Units (which may bear any appropriate legend), duly endorsed by the Seller in blank as of the Closing Date or accompanied by a written assignment of the Units executed by the Seller and dated as of the Closing Date;
(b) a copy of the certificate of formation of the New Company, including any certificate of merger required in connection with the Reorganization, certified by the Secretary of State of the State of Delaware as of a date not earlier than ten (10) days before the Closing Date;
(c) the original Limited Liability Company Agreement of the New Company, executed by the Seller;
(d) the Amended and Restated Limited Liability Agreement of the New Company, in the form attached to this Agreement as Exhibit 25.
(e) an Entity Good Standing Certificate with respect to the New Company, dated as of a date no earlier than ten (10) days before the Closing Date;
(f) a Tax Certificate with respect to the New Company, dated as of a date no earlier than ten (10) days before the Closing Date;
(g) a certificate from the Secretary of State or other appropriate official in each state in which the New Company is required to qualify to do business, to the
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effect that the New Company is qualified to do business in such state, as of a date not earlier than ten (10) days before the Closing Date;
(h) a copy of the certificate of incorporation of Seller, certified by the Secretary of State of the State of Delaware as of a date not earlier than ten (10) days before the Closing Date;
(i) a copy of the bylaws of Seller, certified by the Secretary of the Seller as of the Closing Date;
(j) an Entity Good Standing Certificate with respect to the Seller, dated as of a date no earlier than ten (10) days before the Closing Date;
(k) a Tax Certificate with respect to the Seller, dated as of a date no earlier than ten (10) days before the Closing Date;
(l) a copy of the Board Resolutions of the Seller, certified by the Secretary of the Seller as of the Closing Date;
(m) a copy of the articles of incorporation of the Old Company, including any certificate of merger required in connection with the Reorganization, certified by the Secretary of State of the State of California as of a date not earlier than ten (10) days before the Closing Date;
(n) the bylaws of the Old Company, certified by the Secretary of the Company as of the Closing Date;
(o) a copy of the Board Resolutions of the Old Company, certified by the Secretary of the Seller as of the Closing Date;
(p) copies or originals of all other agreements, instruments, certificates, and documents executed, delivered, or filed by or among the Selling Parties in connection with the Reorganization;
(q) the Call Option Agreement, executed by the Seller and dated as of the Closing Date;
(r) the Put Option Agreements, executed by the Seller and dated as of the Closing Date;
(s) the Releases, fully executed by all parties thereto and dated as of the Closing Date;
(t) the Consulting Agreements, executed by Oscar and Pat, respectively, and dated as of the Closing Date;
(u) the Employment Agreements, executed by the employees thereunder and dated as of the Closing Date;
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(v) the Warrants, in such denominations as the Seller may request, executed by Seller and dated as of the Closing Date;
(w) the Warrant Registration Rights Agreement, executed by the holders of the Registrable Securities, as defined therein and dated as of the Closing Date;
(x) the Pledge Agreement, executed by the Seller and dated as of the Closing Date;
(y) to the Purchaser's order, the Unit Certificate evidencing the Retained Units (which may bear any appropriate legend), duly endorsed by the Seller in blank as of the Closing Date or accompanied by a written assignment of the Units in blank executed by the Seller and undated;
(z) Landlord Estoppel Certificates with respect to each of the Company Real Property Leases, executed by or on behalf of the landlords or lessors thereunder;
(aa) Liquor License Approvals with respect to each of the Company's alcoholic beverage licenses;
(bb) Written evidence of the cancellation or termination of all outstanding Company Options, and the release of all Liabilities of the Company and its Affiliates in connection therewith, by the holders of such Company Options, subject only to delivery by the Company of the payment for such Company Options;
(cc) Written evidence of the redemption or repurchase of all outstanding shares of common stock of the Old Company issued pursuant to exercise of Company Options, and the release by the holders thereof of all Liabilities of the Company and its Affiliates in connection with the grant or exercise of such Company Options, or the issuance of shares pursuant to such exercise, and such redemption or repurchase;
(dd) a written agreement as to allocation of Purchase Price pursuant to Section 1.10, executed by the Selling Parties;
(ee) Such consent, waiver and estoppel certificate and release of liens and other instruments with respect to Southwest Community Bank as the Purchaser shall reasonably require;
(ff) any documents, instruments or actions in connection with the drawdown or funding of a Revolving Loan under the Loan Documents reasonably required by the Purchaser;
(gg) the opinion of counsel to the Selling Parties, executed by such counsel and dated as of the Closing Date; and
(hh) the Selling Parties' Closing Certificate, executed by the Selling Parties and dated as of the Closing Date; and
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(ii) a written assumption of liability under the January 4 Note, executed and delivered by the Shareholders.
Section 1.4 Purchaser's Deliveries. At the Closing, the Purchaser shall
---------------------- deliver or cause to be delivered, in form, substance and manner reasonably satisfactory to the Selling Parties, the following items:
(a) deposit of $15,200,000 of the Purchase Price into the Pay Off Escrow;
(b) deposit of $800,000 of the Purchase Price into the Adjustment Escrow;
(c) the Warrants, executed by the Purchaser in favor of the Seller, in such denominations as the Seller shall request and dated as of the Closing Date;
(d) the Warrant Registration Rights Agreement, executed by the Purchaser and dated as of the Closing Date;
(e) a copy of the Certificate of Incorporation of the Purchaser, certified by the Secretary of State of the State of Delaware as of a date not earlier than ten (10) days before the Closing Date;
(f) the bylaws of the Purchaser, certified by the Secretary of the Purchaser as of the Closing Date;
(g) a copy of the Board Resolutions of the Purchaser, certified by the Secretary of the Purchaser as of the Closing Date;
(h) a Corporate Good Standing Certificate and a Tax Certificate with respect to the Purchaser, dated as of a date not earlier than ten (10) days before the Closing Date;
(i) the Call Option Agreement, executed by the Purchaser and dated as of the Closing Date;
(j) the Put Option Agreements, executed by the Purchaser and dated as of the Closing Date;
(k) the Pledge Agreement, executed by the Purchaser and dated as of the Closing Date;
(l) the Consulting Agreements, executed by the New Company and dated as of the Closing Date;
(m) the Employment Agreements, executed by the New Company and dated as of the Closing Date;
(n) a written agreement as to allocation of Purchase Price pursuant to Section 1.10, executed by the Purchaser;
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(o) the drawdown or funding of the Revolving Loan (as defined under the Loan Documents);
(p) irrevocable letter of credit in the amount of $3.1 million from a bank or other financial institution reasonably acceptable to Seller, securing the Purchaser's obligations under Section 1.5(a)(i) of this Agreement;
(q) the opinion of counsel to the Purchaser, executed by such counsel and dated as of the Closing Date; and
(r) the Purchaser's Closing Certificate.
Section 1.5 Additional Consideration. On the terms and subject to the
------------------------ conditions of this Section 1.9, within 20 business days after the determination of the Additional Consideration (the "Additional Consideration Payment Date"), the Purchaser shall pay or cause to be paid to the Seller additional consideration (the "Additional Consideration"), determined as follows:
(a) The amount of the Additional Consideration payable by the Purchaser to the Seller on the Additional Consideration Payment Date consists of two components and shall be determined as follows:
(i) If, and only if, any of Net Sales, Restaurant EBITDA, Total EBITDA or Number of Business Units for the Earn-Out Period exceeds the Minimum Criteria as set forth in the Additional Consideration Table, then the Purchaser shall pay to the Sellers the amount of Additional Consideration set forth in the Additional Consideration Table, which amounts in the aggregate, shall not exceed $3,100,000.
(ii) If, and only if, each of Net Sales, Restaurant EBITDA, and Total EBITDA for the Earn-Out Period exceeds the Full Target, as set forth in the Additional Consideration Table, and if the number of Business Units is at least 18, then an additional amount shall be paid as follows: the Purchaser shall pay to the Seller (A) one-half (1/2) of the first $2,000,000 in Excess Restaurant EBITDA, and (B) one-third (1/3) of any Excess Restaurant EBITDA that is greater than such initial $2,000,000 Excess Restaurant EBITDA; provided, however, that the Purchaser shall not be obligated to pay in excess of $5,000,000 under clause (B) of Section 1.5(a)(ii) of this Agreement.
(b) Not later than May 1, 2003, the Purchaser shall compute the amount of Net Sales, Restaurant EBITDA, Total EBITDA and Number of Business Units for the Earn-Out Period, and the Purchaser shall provide to the Seller for its review and approval, the Purchaser's computations and working papers reflecting how such computations were made. If the Sellers have any objections to the computation of Net Sales, Restaurant EBITDA, Total EBITDA and Number of Business Units for the Earn-out Period, they will deliver detailed statements describing their objections to the Purchaser within 30 days after receiving the Purchaser's computations and working papers reflecting how such computations were made. The parties will use their reasonable efforts to resolve any such objections. If, however, the parties do not obtain final resolution of this matter within 30 days after the Purchaser has received the statements of objections, the parties shall submit the dispute for resolution in the manner and shall bear the costs thereof as described in Section 1.9(d). The Accountant's
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determination of the amount of Net Sales, Restaurant EBITDA, Total EBITDA and Number of Business Units for the Earn-Out Period shall be rendered by the Accountant in a writing setting forth in reasonable specificity the reasons for each conclusion reached in its decision. The Accountant's determination shall be binding upon all parties. The Purchaser and the Sellers shall use their best efforts to aid the Accountant in reaching a decision within 30 days from the date the dispute is tendered to the Accountant. In computing the EBITDA for purposes of this Section, the Purchaser shall make any adjustment required by the Intercompany Accounting procedures as described on the EBITDA Adjustment Guidelines, attached as Exhibit 26.
Section 1.6 Sales and Transfer Taxes. The Purchaser shall bear the cost
------------------------ of any and all Transfer Taxes applicable to the Sale.
Section 1.7 Pay Off Escrow.
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(a) Before the Closing, the parties shall open an escrow (the "Pay Off Escrow") for the purpose of ensuring the prior payment and satisfaction in full of certain interests in and claims against the Company. The Pay Off Escrow shall be opened at Chicago Title Company in Los Angeles, California or such other institutional escrow holder mutually acceptable to the parties (the "Pay Off Escrow Holder").
(b) The parties shall open the Pay Off Escrow by executing and delivering, together with the Pay Off Escrow Holder, a written escrow agreement (the "Pay Off Escrow Agreement"). The terms and conditions of the Pay Off Escrow Agreement shall be consistent with this Agreement unless the parties otherwise agree.
(c) On or before the Closing, the Seller shall prepare a schedule of holders of any Company Options or any shares of the Old Company's common stock outstanding immediately before the merger contemplated as part of the Reorganization (the "Scheduled Holders"). All of the Scheduled Holders shall have agreed to the cancellation or termination of their Company Options or the redemption or repurchase of their shares, as of immediately before such merger. The schedule shall indicate the name, address, Social Security Number, amount of securities, and termination or redemption price of such securities.
(d) At the Closing, the Purchaser shall deposit into the Pay Off Escrow the cash portion of the Purchase Price described in Section 1.4(a) (the "Pay Off Escrow Amount") and Purchaser and Seller shall deliver joint written instructions to the Pay Off Escrow Holder (the "Payoff Escrow Payment Instructions"). The Payoff Escrow Payment Instructions shall instruct the Pay Off Escrow Holder to immediately disburse the Pay Off Escrow Amount, as follows:
(i) first, to the Pay Off Escrow Holder for its fees and costs;
(ii) second, to the Shareholders in the amount necessary to pay in full all indebtedness of the Company owed to them (whether such Shareholders are the original payee or an assignee thereof);
(iii) third, to the holder of the Mattix Note in the amount necessary to pay in full all indebtedness thereunder;
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(iv) fourth, to George Celmo in the amount necessary to pay in full all indebtedness of the Company owed to him (other than the January 4 Note);
(v) fifth, to Christopher Thomas in the amount necessary to pay in full all indebtedness of the Company owed to him;
(vi) sixth, to the Scheduled Holders in their respective amounts shown on the schedule;
(vii) seventh, to the Seller.
(e) Upon delivery to the Pay Off Escrow Holder of the Payoff Escrow Payment Instructions, the Pay Off Escrow Holder shall immediately disburse the amount specified in such Payment Instructions.
(f) The Pay Off Escrow Amount may be invested by the Pay Off Escrow Holder in certificates of deposit, U.S. governmental obligations, or interest-bearing accounts as reasonably requested by the Seller. All interest accruing on the Pay Off Amount shall be for the benefit of Seller.
(g) The Pay Off Escrow Holder shall close the Pay Off Escrow as soon as possible following execution of the Payoff Escrow Payment Instructions. The Pay Off Escrow Holder shall provide a statement to each of the Seller and the Purchaser of all deposits, interest, costs and disbursements related to the Pay Off Escrow Account. All Pay Off Escrow fees and costs shall be payable by Seller.
Section 1.8 Adjustment Escrow.
-----------------
(a) Before the Closing, the parties shall open an escrow (the "Escrow") for the purpose of ensuring the availability of cash to satisfy any required adjustment to the Purchase Price under Section 1.9 hereof (an "Adjustment"). The Adjustment Escrow shall be opened at Chicago Title Company in Los Angeles, California or such other institutional escrow holder mutually acceptable to the parties (the "Adjustment Escrow Holder"). The parties shall open the Escrow by executing and delivering, together with the Adjustment Escrow Holder, written escrow agreement(s) and instructions (the "Adjustment Escrow Agreement"). The terms and conditions of the Escrow Agreement shall be consistent with this Agreement unless the parties otherwise agree.
(b) All amounts deposited by the Purchaser into the Adjustment Escrow at the Closing, and any interest thereon (the "Holdback Amount"), shall be retained in the Adjustment Escrow until termination of the escrow or the earlier disbursement of all or any portion of the Holdback Amount in satisfaction of any required Adjustment. The Holdback Amount may be invested by the Adjustment Escrow Holder in certificates of deposit, U.S. governmental obligations, or interest-bearing accounts as reasonably requested by the Seller. Subject to disbursement to the Purchaser in satisfaction of any required Adjustment, all interest accruing on the Holdback Amount shall be for the benefit of Seller.
(c) Promptly following the determination of the amount of any Adjustment pursuant to Section 1.9, the Purchaser and the Seller shall execute and deliver joint
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written instructions to the Adjustment Escrow Holder regarding the disbursement of the Holdback Amount in accordance with such Section (the "Adjustment Payment Instructions"). Upon delivery of the Adjustment Payment Instructions to the Adjustment Escrow Holder, the Adjustment Escrow Holder shall promptly disburse the amounts to the Persons specified in such Payment Instructions.
(d) The Adjustment Escrow shall remain open until the earlier of (a) the date on which all of the Holdback Amount has been disbursed pursuant to the Adjustment Payment Instructions, (b) the last day of the sixth calendar month following the Closing Date, unless the Escrow Holder has theretofore received written notice from Purchaser to the effect that there is a claim of Adjustment to which the Purchaser believes it is entitled under Section 1.9, which is unpaid on or before the 150/th/ day before the Closing Date, and which is the subject of pending litigation, arbitration or other dispute resolution proceeding not anticipated to be completed on or before such six- month expiration, or (c) the date of termination set forth in any joint written instructions from the Purchaser and the Seller or any judgment or order of the court delivered to the Adjustment Escrow Holder, in either case to the effect that the Escrow has been or shall be terminated (any such date, a "Termination Date").
(e) As soon as practicable following a Termination Date, the Adjustment Escrow Holder shall do the following:
(i) close the Adjustment Escrow;
(ii) disburse to the Purchaser, out of the Holdback Amount, any amounts as to which the Adjustment Escrow Holder had theretofore received Payment Instructions to pay to the Purchaser but that remain undisbursed as of the Termination Date;
(iii) unless otherwise instructed by the Seller, distribute all of the Holdback Amount remaining after any disbursement required by Section 1.8(e)(ii) hereof to the Seller; and
(iv) deliver to Purchaser and the Seller an accounting of the receipt, investment, and all disbursements of the Holdback Amount and all Adjustment Escrow fees and costs.
(f) All Adjustment Escrow fees and costs shall be payable by Purchaser.
Section 1.9 Purchase Price Adjustment.
-------------------------
(a) The Purchase Price shall be subject to reduction after the Closing Date (i) in the amount, if any, by which Closing Indebtedness exceeds $4,236,000 (the "Closing Indebtedness Overage") and (ii) in the amount, if any, by which Closing Current Liabilities less Closing Current Assets exceeds $600,000 (the "Working Capital Deficiency"), determined as set forth in this Section.
(b) The Purchase Price shall be subject to increase after the Closing Date by an amount equal to (i) the amount, if any, by which Closing Indebtedness is less than $4,236,000 (the "Closing Indebtedness Deficiency") and (ii) the amount, if any, by which
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Closing Current Assets less Closing Current Liabilities (the "Working Capital Excess") exceeds $600,000.
(c) Promptly following the Closing, the Seller shall prepare, and cause the New Company's certified public accountants to audit, consolidated financial of the New Company as of the Closing Date prepared in accordance with GAAP and with such adjustments and reserves as may be required by Section 4.10 (the "Closing Financial Statements"). On the basis of the Closing Financial Statements, the New Company's accountants shall compute Closing Indebtedness, Closing Current Assets, Closing Current Liabilities and Closing Current Indebtedness. In making their computations, the accountants shall not consider Current Assets to include cash in the amount of any unpaid non-working capital items. The New Company shall deliver the Closing Financial Statements and the computations to the Purchaser within 60 days after the Closing Date. If within thirty days following delivery of the Closing Financial Statements and the computations, the Purchaser has not given the Seller notice of its objection thereto (such notice to contain a statement of the basis of the Purchaser's objection), then the Closing Indebtedness, Closing Current Assets, Closing Current Liabilities and Closing Current Indebtedness included in the computation shall be used to determine the Closing Indebtedness Overage, Closing Indebtedness Deficiency, the Working Capital Deficiency, and Working Capital Excess, if any.
(d) If the Purchaser gives such notice of objection, and the parties fail to resolve such objection within thirty (30) days, then the issues in dispute will be submitted to a "Big Five" accounting firm (the "Accountants") for resolution. If issues are submitted to the Accountants for resolution, (i) each party will furnish to the Accountants such work papers and other documents and information relating to the disputed issues as the Accountants may request and are reasonably available to that party, and will be afforded the opportunity to present to the Accountants any material relating to the determination and to discuss the determination with the Accountants; (ii) the determination by the Accountants, as set forth in a notice delivered to both parties by the Accountants, will be binding and conclusive on the parties; and (iii) the Purchaser and the Seller will each bear 50% of the fees of the Accountants for such determination.
(e) If as finally determined either the Closing Indebtedness Overage is greater than zero or the Working Capital Deficiency is greater than zero, then on the tenth business day following the final determination of such amounts, the Seller shall pay to the Purchaser an amount equal to the Closing Indebtedness Overage and the Working Capital Deficiency, as the case may be. All payments will be made together with interest at 8% compounded daily beginning on the Closing Date and ending on the date of payment. Payment must be made in immediately available funds. At the Seller's option, payment may be made by either check, wire transfer, or disbursement from Escrow pursuant to Payment Instructions to the Escrow Holder.
(f) If as finally determined either the Closing Indebtedness Deficiency is greater than zero or the Working Capital Excess is greater than zero, then on the tenth business day following the final determination of such amounts, the Purchaser shall pay to the Seller an amount equal to the Closing Indebtedness Deficiency and the Working Capital Excess, as the case may be. All payments will be made together with interest at 8% compounded daily beginning on the Closing Date and ending on the date of payment. Payment must be made in
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immediately available funds. At the Purchaser's option, payment may be made by either check or wire transfer.
Section 1.10 Allocation of Purchase Price. In accordance with United
---------------------------- States Treasury Regulations Section 301.7701-3(f)(2) and Internal Revenue Service Revenue Ruling 99-5 (and corresponding provisions of state income tax law), for federal and state income tax purposes, Seller and Purchaser agree to report the transaction described in Section 1.1 (Sale of LLC Membership Interest) as (i) a sale by Seller and purchase by Purchaser of an 82% undivided interest in the assets of the New Company, followed immediately thereafter by (ii) the contribution by Purchaser of such 82% undivided interest and by Seller of its remaining 18% undivided interest in such assets to a partnership (i.e., the New Company, upon the acquisition of the Purchase Units by Purchaser at Closing) in a transaction governed by Section 721 of the Code, wherein (iii) the consideration received or to be received for such assets in such sale and purchase for purposes of Section 1060 of the Code consists of the Purchase Price and 82% of the liabilities of the New Company (in connection with which and for all such purposes, including without limitation the determination of the Purchaser's basis in such 82% undivided interest in such assets and the gain or loss of Seller with respect to the sale thereof, the parties shall treat the Additional Consideration in accordance with the "open transaction" method of reporting) (such consideration, as it may be adjusted from time to time in accordance with such method of reporting, is referred to herein as the "Tax Purchase Price"). The Tax Purchase Price shall be allocated among the 82% undivided interest in such assets so purchased by Purchaser as set forth in a schedule to be prepared by the parties on or before the Closing. In connection with such allocation, the parties acknowledge and agree that no portion of the Tax Purchase Price shall be allocated to the covenants of the Principals in Section 4.9 hereof (Non-Competition), it being understood that the Principals have entered into such covenants solely in consideration of the execution of this Agreement by the other parties hereto and not in consideration of any portion of the Tax Purchase Price. The determination of the initial Book Value of assets of the New Company as of immediately after the Closing, within the meaning of Section 1.8 of the Amended and Restated Limited Liability Operating Agreement attached as Exhibit 25, shall be made in a manner consistent with the foregoing allocation of the Tax Purchase Price and shall be adjusted from time to time to reflect Additional Consideration paid.
ARTICLE II
REPRESENTATIONS OF THE SELLING PARTIES
Except as otherwise set forth in the Selling Parties' Disclosure Schedule, each of the Selling Parties represent and warrant as follows:
Section 2.1 Existence and Good Standing.
---------------------------
(a) The Seller is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Seller is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character or location of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary.
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(b) The New Company is a limited liability company duly organized, validly existing and in good standing under the laws of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The New Company is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character or location of the property owned, lease or operated by it or the nature of the business conducted by it makes such qualification necessary. The New Company has not elected to be treated as an association for federal tax purposes pursuant to United States Treasury Regulations Section 301.7701-3(c).
(c) The Old Company is a corporation duly incorporated, validly existing and in good standing under the laws of California and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Old Company is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character or location of the property owned, lease or operated by it or the nature of the business conducted by it makes such qualification necessary.
Section 2.2 Capital Stock.
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(a) The New Company will, as of the Closing, have an authorized capitalization consisting of one hundred (100) Units of Membership Interest, of which 100 Units as of the Closing will be issued and outstanding. No other Units of Membership Interest are authorized or issued. All issued and outstanding Units are duly authorized, validly issued, fully paid and non- assessable. There are no outstanding subscriptions, options, warrants, rights, puts, calls, pre-emptive rights, commitments, conversion rights, rights of exchange, plans or other agreements of any kind relating to any of the outstanding, authorized but unissued or unauthorized shares of or units of equity interest in, or any other security of the New Company, and there is no authorized or issued security of any kind convertible into or exchangeable, for any such capital stock or other security, other than as contemplate...
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