1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): October 19, 1999 (October 5, 1999) JAKKS PACIFIC, INC. (Exact name of registrant as specified in its charter) Delaware 0-28104 95-4527222 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.) 22761 Pacific Coast Highway, Malibu, California 90265 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 456-7799 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. Pursuant to a Stock Purchase Agreement dated as of September 22, 1999 among the Registrant, Flying Colors Toys, Inc. f/k/a Colorbok Paper Products, Inc. (the "Company") and all the shareholders of the Company (each, a "Shareholder"), as amended (the "Stock Purchase Agreement"), the Registrant acquired all of the Company's business and assets, subject to related liabilities, related to its Flying Colors branded product lines by purchasing from the Shareholders all of the Company's outstanding capital stock (the "Shares") for an aggregate purchase price of $35,850,000, of which $34,725,685 was paid in cash on the closing of the transaction and $1,124,315 is to be paid out of cash collections of the Company's pre-closing accounts receivable, and, in any event, on or before January 29, 2000. Also, the Registrant paid on behalf of the Company, on the closing of the acquisition, $17,624,315 in satisfaction of certain indebtedness of the Company and, on October 12, 1999, a transfer fee in the amount of $150,000 to obtain the consent of the licensor under one of the Company's character licenses with respect to the acquisition. In addition, the Registrant agreed to pay to the Shareholders an earn-out in an amount up to $4,500,000 in each of the three 12-month periods following the closing if Gross Profit (as defined) of Flying Colors branded products achieve certain prescribed levels in each of such periods. The Registrant entered into employment agreements with two of the Shareholders who had been senior executives of the Company to continue to serve in essentially the same capacities after the acquisition. Each of these employment agreements provides, among other things, an employment term ending on December 31, 2002 and an annual base salary at a rate of $300,000, and includes covenants prohibiting certain activities by these employees that may be competitive with the Registrant's business. The Company entered into a Transition Services Agreement with an entity that acquired from the Company immediately prior to the closing of the Registrant's purchase of the Shares all of the Company's business and assets, subject to related liabilities, not related to the Flying Colors branded product lines (the "Divestee"), pursuant to which the Divestee will, during an initial period following the closing subject to termination by either party upon prior written notice, perform certain services for the Company, including, among others, inventory control and warehousing, order processing, customer service, shipping and billing, until the Company assumes control of these functions internally. In consideration therefor, the Company will pay to the Divestee a monthly base fee of $310,000 and an additional fee based on Gross Sales (as defined) of Flying Colors branded products processed by the Divestee. The Company also entered into a lease for certain premises indirectly owned by two of the Shareholders, one of whom is employed by the Registrant (the "Lease"). The Lease provides for an initial term of six months and a monthly base rent of approximately $5,000. On September 30, 1999, the parties to the Stock Purchase Agreement entered into an escrow agreement pursuant to which, as of October 1, 1999, the purchase price for the Shares and certain additional amounts were paid into escrow and the Shares and related stock powers assigning the Shares to the Registrant and certain other documents related to the consummation of the acquisition were delivered into escrow, to be released upon termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or on the satisfaction of other conditions set forth therein. The Registrant and the Shareholders were advised of early 2 3 termination of such waiting period on October 4, 1999 and the escrowed funds and documents were released by the escrow agent and delivered in accordance with the escrow agreement and the parties' instructions thereunder on October 5, 1999. Accordingly, the closing of the acquisition occurred on October 5, 1999, but, as among the parties to the Stock Purchase Agreement, the acquisition was deemed to have become effective immediately prior to the opening of business on October 1, 1999. The purchase price for the Shares, the compensation payable to the executives employed by the Registrant, the fees payable under the Termination Services Agreement and the rent payable under the Lease were determined through arms' length negotiations between the Registrant, on the one hand, and the Shareholders, the executives, the Divestee and the landlord, respectively, on the other hand. The entire purchase price for the Shares was funded out of the Registrant's cash reserves. The Company designs, produces and markets activity sets, including stamp-and-sticker, poster, puzzles, project, jewelry making and make-and-paint character kits, "art studios," molding compound playsets, lunch boxes and stationery. In connection with the purchase of the Shares, the Registrant acquired the Company's assets, consisting primarily of proprietary marks and trade rights; character licenses, including for Barbie*, Rugrats*, Blue's Clues* and Hello Kitty* characters; inventory; accounts receivable and certain equipment. The Registrant intends to use the acquired equipment, consisting primarily of tools, molds and other product processing equipment, office equipment and vehicles that were used in the operation of the Company's business prior to the acquisition, in the same manner for the immediate future. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired. Not included herein; to be filed by amendment on or before December 20, 1999. (b) Pro Forma Financial Information. Not included herein; to be filed by amendment on or before December 20, 1999. (c) Exhibits. - -------- * Trademarks of other companies 3
Number Description - ------ ----------- 2.1 Stock Purchase Agreement dated as of September 22, 1999 among the Registrant, the Company and the Shareholders. 2.2 First Amendment to Stock Purchase Agreement dated as of September 30, 1999. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: October 19, 1999 JAKKS PACIFIC, INC. By: /s/ Joel M. Bennett --------------------------------- Joel M. Bennett Chief Financial Officer 4
Number Description - ------ ----------- 2.3 Escrow Agreement dated as of September 30, 1999 among Joshua H. Pokempner, as agent for the Shareholders, the Registrant and Bank One Trust Company, NA, as escrow agent. 2.4 Transition Services Agreement dated as of October 1, 1999 between the Divestee and the Company. 2.5 Lease dated as of October 1, 1999 between Shore Properties LLC and the Company. 2.6 Employment Agreement dated as of October 1, 1999 between the Registrant and Michael Bianco. 2.7 Employment Agreement dated as of October 1, 1999 between the Registrant and Joshua H. Pokempner. 5 EXHIBIT INDEX
Number Description - ------ ----------- 2.1 Stock Purchase Agreement dated as of September 22, 1999 among the Registrant, the Company and the Shareholders. 2.2 First Amendment to Stock Purchase Agreement dated as of September 30, 1999. 2.3 Escrow Agreement dated as of September 30, 1999 among Joshua H. Pokempner, as agent for the Shareholders, the Registrant and Bank One Trust Company, NA, as escrow agent. 2.4 Transition Services Agreement dated as of October 1, 1999 between the Divestee and the Company. 2.5 Lease dated as of October 1, 1999 between Shore Properties LLC and the Company. 2.6 Employment Agreement dated as of October 1, 1999 between the Registrant and Michael Bianco. 2.7 Employment Agreement dated as of October 1, 1999 between the Registrant and Joshua H. Pokempner.
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 2
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 3 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 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 Joshua H. Pokempner, 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 "Bianco" means Michael Bianco. 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 Plante & Moran, 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 Bianco, 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 Hart-Scott-Rodino 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 William Taylor and Pokempner, d/b/a Shore Properties, or their successor as owner of the real property known as 2716 Baker Road, Dexter, Michigan 48130. 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 Joshua H. Pokempner. 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 mark, 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, Phil Jenkins, individually, Jentra Investment Limited Partnership and Lee Tracy, and a Waiver in the form of Schedule 1.82B to be entered into at the Closing by the Shareholders, Phil Jenkins, 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 Bianco or Pokempner for cause (pursuant to Section 13 of his Employment Agreement), or (ii) Bianco 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 Bianco or Pokempner, other than for cause (pursuant to Section 13 of his Employment Agreement), or if Bianco 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 Bianco as described in this subsection (f) or if Bianco terminates his employment with JAKKS as described in this 21 22 subsection (f), then Bianco 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, Bianco and Pokempner 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 Bianco and Pokempner. If JAKKS, Bianco 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, Skala & Bass LLP, 750 Lexington Avenue, New York, New York 10022 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 Bianco shall each execute and deliver to the other the Employment Agreement for Bianco. 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 Bianco 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 Bianco 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 Bianco 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. 22761 Pacific Coast Highway Malibu, California 90265 Attn: President Fax: (310) 317-8527 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, New York 10022 Attn: Murray L. Skala, Esq. Fax: (212) 888-7776 to the Company, the Agent or any Shareholder (in each case, prior to the Closing): Colorbok Paper Products, Inc. Joshua H. Pokempner 2716 Baker Road Dexter, Michigan 48130 Fax: (734) 424-9535 MUST BE MARKED "PERSONAL AND CONFIDENTIAL" 71 72 to the Agent or any Shareholder (in each case, after the Closing): Joshua H. Pokempner Flying Colors Toys, Inc. 2716 Baker Road Dexter, Michigan 48130 Fax: (734) 424-9535 MUST BE MARKED "PERSONAL AND CONFIDENTIAL" to the Paying Agent: The First National Bank of Chicago 611 Woodward Avenue Detroit, Michigan 48226 Fax: (313) 225-3420 Attn: Amy Brehler with a copy, in each case, to: Honigman Miller Schwartz and Cohn 2290 First National Building 660 Woodward Avenue Detroit, Michigan 48226-3583 Attn: Alan S. Schwartz, Esq. Fax: (313) 465-7575 Howard Rice, Esq. 230 Glenwood Drive Delray Beach, Florida 33445 Fax: (561) 638-1136 Barris, Sott, Denn & Driker, PLLC 211 West Forth #1500 Detroit, Michigan 48226-3211 Attn: Dan Share Fax: (313) 965-2493 William E. Taylor 2745 Peters Road Dexter, Michigan 48130 Fax: (734) 424-9535 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) William E. Taylor and Pokempner 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/ WILLIAM E. TAYLOR By: /s/ STEPHEN G. BERMAN ------------------------------- -------------------------- Name: William E. Taylor Name: Stephen G. Berman Title: Chief Executive Officer Title: President and Chief Operating Officer /s/ MICHAEL BIANCO - ---------------------- Michael Bianco /s/ JAMES A. COURTNEY - ---------------------- James A. Courtney /s/ HOWARD DIAMOND - ---------------------- Howard Diamond 79 80 TRACY-GABRIEL IRREVOCABLE TRUST DATED DECEMBER 17, 1997 By: /s/ PHIL JENKINS ---------------------------- Phil Jenkins, Trustee /s/ JOSHUA H. POKEMPNER - ------------------------------- Joshua H. Pokempner, individually and as Agent /s/ WILLIAM E. TAYLOR - ------------------------------- William E. Taylor 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. *Assumption: The foregoing list treats the shares purchased from Jim Courtney by Bill and Josh on March 1, 1996 as owned by Bill and Josh even though some of these shares remain in escrow.
PERCENTAGE OF SHARE NAME AND ADDRESS NUMBER OF SHARES OWNERSHIP - ---------------- ---------------- --------- Michael Bianco 6161 Windmill Court Saline, Michigan 48176 3,216 13.498 James A. Courtney 11390 Bellwood Plymouth, Michigan 48170 2,406 10.099 Howard Diamond 18 Haverhill Court Ann Arbor, Michigan 48105 206 0.865 Tracy-Gabriel Irrevocable Trust dated December 17, 1997, Phil Jenkins, Trustee c/o Phil Jenkins 2041 Greenview Ann Arbor, Michigan 48103 2,584 10.846 Joshua Pokempner 2908 W. Delhi Road Ann Arbor, Michigan 48103 7,706 32.344 William E. Taylor 2645 Peters Road Dexter, Michigan 48130 7,707 32.348 ------ ------- Total 23,825 100.0% 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 (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.
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 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 ----------- ------------------------------- Michael Bianco 31.749% James A. Courtney 5.050 Howard Diamond .433 Phil Jenkins, Trustee 5.423 Joshua H. Pokempner 41.172 William E. Taylor 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 Phil Jenkins and Steve Tracy 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 Phil F. Jenkins Revocable Living Trust to the Company in the principal amount of $190,000. All amounts due and owing in connection with the loan from Lee Tracy, who is Phil Jenkins' 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)).
1 EXHIBIT 2.2 FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "First Amendment") is made on September 30, 1999, among Michael Bianco, James A. Courtney, Howard Diamond, Tracy-Gabriel Irrevocable Trust dated December 17, 1997, Phil Jenkins, Trustee, Joshua H. Pokempner and William E. Taylor, Colorbok Paper Products, Inc., a Michigan corporation (the "Company"), and JAKKS Pacific, Inc., a Delaware corporation ("JAKKS"). RECITALS A. The parties hereto entered into a Stock Purchase Agreement dated as of September 22, 1999 (the "Agreement"), pursuant to which JAKKS agreed to purchase all of the capital stock of the Company. B. The parties desire to amend certain provisions of and Schedules to the Agreement in accordance with this First Amendment. THEREFORE, the parties agree as follows: 1. Section 11.1(e) is hereby amended and restated to read in its entirety as follows: "(e) any transaction, event or circumstance to the extent relating to the Divested Business, whether occurring or existing before, at or after the Closing, or to the extent relating to the Divestiture." 2. Schedule 2.2 of the Agreement is hereby amended to read in its entirety as set forth on Exhibit A attached hereto. 3. Schedule 6.3 of the Agreement is hereby amended to read in its entirety as set forth on Exhibit B attached hereto. 4. The Stock Purchase Agreement is hereby amended to add a new Section 9.15 to read in its entirety as follows: 9.15 From and after the Closing Date, JAKKS will not permit the Company to write any checks or make any withdrawals on any accounts of the Company with the Bank existing at or prior to the Closing Date to the extent that such checks or withdrawals would cause an overdraft on any such accounts. Promptly after the delivery of the HSR Fulfillment Notice (as defined in the Escrow Agreement dated as of the date hereof among JAKKS, the Shareholders' Agent and Bank One Trust Company, NA, as escrow agent thereunder) to the Escrow Agent thereunder, JAKKS will cause the Company to deliver to the Bank documentation (including without limitation signature cards with standard corporate resolutions) reasonably necessary to evidence a change in control of such accounts to JAKKS. 5. The Agreement shall not be amended or otherwise modified except as set forth in this First Amendment. Except as expressly amended by this First Amendment, the Agreement is hereby ratified and confirmed and shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties have executed this First Amendment on the date first above written. COLORBOK PAPER PRODUCTS, INC. JAKKS PACIFIC, INC. By: /s/ WILLIAM E. TAYLOR By: /s/ JOEL M. BENNETT ----------------------------- --------------------------------- Name: William E. Taylor Name: Joel M. Bennett Title: Chief Executive Officer Title: Chief Financial Officer /s/ MICHAEL BIANCO - -------------------------------- Michael Bianco /s/ JAMES A. COURTNEY - -------------------------------- James A. Courtney /s/ HOWARD DIAMOND - -------------------------------- Howard Diamond TRACY-GABRIEL IRREVOCABLE TRUST DATED DECEMBER 17, 1997 By: /s/ PHIL JENKINS ----------------------------- Phil Jenkins, Trustee /s/ JOSHUA H. POKEMPNER - -------------------------------- Joshua H. Pokempner, individually and as Agent /s/ WILLIAM E. TAYLOR - -------------------------------- William E. Taylor 2
1 EXHIBIT 2.3 ESCROW AGREEMENT This Escrow Agreement (this "Escrow Agreement") is made as of September 30, 1999, among (i) Joshua H. Pokempner, as agent for the Shareholders (as defined in the Purchase Agreement, as defined in Recital A below) (the "Shareholders' Agent"), pursuant to a Shareholders' Agent Agreement dated as of September 22, 1999 (the "Shareholders Agent Agreement"), among the Shareholders and the Shareholders' Agent, (ii) JAKKS Pacific, Inc., a Delaware corporation ("JAKKS"), and (iii) Bank One Trust Company, NA (the "Escrow Agent"). Recitals A. JAKKS, Flying Colors Toys, Inc., f/k/a Colorbok Paper Products, Inc., a Michigan corporation (the "Company"), and the Shareholders are parties to a Stock Purchase Agreement dated as of September 22, 1999 (the "Purchase Agreement"), pursuant to which JAKKS has agreed to purchase all of the issued and outstanding shares of capital stock of the Company from the Shareholders, in accordance with the terms and conditions of the Purchase Agreement. Capitalized terms used but not defined herein will have the meanings given to them in the Purchase Agreement. B. It is a condition to the obligations of JAKKS and the Shareholders to consummate the Acquisition that the waiting period under the HSR Act shall have expired or been terminated (the "HSR Condition"). C. All of the remaining conditions to the parties' obligations to consummate the Acquisition have been, or are capable of being fulfilled, on the date hereof. The parties, therefore, wish to enter into this Agreement to facilitate the Closing under the Purchase Agreement upon fulfillment of the HSR Condition and to provide a mechanism for returning the payments and documents delivered into escrow pursuant to this Agreement if the HSR Condition has not been fulfilled in certain circumstances. D. The Escrow Agent has agreed to serve as escrow agent and to hold and disburse the funds and documents delivered to it pursuant to this Agreement in accordance with the terms and conditions of this Agreement. Therefore, the parties agree as follows: 1. Escrow Documents and Escrow Fund. 1.1 Deposit of Escrow Documents. Concurrently with the execution and delivery of this Agreement, (a) the share certificates, stock powers and other documents, if any, described on Exhibit A (collectively, the "Main Stock Documents") and the share certificates, stock powers and other documents, if any, described on Exhibit B (the "U.S. Bank Stock Documents" and, collectively with the Main Stock Documents, the "Stock Documents") are being delivered into escrow with the Escrow Agent, and (b) the 2 documents described on Exhibit C (the "Other Closing Documents" and, collectively with the Stock Documents, the "Escrow Documents") are being delivered into escrow with the Escrow Agent. Of the Other Closing Documents, those annotated with an asterisk on Exhibit C are documents relating to the Divestiture and will be referred to in this Agreement as the "Divestiture Documents." 1.2 Deposit of Funds. Concurrently with the execution and delivery of this Agreement, JAKKS is delivering to the Escrow Agent, by wire transfer of immediately available funds, $52,350,000.00 (the "Escrow Payment"), which is the sum of (a) $34,746,504.79, which represents the portion of the Closing Purchase Price to be paid in cash at Closing pursuant to Article 2 of the Purchase Agreement, (b) $15,986,770.33, which represents the Closing Debt Payments to be made by JAKKS in cash at the Closing pursuant to Section 8.9 of the Purchase Agreement in respect of the Bank Loan (calculated through the time immediately prior to the start of business on the Closing Date) (the "Bank Loan Payment") and (c) $1,616,724.88, which represents the Closing Debt Payments to be made by JAKKS in cash at the Closing pursuant to Section 8.10 of the Purchase Agreement in respect of the indebtedness set forth on Schedule 8.10 to the Purchase Agreement (the "Insider Debt") (calculated through the time immediately prior to the start of business on the Closing Date)(the "Insider Debt Payment"). 1.3 Acknowledgement of Receipt by the Escrow Agent. The Escrow Agent acknowledges receipt of the Escrow Documents and the Escrow Payment and will hold in escrow and distribute and disburse the Escrow Documents and the Escrow Fund (as defined in Section 2 below) in accordance with this Agreement. 2. Deposit of Escrow Payment. From the date of this Agreement until the first to occur of the Finalization Date (as defined in Section 3.2 below) or the Early Return Date (as defined in Section 3.3 below), the Escrow Agent shall deposit the Escrow Payment (together with the interest accrued thereon, the "Escrow Fund") in a separate trust account of the Escrow Agent. The Escrow Agent shall invest the Escrow Fund in (1) U.S. Treasury obligations, obligations issued or guaranteed by U.S. government agencies or instrumentalities and/or (2) mortgage-backed securities and/or (3) commercial paper and/or (4) bank obligations and deposit notes, as directed in a joint written Notice signed by JAKKS and the Shareholders' Agent or, if no such direction is given, in the One Group Prime Money Market Fund, or a successor or similar fund. 3. Disposition of the Escrow Documents and the Escrow Fund. 3.1 Instructions to be Provided by Parties. (a) On the business day on which JAKKS and the Shareholders' Agent receive Notice that the HSR Condition has been fulfilled, they will provide written Notice (either by joint written Notice or by separate written Notices to the same effect) to such effect signed by JAKKS and the Shareholders' Agent (the "HSR Fulfillment Notice") to the Escrow Agent. 2 3 (b) If JAKKS or the Shareholders' Agent receives Notice that any Governmental Authority has issued any Request for Additional Information or has taken any other action to delay or prevent the expiration or termination of the waiting period under the HSR Act with regard to the Acquisition, such party will provide written Notice to such effect signed by such party (the "Non-Fulfillment Notice") to the Escrow Agent. 3.2 Distribution Upon Expiration of HSR Waiting Period or Receipt of HSR Fulfillment Notice. If (x) the Escrow Agent has not received a Non-Fulfillment Notice by 11:00 a.m. (local time) on October 25, 1999 or (y) the Escrow Agent receives the HSR Fulfillment Notice, then, in the case of clause (x), on October 25, 1999, and, in the case of clause (y), as promptly as practicable (and in any event within one business day) after receipt of the HSR Fulfillment Notice, the Escrow Agent shall distribute and disburse the Escrow Documents and the Escrow Fund in accordance with this Section 3.2. The date of such distribution and disbursement shall be deemed the "Finalization Date. " (a) The Escrow Agent shall distribute to the Bank, from the Escrow Fund, an amount sufficient to repay the Bank Loan in full as of the Finalization Date, as such amount is set forth in a written Notice signed by JAKKS and the Shareholders' Agent and provided to the Escrow Agent pursuant to Section 10 below (either by joint written Notice or by separate written Notices to the same effect), with such amount being distributed to the Bank in the manner set forth in such Notice. (b) The Escrow Agent shall distribute an amount sufficient to repay the Insider Debt in full as of the Finalization Date to such Persons, in such manner and in such amount(s) as are set forth in a written Notice from JAKKS and the Shareholders' Agent to the Escrow Agent (either by joint written Notice or by separate written Notices to the same effect). (c) The Escrow Agent shall distribute the amounts remaining in the Escrow Fund to the Paying Agent pursuant to the Paying Agent Agreement, to be held and disbursed in accordance therewith. (d) The Escrow Agent will deliver all of the Stock Documents (consisting of the Main Stock Documents and the U.S. Bank Stock Documents) to JAKKS by recognized overnight courier at JAKKS' address set forth in Section 10 below (with a copy of the transmittal memo provided to Murray L. Skala, Esq., as set forth in Section 10). (e) The Escrow Agent will deliver the Other Escrow Documents to the Shareholders' Agent, by hand delivery, c/o Honigman Miller Schwartz and Cohn ("HMS&C"), 2290 First National Building, Detroit, Michigan 48226-3583, 3 4 Attention: Lisa M. Panepucci, and the Shareholders' Agent will cause such Documents to be disbursed as required by the Purchase Agreement. 3.3 Distribution upon Receipt of Non-Fulfillment Notice. As promptly as practicable upon the Escrow Agent's receipt of the Non-Fulfillment Notice and in any event within one business day after receipt thereof, the Escrow Agent shall distribute and disburse the Escrow Documents and the Escrow Fund in accordance with this Section 3.3. The date of such distribution and disbursement will be deemed the "Early Return Date." (a) The Escrow Agent will return all of the Main Stock Documents to the Shareholders' Agent, who will return them to the Shareholders, as appropriate. (b) The Escrow Agent will return all of the U.S. Bank Stock Documents to HMS&C, as escrow agent pursuant to Escrow Agreement dated as of September 28, 1999, among William E. Taylor, Joshua H. Pokempner, James A. Courtney and HMS&C. (c) The Escrow Agent will transfer all amounts in the Escrow Fund to JAKKS by wire transfer of immediately available funds to the account specified in writing to the Escrow Agent by JAKKS. (d) Unless otherwise instructed by JAKKS and the Shareholders' Agent, the Escrow Agent will destroy all of the Other Escrow Documents, all of which will be deemed rescinded ab initio and of no force or effect whatsoever. 4. Effectiveness of Acquisition; Certain Adjustments; Ownership of the Company's Shares. 4.1 Effectiveness of Acquisition. Notwithstanding anything to the contrary in this Agreement, the Stock Purchase Agreement, any other Acquisition Agreement or any of the Other Escrow Documents, if the HSR Condition is fulfilled, then for all purposes, (a) the Closing will be deemed to have taken place immediately prior to the start of business on October 1, 1999 and the Closing Date will be deemed to be October 1, 1999, notwithstanding that the HSR Condition may not be fulfilled until subsequent thereto, and (b) the closing of the Divestiture will be deemed to have taken place, and the Divestiture Documents will be deemed effective, immediately prior to the Closing. As a consequence of the foregoing, Interim Net Income shall be deemed to be equal to zero. 4.2 Certain Adjustments. If a distribution of the Escrow Fund is made pursuant to Section 3.2 above, then, the Deferred Closing Purchase Price will be increased by an amount equal to the sum of (a) the excess, if any, of (i) the amount payable pursuant to Section 3.2(a) to repay the Bank Loan in full on the Finalization Date over (ii) the amount of interest accruing in the Escrow Fund after the date hereof to (but not including) the Finalization Date on the entire Bank Loan Payment, and (b) the excess, if any, of (i) the amount payable pursuant to Section 3.2(b) to repay the Insider Debt in 4 5 full on the Finalization Date over (ii) the amount of interest accruing in the Escrow Fund after the date hereof to (but not including) the Finalization Date on the entire Insider Debt Payment. 4.3 Ownership of the Company's Shares. Notwithstanding anything to the contrary in this Agreement, until the HSR Condition is fulfilled, the Shareholders will continue to have record and beneficial ownership of the Shares and will continue to be responsible, through the Board of Directors elected by the Shareholders, for all management and operations of the Company. 5. Escrow Agent Fee. The Escrow Agent shall be entitled to compensation for its services hereunder as per EXHIBIT D, which is attached hereto and made a part hereof, and for reimbursement of its out-of-pocket expenses including, but not by way of limitation, the fees and costs of attorneys or agents which it may find necessary to engage in performance of its duties hereunder, all to be paid by the Shareholders and JAKKS (jointly and severally), and the Escrow Agent shall have, and is hereby granted, a prior lien upon any property, cash, or assets held hereunder, with respect to its unpaid fees and nonreimbursed expenses, superior to the interests of any other persons or entities. Although the obligations of the Shareholders and JAKKS to pay the fees and costs contemplated by the preceding sentence (collectively, the "Escrow Agent Fees") shall be joint and several in regard to the Paying Agent, as among the Shareholders and JAKKS, 50% of the Escrow Agent Fees shall be the responsibility of JAKKS and 50% of the Escrow Agent Fees shall be the responsibility of the Shareholders. Responsibility for the portion of the Escrow Agent Fees that are the responsibility of the Shareholders shall be determined as though such portion of the Escrow Agent Fees were "Obligations" under the Contribution Agreement dated as of September 22, 1999 among the Shareholders (the "Contribution Agreement"). 6. Nature of the Escrow Agent's Obligations. 6.1 Duties and Obligations of the Escrow Agent. The Escrow Agent shall have no duties or obligations other than those specifically set forth in or contemplated by this Escrow Agreement. 6.2 Failure to Perform. The Escrow Agent shall not be responsible in any manner whatsoever for any failure or inability of the Agent, any Shareholder or JAKKS to honor any provision of this Escrow Agreement. 6.3 Reliance Upon the Agent and Documents. Except to the extent otherwise notified in writing by an affected party, the Escrow Agent may rely on, and shall be protected in acting upon, any certificate, warrant, instrument, opinion, notice, letter, telecopy or other document or security delivered to it and reasonably believed by it to be genuine and to have been signed by the proper party or parties and, without limiting the generality of the foregoing, upon the authority of the Agent to act on behalf of all of the Shareholders. 5 6 6.4 Errors or Omissions. The Escrow Agent shall not be liable for any error of judgment, or for any act done or step taken or omitted by it in good faith or for any mistake in fact or law, or for anything which it may do or refrain from doing in connection with this Agreement, except for its own gross negligence, willful misconduct or act of bad faith. 6.5 Disputes. The Escrow Agent shall, in the event that any dispute shall arise between the parties with respect to the disposition or disbursement of any of the assets held hereunder, be permitted to interplead all of the assets held hereunder into a court of competent jurisdiction, and thereafter be fully relieved from any and all liability or obligation with respect to such interpleaded assets. The parties further agree to pursue any redress or recourse in connection with such a dispute, without making the Escrow Agent a party to same. 6.6 Advice of Counsel. The Escrow Agent shall have the right, but not the obligation, to consult with counsel of choice and shall not be liable for action taken or omitted to be taken by the Escrow Agent in accordance with the advice of such counsel. 6.7 Reliance on Documents. The Escrow Agent shall be entitled to deem the signatories of any documents or instruments submitted to it hereunder as being those purported to be authorized to sign such documents or instruments on behalf of the parties hereto, and shall be entitled to rely upon the genuineness of the signatures of such signatories without inquiry and without requiring substantiating evidence of any kind. 7. Indemnification. The Escrow Agent shall be, and hereby is, jointly and severally indemnified and held harmless by the Shareholders and JAKKS from all losses, costs and expenses (including reasonable attorneys' fees) which may be incurred by the Escrow Agent as a result of or arising out of this Agreement, including its involvement in any litigation arising from performance of its duties under this Agreement, other than any of the foregoing resulting from any bad faith or grossly negligent or wrongful action taken or omitted by the Escrow Agent. Such indemnification shall survive termination of this Agreement until extinguished by any applicable statute of limitations. Although the indemnification obligation of the Shareholders and JAKKS under this Section 7 shall be joint and several in regard to the Escrow Agent, as among the Shareholders and JAKKS, 50% of such indemnification obligations shall be the responsibility of JAKKS and 50% of such indemnification obligations shall be the responsibility of the Shareholders. Responsibility for the portion of any amounts to be paid by the Shareholders under this Section 7 shall be determined as though such amounts were "Obligations" under the Contribution Agreement. 8. Replacement of the Escrow Agent. 8.1 Resignation or Removal. The Escrow Agent may resign as such after giving 30 days' prior written Notice to JAKKS and the Shareholders' Agent. Similarly, the Escrow Agent may be removed and replaced after the giving of 30 days' prior written Notice from JAKKS and the Shareholders' Agent. In either event, the duties of the 6 7 Escrow Agent shall terminate upon the later to occur of 30 days after the date of such Notice or the appointment of a successor Escrow Agent; and the Escrow Agent shall transfer the amounts in the Escrow Fund and the Escrow Documents to the successor Escrow Agent appointed by JAKKS and the Shareholders' Agent upon termination of the duties of the Escrow Agent, as evidenced by a written Notice filed with the Escrow Agent by JAKKS and the Shareholders' Agent. 8.2 Appointment of Successor. If JAKKS and the Shareholders' Agent are unable to agree upon a successor Escrow Agent or JAKKS and the Shareholders' Agent shall have failed to appoint a successor Escrow Agent prior to the expiration of 30 days following the date of the Notice of resignation or removal, the then acting Escrow Agent shall, and JAKKS, the Shareholders' Agent or any Shareholder may, petition any court of competent jurisdiction for the appointment of a success Escrow Agent or other appropriate relief, and any such resulting appointment shall be binding upon all of the parties to this Agreement. 8.3 Obligation Upon Resignation or Removal. Within 30 days of the Escrow Agent's resignation or removal, as the case may be, the Escrow Agent shall deliver to JAKKS and the Shareholders' Agent a final report of the payments made and the transactions effected by the Escrow Agent under this Agreement. 8.4 Relief from Obligations. Upon acknowledgment by any successor Escrow Agent of the receipt of the Escrow Fund and the Escrow Documents, (a) the former Escrow Agent shall be fully relieved of all duties, responsibilities and obligations under this Agreement, except with respect to actions previously taken or omitted by such Escrow Agent, and (b) the successor Escrow Agent shall agree in writing to be bound by all of the duties and obligations of the Escrow Agent under this Agreement. 9. Termination. This Agreement shall terminate upon the earlier to occur of (a) the Finalization Date and (b) the Early Return Date, except for any ministerial actions to be taken by the Escrow Agent thereafter. 10. Notices. Unless written designation of a different address is received by each of the other parties to this Agreement, all notices required to be given under the Agreement shall be deemed to have been properly given if delivered personally or mailed by registered or certified mail (return receipt requested), or by recognized overnight courier, or by telecopier (with confirmation of receipt thereof), to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): To the Escrow Agent: Bank One Trust Company, N.A. 611 Woodward Avenue MI1-8110 Detroit, Michigan 48226 Attn: Amy J. Brehler Tel: (313) 225-3628 Fax: (313) 225-4935 7 8 To the Agent: Joshua H. Pokempner 2908 W. Delhi Road Ann Arbor, MI 48103 Fax: (734) 663-4863 With a copy to: Alan S. Schwartz, Esq. Honigman Miller Schwartz and Cohn 2290 First National Building 660 Woodward Avenue Detroit, MI 48226-3583 Fax: (313) 465-7575 and Howard Rice, Esq. 230 Glenwood Dr. Delray Beach, Florida 33445 Fax: 561) 638-1136 and Dan Share, Esq. Barris, Sott, Denn & Driker, PLLC 211 W. Fort #1500 Detroit, MI 48226-3211 Fax: (313) 965-2493 To JAKKS: JAKKS Pacific, Inc. 22761 Pacific Coast Highway Malibu, California 90265 Attn: President Fax: (310) 317-8527 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, New York 10022 Attn: Murray L. Skala, Esq. Fax: (212) 888-7776 11. Tax Matters. 11.1 Preparation and Filing of Tax Returns. Any tax returns required to be 8 9 prepared and filed in connection with this Agreement shall be prepared and filed by JAKKS and/or the Shareholders with the Internal Revenue Service and other relevant taxing authorities in all years income is earned, whether or not income is received or distributed in any particular tax year, and the Escrow Agent shall have no responsibility for the preparation and/or filing of any tax return with respect to any income earned by the Escrow Fund. 11.2 Payment of Taxes. Any taxes payable on income earned from the investment of any sums held in the Escrow Fund shall be paid by JAKKS and/or the Shareholders, as appropriate, whether or not the income is distributed by the Escrow Agent during any particular year. 11.3 Form 1099. The Escrow Agent shall issue an IRS Form 1099 to the Shareholders' Agent, as nominee for the Shareholders, reporting the payment of interest to the extent that any amount distributed by the Escrow Agent pursuant to Section 3.2(c) represents interest on the portion of the Escrow Payment described in Section 1.2(a) and shall issue a Form 1099 to JAKKS for the balance of the interest earned on the Escrow Fund. JAKKS and the Shareholders' Agent shall furnish the Escrow Agent with a completed IRS Form W-9 upon the Closing. 12. Miscellaneous. 12.1 Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without regard to principles of conflicts of laws, and each of the parties consents to be subject to personal jurisdiction of the state and federal courts in the State of Michigan. 12.2 Entire Agreement. This Agreement contains the entire agreement of the parties, and supersedes any prior and contemporaneous agreements, understandings and communications, oral and written, among the parties, with respect to the subject matter hereof. This Agreement may not be amended, modified, waived or terminated except by an instrument in writing signed by an authorized representative of the Escrow Agent, JAKKS and the Agent. 12.3 No Third Party Beneficiaries. Except as expressly stated in this Agreement, no Person not a party to this Agreement shall have any rights or duties hereunder except as specifically provided for in this Agreement. 12.4 Severability. If any provision or clause of this Agreement or the application thereof to any Person is held invalid or unenforceable, such invalidity or unenforceability shall not affect other provisions or applications of this Agreement, which shall be given effect without the invalid or unenforceable provision or application, and to this end the provisions of this Agreement are declared to be severable. 12.5 Counterparts. This Agreement may be signed (including by facsimile) in 9 10 any number of counterparts with the same effect as if the signatures of all parties were upon the same instrument, all of which counterparts taken together shall constitute one and the same instrument. 12.6 Further Assurances. From and after the execution of this Agreement, each party shall take such actions and do all things necessary or appropriate to carry out the intent of the parties and to accomplish the purposes of this Agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. SHAREHOLDERS' AGENT: /s/ JOSHUA H. POKEMPNER - ---------------------------------- Joshua H. Pokempner, as Agent JAKKS: JAKKS PACIFIC, INC. By: /s/ JOEL M. BENNETT ------------------------------ Its: Chief Financial Officer ------------------------- ESCROW AGENT: BANK ONE TRUST COMPANY, NA By: /s/ AMY J. BREHLER ------------------------------ Its: Authorized Officer ------------------------- Exhibits 10 11 Exhibit A -- Main Stock Documents Exhibit B -- U.S. Bank Stock Documents Exhibit C -- Other Escrow Documents 11 12 EXHIBIT A MAIN STOCK DOCUMENTS 3,216 shares of common stock in favor of Michael Bianco represented by the following certificate number: 158 2,406 shares of common stock in favor of James Courtney represented by the following certificate number: 26 206 shares of common stock in favor of Howard Diamond represented by the following certificate number: 15 2,584 shares of common stock in favor of Phil Jenkins, Trustee of the Tracy-Gabriel Irrevocable Trust dated December 17, 1997, represented by the following certificate numbers: 150 and 152 6,752 shares of common stock in favor of Joshua H. Pokempner represented by the following certificate numbers: 7, 11, 12, 18, 22, 25, 31, 33, 35, 37, 39, 41, 43, 45, 47, 49, 51, 53, 55, 57, 59, 61, 63, 65, 67, 69, 71, 73, 75, 77, 79, 81, 83, 85, 87, 89, 91, 93, 95, 97, 99, 101, 103, 105 and 107 6,753 shares of common stock in favor of William E. Taylor represented by the following certificate numbers: . 6, 9, 10, 19, 23, 24, 30, 32, 34, 36, 38, 40, 42, 44, 46, 48, 50, 52, 54, 56, 58, 60, 62, 64, 66, 68, 70, 72, 74, 76, 78, 80, 82, 84, 86, 88, 90, 92, 94, 96, 98, 100, 102, 104 and 106 12 13 EXHIBIT B U.S. BANK STOCK DOCUMENTS 954 shares of common stock in favor of Joshua H. Pokempner represented by the following certificate numbers: 109, 111, 113, 115, 117, 119, 121, 123, 125, 127, 129, 131, 133, 135, 137, 139, 141, 143, 145, 147 and 149 954 shares of common stock in favor of William E. Taylor represented by the following certificate numbers: 108, 110, 112, 114, 116, 118, 120, 122, 124, 126, 128, 130, 132, 134, 136, 138, 140, 142, 144, 146 and 148 13 14 EXHIBIT C OTHER ESCROW DOCUMENTS *Resolutions of Colorbok Board contributing Divested Assets, subject to Divested Liabilities, to Colorbok LLC *Assignment and Assumption Agreement and Bill of Sale *Certificates of Title for Vehicles *Assignments of Intellectual Property (Trade Rights) *Employee Transfer Agreement *Assignment of Membership Interest from Colorbok to existing Colorbok Shareholders *Partial Assignment of Membership Interests in LLC from LLC Members to Michael Bianco Employment Agreement of Bianco Stock Option Agreement of Bianco with JAKKS Employment Agreement of Pokempner Stock Option Agreement of Pokempner with JAKKS New Lease Special Indemnity Agreement Transition Services Agreement Termination Agreement Waiver Documents to "Settle Up" 1996 Taylor/Pokempner Buy-Out of Courtney o Courtney Note by Taylor o Courtney Note by Pokempner 14 15 Resignations of Taylor, Pokempner, Jenkins and Bianco Certificate of Chief Executive Officer re: Financial Condition (Section 7.1(i)) Condition Fulfillment Certificate of Corporation and Shareholders (including Schedule Updates) (Sections 8.2 (g) and 7.1(a), (d), (e) and (g)) Notice of Retained Divestee Contracts (Section 9.13) Certificate of Secretary of Colorbok as to Bylaws Condition Fulfillment Certificate of Chief Executive Officer of JAKKS (Sections 8.3(b) and 7.2 (a), (b) and (e)) Certified Resolutions of JAKKS 15
1 EXHIBIT 2.4 Exhibit E TRANSITION SERVICES AGREEMENT This Transition Services Agreement (this "Agreement"), is dated as of October 1, 1999, by and between Colorbok LLC, f/k/a CPP Acquisition, LLC, a Michigan limited liability company ("Divestee"), and Flying Colors Toys, Inc., f/k/a Colorbok Paper Products, Inc., a Michigan corporation (the "Acquired Company"). RECITALS A. The members of Divestee and JAKKS Pacific, Inc., a Delaware corporation ("JAKKS"), have entered into a Stock Purchase Agreement dated as of September 22, 1999 (the "Purchase Agreement") pursuant to which JAKKS has purchased all of the outstanding capital stock of the Acquired Company from the members of Divestee. B. The Purchase Agreement provides that the Acquired Company and Divestee will enter into this Agreement relating to certain services Divestee will provide to the Acquired Company after the Closing. THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Definitions in Purchase Agreement. Capitalized terms used but not defined in this Agreement shall have the same meanings given to them in the Purchase Agreement. 1.2 Other Defined Terms. "Consistent Basis" means in a manner consistent with the practices of the Flying Colors Division of the Acquired Company (the "Division") prior to the Closing Date. "Transition Services" means the services described on Attachment A to this Agreement. The Transition Services will not include any services not listed on Attachment A. Without limiting the generality of the foregoing, the Transition Services will not include, and the Acquired Company will directly bear the costs and expenses associated with, the items and services listed on Attachment B to this Agreement. 2. Services and Fees. 2.1 Services. Except as otherwise provided in this Agreement, Divestee agrees to 2 provide to the Acquired Company, during the Term (as defined in Section 5.1 below), such Transition Services as the Acquired Company may reasonably request from time to time. All Transition Services shall be provided by Divestee to the Acquired Company on a Consistent Basis. Divestee shall be entitled to obtain Transition Services from a third party if (a) it does so for its other operations during the Term and (b) it will not result in a material change in the level and type of Transition Services provided. 2.2 Costs of Services. Except for the costs contemplated by Attachment C to this Agreement or as otherwise provided in this Section 2.2, Divestee will pay its costs incurred in connection with providing the Transition Services to the Acquired Company. All other costs related to the operation of the business of the Acquired Company including, without limitation, the items and services listed on Attachment B, shall be paid by the Acquired Company, except for the costs listed on Attachment D to this Agreement, which shall be paid by Divestee during the Term, and the costs specifically described in Section 3.5(b). 3. Fees. 3.1 Base Fee. The Acquired Company will pay to Divestee, within five days after the beginning of each month during the Term, $310,000 (the "Base Fee"), which fee covers services provided in the month in which the Base Fee is required to be paid. The Base Fee for the first month during the Term will be pro rated based upon the number of days remaining in such month and will be paid simultaneously with the signing of this Agreement. 3.2 Percentage Fee. In addition to the Base Fee, the Acquired Company will pay to Divestee, in arrears, with respect to each whole or partial month during the Term and each month subsequent thereto, an amount equal to the sum of 3.0% of the first $8,000,000 of Gross Sales (as defined in Section 3.3 below) during such month plus 2.5% of Gross Sales in excess of $8,000,000 during such month (such sum, the "Percentage Fee"). Divestee shall calculate the Gross Sales for each month during the Term and each month subsequent thereto and provide the Acquired Company with a monthly report setting forth the Gross Sales for such month. The Acquired Company shall pay the Percentage Fee within 10 days of its receipt of each such report. The Percentage Fee for the first month during the Term shall be based solely upon the Gross Sales during the portion of the month beginning on the Closing Date. 3.3 Gross Sales. For purposes of this Agreement "Gross Sales" shall mean the gross sales of the Acquired Company, without reduction or deduction for any expenses or costs including, without limitation, deductions for advertising expenses, advertising allowances, defect allowances, returns, charge backs, freight, freight allowances, brokerage fees, recall expenses, commissions, or other allowances, costs or expenses. Gross Sales shall be deemed to have been made when shipped or, if later, when invoiced. 3.4 Disputes Regarding Fees. In the event the Acquired Company disputes the calculation of the fees by Divestee, such dispute will be resolved in accordance with the procedures for resolving disputes under this Agreement provided in Section 6.8. Pending the resolution of any such dispute, the Acquired Company will pay all amounts invoiced by Divestee 2 3 hereunder. 3.5 Assembly and Rework. (a) Except as provided in subsection (b) below, this Agreement shall not govern assembly of products or rework of products. To the extent the Acquired Company desires that Divestee provide any services relating to assembly of products or rework of products, the parties will separately negotiate the terms upon which such services will be performed. (b) The Divestee shall provide to the Acquired Company the product rework services specifically described on Attachment E, at no cost or expense to the Acquired Company. 4. Disclaimer of Warranty and Limitation of Liability. Divestee makes no representations or warranties with respect to the provision of Transition Services pursuant to this Agreement, whether express or implied. DIVESTEE HEREBY DISCLAIMS ANY AND ALL WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL DIVESTEE BE LIABLE FOR ANY DAMAGES ARISING FROM THE PROVISION OF TRANSITION SERVICES HEREUNDER EXCEPT AS A RESULT OF DIVESTEE'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AND IN NO EVENT WILL DIVESTEE BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 5. Term and Termination. 5.1 Term. The term of this Agreement (the "Term") will commence on the date of this Agreement and continue, unless sooner terminated in accordance with Section 5.2 below, until Divestee provides the Acquired Company with at least 60 days prior written notice of its desire to terminate this Agreement or the Acquired Company provides Divestee with at least 30 days prior written notice of its desire to terminate this Agreement. In either such case, this Agreement shall terminate on the last day of the month containing the date which is, (a) in the case of a termination by Divestee, 60 days following the giving of such notice, or (b) in the case of a termination by the Acquired Company, 30 days following the giving of such notice, or the last day of such later month as is specified in such notice. 5.2 Default Termination. If the Acquired Company or Divestee defaults in the performance of any of its obligations under this Agreement, and if such default is not cured within 10 days after written notice from the non-defaulting party specifying such default, then the non-defaulting party may, at any time thereafter, terminate this Agreement by giving the defaulting party five days prior written notice of such termination. In the event this Agreement is terminated by Divestee as a result of a default by the Acquired Company in accordance with this Section 5.2, the Acquired Company shall pay to Divestee, as Divestee's damages for such default, by wire transfer of immediately available funds, upon such termination, all amounts owing by the Acquired Company to Divestee hereunder (including amounts due and owing 3 4 through the date of termination), plus an amount equal to the lesser of (a) $310,000 and (b) the product of (i) $10,333 and (ii) a number equal to the day of the month of the date of termination. Termination of this Agreement and the receipt of such amounts shall be Divestee's sole remedy for the Acquired Company's breach of this Agreement. 6. General Provisions. 6.1 Assignment. This Agreement, and each right, interest and obligation hereunder, may not be assigned by either party hereto without the prior written consent of the other party hereto, and any purported assignment without such consent shall be void and without effect. 6.2 Severability. The provisions of this Agreement are severable and, in the event that any provision of this Agreement is determined to be invalid or unenforceable in any respect by a court of competent jurisdiction, the remaining provisions hereof will not be affected, but will, subject to the discretion of such court, remain in full force and effect, and any invalid or unenforceable provision will 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. 6.3 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 waiving 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. 6.4 Notices. Any notice or demand required or permitted to be given or made 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), telex or similar electronic means, to such party at the following address: (a) If to the Acquired Company, to: JAKKS Pacific, Inc. 22761 Pacific Coast Highway Suite 226 Malibu, CA 90265 Telecopy: (310) 317-8527 Attention: President With a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, LLP 750 Lexington Avenue New York, NY 10022-1200 Telecopy: (212) 888-7776 Attention: Murray L. Skala 4 5 (b) If to Divestee, to: Colorbok Paper Products, LLC 2716 Baker Road Dexter, MI 48130 Telecopy: (734) 424-9535 Attention: William Taylor with a copy to: Honigman Miller Schwartz and Cohn 2290 First National Building 660 Woodward Avenue Detroit, Michigan 48226-3583 Telecopy: (313) 465-7574 Attention: Alan Stuart Schwartz 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 such notice or demand is sent. 6.5 Force Majeure. Neither party hereto will be liable in any manner for failure or delay of performance of all or part of this Agreement, directly or indirectly, owing to acts of God, governmental orders or restrictions, strikes or other labor disturbances or shortages, riots, embargoes, computer failures, power failures, telecommunication line failures, unknown or uncorrected program errors, revolutions, wars (declared or undeclared), sabotage, fires, floods or any other causes or circumstances beyond the control of the parties. The party, however, in such delay or failure shall give reasonably prompt notice to the other party and shall exert its reasonable efforts to remove the causes or circumstances of nonperformance. 6.6 Applicable Law. This Agreement will be governed by, and interpreted and enforced in accordance with, the laws of the State of Michigan, without regard to principles of conflict of laws. 6.7 Arbitration. If there is a dispute between the parties with regard to any of the matters set forth in this Agreement, the parties will first use their commercially reasonable best efforts to resolve such dispute among themselves. If the parties are unable to resolve such dispute within 30 calendar days of the initiation of such procedure, such dispute will be settled by arbitration as provided for below, which will be the sole and exclusive procedure for the resolution of any such dispute. Within 10 calendar days after receipt of written notice from one party that it is submitting the matter to arbitration, each party will designate in writing one 5 6 arbitrator to resolve the dispute who will, in turn, jointly select a third arbitrator within 20 calendar days of their designation, with the third arbitrator to be selected in accordance with the procedures established by the American Arbitration Association. The arbitrators so designated will each be a lawyer experienced in commercial and business affairs who is not a representative of any party and who has not received any compensation, directly or indirectly, from any party or any affiliate of any party during the two year period preceding the date of this Agreement or during the period from the date of this Agreement through the time of such dispute. The arbitration will be governed by the then existing rules of the American Arbitration Association. The decision and award (if any) of the arbitrators will be final and binding upon the parties and not subject to appeal. Any such determination shall have the same effect as an arbitration pursuant to Michigan Compiled Laws Annotated Section 600.5001, and a judgment upon the award may be entered in and enforced by any court having jurisdiction thereof and the parties consent and commit themselves to the jurisdiction of the courts of the State of Michigan for purposes of the enforcement of any arbitration award. Each party will pay the fees and expenses of its respective designated arbitrator and its own costs and expenses of the arbitration. The fees and expenses of the third arbitrator will be paid 50% by the Acquired Company and 50% by Divestee. Any arbitration pursuant to this Section 6.7 will be conducted in Detroit, Michigan. 6.8 Independent Contractor. Divestee will, for all purposes, be deemed to be an independent contractor, and, except as required or convenient for the performance of Divestee's duties hereunder or as otherwise agreed to by the parties, neither party will become the agent of the other by virtue of this Agreement. 6.9 Entire Agreement. This Agreement constitutes the entire understanding of parties with respect to the Transition Services to be provided and supersedes all prior agreements, commitments, understandings, communications or arrangements relating thereto, and no modification of or amendment to this Agreement shall be valid unless in writing and duly signed by both parties. 6.10 Headings. The Section headings in this Agreement are included for convenience only and shall not in any way affect the interpretation or construction of any of the provisions of this Agreement. 6.11 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. 6.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and which together will constitute one and the same agreement. 6 7 The parties hereto have executed this Agreement as of the date first written above. FLYING COLORS TOYS, INC. COLORBOK LLC f/k/a Colorbok Paper Products, Inc. f/k/a CPP Acquisition, LLC By: /s/ JOEL M. BENNETT By: /s/ WILLIAM E. TAYLOR ------------------------------ ------------------------------ Joel M. Bennett Its: Chief Financial Officer Its: Manager ----------------------------- ----------------------------- GUARANTY In order to induce Divestee to enter into the above Agreement with the Acquired Company, JAKKS' wholly owned subsidiary, JAKKS hereby unconditionally and irrevocably guarantees to Divestee the full and prompt payment of all amounts due or to become due hereunder to Divestee and the timely performance by the Acquired Company of all of its obligations hereunder. This is a guaranty of payment and performance and not of collection. JAKKS is obligated for the payment and performance of each and every obligation of the Acquired Company hereunder as fully as if any such obligation was directly owing to Divestee by JAKKS, without setoff, recoupment, counterclaim or defense, and Divestee need not seek to obtain payment or performance by the Acquired Company before exercising its rights to payment and performance by JAKKS. JAKKS waives notice of acceptance or any other notices, demands or defenses to which JAKKS may otherwise be entitled, except any defenses that the Acquired Company would have relating to the validity of the obligations of the Acquired Company hereunder. JAKKS PACIFIC, INC. By: /s/ JOEL M. BENNETT ------------------------------ Joel M. Bennett Its: Chief Financial Officer ----------------------------- 7 8 ATTACHMENT A TRANSITION SERVICES Inventory control and stock customers locator management PickPack for independent customers (Flying Colors orders) Pack out for major customers Order processing Customer service Electronic data interchange Allocation of products among customers Coordinating inbound and outbound trucking Managing import containers Interface with JAKKS to insure timely and accurate invoicing of all shipments CDI management Direct ship management Full warehousing services in Belleville and Dexter (receiving, store stock, pull stock, order assembly, shipping) Interface between customers and purchasing/marketing/sales/product launch Billing MIS support related to distribution services 9 ATTACHMENT B EXCLUDED SERVICES AND EXPENSES Collections Ad allowance Returns Charge backs Royalties Tooling New product processing Quality and testing Recall expenses Travel expenses Entertainment expenses Phone system Office supplies (except for distribution related office supplies which Divestee will order and pay for) Computer supplies Art supplies Bad debt expense Design center (including rent) Catalogs Trade show expense Commissions Product advertising Sales design salaries Letter of credit expenses Expenses related to the transfer of goods to JAKKS Assembly or rework of products (except for rework specifically required by Section 3.5 of the Agreement) Ordering and purchasing of products MIS support related to services other than distribution related services 10 ATTACHMENT C CERTAIN COSTS OF TRANSITION SERVICES TO BE BORNE BY THE ACQUIRED COMPANY All costs related to the California Distribution Center Freight (inbound, outbound and transfers) Freight insurance Air freight Brokerage fees Mailing expenses (including postage) Storage of excess inventory 11 ATTACHMENT D OTHER COSTS TO BE BORNE BY DIVESTEE Belleville Distribution Center rent 12 ATTACHMENT E 1. Handy Dandy Notebook - Item No. 3093; quantity: 85,000; Replacement of defective coil. 2. Handy Dandy Activity Set - Item No. 3094; quantity: 54,000; Replacement of defective coil and re-pack in carton. 3. Blues Clues Inflatable Chair - Item No. 31140; quantity: 84,500; Insertion of bumpers into package.
1 EXHIBIT 2.5 DETROIT BOARD OF REALTORS(R) BUSINESS PROPERTY LEASE FORM 113-A NOTICE: MICHIGAN LAW ESTABLISHES RIGHTS AND OBLIGATIONS FOR PARTIES TO RENTAL AGREEMENTS. THIS AGREEMENT IS REQUIRED TO COMPLY WITH THE TRUTH IN RENTING ACT. IF YOU HAVE A QUESTION ABOUT THE INTERPRETATION OR THE LEGALITY OF A PROVISION OF THIS AGREEMENT, YOU MAY WANT TO SEEK ASSISTANCE FROM A LAWYER OR OTHER QUALIFIED PERSON. THIS LEASE is made as of the 1st day of October, 1999, by and between Shore Properties LLC, a Michigan limited liability company, as Landlord, and Flying Colors Toys, Inc., a Michigan corporation, formerly known as Colorbok Paper Products, Inc., as Tenant, and the parties agree as follows: DESCRIPTION (1) WITNESSETH: The Landlord, in consideration of the rents to be paid and the covenants and agreements to be performed by Tenant, hereby leases to Tenant the premises situated in the Village of Dexter, Washtenaw County, Michigan described as: 2716 Baker, Suite 100, Dexter, Michigan 48130, as depicted on Exhibit A (approximately 7800 square feet) (SEE ATTACHED LEGAL DESCRIPTION, EXHIBIT B) Page 1 2 TERM (2) The term shall begin on the Closing Date, as RENT defined in the Stock Purchase Agreement between Jakks Pacific, Inc. and the shareholders of Colorbok Paper Products, Inc. ("Purchase Agreement"), for an initial term of six (6) months and thereafter shall be a month to month lease; provided, however, neither party may terminate this Lease unless six (6) months prior written notice is given to the other party. The total monthly rent in the amount of $4,998.50, shall be payable on the first day of each month commencing on the Closing Date. In the event the Closing Date is other than the first day of the calendar month or the termination date of this Lease is other than the last day of the calendar month then the monthly rental and additional rent for the first and last fractional months of the term of this Lease shall be appropriately prorated. Monthly rent shall be increased by 5% per annum commencing on the first anniversary of the Closing Date and on each yearly anniversary date thereafter while this Lease is in effect. All rents shall be paid to Landlord or the authorized agent, at the following address: 2716 Baker Road, Suite 100 Dexter, Michigan 48130 or at such other place as may be designated by Landlord from time to time. If Tenant fails to make a rent payment on or before the due date, a late charge of 5% of the past due amount shall be added to the rent and paid with the overdue payment. Tenant shall pay to Landlord any increase in real property taxes after the base year 1999 ("Base Year") on the leased premises. On or before the first day of each month during each ensuing calendar year, Tenant shall pay one-twelfth (1/12th) of such estimated increase over the Base Year. Landlord shall provide to Tenant copies of the bills for real property taxes. Tenant shall receive its pro rata share of any refunds of real property taxes with respect to real property taxes paid by Tenant after deduction of its pro rata share of all expenses attributable to obtaining such refund are paid (and Landlord shall provide Tenant with a brief statement of the basis for such refund and proration). DEFAULT (3) If Tenant shall default in any payment other than rent required to be paid by Tenant under the terms hereof, Landlord may make such payment, in which event the amount thereof shall be payable as rental to Landlord by Tenant on the next rent day together with interest at 2% over the prime rate of interest as published in the Wall Street Journal ("Prime Rate") from the date of such payment by Landlord. In addition, on default in any such payment, Landlord shall have the same remedies as on default in payment of rent. Page 2 3 ASSIGNMENT (4) Tenant shall not assign this lease or mortgage or AND SUBLETTING sublet any portion of the premises without prior written consent of Landlord. Notwithstanding the foregoing, Tenant may mortgage or encumber its leasehold interest to financial institutions so long as such mortgage or encumbrance is clearly subordinate to the interest and rights of Landlord under this Lease. If Tenant so mortgages or encumbers its leasehold interest, Tenant shall give written notice of such mortgage or encumbrance to Landlord (including a notice address for the mortgagee) and, after receipt of such notice, Landlord shall give the mortgagee notice of any default hereunder at such address and opportunity to cure any such default on behalf, and in lieu, of Tenant in accordance with Paragraph 39 hereof. Any permitted mortgagee of Tenant must expressly agree to be bound by the terms of this Lease. Any such assignment, mortgage or subletting without consent shall be void and shall give Landlord the right to terminate this lease and reenter and repossess the leased premises. For the purposes of this Lease, a merger or sale of 50% or more of the shares of stock of Tenant shall be deemed an assignment. TAXES (5) [INTENTIONALLY OMITTED] BANKRUPTCY (6) Tenant agrees that if the estate created hereby AND INSOLVENCY shall be taken in execution, or by other process of law, or if Tenant shall be declared bankrupt or insolvent or any receiver be appointed for the business and property of Tenant, or if any assignment shall be made of the Tenant's property for the benefit of creditors, then this lease may be canceled at the option of Landlord, unless adequate assurance of performance is provided by Tenant to Landlord's satisfaction, and affirmation is in strict conformance with the Federal Bankruptcy Code. RIGHT TO (7) Landlord reserves the right to subordinate this MORTGAGE lease to the lien of any mortgage or mortgages now or hereafter placed upon Landlord's interest in the premises and on the land and buildings of which the premises are a part or upon any buildings hereafter placed upon the land of which the leased premises form a part. Tenant covenants and agrees to execute and deliver on demand, without additional consideration being paid to Tenant, an instrument or instruments subordinating this lease to the lien of any such mortgage or mortgages and hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute and deliver any such instrument or instruments in the name of Tenant. In connection with such subordination, Landlord shall use its commercially reasonable best efforts to cause any mortgagee of Landlord to deliver to Tenant such mortgagee's standard non-disturbance agreement for execution by the parties. USE AND (8) The premises shall be used and occupied for OCCUPANCY distribution of toy products and for office purposes and for no other purpose without the written consent of Landlord and Tenant will not use the premises for any purpose in violation of any law, municipal ordinance or regulation or which will increase the existing rate of insurance upon the property or cause cancellation of insurance covering the property. On any breach of this agreement, Landlord shall have the option to terminate this lease forthwith and reenter and repossess the leased premises. Page 3 4 INSURANCE (9) Tenant at Tenant's expense, shall maintain plate glass and public liability insurance including bodily injury and property damage insuring Tenant and Landlord with minimum coverage as follows: $2,000,000 single limit. Tenant shall provide Landlord with a Certificate of Insurance showing Landlord as additional insured. The Certificate shall provide for a thirty-day written notice to Landlord in the event of cancellation or material change of coverage. Tenant shall also maintain business interruption coverage during the term of this lease. Tenant agrees to pay as additional rent any increase in premiums for insurance that are charged during the term of this lease on the amount of insurance now carried by Landlord related to the premises and improvements thereon, resulting from the activities of Tenant or its affiliates and agents on the premises during the term. To the maximum extent permitted by insurance policies which may be owned by Landlord or Tenant, Tenant and Landlord, for the benefit of each other, waive any and all rights of subrogation which might otherwise exist. FIRE (10) It is understood and agreed that if the premises are damaged or destroyed in whole or in part by fire or other casualty during the term, Landlord will repair and restore the same to good tenantable condition with reasonable dispatch, and the rent herein provided for shall abate entirely in case the entire premises are untenantable and pro rata for the portion rendered untenantable, in case a part only is untenantable, until the premises are restored to a tenantable condition. If the Tenant shall fail to adjust Tenant's own insurance or to remove damaged goods, wares, equipment or property within a reasonable time, and as a result thereof the repairing and restoration is delayed, there shall be no abatement of rental during the period of such delay. There shall be no abatement of rental if such fire or other cause damaging or destroying the leased premises shall result from the negligence or willful act of the Tenant, Tenant's agents or employees. If Tenant shall use any part of the leased premises for storage during the period of repair a reasonable charge shall be made therefor against Tenant. In case the leased premises, or the building of which they are a part shall be destroyed, to the extent of more than one-half of the value thereof, Landlord shall have the option to terminate this lease by a written notice to Tenant. REPAIRS (11) Landlord after receiving written notice from Tenant and having reasonable opportunity thereafter to obtain the necessary workmen therefor agrees to keep in good order and repair the foundation, roof and four outer walls of the premises and the mechanical, electrical and HVAC systems servicing the premises at Landlord's cost and expense, subject to the next sentence, but not the doors, door frames, the window glass, window casings, window frames and windows, or any attachment thereto or attachments to said building or premises used in connection therewith which shall be the responsibility of Tenant. Tenant shall bear, as to the repair of the mechanical, electrical and HVAC systems servicing the premises, a percentage of the cost and expense thereof equal to the product of (a) 15% and (b) the number of 12-month periods (or portion thereof) elapsed from the date hereof to the date of incurrence of such cost and expense, but in no event more than 100% of such cost and expense. TENANT TO (12) Tenant agrees to indemnify, represent, defend and INDEMNIFY hold harmless the Landlord from any liability for damages to any person or property in, on or about said leased premises from any cause whatsoever except for any unlawful or tortious acts of Landlord and its employees or agents. Page 4 5 REPAIRS AND (13) Except as provided in Paragraph 11 hereof, Tenant ALTERATIONS/ further covenants and agrees that Tenant will, at Tenant's CARE OF PREMISES expense, during the continuation of this lease, keep the said premises and every part thereof in as good repair and at the expiration of the term yield and deliver up the same in like condition as when taken, reasonable use and wear thereof and damage by the elements, fire, explosion or other casualty excepted. Tenant shall not make any alterations, additions or improvements to the premises without Landlord's written consent, and all alterations, additions or improvements made by either of the parties hereto upon the premises, except movable office furniture and trade fixtures put in at the expense of Tenant, shall be the property of Landlord, and shall remain upon and be surrendered with the premises at the termination of this lease. Tenant covenants and agrees that if the demised premises consist of only a part of a structure owned or controlled by Landlord, Landlord may enter the demised premises at reasonable times and install or repair pipes, wires, and other appliances or make any repairs deemed by Landlord essential to the use and occupancy of the other parts of Landlord's building. Tenant shall not perform any acts or carry on any practices which may injure the building or be a nuisance or menace to other Tenants in the building and shall keep premises under Tenant's control (including adjoining drives, streets, alleys or yard) clean and free from rubbish, dirt, snow and ice at all times. If Tenant shall not comply with these provisions, Landlord may enter upon said premises and have rubbish, dirt and ashes removed and the side walks cleaned, in which event Tenant agrees to pay all charges that Landlord shall pay for hauling rubbish, ashes and dirt, or cleaning walks. Said charges shall be paid to Landlord by Tenant as soon as the bill is presented and Landlord shall have the same remedy as is provided in Paragraph 3 of this lease in the event of Tenant's failure to pay. The Tenant shall at Tenant's own expense under penalty of forfeiture and damages promptly comply with all lawful laws, orders, regulations or ordinances of all municipal, County and State authorities affecting the premises hereby leased and the cleanliness, safety, occupation and use of same. Notwithstanding anything herein to the contrary, Landlord shall be solely responsible for the repair items of Landlord (i.e., mechanical, electrical and HVAC systems (except to the extent the responsibility of Tenant pursuant to Paragraph 11 hereof), foundation, roof and four outer walls) set forth in Paragraph 11 hereof. EMINENT DOMAIN (14) If any part of the premises shall be taken or condemned for public use, and a part thereof remains which is susceptible of occupation, this lease shall, as to the part taken, terminate as of the date the condemner acquires possession, and thereafter Tenant shall be required to pay such proportion of the rent for the remaining terms as the value of the premises remaining bears to the total value of the premises at the date of condemnation; provided however, that Landlord may at Landlord's option, terminate this lease as of the date the condemner acquires possession. In the event that the demised premises are condemned in whole, or that such portion is condemned that the remainder is not susceptible for use hereunder, this lease shall terminate upon the date upon which the condemner acquires possession. All sums which may be payable on account of any condemnation shall belong to Landlord, and Tenant shall not be entitled to any part thereof except any amount awarded to Tenant for Tenant's trade fixtures or moving expenses. Page 5 6 RESERVATION (15) The Landlord reserves the right of free access at all times to the roof of the leased premises and reserves the right to rent the roof for advertising purposes. The tenant shall not erect any structures for storage or any aerial, or use the roof for any purpose without the consent in writing of Landlord. CONDITION OF (16) Tenant acknowledges that Tenant has examined the PREMISES leased premises prior to the making of this lease, and knows the condition thereof, and that no representations as to the condition or state of repairs thereof have been made by Landlord, or Landlord's agent, which are not herein expressed, and Tenant hereby accepts the leased premises in their present condition at the date of the execution of this lease. This provision is not intended to negate or waive any specific representation and warranty as to the physical condition of the leased premises set forth in the Purchase Agreement if such representation and warranty expressly survives the Closing under the terms of the Purchase Agreement. Landlord shall not be responsible or liable to the Tenant for any loss or damage that may be caused by the acts or omissions of persons occupying adjoining premises or any part of the building of which the leased premises are a part or for any loss or damage resulting to Tenant or Tenant's property from bursting, stoppage or leaking of water, gas, sewer or steam pipes. RE-RENTING (17) Tenant hereby agrees that for a period commencing ninety (90) days prior to the termination of this lease, Landlord may show the premises to prospective purchasers or tenants, and sixty (60) days prior to the termination of this lease, may display in and about said premises and in the windows thereof, the usual "TO RENT" or "FOR SALE" signs. HOLDING OVER (18) It is hereby agreed that if Tenant holds over after the termination of this lease, thereafter the tenancy shall be from month to month in the absence of a written agreement to the contrary. GAS, WATER, [INTENTIONALLY OMITTED - SEE ATTACHED ADDENDUM] HEAT, ELECTRICITY ACCESS TO (20) Landlord shall have the right to enter upon the PREMISES leased premises at all reasonable hours for the purpose of inspecting the same. If Landlord deems any repairs necessary which are the responsibility of Tenant, Landlord may demand that Tenant make such repairs. If Tenant refuses or neglects forthwith to commence such repairs and complete them with reasonable dispatch, Landlord may make such repairs or cause them to be made and shall not be responsible to Tenant for any loss or damage that may accrue to his stock or business by reason thereof (except as to any unlawful or tortious acts of Landlord for which Landlord shall be responsible). If Landlord makes such repairs or causes them to be made, Tenant agrees that Tenant will forthwith on demand pay to Landlord the cost thereof with interest at 2% over the Prime Rate, and if Tenant shall make default in such payment the Landlord shall have the remedies provided in Paragraph 3 hereof. REENTRY (21) In case any rent shall be due and unpaid or if default be made in any of the covenants herein contained, or if the leased premises shall be deserted or vacated, then it shall be lawful for the Landlord, his certain attorney, heirs, representatives and assigns, to reenter into, repossess the said premises and the tenant and each and every occupant to remove and put out. Page 6 7 QUIET ENJOYMENT (22) Landlord covenants that Tenant, on payment of all rent due and performing all the covenants herein, shall and may peacefully and quietly have, hold and enjoy the demised premises for the term. Landlord and Tenant will each, upon written request from the other party, provide an estoppel certificate within ten (10) days of such request, setting forth the terms of this Lease and their compliance as to the terms of this Lease by each party. EXPENSES - (23) If Landlord shall, during the period covered by DAMAGES - this lease, obtain possession of the premises by reentry, REENTRY summary proceedings, or otherwise, Tenant hereby agrees to pay Landlord the expense incurred in obtaining possession of the premises, including, without limitation, attorneys' fee and also all expenses and commissions which may be paid for the letting of the premises, and all other damages. REMEDIES NOT (24) It is agreed that each and every of the rights, EXCLUSIVE remedies and benefits provided by this lease shall be cumulative, and shall not be exclusive of any other of said rights, remedies and benefits, or of any other rights, remedies and benefits allowed by law, in equity, any other agreement or otherwise. WAIVER (25) One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a further breach of the same covenant or condition. DELAY OF (26) [INTENTIONALLY OMITTED] POSSESSION NOTICES (27) Any notice which either party may or is required to give, shall be given by mailing the same, postage prepaid, to Tenant at c/o JAKKS Pacific, Inc., 22761 Pacific Coast Highway, Suite 226, Malibu, California 90265, or to Landlord, at 2716 Baker Road, Suite 100, Dexter, Michigan 48130 or at such other place as may be designated by the parties from time to time. HAZARDOUS (28) Tenant shall not use, store, or dispose of any SUBSTANCES hazardous substances upon the premises, except use and storage of such substances if they are customarily used in Tenant's business, and such use and storage complies with all environmental laws and regulations. Hazardous substances means any hazardous waste, substance or toxic materials regulated under any federal or state environmental laws or local regulations or ordinances applicable to the property. SECURITY DEPOSIT (29) Landlord acknowledges the receipt of $4,998.50 to secure the performance of Tenant's obligations hereunder. Landlord shall not be obligated to apply all or portions of said deposit on account of Tenant's obligations hereunder. Any balance remaining upon termination shall be returned to Tenant. Tenant shall not have the right to apply the Security Deposit in payment of last month's rent. (30) The covenants, conditions and agreements herein are binding on the heirs, successors, representatives and assigns of the parties hereto. (31) - (39) See Attached Addendum incorporated herein by reference Page 7 8 IN WITNESS WHEREOF, The parties have hereunto set their hands and seals the day and year first above written. WITNESSED BY: LANDLORD SHORE PROPERTIES LLC, a Michigan limited liability company By: /s/ JOSHUA H. POKEMPNER ----------------------------- Joshua H. Pokempner, Member By: /s/ WILLIAM E. TAYLOR ----------------------------- William E. Taylor, Member TENANT FLYING COLORS TOYS, INC., a Michigan corporation, formerly known as Colorbok Paper Products, Inc. By: /s/ JOEL M. BENNETT ------------------------------- Its: Chief Financial Officer ACKNOWLEDGMENT OF LANDLORD STATE OF MICHIGAN ) )ss COUNTY OF WAYNE ) On this 30th day of September, 1999, before me personally appeared Joshua H. Pokemner and William E. Taylor, members of Shore Properties LLC, a Michigan limited liability company, to me known to be the persons described in and who executed the foregoing Lease on behalf of the company and acknowledged before me that they executed the same as the free act and deed of said company. /s/ DIANE P. WASILEWSKI ---------------------------------- Notary Public Macomb County, MI My Commission Expires: 7-29-01 acting in Wayne County, MI Diane P. Wasilewski Notary Public, Macomb County, Michigan My Commission Expires July 29 2001 ACKNOWLEDGMENT OF TENANT STATE OF Michigan ) )ss COUNTY OF Wayne ) Page 8 9 On this 30th day of September, 1999, before me personally appeared Joel M. Bennett, to me personally known, who, being by me duly sworn, did for himself say that he is the Chief Financial Officer of Flying Colors Toys, Inc., a Michigan corporation, formerly known as Colorbok Paper Products, Inc., the corporation named in and which executed the within instrument, and that said instrument was signed on behalf of said corporation by authority of its board of directors and he acknowledged before me said instrument to be the free and act and deed of said corporation. /s/ DIANE P. WASILEWSKI -------------------------- Notary Public Macomb County, MI My Commission Expires: 7-29-01 acting in Wayne County, MI Diane P. Wasilewski Notary Public, Macomb County, Michigan My Commission Expires July 29 2001 Page 9 10 ADDENDUM TO BUSINESS PROPERTY LEASE This Addendum is made as of the Closing Date by and between Shore Properties LLC, a Michigan limited liability company, as Landlord, and Flying Colors Toys, Inc., a Michigan corporation, formerly known as Colorbok Paper Products, Inc., as Tenant. (31) Notwithstanding Paragraph (28) hereof, the Tenant shall not cause or permit the premises to be used to generate, manufacture, refine, transport, treat, store, handle, dispose of, transfer, produce or process hazardous substances except in the ordinary course of Tenant's business and in full compliance with all applicable laws, ordinances, rules, regulations and statutes. The Tenant shall not cause or permit any release or discharge of hazardous substance on to the premises or on to any adjacent area as the result of any intentional or unintentional act or omission on the part of Tenant, its employees, officers agents and invitees. Tenant hereby indemnifies, defends and holds harmless Landlord and its successors, transferees or assigns and its employees, attorneys, agents, advisors, members, shareholders, officers and directors from and against any claims, suits, demands, penalties, fines, liabilities, settlements, damages, costs or expenses of whatever kind or nature, including attorneys' fees, fees of environmental consultants and laboratory fees known or unknown, contingent or otherwise, arising out of or in any way related to a violation by Tenant or its employees, agents or invitees of Paragraph (28) and this Paragraph (31). (32) In addition to the rent set forth in Paragraph (2) hereof and the insurance premiums required of Tenant under Paragraph (9) hereof, the Tenant agrees to pay all premiums for fire and extended coverage insurance for the leased premises maintained by the Landlord. The Tenant shall pay monthly one-twelfth of the estimated amount of such premium, together with its monthly payment, subject to adjustment annually. (33) Landlord shall supply all heat, electricity, water and sewer to the leased premises as are existing as of the Closing Date. Notwithstanding the foregoing, Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the rental herein reserved be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of the foregoing services, (ii) failure to furnish or delay in furnishing any such services when such failure or delay is caused by an accident or any condition beyond the reasonable control of Landlord or by the making of necessary repairs or improvements to the leased premises, or (iii) any limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy serving the leased premises. Landlord shall use reasonable diligent efforts to remedy any interruption in the furnishing of such services. (34) Tenant shall have a non-exclusive right to use the parking areas, sidewalks and lawns adjacent to the leased premises and owned by the Landlord ("Common Areas"). Tenant's non-exclusive rights to utilize the Common Areas shall be in common with Landlord and/or other tenants or occupants and others to whom Landlord grants such rights from time to time. Landlord agrees to maintain the Common Areas in good order and condition as reasonably determined by Landlord. Landlord shall not grant any rights to use the Common Areas which will materially and adversely affect Tenant's reasonable use of the Common Areas. (35) Tenant hereby waives all claims against Landlord for damage to any property or injury or death of any person in, upon or about the leased premises arising at any time and from any cause whatsoever arising from and after the date hereof which are not caused by any unlawful or tortious acts of Landlord or its employees or agents, and Tenant shall hold Landlord harmless from any damage to any property or injury to or death of any person arising in, on or about the leased premises. The foregoing indemnity obligation of Tenant shall include reasonable attorneys' fees, investigation costs and all other reasonable costs and expenses incurred by Landlord from the first notice that any claim or demand is to be made or may be made. The provisions of this 10 11 Paragraph (35) shall survive the termination of this Lease with respect to any damage, injury or death occurring prior to such termination. (36) If Landlord shall fail to perform any covenant, term or condition of this lease upon Landlord's part to be performed, and, if as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only against the right, title and interest of Landlord in the leased premises and the property owned by Landlord adjacent to the leased premises ("Premises") and out of rents or other income from the Premises receivable by Landlord, or out of the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title and interest in the leased premises, and neither Landlord nor any of the members or partners of Landlord shall be liable for any deficiency. (37) Landlord and Tenant shall each request from their respective insurers under all policies of fire insurance maintained by either of them at any time during the term of this lease insuring or covering the property owned by Tenant or any portion thereof or operations therein, a waiver of all rights of subrogation which the insurer of one party might have against the other party, and Landlord and Tenant shall each indemnify the other against any loss or expense, including reasonable attorneys' fees, resulting from the failure to obtain such waiver and, so long as such waiver is outstanding, each party waives, to the extent of the proceeds received under such policy, any right of recovery against the other party for any loss covered by the policy containing such waiver; provided, however, that if at any time their respective insurers shall refuse to permit waivers of subrogation, Landlord or Tenant, in each instance, may revoke said waiver of subrogation effective thirty (30) days from the date of such notice, unless within such thirty (30) day period, the other is able to secure and furnish (without additional expense) equivalent insurance with such waivers with other companies satisfactory to the other party. (38) Landlord shall indemnify, defend and hold Tenant harmless against any actual damages experienced by Tenant because of any unlawful or tortious acts of Landlord under this Lease. (39) In connection with Paragraph (21) hereof, Tenant shall have three (3) days to cure any monetary defaults under this Lease and ten (10) days after written notice of any non-monetary defaults under this Lease to cure such default. This right to cure shall not be given more than three (3) times in any Lease year. TENANT: Initials /s/ JB LANDLORD: Initials /s/ WET 11 12 EXHIBIT A [SCHEMATIC DIAGRAM OF PREMISES] 13 EXHIBIT B LEGAL DESCRIPTION Land situated in the Township of Scio, Washtenaw County, Michigan, to wit: PARCEL A: Commencing at the South 1/4 post of Section, Town 2 South, Range 6 East, Washtenaw County, Michigan; thence East along the South line of the Section, 333.5 feet to the centerline of Baker Road, so-called; thence Northerly deflecting 89 degrees 01 minutes 30 seconds to the left 1371.8 feet along the centerline of Baker Road for a Place of Beginning; thence Easterly deflecting 90 degrees 38 minutes to the right along the line of the fence 265.0 feet; thence Northerly deflecting 90 degrees 38 minutes to the left 330.0 feet; thence Westerly deflecting 89 degrees 22 minutes to the left 365.00 feet to the centerline of Baker Road; thence South along the centerline of Baker Road 330.0 feet to the Place of Beginning, being a part of the Southeast 1/4 of Section 6, Scio Township, Washtenaw County, Michigan. PARCEL B: Commencing at the South 1/4 corner of Section; thence 333.5 feet in the South line of Section; thence deflecting 89 degrees 01 minutes 30 seconds to the left 1371.8 feet in the center of Baker Road; thence deflecting 90 degrees 38 minutes to the right 365 feet for a Place of Beginning; thence deflecting 90 degrees 38 minutes to the left 330 feet; thence deflecting 90 degrees 38 minutes to the right 295 feet; thence deflecting 89 degrees 22 minutes to the right 330 feet; thence deflecting 90 degrees 38 minutes to the right 295 feet to the Place of Beginning, being a part of the Southeast 1/4 of Section 6, Town 2 South, Range 5 East, excepting therefrom that part that lies northerly of the following described line: Commencing at the South 1/4 corner of Section 6, Town 2 South, Range 5 East, Scio Township, Washtenaw County, Michigan; thence East 333.5 feet along the South line of said Section; thence North deflecting 89 degrees 01 minutes 30 seconds to the left 1371.8 feet along the centerline of Baker Road; thence East deflecting 90 degrees 38 minutes to the right 365.0 feet; thence North deflecting 90 degrees 38 minutes to the left 322.33 feet; thence East deflecting 90 degrees 35 minutes to the right 30.97 feet for a Place of Beginning; thence continuing East on extension of the previous line 136.74 feet for a Place of Ending, said line being 0.50 feet North of new Jenkins Equipment Company building and the extension of said building line easterly. Together with a perpetual non-exclusive easement three feet in width and bounded on the South by the aforesaid line, for purposes of ingress and egress to and from and for performing any and all future repairs or other work on or maintenance to the building presently situated 0.50 feet South of the aforesaid line recorded in Liber 1569, Page 261. 14 PARCEL D: a PARCEL OF LAND IN THE Southeast 1/6 of Section 6, Town 2 South, Range 5 East, Scio Township, Washtenaw County, Michigan, described as: Commencing at the South 1/4 corner of said Section 6; then North 89 degrees 25 minutes 55 seconds East 333.61 feet (recorded as 333.5 feet) along the South line of said Section 6; then North 00 degrees 23 minutes 00 seconds East 1176.8 feet along the centerline of Baker Road to the Point of Beginning; thence continuing North 00 degrees 23 minutes 00 seconds East 20.00 feet along said centerline; thence South 88 degrees 59 minutes 00 seconds East 660.00 feet; thence South 85 degrees 289 minutes 10 seconds West 206.89 feet; thence North 88 degrees 59 minutes 00 seconds West 453.86 feet to the Point of Beginning. PARCEL E: Commencing at the South 1/4 post of Section; thence East 333.5 feet in the South line of Section; thence deflecting the 89 degrees 01 minutes 30 seconds to the left 1196.8 feet in the center of Baker Road for a Place of Beginning; thence deflecting 90 degrees 38 minutes to the right 660 feet; thence deflecting 90 degrees 38 minutes to the left 175 feet; thence deflecting 89 degrees 22 minutes to the left 660 feet; thence South 175 feet in the center of Baker Road to the Place of Beginning, being a part of the Southeast 1/4 Section 6.
1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of October 1, 1999 by and between JAKKS Pacific, Inc., a Delaware corporation (the "Company"), and Michael Bianco ("Executive") W I T N E S S E T H : WHEREAS, concurrently with the effectiveness of this Agreement, the Company is acquiring (the "Acquisition") all of the outstanding capital stock of Flying Colors Toys, Inc., a Michigan corporation formerly known as "Colorbok Paper Products, Inc." ("Flying Colors"); and WHEREAS, Executive was, until the closing of the Acquisition, an executive officer and shareholder of Flying Colors; and WHEREAS, the Company desires to employ Executive on the terms and subject to the conditions hereinafter set forth, and Executive desires so to be employed; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the Company and Executive agree as follows: 1. Offices and Duties. The Company hereby employs Executive during the Term (as hereinafter defined) to serve as the senior employee of Flying Colors responsible for sales and marketing with the divisional title of Senior Vice President - Sales and Development and to perform such executive and supervisory duties on behalf of Flying Colors as the Board of Directors or an executive officer of the Company or the Board of Directors or an executive officer of Flying Colors may from time to time reasonably direct; provided that such duties are substantially within the scope of the duties required to be performed by Executive for Flying Colors immediately prior to the date hereof. The Board of Directors of Flying Colors may elect or designate Executive to serve in such other corporate offices of Flying Colors or a subsidiary thereof as they may from time to time deem necessary, proper or advisable. Executive hereby accepts such employment and agrees that throughout the Term he shall faithfully, diligently and to the best of his ability, in furtherance of the business of the Company and Flying Colors, perform the duties assigned to him or incidental to the offices assumed by him pursuant to this Section. Executive shall devote substantially all of his business time and attention to the business and affairs of the Company, but Executive shall not be required to devote any minimum amount of time or report or perform his duties hereunder on a fixed or periodic basis, and Executive may engage or participate in such other activities incidental to any other employment, occupation or business venture or enterprise as do not materially interfere with or compromise his ability to perform his duties hereunder. Executive shall at all times be subject to the direction and control of the Boards 2 of Directors of the Company and Flying Colors, respectively, and observe and comply with such rules, regulations, policies and practices as the Board of Directors of the Company or of Flying Colors may from time to time establish. 2. Term. The employment of Executive hereunder shall commence on the date hereof and continue for a term ending on December 31, 2002, subject to earlier termination upon the terms and conditions provided elsewhere herein (the "Term"). As used herein, "Termination Date" means the last day of the Term. 3. Compensation. (a) As compensation for his services hereunder: (i) the Company is granting to Executive on the date hereof options to purchase 10,000 shares of the Company's Common Stock pursuant to the Company's Third Amended and Restated Stock Option Plan and subject to the terms and conditions set forth in Annex I hereto; and (ii) the Company shall pay to Executive during the Term: (A) a base salary at the rate of $300,000 per annum (the "Base Salary"), such Base Salary to be paid in substantially equal installments no less often than twice monthly; and (B) such additional incentive or bonus compensation as the Company's Board of Directors may from time to time determine. (b) In addition to his Base Salary and other compensation provided herein, Executive shall be entitled to participate, to the extent he is eligible under the terms and conditions thereof, in any stock, stock option or other equity participation plan and any profit-sharing, pension, retirement, insurance, medical service or other employee benefit plan generally available to the executive officers of the Company, and to receive any other benefits or perquisites generally available to the executive officers of the Company pursuant to any employment policy or practice, which may be in effect from time to time during the Term. Except as otherwise expressly provided herein, the Company shall be under no obligation hereunder to institute or to continue any such employee benefit plan or employment policy or practice. (c) During the Term, Executive shall not be entitled to additional compensation for serving as a director or officer of the Company (or any subsidiary thereof) to which he is elected or appointed; provided that such duties are substantially within the scope of the duties required to be performed by Executive for Flying Colors immediately prior to the date hereof. Throughout any period or periods during which he shall serve as a director of the Company (or such subsidiary), Executive shall be entitled to directors' fees in 2 3 accordance with the policies and practices of the Company (or such subsidiary) then in effect. 4. Expense Allowance. The Company shall pay directly, or advance funds to Executive or reimburse Executive for, all expenses reasonably incurred by him in connection with the performance of his duties hereunder and the business of the Company, upon the submission to the Company of itemized expense reports, receipts or vouchers in accordance with its then customary policies and practices. 5. Location. Except for routine travel and temporary accommodation reasonably required to perform his services hereunder, Executive shall not be required to perform his services hereunder at any location other than the principal executive office of Flying Colors, which office shall be located throughout the Term at its location on the date hereof, or, if relocated, at a location within a distance of 30 miles from its location on the date hereof, or at such other office or site to which Executive may, in his sole discretion, consent; nor shall he be required to relocate his principal residence to, or otherwise to reside at, any location specified by the Company. 6. Office. The Company shall provide Executive with suitable office space, furnishings and equipment, secretarial and clerical services and such other facilities and office support as are reasonably necessary for the performance of his services hereunder. 7. Vacation. Executive shall be entitled to four weeks paid vacation during each year of his employment hereunder, such vacation to be taken at such time or times as shall be agreed upon by Executive and the Company. Vacation time shall be cumulative from year to year, except that Executive shall not be entitled to take more than six weeks vacation during any consecutive 12-month period during the Term. 8. Key-Man Insurance. The Company shall have the right from time to time to purchase, increase, modify or terminate insurance policies on the life of Executive for the benefit of the Company in such amounts as the Company may determine in its sole discretion. In connection therewith, Executive shall, at such time or times and at such place or places as the Company may reasonably direct, submit himself to such physical examinations and execute and deliver such documents as the Company may deem necessary or appropriate. 9. Trade Secrets. Executive shall hold in a fiduciary capacity for the benefit of the Company all confidential or proprietary information relating to or concerned with its operations, business and affairs, and he shall not, at any time hereafter, use or disclose any such information to any person other than to the Company or its designees or except as may otherwise be required in connection with the business and affairs of the Company. 3 4 10. Intellectual Property. Subject to Sections 2870 and 2871 of the California Labor Code: (a) Any invention, design, process, system, procedure, improvement, development or discovery conceived, developed, created or made by Executive, alone or with others, during the Term and applicable to the business of the Company, whether or not patentable or registrable, shall become the sole and exclusive property of the Company. (b) Executive shall disclose the same promptly and completely to the Company and shall, during the Term or thereafter, (i) execute all documents requested by the Company for vesting in the Company the entire right, title and interest in and to the same, (ii) execute all documents requested by the Company for filing and procuring such applications for patents, trademarks, service marks or copyrights as the Company, in its sole discretion, may desire to prosecute, and (iii) give the Company all assistance it may reasonably require, including the giving of testimony in any Proceeding (as hereinafter defined), in other to obtain, maintain and protect the Company's right therein and thereto; provided that the Company shall bear the entire cost and expense of such assistance, including without limitation paying the Executive reasonable compensation for any time or effort expended by him in connection with such assistance after the Termination Date. 11. No Competition. (a) During the Term, and unless his employment terminates pursuant to Section 14 or by action of the Company or Flying Colors other than pursuant to Section 13, for a further period of three years thereafter, Executive shall not, directly or indirectly: (i) own, control, manage, operate, participate or invest in, or otherwise be connected with, in any manner, any business activity, venture or enterprise which is engaged in the Restricted Business or any other business in which the Company (or any subsidiary thereof) is engaged at the time of termination of Executive's employment hereunder; provided, however, that Executive may invest his funds in securities of an issuer engaged in the Restricted Business or any other business in which the Company (or any subsidiary thereof) is engaged if the securities of such issuer are listed for trading on a registered securities exchange or actively traded in an over-the-counter market and Executive's holdings therein represent less than 1% of the total number of shares or principal amount of the securities of such issuer outstanding; or (ii) for himself or on behalf of any other person, employ or engage any Person (other than a Shareholder) who at the time shall have been within the preceding 12-month period an employee of the Company (or any subsidiary thereof) or contact any supplier, customer or employee of the Company (or such subsidiary) for the purpose of soliciting or diverting any supplier, customer or employee from the Company (or such subsidiary); 4 5 provided that no provision of this Section 11(a) is intended or shall be deemed to preclude Executive or the Divestee from engaging any sales representative or conducting business or dealing with any vendor, supplier or customer in the ordinary course of the Divested Business. (b) The provisions of Section 11(a) notwithstanding, Executive may: (i) retain (but not increase, except pursuant to an agreement in effect on the date hereof or by operation of law) his interest in the Divestee; and (ii) until December 31, 2000, serve as a director of, and perform consulting services for, the Divestee. (c) Executive acknowledges that the provisions of this Section, and the period of time, geographic area and scope and type of restrictions on his activities set forth herein, are reasonable and necessary for the protection of the Company. 12. Termination Upon Death or Disability. Executive's employment hereunder shall terminate immediately upon his death. In the event that Executive is unable to perform his duties hereunder by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 90 days in any consecutive 12-month period, the Company shall have the right to terminate Executive's employment hereunder within 60 days after the 90th day of his disability or incapacity by giving Executive notice to such effect at least 30 days prior to the date of termination set forth in such notice, and on such date such employment shall terminate. 13. Termination for Cause. (a) In addition to any other rights or remedies provided by law or in this Agreement, the Company may terminate Executive's employment under this Agreement if: (i) Executive is convicted of, or enters a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either Executive fails to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if Executive does perfect such an appeal, his conviction of a felony offense is sustained on appeal; or (ii) the Company's Board of Directors determines, after due inquiry, that Executive has: (A) committed fraud against, or embezzled or misappropriated funds or other assets of, the Company (or any subsidiary thereof); 5 6 (B) violated, or caused the Company (or any subsidiary thereof) or any officer, employee or other agent thereof, or any other Person to violate, any material law, regulation or ordinance, which violation has or would reasonably be expected to have a significant detrimental effect on the Company or Flying Colors, or any material rule, regulation, policy or practice established by the Board of Directors of the Company or Flying Colors; (C) willfully, or because of gross or persistent negligence, (A) failed properly to perform his duties hereunder or (B) acted in a manner detrimental to, or adverse to the interests of, the Company; or (D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by Executive hereunder. (b) The Company may effect such termination for cause by giving Executive notice to such effect, setting forth in reasonable detail the factual basis for such termination, at least 20 days prior to the date of termination set forth therein; provided however that Executive may avoid such termination if Executive, prior to the date of termination set forth in such notice, cures or explains to the reasonable satisfaction of the Company's Board of Directors the factual basis for termination set forth therein. (c) In making any determination pursuant to Section 13(a) as to the occurrence of any act or event described in clauses (A) to (D) of paragraph (ii) thereof (each, a "For Cause Event"), each of the following shall constitute convincing evidence of such occurrence: (i) if Executive is made a party to, or target of, any Proceeding arising under or relating to any For Cause Event, Executive's failure to defend against such Proceeding or to answer any complaint filed against him therein, or to deny any claim, charge, averment, or allegation thereof asserting or based upon the occurrence of a For Cause Event; (ii) any judgment, award, order, decree or other adjudication or ruling in any such Proceeding finding or based upon the occurrence of a For Cause Event (that is not reversed or vacated on appeal); or (iii) any settlement or compromise of, or consent decree issued in, any such Proceeding in which Executive expressly admits the occurrence of a For Cause Event; provided that none of the foregoing shall be dispositive or create an irrebuttable presumption of the occurrence of such For Cause Event; and provided further that the Company's Board of Directors may rely on any other factor or event as convincing evidence of the occurrence of a For Cause Event. 6 7 14. Termination by Executive for Good Reason. In addition to any other rights or remedies provided by law or in this Agreement, Executive may terminate his employment hereunder if (a) the Company violates, or fails to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by it hereunder or, (b) as a result of any action or failure to act by the Company, there is a material change in the nature or scope of the duties, obligations, rights or powers of Executive's employment, by giving the Company notice to such effect, setting forth in reasonable detail the factual basis for such termination, at least 20 days prior to the date of termination set forth therein; provided however that the Company may avoid such termination if it, prior to the date of termination set forth in such notice, cures or explains to the reasonable satisfaction of Executive the factual basis for termination set forth therein. The termination by Executive of his employment pursuant to this Section 14 shall not constitute or be deemed to constitute for any purpose a "voluntary resignation" of his employment. 15. Compensation upon Termination. (a) Upon termination of Executive's employment hereunder, he shall be entitled to receive, in any case, any compensation or other amount due to him pursuant to Section 3 or 4 in respect of his employment prior to the Termination Date, and from and after the Termination Date, except as otherwise provided in Section 15(b), the Company shall have no further obligation to Executive hereunder. Any amount payable to Executive pursuant to this Section 15(a) upon termination of his employment hereunder shall be paid promptly, and in any event within 30 days, after the Termination Date. (b) If Executive terminates his employment hereunder for Good Reason pursuant to Section 14 or if the Company terminates his employment hereunder other than upon his disability or incapacity pursuant to Section 12 and other than for cause pursuant to Section 13, the Company shall make to Executive payments at the times and in the amounts provided herein for the payment of his Base Salary during the period beginning on the day after the Termination Date and ending on December 31, 2002 offset by any amount earned by Executive as compensation for services he performs for any other Person during such Period. (c) Executive shall have no obligation hereunder to seek or to accept any other employment after the Termination Date or otherwise to mitigate the payments required to be made by this Section. Except as provided in Section 15(b), no compensation or other amount received or receivable by Executive on account of any employment or engagement after the Termination Date shall be offset against or deducted from any payment required to be made by this Section. 16. Limitation of Authority. Except as expressly provided herein, no provision hereof shall be deemed to authorize or empower either party hereto to act on behalf of, obligate or bind the other party hereto. 7 8 17. Notices. Any notice or demand required or permitted to be given or made hereunder to or upon either 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 telegram, telecopy, 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 the Company at: 22761 Pacific Coast Highway, Suite 226 Malibu, California 90265 Attn: President Fax: (310) 317-8527 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, New York 10022 Attn: Murray L. Skala, Esq. Fax: (212) 888-7776 to Executive at: 6161 Windmill Court Saline, Michigan 48176 with a copy to: Howard Rice, Esq. 230 Glenwood Drive Delray Beach, FL 33445 Fax: (561) 638-1136 or such other address as either party hereto may at any time, or from time to time, direct by notice given to the other party in accordance with this Section. 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), five 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. 18. Amendment. Except as otherwise provided herein, no amendment of this Agreement shall be valid or effective, unless in writing and signed by or on behalf of the parties hereto. 19. Waiver. No course of dealing or omission or delay on the part of either 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. 8 9 20. Governing Law. This Agreement shall be governed by, and interpreted and enforced in accordance with, the laws of the State of California without regard to principles of choice of law or conflict of laws. 21. Jurisdiction. Each of the parties hereto hereby irrevocably consents and submits to the jurisdiction of the courts of the State of California and the United States District Court for the Southern District of California in connection with any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, waives any objection to venue in the County of Los Angeles, State of California, 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 17. 22. Remedies. In the event of any actual or prospective breach or default under this Agreement by either party hereto, the other party shall be entitled to equitable relief, including remedies in the nature of rescission, injunction and specific performance. All remedies hereunder are cumulative and not exclusive, and nothing herein shall be deemed to prohibit or limit either 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 that, except as provided in Section 15 and except with respect to a breach by Executive of his obligations pursuant to Sections 9, 10 and 11, no party hereto shall be liable under this Agreement for lost profits or consequential damages. 23. 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. 24. 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. 25. Assignment. This Agreement, and each right, interest and obligation hereunder, may not be assigned by either party hereto without the prior written consent of the other party hereto, and any purported assignment without such consent shall be void and without effect, except that this Agreement shall be assigned to, and assumed by, any person with or into which the Company merges or consolidates, or which acquires all or substantially all of its assets, or which otherwise succeeds to and continues the Company's business substantially as an entirety. Except as otherwise expressly provided herein or required by law, Executive shall not have any power of anticipation, assignment or alienation of any payments required to be made to him hereunder, and no other person may acquire any 9 10 right or interest in any thereof by reason of any purported sale, assignment or other disposition thereof, whether voluntary or involuntary, any claim in a bankruptcy or other insolvency proceeding against Executive, or any other ruling, judgment, order, writ or decree. 26. Binding Effect. 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. 27. 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. 28. 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. 29. 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. 30. No Presumptions. Each party hereto acknowledges that it has had an opportunity to consult with counsel and has participated 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 the other party hereto drafted or controlled the drafting of this Agreement. 31. Certain Definitions. As used herein: (a) "Person" includes without limitation a natural person, corporation, joint stock company, limited liability company, partnership, joint venture, association, trust, government or governmental authority, agency or instrumentality, or any group of the foregoing acting in concert. (b) A "Proceeding" is any suit, action, arbitration, audit, investigation or other proceeding before or by any court, magistrate, arbitration panel or other tribunal, or any governmental agency, authority or instrumentality of competent jurisdiction. (c) Other capitalized terms not defined herein are used herein as defined in the Stock Purchase Agreement dated as of September 22, 1999 relating to the Acquisition. 10 11 32. Entire Agreement. This Agreement embodies the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any prior agreement, commitment or arrangement relating thereto, including without limitation Sections 1, 2, 3 and 6 of the Employment Reinstatement Agreement dated as of May 1, 1999 among Flying Colors, Executive and certain other Persons, as amended, which shall terminate, notwithstanding any contrary provision thereof, immediately upon the commencement of the Term, except that (a) each party thereto shall (i) remain required to perform any act and to satisfy any obligation or condition that such party is required to perform or satisfy thereunder with respect to any event occurring or circumstance existing during the term thereof (including without limitation the payment or delivery to Executive of any compensation, reimbursable expense or employee benefit or perquisite to which he may be entitled, but which has not yet been paid to him, on account of his employment thereunder) that has not been so performed or satisfied, and (ii) retain its right thereunder to assert or to allege any claim or cause of action relating to or based upon, or otherwise to enforce, any provision thereof with respect to any event occurring or circumstance existing during the term thereof, and (b) Sections 4, 5, 7, 8 and 9 of such Employment Reinstatement Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year first above written. THE COMPANY: JAKKS PACIFIC, INC. By: /s/ Joel M. Bennett ------------------------------------ Name: Joel M. Bennett Title: Chief Financial Officer EXECUTIVE: /s/ Michael Bianco ---------------------------------------- Michael Bianco 11 12 ANNEX I Exercise Price: closing sale price as reported by Nasdaq National Market on grant date Term: 6 years from grant date Vesting Schedule: 1,500 shares after 1st anniversary of grant date 1,500 shares after 2nd anniversary of grant date 1,500 shares after 3rd anniversary of grant date 2,500 shares after 4th anniversary of grant date 3,000 shares after 5th anniversary of grant date 12
1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of October 1, 1999 by and between JAKKS Pacific, Inc., a Delaware corporation (the "Company"), and Joshua H. Pokempner ("Executive") W I T N E S S E T H : WHEREAS, concurrently with the effectiveness of this Agreement, the Company is acquiring (the "Acquisition") all of the outstanding capital stock of Flying Colors Toys, Inc., a Michigan corporation formerly known as "Colorbok Paper Products, Inc." ("Flying Colors"); and WHEREAS, Executive was the founder and, until the closing of the Acquisition, an executive officer and shareholder of Flying Colors; and WHEREAS, the Company desires to employ Executive on the terms and subject to the conditions hereinafter set forth, and Executive desires so to be employed; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the Company and Executive agree as follows: 1. Offices and Duties. The Company hereby employs Executive during the Term (as hereinafter defined) to serve as the General Manager of Flying Colors' operations with the divisional title of Senior Vice President - Development and to perform such executive and supervisory duties on behalf of Flying Colors as the Board of Directors or an executive officer of the Company or the Board of Directors or an executive officer of Flying Colors may from time to time reasonably direct; provided that such duties are substantially within the scope of the duties required to be performed by Executive for Flying Colors immediately prior to the date hereof. The Board of Directors of Flying Colors may elect or designate Executive to serve in such other corporate offices of Flying Colors or a subsidiary thereof as they may from time to time deem necessary, proper or advisable. Executive hereby accepts such employment and agrees that throughout the Term he shall faithfully, diligently and to the best of his ability, in furtherance of the business of the Company and Flying Colors, perform the duties assigned to him or incidental to the offices assumed by him pursuant to this Section. Executive shall devote substantially all of his business time and attention to the business and affairs of the Company, but Executive shall not be required to devote any minimum amount of time or report or perform his duties hereunder on a fixed or periodic basis, and Executive may engage or participate in such other activities incidental to any other employment, occupation or business venture or enterprise as do not materially interfere with or compromise his ability to perform his duties hereunder. Executive shall at all times be subject to the direction and control of the Boards of Directors of the Company and Flying Colors, respectively, and observe and comply with such rules, regulations, policies and 2 practices as the Board of Directors of the Company or of Flying Colors may from time to time establish. 2. Term. The employment of Executive hereunder shall commence on the date hereof and continue for a term ending on December 31, 2002, subject to earlier termination upon the terms and conditions provided elsewhere herein (the "Term"). As used herein, "Termination Date" means the last day of the Term. 3. Compensation. (a) As compensation for his services hereunder: (i) the Company is granting to Executive on the date hereof options to purchase 10,000 shares of the Company's Common Stock pursuant to the Company's Third Amended and Restated Stock Option Plan and subject to the terms and conditions set forth in Annex I hereto; and (ii) the Company shall pay to Executive during the Term: (A) a base salary at the rate of $300,000 per annum (the "Base Salary"), such Base Salary to be paid in substantially equal installments no less often than twice monthly; and (B) such additional incentive or bonus compensation as the Company's Board of Directors may from time to time determine. (b) In addition to his Base Salary and other compensation provided herein, Executive shall be entitled to participate, to the extent he is eligible under the terms and conditions thereof, in any stock, stock option or other equity participation plan and any profit-sharing, pension, retirement, insurance, medical service or other employee benefit plan generally available to the executive officers of the Company, and to receive any other benefits or perquisites generally available to the executive officers of the Company pursuant to any employment policy or practice, which may be in effect from time to time during the Term. Except as otherwise expressly provided herein, the Company shall be under no obligation hereunder to institute or to continue any such employee benefit plan or employment policy or practice. (c) During the Term, Executive shall not be entitled to additional compensation for serving as a director or officer of the Company (or any subsidiary thereof) to which he is elected or appointed; provided that such duties are substantially within the scope of the duties required to be performed by Executive for Flying Colors immediately prior to the date hereof. Throughout any period or periods during which he shall serve as a director of the Company (or such subsidiary), Executive shall be entitled to directors' fees in 2 3 accordance with the policies and practices of the Company (or such subsidiary) then in effect. 4. Expense Allowance. The Company shall pay directly, or advance funds to Executive or reimburse Executive for, all expenses reasonably incurred by him in connection with the performance of his duties hereunder and the business of the Company, upon the submission to the Company of itemized expense reports, receipts or vouchers in accordance with its then customary policies and practices. 5. Location. Except for routine travel and temporary accommodation reasonably required to perform his services hereunder, Executive shall not be required to perform his services hereunder at any location other than the principal executive office of Flying Colors, which office shall be located throughout the Term at its location on the date hereof, or, if relocated, at a location within a distance of 30 miles from its location on the date hereof, or at such other office or site to which Executive may, in his sole discretion, consent; nor shall he be required to relocate his principal residence to, or otherwise to reside at, any location specified by the Company. 6. Office. The Company shall provide Executive with suitable office space, furnishings and equipment, secretarial and clerical services and such other facilities and office support as are reasonably necessary for the performance of his services hereunder. 7. Vacation. Executive shall be entitled to four weeks paid vacation during each year of his employment hereunder, such vacation to be taken at such time or times as shall be agreed upon by Executive and the Company. Vacation time shall be cumulative from year to year, except that Executive shall not be entitled to take more than six weeks vacation during any consecutive 12-month period during the Term. 8. Key-Man Insurance. The Company shall have the right from time to time to purchase, increase, modify or terminate insurance policies on the life of Executive for the benefit of the Company in such amounts as the Company may determine in its sole discretion. In connection therewith, Executive shall, at such time or times and at such place or places as the Company may reasonably direct, submit himself to such physical examinations and execute and deliver such documents as the Company may deem necessary or appropriate. 9. Trade Secrets. Executive shall hold in a fiduciary capacity for the benefit of the Company all confidential or proprietary information relating to or concerned with its operations, business and affairs, and he shall not, at any time hereafter, use or disclose any such information to any person other than to the Company or its designees or except as may otherwise be required in connection with the business and affairs of the Company. 3 4 10. Intellectual Property. Subject to Sections 2870 and 2871 of the California Labor Code: (a) Any invention, design, process, system, procedure, improvement, development or discovery conceived, developed, created or made by Executive, alone or with others, during the Term and applicable to the business of the Company, whether or not patentable or registrable, shall become the sole and exclusive property of the Company. (b) Executive shall disclose the same promptly and completely to the Company and shall, during the Term or thereafter, (i) execute all documents requested by the Company for vesting in the Company the entire right, title and interest in and to the same, (ii) execute all documents requested by the Company for filing and procuring such applications for patents, trademarks, service marks or copyrights as the Company, in its sole discretion, may desire to prosecute, and (iii) give the Company all assistance it may reasonably require, including the giving of testimony in any Proceeding (as hereinafter defined), in other to obtain, maintain and protect the Company's right therein and thereto; provided that the Company shall bear the entire cost and expense of such assistance, including without limitation paying the Executive reasonable compensation for any time or effort expended by him in connection with such assistance after the Termination Date. 11. No Competition. (a) During the Term, and unless his employment terminates pursuant to Section 14 or by action of the Company or Flying Colors other than pursuant to Section 13, for a further period of three years thereafter, Executive shall not, directly or indirectly: (i) own, control, manage, operate, participate or invest in, or otherwise be connected with, in any manner, any business activity, venture or enterprise which is engaged in the Restricted Business or any other business in which the Company (or any subsidiary thereof) is engaged at the time of termination of Executive's employment hereunder; provided, however, that Executive may invest his funds in securities of an issuer engaged in the Restricted Business or any other business in which the Company (or any subsidiary thereof) is engaged if the securities of such issuer are listed for trading on a registered securities exchange or actively traded in an over-the-counter market and Executive's holdings therein represent less than 1% of the total number of shares or principal amount of the securities of such issuer outstanding; or (ii) for himself or on behalf of any other person, employ or engage any Person (other than a Shareholder) who at the time shall have been within the preceding 12-month period an employee of the Company (or any subsidiary thereof) or contact any supplier, customer or employee of the Company (or such subsidiary) for the purpose of soliciting or diverting any supplier, customer or employee from the Company (or such subsidiary); 4 5 provided that no provision of this Section 11(a) is intended or shall be deemed to preclude Executive or the Divestee from engaging any sales representative or conducting business or dealing with any vendor, supplier or customer in the ordinary course of the Divested Business. (b) The provisions of Section 11(a) notwithstanding, Executive may: (i) retain (but not increase, except pursuant to an agreement in effect on the date hereof or by operation of law) his interest in the Divestee; and (ii) until December 31, 2000, serve as a director of, and perform consulting services for, the Divestee. (c) Executive acknowledges that the provisions of this Section, and the period of time, geographic area and scope and type of restrictions on his activities set forth herein, are reasonable and necessary for the protection of the Company. 12. Termination Upon Death or Disability. Executive's employment hereunder shall terminate immediately upon his death. In the event that Executive is unable to perform his duties hereunder by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 90 days in any consecutive 12-month period, the Company shall have the right to terminate Executive's employment hereunder within 60 days after the 90th day of his disability or incapacity by giving Executive notice to such effect at least 30 days prior to the date of termination set forth in such notice, and on such date such employment shall terminate. 13. Termination for Cause. (a) In addition to any other rights or remedies provided by law or in this Agreement, the Company may terminate Executive's employment under this Agreement if: (i) Executive is convicted of, or enters a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either Executive fails to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if Executive does perfect such an appeal, his conviction of a felony offense is sustained on appeal; or (ii) the Company's Board of Directors determines, after due inquiry, that Executive has: (A) committed fraud against, or embezzled or misappropriated funds or other assets of, the Company (or any subsidiary thereof); 5 6 (B) violated, or caused the Company (or any subsidiary thereof) or any officer, employee or other agent thereof, or any other Person to violate, any material law, regulation or ordinance, which violation has or would reasonably be expected to have a significant detrimental effect on the Company or Flying Colors, or any material rule, regulation, policy or practice established by the Board of Directors of the Company or Flying Colors; (C) willfully, or because of gross or persistent negligence, (A) failed properly to perform his duties hereunder or (B) acted in a manner detrimental to, or adverse to the interests of, the Company; or (D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by Executive hereunder. (b) The Company may effect such termination for cause by giving Executive notice to such effect, setting forth in reasonable detail the factual basis for such termination, at least 20 days prior to the date of termination set forth therein; provided however that Executive may avoid such termination if Executive, prior to the date of termination set forth in such notice, cures or explains to the reasonable satisfaction of the Company's Board of Directors the factual basis for termination set forth therein. (c) In making any determination pursuant to Section 13(a) as to the occurrence of any act or event described in clauses (A) to (D) of paragraph (ii) thereof (each, a "For Cause Event"), each of the following shall constitute convincing evidence of such occurrence: (i) if Executive is made a party to, or target of, any Proceeding arising under or relating to any For Cause Event, Executive's failure to defend against such Proceeding or to answer any complaint filed against him therein, or to deny any claim, charge, averment, or allegation thereof asserting or based upon the occurrence of a For Cause Event; (ii) any judgment, award, order, decree or other adjudication or ruling in any such Proceeding finding or based upon the occurrence of a For Cause Event (that is not reversed or vacated on appeal); or (iii) any settlement or compromise of, or consent decree issued in, any such Proceeding in which Executive expressly admits the occurrence of a For Cause Event; provided that none of the foregoing shall be dispositive or create an irrebuttable presumption of the occurrence of such For Cause Event; and provided further that the Company's Board of Directors may rely on any other factor or event as convincing evidence of the occurrence of a For Cause Event. 6 7 14. Termination by Executive for Good Reason. In addition to any other rights or remedies provided by law or in this Agreement, Executive may terminate his employment hereunder if (a) the Company violates, or fails to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by it hereunder or, (b) as a result of any action or failure to act by the Company, there is a material change in the nature or scope of the duties, obligations, rights or powers of Executive's employment, by giving the Company notice to such effect, setting forth in reasonable detail the factual basis for such termination, at least 20 days prior to the date of termination set forth therein; provided however that the Company may avoid such termination if it, prior to the date of termination set forth in such notice, cures or explains to the reasonable satisfaction of Executive the factual basis for termination set forth therein. The termination by Executive of his employment pursuant to this Section 14 shall not constitute or be deemed to constitute for any purpose a "voluntary resignation" of his employment. 15. Compensation upon Termination. (a) Upon termination of Executive's employment hereunder, he shall be entitled to receive, in any case, any compensation or other amount due to him pursuant to Section 3 or 4 in respect of his employment prior to the Termination Date, and from and after the Termination Date, except as otherwise provided in Section 15(b), the Company shall have no further obligation to Executive hereunder. Any amount payable to Executive pursuant to this Section 15(a) upon termination of his employment hereunder shall be paid promptly, and in any event within 30 days, after the Termination Date. (b) If Executive terminates his employment hereunder for Good Reason pursuant to Section 14 or if the Company terminates his employment hereunder other than upon his disability or incapacity pursuant to Section 12 and other than for cause pursuant to Section 13, the Company shall make to Executive payments at the times and in the amounts provided herein for the payment of his Base Salary during the period beginning on the day after the Termination Date and ending on December 31, 2002 offset by any amount earned by Executive as compensation for services he performs for any other Person during such Period. (c) Executive shall have no obligation hereunder to seek or to accept any other employment after the Termination Date or otherwise to mitigate the payments required to be made by this Section. Except as provided in Section 15(b), no compensation or other amount received or receivable by Executive on account of any employment or engagement after the Termination Date shall be offset against or deducted from any payment required to be made by this Section. 16. Limitation of Authority. Except as expressly provided herein, no provision hereof shall be deemed to authorize or empower either party hereto to act on behalf of, obligate or bind the other party hereto. 7 8 17. Notices. Any notice or demand required or permitted to be given or made hereunder to or upon either 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 telegram, telecopy, 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 the Company at: 22761 Pacific Coast Highway, Suite 226 Malibu, California 90265 Attn: President Fax: (310) 317-8527 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, New York 10022 Attn: Murray L. Skala, Esq. Fax: (212) 888-7776 to Executive at: 2908 West Delhi Road Ann Arbor, Michigan 48103 with a copy to: Howard Rice, Esq. 230 Glenwood Drive Delray Beach, FL 33445 Fax: (561) 638-1136 or such other address as either party hereto may at any time, or from time to time, direct by notice given to the other party in accordance with this Section. 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), five 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. 18. Amendment. Except as otherwise provided herein, no amendment of this Agreement shall be valid or effective, unless in writing and signed by or on behalf of the parties hereto. 19. Waiver. No course of dealing or omission or delay on the part of either 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. 8 9 20. Governing Law. This Agreement shall be governed by, and interpreted and enforced in accordance with, the laws of the State of California without regard to principles of choice of law or conflict of laws. 21. Jurisdiction. Each of the parties hereto hereby irrevocably consents and submits to the jurisdiction of the courts of the State of California and the United States District Court for the Southern District of California in connection with any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, waives any objection to venue in the County of Los Angeles, State of California, 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 17. 22. Remedies. In the event of any actual or prospective breach or default under this Agreement by either party hereto, the other party shall be entitled to equitable relief, including remedies in the nature of rescission, injunction and specific performance. All remedies hereunder are cumulative and not exclusive, and nothing herein shall be deemed to prohibit or limit either 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 that, except as provided in Section 15 and except with respect to a breach by Executive of his obligations pursuant to Sections 9, 10 and 11, no party hereto shall be liable under this Agreement for lost profits or consequential damages. 23. 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. 24. 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. 25. Assignment. This Agreement, and each right, interest and obligation hereunder, may not be assigned by either party hereto without the prior written consent of the other party hereto, and any purported assignment without such consent shall be void and without effect, except that this Agreement shall be assigned to, and assumed by, any person with or into which the Company merges or consolidates, or which acquires all or substantially all of its assets, or which otherwise succeeds to and continues the Company's business substantially as an entirety. Except as otherwise expressly provided herein or required by law, Executive shall not have any power of anticipation, assignment or alienation of any payments required to be made to him hereunder, and no other person may acquire any 9 10 right or interest in any thereof by reason of any purported sale, assignment or other disposition thereof, whether voluntary or involuntary, any claim in a bankruptcy or other insolvency proceeding against Executive, or any other ruling, judgment, order, writ or decree. 26. Binding Effect. 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. 27. 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. 28. 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. 29. 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. 30. No Presumptions. Each party hereto acknowledges that it has had an opportunity to consult with counsel and has participated 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 the other party hereto drafted or controlled the drafting of this Agreement. 31. Certain Definitions. As used herein: (a) "Person" includes without limitation a natural person, corporation, joint stock company, limited liability company, partnership, joint venture, association, trust, government or governmental authority, agency or instrumentality, or any group of the foregoing acting in concert. (b) A "Proceeding" is any suit, action, arbitration, audit, investigation or other proceeding before or by any court, magistrate, arbitration panel or other tribunal, or any governmental agency, authority or instrumentality of competent jurisdiction. (c) Other capitalized terms not defined herein are used herein as defined in the Stock Purchase Agreement dated as of September 22, 1999 relating to the Acquisition. 10 11 32. Entire Agreement. This Agreement embodies the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any prior agreement, commitment or arrangement relating thereto. IN WITNESS WHEREOF, the undersigned have duly executed this Agree ment as of the day and year first above written. THE COMPANY: JAKKS PACIFIC, INC. By: /s/ Joel M. Bennett --------------------------------- Name: Joel M. Bennett Title: Chief Financial Officer EXECUTIVE: /s/ Joshua H. Pokempner -------------------------------------- Joshua H. Pokempner 11 12 ANNEX I Exercise Price: closing sale price as reported by Nasdaq National Market on grant date Term: 6 years from grant date Vesting Schedule: 1,500 shares after 1st anniversary of grant date 1,500 shares after 2nd anniversary of grant date 1,500 shares after 3rd anniversary of grant date 2,500 shares after 4th anniversary of grant date 3,000 shares after 5th anniversary of grant date 12