Stock Purchase Agreement

Exhibit 10.1- -------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT Dated as of October 12, 2006 Among CHESTER F. ZOELLER III, BRITTANY LYNN ZOELLER CARLSON, BETH ALLISON ZOELLER WILLIS And CASTLE BRANDS INC. STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT made as of this 12th day of October, 2006among Chester F. Zoeller, III, an individual residing at 5912 Brittany ValleyRoad, Louisville, Kentucky 40222 (the "Major Shareholder"), Brittany LynnZoeller Carlson, an individual residing at 5006 Worthington Drive, Bethesda,Maryland 20816, and Beth Allison Zoeller Willis, an individual residing at 129Council Road, Louisville, Kentucky 40207 (Chester F. Zoeller, III, Brittany LynnZoeller Carlson and Beth Allison Zoeller Willis are each individually referredto herein as a "Shareholder" and collectively as the "Shareholders"), and CastleBrands Inc., a Delaware corporation having an office at 570 Lexington Avenue,29th Floor, New York, New York 10022 (the "Buyer"). W I T N E S S E T H : WHEREAS, the Shareholders are the sole holders of the issued andoutstanding shares of the authorized capital stock of McLain & Kyne, Ltd. (f/k/aMcLain & Kyne Distillery Limited), a Kentucky corporation with a principal placeof business at 227 South Fifth Street, Louisville, Kentucky 40202 (the"Company"); WHEREAS, the Company is engaged in the production and marketing ofpremium branded bourbon under the names "Jefferson's", "Jefferson's Reserve" and"Sam Houston" (hereinafter, the "Business"); and WHEREAS, the Shareholders desire to sell and transfer to Buyer andthe Buyer desires to purchase from the Shareholders all of the issued andoutstanding shares of capital stock of the Company, upon the terms and subjectto the conditions provided herein; NOW, THEREFORE, in consideration of the mutual covenants andpromises contained in this Agreement, and other good and valuable consideration,the receipt and sufficiency of which are hereby acknowledged by all parties, theparties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES SECTION 1.01. PURCHASE AND SALE OF SHARES. Subject to the terms andconditions of this Agreement, each of the Shareholders hereby agrees to sell,transfer and assign to the Buyer and the Buyer agrees to purchase and acquirefrom each Shareholder all of the issued and outstanding shares of capital stockof the Company held by such shareholder, which together consists of 1000 shares(the "Shares") of common stock, no par value per share, of the Company (the"Company Common Stock"). The sale of the Shares shall occur on the Closing Date(as defined in Section 1.02). SECTION 1.02. THE CLOSING. The purchase and sale of the Shares (the"Closing") will take place concurrently with the execution of this Agreement(the "Closing Date"). The Closing will be held at the New York offices of CastleBrands Inc. SECTION 1.03. INSTRUMENTS OF CONVEYANCE. At the Closing, theShareholders shall deliver to the Buyer certificates evidencing and representingall of the issued and outstanding capital stock of the Company duly endorsed inblank or accompanied by stock powers duly executed in blank in proper form for atransfer, which shall convey to Buyer all of the Shares free and clear of allliens, pledges and other encumbrances. SECTION 1.04. FURTHER ACTS AND ASSURANCES. The Major Shareholdershall, at any time and from time to time, take any and all steps necessary toplace Buyer in possession and operating control of the properties and theBusiness of the Company and each Shareholder will do, execute, acknowledge anddeliver or will cause to be done, executed, acknowledged and delivered, all suchfurther acts, deeds, assignments, transfers, conveyances, powers of attorney andassurances as may be required to more effectively transfer and confirm to Buyeror to its successors or assigns, or to reduce to possession, any or all of thestock of the Company and to carry out the purposes and intent of this Agreement. ARTICLE II CONSIDERATION SECTION 2.01. DELIVERY BY SHAREHOLDERS OF THE SHARES AT CLOSING. Inreliance on the representations, warranties and covenants herein contained andsubject to the terms and conditions of this Agreement, on the Closing Date theShareholders will sell, convey, transfer and deliver the following number ofShares to the Buyer: Shareholder Number of Shares of Company Common Stock ----------- ---------------------------------------- Chester F. Zoeller, III 802 Brittany Lynn Zoeller Carlson 99 Beth Allison Zoeller Willis 99 Total 1000The Shares represent all of the issued and outstanding shares of capital stockof the Company. It is the essence of this Agreement that Buyer acquires all ofthe capital stock of the Company. SECTION 2.02. DELIVERY OF CONSIDERATION BY BUYER AT CLOSING. Inreliance on the representations, warranties and covenants herein contained andin exchange for the sale, conveyance, transfer and delivery of the Shares, ineach case subject to the terms and conditions of this Agreement, on the ClosingDate, the Buyer shall deliver or cause to be delivered the following aggregateconsideration (collectively, the "Initial Purchase Price", and together with theaggregate Additional Consideration (as defined herein), the "Purchase Price"): (a) an aggregate number of 100,000 shares of common stock, $.01par value, of Buyer (the "Buyer Common Stock"), to be delivered as soon asreasonably practicable after the Closing Date (the "Consideration Shares"),which Buyer Common Stock will be allocated 2 among the Shareholders ratably in direct proportion to their ownership interestsin the Company immediately prior to the Closing as set forth in Exhibit 2.02(a)(the "Ownership Interests"); (b) cash in the amount of One Million Two Hundred ThousandDollars ($1,200,000.00) which shall be allocated among the Shareholders ratablyin accordance with their Ownership Interests; and (c) if the average closing price on the American Stock Exchangeof a share of Buyer Common Stock for the five trading days immediately prior tothe Closing (the "Closing Date Buyer Common Stock Price") is less than $8.00 pershare, additional cash in the amount equal to the difference obtained bysubtracting (i) the aggregate Closing Date Buyer Common Stock Price of all ofthe Consideration Shares from (ii) Eight Hundred Thousand Dollars ($800,000),which shall be allocated among the Shareholders ratably in accordance with theirOwnership Interests. SECTION 2.03. ADDITIONAL CONSIDERATION. (a) If the Company shall have a gross margin (determined inaccordance with generally accepted accounting principles ("GAAP")) derived fromthe Business in the manner described in Appendix I hereto (the "Business GrossMargin") which exceeds Five Hundred Thousand Dollars ($500,000) for any fiscalyear of the Buyer (the end of such fiscal years currently being March 31)starting with the Buyer's 2008 fiscal year (ending on March 31, 2008) and endingwith the Buyer's 2011 fiscal year (ending March 31, 2011) (each such fiscal yearof the Buyer, an "Earn-Out Year"), the Buyer shall cause to be paid in cash tothe Shareholders additional consideration (together with the Stub PeriodAdditional Consideration (as described herein), the "Additional Consideration")for such fiscal year equal to thirty percent (30%) of (x) the Business GrossMargin for such Buyer's fiscal year, less (y) Five Hundred Thousand Dollars($500,000), which additional consideration, if any, for each applicable fiscalyear shall be paid on or prior to June 30 of the next fiscal year; provided,however, that if the Business Gross Margin for any fiscal year does not exceedFive Hundred Thousand Dollars ($500,000) (the "Hurdle"), no AdditionalConsideration shall be due with respect to such fiscal year pursuant to thisSection 2.03(a); provided, further, that in no event shall the aggregateAdditional Consideration due pursuant to the terms of this Agreement exceed FourMillion Dollars ($4,000,000). The consideration provided for in this Section2.03(a) shall be allocated among the Shareholders ratably in accordance withtheir Ownership Interests. At all times prior to September 30, 2011, the Buyershall maintain a separate set of books and records of the Company, calculated inaccordance with GAAP and derived from the Business in the manner described inAppendix I hereto for the purpose of calculating the Business Gross Margin, withsuch books and records being made available to the Shareholders during normalbusiness hours, subject to the terms of this Agreement, upon written request forthe purposes of verifying the accuracy of the Business Gross Margin andAdditional Consideration. (b) If the Company shall have a Business Gross Margin whichexceeds Two Hundred and Ninety Thousand Dollars ($290,000) for the periodbeginning on the Closing Date and ending on March 31, 2007, the Buyer shallcause to be paid in cash to the Shareholders additional consideration (the "StubPeriod Additional Consideration") for such period equal to thirty percent (30%)of (x) the Business Gross Margin for such Buyer's fiscal year, less (y) Two 3 Hundred Ninety Thousand Dollars ($290,000), which additional consideration, ifany, for each applicable fiscal year shall be paid on or prior to June 30, 2007;provided, however, that if the Business Gross Margin for such period does notexceed Two Hundred Ninety Thousand Dollars ($290,000), no Stub Period AdditionalConsideration shall be due pursuant to this Section 2.03(b). (c) If any Change of Control Event (as defined herein) isconsummated prior to March 31, 2011, then the Shareholder Representative, onbehalf of himself and each other Shareholder, shall have the right, but not theobligation, to deliver, within thirty (30) days of the consummation of a Changeof Control Event and in no event after March 31, 2011, a written notice to theBuyer (the "Acceleration Notice"), whereby (x) the Shareholder Representativestates that a Change of Control Event has taken place, (y) the Shareholdersdemand a one-time cash payment of an amount equal to the Acceleration Payment(as defined below) and (z) the Shareholders confirm that in exchange for theAcceleration Payment, each Shareholder waives any and all rights to any furtherpayments pursuant to this Section 2.03. Only the Shareholder Representative,acting with proper and full authority for all of the Shareholders, shall havethe ability to deliver the Acceleration Notice. Within thirty (30) days of thereceipt of an Acceleration Notice following a Change of Control Event, the Buyershall pay an amount equal to the Acceleration Payment to the Shareholders. (d) The Buyer acknowledges that the additional considerationprovided in this Section 2.03 is a material inducement to the Shareholders toenter into this Agreement. Buyer agrees that following the Closing, it shall useits commercially reasonable efforts to operate the Business and market theproducts of the Business in a manner consistent with the other high priorityproducts of the Buyer, and the Major Shareholder agrees, subject to the terms ofhis Employment Agreement, to support and aid Buyer in such operation of theBusiness. (e) The "Acceleration Payment" shall be the sum of: (i) an amount equal to thirty percent (30%) of (A) the aggregate Business Gross Margin for the twelve most recently completed calendar months, less (B) Five Hundred Thousand Dollars ($500,000) (such amount, for purposes of calculating the Acceleration Payment, being the "Additional Consideration" for the Earn-Out Year in which the Acceleration Notice is delivered); plus (ii) for each full Earn-Out Year of the Buyer following the Earn-Out Year in which the Acceleration Notice is delivered, ending with March 31, 2011, if any, an amount equal to one hundred forty percent (140%) of the Additional Consideration to be paid pursuant to this Section 2.03(e) in respect of the immediately preceding Earn-Out Year, as calculated pursuant to the terms of this Section 2.03(e);provided, however, that in no event shall the Acceleration Payment be greaterthan the difference obtained by subtracting (x) the amount of aggregateAdditional Consideration paid to the Shareholders pursuant to this Section 2.03as of the date that the Acceleration Notice from (y) $4,000,000; provided,further, that if a valid Acceleration Notice is delivered prior to March 31,2008, then notwithstanding any other provision of this Section 2.3, theAcceleration Payment shall be equal to the net present value of the differenceobtained by subtracting (A) the Stub 4 Period Additional Consideration paid to the Shareholders (if any) from (B) ThreeMillion Dollars ($3,000,000), calculated using a discount rate of eight percent(8%) per annum, compounded annually, as of the date of the Acceleration Noticefrom March 31, 2011. (f) For purposes of this Section 2.03, "gross margins" shallmean sales (determined in accordance with GAAP) minus the sum of direct materialcosts and direct labor costs (including warehousing, insurance, excise taxes andshipping, each determined in the same manner as the Buyer has heretofore used,as specified on Appendix I hereto). (g) For purposes of this Section 2.03, "Change of Control Event"shall mean (i) a sale, merger or consolidation of the Buyer or the Company withor into another entity or other transaction as a result of which the holders ofthe voting stock of the Corporation immediately prior to such transaction own,directly or indirectly, in the aggregate, less than fifty percent (50%) of thevoting power of the Buyer after such transaction or (ii) a sale of all orsubstantially all of the assets of the Buyer or the Company; provided, however,that notwithstanding anything to the contrary in this Agreement, in no eventshall an internal reorganization or sale, merger or consolidation of the Companywith or into the Buyer or any affiliate of the Buyer be a Change of Control. (h) It is the intention of the parties hereto that all amountspayable to the Shareholders pursuant to this Section 2.03 be recognized foraccounting and tax purposes as additional purchase consideration. Allconsideration provided for in this Section 2.03, including, without limitation,the Stub Period Additional Payment, any other Additional Payment and anyAcceleration Payment, shall be allocated among the Shareholders in accordancewith their Ownership Interests. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.The Major Shareholder represents and warrants to the Buyer that the statementsset forth in this Section 3.01 are true, correct and complete as of the datehereof, subject to the qualifications set forth in the Exhibits to this Section3.01 (said Exhibits are arranged in paragraphs corresponding to the numbered andlettered paragraphs contained in this Section 3.01) and each Shareholderrepresents and warrants to the Buyer, solely as to himself, that the statementsset forth in Section 3.01(a)(ii), Section 3.01(b)(i) and Section 3.01(n) aretrue, correct and complete as of the date hereof: (a) Organization; Good Standing; Stock Ownership;Capitalization. (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Kentucky, and has the corporate power and authority to own or lease its assets or properties and to conduct its business as currently conducted, and the Company is qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions where failure to qualify would have a material adverse effect on the Company or the conduct of the Business by 5 the Company after the Closing Date. The Company maintains offices only at the site listed on Exhibit 3.01(a)(i) and conducts no operations other than from that site. (ii) The Shareholders are the sole beneficial and record owners of all of the issued and outstanding shares of capital stock of the Company and own the number of shares of such stock set forth opposite his or her name on Exhibit 3.01(a)(ii). The Shareholders' residence addresses are as set forth in the first paragraph of this Agreement. The Shareholders are the beneficial and record owner of all of the Company's capital stock, free and clear of any liens, encumbrances or restrictions on transfer of any nature whatsoever. Except for this Agreement and the transactions contemplated hereby, the Shareholders have no legal obligation, absolute or contingent, to any Person to sell the Company's capital stock or to enter into any agreement with respect thereto. Other than the Shareholders, no other Person has ever been a shareholder of the Company. No Shareholder is a party to any agreement with any other Shareholder relating to the capital stock or ownership of the Company. (iii) The Company's authorized capital stock consists exclusively of two thousand (2000) shares of common stock, no par value per share, of which all is designated as voting common stock; one thousand (1000) of which (the voting common shares) are issued and outstanding. All of the outstanding shares of capital stock of the Company have been duly authorized and are validly issued, fully paid and non-assessable and have been issued in accordance with all applicable federal and state securities laws. There are no existing options, calls or commitments of any character whatsoever, or agreements to grant the same, relating to the Company's capital stock and the Company has no outstanding securities convertible into or exchangeable or exercisable for any shares of common stock or any options, calls or commitments of any character whatsoever with respect to the issuance of such convertible securities. The Company owns no equity interests, convertible securities, marketable securities, notes or other obligations evidenced by written instruments of any other firm or entity. The Company has no subsidiaries. (b) Shareholder and Corporate Authorization. (i) The execution, delivery and performance by each Shareholder of this Agreement and any other agreements contemplated herein to which such Shareholder is a party have been authorized and approved by all requisite action on the part of such Shareholder, and no other approval or authorization is required on the part of such Shareholder, any trustee or any other Person by law or otherwise in order to make this Agreement the valid, binding and enforceable obligation of such Shareholder. This Agreement and any other agreements contemplated herein to which such Shareholder is a party are the valid, binding and enforceable obligations of such Shareholder, enforceable against such Shareholder in accordance with its respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditor's rights generally. The execution, delivery and performance of this Agreement and any other agreements contemplated herein to which such Shareholder is a party and the transactions contemplated hereby (and thereby) by such Shareholder will not (a) conflict with or violate the provisions of any applicable law, rule or order or 6 the Company's Articles of Incorporation or by-laws, (b) conflict with or constitute a default under any agreement or contract by which such Shareholder is bound, or (c) require the consent or approval of, or filing with, any governmental body or third party other than in the case of clause (b) and (c) those items set forth on Exhibit 3.01(b)(1). (ii) The execution, delivery and performance by the Company of any other agreements contemplated herein to which the Company is a party have been authorized and approved by all requisite corporate and other action on the part of the Shareholders and the Company, and no other corporate or other approval or authorization is required on the part of the Company, any trustee or any other Person by law or otherwise in order to make any such agreement the valid, binding and enforceable obligation of the Company. Each of the agreements contemplated herein to which the Company is a party are the valid, binding and enforceable obligations of the Company, enforceable against the Company in accordance with its respective terms. The execution, delivery and performance of each of the agreements contemplated herein to which the Company is a party and the transactions contemplated hereby (and thereby) by the Company will not (a) conflict with or violate the provisions of any applicable law, rule or order or the Company's Articles of Incorporation or by-laws, (b) conflict with or constitute a default under any agreement or contract by which the Company is bound, or (c) require the consent or approval of, or filing with, any governmental body or third party. (iii) Set forth on Exhibit 3.01(b)(2) is a list of the current officers and directors of the Company, all trade names used by the Business and all jurisdictions in which the Business is conducted. (c) The Company's Assets. (i) All vendor and customer contracts, distribution agreements, confidentiality agreements, purchase and sales orders, powers of attorney, undertakings, commitments and other agreements to which the Company is a party and which relate in any manner to the Business and/or the relationship between the Company and the Customers (hereinafter defined) or its vendors, whether written or oral, shall be referred to herein collectively as the "Business Agreements". The Company will deliver to the Buyer, on or before the Closing Date, true and correct copies of all written Business Agreements and detailed summaries of all oral Business Agreements. Attached hereto as Exhibit 3.01(c)(i)(1) are true and correct copies of all agreements which have been entered into between the Company and its Customers concerning the Business (or a listing thereof; provided, however, that the Shareholders shall have previously delivered true and correct copies of said Agreements to the Buyer) under which the Company has any present or potential liability or obligation, or from which the Company derives, or may in the future derive, a benefit. Also attached as part of Exhibit 3.01(c)(i)(1) is a schedule stating the identity of the Customer to each of those agreements which are in force and effect as of the Closing Date. Annexed as Exhibit 3.01(c)(i)(2) is a detailed summary of all oral Business Agreements, as well as a copy of all written Business Agreements and all agreements of the Company which relate to any strategic partnerships, reselling arrangements or joint ventures between the Shareholders and others, concerning 7 the Business (or a listing thereof; provided, however, that the Shareholders shall have previously delivered true and correct copies of said Agreements to the Buyer). Listed on Exhibit 3.01(c)(i)(3) is a description of each and every real estate lease, equipment and personal property lease (collectively, the "Leases") to which the Company is a party (whether as a principal or guarantor or otherwise). The Leases are also included within the definition of Business Agreements as said term is used herein. The Company is not the owner or lessee of any motor vehicles whether or not they are used in the Business. The Company does not own or lease any interest in any real property or lease any equipment used in the Business, except as expressly stated on Exhibit 3.01(c)(i)(3). Neither the Company nor any other party is in material default under any Business Agreement and no other party to any Business Agreement has given the Company notice of any dispute under any Business Agreement or, to the knowledge of the Shareholders, has made any claim, except as set forth on Exhibit 3.01(c)(i)(4). Each Business Agreement is in full force and effect and the Company has obtained all required consents transactions contemplated in this Agreement (including, without, limitation, any such consent required to be obtained under any of the Business Agreements). (ii) All of the tangible assets of the Company used in the Business, including, without limitation, all machinery, office and other equipment, furniture, hardware, computers and related equipment, business machines and telephones, telephone systems, parts and accessories presently utilized by the Company in the Business, shall be referred to herein collectively as the "Tangible Assets". Attached hereto as Exhibit 3.01(c)(ii) is a true and correct list or description of the Tangible Assets. As of the Closing Date, each of the Tangible Assets will be in good and operable condition, reasonable wear and tear excepted. (iii) All patents, trademarks, trade names, service marks, service names, logos, designs, formulations, copyrights, trade dress and other intellectual property and all registrations and applications therefor, all know-how, trade secrets, technology or processes, compounds, formulas, specifications, brands, research and development, all telephone numbers, facsimile numbers, e-mail addresses and Internet domain addresses, all Web sites and all computer programs, databases and software documentation owned or used by the Company, if any, other than off-the-shelf software licensed by the Company, shall be referred to herein collectively as the "Intellectual Property". The Intellectual Property comprises all intellectual property rights necessary or advisable for the conduct of the Business as currently conducted. Attached hereto as Exhibit 3.01(c)(iii)(A) is a true and correct list of all of the Intellectual Property which has been reduced to writing or other medium (and where practicable, a copy thereof), including, without limitation, all proprietary software owned by the Company. Exhibit 3.01(c)(iii)(A) also indicates which of such items have been patented or registered or are in the process of application for same. The Company is the sole owner, free of any lien or encumbrance, of all the Intellectual Property listed in Exhibit 3.01(c)(iii)(A). The Company has taken, and will take, all reasonable actions to protect its rights in Intellectual Property owned by it. The Company's rights in the Intellectual Property are valid and enforceable. Except as disclosed on Exhibit 3.01(c)(iii)(B), the Company has received no demand, claim, notice or inquiry from any individual, organization or entity (collectively, "Person") in respect of the Intellectual Property which challenges, threatens 8 to challenge or inquires as to whether there is any basis to challenge, the validity of, or the rights of the Company in the Intellectual Property, and the Shareholders know of no basis for any such challenge. The Company is not in violation or infringement of, and has not violated or infringed, any intellectual property rights of any other Person. No third party is infringing on the rights of the Company in and to the Intellectual Property. Except as set forth on Exhibit 3.01(c)(iii)(C), the Company has not granted any license with respect to the Intellectual Property to any Person and all such licenses are on an arm's-length basis for value and on commercially reasonable terms. Set forth on Exhibit 3.01(c)(iii)(D) is a true and complete list of all software licensed or used by the Company in operating and maintaining the Business, including, without limitation, all off-the-shelf or shrink-wrap licensed software (collectively, the "Licensed Software"). The Company has valid, royalty free and fully-paid licenses for all of the Licensed Software and has provided the Buyer with copies of all such licenses. Exhibit 3.01(c)(iii) also indicates which of such items have been patented o ...